Major Label Music Production: The
Music Industry
By: Shane Savage, Nicholas Tandy,
Rashad Campbell, & Elle Fenn
Quick Overview
• Past
• Present
o Industry
Analysis
• Future
the PAST
Music Timeline
1960's
• Industry had 6 major players
o Sony and Warner still remain today
• Players were comprised of several labels
o each focusing on a unique musical
‘identity’
o different process of talent
management.
• Manufacturing, distribution and overhead
were not differentiated
• Same product - Vinyl Records
Music Timeline
1960's
1970's
• Beginning of record store chains.
o stores stocked around 10 thousand
titles each.
• Introduction of cassette players
o boosted sales in the industry.
Music Timeline
1960's
1970's
1980's
• Introduction of compact disk technology;
replacing casettes
• Another boost in sales
• Distribution: by 1982, 8 retail chains sold
17.5% of retail music sales.
Music Timeline
1970's
• Revenues reach all time music industry high of
14.5 billion dollars by 1999.
• 1999 was the ‘peak’ for the industry, with
revenues dropping since.
1980's
• Distribution: major retailers increased to selling
57.8% of music sales
• Trend of independent music retailers closing;
larger chain stores emerging
1990's
• Walmart & Best Buy start stocking music, using
it as a loss-leader
Positive Feedback
1970's 1990's
Cassettes
CD's
Vinyl
Cassettes
Technology
2000's
MP3's
CD's
Structure & Product
Overall: cooperation between artists and business people
• Corporations lead marketing, production and sales
• Compositions created and owned by songwriters,
usually licensed to production companies.
• Artists with the help of production companies create
recordings. The companies usually own the recordings.
• Consumers own physical media, such as compact disks
and MP3s. Retailers distribute these from producers to
consumers
Financing led by production companies:
•Company covers touring, marketing, engineering, studio
•Artists earn a portion of album proceeds
•Companies integrated; outsourcing minimal
•Exception: live performances booked by promotion companies
• Livenation
Evolution of Napster
Changed the music industry structure
•Disruptive technology
Peer-to-peer file sharing network
•Mass distribution of music files
•Competition for classic record companies and retailers
50 million users
•Environment facilitating this
– Multimedia capabilities
– Internet as a distribution platform
– File compression; mp3
Legal action taken; copyright issues
•Damage already done, the industry has changed
•Other sites follow similar model
•Source: Bergmann, 2004
the PRESENT
Revolutionizing Music: iTunes
• Within last decade, CD sales have
dropped by more than half
• Digital music sales has yet to come
close to recouping the losses from
traditional sales.
Technology
• Challenge to create growth in digital and
other non-traditional revenue streams
that are strong enough to offset the
decline in physical album sales.
• Digital music has turned the
music industry upside down
Evolution
• 2005 - 2010:
o Digital downloads grew at an
average of 41.6% annually
o CD sales fell at an average of
17.9% per year
Music Industry Role Players
1.Creative Talent
2.Major Labels
3.Publishers
4.Distribution Channels
Creative Talent
Artist
• Record on the track (Who you hear)
• No Intellectual Property rights to the
song (unless they wrote some of it)
Writer
• Writes the words to the music (The
words you hear)
• Split Intellectual property rights with
Producer
Producer
• Creates the musical soundtrack (Make
the beats)
• Split Intellectual Property Rights with
Writer
Engineer
• Mix the track (make sure everything
flows)
Mastering Center
• Make the audio "Commercial-Ready"
(Adjust Hi-Lows to for Radio Play)
Major Labels
4 Majors, Many others
• Universal Music
• Warner Brother Group
• Sony Music
• EMI
• Other smaller Majors and Many
independents
Job of Music Label:
• Finding music talent
• Manufacture of recordings
• Production of master recordings
• Purchase of reproduction and
distribution rights to master recordings
• Release, promotion, and distribution of
sound recordings
360 Deals: provide brand management, merchandising, tour support and
expanded artist services and in return get a higher percentage
Publishers
•
Vertically Integrated Companies: Universal (Vivendi), Sony, WB, EMI
•
Music publishers earn their revenue from licensing the right to use an
artist's songs. They licensing them for inclusion on records (samples), film,
TV and other media. Also seeking new uses for the compositions
•
Administer and collect the proceeds generated, then royalties are collected
by Publisher and paid out to songwriter/producers
•
Interesting Fact: In1909, royalties paid to songwriters were $.02 per song.
Based on the Consumer Price Index, two cents in 1909 would be over
$0.40 cents per song today
Distribution Channels
Role:
• Bridge the gap between consumers and production companies
• Purchase the recordings from the producers and selling to
consumers.
Forms:
• Digital Role Players
• Online Radio
• Physical Distributors
Evolution:
•The distribution of recorded music CDs has shifted from specialty
shops to mass-market, online retailers and more recently to online
digital media retailers and other digital music services.
Digital Role Players
in price of many iTunes songs from $0.99 to $1.25 per track
Break Down of Download Costs
Labels
$0.60 - $0.70
Financial Transaction
$0.10 - $0.15
Marketing
$0.05 - $0.10
Staff
$0.03 - $0.05
Bandwidth and Hosting
$0.02 - $0.03
Start-up Costs
$0.02 - $0.03
Total Costs
$0.82 - $1.03
Online Radio: Pandora
• Serves ages 13 to 90
– Target market 18 to 34 years old
• 16 million registered users
– 1 million people listening per day
– Spend between 2 to 3 hour sessions
• 65 million stations created
– Increases by 10,000 a day
• iPhone App
• HUGE advertising opportunity
• Offer precision targeting to advertisers
– Use same model as Facebook & Google
• New business model
– Up to 40 hours of free radio
– $0.99 for over 40 hours = one download
Physical Distributors
• Decreasing market
• Higher shelving costs
• 39,000 songs on CD’s in
average store
– Small consumer surplus
• Can only sell hit albums
5 Major Pricing Strategies
Versioning
A La Carte Downloading
Subscription
Tying
Mixed Bundling
#1: Versioning
Creating different forms of the same product to sell:
1. Digital Full-Length Albums
2. Digital Singles
3. Product Placement
5. Physical CDs
6. Mobile Music Downloads
7. Music Videos
1. Movies, TV, Events, Video Games
8. Vinyl LPs
4. Live Concerts
# 2: A La Carte Downloading
• Unbundling CD’s to maximize consumer surplus
• Since 2005, consumers increasingly have turned
to individual track purchases instead of bundled
albums
• Dominance of single-track downloads over
album sales
– Margins on new sales to narrow
– Revenue to fall
# 3: Subscription
Certain online distributors require their customers pay monthly
fees to access unlimited downloads
Major Labels are establishing partnerships to create
subscription based streaming models
– provides users with more access than free services
– increases revenue from distribution rights for labels
#4: Tying
iPods and MP3 players are need to play the
music for the customer
#5: Mixed Bundling
Buying multiple artists from the same record label
for a concert
Snapshot: Industry Analysis
Music Production Industry at a Glance
Key Statistics:
•Revenue: $7.5 Billion
•Profit:
$188.1Million
•Margin: 2.3%
•Annual Growth 05-10: -9.7%
•Annual Growth 10-15: 1.7%
How Major Labels Feel
Snapshot
Why is Music Declining?
• Pirating
–
Illegal downloading directly and
indirectly caused the music industry to
go into decline.
• Consumer Behavior
Changes
–
Since 2005, consumers have turned to
individual track purchases instead of
bundled albums, causing revenue to
fall and margins on new sales to
narrow.
• Devaluation of music
–
–
Access to free music makes consumers
less inclined to pay high prices
Cheap digital songs devalue physical
bundled albums
• Big Time Artist Going
Independent
–
–
Madonna's, Michael Jacksons, Justin
Timberlake's, etc bring in big amounts of
money for labels.
Radiohead
the Facts of Modern Pirates!
The International Federation of the Phonographic Industry (IFPI):
• Estimates 95% of music downloaded worldwide is done illegally!
• Illegal piracy of music costs the broader US economy as much as
$12.5 billion in losses and 71,060 jobs annually
•Between 2003 through 2008, the industry sued over 35,000 individuals
Preventing File Sharing
• Attacking the pirating systems
• Napster, LimeWire, FrostWire, Kazaa, etc.
• Updating digital file protective encryptions
• Digital Rights Management (DRM)
– software that can detect, monitor, and block the use of
copyrighted material
– limits or prevents the sharing of downloaded music
– opened the door for new ways of legally distributing
digital content
– different versions of DRM allow different access to files
The effect of these efforts appears to be positive, with growth
in legal downloading now exceeding illegal file sharing.
4 Current Trends
Profit margins decrease
Shift to Tech Based
Business Models
Long Tail Marketing
Digital sales increase,
growth slows
Profits Margins Sucked Dry
• Down from over 15% in mid 1990’s to 2.3% in
2010.
Year
Warner Brother
Music Group Net
Income Over the
Years
2006
$60.0 Million
2007
($21.0) Million
2008
($56.0) Million
2009
($100) Million
2010
($143) Million
Profit Margins Across Industries
Profit Margin Comparisons
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
Profit Margin
Shift in business models: Tech is future
Physical  Digital
– In 2010, the big four shift budgets
from physical distribution models
to investing in new technologies for
digital distribution.
• Itunes
• Advertising based models
– Pandora
– YouTube
Invest
The Long Tail Marketing Trend
•Digital Music allows for greater variety amongst music
groups and makes it easier for consumers to find lesser know
artists of their liking up and coming artists to find a target
market
Trends of Digital sales
– Digital Sales are increasing
but growth is decreasing
• 28.1% growth (08), 18.7%
growth (09), 5.4% (10)
• Mathematical terms: sales
increasing but marginal sales
decreasing
Marginal Change of Digital
Music Sales
Digital Music Sales
30
25
20
15
10
5
0
2007.5 2008 2008.5 2009 2009.5 2010 2010.5
Percentage Change
Structure & Market Share
Industry Structure
•
•
•
•
•
•
•
•
•
•
Life Cycle Stage- Decline
Revenue Volatility- Medium
Capital Intensity- Medium
Industry Assistance- Low
Concentration LevelRegulation Level- Heavy
Technology Change- High
Barriers to Entry- High
Industry Globalization- High
Competition Level- High
Market Share & HHI
Company
Market Share
Universal
(Vivendi)
30.6%
Sony
26%
Warner Group
14.6%
EMI
10.7%
HHI=1,940.01
Math: (30.62+262+14.62+10.72)
HHI Categorization:
Less then 1,000= Competitive
1,000-1,800= Moderately Concentrated
Greater then 1,800= Highly Concentrated
Target Market & Product Segmentation
Target Market: Ages 15-45
Product Segmentation
the FUTURE
Preparation for the Digital Age
UMG: Adaptive pricing strategies for their most profitable
sectors
Sony: Consolidation and innovation
WMG: Aggressive new cost management strategy to prepare
for digital age
EMI: Enthusiastic about embracing the digital age, but very
preoccupied with survival
Universal Music Group
Adaptive Pricing Strategies for their most Profitable Sectors
The label will reduce the average wholesale price of albums from $10.35 to $7.50. This is equivalent to a Large Meal
at McDonald's
UMG is actively working with cell phone manufacturers, including Apple and Google, to improve mobile digital
music technology.
Sales for streaming services as well as full track and album purchases.
UMG is also the principal participant in VEVO, an online streaming music video service.
the
Short advertisements before the music videos provide income for the labels and allow fans to access
service free of charge.
Since its launch VEVO has already grown to the #1 music video website, receiving 44.7 million unique
viewers in July 2010.
Sony Music Group
Consolidation and Innovation
SME joined in a partnership with UMG for VEVO launch in December 2009
Reconstructing cost have been the bulk of their losses to date
These costs include severance of benefits as well as lease and contract terminations.
Sony has incurred restructuring charges of $14.2, $8.69 and $67.73 million in 2007, 2008, and 2009
Abandoning the Physical CD Despite:
SME experienced market share increases in physical sales of new releases and catalogue albums as a result
of strong demand for Sony artist Michael Jackson and Susan Boyle.
Licensing Deals:
Sony benefits from its advances in digital distribution including licensing deals with Apple, Nokia,
Vodafone, MySpace and Amazon.
Warner Music Group
Aggressive New Cost Management Strategy to prepare for Digital Age
Unique Distribution:
services
WMG has partnerships that enable distribution of the label's music online and through mobile
including partnerships with News Corp's MySpace Music and Nokia.
360 Deals:
Like its major competitors Warner Music Group has also expanded into artist image and brand
management, which includes merchandising, sponsorship, touring and artist management.
By utilizing in-house resources and some acquisitions the label has been successful in
embarking in these expanded-rights deals with a number of represented artists.
EMI
Enthusiastic about the digital age, but preoccupied with survival
EMI has attempted to embrace digital music more enthusiastically than their competitors.
EMI removed Digital Rights Management (DRM) from their catalog well before its competitors, allowing files
to
be traded easily.
EMI's current debt obligations to Citigroup, talks of a merger or, more likely, a licensing deal with Warner, Sony or
Universal for the distribution of EMI's catalog in the US have resurfaced and been the focus of the EMI record label.
Industry Recommendations
Stricter Security of Intellectual Property
Cheaper Physical Products
Label Consolidation
Artists Social Media Site Management
Free Music
Attractive Multiple Revenue Streams (360 Deals)
Encourage Diversified Works for Multiple Industries