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MUSIC INDUSTRY

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Title: MUSIC INDUSTRY


1
MUSIC INDUSTRY
2
OVERVIEW
  • U.S. Sales 2002 (U.S. accounts for one third of
    sales)
  • Music 12.6bn (12.5bn,1996)
  • Games 10.3bn
  • Movie Box Office 9.5bn
  • Movie Rentals 8.2bn

3
MUSIC REVENUE TRENDS
  • Worldwide Sales for Music were 32 bn 2002
  • But they were 35.5 billion in 1994 (!)
  • 2001-2002 sales of CD albums fell globally by
    6, singles by 16, cassettes by 36, while music
    videos grew 9.
  • In 2000-2003 global revenue has fallen 25
  • Piracy / CD burning represents annual lost
    revenue of 4bn.

4
MARKET SHARE 2002
  • Universal (Vivendi) 25.9
  • Sony 14.1
  • EMI 12
  • Warner (AOL Time Warner) 11.9
  • BMG (Bertelsmann) 11.1
  • Independents 25

5
PLANNED MERGERS 2003
  • SONY CORP TO MERGE MUSIC OPERATIONS WITH
    BERTELSMANN (BMG) IN JOINT VENTURE (SONY BMG),
    EXPANDING MARKET SHARE IN US TO 28,SHARING RISK,
    AND CUTTING COSTS BY 300M. WILL MERGE ONLY THE
    LABELS, NOT MUSIC PUBLISHING OR CD DISTRIBUTION
  • EMI PLANNING TO ACQUIRE TIME WARNER MUSIC (TW
    WOULD HAVE 25 SHARE)
  • DREAMWORKS PLANNING TO SELL ITS MUSIC DIVISION TO
    VIVENDIS UNIVERSAL WHICH IN TURN IS LIKELY TO BE
    SOLD TO GES NBC

6
SOURCES OF COMPETITION
  • Piracy of CDs and Cassettes. In No.2 market,
    Japan, 236m CD-Rs were burned in 2002, while
    legitimate CD sales were 229m. In Spain, two out
    of five records were pirated.
  • In Mexico, 1 in 2 people buy pirated music
  • MP3 file swapping
  • Increased access to Internet worldwide
  • Competition from new forms of entertainment
    including video games and DVD films
  • Downward pressure on prices

7
Features of Consumption
  • Cycles of rapid growth and relative decline
  • Major growth periods facilitated by technology
    and content (e.g. rockroll 1955-1969)
  • Considerable time spent listening to music
  • More hours per dollar spent on recorded music
    than on other media, except TV
  • Infrastructure of in-home consumer electronics
    changes in technology affect system
    compatibility, distribution, sales. Technology is
    expected to change
  • Depends on socially-constructed culture of
    listening
  • Subject to massive changes in taste

8
Industry structure
  • Major companies own manufacturing and wholesale
    distribution facilities (Vertical integration)
  • Major five Universal Music Group (Vivendi),
    Warner Music (AOL Time Warner), Bertelsmann Music
    Group, Sony, EMI. (High concentration, partly
    through horizontal integration).
  • Popularity of product highly uncertain
    uncertainty reduced through star strategies,
    genre strategies, over-production, structured
    contracts (commonly five renewable 1-year
    contracts, and royalty system that pays the
    artist 7-15 payable after costs are met plus
    songwriter publishing royalties), controlled
    novelty (incl. cross-over music).
  • Cheaper costs of production facilitate
    independents, often bought out by big companies
    when they generate appreciable revenues.
    Vertical integration (e.g. Motown) can prolong
    power and independence of smaller companies.

9
Promotion
  • Promotion as important as production
  • Single largest expense
  • Includes attempts to influence positions on music
    charts, radio play time (payola), tours

10
Oligopoly
  • Oligopoly a fairly consistent feature in the
    50s, 8 companies controlled 95-100 of weekly
    top-10 hits in the 80s and 90s, 6 companies
    controlled distribution of nearly all popular
    music
  • New fashions (e.g. rock and roll 1955-1970) often
    upset existing hierarchies, foster independents
  • Certain genres less controlled than others
    (rhythm and blues in the 1960s specialty labels
    today)
  • Old-style concentration correlated with fewer
    successful songs, fewer artists, more established
    stars, and fewer sales. But in the 1990s,
    concentration coexisted with high product
    diversity and better music. Perhaps because high
    financial concentration coupled with
    decentralization of music making decisions

11
Conglomeration
  • Synergies through ties to film studios, cable
    channels, multi-media conglomerates offers, e.g.
    film scores developed for general market rather
    than for particular narrative film yields
    cheaper music video music video channels provide
    vehicles for music artists stars can appear in
    chat shows, magazine articles, films etc. all
    owned by corporate parent vast archives provide
    competitive edge when transitioning to new
    consumer electronics formats
  • Conglomeration spreads risks and losses

12
Economies of Scale
  • Importance of first copy costs increases where
    ratio of fixed to marginal costs is high. More
    benefit to spreading of fixed costs across large
    numbers of units. Once fixed costs are covered,
    profit per unit is huge.
  • Increasingly national character of radio, cable
    channels, record chains with nationally
    coordinated inventory, sets high barrier for
    definition of market success

13
Organizing for Uncertainty
  • Structured contracts remove need for staff
    producers and engineers (though independents may
    have own studio, producers, staff), though most
    have own promotional office
  • Track records and reputations celebrity power
  • Pre-selection systems selecting that which is
    most likely to succeed in light of recent
    successes
  • Overproduction covering bets - and differential
    promotion more products are produced than can be
    successful, while promotional efforts are
    differentially assigned to minimize risk
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