MUSIC INDUSTRY
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 $ 09.5bn Movie Rentals $ 08.2bn
MUSIC REVENUE TRENDS
Worldwide Sales for Music were $28bn in 2003, $32bn 2002, and $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%. Piracy / CD burning represents annual lost revenue of $4bn.
MARKET SHARE 2002
Universal (Vivendi) Sony EMI Warner (AOL Time Warner) BMG (Bertelsmann) Independents 25.9% 14.1% 12% 11.9% 11.1% 25%
Share of New Releases (U.S.) 2003
Universal 30.1%
BMG 18.3%
Warner 16.8% Sony 13.7%
EMI 10.2%
Other 10.9%
2003 Sales and Losses
Universal $3.7bn world sales (down 22%), through
Sept., $43m operating loss (down from profit of $207m 2002), despite slash of CD prices to $13. BMG $1.2bn world sales (down 8%) through June, $131m operating loss (down from $50m loss, 2002) Warner $2.9bn world sales (up 0.01%) through Sept, $9m operating loss (down from profit of $71m 2002) Sony Music Entertainment $2.08bn world sales (down 9%), through Sept., operating loss $49m (up from loss of $133m 2002) EMI $1.6bn world sales (flat), $129m operating loss (up 40%).
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), but was beaten to it by Bronfman investor group DREAMWORKS PLANNING TO SELL ITS MUSIC DIVISION TO VIVENDI’S UNIVERSAL WHICH IN TURN IS LIKELY TO BE SOLD TO GE’S NBC
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
Features of Consumption
Cycles of rapid growth and relative decline Major growth periods facilitated by technology and
content (e.g. rock&roll 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
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.
Promotion
Promotion as important as production
Single largest expense
Includes attempts to influence positions on
music charts, radio play time (“payola”), tours
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
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
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
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