Bmg Case Study Analysis

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STRATEGY (MGMT102)

CASE WRITE UP OF:

BMG ENTERTAINMENT

SUBMITTED BY: AISHWARYA MIRANIA AGARWAL

DATE: 11TH FEBRUARY 2015.

1. How does the advent of the Internet change the structure and economics of the music industry? Will major record companies continue to dominate the business?

Prior to the advent of Internet, the music industry was a kind of oligopoly, with 5-6 major players, like BMG Entertainment, Universal Music Group, etc. These companies handled almost every aspect involved in the distribution of music, from manufacturing of CD’s to handling legal issues and marketing. Composers, lyricists and performing artists solely relied on such companies to get their music to major retail stores, and then ultimately, the consumers. These artists received little remuneration as compared to the retail price of the CD’s sold, as shown in Exhibit 7.

A lot of expenditure was involved in the manufacturing, distribution, sales, marketing and promotion of the CD’s.

However, since the late 1990s, the music industry has witnessed significant changes in its structuring and economies. Internet brought in different types of music product for the customers. One was online purchase of CD’s, available on the net through various sites like CDNow and Amazon. Consumers could now buy music without having to visit retailers, in the comfort of their homes. They were given the option of choosing one mode of music from another, which was a change in the music industry, as mostly consumers could only buy CD’s/cassettes from stores to listen to music. This could greatly reduce the costs involved in distribution and sales of a product, as the “brick-and-mortar storefronts” way of selling could be eliminated, providing greater remuneration to the artists. In 1998, Record stores accounted for 50.8% of music sales, while the Internet accounted for 1.1%. Though the sales figure for Internet sale is low, it was estimated, that by 2005, Internet could account for 10%. The retail stores felt the increasing competition from the Internet, and by the end of 1998, 70% of the members of the National Association of Recording Merchandisers tried to develop an online presence. In this way, Internet changed the structure of retailing in the music industry.

The Internet brought with it the technology of downloading music. Consumers could now listen to music without actually purchasing a physical CD or cassette.  All that was needed to download music was an Internet connection and a computer. Although issues of piracy of music were involved, this, I feel, was a revolution in the music industry. The entire process of manufacturing the CD’s and distributing them was threatened in this case. The Internet also provided listeners with the option of listening to different sample music pieces before selecting what they want to buy. Previously, this could only be done on radio or TV stations, and these mediums were corrupted by the amount of money record companies paid for promoting their artists. The Internet provided a different medium of marketing, one that was practically cost free.

With the advent of easy downloading, major record companies could face losses, in terms of the demand for the products they sold to retailers.

Another major organization structure of the music industry was the performing artist. These artists were signed on by the major recording companies, which paid them royalty fees for the music they made. However, the royalty they received was quite little as compared to the retail price of their CD’s sold to consumers. This is demonstrated below:

As can be seen above, the performing artists were paid even lower than the amount of money spent on distribution and sales. Sometimes the artists also faced the problem of limitations on creative freedom, owing to the profit making agenda of the record companies. The artists could not produce songs that the companies felt would generate no returns. The Internet provided these performing artists with a different source to reach out to their listeners. Websites like MP3.com aimed to provide a platform to these artists to connect with their listeners without any intermediary recording company. With such a facility available, the artists could earn much more for their songs and CD’s, as the consumers directly purchased their albums by listening to their songs on the website. The artists had the freedom to record and upload whatever kind of music they made, and they could evaluate the success or failure of their efforts through various data the websites provided, like number of customers who visited their sites, number who downloaded their music and so on. Even though the popular musicians weren’t available on this site at that time, this could potentially be a more profitable and creatively challenging source for the artists, and could also provide a platform to various up and coming artists, who were not taken by major record companies. The Internet has the potential to take away the main producers of the recording company, and change the structure of the way artists work in.

With the Internet leading to such changes in the structure and economics of the music industry, there is a strong chance that the major recording companies would not be the dominators in the industry and maybe side tracked by the Internet.

2. Does BMG’s approach to the Internet make sense?

BMG was one of the companies in the music industry that started preparing for the advent of the Internet world from 1995. The company decided to invest $1 million per year in the World Wide Web. Initially, BMG looked at the Internet as a medium for marketing its artists and products, not as a direct means to sell its products. They set up various websites to promote different genres of music to different listeners by providing information, interviews, live broadcasts and so on. As the Internet was relatively new, this seemed like a good idea, as it helped the listeners get more details about their favourite artists from a source other than the TV or radio. The Internet was at their beck and call, and the views and clicks BMG received increased, as mentioned.