Entertainment Business

BMG - The Future of Music Distribution

The music industry has always been an evolving industry where new technology continually "breaks the frame" and changes old processes and business plans to accommodate new technology. In August 1999, CEO of BMG Entertainment Strauss Zelnick had to decide how to incorporate the Internet into his company. Should the new "digital customers" be part of the current process or a separate distribution entity? Should BMG change the current distribution process to meet the needs of the digital customers, create a new distribution process for them, or to limit their activities in the online arena until the online market is mature enough to support the necessary changes to the music recording industry.

Music Industry History

The music recording industry began with print sheet music, where the process and business model were similar to those utilized by the book publishing industry. The first major change to the industry occurred in 1877 when Thomas Edison invented the cylinder based talking machine. But competition came early from Alexander American Bell's American Graphaphone Company and Columbia, a maker of coin-operated talking machine. These two competed side-by-side until 1901 when Victor Talking Machine company launched of discs recordings. Victor's disc invented by Emil Berliner, quickly displaced cylinders and became the industry standard. Even though Thomas Edison invented a better disc later on called "Edison Diamond Disc" the industry and public had already switched to the Berliner discs. The lesson to be learned is that in the music industry, it is key to be on top of the new technology and develop strategies and processes that ensure the technology become the industry standard.

At all stages with the invention of radio, TV, MTV and CDs the historical time line is one of constant innovators. The new independents become the driving force of change. A smaller and new company will introduce a new way to consume the new technology. The consumer falls in love with it and then the higher quality new medium produces increase sales. Initially the major industry companies will refuse the new technology, but as the consumer steers toward the new technology, the major companies will come together to agree on a standard and process.

During the radio boom, the major industry agreed to sell players of two different standards i.e. 33-rpm and 45-rpm and discontinued the EP. In the 1950s with the advent of rock roll and FM stereo broadcasting, radio and disc jockey became the way to promote music, and this new medium allowed for the barriers to entry to be lowered. As a result, small independents recording companies were highly successful and produced most of the hits in the industry. As time went on, "the majors" developed a complicated distribution network and promotional channels and thereby reconsolidated the industry. By the 1999 nearly 85% of the global market is owned by the majors: BMG Entertainment, EMI, Sony Music Entertainment, Warner Music Group, Universal Music Group.

This is why BMG in 1999 has been on the forefront embracing new technology.

In 1995 BMG was the first major record company to create a set of branded web sites tailored to particular genres of music in order to attract fans with web sites such as

Peeps.com for hip hop, Bugjuice.com for alternative, Twangthis.com for country

Connect2music.com for adult contemporary. For example Britney Spears album was release 8 months before and the site gathered 100,000 names 80% bought her album.

The Music Industry

Current BMG Production Process

A&R - In a general contract with a newcomer artist, BMG will provide upfront capital for the production and marketing of the CD. Once the CD is distributed, this money is recouped via the artist's royalty payment. For example, in an arrangement where the artist was given $300,000 up front, the record label may excise the $2 per unit royalty fee for the artist from the first 100,000 units to recover the majority of this cost. After that point the artist would begin receiving his royalties. With more mature artist is per-case basis depending upon popularity. Provide raw material for BMG

Music publishing company - Mediates between the artist and the record company. While originally these were outside of the record company, in later years, BMG has established its own publishing entity.

Licensing - This department works in conjunction with BMG's publishing firm, and is responsible for purchasing and controlling the rights of those songs created both by lyrists and composers as well as by the artists.

Recording , Mixing & Editing - The record company manages the process and provides contacts and resources, while allowing the artist the creative freedom to produce their own material.

Manufacturing & Packaging- BMG is like a standard printer type shop. It prints a certain quantity of CDs and then switches production to the next job.

Promotion and marketing - The greatest expense to the record company is promotions. In part this is because record companies "cooperative advertising" arrangements through which the pay a portion of the advertising efforts of the retailers. In return, retailers agree not sell below an agreed price. It is important part of the strategy is to lobby radio and television DJs with their artists. All major labels utilize similar tactics and the promotion is important when competing against on average 135 singles and 95 albums each week.

Distribution - BMG distributes CDs directly to their retailers using their own trucks and resources.

Additional Factors

Workers Organization - Within the industry, workers are organized in a number of ways. From the broadest strokes, they can be organized into the creatives - artists, mixers, and producers; and "suits" - business executives, CD manufacturers, distributors, etc. Workers may also be organized in terms of their specific job title, and in some cases they are organized in unions.

Quality of Product - The quality of a CD is determined both in terms of the sound quality of the CD and the caliber of the artist. Much of this is also subjective, as the music industry is a hit driven one,