Through the 20th century, record companies became the largest player in the music business. The business has largely been dominated and controlled by the record industry, as the economics of mass-production of copies allow the manufacture of music recordings for a small fraction of their sale price.
By 1999, the recording industry is dominated by five major companies that control about 85 percent of the marketplace for recorded music worldwide. The "Big Five" are Bertelsman Music Group (BMG), Electrical and Musical Industries (EMI), Sony Music, Universal Music Group (UMG), and Warner Music Group. The transformation of the mainstream record labels from commercial "independents" to members of corporate "groups" that in turn are owned by major global conglomerates has greatly increased concentration of ownership. The industry is moving toward tight oligopoly, where four or fewer firms hold 60 percent of the market.
Independent labels, however, are those not owned in whole or part by the Big Five, although many of them do have distribution deals with the majors corporations to assure their product reaches all markets effectively. Throughout the 20th century, smaller labels showed themselves to be better adjusted to changes in popular music forms and popular taste. In the mid-1990s, independent labels accounted for about 21% of record sales in the United States, releasing 66% of the titles. The scale of these companies' operations permits low-cost production, marketing, and distribution, allowing some to make a profit even at a comparatively low sales level. When a recording artist on an independent label begins selling tens or hundreds of thousands of copies, the profits can be enormous, which often arouses interest from the major players. As the upstart independents gained sales momentum, they were acquired by the larger companies. Decades of these acquisitions since the Depression led to the dominant of the Big Five described above.
The Internet is a big tsunami (in light of recent event) that changes the landscape of the music industry forever. The Internet, by making free and non-free online distribution of music, has deeply affected how business is conducted in the record industry in terms of distribution channels, copyright and the economic structure of the major players in the global market.
Initially, the Internet was viewed as an opportunity by some of the major players as a new channel of promotion. However, after the existence of Napster and few others, the majority considered it as threat because of the increase in the free file sharing. Consequently, for the Internet to be an opportunity for the major players, they had to adopt new business model in terms of distribution for online customers while keeping their conventional distribution channels.
With internet and peer-to-peer network, music industry's customers have a new way to obtain music. They no longer have to go to the store to pay for an album or single but instead download it via the net for no charge at all. Peoples are quickly shifting to digital music because of its free and easy access. It has been a trend in music, as well as in television, movies and print. The Recording Industry Association of America (RIAA) reported data on the music industry's sales by format over the ten-year period from 1998 until 2007. The data in the table below is from the 2007 report.
Those in the music industry have begun to worry that this trend would affect its business because customers would turn to the free alternative which is downloading music rather than buy a legal copy of the record. The music industry has experienced many different changes in its technologies, from vinyl discs to cassettes to CDs and MDs . Even after all those drastic changes the music industry has managed to survive. So the question is why any of those are any different to the switch to digital music. This is possibly because the giant music corporations such as Sony had control over these technologies; therefore they managed to escape unharmed and even boost sales. The difference now is that the music companies have no control over the music traded online. This means that they have lost the control of distribution, packaging and maybe even promotion. The industry respond to this threat was searching for technological solution in order to prevent piracy, going to court to sue for copyright infringement, the five major players and others offered their own authorized online distribution joint venture, all in attempt to keep their power in the market.
The Recording Industry Association of America (RIAA) stated that file sharing is only "one factor, along with economic conditions and competing forms of entertainment that is displacing legitimate sales." The industry is rethinking its position, although change occurs slowly. The internet may pose a threat in the sense of record sales, but it has helped the music industry indirectly in many other ways such has promotion, exposure, and expanding its horizons. People do not download entire CDs. They download a few songs, typically the hits that one would also hear on a Top 40 station. This suggests that peer-to-peer is much like the radio, a great tool to promote new music. The problem with radio as a promotional tool is that it can be quite expensive for labels to get radio stations to play their music. Peer-to-peer networks are promising because they make the market for music promotion more competitive. From the perspective of the music industry, the more competition among peer-to-peer services, the less costly it will be to promote music.
Furthermore, the internet has helped the musicians and artists more than it has with the record companies. Artists are able to gain better recognition with the support of the internet. Artists can also offer snippets of their songs on the internet via their website, bypassing the record company as middle man . There was a time when metal music was almost completely underground and it was hard to get a hold of the songs. However, with the introduction of file sharing and the internet, metal fans were able to share tracks and discuss bands of similar interests . The evidence is obvious today as metal music is just as available as any other genres. Even though the internet helped to spread and make available a formerly underground genre which seems like a positive effect, it has been argued otherwise by its skeptics. This is because the large profits of record companies are generated by catering to large demographics with similar music interests, so by introducing more genres it downsizes the demographics making it more difficult for the record companies to satisfy the increasing diverse interests .
The internet is a technology filled with ever-changing potentials. If the music industry tried to better understand the technologies and opportunities and utilized it instead of fighting it, the damages could be minimized and profits could even increase rapidly.
The major four competitors are EMI Group, Sony Music Entertainment, Universal Music Group and Warner Music Group. All competitors are part of Parent Corporation except EMI Group. Competition is based on keeping successful artists with the company as well as discovering newcomers in order to establish a long term contracts. Less than 5% of the major label releases were profitable that made the competition intense in terms of finding creative new comers artists. Most of the other organizational structure was similar within the major five players because competition was based mainly on labels rather than companies. However, Sony Music had a competitive advantage in terms of hardware technology devices that was derived from its parent Sony, a Japanese entertainment conglomerate. All major players have the ability to respond to any move that one company would make. After passing the trigger stage because of the new technology that is connecting sellers and buyers, it is predicted to be a very slow transformation within the industry, and this is due to the fact that we have a combination of customer needs. While industry sales profits were 3.2% from the internet in the year 2000, 83.2% were from conventional sales channels. Therefore, it is unlikely that a technological change will unseat the current leaders in music industry.
The advent of broadcast radio as well as Internet made many record companies change their organizational structures to fit to the new technology. To be a survivor in any industry, firms must be flexible to the changes of technology. Therefore, BMG also need to fully respond to this challenging environment by adopting well-structured digital distribution system to replace its physical production facilities.
BMG Entertainment is one of the earliest to enter the online opportunities. It created websites to attract consumers and was the first to use downloading technology as promotional tool. The problem with the current strategy is that consumers are not satisfied with the services that Getmusic.com is providing in terms of the limitation of the services in terms of downloading, burning to CDs and streaming.
. The main issue for BMG now is how to create a sustainable business model for the internet distribution while focusing on the daily business of scoring hit records. The main objective of developing the Internet sales channel is to alter BMG position, and promote both in order to maximize revenues and market share. In addition, BMG has to respond to the new start-up companies that are trying to establish online retailers' positions.
After analyzing the current environment of the music record industry, BMG and its current strategy, there are three alternatives that BMG can consider for implementation. The first alternative is to keep the current strategy with its joint venture Getmusic.com. The second alternative is to create exclusive joint venture with existing online music retailer. The third alternative is to lobby with all of the major recoding companies to create a giant joint venture for multiple common goals.
The gains of the first alternative are no additional cost that is required, focus on core competences, use Getmusic.com as testing channel for new albums, use Getmusic.com as experimenting method for the new distribution channel in the industry before BMG make substantial move, keep BMG with the other players in the market. Losses are Getmusic.com is not successful so far, conflict of interest between partners, opportunity cost.
The gains of the second alternative are more control towards the new distribution line, flexibility in terms of price settings, first move advantage, gain experience of the existing online retailer. Losses are high cost for the new venture, more risk on BMG due to the uncertainty in the market, less focus on the core competences.
Giving the gains and losses for the first two alternatives, I would recommend the third alternative for the following reasons. Establishing a giant venture between all of the major players by lobbying has mush more gains for BMG as well as for the other major players. The first goal for this giant venture is to search for the best technology that could be used by all major companies to disable consumers from copying the CDs as well as to standardize the encryption in the industry, which in turn will reduce the risk of decreasing sales. The second goal is to lobby in the legal system for the interest of all major players; a giant venture would make it easier to have common interest. Another goal is to make it much more difficult for others who are thinking of entering the market; a giant joint venture would create a competitive advantage that even the current online distributors could not survive. Another goal is to use the new joint venture as a testing channel for new artists because this is the most costly part for the whole industry.
As one of the leaders in the industry, BMG has to pass the third alternative to the other four major leaders in order to convince them that this would be the best move giving the current threats that the major companies are facing. The five major companies have to use all of their albums in the new giant venture, and in this way competing by others would be very hard. Consumers would use this channel because it has more than 85% of the albums in the market. Through online promotions, the new venture would gather information on new prospective buyers for new albums. Therefore, all the major companies can make their marketing strategies more efficient.
By following the third alternative, BMG would reduce the risk that is associated with the next move. BMG would be heading in the same direction of the industry as well as focusing on its core competence. Because of the uncertainty of how the new business model would look like, there would be new business model for the whole industry. This alternative is the lowest risk in terms of financial cost.