Analysis of music industry and EMI music

Emi Music is one of the largest and trusted sound recording studios in the word. In general, this is the synonym of reliable cooperation, high quality services and trust of the clients, hence, the reputation of the company is high enough. The aim of the paper is to analyze the competitive environment as well as the financial performance of the company. (Vittes, 2009)

Competitive Environment

EMI is regarded as the third largest sound recording studio in the world after Universal Music Group and Sony Music Entertainment. EMI sells its production in 50 states of the world, and the company owns the rights for more than 1 million music compositions. The key competitors of the company on the British sound recording market are Modern World Records, Rockfield Studios, and Yellow Shark Studio. (Samuels, 2008)

Corporate Strategy

The strategy of the company presupposes providing high quality sound recording services for musicians and singers. This involves offering them musical instruments, sound recording and sound processing equipment. The music should be provided to consumers in any form, at any time and in any place. The current changes in the company are closely linked with the new practice of music retail – digital and mobile content promotion, as the sales of this type of data have increased essentially for the recent few years. Additionally, in accordance with NPD Group marketing studies, the sales of internet sold music will equal CD sales volumes by the end of 2010. (Galo, 2010)

Financial Performance

Financial report of EMI for last 5 years shows a very positive structure and significant above average performance. Constant revenue generation and high dependence on fixed asset actually gave the company a very good operating profit.

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Though EMI has very low fixed assets due to the industy structure but their net worth is very high as they got very well reputed non tangible assets such as good will, backed by previously owned record labels.

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If we take a look in profit margin ratio, we can see a stable ratio figure till 2007, but on 2007 it had negative figure in on net profit after tax due to acquisition by Terra Firma, subsequently triggering a chain event of selling off assets and restructuring depression. On 2007 they also had to incur significant increase in differed tax as well as current tax. This clearly backs-up the new structure implemented by the new management.

Now if you take a look at a gross profit ratio we can see the margin is very consistent over last 5 years and kept an average of 15%. This means the Director actually set a benchmark and maintained it very well. This shows they may have a strategy of a eye catchy stable company for investors.

On net asset turn over we can see it had a decline from 2006 to 2009 but actually picked up on 2010.The music industry saw a decrease on their sales because of decline of traditional market and retail environment combined with the issue of privacy as well as industries structure and competitive environment . The same factors also affected ROTA which also saw a declining trend after 2006. But for both ROTA and Asset turnover ratio, the marginal increase on 2010 is mainly due to interest rate swap and Bank term loans. The same factors may also have influenced the same impression on liquidity ratio as well as current ratio.

The liquidity ratio also shows a very constant approach by the directors to keep the company more lucrative for getting future finance and also getting a positive view from investors.

When it comes interest cover ratio EMI had a decline from 2006 to 2007, and maintained a very steady interest payable ratio. But on 2010 the interest cover ratio jumped to 29.94% mainly due to decline in interest payment , backed up by long term debt and restructuring of debt policy. This could be contributed from international operation and high degree of dependence on fixed asset.

ROCE further backs up the new management strategy and hands on approach on company profile to the public, which shows a general confidence to the public on its asset utilizing capabilities. It also tells us that after 2007 the company actually puts on more efficient operation and started utilizing its capitals on a more rehearsed manner, though it had an significant fall on 2007 due to massive restructuring and management change.

Economic indications

The level of inflation will affect EMI’s business planning. If the inflation level rises then EMI will have to review their strategy and how they are going to continue to get consumers to buy into a market where prices are rising, as well as keeping the artists for the labels that they have.

Business performance of the company has worsened over the latest five years, but actually picking up the pace on first quarter of 2010. It can also relate to the interest rate increase as well as reducing inflation. As the economies of the world seeing positive sign after the recession, consumer confidence is rising. We can even see this also effects UK economic indicators such as personal disposable income. Business investment is also increasing though there are slight increases on extent of regulations.

Conclusion

So the overall performance of EMI is actually foreseeing a positive development and market confidence which in terms of more revenue generation opportunity. On the other hand, the new financial management has to play its role to bring back the confidence that the company once enjoyed.

Appendix

PESTEL Analysis

Political

1. Taxation

The most important factor could be taxation for political which is controlled by government, it will effect music industry’s incomes, as well as consumer preferences as the more the VAT on music the more the price of music.

2. Public expenditure controls

When People’s expenditure being controlled which lead t o CD sales decline, and it will affect the whole music industry profit at the same time.

3. Government stability

Government stability is positive to music industry, as for any business it will harm the total business procedure and policies, if there is no stable platform for business.

Economical

1. Interest and inflation rates

Inflation can affect consumer spending, though based on demographic but it also can influence greater performance to music industry if targeted to specifically to the generation who gained from change of Interest and inflation rates

2. Consumer confidence

If the consumer’s confidence is high it means they are ready to buy and actually make lot of purchases. Music is always one of the things that they will keep among their first priority list for that spending.

3. Economic growth prospects

When the country’s economy increases, the whole business environment expands as a whole. So more choice of suppliers as well as increased consumer base.

4. The business cycle

The maturity if the industry has a significant impact on competition as well as profit and cost.

Social-cultural

1. Values in society

The different culture can enjoy different music, so the musical industry should change their music style by different values in society.

2. Changing lifestyles

The most dramatic recent change in ‘buying behavior’ has been found to be among the younger generation. There is also the issue of increasing substitute goods from different industries, such as video games and DVD that compete against the music industry as a whole.

Technological

1. New product potential

New product has potential, creating new competition, also new way of reaching customers and delivering product

2. Changing technology

The future of the music industry is unclear as new technology is changing the way in which consumers search for and obtain new and old favorite music. As older methods of music exploitation prove to be increasingly ineffective, major entertainment companies are changing their platform for finding, growing, and ultimately selling artists (Walaika, 2007).

3. Rate of technology transfer

The music industry has been seriously affected by digital music sharing websites, such as Napster and Baidu. CD sales have gone down as a result of this. New technology, such as Mp3 players have been introduced to substitute for CD players, which are smaller and more convenient to carry. One can buy music off the internet by purchasing using credit cards with the instant ability to download the music.

Environmental

1. Energy supplies

we may use natural resource to make different styles for music covers and labels so that music industry can produce CD or DVD with high quality material. Energy consumption for the whole music experience is an environmental issue, so how much carbon footprint is developed by this is an going concern for the industry.

Legal

Company Law

Copyright protection laws are paramount within this industry. Copying, making adaptations, public performing, public issuing (copies of) and broadcasting (Chalmers, 2007) are illegal unless the owner of the copyright has given permission for any of the specific activities to be done. A copyright normally lasts for 50 years.

PESTEL

Thing which may change

Frequency in

how this will change (1-5)

Impact positive or negative

(+/-)

Impact by dynamics (ie is the significance/importance of the implication (↑↓→)

Importance or Impact/Relevance

Very

high, high, medium, low,

Very low

Which area of an organizations finance is it likely to affect (B/S,P/L,C/F)

Political

Taxation

Environmental legislation

Public expenditure controls

Government stability

Economical

Interest and inflation rate

Consumer confidence

The business cycle

Economic growth prospects

Disposable incomes

Labour costs

Socio-cultural

Demographics

Values in society

Chnging lifestyles

Changes in

consumer tastes and preferences

Levels of education

Technological

New product potential, creating new competition

New discoveries

Rates of government and industry expenditure on research and development

Changing communications technology

Rate of technology transfer

Environmental

Energy supplies

Legal

Company Law

Business regulation

SWOT

SWOT analysis was devised by Albert Humphrey. It evaluates the Strengths, Weaknesses, Opportunities, and Threat in order to pursuit a specified objective. As the objective for this case is to broaden the digital music market in UK; therefore, the analysis will emphasis on the Strengths and Weaknesses of EMI as well as will determine its ability to embark upon the Opportunities and Threats generated by the market.

Strengths:

Strong global presence

– EMI Groups are strong global presence as they stand in a worldwide market which covers almost 50 countries. The major markets are in North America, Europe, Latin America, UK and Ireland, Australia, Japan and Asia.

World largest independent music company

– EMI is the world largest independent music company. Its market share is 12.6% in 2002. With the large size, the company can get many benefits such as cost reduction from economic of scale. Furthermore, it can attract the potential staff and artist to the company which have a strong position for the future.

Financial Performance

– The reorganization of EMI Record Music Division could improve the operating profit as sales in fiscal 2003 was decrease from 2002 but the company increased in operating profit about 33.1% compare to 2002.

World class artist roster

– There are over 1300 artists on a roster such as David Bowie, The Beatles, Norah Jones, Queen, Robbie William etc. and release more than 1000 albums every year.

Weaknesses:

– The online catalogue of download is not raise customer awareness as it should be.

– It is not popular as a top digital music download site e.g. iTunes, Napster, Amazon MP3.

– The price is higher than the market leader in digital music downloads.

– The company doesn’t have a multinational and a larger corporation backing up as EMI is the top five independent music company. It has to produce its own resources.

Opportunities:

Joint Venture / collaboration

– In a joint project for mutual gain, EMI has a joint venture strategy with a large corporation such as Apple Computer (iTunes) and Yahoo. This can be the big opportunity for EMI in a recent merger stopped.

Internet sales

– Internet builds the fastest media expansion in music distribution. The downloading trends continue growing. Apple (iTunes)’s success has show that the internet channel is possible to sell download music. There are a huge number of customers willing to pay rather than download for free music. It is the opportunity for EMI to enter to internet channel in order to increase market share.

More Open M&A regulatory

– The liberalization of M&A in music industry increases the opportunity to EMI Group to attain or join with the other music company. It can increase EMI market share and resources in order to compete with others in the industry.

Focus on market where it has a strong market share and growth

– The big opportunity for EMI may be in the strong share market such as UK & Ireland rather than in the US which is the biggest market for recorded music due to EMI has the problem to gain a market share in the big market. To focus on the potential market, it can generate more profits and strong position. EMI also has to focus more on the new growing market such as Japan and Asia region.

Provide the new channel to support technology

– The people use mobile phones to be their entertainment more and more. Listen to music on the go be used as their means but there are no site online to provide tracks with sound quality to support each model of mobile.

Threats:

Poor economics condition and exchange rate fluctuation

– EMI is the global company. It can be impacted by poor economics condition and exchange rate fluctuation. These threats can affect to company’s revenue and profits.

Aggressive Competition

– It is high competitive situation in recorded music industry which dominated by five larger companies; Universal Music Group, Sony Music Entertainment, Warner Music Group, BMG Entertainment and EMI Group. EMI has to aware of aggressive competition and built the suitable strategy to make competitive advantages.

Impact of piracy (CD burning and mass downloading)

Porter’s Five Forces

Five forces framework which provided by Michael Porter (1979), is beneficial to analysis industry and to develop business strategy. It is the tool to analyse the competitive intensity. Resulting from that, marketers can identify the key and the attractiveness of industry in terms of profitability of operations. The Porter’s five force analysis factors are considered under micro environment which decide the company’s ability to supply customers effectively and efficiently. The followings are graphical presentation of the Porter’s five forces.

Bargaining power of Suppliers:

Music producer for artists and internet services providers including website management companies are the suppliers for EMI. For signing of Artists case, the bargaining power can be high as it is very difficult to sell for a record label. In contrast, Web developer case, the bargaining power can be low as the competition in the market is growing promptly.

Bargaining power of Customers:

The bargaining power of customers is getting higher due to the fact that competition and online piracy is increasing. To cope with this force, the company has to use promotions such as discounts and draws in order to attract customers.

Threat of New Entrants:

Amid the digital music market era, the threat of new entrants always remains at a high level. To consider the entrance into the digital music market of the high ranking online brands such as Amazon and eBay with the reputable brands such as Walmart, the competitive field is increasingly being threatened.

Threat of Substitutes:

The substitute for music industry is pirated music which offer free of charge music. Due to the fact that the choice of a customer to purchase and to download music is remaining; the threat of substitutes is very high.

Industry Rivalry:

It is high competitive in digital music industry as there are a huge number of competitors such as Napster, iTunes, AmazonMP3, HMV, Zune, etc. Each player in the market tries to attract customers by offering various promotions; therefore, there is high threat for EMI.

After using the five forces analysis for EMI, it found that the ability to generate high profits in the digital music industry is difficult. Alternatively, there is the probability to penetrate the market by lower margins in order to generate scale based profits.