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Jürgen Preiser and Armin Vogel ma non troppo" This sample is for evaluation purposes only: unauthorised use or distribution is forbidden *"
REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES screendigest
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The music industry in the 21st century
The music industry in the 21st century: Facing the digital challenge screendigest
Published May 2002 by Screen Digest Limited Screen Digest Limited Lymehouse Studios 38 Georgiana Street London NW1 0EB telephone +44/20 7424 2820 fax +44/20 7580 0060 e-mail [email protected] website www.screendigest.com
Authors Jürgen Preiser, Armin Vogel Jürgen Preiser has 15 years’ experience in Editorial Mark Smith music and film entertainment sectors with the Editorial/design David Fisher major multi-media companies Time Warner, Polygram and Universal. He has held national and international positions with these companies as Director Business Development, Director Strategic Planning and Director Market Research. Over the past seven years he worked on various international projects, particularly in new media. More recently, as Venture Director, Media at venture capitalist Venturepark Incuba- tor he was responsible for advising portfolio companies on their strategy and its implementa- tion, directing deal evaluation, and performing due diligence.
Armin Vogel is co-founder and managing director of the independent e-business consulting and business development firm Tivona Partners. Prior to that he worked several years as consultant and equity analyst for US and German banks, and as senior research analyst for Roland Berger Strategy Consultants. Most recently he held a position as head of research in the venture capital industry. He has
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden long experience with business research and analysis, having worked on benchmark and due diligence projects, industry and company reports, and numerous business plan evaluations.
All rights reserved. No part of this publication may be reproduced, transmitted, or stored in a retrieval system, in any form or by any means without the prior written permission of the publisher, nor be otherwise circulated in any form of cover or binding other than that in which is it published and without a similar
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7 List of tables and charts 19 Only with mass adoption of broadband and new devices will 11 Introduction online music delivery take off. Major record companies will 1 Executive summary continue to play an important role. Record companies will become 15 Traditional record industry has better at marketing artists. low growth perspective. 20 The main currency of the record Internet users and music industry will be the song instead of purchasers have very similar socio- the album. demographic profiles. Legal framework for prospering 16 Music will be consumed anytime online music market is largely in and anywhere. place. Non-physical distribution of music will help to increase catalogue sales. Artists will strengthen their 2 The global music market position in the record industry value chain. 21 The value chain E-commerce will replace 21 The economics traditional record clubs and mail 22 Who does what in the music order. industry 17 A handful of mega music 24 The global market This sample is for evaluation purposes only: unauthorised use or distribution is forbidden destination sites will emerge. 25 Repertoire Streamed subscription services 27 Distribution channels will prove to be the dominant way of 31 A publishers five main sources of delivering music. income The record industry needs ASP 31 Music publishing based business models. 33 How music publishers can benefit 18 There will be no absolute from the Internet protection against piracy. 34 The traditional music industrys Standardisation is a prerequisite prospects for mass adoption of online music. Population Huge investments in content Music spend per capita warehouses will be required. Pricing REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES Online delivery of music will see a Volume increases divergence rather than convergence Shift from analogue to digital of devices. Geographic expansion
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The music industry in the 21st century
3 The new music consumer 70 File sharing (P2P networks) 74 Music destination sites/Affinity 39 General consumer trends portals 77 Online record labels The music consumer 80 Internet radio 85 Obstacles currently preventing 41 Reach and buying intensity Internet radio becoming a mass 46 Music consumption in the context market of entertainment media in general 86 Challenges for traditional radio Reasons not to buy more records broadcasting and radio prospects Sources of awareness 89 E-commerce 49 Purchase motives and behaviour 89 E-commerce music market Behaviour at POS 90 Characteristics of preferred online products The Internet user 93 Challenges to music retailersthe changing structure of retail 52 Reach and usage intensity 96 Music e-commerce prospects 53 Socio-demographics 97 Digital kiosks 55 Music-related behaviour and 98 Consumer awareness and usage motives 98 Obstacles 99 Potential utilisation in the music industry This sample is for evaluation purposes only: unauthorised use or distribution is forbidden 57 4 Online business models 99 Strategy and prospects
Online business modelsB2C Online business modelsB2B
59 Digital downloads 101 Shopping aids 61 Challenges for the music industry 101 Recommendation engines and 63 Obstacles for digital downloads agents 64 Initial target groups 101 Example: Recommendation engine: 65 Subscription Gigabeat 66 Cable TV economics 102 Example: Recommendation engine: 68 Change of existing music Hifind consumption patterns 102 Shopping bots REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES 68 Penetration of CD-R and MP3 103 Example: Agent: CyMON players (developed by Agentscape) 68 Metered Internet access in Europe 103 Example: Shopping bots: books.com
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104 Music licensing platforms 120 Online copyright protection 105 Prospects technologies and methods Watermarking Encryption 5 The legal framework Fingerprinting Spoofing 107 Copyright 123 Digital rights management The Berne Convention 123 Secure Digital Music Initiative The Rome Convention (SDMI ) Trade Related Aspects of 125 DRM technologies and Intellectual Property (TRIPS) applications Agreement 125 Fundamental security approaches World Intellectual Property 126 DRM commerce platforms Organisation (WIPO) treaties 128 DRM business models 109 Case law Prevention models MP3 vs the record industry Marketplace model Napster vs the record industry Advertising-supported model 111 New legislation 133 Conclusion Digital Millennium Copyright Act (DMCA) European directives on Copyright 135 7 Digital music and new in the Information Society and technologies This sample is for evaluation purposes only: unauthorised use or distribution is forbidden Ecommerce The EU Directive on E-commerce 136 Compression formats 112 The role of collection societies 138 Short guide to MPEG codecs and proprietary compression formats 139 Storage media 6 Copyright protection and Flash memory digital rights management DVD-A and SACD 142 Broadband access 117 The problem 145 Wireless Internet access 118 Traditional approaches of Wireless data transfer and network copyright protection online generations 119 Example: New revenue source 148 WAP (Wireless Application REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES Protocol) 149 Services and applications 149 Barriers
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The music industry in the 21st century
150 Examples of music-related 183 EMusic.com services 185 InterTrust i-mode 187 Launch Media Location-based service 189 Liquid Audio Ringing tone downloads 190 Listen.com Song recognition 191 Loudeye Wireless Internet radio 193 Microsoft 152 Digital Audio Broadcasting (DAB) 197 MP3.com 153 iTV 199 Napster 154 New consumer electronics 201 NTT DoCoMo 155 Portable digital compressed audio 205 RealNetworks player 207 Sony Music Entertainment 155 Other devices 209 Viacom 210 MTVi Group 212 Vitaminic 8 Winners and losers 214 Vivendi Universal 215 Universal Music Group 160 Ability to secure financing 218 Yahoo 161 Alliances and partnerships 163 Strength of the business model 164 Positioning of companies 10 Market forecasts:North America and Europe
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden 9 Company profiles 223 E-commerce 223 Digital downloads and subscription 168 Amazon 171 AOL Time Warner 173 Time Warner Music Group Appendices 175 ArtistDirect 177 Bertelsmann AG 227 Highlights of record industry history 178 BMG Entertainment 231 Useful contacts 180 CDnow 235 Glossary 182 EMI Group
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2 The global music market 43 Distribution of consumer types in the global music market 21 Structure of the music industry: 44 Key determinants of the global music traditional and online market by age 24 Recoupment of advances 45 Music preferences by age group 25 Global music market value by region 47 Simultaneous entertainment media 2001 use 25 Comparison of price development 47 Leisure preferences by age for different leisure goods 48 Importance of marketing measures 26 Global music market unit sales by on the purchasing decision region 2001 49 Distribution of consumer types in the 26 Repertoire categories global music market 28 Share of distribution channels of 50 Distribution of behaviour among global music market 2000 consumers visiting a record shop 28 Top retailers with a global presence 52 Reasons to access the Internet 2000 52 Music reach, CD player and Internet 28 Global music market shares penetration in selected countries 29 Major acquisitions of the Big 5 53 PC and Internet penetration in record companies selected countries 30 Top independent record companies 54 Internet users by region 2000 54 Distribution of Internet user types 31 Music publishers global market 54 Reasons prohibiting the use of the
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden shares Internet 32 Global music publishing revenues 55 Top activities at music-oriented sites 34 Music spend per capita by region 2000 35 Population growth by age group 4 Online business models 35 Music market growth by age group 36 Music spend per capita vs GNP 57 Structure of the music industry: traditional and online 59 Download times 3 The new music consumer 60 Structure of the digital download business 42 World population and music market 62 Acceptable constraints to keep REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES shares compared prices low 42 Market growth through increase of 65 Subscription services that consumers music spending per capita are willing to pay for
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The music industry in the 21st century
65 Top features that would convince 89 Potential advantage of music online consumers to pay for subscription retail to consumers 70 Napster schema 90 US online retail sales by selected 71 Cross visitation category 2000 72 Napster usage 90 Motivators for online shoppers 75 Portals, affinity portals and niche sites 90 Top five online categories 77 Structure of the online music 91 Characteristics of online/offline industry products and value to customers 78 Online/offline A&R comparison 92 US and European music e-tailers: 79 Positioning of players price comparison May 2001 80 US radio stations website features 92 What inspires music purchase? 81 Arbitron US webcast networks 92 Brand awareness is critical success ratings report January 2001 factor 82 Number of radio stations on the Web 93 Characteristics of online/offline 83 Radio networks/stations strengths products and value to customers and weaknesses vs online consumer 93 Germany: books/music/video preferences purchasing in Germany 83 US Internet vs Internet radio and 93 Motivators for non-shoppers broadband growth 94 Online selling-related strengths and 84 Demographics of US population vs weaknesses of different retailer types Internet users and streaming media 95 Convergence of content formats and users platforms
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden 85 US: types of programming audio 97 Activities consumers use kiosks for streaming users listen to 97 Activities consumers would like to 85 Return rate to radio stations use kiosks for websites 97 Forecast digital kiosk market in Europe 85 Time spent on radio websites 85 Use of standalone multimedia players 86 US: growth of streaming advertising 5 The legal framework 87 Wireless Internet radio evolution 88 Online spending music users vs 112 Top 10 collecting societies average online users 114 Piracy percentages 88 Top music-related websites visited in 114 Production capacity past month by type 115 Forms of piracy REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES 88 US online shoppers as percentage of 116 Copyright piracy: music, video, population business software, entertainment 88 Leading online music retailers software and books 2000
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6 Copyright protection and 141 Music labels supporting each format digital rights management 142 Selected broadband technology 143 Forecast broadband penetration of 118 European broadband penetration of households in Europe households 143 DSL vs cable modem subscribers in 118 Broadband access drives audio/video Europe content usage 143 Broadband impact on Internet 120 Watermarking process activities 126 Example: How the InterTrust Digital 145 Mobile subscriber growth Rights Management system works 145 Mobile penetration 2000 127 Example: How the Verance 146 Worldwide SMS traffic forecast ConfirMedia monitoring system 147 Short primer on next-generation works networks 128 DRM prevention models 148 How WAP works 128 DRM marketplace model 149 Download time for a five-minute 128 DRM advertising-supported model music track 130 Positioning of major DRM players 149 Limiting factors to mobile commerce 130 Selected major DRM vendors 150 Forecast US mobile revenues focusing on the music industry 151 Forecast mobile entertainment 131 Partnerships revenues in Europe to 2005 153 Forecast US iTV revenues to 2005 156/7 Representative new storage media,
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden 7 Digital music and new connected and music playback technologies devices
135 Western European Internet forecasts 136 Data reduction by compression 8 Winners and losers format 137 Adoption of digital music 159 Global investment 138 Short guide to MPEG codecs and 160 Twelve months of business closures proprietary compression formats 161 Venture capital comparison US/EU 140 Global DVD-A disc replication 162 Corporate lay-offs forecast compared with other formats REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES 140 Hardware brands for SACS & DVDA
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The music industry in the 21st century
9 Company profiles 182 EMI labels and artists 203 I-mode access and menu site 168 Amazon: unique visitors per month categories 169 Amazons US activities and launch 204 I-mode development strategy dates 208 Sony Music labels and artists 171 AOL Time Warner: overview of 209 Viacom sales 2000 fundamental business areas 216 Universal Music Group (UMG) 172 AOL Time Warner: Revenue operations, labels and artists breakdown by segment 220 Yahoo: selected service categories 172 AOL Time Warner: EBITDA breakdown by segment 173 TIme Warner: selected operations 10 Market forecasts:North 178 BMG Entertainment: sales by region America and Europe 2000 179 BMG Entertainment operations and 224 Music industry revenue forecasts: artists North America 181 CDnows US activities and launch 226 Music industry revenue forecasts: dates Europe
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The record industry, after more than a down to acceptable levels leading to mass- decade of comfortable growth from the early market consumer purchases. 1980s to the late 1990s, must now adapt to The advent of the Internet, however, is sales increases that are more or less in line another story. with global economic growth. Since its conception the music industrys main growth Digital technologies create a host of driver has been technological changes of the new business opportunities. content carrier, which delivered music to the The parallel evolution of three distinct consumer. The evolution from vinyl LP to technologies is driving the increase in the eight-track, then to the music cassette (MC) number of business models available today. and finally to the compact disc (CD) brought These are: along with it a huge boost in revenues for n access technologyeg, Internet, the industry. broadband, mobile telecommunications These technology changes stimulated n software developmenteg, compression, consumer interest and led to huge sales gains, encryption, player formats as music listeners replaced huge parts of their n hardwareeg, flash memory, PDA. existing collections by re-purchasing music All three developments will have a pro- recordings on the new carrier. Admittedly, found effect on the music industry because it each technology change brought with it completely changes the industrys entire significant quality improvements over those value chain. They both allow and influence of the replaced carriers. The introduction of business models such as virtual record labels,
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden DVD Audio (DVD-A) or Super Audio CD online radio, digital downloads, streaming (SACD) appears to be just another step in and music destination sites. Not all the this evolution. But we believe that neither of business models being developed today will the two new carriers offers the consumer prove successfulie, be profitable. And enough added value, compared with the others will most likely be adopted by the CD, to lead to a new wave of replacement masses much later than todays forecasters purchases and significantly boost sales for the may want us to believe. Still it seems there is record industry. no doubt that the future consumer will have In the long term, we are convinced that much more choice of how he wants to con- Flash memory card players will be the new sume music than his counterpart has today. physical carrier for music and that credit card Whereas in the past the industry could size recordings have the potential to create a more or less passively ride out changes to the
REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES revenue boom similar to that caused by CDs. music carrier, with the coming of Internet However, there is still a long time to go Age, industry companies must actively drive before prices of these new carriers come changes if they are to prosper.
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The music industry in the 21st century
The Internet offers music creators and are established on the Internet under a legal performers the opportunity to take a more framework that is fair to both the industry prominent role in the industrys value chain and the consumer. If this is not done, then than they could in the past. Prince, Chuck D music piracy will continue to flourish both and David Bowie have all shown that the on- and off-line. Internet gives them, for the first time, the The Internet provides the record chance to control the marketing and industry with more than just an additional distribution of their music. distribution mode for incremental sales but, Although several functions of the music more importantly, a marketing and industrys traditional value chain, such as communication platform to increase overall A&R, marketing and promotion lend interest in music. Through proper online themselves easily to migrate online, others marketing techniques the industry can mold eg, manufacturing and physical distribution communities of like-minded consumers, will begin to be replaced by a virtual which are the basis for purchases. market of digital downloads, file sharing and Music is one of the top interests for subscription services. The Internet will consumers on the Internet and today the probably change the manner in which record different music offerings reach around 50 per labels execute their core functions of A&R cent of all Internet users. and marketing/promotion, but the labels should still retain control over these Whilst consumer interest is there to listen to functions. music via the Internet, the question still More and more music-content remains of how to turn this interest into channelseg, music TV, digital radio, purchases of music and thereby create a mobile phones, etcare continually viable and profitable business model. emerging through which fans can consume Predictions of the future of music retail music. The Internet is another, albeit more vary wildly, ranging from the doom of important, one of these channels. record labels to projecting a huge boom in music industry sales. There are claims that More channels mean not only increased digital distribution (eg, downloads via the music consumption but also additional PC and future devices, streaming opportunities for the industry to convert technologies and file sharing) will completely listeners into commercial consumersie, replace the physical distribution of pre- music buyers. The record industry has recorded plastic discs. If this were to happen known for a long time that there are twice as then both online and offline music stores that many listeners as purchasers of music. built their business on physical distribution In the world of physical carriers the would be cut out of the record industrys record companies have in the past tried with value chain. some success to stimulate commercial If, as some predict, all music ever consumption of musicie, purchasesby recorded is available free on the Internet opening up new distribution channels. The with person-to-person (P2P) models like
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden industry used more non-traditional outlets Napster, then there would be dire conse- such as petrol stations, fast food chains, quences for the industry. newsagents, etc, to stimulate the consumer On the other hand, predictions of a with the opportunity to buy music doubling in size over the next 10 years as recordings any time and any place. The music listeners completely switch to online Internet offers not only more possibilities for music subscription services and abandon their music to reach the consumer but also allows CD archives, would be like music to the the music industry to learn more about the industrys ears. Such a consumer migration consumer and to establish direct links with would give the music industry a push in sales him. similar to what happened with the advent of CD technology. The Internet has the potential to increase The reason for these differing
REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES significantly the demand for paid music predictions is the massive uncertainty about consumption. It will deliver on this potential the viability and adoption rate of online provided that reasonable rules of operation business models.
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Introduction
In recent years a number of new channels for the value chain shows this. So does the little music consumption have been introduced success that artists have had trying to take and there have been quite a few attempts to over record companies traditional roles such improve the business processes of the as marketing and distribution. Artists and traditional record industry to make them start-ups alike soon realised that having one more effective as well. These changes and single product offering, be it the artists own improvements were initiated by a number of works or a single site with little-known young and creative entrepreneurs and new artists, did not provide them a vehicle strong players in the market rather than by the enough to draw millions of consumers. business development staffs of the large The consumer, whether he is on or companies. offline demands a strong blend of content Despite the majors prestige and big and brandsie, artists. That is what he is money on the line they did not act or react looking for when he enters a music shop or to market developments. It was the new accesses the Internet, and only the big record entrants to the market that had the initiative companies can provide this by licensing their to try out new business models and to assets. experiment with new approaches using the Only after the tremendous success of latest technology. It was newcomers who industry rebels like Napster pure-plays were were driving innovation in their attempts to successful in gaining the pole position for carve out a niche in the new value chain that online music sales. This did stir the industry they saw on the digital horizon. The major into action. The companies initial move was record companies are embracing the Internet litigation. They had to stop the bleeding and slowly and cautiously, and some say fast if they were to survive. Once their reluctantly. position had stabilised they began their own Over recent years the traditional offensive using digital distribution. industry companies went through different For the big record companies it had phases in their approach to the Internet. At become evident that they had to find and try the same time that the traditionals were new business models pro-actively before foundering some of the new entrepreneurs these new entrantsoften able to command reached critical mass and became the vast amounts of cash through their IPOs industrys new patrons, offering fans a became legal and solidified their positions multitude of music-content portals, e-tailers even further. The major record labels have and online radio sites. It is the few successful only just now begun to sell directly to newcomers that are in a prime position to consumers in order to win back revenue benefit when the Internet starts to be a real they had lost by ignoring the Internet and moneymaking business. Most of them only leaving it to upstart competitors. just survived the euphoric hype phase and are now running out of cash as their business The Internet poses two crucial questions for models prove too weak to guarantee their the music industry: one centered on sales, backers a reasonable return on investment. the other on distribution. The first is
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden The losers paid dearly, as noted by the large whether online music retail and music on number of bankruptcy cases, for their new carriers will generate incremental mistakes and experiments. But every small revenues or merely replace offline sales. The entrepreneur who experimented with a new second is whether the industry can come up digital process or innovation in an attempt to with a digital distribution business model to shape the record business of the 21st century recoup revenues lost to illegal digital helped to drive the music industry a bit distribution of music online. closer to the business models that will finally For the IFPI the 1.3 per cent decline of succeed. global recorded music sales in 2000 was the first evidence of the impact that digital The early prediction that the rise of the distribution and electronic piracy (eg, Internet would lead to the demise of Napster, CD-burners, and MP3) have had
REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES traditional record companies is proving to be on industry revenues. This has deepened wrong. The failure of most entrants who with a five per cent decline in sales value in tried to carve a business out of the change in 2001.
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The music industry in the 21st century
The dramatic collapse of physically and service comparable to Napster or MP3.com? digitally distributed CD single sales in a n Did it really need to take a Napster with world where music has become more and its huge success and 50m annual users to more pervasive is extremely alarming to the shake up the industry? industry. n What internal workings prevented the On the positive side, results of industry industry from offering legal Internet music surveys of music fans vary a bit but generally services of comparable value to customers indicate that Internet users who listen to eg, Pressplay and MusicNetsooner? (Both music online do not necessarily buy less of which finally demonstrate that the record music. The majority of Internet consumers industry is getting ready to join the online interviewed, approximately 60 per cent, party.) believe that their purchasing behavior did n Was the litigation of pure-plays a waste of not change, 30 per cent report or expect time in a vain effort to preserve traditional increased purchases, and only 10 per cent structures or a brilliant tactical maneuver to report or expect a decrease. gain time? n Would a more pro-active approach There are some uncomfortable questions to exploiting the opportunities the Internet be askedparticularly to the major record provides have reduced the piracy problem companieswhy they did not act pro- earlier and thereby made it easier to actively. convince consumers that they have to pay n Why did the industry wait for so long for music on the Internet ? before offering consumers a legal music
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General A number of consumer trends have become to older consumers of the same nationality, consumer apparent over the last couple of years that particularly in Europe. Again, the Internet trends will shake up the record industry and enhances this trend. determine the role the Internet in the life of the modern consumer. Critical consumer Higher levels of education and greater Individualism availability of information have made the Born out of the increasing number of single- consumer increasingly critical when making parent households and the demise of the a product choice. This trend has developed community/family, the consumer now as the number of alternatives, within the strives to be different. The individual seeks same product category as well as replacement to achieve a unique identity, one that products from other categories, offers the separates him from the anonymous masses. consumer an almost infinite range to choose The lack of global trends in both fashion and from. music is a clear indication of the drive The availability of information over the toward individualism. The proliferation of Internet has made the consumer ever more niches in all markets is another. critical, and thus more powerful, particularly The resulting increased number of with respect to product pricing. market segments has prompted the need to communicate effectively to small groups, Convenience thus the emergence of fractal marketing. The New distribution channels, such as petrol
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden Internet is a medium particularly suited stations, offering a wider range of products towards this development. and new media, such as direct response TV, the Internet, home shopping TV and mail Globalisation order, allow the consumer to buy at his This phenomenon was spawned by the convenience. He can do this from the increasing availability of instant worldwide comfort of his home, office, or hotel room communication and the rise of the new 24 hours a day, seven days a week, without media (telephone, mobile telephones, TV, losing time travelling. video conferencing, Internet). Consumer This developing convenience beha- proximity within the younger generation in viour applies particularly to the purchase of particular has radically increased, facilitated goods for which shopping is not a pleasure. by cheaper forms of transport.
REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES Recent consumer research showed that Enhanced shopping experience young consumers have greater proximity to Whilst the consumer values convenience young consumers of other nationalities than when shopping for low-involvement
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The music industry in the 21st Century
products, he still expects to be entertained sales of cosmetics and use of plastic surgery. while leaving the comfort of home for This movement is furthered by the shopping. Many retailers have already idealisation of youth through the media. responded to this trend by offering consumers far more than more shelf space. Social differences Shopping malls and record shops in the The gap in western societies between rich USA provide live gigs and even chances to and poor is widening and an increasing part meet film, TV or other entertainment stars of economic wealth is owned by a decreasing while shopping. number of people. Although information as the currency for economic wealth is available Youth orientation to everyone the access barrier is getting Open media access and both parents being steeper. employed , turns children into adults much Unfortunately, the Internet will earlier today than in previous generations. increase this trend globally, as access to it This trend is demonstrated by statistics on requires a computer, a reliable telecommuni- sexual awareness, crime and consumption of cation network, and the knowledge to use drugs. At the same time older consumers try them effectively. to appear young and activeeg, increased
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3 The new music consumer
The music Reach and buying intensity other luxury goods and even other consumer The global market size of the record industry entertainment products. The record is determined by two factors: industrys competitors are also trying to 1 the reach of music among the exploit the increase in wealth in these populationie, the percentage of the total countries at the same time. population buying records; 2 average music spend per buyer composed 1 The average music spend per buyer is of calculated by multiplying the number of n the number of records bought by each records bought by the average amount spent buying consumer; per unit. The result, multiplied by the n the average amount spent by each population of a country and the reach of consumer per record bought. music in that country, forms the market size of the domestic market. The average music The reach of music among the population is spend per unit is influenced by relatively stable within a country but differs n the mix of formats (MC vs. CD, strength between countries. This difference correlates of single/maxi-single segment); vaguely with the countrys level of n the mix of price categories (budget, mid-, economical development (see also table of full-price) and music spending vs GNI, page 36). The reach n the overall price level in a country. is also influenced by other determinants such as lifestyle, consumer attitudes and, 2 The number of records bought by those obviously, the penetration of playback consumers reached by music does not devices in the domestic market. correlate as clearly with the stage of There are also indications that economic development as the reach of circumventing certain barriers could increase music. The number of records sold depends the reach. Some of these barriers could be on domestic price levels. This does not avoided through effective use of Internet (see necessarily refer to differences in price for section on Sleepers, below). single productsie, internal competitive Even in the most developed countries, prices within the music industry, but could the reach of music does not exceed 60 per refer to differences in market structure. cent of the total population. For example, the availability of cheaper budget or mid-price products, or the reach country existence of a strong single/maxi-single 45-55% UK, Germany, France, market segment, would have a great effect Sweden, Netherlands, Japan, on the number of records bought. USA The average number of purchases varies 30-40% Italy, Spain, Taiwan, Poland from four in countries where practically no 15-25% Mexico, Brazil singles/maxi-singles segment is available (Italy or Spain) to 8-10 in countries with a Of those consumers buying records, nearly strong singles/maxi-singles segment (Japan,
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden all buy albums. However, in the markets UK and Germany). The latter three which have strong single/maxi-single countries account for approximately 60 per segmentseg, Japan, Germany, UK, 40-50 cent of the global singles/maxi-singles per cent of all record buyers purchase singles. market segment and domestic sales in this A well developed single/maxi-single segment segment account for 2040 per cent of total can significantly extend the total reach of unit sales in those country. music in general and particularly among consumers under 30 years old. The average music spend per buyer can It is important to realise that the record differ significantly by country. For example, industry still has tremendous long-term music buyers in Poland spend less than $20 a growth potential in less developed countries, year, which is due to the high share of MCs which it can realise if it effectively exploits and cheap pirated product in that market. In
REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES the rise in economic prosperity in those Japan, on the other hand, music buyers spend countries. To do this it must promote more than six times that amount due to the consumption of record products ahead of very high retail prices.
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The music industry in the 21st Century
World population and music market shares compared
% of total % of total % of total % of total population music market population music market
Argentina 0.7% 0.5% Lebanon 0.1% 0.0% Australia 0.4% 1.5% Lithuania 0.1% 0.0% Austria 0.2% 0.8% Malaysia 0.4% 0.1% Belgium 0.2% 0.7% Mexico 1.9% 1.8% Brazil 3.4% 2.0% Netherlands 0.3% 1.2% Bulgaria 0.2% 0.0% New Zealand 0.1% 0.2% Canada 0.7% 2.2% Norway 0.1% 0.6% Chile 0.3% 0.2% Pakistan 2.4% 0.0% China/Hong Kong 30.3% 0.5% Paraguay 0.1% 0.0% Colombia 0.7% 0.3% Peru 0.5% 0.0% Croatia 0.1% 0.0% Philippines 1.4% 0.1% Cyprus 0.0% 0.0% Poland 0.8% 0.4% Czech Republic 0.2% 0.1% Portugal 0.2% 0.4% Denmark 0.1% 0.6% Russia 3.2% 0.5% Ecuador 0.2% 0.0% Saudia Arabia 3.7% 0.2% Egypt 1.3% 0.1% Singapore 0.1% 0.1% Estonia 0.0% 0.0% Slovakia 0.1% 0.0% Finland 0.1% 0.3% Slovenia 0.0% 0.0% France 1.2% 4.6% South Africa 0.8% 0.4% Germany 1.8% 6.6% Spain 0.9% 1.5% Greece 0.2% 0.2% Sweden 0.2% 0.9% Hungary 0.2% 0.2% Switzerland 0.2% 0.7% Iceland 0.0% 0.0% Taiwan 0.5% 0.7% India 18.8% 0.6% Thailand 1.2% 0.3% Indonesia 4.3% 0.3% Turkey 1.3% 0.3% Ireland 0.1% 0.4% UK 1.2% 7.7% Israel 0.1% 0.1% Ukraine 1.1% 0.0% Italy 1.3% 1.4% Uruguay 0.1% 0.0% Japan 2.7% 17.7% USA 5.7% 38.2% Korea 1.0% 0.8% Venezuela 0.4% 0.1% Latvia 0.1% 0.0% Zimbabwe 0.2% 0.0%
excl. Central America & Gulf states Source: IFPI, US Census, Screen Digest calculation
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden Market growth through increase of music spending per capita
excl. Central America & Gulf states market music spend market size 2000 per capita 2000 size 2005 CAGR
mature markets 32,631.7 43.832,631.7 0.0% Eastern Europe 523.4 2.1 1,118.5 16.4% Asia 1,328.1 0.6 2,062.64 9.2% South America 1,821.6 5.3 2,491.32 6.5% Middle East/Africa 454.1 1.5 551.0 3.9%
REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES all regions 36,758.9 9.3 38,855.11 1.1%
Mature markets: North America, Western Europe, Japan, Australasia Source: IFPI, US Census, Screen Digest calculation
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3 The new music consumer
Consumers in northern European markets Under a hypothetical scenario where spend $75-$100 a year, whilst in the south the developing markets evolve as follows European markets the music spend ranges within the next five years: from $35-$55 a year, the same level as in the developing markets of Mexico, Brazil or improves to level Taiwan. developing market of (as it is today)
A comparison of the share of the population Russia, Baltic states Poland with the share of the global record market China, India, Pakistan Indonesia indicates that some countries account for a Brazil, Chile, Argentina Mexico higher share of the global record market than Other Latin American markets Venezuela their share of the global population would most advanced Eastern Greece suggest and gives indications of unexploited European markets market potential. Ukraine Bulgaria To exploit this potential fully the music Saudi Arabia Egypt industry must take specific measures, some of Bulgaria Russia which are dependent on the circumstances within the individual market. The industry The global record market would grow at an first needs to generate a favourable market annual rate of around one per centwithout infrastructure consisting of taking the population effect (see Chapter 2) n the right product offeringie, singles, into accountand the share of mature compilations, different price categories; markets in the global market (where music n an extensive retail infrastructure including spend per capita will remain stable at best in distribution; the coming years) would fall from 89 per n marketing and promotion tools adapted to cent to 84 per cent. that market, such as charts, music TV, radio channels promoting new product, etc. Another important feature of the record The above three are interdependent industry is its dependence on a relatively and movement of any one will affect the small number of consumers who spend a lot other two. The Internet might prove to be of money on buying music. Only 410 per an important help in developing markets, cent of all record buyers in any one market particularly as regards the last two points. purchase 20 or more records a year, but this Although lower prices might help to increase group represents 1535 per cent of the total reach in some markets, it does not necessarily market size. increase the market size. Pricing must This dependency on super heavy therefore be used very carefully in market buyers seems to be greater in the more development, particularly as the consumers developed markets than in others. On the decision-making process in buying a record other hand this shows that there are still a is not primarily driven by price. large numbers of consumers who buy little. The industrys market approach must be
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden tailored to address both consumer groups. The heavy and super heavy buyers are predominantly male and concentrated in the Distribution of consumer types in the global music market 2039 age bracket. Fifty per cent of heavy/super heavy buyers are 20-39, and 35 records bought average share of per cent are 20-29. per year total buyers total sales With such a strong dependency on no % % relatively few consumers the record industry is understandably cautious in its management light buyers 1-3 45 15 of any fundamental change coming along medium buyers 4-9 35 30 with the Internet. This is even more so if the heavy buyers 10-19 15 30 Internets socio-demographic structure is
REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES super heavy buyers 20+ 5 25 similar to that of the record industrys core target group. Source: industry estimates
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Companies profiled in this section
F=CA F=CA Amazon 168 Loudeye 191 AOL Time Warner 171 Microsoft 193 Time Warner Music Group 173 MP3.com 197 ArtistDirect 175 Napster 199 Bertelsmann AG 177 NTT DoCoMo 201 BMG Entertainment 178 RealNetworks 205 CDnow 180 Sony Music Entertainment 207 EMI Group 182 Viacom 209 EMusic.com 183 MTVi Group 210 InterTrust 185 Vitaminic 212 Launch Media 187 Vivendi Universal 214 Liquid Audio 189 Universal Music Group 215 Listen.com 190 Yahoo 218
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REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES
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AMAZON.COM Amazon first began as an online bookstore, Headquarters 1516 Second Avenue and then expanded into selling music in Seattle 1998, overtaking CDnow to become the Washington 98101 premier online music retailer. USA +1206 622 2335 Amazon subsequently added DVDs, computer games, software, wireless URL: www.amazon.com equipment, and videos to it retail offering. CEO: Jeffrey P Bezos Expansion continued with the acquisition of Employees: 9,000 PlanetAll, the Web-based address book, Ownership: Publicly traded on Nasdaq; calendar and reminder service and of (AMZN) shopping bot Junglee in August 1998. Internationally, the company acquired online Key financials booksellers Bookpages (UK) and Telebook, 1999 2000 Inc (Germany), then re-launched them in $m $m 1999, adding music stores to each. revenues 1,639.8 2,762.0 Continuing to lead the market, operating income (605.8) (863.9) Amazon.com launched a free digital net income (720.0) (1,411.3) download section in June 1999. In the same In 2000, the books/music/video segment year, the company acquired a 50 per cent counted for approximately 70 per cent of stake in Pets.com, a 46 per cent investment revenues. in drugstore.com and also launched its Amazon.com Auctions service. In 2000, Amazon Marketplace followed. Amazon Company overview improved its service in February 2001 when The Amazon.com site was launched in July it added new, more convenient, download 1995, one year after Jeff Bezos set up software. Amazon. In 1997, the company went public Amazon Commerce Network (ACN) and today it is the leading online retailer partnerships include ToysRUs, worldwide and probably the Internets most Audible.com, Ashford.com, NextCard, recognised brand name. Amazons reach Ofoto, Greenlightcom, Microsoft, exceeds 20m unique visitors each month. Drugstore.com, and Hewlett Packard.
Amazon: unique visitors per month March 2001 20
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15
10
5
0 unique visitors (m)
REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES Amazon BMG Barnes&Noble CDNow Columbia- Musicservice house Source: Jupiter Media Metrix
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Chapter number and title here
Amazon has signed other agreements for program is a service for unsigned artists example with Yahoo!, Excite, MSN, enabling them to promote and sell their CDs AltaVista, AOL Time Warner, iVillage, on the Web site. Women.com, and Hoover´s Online. The Marketplace offers visitors the possibility to buy or sell used, collectible and Business description rare merchandise including music-related Amazon.com served 29m customers in more products. Further services include auctions than 160 countries in 2000. Their music for buyers and sellers of a variety of content includes CDs and a free download merchandise and zShops for individuals or section with weekly additions featuring businesses offering their products to independent artists and new releases as well Amazon.com customers. Participants can use as famous singers and bands. Tracks are the convenient Amazon Payment Service, available in Liquid Audio or MP3 format, which accepts credit cards for payments. Its and additional services feature the Liquid Associate Program enables individuals to earn Audio player and the RealJukebox, both free a commission on titles sold on their web sites for downloading. Aside from Bargain Music, through Amazon.com. Latin and Box Set stores, there is a Music Accessories store for items such as MP3 Strategy players and blank media. Furthermore, all Starting with lower margin books, Amazon CDs offered can be found and accessed by expanded into higher margin products such keying in a certain song title featured on as software to entice their core, loyal them. Amazon.com´s Advantage for Music consumers to buy those products as well. Internationally, the music business was launched in the UK and Germany in October 1999 and in France in August 2000. The free download of newly released music is another important feature of Amazons promotion strategy. But based on company Amazons US activities and launch statements, digital music distribution seems dates not to play an important role in Amazons current music distribution strategy. This is Books July 1995 most likely the reason why Amazon has not Music June 1998 signed a high-profile agreement with any of DVD/Video November 1998 the major music players so far. Nonetheless, Amazon and AOL Time Auctions March 1999 Warner recently signed a strategic alliance for Electronics July 1999 joint marketing and technological initiatives Toys July 1999 for e-commerce. Starting in the 2002 holiday zShops October 1999 shopping season, the agreement will Home improvement November 1999 combine Amazons online retail services, Software November 1999 This sample is for evaluation purposes only: unauthorised use or distribution is forbidden such as product reviews, ratings and Video games November 1999 comparison services, as well as its search and Gifts November 1999 personalisation software, with AOLs Health and beauty April 2000 (operated by technology and shopping channels, such as Drugstore.com) Shop@AOL. Lawn and patio April 2000 Furthermore, AOL Time Warner will Furnishing May 2000 (operated by invest $100m into Amazon, receiving Living.com) approximately 6.5m shares of Amazons Kitchen May 2000 common stock. It is not unlikely that the Spoken audio May 2000 (operated by expansion of the marketing alliance of Audible.com) Amazon and AOL, established in 1997, will Cars August 2000 (operated shape both companys music distribution REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES by Greenlight.com) strategy in the future. Camera and photo October 2000 Regarding its marketing strategy, the E-books November 2000 company focuses on the excellence of
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services and personalisation. Amazons customer service centres. Realising profitable convenient shopping experience, enhanced growth and reversing the decreasing repeat by easy to use payment features and fast 1- rate in a worsening consumer spending Click technology, attracts customers as much environment, whilst at the same time as the number of products and variety of managing the restructuring programme, will service features it offers. Amazons personal be challenging, to say the least. touch of greeting its customers by name and giving out gift certificates has won the accolades of users all over the world. Amazon Anywhere is Amazons wireless initiative that aims to provide easy access to Amazon.com from Internet- enabled mobile phones and handheld Personal Digital Assistant (PDA) devices. Amazon has over 11 partnerships with Internet mobile phone manufacturers, such as Nokia and Motorola, and with several US mobile phone network operators including Sprint, PCS, Nextel and Airtouch. Amazon has created several new Web addresseseg, amazon.com/phone and amazon.com/pocketpc for mobile e- commerce. European customers can access the UK and German websites using WAP (Wireless Applications Protocol) devices.
Key risks Although Amazon.com has expertly broadened its range horizontally, thereby creating a huge variety of products and services, its lack of high-level partnerships, especially in the field of music, limits its potential. Whilst emphasising its partnerships with booksellers, agreements with music partners are limited to Liquid Audio and, since April 2001, Launch.com. If Amazon is to hold its leading position in this sector as well as position itself properly for digital music distribution, it must build high-profile partnerships, expand
This sample is for evaluation purposes only: unauthorised use or distribution is forbidden partnerships with other music companies and increase the music content services. This could be crucial for future brand recognition regarding digital music, although CDs will remain the single most important revenue source in the consumer music business in the mid-term. Shareholders have been patient but they are unwilling to accept continuing losses much longer. So Amazon has to become profitable soon. Amazon has recently begun a restructuring programme,
REPORT EXTRACT: FULL VERSION IS 236 PAGES WITH OVER 200 CHARTS AND TABLES which resulted in a $155m asset write-off, a 15 per cent reduction in the workforce, and the consolidation of distribution and
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