Sony h/usic Entertainment and the Evolution of the Music Industry
A. J. Strickland The Ilniversitg of Alabama
Andrew Pharaoh 2015 Undergraduate, The Universitg of Alabama
d d A t such a pivotal time for music, it’s more ffi imRortant than ever to develop a fertile,d \ creative environment that generates the
highest quality of artists and music, while seeking to fully exploit the many opportunities that new digital services and products provide in reaching audiences around the world.”r
The remarks of Sony Music Entertainment CEO Doug Morris in 2011 illustrated an accurate under- standing of the environment of music sales. Morris, a globally influential executive and music innovator, agreed to join Sony Music Entertainment as chief executive officer effective July 1, 201l. In a time of great change in the music marketplace, it was abso- lutely necessary that Sony take active steps to remain competitive. Morris took the job graciously, but he placed himself into a business whose margins were becoming thinner and thinner. With a declining industry that had been made less lucrative by the wide availability of substitutes, Morris was forced to develop a strategy to contend with industry change and unfavorable competitive forces in 2014.
F”$$ST#ffiV #ffi S#NY f’1U$$* ffiNTKreT&!Iq P–$ffiNY American Record Company, the company that would laterbecome Sony Music Entertainment, was founded in 1929 and then acquired by Columbia Broadcasting Company in 1938. In March 1968, Sony, at that rime
Seth Kennedg 2014 Llndergraduate, The Universitg of Alabama
a Japanese company, began a joint venture with the American company CBS to form CBS/Sony Records Inc. In September 1976, Sony introduced the optical digital audio disc, now known as the compact disc (CD). In 1983, CBS Inc., as an American company, allowed introduction of the CD to American markets. In January 1988, CBS Records Inc. was absorbed, and in January 1991, the new company was renamed Sony Music Entertainment Inc.
In August 2004, Sony BMG Music Entertain- ment was established as a new joint venture with Ber- telsmann AG. Later, in August 2008, Sony acquired BMG’s 50 percent stake in Sony Music Entertain- ment and began operation once again as Sony Music Entertainment, a wholly owned subsidiary of Sony Corporation. In July 2012, Sony/AIV Music Publish- ing, a joint venture between Sony and the Michael Jackson Family Trust, along with a consortium of other investment firms, bought the publishing arm of the EMI Group, which solidified Sony’s position as the world’s largest music publisher.
#VffiRV!HW ffiT THffi ML,}$$T il N,EM M$TruV Before the 1900s, music and entertainment media had a strong emphasis on performance. If theater, magic, or music was wanted in a certain venue, individuals
Copyright O 2014 by A. J. Strickland. All rights reserved.
who could perform the arl personally were found and paid to do so. At the beginning of the 20th century, music began to become ownership-driven. Listen- ing to music was still done live, but, as the quality of technology improved, artists began to produce recordings of their music. Recordings initially made the music industry more efficient, because artists were able to receive royalties on physical recordings and were able to reach a wider audience with their songs. This allowed more time to be spent on cre- ating new music, and the field became more lucra- tive and more attractive. However, aftet a shorl-lived heyday came a long decline, beginning in the early 2000s, as a result ofpiracy (discussed later) and digi- tal distribution.
The 1993 release of the MP3 algorithm enabled the reduction of song files to a size that made Internet broadcasting and uploading and downloading fea- sible. Shortly afterward, in 1994, WXYC (89.3 FM, Chapel Hill, North Carolina) became the first tradi- tional radio station to announce broadcasting on the Intemet. In 1998, the newfound portability of music was coupled with a naming service and comprehen- sive databases of music information developed by Gracenote (later purchased by Sony in 2008 for $260 million), making it possible to retain the information associated with the song files. Technologies like these opened the floodgates of digital distribution. Napster, the popular (illegal) file-sharing service, was started shortly afterward, in 1999, and iTunes, a legal online music store, was launched by Apple in 2001.
In February 2003, Warehouse Music, a retail music store selling physical albums, declared bank- ruptcy. The followingyear, in February 2004,Tower Records filed for the first of three bankruptcies, which ended with the closing of its 93 stores across the United States. Virgin and Circuit City lasted some- what longer, until 2009, but were also eventual fod- der to digital music. Sellers of other types of physical media, such as Borders (books) and Blockbuster (DVDs), also chose to shut their doors in the 2000s as a result of the digital music and video age. These companies, however, tended to blame piracy for their financial downtum, not digital media, and certainly not an outdated business model.
Album sales continued the decline that put brick-and-mortar record stores out of business, with sales falling from about 575 million in2006 to about 290 million in2013.Internet and digital track sales, on the other hand, continued to rise, topping out
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at an estimated I.34 billion tracks in 2072. Digital sales declined slightly in2013 to 1.26 billion. This roughly 6 percent decline was the first decline in digital sales since the iTunes store debuted more than a decade earlier. However, industry revenues steadily declined from a peak of $17 billion in 2000 to $7.9 billion in2013.
Copyright Infringement and Piracy The early 2000s saw a huge increase in copyright infringement in the music world. For products such as Rolex watches and Gucci bags, imitations had always existed. Third-party manufacturers, especially abroad, re-created the look of the original product with cheaper raw materials and sold the counterfeits at a discount. With music, however (and most digital media, for that matter), the duplicates were identical in quality, simple and costless to the duplicator, and able to be redistributed digitally. To make matters worse for the profitability of the industry the likeli- hood of being held responsible for the crime was quite low Sharing music was so easy, so ubiquitous, and so socially acceptable that it was not long before it gave birth to popular flle sharing on a much larger scale, like that through Napster (1999), LimeWire (2000), and Kazaa (2006)-not to mention sharing by indi- viduals who bumed physical CDs to give to friends.
As of May 2014, two bills were under consid- eration by the U.S. Congress that addressed digital piracy. The Stop Online Piracy Act (SOPA) and the Protect IP Act (PIPA) aimed to stop copyright infringe- ment and to stop the trafficking of copyright material by requiring that search engines abstain from linking to websites violating copyright laws and that Intemet service providers block access to these websites. Both bills were met with public opposition, and votes on the bills were postponed until the issues regarding the bills could be resolved.
The Institute for Policy Innovation estimated that “global music piracy causes $12.5 billion of economic losses every year,7l,O60 U.S. jobs lost, a loss of $2.7 billion in workers’ earnings, and a loss of $422 million in tax revenues, $291 million in per- sonal income tax and $131 million in lost corporate income and production taxes.”
Music Publishing Record labels scout for promising musicians and bands, sign them to publishing contracts, and help
CASE 12 Sony Music Entertainment and the Evolution of the Music Industry
c-180 PART 2 Cases in Crafting and Executing Strategy
them through the process of creating and marketing their music. Record labels (or the artists themselves) will typically own all rights to the master recordings that their artists produce and then compensate the artists according to the amount of sales that the spe- cific sound recording produces. Labels record the music of artists in studios, manufacture recordings, and promote and distribute that music by various means to the consumer. Through copyrights, labels are responsible for the protection of the music and artists they sponsor.
There was an increasing simplicity to digital music distribution, and it was becoming easier and easier for artists to record, publish, and promote their music themselves without the help of corpora- tions. The trend of using the Internet and technology that was more accessible than ever had initiated a bypass of the middlemen and was a difficult obsta- cle for music companies to overcome.
In January 2014, Sony Music Entertainment was the second-largest record label, with 20 percent of total industry market share. In terms of total album sales, Sony Music Entertainment was posi- tioned with 30.4 percent of market share, behind the leader Universal by 7.3 percent; however, Sony’s artist Justin Timberlake was the top-selling artist in 2013.In digital sales, Sony still lagged behind Universal by 6.2 and 9.5 percent in album sales and individual-track sales, respectively. Sony/ATV Music Publishing was the largest music publisher, with 16.9 percent of the total market share.
Whereas record companies owned the physi- cal sound recording, publishers (or the artists themselves) typically owned the rights to license and collect royalties on the specific melody, lyr- ics, rhythm, and so on, every time they were used. A “use” of a song was typically classified as fall- ing under one of three “rights” controlled by a pub- lisher: Mechanical rights represented the ability of an owner to collect royalties when the song was dig- itally downloaded; performing arts royalties were collected when a song was played on the radio; and synchronization royalties would be collected when a song was used in a movie or commercial. Pub- lishers typically worked closely with record labels in the same way that a hardware store might have worked with a carpenter or plumber. In the case of Sony Music Entertainment and the other two lead- ing music industry giants, both the publisher and the label were vertically integrated as subsidiaries
of the same parent company. Publishers also helped to market recordings and performed services for a musician much as a bank did for a businessperson- providing advances and loans with future income as collateral.
NIGITAL MUSIC DISTRIBUTION IN 2O’I4 In 2014, there were three main methods of digital music distribution: digital download, Internet radio, and interactive streaming. For the digital purchases of music, iTunes was the clear leader, accounting for 63 percent of digital music sales in 2013, and it had facilitated over $25 billion in digital music sales since its inception. According to Apple’s 2013 10-K report, filed October 30,2013, the iTunes Store gen- erated a total of $9.3 billion in net sales during 2013, representing a 24 percent increase over 2012 sales. The iTunes sales figure included digital music down- loads through iTunes, purchases through the App Store, and purchases on iBooks. In September 2013, iTunes had launched its own free Internet radio ser- vice, iTunes Radio. The service tailored radio sta- tions on the basis of users’ iTunes libraries and user input. The service was available in Australia and the United States and boasted over 20 million users.
Self-Publishing in the Music Industry The same technologies and social environment that facilitated the rise in digital distribution through services like iTunes and Amazon were also facili- tating self-publishing, and in 2014 the allure to an artist was strong. The creator had control over the creation; the profit margin was much higher and paid monthly, in contrast to the annual roy- alty remuneration typical of labels; and the whole process was completed much faster. Avoiding the 30 percent cut that distributors like iTunes and Amazon took was an incentive in and of itself, if avoiding the typical 10 percent cut to record labels wasn’t enough.
For example, the band Radiohead digitally self- published two albums, In Rainbows (October 2007) and King of Limbs (February 20II), by means of the band’s website, radiohead.com. Additionally, In Rainbows was released on a donation-based sys- tem, which effectively allowed fans to download the album free. In the first month after its release.
40 percent of the approximately I million fans who had downloaded the album paid an average of $6, earning almost $3 million for the band.
Artists without a substantial preexisting constit- uency also had options to bypass the record labels through a growing number of services such as Ama- zon’s Create Space and CD Baby. Exhibit 1 presents a breakdown of the split in royalties with CD Baby.
Interactive Streaming and lnternet Radio There were many Internet radio and subscription streaming services in 2014, but Spotify, Slacker Radio, Rdio, Pandora, Last.fm, Beats Music, Napster, Zune Marketplace, Grooveshark, Myspace, iTunes Radio, and Rhapsody were among the largest. From 2008 to 2013, Intemet radio grew at an annual rate of 42percent, to a $767 million industry. It was projected that Intemet and streaming radio would continue to grow at an annual rate of 72.7 percenta year until 2018 and that in2016 almost 161 million consumers would be subscribing to a streaming music or Intemet radio service. Increasingly, many music companies saw revenue from music streaming and Internet radio as a substitute for sales. This meant that, instead of pur- chasing a physical CD or even downloading a CD on iTunes, the consumer would instead turn to a cheaper (in many cases, free), more convenient Intemet stream- ing source. A business model that relied on scarcity to
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force consumers to buy, download, or have ownership of the product in any way waned in efficacy.
Despite manifold flaws in licensing models and remuneration of artists (Grooveshark, another popu- lar interactive streaming service, had been sued by all of the Big Three record labels over licensing problems since its inception), the period from 2010 to 2012 saw rapid growth of Internet distribution. Possibly stimulated by the threat of file sharing and reductions in physical CD sales, record labels and music publishers were willing to look to new monetization methods, such as streaming services, that might save their profitability. A common goal of salespeople was to make their product as attrac- tive and accessible as possible to the consumer. In the early to mid-2000s, the constraints of technology were still a problem, but advancements quickly pro- gressed to reduce these constraints. Music streaming services weren’t a new idea by any means, but in 2010-2011 new streaming services were accompa- nied by the ubiquity of the smartphone. In 2014, any smartphone, computer, and Internet-enabled auto- mobile (as of January 2074, Pandora had partnered with 140 different car models to offer its in-car radio service) was able to stream music directly and quickly. It was estimated that, in2014,58 percent of Americans had a smartphone and 63 percent of cell phone owners used their phones to access the Inter- net. Content owners had been reluctant to embrace the services because of very low profit margins, but
CASE t2 Sony Music Entertainment and the Evolution of the Music Industry
EXHIBIT I split of cD Baby Royalties
CDs and vinyl (includes sales through our distribution partners)
CDBaby.com downloads (single tracks and full-album)
Digital distribution sales (from iTunes, Amazon MP3, Rhapsody, and many more) Credit card swiper sales
Your chosen purchase price minus $4
75ok of your chosen purchase price
91″k of net income
87.2″k
We keep $4 per unit sold. lf your album sells for $13, you get paid $9.
We keep only 25o/o and pay you a whopping 75% per download sold on our store-more than iTunes, Amazon, and other retailers. So if you set your single- song download price at 99@ you’tt get paid 740 per song!
We keep 9% of the net income paid to us by our partners and you keep the rest.
We keep 9% plus 3.8% for credit card fees (12.8% total).
Source; CDBaby.com.
c-182 PART 2 Cases in Crafting and Executing Strategy
it had become clear that consumers were enjoying the services’ flexibility, freedom, and access.
Interactive streaming services like Rhapsody and Spotify licensed music from artists and record labels and then provided it to users through a client available on their respective websites. Spotify and Rhapsody were very similar in terms of business model, as both companies relied most heavily on payments from subscribers in order to fund their high cost of sales, or licensing fees. The main differ- ence was the content available to unsubscribed users. Whereas Rhapsody allowed a short, 30-day trial of its premium service, nonpaying Spotify users were able to listen to much of its paid content for free, as long as they were willing to listen to ads played between every few songs.
Spotify seemed to be offto an inauspicious start in October 2008, with heavy losses totaling $42 million. Exhibit 2 shows the change in the number of paying customers for Spotify. Since its inception, Spotify had not turned a profit but had seen explosive revenue growth. The company increased its revenues from $99 million in 2009 to $578 million in2012.
YouTube YouTube was an unlikely but very significant player in the music industry. An integral part of YouTube’s success in the music scene was the introduction of Content ID, a service that identified the music in vid- eos posted by users. With this information, instead of removing videos that contained a song whose use was a copyright infringement, YouTube simply identified the owner of the copyright and paid a royalty to the record label or artist after a short verification process.
Like Spotify and Rhapsody, YouTube paid licens- ing fees to record labels and artists, and it was better able to absorb the costs paid to content owners because
of the higher price advertisers paid for video ads. Below the video would be a link to a digital disfibutor, such as iTunes orAmazon, from which the song could be purchased, as well as a link to theYouTirbe account run by the artist. In this way, YouTube was somewhat able to harness what was once copyright infringement in order to gain legal entry into the market of interac- tive streaming. Of course, the technology was still flawed, but it had come far. YouTube is also rumored to be planning to unveil a subscription music and video service to directly rival Spotify, Rdio, and other com- petitors.YouTirbe would offer a free version along with a premium service for a monthly fee of $9.99.
To put the rivalry between YouTube and stream- ing services in perspective, Spotify announced in February 2014 that its most popular song was Avicii’s “Wake Me Up,” with more than 200 million plays since it was released in June 2013. On YouTube, “Wake Me Up” had over 450 million plays and that number did not include other uploads featuring the song, such as uploads from fans, live performances, or remixes.
SONY MUSIC ENTERTAINMENT’S BUSI NESS MODEL AND STRATHGY In 2007, Sony Music Entertainment, in collabora- tion with BMG, focused on two things: finding promising new talent and collecting more fans for its stars such as Daughtry, Alicia Keys, Avril Lavigne, Celine Dion, Bruce Springsteen, and Foo Fighters. The year 2007 was an excellent one for innovation. Sony began Myspace Music as a joint venture “as an interactive online platform for music sales, sub- scription services and ad supported entertainment”; access to many of the company’s artists’ greatest hits
EXHIBIT 2 Change in Spotifyi Number of Paying Subscribers,2oro-2org
Number of paying subscribers 13m
Source: onfine.wsj.com/news/articles/SBrooor4z4os27o2zo479t7o s7g2t2’ts216s4 gA52.
was included on stock mobile phones, and an agree- ment was made with Amazon to sell MP3s, which were compatible with iPods and other MP3 players. All this was accompanied by the promise in Sony’s 2008 annual report that the company would maxi- mize the potential of the digital distribution age.
A change in strategy came on October I,2009, when Sony Music Entertainment became a wholly owned subsidiary of Sony Corporation. Previously, the company had been a 50-50 joint venture with Bertelsmann AG, but the remaining 50 percent stake was acquired by Sony for $1.2 billion. This was done to lower costs through increased efficiency, and, according to Sony’s 2009 annual report, it was envisioned that the acquisition would allow the com- pany to work more effectively with the electronics, game. and pictures businesses.
VEVO In December 2009, Sony Music entered into a joint venture with Abu Dhabi Media and Universal Music Group to form VEVO, a music video licensor and aggregator. The videos were uploaded by VEVO, and users viewed and listened for free as advertise- ments scrolled simultaneously. The company oper- ated at a loss in 201 0 and 201 1 , but it was projected to be profitable sometime in the middle of 2012, with revenue jumping from $150 million in 20lI to $280 million in 2012. ln 2013, VEVO had 221 million viewers from 13 countries and 5.5 billion monthly video views. The company had seen a transition from videos being viewed on smart TVs and computers to 65 percent of videos being viewed on mobile phones. The company was valued at $500 million in20l3.
Music Unlimited In December 2010, Sony Music announced Music Unlimited, a cloud-based music streaming service powered by Qriocity, the company’s video distribution platform. Music Unlimited had a library of approxi- mately 15 million songs and allowed both radio and interactive streaming capabilities. In Janaary 2012, Music Unlimited had more than 1 million active users. Sony was not the first to develop a cloud-based music listening service, so the company made use of its mar- ket share in consumer electronics to bundle the soft- ware with Sony-made devices, like gaming systems, Blu-ray players, and TVs, in order to gain an initial audience. Holding true to the strategy of October
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2009, Sony aimed to blend the business of Sony Music Entertainment and Sony Corporation for the sake of efficiency. This strategy paid dividends, with nearly 38 percent of all song streams occurring on Sony’s PlayStation 4 gaming device as of January 2014.
On June 15, 2077, Sony introduced the Music Unlimited app for Android-enabled devices; the app was, therefore, compatible with all Sony Corporation tablets and smartphones. Sony Corporation also part- nered with various other music services, most notably Pandora and Slacker Radio, whose applications were compatible with SonyTVs, MP3 players, smartphones, and tablets. The Sony Entertainment Network allowed linking of devices, so the same preferences, library, and account could be used on multiple machines.
Upon creation of an account, Music Unlimited provided certain benefits free, with progressive ben- efits based upon the subscription type. New users were given a free 30-day preview of premium ser- vice. There were two subscription levels:
. For $4.99 per month, the basic subscription included Spotify-like full interactive streaming from a consumer’s home PC and game console.
o For $9.99 per month, the premium subscription included Spotify-like full interactive streaming from the devices covered in the basic subscription as well as Androids, iPhones, and tablets.
Interestingly, Music Unlimited was not Sony’s first attempt at a digital music medium. In December 2001, Sony Music (then Sony Music Entertainment Inc.) and the Universal Music Group began Press- play, an online, subscription-based music service that allowed tracks to be streamed, downloaded, and burned onto a CD while protecting artists’ rights. Pressplay had many of the features that characteized subsequent popular services such as Spotify-for example, playlist sharing and access to music charts and new release information. However, the initiative was discontinued in mid-2003 because of intense criticism of the heavy-handed implementation, shal- low variety of music, and inefficient licensing,
Beginning in2072, under new CEO Kazuo Hirai, Sony launched a four-part plan to save the company, which was hemonhaging cash. Hirai wanted to focus the company on its core business, which he identi- fied as gaming, mobile products, and digital imag- ing, while curtailing the company’s diverse business portfolio and exiting the LCD TV market. In 2012, Sony Publishing completed the purchase of EMI
CASE 12 Sony Music Entertainment and the Evolution of the Music lndustry
c-184 PART 2 Cases in Crafting and Executing Strategy
Music Publishing for $2.2 billion. The purchase gave Sony Publishing access to 1.3 million songs, raising its total to over 2 million songs. In 2012 and 2013, Sony sold Gracenote, an ownership stake in M3, and Sony Chemical.
Sony Corporation’s revenues from the sale of music increased fromY44l.1 billion in 2012 to Y503.3 billion in2013, and its operating income for the division increased fromY37.2 billion to Y50.2 billion over the same period. This increase in operat- ing income was mainly the result of lower restruc- turing costs than in previous years and growth in digital revenue. A summary of Sony Corporation’s financial performance between 2009 and 2013 is presented in Exhibit 3. Exhibit 4 presents the reve- nue and operating profit contributions for Sony Cor- poration’s various divisions for 2011 through 2013.
COMPHTITION IN THE DXGITAL M USIC INNLISTRY In the record label business in 2014, Sony Records was second in terms of market share. with 20 oercent.
Universal Music Group boasted a slight edge at 25.5 percent, and Warner Music Group lagged somewhat behind, with 11.6 percent. The Big Three music companies collectively held 57.1 percent of the industry market share. In music publishing, the same players held 35.9 percent of the industry market share: Sony/ATV had 16.9 percentt Univer- sal Music Group, 13.9 percent; and Warner Music Group, 5.1 percent. In 2013, Universal Music Group (a l00%a Vivendi subsidiary) had revenues of $6.7 billion and employed 6,500 employees. On November 11.2011. Vivendi announced that it had signed a definitive agreement to purchase EMI’s recorded music division for $1.9 billion, which was seven times EBITDA prior to synergies.
Mobile Applications In the age of data streaming and smartphones, mobile application downloads were an apt way to track the success of services. For comparison with the ratings below, Clash of Clans, the most popular free app in the Apple Store in 2014, received 752,024 ratings with an averase of 4.5 stars.
EXHIBIT 5 Financial Summary for Sony Corporation, 2oo9-2o15 (in millions of yen, except per share amounts)
Sales and operating revenue Operating income
Income (loss) before income raxes Income taxes
Net income (loss) attributable to Sony Corporation’s stockholders
Data per share of common stock: Basic
Diluted
Cash dividends
At year-end Net working capital (deficit)
Long-term debt
Sony Corporation’s stockholders’ equity Common stock
Total assets
Y6,800,851
230,100
245,68’l 141,505
Y43,034
*42.80 Y40.19
Y25.00
-Y668,556 938,428
2,197,766
630,923
14,206,383
Y6,493,212 *67,275
– 83,1 86 315,239
-Y456,660
-Y455.03 -Y455.03
Y25.00
-Y775,019 762,226
2,028,891
630,923
13,295,667
Y7,181,273
199,821
205,013
425,339
-Y259,585
-Y258.66 -Y258.66
Y25.00
-Y291,253 812,235
2,547,987
630,921
12,911,122
Y7,213,998
31,772
26,912 13,958
-440,802
-Y40.66 *Y40.66
Y25.00
Y64,627
924,207 2 oAE On4
630,822 12,862,624
v7,729,993
-227,783 *’t74,955
-72,741
-Y98,938
-Y98.59 -Y98.59
Y42.50
-Y190,265 660,147
2,964,653
630,765
11,983,480
Source: Sony Corporation 2013 annual report.
Pandora. Pandora received 8ll,I24 ratings with an average of 4 stars at the Apple Store and 1,428,724 ratings with an average of 4.5 stars at Google Play in 2013. As of the first quarter of 2014, Pandora had over 250 million registered users, who listened to 4.8 billion hours of music, and had total revenue of $194.3 million. Panoora had been downloaded more than 1 billion times and claimed 73.6 percent of the market share of streaming Internet radio listenin g in 2013. Music Unlimited. At $9.99 per month, Music Unlimited was far less popular than Pandora. It received 688 ratings with an average of 3 stars at the Apple Store and 24,029 ratings with an average of 3.7 stars at Google Play. Music Unlimited had approximately 10 million downloads by 2014.
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. Spottfy. Spotify had 303,200 ratings with an aver- age of 4.5 stars at the Apple Store and 568,870 ratings with an average of 4 stars at Google Play in 2013. It was estimated that Spotify had been downloaded more than 100 million times by 2014. In May 2014, Spotify had over 24 million active users, 5 million of whom were paying for the inter- active streaming service. The company was based in Sweden and operated globally in 56 countries.
The bulk of an average band’s or artist’s income in2013 came from live performances-this was true even for a band like Radiohead, which was able to self-publish a CD that earned almost $3 million. Under such circumstances, the publishing industry still continued to struggle with monetizing stream- ing music and saw an average annual growth of
CASE 12 Sony Music Entertainment and the Evolution of the Music Industry
EXHIBIT 4 Sony Corporation’s Revenues and Operating Income, by Division, 2c12-2e13 (in millions of yen)
Sales and operating revenue Mobile Products & Communications
Game
lmaging Products & Solutions Home Entertainment & Sound
Devices
Pictures
Music
Financial Services
All other, corporate and eliminations
Consolidated
Operating income Mobile Products & Communications
Game
lmaging Products & Solutions Home Entertainment & Sound
Devices
Pictures
Music
Financial Services
All other, corporate and eliminations
Consolidated
Y1,257,618
707,078
756,201
994,827
848,575
732,739 441,708
‘1,002,389
59,716
Y6,800,851
*Y97,170 1-7e8,
1 442 *84,315
43,895
47,800
37,218
142,209
137,286
Y230,100
Y622,677
804,966
785,116
1,286,261
1,026,568
657,721
442,789 868,661 *1,547
Y6,493,212
v7,246
29,302 19,641
-199,461 -22’12F’
34,130
36,887
129,283 *102,177
-Y67,275
Source: Sony Corporation 2013 annual report
c-186 PART 2 Cases in Crafting and Executing Strategy
negative 3.8 percent from 2008 to 2013. This was only slightly better than the performance of its big- brother industry, record labels, which recorded a negative 4.3 percent growth rate from 2009 to 2014. Prior to CD duplication and digital distribution, con- sumers either paid the price to hear the entire album (even if they liked only five songs on it) or didn’t hear the music at all. In the same scenario in 2014, consumers were likely to simply download the music illegally from a file-sharing site. The small number of people who purchased music legitimately would buy only the five songs they liked.
Whatever the model of access to music, some- thing that seemingly was dropped by the wayside was remuneration of artists. In an industry where the consumer was becoming increasingly important, it was equally important for record labels like Sony Music Entertainment to keep in mind that with- out the promise of profitability, sustainability, and means of financial support, artists might return to their roots, heavily focused on live performances, whereby the product was much harder to steal. The stimulation and motivation for an artist to record a song decreased significantly if there was no way to support oneself financially, and, although the world would never stop making music, profitability incen- tives and disincentives were just as real in the music industry as they were in any other industry that pro- duced a product for sale.
Although the way of the future seemed to be interactive streaming and Internet radio funded by subscription or advertisements, there was much debate in the music community about the effects that such a shift would have on the industry. Streaming services were growing very rapidly, as evidenced by the success of a wide variety of new services and the continued decreases in physical and digital CD sales. While these services were growing rapidly, in 2014 they still represented only 6.6 percent of the total revenue to labels and even less to the average artist, A subscriber had no idea where his or her $9.99 subscription went, but it certainly didn’t go straight to the artist. Label agreements with artists were traditionally confidential, so it was difficult to discern exactly how much money was being trans- ferred to the original creators of the product, that is, the music. This was why many popular artists, such as Coldplay, Adele, and the Black Keys, resisted or even denied access to their music throush subscription-based services.
However, despite the downside risk of the shift in the way that music was monetized, subscription services still represented significant opportunity. They were much more accessible and convenient to the consumer than was purchasing an MP3, and such convenience represented an addition in value. Addi- tions in value were typically commensurate with an increase in demand and therefore an increase in rev- enue, and most agreed thal an increase in the o’rev-
enue pie” of the industry would help solve problems. Subscription services also proved to be helpful to new bands whose focus was more on promotion and development of a fan base than on immediate profit. Exploring new music on a Pandora radio station or through the Related Artists feature on Spotify was much more accessible, as it was not necessary to purchase each individual song. Streaming had also proved to be an excellent medium for advertising and publicity for concerts, downloads, and merchandise.
Rhapsody, a subscription service available only in the United States, had been around for nearly 10 years and had experienced slow, steady growth. Rhapsody had been stagnant at 800,000 subscribers for several years, but in December 2011, the com- pany experienced tremendous growth, hitting 1 mil- lion paying customers for the first time. Since the large increase, Rhapsody made only incremental gains, reaching an estimated 1.2 million subscribers in2013. With Spotify and other streaming services posting wild growth increases, the only question was the sustainability of such increases.
According to David Hyman, CEO of Beats Music and former CEO of MOG (a popular interac- tive streaming service that shut down in 2014), an average iTunes user spent $40 a year on music, the average American spent $17 a yeat on music, and premium subscribers to MOG paid $120. Hyman attested, “When it comes to individual deals between artists and labels, I do know that the content owners, the labels and the publishers are getting a lot more money out of these subscription services than they’re getting from iTunes.” Like iTunes, MOG had for- warded an average of 65 percent of income to labels.
In another interesting use of technology to mon- etize music, Denison Witmer, a solo artist who got his start playing with Sufjan Stevens, began what he called an “Everywhere at Once” tour in 20l2.By paying $25 at his website, fans were able to order a personal show of one to two songs played by Witmer himself live from his kitchen over Skype orApple’s FaceTime.
In terms of forecasting the future of the music industry, the movie industry offered some clues, especially with services like VEVO and YouTube bluning the line between video and music. Quite recently, Netflix superseded physical DVD stores, driving companies like Blockbuster and Movie Gal- lery to Chapter 11 bankruptcy in Septembet 2010 and February 2010, respectively.
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In the words of Sony founder Masaru Ibuka, “Cre-
ativity comes from looking for the unexpected and step- ping outside your own experiencel'” Sony as a company showed great innovation and clever execution in the past, earning a sigfficant market share in many diffirse markets, both in terms of geography and in terms of products. The question of the funne was always: How would the current position be used to press forward?
CASE 12 Sonv Music Entertainment and the Evolution of the Music Industry
END:NOTES
1.As quoted in a Sony Corporalion press release, March 2, 2011.
lQuoto from Magaru lbuka at qsotes.lifehack .org.