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internet
business models
text and cases

BMG Entertainment

Kristin Belanger

© 2005 UMFK.
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Development of a
Global Music Industry

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Overview
• Introduction
• Strategies
• Stakeholders
• Get Big Fast!
• 20-20 Hindsight

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Introduction
• Music Industry
– One of the fastest moving Industries
• CEO – Strauss Zelnick (in 1998)
• Brick and Mortar company gone Online
• Two of the Six leading companies merged
in the past year
• Steered BMG towards online opportunities
• Cautiously made strategic moves
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Road Blocks
• The ever changing Music Industry
– Company able to keep up with changes
– Predict upcoming problems
• Five other competitive content providers

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Music Industry Organization

• Composers & Lyricists
– People who wrote the music and words
• Performing Artists
– Performers of their own original songs or used some created by
lyricists and composers
• Music Publishers
Bought rights to the pieces and promoted music through channels
• Record Companies
– Artists under contract, bought musical rights, managed recording,
made CDs, distributed, promoted products
• Independent Distributors
– Distributed on behalf of independent labels and made cross-
regional mergers

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Music Industry Organization (cont.)

• Retail Channels
– Sold through brick & mortar, record clubs, mail order, online
retailers
• Consumers
– Directed at individual consumers (by genre)
• Promotion
– Battled with radio stations to get new releases aired (equals more
record sales)
• Rights Agencies
– Paid by royalties (payments tied to actual use of music)
• Industry Economics
– Divided profits among various players

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Strategic Plans
• Mergers in 1920’s helped in 1999
– BMG one of top 5 corporations
• Manufacturing, distribution, music publishing,
sales and marketing activities were centralized
over the 200 labels
• Labels responsible for individual promotion of
artists
• Launched first website in 1995 with many
different website for different genre’s
– Peeps.com for hip-hop (non – existent anymore)
– TwangThis.com (country)

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Strategic Plans cont.

• Teamed up with GetMusic.com –
comparable to CDnow.com or Amazon.com
• Were first to experiment with downloads in
1997
• Had longer-term intentions

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Strategic Partners
• Microsoft, Liquid Audio, Real Networks,
AT & T and IBM
• Helped stream in audio clips, music video’s
and more
• All partners were needed to help set
technological standards for downloading
music
• Had hundreds of files on potential deals

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Don’t sell your copyrights or license them

exclusively.
Don’t make long-term deals that you can’t
change.
Once you’ve followed those rules, be willing to
take risks and try things out.
If God forbid you’re wrong, you still own your
copyrights.

-Strauss Zelnick

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Competition
• Universal Music Group
– Still around today
• Sony Music Entertainment
– (merged with BMG – now called Sony BMG Music
Entertainment)
• Warner Music Group
– Still around today
• EMI
– Still around today as well

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Serious Threats
• Napster, BearShare, Limewire
– All free* MP3 download programs
• Listen.com, Emusic.com, MP3.com
– Consumers sampled music for .99 cents a song
– downloaded an album for $8.99

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Stakeholders
• Customers
– Strategic Partners
– Buying consumers
• Employees
– Employees of BMG
– Shareholders (both employees of Bertelsmann AG and
Sony)
• Partnerships
– Microsoft, Liquid Audio, Real Networks, etc.

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Winner Takes All?

• Customer Acquisition Costs
– Low to moderate - people keep returning for the content (i.e. Music
downloads, albums, information)
• Network Effects
– Strong the more people go to BMG music to see their favorite artists the
more they can download songs & info

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Update!
• August 2004 Merger
– Sony Corporation of America and Bertelsmann A.G.
(Billboard, 9/24/2005, Vol. 117 Issue 39, p5, 2p)

• Reason for merger

– Music industry = global crisis (Billboard.com)
– Costs risen and CDs fallen (Billboard.com)
• Andrew Lack is CEO of Sony BMG
Entertainment (previous jobs include President of
NBC News, CBS News, West 57th) (bmg.com)

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Questions??

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