Sony BMG's strategy for combating music industry piracy

Sony Corporation

The recorded music industry is in a state of flux. Thanks to technology, new opportunities have been made available, however, new challenges have emerged as well. The most significant concern is piracy, especially with peer-to-peer file sharing over the Internet.

Sony Corporation's business unit, Sony BMG, is a new merger of Sony Music Entertainment and Bertelsmann AG. The merger occurred as an effort to take advantage of economies of scale and ward off against declining sales and profitability the industry is faced with. The mega music organization is positioned at #2 in the industry.

By applying a strategy of utilizing the Internet as a channel of distribution and as a marketing tool, Sony BMG can ward against the piracy that is plaguing the industry. Offering inexpensive music downloads provides a win-win solution for both Sony BMG and their customers. Customers will get quality music, increased flexibility, and increased convenience from the service, while Sony BMG will see increased revenues and increased profitability due to reduced costs of distribution.

Overview of Sony:

In 1946, Akio Morita, Masaru Ibuka and Ibuka's father-in-law, Tamon Maeda, founded Tokyo Telecommunications Engineering, with money from Moria's father's sake business. They produced the first Japanese tape recorder in 1950, and three years later purchased transistor technology licenses from Western Electric for $25,000, which began the Japanese consumer electronics revolution ("History").

In 1955, the company manufactured their first transistor radios, and shortly thereafter they developed their first trademarked product, a pocket-sized radio. In 1958, the company changed its name to Sony, derived from the Latin word 'sonus' for 'sound' and 'sonny' for 'little man'. The company continued to flourish, bringing transistor TVs first to market in 1959, and solid state videotape recorders in 1961. For twenty years, Sony's history was punctuated by both successes and failures, such as the Beta video recorder and their Sony Walkman ("History").

During the 1980s, adverse currency rates and increased global competition led Sony to diversify beyond consumer electronics. During this time, they developed and manufactured Japan's first 32-bit workstation and became a major manufacturer of computer chips and floppy disk drives ("History").

In 1988, Sony diversified even farther with the $2 billion purchase of CBS Records. The next year, they purchased Columbia Pictures, along with TriStar Pictures, for $4.9 billion. These purchases made Sony a major force in the rapidly expanding entertainment industry ("History").

It was this leap into the entertainment industry that would eventually lead to the merger with Bertelsmann AG. Sony BMG Music Entertainment is now the world's 2nd largest music company. The company is home to some of the top labels in the industry including: Columbia, Epic, Jive, J records, LaFace, Sony Classical, and RCA. They have a diverse group of artists under contract, from Britney Spears to Yo-Yo Ma (Wardrip).

Sony's Current Strategy:

In 2004, Sony launched a restructuring effort deemed 'Transformation 60' across the organization despite the industry they service. This effort will last through 2006. It is a cost-cutting plan that will reduce the Sony workforce by 13%, or approximately 20,000 workers. In addition Transformation 60 will combine the operating divisions and shift component sourcing to low-cost markets, such as China ("Overview"). Specifically, Sony BMG Music Entertainment will cut their workforce by 20% (Wardrip).

In addition, Sony's current strategy, in the entertainment segment, is wholly based on its recent merger with Bertelsmann AG. The organization has realized that it is facing a global crisis in the industry. There has been a massive decline in sales of recorded music. Increasing costs and falling CD prices then compound these reduced sales. Sony's strategy is to merge operations and thus take advantage of a program of cost savings. In this way, they hope to be able to maintain and increase their investment in artists, rather than simply continuing their previous strategy of streamlining and cutting costs, due to the adverse market conditions ("FAQ").

Financial Overview:

In 2004, Sony sales reached more than $72 billion. This is up approximately 15% from the previous year's sales of $63 billion. 2002 showed sales of just over $57 billion, which was down approximately 1.5% from 2001's sales of $58.5 billion. Net income, however, was down from 2003 ("Financial").

Sony's 2004 net income was approximately $851 million, just over 11% of sales. In 2003, Sony posted a net income of $978 million, approximately 15.5% of sales. However, this is an increasingly stronger net income margin when compared to 2002's and 2001's net income of $115 million and $134 million respectively, where neither year netted even 3% of sales ("Financial").

As Sony BMG Music Entertainment is a new entity, the only financial numbers available are estimates for 2004. Annual sales for the organization are estimated at $8 billion, for year ending 2004. Sales for Sony Music Entertainment, prior to the merger, in 2002 were approximately $4.8 billion.

Mission Statement:

Sony was founded on several principles, drawn up by Mr. Ibuka in 1946. These principles still guide the company today, after more than 50 years, and echo the spirit in which all facets of the business operate. The company's first goal "was to create a stable work environment where engineers who had a deep and profound appreciation for technology could realize their societal mission and work to their heart's content" ("Sony Mission").

The initial precepts also included the establishment "of an ideal factory that stresses a spirit of freedom and open-mindedness, and where engineers with sincere motivation can exercise their technological skills to the highest level" ("Sony Mission"). Lastly, Sony's original mission statement stated,

We shall be as selective as possible in our products and will even welcome technological challenges. We shall focus on highly sophisticated technical products that have great usefulness in society, regardless of the quantity involved. Moreover, we shall avoid any formal demarcation between electronics and mechanics, and shall create our own unique product uniting the two fields, with a determination that other companies cannot overtake. We shall fully utilize our firm's unique characteristics, which are well-known and relied upon among acquaintances in both business and technical worlds, and we shall develop production and sales channels and acquire supplies through mutual cooperation ("Sony Mission").

These precepts, developed more than five decades ago, speak of the innovation, dedication, and cooperation that has made Sony a leader not only in the electronics industry, but other complimentary industries as well, including the entertainment industry.

At Sony BMG, these general precepts are applied specifically to the recorded-music operations. They strive to develop their relationship with the artists, understanding that this is at the core of what they do. Their mission is to develop music talent, find new repertoire, assist established artists to grow into new areas, and to explore new ways to promote and market music ("FAQ").

External Analysis:

Industry Overview:

The history of the recorded music industry began with Thomas Edison's 'talking machine', which was developed in 1877. From this modest beginning, the music industry became a more than $50 billion industry. The industry itself has recognized a 3 to 4% growth over the past two decades, however, technology has not only made the industry more innovative, but also brought with it new threats.

The industry currently is in a state of flux. For this reason, even the most popular artists typically only have a short product life cycle. In addition, consumers have adopted new shopping styles, which have added unique challenges to the industry. This, coupled with technological advancements, such as peer-to-peer file sharing, has sent the recorded music industry into a chaotic spin.

Porter's Five Forces:

An external analysis of specifically Sony BMG's environment looks to identify the conditions that affect the organization's strategic development, as well as the competitiveness of the industry, as a whole. Porter's Five Forces is one useful tool in analyzing this situation. Porter's Five Forces include: rivalry among competitors, threat of substitutes in the marketplace, bargaining power of channels and consumers, bargaining powers of suppliers, and barriers to entry for new competitors entering the industry.

Rivalry among competition, in the recorded music industry is fierce, causing it to be a powerful influence on the industry. As noted earlier, Sony BMG is currently the second largest recorded music organization in the world, second only to Universal Music. However, organizations such as EMI Group and Warner Music are nipping at their heels. Add to this competition the plethora of smaller and medium sized recording companies, and it becomes clear that the industry is hyper-competitive.

The threat for substitutes is perhaps the most significant force in the recorded music industry. Although the ability to play music from various artists, as a whole, has no substitute, there are substitutes now for traditionally recorded music, such as CDs, tapes, and even DVDs. Technology now allows music lovers to burn copies of CDs from friends and family. Unlike the degradation that often occurred with the tape-to-tape transfer of copied music, digital music retains most of its high quality when burned from one CD to the next. This has become a challenge to the music industry

Yet, perhaps the biggest challenge is the peer-to-peer file sharing that has continued to occur in the industry, despite the best efforts of recording companies and artists alike. Computer technology combined with the Internet now takes 'music sharing' to a whole new level. Where once a person may have shared an album with a couple of friends or family members, now, thanks to the connectivity of the Internet, one person can literally share their album with millions of people worldwide. These illegal music downloads are the most significant substitute threat to Sony BMG and others in the industry.

The bargaining power of the end users is also quite significant, in the industry, thanks primarily to the technological advancements noted above. Despite the shutting down of many of the illegal peer-to-peer file sharing services, and even the prosecution some of the users, consumers have found ways to continue to share music via the Internet. This has given them significant power and has led the industry to respond with the creation of more cost friendly, download services such as: Apple's iTunes Music Service, Napster 2.0, Listen.com, and more.

The bargaining power of suppliers is another strong influence on the recorded music industry. Although actual material suppliers are quite abundant, and do not have that much influence, the artists themselves are quite significant. Multi-million dollar record deals for mega-artists are not uncommon. And, should these contracts not be to the artist's liking, they are certain to find a home with a rival competitor. In addition to the primary artists, the behind the scenes artists, such as the producers have significant bargaining power as well. A good producer can mean the difference between platinum albums and not.

Lastly, perhaps the least significant influence in the industry is the barriers to entry for new competition. General entry into the recorded music industry is quite easy. Anyone with a small amount of capital can lease a recording studio and record music, make copies and distribute them. However, the mass marketing that companies, such as Sony BMG, undertake requires considerably more capital to be competitive. Although there are thousands of small, unheard of record labels that exist, these are not true competition to the likes of Sony BMG.

Threats:

There is one significant threat to the recorded music industry, and that is the failed attempt to stem the piracy of their music. If music piracy continues to increase and costs of music production also continue to increase, Sony BMG, along with its fellow competitors, will be faced to continue to raise the prices of their CDs, making the honest consumer pay for the dishonesty of others. However, this will tend to have a snowball effect. As CD prices rise beyond what consumers find acceptable, more and more will turn to illegal music sharing, thus causing the prices to rise even higher, which will encourage more illegal downloading, and continue until the music industry is in shambles.

Opportunities

Despite the threats new technology presents for Sony BMG, there are also new opportunities as well. This includes the cost efficient means of downloading music, from entire albums to single songs. Virtual libraries of music can be browsed by consumers, allowing them to pick and choose exactly which songs they would like to purchase, creating their own personal compilation album. This type of service provides a win-win opportunity for both Sony BMG and consumers.

Obviously, consumers will appreciate the lower costs of purchasing downloaded music. They will also appreciate the convenience of being able to make their purchase instantly any time, day or night. In addition, the flexibility of being able to choose even a single song, is certain to be attractive to consumers.

For Sony BMG, a download music store offers reduced costs of doing business. Physical costs of CD duplication, cover printing, and shipping are eliminated in this virtual music store scenario. In addition, they can reach consumers around the globe without the expense and difficulties of exporting to foreign countries. Plus, there will never be a time when a popular album is sold out as the number of downloads is limitless. Lastly, if priced competitively and advertised effectively, downloadable music stores should prevent many consumers from turning to piracy.

In addition, the Internet offers a plethora of new marketing opportunities. Ancillary products, such as posters, t-shirts, books, dolls, lunchboxes, concert tickets, and more can all be promoted online efficiently and effectively. Even offering the free download of one song from an artist's new album can be a powerful marketing tool. Not only will the consumer who has downloaded the free song be more likely to purchase the album, if they like the song, but Sony BMG can use the data collected from the download to market specific complimentary products, as mentioned above.

Internal analysis

Strengths

Sony BMG has several strengths that have led them to become the second largest recorded music organization in the world. First and foremost is their ability to be innovative. It was innovation that led Sony to merge with Bertelsmann AG as opposed to simply continuing to try to streamline their processes and cut costs to meet the challenges that they were faced with.

Another Sony BMG strength lies in their dedication. Just as any Sony organization under the global Sony umbrella, Sony BMG is dedicated to doing what it takes to be successful. As mentioned, this of course involves innovation, but also developing relationships with their employees (in this case artists) and their consumers.

In addition, Sony BMG has their brand name, as well as their individual label names, as a significant strength. From Columbia Records to RCA to Sony Classical to the Sony BMG name itself, these are standards in the industry, and as such garner some respect and power. Artists want to be associated with a well-known label and may be more willing to negotiate a better contract, then if the label was unknown.

Lastly, Sony BMG's biggest strength is their artists. Sony BMG is home to some of the biggest names in the music industry. Crossing genres from Pop to Rap to Classical, Sony BMG has cultivated contracts with the top talent available. Developing new artists and retaining those who are already successful is key to Sony BMG's competitiveness.

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Sources of Advantages

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Size of Advantage

A second strategic analysis tool is the GE/McKinsey Matrix. This matrix maps strategic business units on a grid of the industry and the unit's position in the industry. It is superior to the BCG Growth Share matrix in that the GE matrix generalizes the axes as 'Industry Attractiveness' and 'Business Unit Strength', as opposed to market growth rate as a substitute for industry attractiveness and relative market share for the strength of the business unit. In addition, the GE matrix allows for more precision with nine cells as opposed to four.

Utilizing market growth rate, market size, demand variability, industry profitability, industry rivalry, global opportunities and macroenvironmental factors, one can determine that the overall industry attractiveness for the recorded music industry is medium. The growth of the market is declining in recent years, as is the market size. Demand has slackened a bit, as has profitability. Rivalry in the industry is quite strong, but there are significant global opportunities, and the macroenvironmental factors are favorable.

To determine the business unit strength for Sony BMG, several factors need to be taken into consideration, including: market share, growth in market share, brand equity, distribution channel access, production capacity, and profit margins in relation to competitors. Given these factors, Sony BMG's strength is rated as high. They have a significant market share, and this share is growing. They have significant brand equity, access to distribution channels, and unlimited production capacity. Their profit margins, in comparison to competitors, are similar (See Figure 2).

Strategic Actions:

With these considerations, it would behoove Sony BMG to focus on developing their Internet sales of music and exploiting the marketing opportunities that come with this technology. Piracy will continue, no matter what strategy Sony BMG implements, there best hope is to develop a plan that minimizes it. By offering the convenience and price attractive option of downloadable music, Sony BMG can help prevent piracy by better meeting the needs of their customers. When one looks at a Balanced Scorecard, it becomes clearer that this strategy fits the needs of the company best (see Figure 3).

Figure 2.

GE/McKinsey Matrix

For Sony BMG

Business Unit Strength

High

Medium

Low

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Attrac-

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Low

Figure 3.

Balanced Scorecard

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Sony BMG needs to show an increase in sales, as well as profitability. In-creased Internet sales will meet this need.

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beyond their current Internet strat-egies and develop new and innovative ways of utilizing the Internet to sell and market their music. This is the only way that they will be able to prevent piracy, increase sales and increase profitability.