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").
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.
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").
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…