Digital Music Business - Case Study Example

Digital Music Business Table of Contents Digital Music Business 1 Table of Contents 1 The Digital Music Industry 2 Porter’s Five Force Analysis 3 The Company: Sony 6 SWOT Analysis 8 Strategic Management of Sony 11 Recommendations 13 Conclusion 14 Reference 15 Introduction The music industry is characterised by the element of change that has been revolutionising the industry since its very inception. Emergence of advanced technology has revolutionized every aspect of this industry. Today, almost all music is distributed in digital format. Earlier, digital music was sold mostly in compact discs. Music fans are now enjoying new and advanced forms of music like mp3, an audio compression file format. This industry is comprised of several big names like Apple, Sony, Universal Music etc. This report attempts to analyse the industry along with the company, Sony, which is one of the leading players in digital music business. Effort has been taken to provide an insight into the company’s strategic management framework. Based on the same, recommendations have been provided to enhance its service in the digital music industry. A conclusion has been inferred from the entire analysis. The Digital Music Industry “In the year 2009 globally, for the first time, more than one quarter of record companies’ revenues came from digital channels” (IFPI, 2010, p.3). People can acquire albums and tracks in ways which have been unimaginable few years ago. Fans can get hold of their favourite tracks from download stores, subscription services, streaming sites, free download sites, accompanied by their broadband or mobile phone handsets. Despite these innovations, the market failed to report significant growth in this year. Digital piracy still remains the most insurmountable barrier for the market growth. Slowdown in sales and investment in the major music markets testifies this. The global sales fell by around 30 percent from the year 2004 to 2010. Despite all these facts, the industry has been able to build up a US $ 4.2 billion digital business, up around 12 percent on the trade value in the year 2008. The business is focused on customer friendly services. The digital sales have been experiencing a slowdown; however, this did not stop the success stories to evolve. These success stories would nonetheless struggle to survive unless the fundamental problem of piracy is dealt with in an appropriate way. In this year, music business has maintained its lead to the creative industries while entering into the digital revolution. United States has been one of the leading music markets in the world. In US, more than 40 % of music sales come from online and mobile revenues. The worldwide music industry is diversifying its business models and revenue streams. The a-la-carte download model which has been pioneered by iTunes is still the most significant revenue source in the online sector. This accounted for more than 100 million across some 23 countries. The advertising and support services, being licensed from the music companies, channelize their effort to attract the non-payers and the file sharers. Moreover, the companies have struck considerable deals with major ISPs, moved into partnerships with significant device manufacturers and introduced a new platform for the high quality music videos which are meant for the mass audiences (IFPI, 2010). Till this year, the industry has taken a number of innovative initiatives which are fundamentally aimed at meeting the requirements of the music fans. Porter’s Five Force Analysis Formulation of an effective strategic management is indebted to the accuracy with which the environment of an organisation is evaluated. The environment of an organisation includes both its internal as well as external features. This section will attempt to scan the external environment of Sony Corporation. Porter’s Five Forces is an important management tool in this regard. This helps to identity five important factors that influence the degree of competition. These five forces are, existing rivalry, threat of substitute products, threat of new entrants, bargaining power of suppliers and bargaining power of buyers (Henry, 2008. p.69). These five factors are discussed below for Sony Corporation in context of digital music sector. Bargaining power of buyer: Music has become an integral part of human lifestyle and is a prominent and popular mode of entertainment. The buyers are increasing significantly in the global digital music industry. High quality and reliability are the ones that affect consumer behavior. Buyers’ perceptions are colored by the brand image of their products. Sony Corporation has developed a unique brand image that has helped it to attract a large and loyal customer base. However, high availability of other branded products like Apple, Bose, J.V.C. etc the bargaining power of buyers has increased substantially in the recent years. Bargaining power of suppliers: A wide range of material is required for making digital music system. The suppliers are very important in this regard, for providing uninterrupted high quality raw materials. However, digital electronic industry abounds with suppliers of various kinds. Sony Corporation has developed a standard process to maintain good relation with suppliers. The following figure shows an efficient process that increases the value of Sony’s suppliers. Figure 1: Sony’s Supplier Management Process (Source: Sony Corporation-a, 2010) This efficient process has reduced the bargaining power of Sony’s suppliers. Threat of substitute products: Sony provides a large variety of digital electronics products. It has acquired a significant market share in the digital music industry by the virtue of its innovative products and hence, the treat of substitute product has become weak. From the buyer’s perspective, there are hardly any substitutes for high quality digital music system. Most of the substitute products have become obsolete or are out of market. Therefore, the threat of the substitute product is weak as compared to other forces of the industry. Sony Corporation is the leader in product innovation and has consequently launched many products for digital music. For example in 1998 and in 1999, it launched “Digital Versatile Disc (DVD) player” and “Network Walkman digital music player” respectively (Sony Electronics Inc., 2010). Threats of new entrants: In digital music business, the entry barrier is very high and it leads to develop lower entry barrier. Certain factors are responsible for high entry barrier. Firstly, the capital investment in this sector is very high. Secondly, technological know-how and innovation are the major determinants of this sector. Thirdly, the switching costs are very high. Finally, this sector is dominated by leading players like Sony, Apple, Bose and these companies have developed their brand recognition among the consumer groups. The existing rivalry: It is the strongest force that intensifies the degree of competition of digital music industry. The competitors are equally strong and balanced. Competitors are engaged in a bitter rivalry to gain upper hand position by achieving effective and strong competitive advantage. In this respect, competitors are investing significantly to enhance their R&D for product development. The imitation of technology is also a major market trend that increases the rivalry among the competitors. The high degree of competition has reduced the profitability of existing players in this digital music sector. The Company: Sony Sony Corporation which is popularly known as Sony in the global market is the parent company of many subsidiary companies like Sony Music, Sony Entertainment, Sony Electronics Inc etc. Sony Corporation is one of the biggest multinational companies in the global market. Sony Corporation is basically a Japan-based company and it was founded on May 07, 2010. Its major products are related to digital music, video, computers and entertainments (Sony Corporation-b, 2010). The following figure shows the organisational data of Sony Corporation that includes its entire core business units. Figure 2: Sony Group Organisational Chart Summery (Source: Sony Corporation-c, 2010) The above figure shows major business units of Sony Corporation that operate in different areas. This paper deals with the digital music business of Sony Corporation. The Sony Music Entertainment is its digital music business segment. “Sony Music Entertainment is a global recorded music company with a roster that includes a broad array of both local artists and international superstars” (Sony Music Entertainment, 2010). This subsidiary company of Sony Corporation was established as American Record Company in 1929 and at present, it has become one of the largest music recording companies in the global market. SWOT Analysis Analysis of internal strengths and weaknesses, and external opportunities and threats are essential for disclosing the key information regarding a company’s position. SWOT analysis is an effective tool in this respect that “determines the current state of the market outlines the challenges that lie ahead” (Kern, 2001, p.3). The SWOT analysis of Sony includes its major strengths, weaknesses, opportunities and threats. These four major areas are discussed below. Strengths: Sony Music Entertainment is one of the major business units of Sony Corporation that add significant amount of sales revenue to the parent company. As per the consolidated proportion of business of Sony Corporation, Sony Music contributes 7.1% of total business revenue. The following figure depicts this graphically. Figure 3: Proportion of sales by business (Source: Sony Corporation-d, 2010) The above figure indicates that this segment is one of the strongest business units of Sony Corporation. In USA, it has captured a large portion of market share, and among the buyers groups, it has become very popular as a reputed brand. Market expansion of Sony Music is considerably larger than its competitors. The company has also acquired a number of popular singer artists. Its famous featured artist includes Adam Lambert, Avril Lavigne, Christina Aguilera, Susan Boyle, Jackie Evancho etc. The company also brought several innovations in its physical music products and also invested in MP3 technology that has added value to the company’s operating business. Weaknesses: Illegal sharing of music files and piracy is the major threat for the company. However, the company has not taken any effective steps to reduce the same. Since last few years, Sony Music Entertainment has been failed to target its potential customer groups. In some of the major markets, the company’s performance has been poor. The company is unable to capture significant market share in regions like Australia and Europe. The operating income of Sony Music Entertainment was reduced by 50.1% in 2009 as compared to the previous year (Sony, 2009). Opportunities: the digital music market is a large sector that will grow with increasing number of music lovers. At present, the passion among the youngsters for modern music is increasing significantly. Sony Music Entertainment must identify the preferences of its target consumer groups. Legal policies are trying to check the illegal piracy business, the success of which promises growth of the market in the years to come. Technological advancement of this industry also helps to increase consumer demand. Sony Music Entertainment must identify these underlying opportunities in order to gain an upper hand position in the market. Threats: Increasing competition is the biggest threat of Sony Music Entertainment. Companies like Universal Music Group International, Virgin Music, and Warner Music International etc are some of the biggest rivals of Sony Music Entertainment. These competitors are very active in the market and aim to increase their market share by competing each other. Increasing piracy is another major threat for the company. In the European Union, nearly 29.8 million of users are found to be using pirated music. During the last five years, there has been 30% decline in the music market (IFPI, 2010). These are the major challenges faced by the company, which if left untreated will pose as a threat to its profitability and market share. Strategic Management of Sony In the year 2004, Sony’s music unit merged with Bertelsmann AG. The merged company, Sony BMG, was expected to fend off illegal file sharing and enhance dwindling CD sales. The new recording company was expected to have the kind of required resources which could have challenged Universal Music Group, one of the leading players in the digital music business. Sony BMG did win a considerable chunk of U.S. music sales which was almost as big as that of Universal. The company was able to curb out its competition with its emergence as one of the leading players in the industry. Sony has been the first to renew its music licensing agreement with YouTube. In the digital music industry, the significance of YouTube cannot be denied. According to a recent study, sites such as YouTube has led the digital music activities in Europe with around 31 % of the internet users prefer to watch music online. Sony has realised this fact. In the end of 2009, Universal Music Group and Sony Music Entertainment entered into a partnership with YouTube and Abu Dhabi Media Company to launch VEVO in US and Canada. The service is in agreement with EMI group also. It is focused on the ad supported distribution of professional music videos. Online music distribution is done through VEVO.com, VEVO channel within YouTube and other online sites. According to Thomas Hesse, President, Global Digital Business, US, Sales and Corporate Strategy, Sony, VEVO was launched to offer professionally produced content both to the customers and the advertisers, and enhance their experience by providing a new premium environment of digital music. As VEVO offers 85 percent of the music online, it is expected to create an attractive online environment for the advertisers and music fans. Partnering with the same, Sony is expected to enhance its service in the global digital music industry. Economic Times has reported that online video advertising enjoyed a growth rate of 300 percent last year. Even the brands are looking for more premium content. In such a situation, teaming up with VEVO is expected to result in higher revenue for the company with enhanced sales graph. Earlier, Sony was reluctant to embrace digital music download services. However, the organisation has learnt a number of lessons from this and is now working hard to make its mark against the supremacy of competitors like Apple. Unlike Apple, Sony was not able to grip the digital music download services. Organisations like Apple, RealNetworks have been offering a system to download music to the digital players. When Sony introduced a service, it got stuck to “a proprietary encoding system and offered no support in its players for the widely used MP3 format” (Williams, 2005). As a consequence, Sony, traditionally one of the leading names in music business, has experienced a downturn in its revenue. According to Ken Kutaragi, Executive Deputy President of Sony, the organisations was reluctant and sceptical in introducing a product like iPod. Even until 2004, various divisions of Sony did not work together to establish a sound strategy in promoting its digital music business. However, this perception is changing at a fast pace. An internal group, named Connect Company, was formed by Sony to connect various business units of the organisation. The objective is to combine all its efforts in the field of digital music players, online sales and required software. The organisation has also decided to come up with updated version of Walkman Player offering a support of mp3. The year 2009 proved bleak for this music company. Some have attributed it to lack of proper managerial abilities. The market share of this company in digital album and song sales has been reduced from 28.6 percent in 2004 to 22.5 percent in 2009 (Sandoval, 2009). Since the year 2008, Sony Ericsson has been offering unlimited music service in its mobile phones. This is expected to be an add-on in mobile technologies. “In order to take the business to the next level and capture the enormous potential that’s still untapped, we need new services to truly break through to the mass market- Thomas Hasse” (IFPI, 2010, p.5). According to him, to accomplish the same, the company would require an attractive user interface, a clear marketing message, a strong value proposition and an effective way to curb piracy. Recommendations The above discussions and analysis of Sony’s internal and external environment and strategic management have disclosed key information regarding the company’s overall position. Currently, the digital music industry is experiencing a major challenge due to increasing ‘piracy’. However, the numbers of music lovers are growing in the global market and technological development is the major reason behind it. Sony Music Entertainment must identify the opportunities and challenges and build its internal strengths accordingly. Some relevant recommendations have been given below to assist the company in overcoming its internal weaknesses. It must focus on its long term goal rather than short term goal. In this respect, it must evaluate its exiting mission and vision with the changing market trend. The company must engage in continuous product development strategy by embracing the latest technological advancement in its business operations. Consumer preference and market trend is constantly changing and the company must identify these factors before its competitors. The company must take necessary action against piracy. The company can offer online subscription for providing music services. The sales of music CDs are decreasing. The company must invest for promoting music CDs. It can provide value added services like discounts, posters of famous singers etc. It must acquire the famous featured signer artists, which will enhance its brand image. The organisational structure is very important for proper strategic management. Sony Music Entertainment must develop a favourable organisational culture and structure. Conclusion The digital music industry has been a witness to several changes for the last twenty years. Advanced technology has made the industry more competitive for its players. In the recent years, Sony’s performance in the digital music industry has not been satisfactory. Sony, one of the leading names in this industry is required to review its strategic management framework and intensify the same to enhance its current position. Music piracy has been the most significant barrier to the digital music industry. Sony must realise that a combination of comfortable user friendly digital services and a strict stand against piracy can only pave its way to success. Reference Henry, A. 2008. Understanding Strategic Management. Oxford University Press. IFPI. 2010. IFPI Digital Music Report 2010. [Pdf]. Availability at: http://www.ifpi.org/content/library/DMR2010.pdf. [Accessed on November 22, 2010]. Kern, R. 2001. S.U.R.E.-fire direct response marketing: generating business-to-business sales leads for bottom-line success. McGraw-Hill Professional. Sandoval, G. 2009. Sony Music woes extend to digital sales. [Online]. Available at: http://news.cnet.com/8301-1023_3-10159985-93.html [Accessed on November 22, 2010]. Sony. 2009. Annual report. [Pdf]. 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