Case presentation: SONY MUSIC ENTERTAINMENT

Main question (write here the assigned by the instructor)

Describe the competitive environment in digital music as the industry moved into 2014

Specific questions assigned and team analysts

Question 1
Describe the competitive environment in digital music as the industry moved into 2014

QUESTION N.1
____ Describe the competitive environment in digital music as the industry moved into
2014___________________________________________________________________________

Textbook, articles and additional sources

Textbook

N. Topic Chapter Page

1. Crafting & Case 12 C178-C187
Executing
Strategy. The
quest for
competitive
advantage
2. SWOT Analysis CHAPTER 4 pp. 89-94
Evaluating a
Company’s
Resources,
Capabilities, and
Competitiveness.
3. FIVE FORCES CHAPTER 3 pp. 48-60
FRAMEWORK Evaluating a
Company’s
External
Environment

1
Scientific articles/books

N. Title Author Journal Year, Link

number
1. Analysis and Hong YU & 4th 2017 file:///C:/Users/User/Download
Suggestion on Jia-yu International s/13136-22040-1-SM.pdf
the WANG Conference on
Development Economics and
of SONY Management
(ICEM 2017)

ISBN: 978-1-
60595-467-7
2. Possibilities of Marius 20th 2015 https://core.ac.uk/download/p
Digital Piracy Akulavia & International df/82369849.pdf
Management Edverdas Scientific
in Music Vaclovas Conference
Records Bartkusb Economics and
Industry Management -
2015
(ICEM-2015)

Additional sources (company disclosures, web pages, video etc)

N. Title Author Journal Year, Link

number
1. SONY MUSIC / SITE 2000 https://www.universalmusic.c
ENTERTAIN Universal Music om/sony-music-entertainment-
MENT AND Group News and-universal-music-group-to-
UNIVERSAL create-joint-venture-to-
MUSIC develop-subscription-based-
GROUP TO service/
CREATE
JOINT
VENTURE TO
DEVELOP
SUBSCRIPTI
ON-BASED
SERVICE
2. Sony Music e Andrea Quotidiano.net 2015 https://www.hwupgrade.it/arti
Spotify: un Bai coli/web/4367/sony-music-e-
contratto svela spotify-un-contratto-svela-gli-
gli altarini altarini-dello-streaming-
dello streaming musicale_index.html
musicale

2
 ANSWER AND RECOMMENDATIONS N.1
Write your answer and be critical not descriptive
The environment in 2014 is composed by three main methods of digital music distribution:
1. digital download,
2. Internet radio,
3. interactive streaming.

1. For what concern digital purchases and download of music, iTunes is the leader. In 2013 accounted
for 63 percent of digital music sales, and it had facilitated over $25 billion in digital music sales since its
inception. According to Apple’s 2013 10-K report, in October 2013, the iTunes Store generated a total
of $9.3 billion in net sales, representing a 24 percent increase over 2012 sales. The iTunes sales figure
included digital music downloads through iTunes, purchases through the App Store, and purchases on
iBooks. In September 2013, iTunes had launched its own free Internet radio service, iTunes Radio. The
service tailored radio stations 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.
2. Another way of digital music distribution, is Internet radio and subscription streaming services in
2014 (such as Spotify, Myspace, iTunes Radio, and Rhapsody were among the largest). Many music
companies saw revenue from music streaming and Internet radio as a substitute for sales. This meant
that, instead of purchasing a physical CD or even downloading a CD on iTunes, the consumer would
instead turn to a cheaper, or free, more convenient Internet streaming source. The period from 2010 to
2012 saw rapid growth of Internet distribution. For this reason record labels and music publishers were
willing to look to new monetization methods, such as streaming services, that might save their
profitability.
3. Interactive streaming: the leader is YOUTUBE. Was and is very significant player in the music
industry. A part of YouTube’s success in the music scene was the introduction of Content ID, a service
that identified the music in videos posted by users YouTube simply identified the owner of the
copyright and paid a royalty to the record label or artist after a short verification process.

In the record label business in 2014, Sony Records was second in terms of market share, with 20%.
Along with the others Big two music companies (Universal Music Group and Warner Music Group),
these three companies collectively held 57.1% of the industry market share.

To understand better the external environment I did the SWOT analysis and the FIVE FORCES
FRAMEWORK.

SWOT ANALYSIS
SWOT analysis is a simple but powerful tool for sizing up a company’s strengths and weaknesses, its
market opportunities, and the external threats to its future well-being. The two most important parts of
SWOT analysis are drawing conclusions from the SWOT listings about the company’s overall situation
and translating these conclusions into strategic actions to better match the company’s strategy to its
internal strengths and market opportunities, to correct important weaknesses, and to defend against
external threats

Strengths
The strength is something a company is good at doing or an attribute that enhances its competitiveness
in the marketplace. A company’s strengths depend on the quality of its resources and capabilities, in
fact represent its competitive assets.
- The second biggest major music company. According to the statistics, Sony Corporation is a
major firm in the electronics, gaming, entertainment, music record industry and financial services
markets. The company has the necessary strengths to continue succeeding;
- Strong brand. It is globally known and recognized;
- A portfolio of successful artists; SONY Music include Avril, Adele, Backstreet Boys and other
stars, also have like Jay Chou, Faye Wong, and other distribution rights record of the Chinese star .
- In many areas have strong patent reserves. The total number of patents in the reserves among
the world’s top ten ;
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- An organized and clear website;
- Attractive customer base. In fact, SONY has a large number of faithful fans ;
- Channels of distribution: radio, TV, Internet, music record shops;
- Wide geographic coverage and strong global distribution capability.

Weaknesses
Is called competitive deficiency too, and is something a company lacks or does poorly (in comparison
to others) or a condition that puts it at a disadvantage in the marketplace.
- SONY has development in various fields so that it has a long production line, which is why
SONY has also led to various rivals to face in various fields. In particular, a SME competitor is Warner
Music .
- Global music piracy. It's the biggest issue that worries all music record companies. “The
number of users copying and distributing these products without the legal consent of their authors is
increasing […] for this reason music authors evaluate possibilities of digital piracy management in the
digital space” . Music industry has the largest scale of digital piracy over the whole creative content in
the business sector but it is difficult to determine the exact volume of digital piracy. Digital piracy
should be treated as a new phenomenon and for this reason should be find a way to manage it. There
are two principles to fight piracy and manage it: the first one is that business has to adapt to
innovations and promote them, the second is that business has to take into account the needs and
approaches of consumers .
- Decrease of demands, because of the piracy.

Opportunities
- Innovation and new technology, to better meet their customer’s needs with new and improved
products and services. Technology also builds competitive barriers against rivals.
- New markets allow Sony Music Entertainment to expand their business and diversify their
portfolio of products and services;
- Entering into alliances or joint ventures to expand the firm’s market coverage or boost its
competitive capability. Examples of Joint ventures is between SME and Universal Music Group in
2000. They have agreed to enter into a joint venture to develop a subscription-based service which will
include various music and video offerings for the Internet across multiple platforms such as computers,
wireless personal devices, and set-top boxes. Both companies will license content to the new venture.
Another important agreement is between SME and Spotify. The contract stipulated between SME and
Spotify provides annual advances that Spotify must pay in order to distribute the catalog of Sony
Music, the minimum number of subscribers that must be able to achieve, the calculation of the fees for
streaming. The contract also establishes that the label is given free advertising space on the streaming
service. In particular, Sony Music is guaranteed a "credit for advertising inventory" of a total value of
5.5 million dollars. Sony thanks to this joint venture with Spotify has increased its profits between 15-
20%.
It is important for a major like Sony to take advantage of these streaming spaces to promote its artists.
- Gain momentum in the changing digital music era.

Threats
- Changes in technology—particularly disruptive technology that can undermine the company’s
distinctive competencies;
- The music pirates will drive music record companies to a decrease of their sales;
- People are more attracted to download a song online rather than buy the whole album;
- Physical sales are decreasing due to digital music. Nowadays, there is a new abilities to acquire
music illegally and for free;
- Wrong selection of an album release may result badly to the company;
- Competition innovation first;
- Reduce incomes due to new forms of generating sales.

FIVE FORCES FRAMEWORK

The most powerful and widely used tool for diagnosing the principal competitive pressures in a market
is the five forces framework. This model is used to determine the nature and strength of competitive
pressures in a given industry.

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Porter's five forces are the rivalry among competitors, the threat of potential entry, the bargaining
power of suppliers, the bargaining powers of buyers and the threat of substitutes.

Rivalry among competitors

The most competitive force between Porter's five forces is the rivalry between producers and sellers in
the music industry. Sony Music has 3 biggest competitors: EMI, Warner Music Group and Universal
Music Group. The competition of these four companies depends on the popularity of the artist and
their songs. In one hand, if the artist is very popular and promises reassured sales, then the price
doesn't play a significant role. On the other hand, if the artists are not known enough then the price is
at the same stage of importance as the competition. Furthermore, the rivalry between the competitors
is affected by the advertisement and promotion of the songs. So, the rivalry among competitors is high.

Threat of potential entry

The threat of potential entry is the weakest force. It’s very difficult for a new music recording company
enters the market to reach the levels of the existing company. In fact there are high barriers to entry. In
addition to this, the companies that are trying to entry in the market must have vast amount of resource
and expertise. In the music industry there are millions of music record firms globally but still the top
four remain unbeatable.

Bargaining power of suppliers

The power of suppliers depends on the popularity of artists. The artists possess the power of supplying
music to the industry. Sony specializes on already famous artists, therefore is difficult to compete.

Bargaining power of Buyers

Buyers have lots of power because of constant changes in taste and because of the increasing digital
copy demand. So, this force is high.

Threat of substitutes
The real issue in this moment is that people prefer listening songs through Internet (for example on
YouTube and Spotify), on radio, on TV channels and other rather than buying the CD. Internet has
become a substitute of CD records, through piracy and downloads. This is very an important matter in
music record industry, even if they try to fight it, there will always be this competition.