The music industry has been dominated throughout the century by a limited number of majors. The oligopoly exists due to several factors. These include: - The large fixed costs: the costs of production and the distribution of fixed costs are extremely high, and constitute barriers to entry. Effects of scale allow larger companies to become profitable. - Rapid technological change: the ability of companies to follow technical developments is an important success factor in an industry in constant change (the different media changes). - Low margins: The number of actors involved in the production of an album are very important (composers, artists, producers, etc.).
To illustrate the small margin that carry the majors, take the typical cost structure of this type of company for a product sold for $10.75. The operating income is only $0.59 (representing a margin of 5.5%). By comparison, retailers have a slightly higher operating margin (5.7%), which still remains relatively low.
Tags: BMG, music industry margins, cost of production of music, music retailers
[...] Note that we are still far from this extreme value chain since 1999, only of the market sells online music. However, the price advantage of the Internet may make the exponential growth of this market. The reaction of the majors should be fast, and common: the majors do not differ from each other by specific competitive advantages; it is conceivable that the impact will be the same for all and that the relative positions will not change. In this case, the collaboration seems to be the most profitable - The reaction of BMG: recommendations To maintain their dominance, the majors need to adapt quickly to new business model and possibly use their existing competitive advantages to create value "differently". [...]
[...] ) that derive their profits from fees on artists who remain as the only source that is more competitive to BMG. Market rules will therefore change with internet and BMG should create a special division to address this market. This would combine the traditional division of BMG (marketing, sales and production to new artists) as internet should be considered as a separate and complete market. Regarding partnerships, the Internet is a very volatile market; it is advantageous to keep up to partners to minimize risks. [...]
[...] BMG case study 1 - A market dominated by the majors The music industry was dominated throughout the century by a limited number of majors. This oligopoly is due to several factors: - High fixed costs: the cost of production and distribution of fixed costs is extremely high and are barriers to entry. Effects of scale allow companies of large sizes to become profitable. - Rapid technological change: the ability of firms to follow the technical development is an important success factor in an industry that is constantly changing (see the different media changes) - Low margins: The number of actors involved in the production of a disk is very important (composers, artists, producers, etc . [...]
[...] In this context, the internet is not only dangerous, it is also an opportunity for the majors because the web can be an inexpensive marketing platform and can serve as a test before adopting a new artist. Selected Bibliography Musical culture and mass marketing tools: how marketing has he democratized the music? [...]
[...] - Develop business sales and legal download on the internet. In this context, partnerships, cooperative strategies or alliances (between majors or resellers) seem adapted to this change. Especially since the five majors are very comparable in terms of structures and in terms of market share. Unilateral actions will be followed so quickly and can result in opposing coalitions making it ineffective. To save themselves, the majors should cooperate. - Adopt a different pricing model of the artist as sales of CDs have doomed and are falling sharply and that the margin on downloads is very low, BMG should not be considered to have too long sales activity as its core business. [...]
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