HBS-BMG-Entertainment-(9-701-003)

9-701-003REV:SEPTEMBER22,2005________________________________________________________________________________________________________________GerritMeier,MBA2000,preparedthiscaseunderthesupervisionofProfessorJanW.Rivkin.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2000PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.JANW.RIVKINGERRITMEIERBMGEntertainmentFortyfloorsaboveTimesSquare,StraussZelnickandKevinConroymetinZelnick’scorneroffice.AspresidentandCEOofBMGEntertainment,oneoftheworld’sleadingrecordcompanies,Zelnickfacedatoughsetofdecisionsabouthowtoorganizeandoperatethecompany.HeknewhecouldcountonConroy,seniorvicepresidentofworldwidemarketingandnewtechnology,foraclearopinion.ThediscussioncameinAugust1999astheglobalmusicindustryfacedaperiodofpotentiallytumultuouschange.Twoofthesixcompaniesthatdominatedtheindustryhadmergedayearearlier,andatleastoneotherwasrumoredtobelookingforabuyer.Customertastesandbuyinghabitswereinflux.TheInternetbroughtthepromise—orspecter—thatconsumerswouldbuymuchoftheirmusiconlineratherthanpurchaseitfromstorefrontretailers.Soon,customersmightdownloadmusicratherthanbuyprerecordedcompactdiscsorcassettetapes.Withthischange,thetraditionalchainlinkingartiststhroughrecordcompaniesandretailerstoconsumersmighttakeonanentirelynewform.Certainindustryanalystsandparticipantsevenpredicted—somegleefully—thatthenewtechnologywouldspelltheendofthemajorrecordcompanies.ChuckDoftherapgroupPublicEnemytookanextremeposition:Soonyou’llseeamarketplacewith500,000independentlabels—themajorscanco-optalltheywant,butit’snotgoingtostoptheaveragepersonfromgettingintothegame.TodayamajorlabelmakesaCDforaslittleas80cents,thensellsitwholesalefor$10.50soretailerscancharge$14—that’shighwayrobbery....Thetruerevengewillcomewhenthemajorlabelsstartdroppingtheirprices.Icanseethepublicsaying,“OK,IcouldgotothestoreandpickupthealbumIwantfor$5,butIcangetitontheNetfor...$3.”1Amongmajormusiccompanies,BMGhadbeenoneofthemosteagertoembracethenewtechnology,despitethethreatsitmightpose.ConroyandZelnickhadsteeredBMGtowardonlineopportunitiesasearlyas1995.BMGwasthefirstmajorrecordcompanytocreateasetofbrandedwebsitestailoredtoparticulargenresofmusicinordertoattractmusicfans.Itwasalsothefirsttousedownloadingtechnologytopromotethesaleofconventional,prerecordedCDsandcassettes.2ViaaninnovativeagreementwithAmericaOnline,consumerswhoplayedtheCDsofcertainBMGartistsontheircomputerswerelinkedautomaticallytorelevantwebsites.Changingtechnologycreatedanewsetof“digitalcustomers”forBMG:onlineretailerssuchasCDNow,whichshippedCDsandtapestoconsumers;storefrontretailerssuchasTowerRecordsthat701-003BMGEntertainment2wereestablishingonlineoperations;websitesthatenabledconsumerstodownloadmusicdirectlyfromtheweb;andindividualconsumerswhowerevisitingBMG’smusicwebsites.ZelnicknowhadtodecidehowtoorganizeBMGtoserveitsdigitalcustomers.Oneoptionwastogivetheexistingdistributionorganizationresponsibilityforthenewclassofcustomers.Alternatively,BMGcouldsetupaseparatedivisiontohandledigitaldistribution.Themandateofthedigitalorganizationwasalsoatstake.HowloyalwouldBMGremaintoitstraditionalcustomers,storefrontretailers?Howeagerlywoulditpursueotherretailersorconsumersthemselves?Regardlessofitsstructureandmandate,thedigitalorganizationwouldsoonfacedifficultchoicesabouttechnology.AnumberofcompaniessuchasMicrosoft,LiquidAudio,andIBMweredevelopingtechnologiestosupportthedownloadingofmusicovertheInternet.ShouldBMGcontinuetoforgenonexclusivepartnershipswithawiderangeoftechnologyvendors,orwasittimetofocusonasmallernumberofexclusiverelationships?ZelnickandConroyknewthatothersintheindustrywouldwatchBMG’smovescarefully.DevelopmentoftheGlobalMusicIndustry3Beforetheadventofthephonograph,musicwasdisseminatedbymeansofprintedsheetmusic.Sheetmusicwaspublishedmuchasbookswere:Publishingcompaniesboughttheworksofcomposersandlyricists,printedtheworks,andsoldthemthroughretailconcessionstandsandlicensedagents.Composersandlyricistsoftentriedtobypasspublishingcompaniesandgodirectlytotheconsumersbyplayingtheirmusicinpianobarsandpublicplaces,oriftheywereabletoaffordit,havingtheirmusicsungbyprofessionalsingersineveningdancehallsandrestaurants.Aspublishingcompaniesforgedrelationshipswithretailoutletsanddevelopedmail-orderlists,however,composersandlyricistsincreasinglyreliedonpublishers.Bythelatenineteenthcentury,themusic-publishingbusinesswascentralizedinNewYorkCity,particularlyinanareaoflowerManhattancalledTinPanAlley.Thefirstpopularsongtosell1millioncopies,“AftertheBall”(1892),sparkedrapidgrowthintheindustry.Composersand