CASE STUDY: EMI Group, PLC

CD Pricing in the recorded music industry

Company Overview

Electric & Musical Industries (EMI) was established in 1931. EMI Group, PLC is

the world 3rd largest music company which based in London. It is the world largest

independent music company, not being a unit, subsidiary or division of a larger

conglomerate corporation. EMI’s business is comprised of two main group; EMI

Recorded Music and EMI Music Publishing. EMI Recorded Music accounted for 81.6%

of EMI Group, PLC sales and 59.3% of the company’s operating profit in fiscal 2003.

EMI Recorded Music has over 100 recording labels featuring some of the greatest rock

and pop artists in recorded music history. Its major recording label includes: Capital

Record and Capital Record Nashville, Chrysalis, EMI Classics, Java Records, Mosaic

Records and many more. Its artist with major albums in 2002 and 2003 included: David

Bowie, The Beatles, Blue, Cold play, Norah Jones, Queen and many more.

EMI Music Publishing owns the rights to more than one million musical

compositions, which its market, licenses and sell. Royalties derived from EMI-owned

compositions for the sale of music in the CD format comprised 53% of EMI Music

Publishing revenue in fiscal 2003. Performance income derived from the public

performance of song in EMI catalog, accounted for 25% of EMI Music Publishing

revenue. Among the major music compositions and catalogues is “getting better” (The

Beatles), James Bond Theme, We Will Rock You (Queen), Mamma Mia (ABBA) and

Our House (Madness).

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Problem Statement

How EMI Group, PLC has to access and response to the likely impact of UMG’s pricing

initiative action on the recorded music industry.

SWOT Analysis

Strength

Strong global presence

- EMI Group, PLC has a worldwide market in nearly 50 countries; among its major

market are North America, Continental Europe, Latin America, UK & Ireland,

Australia, Japan and Asia.

World largest independent music company

- In 2002, EMI worldwide market share is 12.6%. Its large size gives many benefits

such as cost reduction through economic of scale. Vast resources and strong

market share also give the benefit of being able to attract the best staff and artists

to the company which have a strong position for the future.

Financial Performance

- Although EMI Group sales in fiscal 2003 decline compared to 2002, the company

operating profit show excellent increased about 33.1% in 2003 compare to 2002.

The improvement in operating profit was due to a comprehensive reorganization

of EMI Record Music Division.

World class artist roster

- EMI releases more than 1000 albums every year and has a roster of over 1300

artists. Among them are David Bowie, The Beatles, Norah Jones, Queen, Robbie

William and many more.

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Weaknesses

Difficulties in the US Market

- EMI has consistently been towards the bottom of the five majors in the US market

share, which is the world largest recorded music market in the world. In 2003 it

only command 9.8 % of US market share.

Don’t have conglomerate backing

- EMI is the only top five music company that solely independent which not being

own by larger corporation. This mean EMI has to generate its own resources

without any help from other larger company.

Decreasing in worldwide market share

- EMI Group, PLC worldwide market share dipped from 13.4% in 2002 to 12.6%

in 2003. The worldwide decreasing were resulted from the decreasing of EMI

Group market share in several major region in 2003 compared from 2002 which

included North America (-0.03%), UK & Ireland (-0.01%), Continental Europe

(-1.7%), Latin America (-2.6%) and Australia (-0.10%).

Opportunities

Joint Venture / collaboration

- With recent merger attempts being stopped, EMI consolidation within the industry

is becoming more difficult. EMI has often enjoyed success with joint venture with

other large company such as Apple Computer (i tunes) and Yahoo! In joint project

for mutual gain.

Internet sales

- Internet has become the fastest growing media for music distribution and many

analyses expect that the downloading trends will continue to grow in a future. The

success of Apple i tunes has show it is possible to sell download music over the

internet with many customers willing to pay rather than download the music for

free from such sources as KazaA, Morpheus and many more where legality is still

a rather grey area. Selling music by internet download may be an area EMI may

try to enter directly or through collaborations and increase market share.

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More Open M&A regulatory

- More open or liberalization of M&A in music industry may increase EMI Group

opportunity to acquire or merge with other music company. This will give EMI

added market share and resources to compete with other major music companies.

Focus on market where it has a strong market share and growth

- Although North America especially US is the biggest market for recorded music,

however it seem that EMI having trouble to keep competing to gain more market

share. Maybe EMI has to give more focus or gaining more in the market that it

has a strong share such as UK & Ireland, Australasia and Continental Europe.

EMI also has to focus more in growing market region such as Japan and Asia.

Threats

Limited growth potential for recorded music

- The worldwide recorded music industry posted sales of $32 billion in 2002. The

figure represent a 7% decline in Dollar sales and an 8% decrease in unit volume

from 2001. Compared to 2001, sales of CD albums fell globally by 6% and there

more continued declines in the sales of CD singles (down 16%) and cassettes

(down 36%). These show that is very difficult to find growth opportunities in the

market.

Poor economics condition and exchange rate fluctuation

- As a global company operating in many countries worldwide, EMI Group, LTC is

easily be vulnerable to the deteriorating economic condition worldwide and

fluctuation in exchange rates and interest rates. These can often adversely affect

both revenues and profits for the company.

Impact of piracy (CD burning and mass downloading)

- Piracy in the music industry, particularly the burning of CD and mass

downloading of free music from the internet has increased recently. The industry

analysis estimate that unauthorized file sharing alone has accounted for $700

million in lost sales to industry in 2002. Predicted the CD album sales globally

will drop almost 30% from their 2000 peak by 2007 if present pace of

unauthorized downloading continued.

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Filling low

- In early September 2003, RIAA filed 261 separate lawsuits in US against

individuals engaged in unauthorized file sharing. Industry analysts expected that

litigation would have a short-run dampening effect on unauthorized CD

downloading and burning. However it was viewed as having a minima long-run

effect on this practice.

Aggressive Competition

- The recorded music industry is very competitive which dominates by five larger

companies which included Universal Music Group, Sony Music Entertainment,

Warner Music Group, BMG Entertainment and EMI Group, PLC. EMI has to

always consider any action from competitors which may effect the company

competitive position.

Solution Alternatives

There were two alternatives that can be evaluated in order to come out with the best

solution to solve the EMI problem. The first alternative is EMI should follow the UMG

pricing strategy. The second alternative is EMI decrease small portion of the price for the

MSRP (manufacturer’s suggested retail list price), create a new market based on internet

medium, increase the promotion using the new medium and focus on the other region

such as Asia and Japan.

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Alternative 1:

EMI should follow the Universal Music Group’s (UMG) Pricing Strategy

UMG’s pricing initiative included a suggested retail price reduction, retailer

display space requirements, and abolishment of retailer cooperative advertising

allowance and discounts. The most publicized element of UMG’s pricing initiative was

the price reduction. UMG reduce its CD prices to retailers.

Retail prices of $16.98 to $18.98 reduce to $12.98. Except for superstar artist

titles, UMG would lower the wholesale CD price it charges retailers to $9.09. With this

new pricing policy, UMG may attract a lot of customers to buy those CDs.

UMG also have ‘Jump Start’ sales plan, which offer $9.09 to $10.10 prices to

retailers if retailers would guarantee to give about 27 percent of a store’s display space, or

33 percent of the display space retailers used to promote major music company’s release.

But if some retailers elected not to guarantee display space under UMG’s terms, they did

not have to participate in the Jump Start program.

Whether or not retailers participated in UMG’ Jump Start program, the company

stated that it would eliminate all retailer cooperative advertising allowances and

discounts. If the elimination of these advertising allowance and discounts turns into an

industry-wide trend, would turn barely profitable stores into money losers and could bury

those already in trouble. UMG spent $4.7 million for advertising, while EMI only spent

$734,000 for advertising. EMI should spend more budgets in advertising, because with

advertisements customers may known about EMI and also known about the artist who’s

published by EMI.

PRO CONS1. Attract more customers

2. Increase retailers demand

3. Increase sales of CDs

4. Compete with competitors

1. Lower artist royalties

2. Decline in profit

3. Change customers’ perspectives

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EMI must consider these advantages and disadvantages that state above. EMI

should follow this strategy to attract more customers. With the price cut, EMI might gain

the loyalty from customers to buy the CDs. Lower price of CDs should boost adaptation.

“High price” is one of reasons why customers do not want to buy CDs. The price

reduction can increase the demand from retailers. Price cut also would allow retailers to

increase their profit. With the same strategy, EMI can compete with competitors,

especially UMG.

EMI should concern that lower prices would also lower the artist royalties. The

artists might not want to extend their contract with EMI because they do not get enough

royalties from EMI. From the sales of CDs, EMI might not get a lot of profit, because of

the low price that EMI give. This strategy also might change the customers’ perspective.

Customers might think why some major music companies give the price cut for their CDs

or they might think the artist may not as good as they hope because of the price cut.

With the less market share from UMG, EMI really need some courage to do this strategy.

EMI must ready to take the risk if the strategy failed.

Alternative 2:

EMI decrease small portion of the price for the MSRP (manufacturer’s suggested retail

list price), create a new market based on internet medium, increase the promotion using

the new medium and focus on the other region such as Asia and Japan.

Pros:

• Give a new market share to EMI Group because by involving in a new

medium, they can get more customers. Nowadays, a lot of customers using

internet and it become convenience to them buying from internet.

• Collaborate with other internet company such as E Bay, Amazon, Yahoo,

iTunes and many others.

• A strong promotion and advertising will help EMI Group to compete with

UMG who has become a major competitor in the industry. They can’t compete

using pricing but with a good promotion and high quality albums, they will create

a customer loyalty to the company.

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• Using a great and top artist also can be a stronger part to them. The big name in

music industry such as Snoop Dog, Robbie Williams, Norah Jones and many

more can help them to increase their sales. The compilation album for the

evergreen song from The Beatles, Rolling Stones and Queen also need more

promotion because there are a lot of fan for these three famous bands.

Cons

• A lot of money needs to be investing to get top and famous artists, promotion

and advertising. In a short term situation, this will decrease their profit.

• The several risks will come out for this alternative. The customer purchasing

behavior need to identify clearly because we didn’t know the customers purchase

their CD based on convenience, price or something else.

• Decrease a little bit in MSRP also means decrease on their net profit but this is

depending on sales. In this case, EMI can’t estimated how much customers will

purchase their product based on the reducing price that they make because the

price that offered by UMG was very low.

Recommendation

After evaluating both alternatives, it seem alternative two (EMI decrease small

portion of the price for the MSRP (manufacturer’s suggested retail list price), create a

new market based on internet medium, increase the promotion using the new medium and

focus on the other region such as Asia and Japan) is a better solution for EMI problem

compare to alternative one. Although the UMG pricing initiative is a drastic action to

aggressively compete in North America market to strengthen its position, which create

tension among other competitors. The UMG pricing initiative were too risky to be

followed and many independent music retailers critic that initiative. Besides that, EMI

which has small market share in US cannot do the same thing as UMG which has almost

30% of market share.

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