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TEACHING NOTE
CASE 12
and the
*This teaching note reflects the thinking and analysis of Professor David Turnipseed, University of South Alabama. We are most
grateful for his insight, analysis and contributions to how the case can be taught successfully.
Evolution of the Music Industry*
Sony Music Entertainment
Overview
Sony Music Entertainment was founded in 1929 as American Record Company. Columbia Broadcasting
Company bought the company in 1938: in 1968, Sony which was at that time a Japanese company, began
a joint venture with CBS to form CBS/Sony Records, Inc. CBS Records, Inc. was absorbed in 1988,
and the company renamed Sony Music Entertainment in 1991. Thirteen years later, in 2004, Sony BMG Music
Entertainment was established as a joint venture with Bertelsmann AG. Sony acquired BMG’s interest in 2008,
and Sony Music Entertainment returned to a wholly owned subsidiary of Sony Corporation. In 2012, Sony/ATV
Music Publishing, which was a joint venture with the Michael Jackson Family Trust, along with a group of other
investors, bought the publishing division of EMI Group, making Sony the world’s largest music publisher.
Over the years, the music industry has experienced significant changes, driven primarily by technological
advances in music recording. Beginning in 1993, the MP3 algorithm enabled internet broadcasting to upload and
download music files. This began the weakening of record sales and the decline and eventual failure of brick-
and-mortar record stores. Also, this technology enabled the proliferation of piracy that costs the music industry
billions of dollars and is driving the return to live performances. Advancing technology gave artists the ability
to self-publish their songs which dealt another blow to the record labels and publishers in the music industry.
Sony Music Entertainment entered into a joint venture with Abu Dhabi Media and Universal Music Group
to form a music video licensing company named VEVO. In 2010, Sony Music started a cloud-based music
streaming service, Music Unlimited, which had a library of approximately 15 million songs. Within two years,
Music Unlimited had over 1 million users. In 2014, Universal Music Group had the largest market share in the
record label business with 25.5 percent. Sony Records was in second place with 20 percent and Warner Music
Group lagged behind, with 11.6 percent. Collectively, the Big Three music companies held 57.1 percent of the
industry market share. In music publishing, the same players held 35.9 percent of the industry market share:
Sony/ATV had 16.9 percent; Universal Music Group, 13.9 percent; and Warner Music Group, 5.1 percent. As
the music industry moved into 2014, internet radio and interactive streaming, funded by advertisements or
subscriptions, appeared to be the immediate future.
Going into 2014, Sony Corporation comprised eight major divisions: Mobile Products & Communications,
Games, Imaging Products and Solutions, Home Entertainment and Sound, Devices, Pictures, Music, and
Financial Services. These divisions had greatly varying growth rates and their returns varied from significant
losses to 14 percent. Sony Corporation’s operating income between 2009 and 2013 ranged between -3 and +3
percent. The company’s working capital was negative for four of the past five years. The new CEO of Sony
Corporation, Kazuo Hirai, wanted to focus the company on its core businesses, which were gaming, mobile
products and digital imaging. If Hirai continues with that plan, Sony Music Entertainment must expect to be
divested and cannot expect priority claim on resources during the time it remains in the Sony portfolio.
Case 12 Teaching Note Sony Music Entertainment
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The Sony Music Entertainment case contains a wealth of information on the music industry and traces the
industry evolution from the early days of records to the current age of digital music, smart phones, and data
streaming. Also, there is information on Sony Corporation and its eight major divisions, and the new CEO’s
plan to re-focus the corporation and concentrate on gaming, mobile products, and digital imaging, and curtail the
company’s diverse business portfolio. There is plenty of information in the case to provide a basis for students
to assess:
nSony Music Entertainment’s strategy
nThe music industry, the influence of technology on the industry, and the effects of the constantly changing
industry on companies operating in the industry
nSony Music’s current business model and strategy and the effectiveness of that strategy
Suggestions for Using the Case
The Sony Music Entertainment case will allow students to evaluate a dynamic industry and understand how
a company’s strategy must match evolving industry conditions. You’ll find this case to be suitable for having
students apply the concepts and the tools of analysis from Chapter 3.
Students should easily grasp the nature of Sony’s business as described in the modest 9-page length case.
Because almost if not all class members are certain to have been a customer of Sony Music Entertainment and
one or more of its rivals, they will likely have some strong opinions about their experiences—which always adds
interest and liveliness to the class discussion. The Sony case works quite well when assigned immediately after
the class has covered Chapters 1–5. The straightforward nature of the required analysis makes it ideal for use in
the first half of your module on business strategy.
The assignment questions and teaching outline presented below reflect our thinking and suggestions about
how to conduct the class discussion and what aspects to emphasize.
Making Use of Assignment Questions. It is really very difficult to have an insightful and constructive
class discussion of an assigned case unless students have not only read the case but also conscientiously worked
their way through a set of well-conceived assignments or study questions before they come to class. In our
classes, we expect students to bring their notes to assigned study questions to use/refer to in responding to the
questions that we pose. Moreover, students often find having a set of assignments or study questions useful in
preparing oral team presentations and written case assignments—in addition to whatever directive questions you
supply for these assignments.
Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have
class members read the Guide to Case Analysis that immediately follows Case 31 in the text. The content of this
Guide should be particularly helpful to students if your course is their first experience with cases and they are
unsure about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.
Video for Use with the Sony Music Entertainment Case. There is a 1:01 video entitled “Richard
Branson: The Music Industry Imploded Due to Apple” that would be best viewed after students have read the
case and become familiar with the industry. You may prefer to have students watch the video on their own. It can
be accessed at http://www.youtube.com/watch?v=JILvtBUpHks.
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Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis. You
will find that the Sony Music Entertainment case is very appropriate for written assignments and/or oral team
presentations. Three good assignment questions are:
1. Top executives at Sony Music Entertainment, have become impressed with your growing prowess in
strategic thinking and strategic analysis and have employed you as a consultant to assess the company’s
strategy, competitive market position and overall situation. In addition, Sony executives have asked for a set
of recommendations to help ensure that the company continues to achieve attractive growth and profitability.
Please prepare a report to the senior executives at Sony Music Entertainment that includes:
• an identification of the key elements of the company’s strategy,
• the pros and cons of the company’s strategy,
• an evaluation of Sony Music Entertainment’s financial performance (based on the data in case Exhibits
3 & 4),
• a set of action recommendations to deal with any issues and problems that you identify in the financial
analysis.
Your report should be 5–6 pages, and should include charts, tables, and exhibits to support your analysis and
recommendations.
2. As part of an internship with Sony Music Entertainment, you have been asked to evaluate the state of the
music industry. The manager overseeing your work with Sony expects that you will use all of the tools of
analysis necessary to provide a thorough assessment of the industry. In addition, you have been asked to
evaluate the strategy and performance of Sony Music Entertainment. Your 5–6 page report should also
include a set of action recommendations that will allow Sony Music Entertainment to improve its financial
performance.
Assignment Questions
1. Describe the music industry and the trends leading up to the present competitive environment in the industry.
2. Describe the competitive environment in digital music as the industry moved into 2014.
3. What is Sony Music Entertainment’s business model and strategy? Assess the overall attractiveness of that
strategy.
4. Using the information provided in case Exhibits 3 and 4, what is your assessment of Sony’s Corporation’s
financial condition in fiscal 2013? What would you report to Sony’s Board about the company’s financial
condition from information provided in the case?
5. What are the driving forces in the digital music industry?
6. Identify in descending priority order, the top priority issues that Sony Music Entertainment’s Board should
address.
7. What can you recommend to Sony Music Entertainment’s Board to address the priorities that you have
identified in question 6 above?
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Teaching Outline and Analysis
1. Describe the music industry background and the trends leading up to the present
competitive environment in the industry.
Industry Background
The music industry was performance-based prior to the 1900s. As technology improved in the early 20th
century, music transitioned to “ownership-driven” as artists began to produce recordings of their music.
Recordings initially made the industry more efficient because artists could reach a wider audience, receive
The release of the MP3 algorithm in 1993 enabled song files to be reduced to a size that made internet
broadcasting and uploading, and downloading feasible. In 1994, the first traditional radio station began
broadcasting on the internet. In 1998, the new portability of music was joined with a naming service and
comprehensive databases of music information developed by Gracenote (purchased for $260 million by
Sony in 2008), making it possible to retain the information associated with the song files. These technologies
Sales of albums continued to fall, which put brick-and-mortar record stores out of business, as their sales fell
from about $575 million in 2006 to about $290 million in 2013. During the same period, internet and digital
track sales continued to rise, eventually reaching about 1.34 billion tracks in 2012. Digital sales declined
of Music and most digital media were identical in quality, and simple and costless to the duplicator: they could
In 2014, two bills were under consideration by the U.S. Congress that addressed digital piracy. The Stop
laws, and that Internet service providers block access to these websites. There was public opposition to
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Music Publishing
Record labels are companies that record music, manufacture recordings, and promote and distribute that
search for marketable talent, sign them to contracts, and assist them in the creation and marketing of their
music. Record labels, or the artists themselves, usually own all rights to the master recordings. Artists’
compensation is based on the sales of their sound recording. The increasing simplicity of digital music
Sony Music Entertainment was the second-largest record label in January 2014, with 20 percent of
industry market share, and 30.4 percent of the market share in total album sales, 7.3 percent behind the
leader Universal. However, Sony’s artist Justin Timberlake was the top-selling artist in 2013. Sony lagged
behind Universal by 6.2 percent in album sales and 9.5 percent in individual-track sales. Sony/ATV Music
Publishing was the largest music publisher, with 16.9 percent of the market share. Record companies owned
the physical sound recording, but publishers or the artists themselves typically owned the rights to license
Digital Music Distribution in 2014
There were three main methods of digital music distribution in 2014: digital download, internet radio, and
interactive streaming. iTunes was the leader for the digital purchase of music with 63 percent of digital
music sales in 2013; and it had facilitated over $25 billion in digital music sales since its inception. The
iTunes Store generated a total of $9.3 billion in net sales during 2013, representing a 24 percent increase
Self-Publishing in the Music Industry
Self-publishing became a strong force in the music industry in 2014, using the same technologies and social
environments that facilitated the rise in digital distribution through services like iTunes and Amazon. The
artists had control over the creation, the process was faster, and the profit margin was much higher and
Interactive Streaming and Internet Radio
Internet radio grew at 42 percent per annum, to a $767 million industry from 2008 to 2013. There were many
Internet radio and subscription streaming services in 2014, with Rdio, RSpotify, Slacker Radio, Pandora,
Last.fm, Beats Music, Napster, Zune Marketplace, Myspace Grooveshark, iTunes Radio, and Rhapsody
among the largest. Internet and streaming radio were projected to grow at an annual rate of 12.7 percent until
2018, and in 2016 almost 161 million consumers were projected to be subscribing to a streaming music or
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Record labels and music publishers, possibly stimulated by the threat of file sharing and reductions in
physical CD sales, were looking for new monetization methods, such as streaming services, to remain
profitable. Salespeople commonly tried to make product as attractive and accessible as possible to consumers.
In the early to mid-2000s, technology constraints were problematic, but advancements quickly reduced
these constraints. Music streaming was not a new idea, but in 2010–2011, streaming was aided by the
Content owners were reluctant to embrace the services because of very low profit margins; however,
consumers enjoyed the services’ flexibility, freedom, and access. Interactive streaming services like
Rhapsody and Spotify licensed music from artists and record labels and then provided it to users through a
client available on their respective websites. Spotify and Rhapsody had similar business models: both relied
heavily on payments from subscribers to fund their high cost of sales, or licensing fees. The main difference
You Tube
YouTube became a significant player in the music industry. An integral part of YouTube’s success in music
was the introduction of Content ID, a service that identified the music in videos posted by users. With this
a short verification process. Like Spotify and Rhapsody, YouTube paid licensing fees to record labels and
artists, but it was better able to absorb costs because of paid advertisement for video ads. Below the video
2. Describe the competitive environment in digital music as the industry moved into 2014.
In 2014, Universal Music Group was the number one record label in the industry (in market share) with 25.5
percent of the market. Sony was the number two company with 20 percent, and Warner Music was a distant
third with 11.6 percent. These “Big Three” companies combined controlled 57.1 percent of the industry