Sony BMG - A Goliath’s View of the Digital Music Business in 2008
29 February 2008As president of the Global Digital Business for Sony BMG, Thomas Hesse stands at Ground Zero of the music industry as it suffers through profound convulsions caused by dramatic shifts in consumer behavior.
Hesse, who not only sets the digital agenda for Sony BMG but is also responsible for CD sales in the US, was at the Digital Music Forum East in New York on Tuesday where he participated in a keynote interview with John Frankenheimer, chair of the Music Group and co-chair of the law firm Loeb & Loeb.
Hesse responded to a wide range of questions in his 45 minute interview ranging from the decline in physical CD business to digital marketing to iTunes to Amazon.com’s entry into the market.
How Did 2007 Turn Out?
For Sony BMG, 2007 has been a mixed year. Even as the company continued to develop new opportunities in digital, its physical business continued to decline. As Hesse put it, the decline was significant and larger than the growth in digital.
Digital Business in 2007
Hesse told the audience that Sony BMG’s digital growth continues to be encouraging and is up worldwide by 35%-40%. “It helps to counterbalance the large chunk of the physical decline,” he said.
Although the digital business has several components, the bulk of the company’s digital revenues come from downloads and ringtones. In the second tier, there is the subscription business, a significant business.
A third tier, growing very quickly but still relatively small, is the ringback tones and downloads to mobile phones.
Geographical Differences
Hesse said development of the company’s digital business varies by geography and is dependent on the continent and territory.
In the US, digital is said to account for 30% of total business and rapidly marching toward 40%-50%.
According to Hesse, digital accounted for 18% of the company’s business on a worldwide basis in 2007.
However, in some other territories growth has been slower and is probably the lowest in continental Europe.
In Korea, Sony BMG’s digital business has reached a tipping point, accounting for 60%-70%.
“The global landscape is evolving very, very quickly and causing a fundamental transformation in how you run a record company,” Hesse said.
Responding to a question from Frankenheimer, Hesse acknowledged that “the tail” is a lot longer in the digital business compared to physical because there is unlimited space to display. “The digital catalog just keeps growing and the physical catalog keeps shrinking,” Hesse said.
But Hesse also told the audience that the “long tail” sometimes tends to be exaggerated when you consider where the sales are coming from. “A large percentage of revenue is coming from a small percentage of the catalog,” he said.
On Apple iTunes
Unless you’ve just come in from another planet, you know that the Apple iTunes store is the largest digital music retailer and has given an enormous fillip to the digital music business through its cool line of iPod MP3 players and the iPhone.
Hesse candidly acknowledged that a vast majority of Sony BMG’s downloads is currently generated by iTunes, which is now the second largest music retailer in the US after Wal-Mart. “The other players really don’t focus so much on downloads but on selling subscriptions,” he said.
Hesse believes that as the company expands its digital business, there will be more genre-based, vertical players. “There is still a lot of opportunity under the surface,” Hesse said.
On Amazon’s Digital Downloads Play
While Hesse expressed enthusiasm and support for Amazon’s entry into the market with a DRM-free digital downloads store, he considered it very early days at this point. “We’ll see how they do,” he said. “There are tons of opportunities addressing clientele that they are serving.”
Hesse sees great opportunities for Amazon to sell CDs and downloads side by side as well as potential for up-selling downloads to CD buyers and vice versa. “People want the CD and the instant gratification of the download,” Hesse said and offered praise for the solid technical infrastructure and customer service that Amazon.com had built up over the years.
On Physical CDs
Not surprisingly and given Sony BMG’s big stake in the business, Hesse said he was more upbeat about the CD business than the naysayers.
“I don’t think the CD is dead at all,” Hesse said and pointed out an interesting contrast between the shift from vinyl records to CDs and the shift from CDs to digital downloads. While everybody went and bought a CD player and vinyl records just died, Hesse argued that not everybody is going online.
According to Hesse, 30% of the US population is still not online. “How are they going to get their music”, he asked rhetorically. “The CD is not going to disappear,” Hesse said in answer to his question of a few minutes earlier.
Hesse said traditional retailers get tremendous amount of foot traffic prompting companies like Sony BMG to try new initiatives.
He cited a new Sony BMG initiative to sell a digital download card at traditional retailers as well as non-traditional retailers. The cards, which are artist-specific, lets consumers download music later.
Sony BMG is currently offering 37 different cards for $12.99 each. “The initial results are very, very promising,” Hesse said. “It’s one of many, many new products we are putting into the market. By the end of this year and the Christmas season, I hope we’ll see some significant takeup.”
Hesse sees opportunities to extend this program by attaching digital download cards to concert tickets, T-Shirts and a variety of other things.
“That opens up tremendous opportunities in doing transactions with music. Music becomes ubiquitous in many, many different places and it’s an online redemption experience or a mobile redemption experience ultimately,” Hesse said.
In the Sony BMG worldview, traditional retailers peddling CDs also serve other purposes.
With over 50% of consumers who buy CDs putting it into their PCs to rip it for playing the music on their iPods or other MP3 players, Sony BMG sees a chance to connect to consumers at that point of time to peddle other stuff like concert tickets or more music. “Connected CDs is going to be a huge thing,” Hesse said.
Advertising-Funded Music
To us, it seemed like Sony BMG’s digital czar was not too enthusiastic about ad-funded music.
Hesse described it as a model that is interesting but also challenging. “We’re still grappling with that model,” Hesse said and wondered to what extent it’d disintermediate or drive out the subscription models that some of Sony BMG’s partners have launched.
Sony BMG plans to experiment with the ad-funded model or at the very least look at it. “We’re very, very keen to see if ultimately they work,” Hesse said.
Digital Marketing
According to Hesse, labels have become smart in recognizing that different types of repertoires will sell in different ways in terms of the channels they move through.
Some artists might sell better on iTunes while others could do better with ringtones. In these difficult economic times, Sony BMG sees both online and mobile avenues as effective techniques of marketing.
Big Opportunities
Among the big opportunities that Sony BMG is exploring is in creating an access model that will allow consumers to consume music in a limitless way either through a subscription or a device that provides unlimited access. “Various models are being debated,” Hesse said. “At the end of the day, it’s about giving consumers satisfaction to enjoy as much music as they want at a price that’s fair.”
Mobile World
Sony BMG sees mobile phones playing a critical role in providing consumers limitless music at a fair price. Hesse cited the iPhone as an illustration of how much interest there is in such a phone that can also play music.
Subscriptions
Hesse said Sony BMG’s research has shown that consumers are not comfortable with a model where they pay a certain subscription fee but do not own anything at the end of the year. “They kind of like to own their music,” he said. “If you sweeten that by saying here’s a subscription offer that gives you access to all the music and you get to keep 100 tracks then certainly $100 looks a lot less daunting.”
For Sony BMG, the future of subscription models lies in bundling it with a device the consumer has and letting him keep some tracks. Hesse said Sony BMG is having conversations along those lines with carriers, operators and handset manufacturers.
Music Video
Sony BMG considers music videos to be an attractive opportunity and is working aggressively to build revenue streams in this arena.
However, music videos are still a small revenue generator for the company compared to audio download sales but are supposed to be growing rapidly.
Sony BMG is now selling music videos on iTunes and expects sales to increase from Apple TV, which now lets people play their video directly on HD TVs without requiring a PC. Sony BMG is also a content partner for YouTube.
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