In an illustrative account of the fast evolving digital music space, Professor Deepa Mani and Geetika Shah, explore the context and evolution of Sony Music (India), in an era of disruptive innovation through widespread technological changes, including the spread of the Internet and increased mobile penetration.
By early 2012 the music industry in India had witnessed remarkable changes. With the rapid growth in Internet penetration and usage, innovative technology was driving music production, access and consumption. Sales from digital platforms had surpassed sales from traditional physical formats, such as CDs and tapes. With the distribution of digital music in India largely skewed towards the telecom business, music was increasingly being accessed via mobile devices, including smartphones and tablets. Overall, the role of the recording company seemed to be diminishing. While some of the leading companies in the music industry were testing the waters in the digital space, new players, including technology companies, were quickly entering the market with various new platforms and services.
In a US$1 billion mobile music market, with music copyright owners such as Sony operating in a 25-30 per cent segment, there was a huge opportunity to build the next stage of the business ecosystem. It appeared that the best way to shape the highly fragmented market was to create a compelling product strategy and develop the business. The key question for Sony however was what form its digital platform offering should take and how different it should be from the competition. Should the response of the company mirror its parent in the West? How different was the Indian music landscape? Should the company enter into partnerships with a wide range of technology vendors? Should it sell exclusively through its own site? How would this impact the company’s relationships with its traditional retailers? Should the company launch a separate organisation to manage its digital business?
Evolution of the Music Industry in India
The history of recorded music in India began in 1901, when London-based Electrical Musical Industries (EMI Music) entered the Indian market, establishing the Gramophone Company of India Limited (GCI, now Saregama) as its Indian subsidiary. By 1916, there were more than 75 record labels or brands in the Indian market. However, over time, very few of these survived, while many others merged with GCI, which went on to monopolise the Indian music industry well into the 1960’s.
The economic liberalisation policies introduced in 1978, coupled with the boom in the Indian consumer electronics industry, aided the spread of cassette technology in India in the early 1980s. With the low cost of production, many new players entered the market and piracy became widespread. Compact discs, or CDs, made their appearance in the Indian market in the early 1990s and proved to be yet another game changer. Apart from established players such as Saregama, T-series, Tips and Venus, international players like Sony, Universal and EMI began to enter the market around this time. Cassettes and CDs were mainly sold through distributors and retailers across the country, from small gift and electronic goods stores, to local music chains. As retailer margins were quite high in the industry (around 40 percent), many of the large recording companies set up their own retail stores. Large corporate groups also opened exclusive music retail outlets, for example, Music World by the RPG group, which owned Saregama, and Planet M by the Times Group. These showrooms offered customers a superior consumption experience, and at the same time, gave recording companies direct access to their customers, thereby allowing them to maximise their profit margins.
The early 2000s saw the emergence of digital music. Globally, the advent of peer-to-peer (P2P) networks such as Napster and Kazaa allowed for the free exchange of music fi les between consumers. Slowly over time, music also became accessible through mobile phones. With the increase in Internet penetration and growth of the telecom industry, digital music revenues began to contribute increasingly to music industry revenues. Thus, not surprisingly, the traditional Indian music market, which relied predominantly on sales of physical products, including CDs, started to decline. Overall industry revenues shrank from INR 13.5 billion in 2000 to INR 8.53 billion in 2010. It was becoming increasingly clear that emerging formats of digital delivery and consumption of music would alter relationships in the value chain, industry dynamics and the structure of competition in the music industry.
The Traditional Value Chain in the Music Industry
A complex value chain characterised the Indian music industry and was quite different from the international music business value chain. While the international music business was primarily driven by artists and bands, revenues in the Indian music industry were driven by the film industry, and recording companies were largely focused on acquiring fi lm soundtracks from producers. The recording company and the retailers shared margins on the CDs and cassettes sold, with retailers charging about 40 per cent, and the remaining 60 per cent resting with the recording company. Other revenues included royalties from radio companies who paid about INR 850 per hour of broadcast.
Traditional Industry Economics
Depending on the type of sales transaction, recording companies would either purchase the rights to the songs up front or enter into a revenue sharing model based on royalty. Film producers generally preferred an outright sale of the music rights. If the movie did not perform satisfactorily at the box office, their risk would still be covered. On the other hand, if the movie turned out to be a hit, it would be the music company that would stand to gain. For non-fi lm music, the value chain was a little different. Artists or bands were signed on by recording companies, and the nature and duration of the contract between the two varied from one artist to the other, based on the degree of involvement of the recording company in the music creation, production, mixing and mastering process.
In a US$1 billion mobile music market, with music copyright owners such as Sony operating in a 25-30 per cent segment, there was a huge opportunity to build the next stage of the business ecosystem. It appeared that the best way to shape the highly fragmented market was to create a compelling product strategy and develop the business.
The Digital Revolution
The music industry has four major streams: physical sales of music, digital sales (Internet and mobile), radio and television broadcasting royalties and royalties from public performances. In 2010, digital sales surpassed physical sales of music in India. Physical sales were estimated to be INR 3.2 billion in 2010, compared to INR 4.5 billion the previous year, reflecting a decline of 28 per cent. On the other hand, digital sales of music through download or streaming, including the Internet and mobile phones, grew by 57 percent. It was estimated that physical sales would drop to six percent of the total market in 2015, a declining CAGR of 18 per cent. The digital segment was expected to be the largest contributor to the music industry in India, and was estimated to grow at a CAGR of 29 per cent from INR 1.1 billion in 2006 to INR 14.8 billion, or 79 per cent of the market, in 2015.
India’s wireless market comprised 771.2 million mobile phones and 548.7 million active mobile subscribers at the end of 2010. Not surprisingly, mobile access to music outpaced PC access. Nearly 75 per cent of the Indian music industry’s digital sales comprised ringtones and caller ring back tones (CRBT) on mobile phones. The proliferation of smart phones and tablets, combined with 3G services, provided a boost to online music streaming and access. With 150 million mobile phones or other portable music players bought in 2010, music dominated the value-added-services (VAS) revenues of the telecom industry, accounting for 56 per cent of VAS revenues. As Internet penetration and usage looked set to increase fi vefold from 88 million active connections in 2010 to more than 400 million by 2016, recording companies, including Sony, knew it was imperative to respond to the forces of digitisation. The evolving landscape provided opportunities for new revenue models such as “freemium” and diversifi cation in existing revenue streams through music videos and “cloud” streaming. However, it also brought with it many challenges including the issue of piracy and increased competition from international e-tailers.
The New Digital Music Competitive Landscape in 2012
With the drop in physical music sales, traditional recording companies in the Indian music industry such as Saregama, Tips, T-series, and Universal, along with Sony Music, entered the digital arena, investing in digitising their content and offering online streaming services themselves. Content aggregators such as Hungama Music also appeared on the scene. By taking licenses from all the major labels and storing music in one place, these content aggregators offered customers the convenience of searching through music without having to know which artist was available under which label. Several technology platforms that allowed for streaming music were also increasing their footprint in the market and the entry of iTunes and Spotify was on the horizon. Globally, players like Apple and Amazon were moving towards storing music on the cloud as it provided music protection and division of ownership/ access, i.e., download or stream.
Digital sales of music through download or streaming, including the Internet and mobile phones, grew by 57 percent. It was estimated that physical sales would drop to six percent of the total market in 2015, a declining CAGR of 18 per cent. The digital segment was expected to be the largest contributor to the music industry in India, and was estimated to grow at a CAGR of 29 per cent from INR 1.1 billion in 2006 to INR 14.8 billion.
Sony Music (India)
Sony Music, a global recorded music company, is a wholly owned subsidiary of Sony Corporation of America. One among the “big four” record companies, Sony Music supports a broad array of local and international artists, sourced from premier record labels cutting across genres.
Sony Music made its foray into the Indian market in 1996. In spite of being a multinational company, Sony came with a mandate to participate and grow its share in the local music market and debuted with the successful release of “Maa Tujhe Salaam” in 1997. Following this, the company had a spate of successful releases with hit music in films such as “Kal Ho Na Ho,” “Kuch Kuch Hota Hai,” “Lagaan,” and “Kabhie Khushi Kabhie Gham.” In a largely fragmented industry, aiming for aggressive growth targets, Sony expanded its market share from five per cent in 2002 to 10 per cent by 2007-08.
While other players were exploring various avenues such as fi lm production, Sony decided to concentrate on music content, specifi cally Bollywood music, its Western music catalogue and select regional markets. In 2010, Sony set up an offi ce in Chennai to make inroads into the Tamil music market. By 2011, Sony Music was one of the largest labels in Bollywood, with a 25 per cent share of that market and over 65 per cent share of the Tamil music market. Sony also ventured into other regional markets and entered the indie music and Hindustani classical segments as well.
In 2009, Sony Music partnered with Independent Online Distribution Alliance to offer Indian artists and labels the ease of global distribution and marketing in an easy and transparent manner by connecting them to blogs, Internet radio stations, social networking sites and music websites. Sony also forayed into the talent management and music publishing verticals and began working with indie artists. The company also established genre-specifi c music labels: Folktronic for folk music and Zomba for hip-hop music. In 2011, the company partnered with a global music publishing house, Sony ATV Music Publishing (jointly owned by the Michael Jackson family trust and Sony), to allow Sony Music to represent Sony ATV’s 750,000-plus global music assets in India.
Sony’s digital presence was signifi cant, with 40 per cent of the company’s sales accruing from sales of digital products. Of this, revenue from mobile platforms was 90 percent; while revenue from desktop platforms was 10 per cent. Sony had a strong presence on Facebook, with a million fans on its international Hindi and Tamil pages. The company spent between 15 and 25 percent of its overall marketing budget on digital products. By choosing an innovative digital launch for the Tamil-English song “Kolaveri di,” the company broke new ground and the song went on to become a viral hit.
In an effort to keep up with global digital trends, Sony Music (India) was in the process of transforming its strategic business model from physical sales-based to license- and services-based, moving into every vertical in the music industry, from technology, rights and artist management to video.
Launched in December 2010 in the United Kingdom and Ireland, Sony’s Unlimited, was a cloud-based, digital music service that provided unlimited music access across a wide range of Sony devices including PS3, PSP, home theatre systems, as well as iOS and Android mobile devices, VAIO and any web connected PC. By 2011, it was live in 14 countries and allowed users to sync their music collections into the cloud to listen on any Qriocity enabled device.
Riding the Digital Future
Although Sony Music was a dominant player in the Indian music industry, it needed to revamp its organisation from a conventional record label to a comprehensive music and entertainment business in order to grow its market share and to keep up with trends. This would require a transition from the traditional transaction-based physical sales business model to a licensing administration and services business model, such as publishing, live events, talent management and administration of digital distribution.
In such an environment, it appeared that Sony would do well to focus on a dual strategy involving rights management and distribution. With no clear industry leader identifiable in the Indian market, it was becoming increasingly clear that a company that had a presence in the movie and “indie music” businesses, and which could support digital innovation while enabling both streaming and downloading services across a wide selection of genres, would take the lead. A clear platform strategy that considered mobility, ease of access and the right mix of on-demand services was going to be crucial for sustained success. The beauty of the digital economy lies in aggregating customers, connected commerce and long-tailed revenue streams —through the single asset creation model. Given the above, it appeared that the time was right for Sony to consider launching its own music platform (Music Unlimited) in India to tap into the growing market.
However, many questions are yet to be resolved. Should the music consumption model include unlimited streaming, with an option to buy based on a subscription charge? What should be the price? Should Sony look at supporting the platform with secondary consumption models such as publishing, live music, branded music and a DIY platform? Should they have a separate division to spearhead this? One thing was clear: the market dynamics in the music business were changing rapidly and Sony had to accordingly act fast to successfully ride the digital revolution.
Vivek ND, Associate Editor, ISBInsight compiled this summary based on the original case written by Deepa Mani, Assistant Professor in the Information Systems group and Research Fellow, Joint Executive Director, Srini Raju Centre for IT and the Networked Economy at the Indian School of Business (ISB) and Geetika Shah, Associate Director, Content Development and Training at the Centre for Teaching, Learning, and Case Development at the Indian School of Business (ISB).