1) Executive Summary:
As new technology came out in this world, music industry was destroyed. The advent of broadcast radio as well as Internet made many record companies change their organizational structures to fit to the new technology. No one can stop technology being changed. To be a survivor in any industry, firms must be flexible to the changes of technology. Therefore, BMG also need to fully respond to this challenging environment by adopting well-structured digital distribution system and shutting down its physical production facilities.
2) Problem Identification:
In the late 20th century, the global music industry faced difficulties, as new technology, specifically Internet, was prevalent among people in the world. The new technology totally changed ways in which people used to buy goods and services, especially related to the music industry. The Internet accounted for 0.3% of all music sales in 1997, 1.1% in 1998, and amazingly 10% by 2005. Music was sold out over Internet through some well-known web sites, which uploaded samples of music by genre as well as information about the music and the musicians. Then, consumers listened the samples, and chose what they most enjoyed. An order from the consumer was received, and shipped by the web sites. Another way through which music could be sold was downloading music. New technology allowed surfers to download music directly to their computers. Although in the perspective of consumers, it was cheaper and more convenience than purchasing a CD, or cassette at local retail shops, in the perspective of merchant, this new technology brought huge losses. Since thousands of web sites posted illegal, pirated copies of songs, big record companies such as BMG Entertainment were not received any compensation from the others who illegally copied song for their own profits. Therefore, the new technology threatened not only BMG’s overall profits, but also the company’s structure, which was designed to fit to produce physical products rather than digital products.
3) Historical Industry Analysis:
Before the digital age, the music industry was so prospered. In the early 20th century, protected by patents, big three companies of the recording industry, Edison, Columbia, and Victor, maintained an oligopoly for many years. Again, since government protected this industry by giving companies patents, there was a high barrier to new comers. Although, there were few record companies, they had to fiercely compete with each other to gain more market shares relative to one another. Nevertheless, since each of the companies produced different songs by different musicians and therefore, products could not be substituted each other. Because of the uniqueness of the each company’s products, availability of substitutions was very low, and bargaining power of customers, mainly retail shops, and suppliers, mainly talented musicians, was also low. Complement to records was phonograph that could play records, but the companies focused on records, not machines, as their primary products. However, when broadcast radio, a new technology, posed a serious threat, the U.S. music industry started to depress from 1923. As consumers purchased radios, record sales Kim.2
significantly declined. As a result, record companies adopted the new technology with huge costs, and many of them, lack of enough capital, were consolidated by...