The current scenario confronting Dr Schramm is challenging. Schramm will need to address several issues including piracy of Sony music assets, organisational structure and artist management policies. However, the issue that arguably will impact Sony’s performance longer term is how they deal with the challenges and opportunities presented by digital music distribution.
Legal digital music distribution promises a very low cost way of selling music to consumers. If Sony Music was able to control the entire supply chain, from artist direct to consumer, the already considerable opportunities presented by digital distribution would be increased.
Sony Germany has just experienced a 12.7% fall in sales, seemingly from the expanding problem of on-line piracy. Why have they encountered this problem? Are they problems that could be foreseeable or avoidable? Peter Drucker developed a concept of ‘Five Deadly Business Sins’ that should be avoided. Using this framework, we might be able to analyse what has gone wrong and how repeating these sins can be avoided in the future regarding digital music distribution.
Peter Drucker’s Five Deadly Business Sins
Some of Drucker’s theories may not be applicable to businesses of varying sizes and circumstances but in this case they offer a good indicator of the source of some current problems that have the potential to get bigger in the future. While they illuminate some of the problems facing Sony, this analysis also proves useful in suggesting some directions for the future.
- ‘The worship of high profit margins and premium prices’ It is quite possible that Sony’s approach to both CD pricing and on-line music pricing commits this sin. CD prices have remained the same in the face of competing products such as DVDs and video games that arguably have a superior value proposition to music in the perceptions of some consumers. (see discussion of value proposition below) If the DVD and video game markets continue to grow, with no change to the price of music, we could reasonably expect a sales decline to continue. (even accounting for the affect of piracy) Additionally Sony mis-priced their initial DRK07005 Page 4 of 13
digital offering pressplay™, as a subscription service that proved very unpopular when compared with the 99c price point established by Apple iTunes. - ‘Charging for new products what the market will bear’
In a similar way that Sony may have overcharged for their traditional music product, the CD, Sony may also be part of a system that possibly overcharges for digitally distributed music. While 99c downloads from iTunes may represent good value in comparison to CD singles, some digital albums are now priced higher than their CD counterparts, while the record companies are entertaining raising the price of singles to $1.25 and even up to $2.49. (Wired, 8 April 2004) This is arguably committing the sin of worshipping premium prices, but probably indicates a price that the market would bear. It would however be possibly sacrificing the growth of the digitally distributed market.
- ‘Cost-driven pricing’
Again related to the above sins, the major record companies are arguable guilty of this by pricing digital downloads in line with CD releases. CD pricing, as shown in Exhibit 12 of the case, includes covering costs such as manufacturing, distribution, rent and retail sales staff costs that do not apply to the digital distribution model. - ‘Slaughtering tomorrow’s opportunities on the altar of yesterday’ Sony, and indeed the music industry at large seem to be guilty of this sin. It appears that the industry has been focused at improving sliding CD sales while largely ignoring the opportunity presented by digital distribution. While the number of people downloading pirated files from the internet was growing enormously, the majors only saw this in terms of an illegal activity. They would have been better served if they recognised this as a...