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UFRJ Federal University of Rio de Janeiro The COPPEAD Graduate School of Business

Global Partners/Technology Global Competition Vivian Nwakah

BMG How do these threats and opportunities impose on the current business model of BMG? . 1. If you were Strauss Zelnick, would you proceed to implement digital music distribution? Why? Comment about it If you were Strauss Zelnick, would you proceed to implement digital music distribution? Why? Comment about the threats and opportunities that this technology imposes on the current business model of BMG. The business model of the music industry and specifically BMG was set up to put BMG in the most powerful position. Content producers such as composers, lyricists, performing artists and music publishing companies worked through the record companies to reach methods of distribution and then finally the consumers. BMG was the gate keeper of all the content that needed to reach the consumer. The advent of the internet and providing musical content on the internet had the ability to cut out the distribution centers and connect the artists directly with the consumers. Yet if BMG did not address the digital music distribution strategy then it would be in danger of not being in control of this medium and providing the consumer with the services that they needed. As the CEO of BMG, I would implement digital music distribution in order to test it out and see if it would be an effective distribution method. The Opportunities with digital music distribution: One of the most important

opportunities with the digital music distribution service is that it would cut costs, time, manufacturing, and distribution for musical content. This would could result in more reduced costs to the consumer and increased profits for the music company. Allowing content online would also potentially introduce old music to a new audience of listeners. At the record stores and on the radio, vast collections of music were not able to be played or stored due to space and time issues. Online, all the music could be sold to whomever was looking for it. The threat of digital music distribution: Digital music distribution disrupted the decades old operations of the music industry. A handful of firms had always controlled the market and they were able to maintain this control because of their mastery of the status quo. Through new innovations such as the tape recorder, cd, and dvd forced these firms to adapt, the advent of the internet and its impact on the music industry was novel and set up a unique set of challenges. The first notable challenge was that BMG owned and worked with two hundred labels in fifty three countries. They also owned manufacturing facilities in Argentina, Brazil, Germany, Hong Kong, Ireland, Mexico, South Africa, Spain and the United States, creating 2.5 million CDs per day. By creating a digital music distribution-operating arm, they had to face the reality that one day, digital content might compete with or replace the CD and render the physical distribution centers obsolete. The ramifications for this worst case scenario had to be thought out and carefully implemented. The other threat was that BMG would not be able to control the 700,000 songs that their music-publishing department controlled and managed. The Internet was volatile and the though they might be able to invest in anti-piracy methodology, there was no guarantee that it would be as effective as necessary.

2 If so, would you do it through the existing distribution organization or build a new and independent one, from the scratch? What are the pros and cons of each option?

As the CEO of BMG, I would definitely build a new distribution organization dedicated specifically to online distribution. Though the principle is the same, physical distribution organizations have a completely different structure and set of expertise. If the goal is to make the online distribution organization as successful it needs to have its own special attention drawing on the experiences of current infrastructure but with the room to be creative and have trial and error. Some pros of funneling it through the existing distribution organization would be the ability to use previous expertise and reduce start up costs. One factor to think about would be the perceived threat of an online distribution organization and internal attempts to stifle its growth.

3. How would you manage channel conflicts? And customers conflicts? Could the physical and digital distribution coexist?

With an organization as massive as BMG there are bound to be many opportunities for channel conflicts. Yet the most important factor in managing any company is realizing that every department should operate for the good of the company as a whole. If every department within BMG was subscribed to this philosophy and had easy manageable ways to interact with each other then the propensity for conflicts would be diminished. Yet reality is that having a physical and digital distribution operation running at the same time could be seen as a conflict of interest for both divisions. The key would be managing perceptions and streamlining operations in order to enhance both divisions in a fair and beneficial manner. The focus should always be to provide the customer with what they need and want. As customers switch from the physical stores to the digital downloads of content, then BMG should monitor and adjust their operations in a

strategic manner that best capitalizes the momentum. The customers should not be steered toward any specific option but should be allowed to choose and taught how to use the digital component in order to minimize the chance for customer conflicts. If the customer is put as the number one priority, operations were streamlined and interconnected, and the vision of the company was geared toward the company as a whole and not separate departments, then the physical and digital distribution operations can coexist perfectly together. . . 4 How would you choose your partners (complementors) for online distri- bution? BMG is a company well versed on the daily operations of running physical distribution, but they did not have adequate experience running the online sector of their business. Their marketing department at the time was moving towards digital distribution, and technology but they did not commit fully or have a proven track record of being able to best utilize this medium of distribution. Therefore the right partner would be one that was on the forefront of digital distribution and had the long term data to prove effectiveness. Companies such as MP3.com and Emusic understood how the business should be run yet they were losing money. One observation would be that they did not have as vast of a music collection to share online which would attract even more customers. These companies needed buy in from a major record company such as BMG. If the songs under BMG could be sold legally online that would be an opportunity to save these companies and also use their expertise in order to drive digital sales. . . 5 Is there a conflict between protecting intellectual capital and maximizing its value? The conflict between protecting intellectual capital and maximizing its value is that it is

easy to worry about protecting the intellectual capital just for the sake of protecting it. The conflict only comes from the management of protecting the property and the extent to which it is protected. Looking at losses as the cost of doing business is a better way to approach this potential conflict. The focus should be on maximizing the value, by putting in place liberal terms and conditions that can increase the value of the product, and appropriately setting the transaction costs. . .

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