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  1. 1. Consumer Behavior Drives the Music Industry An Inside Look at How One Industry Giant Survives by: David J. Orr Submitted to: Professor Thomas Matula MRKT 602 Dec 4, 2007 UNIVERSITY OF MARYLAND AT UNIVERSITY COLLEGE
  2. 2. Introduction In today’s technology driven music industry, consumer behavior, in respect to how fans obtain their music, how they play it, and how they keep up with their favorite artists, has had a major impact on the way industry giants do business. With so many record companies, and online venues, this paper’s focus will be on the industry leader, the Universal Music Group, which is a prime example of one company that has responded and adapted to the influence of consumer behavior, and transformed the way they do business as consumer behavior drives the music industry of today. Handling all aspects of music from production, to artist management, to distribution, to internet radio, and partnerships with digital music and video giants such as & iTunes, the Universal Music Group is adept at following the trends of consumer behavior in relation to the purchase and use of music in today’s rapidly changing industry. Branching out into new markets, Universal has stayed in front of the pack with aggressive integrated brand promotion (IBP) including partnership deals with major telcos to sell their artists music as mobile phone features such as ring tones, ring backs, and master tones. Consumer’s Impact on the Marketing Environment In a rapidly changing industry, the consumer provides the major record companies with the challenge of changing demographics and trends as their choice of media, and associated technology, heavily impact the way music is delivered. The new millennium has ushered in a new era known as the digital revolution. No stranger to change, Universal was one of the first majors to jump aboard, and in 2002 made over 75,000 of 1
  3. 3. its artists recordings available for digital download. This was significant, in part, because many labels feared the digital domain, due to the prevalence of peer to peer digital music “sharing” sites such as where music is often obtained without the artist or licensed company receiving royalty for a sale. Demographically, Universal’s artist roster has every genre of music covered, they push their music globally, and support distribution of such popular, trendy music companies such as Bad Boy Records. With laisons (Marketing Executives) who are hired and groomed specifically to cater to individual markets (I.e. Latin Sales), UMG recognizes and meets the demands of a wide variety of consumers near and abroad, young and old. ( Economic Strategically, Universal recognized that digital consumers preferred to have the option to buy individual songs, rather than the entire album, consisting of possibly only a few songs they desired, and therefore offer their digital downloads for .99 cents each, or $9.99 per album. ( On a similar note, Universal executives recognized that as album sales have dropped, partially due to consumers preference on creating their own play lists by downloading digital music individually, a new approach may be to offer artists single or ep (2-3 songs) deals rather than album deals. An example of this is Candy Hill, a female r&b group signed by Universal subsidiary, Republic Records to a two single deal. Any record deal is a gamble for a record company, and according to group member Vatana Shaw “Only true fans are buying full albums. Most people don’t really do that anymore.” (Leeds) 2
  4. 4. According to Nielsen Data, in 2006, digital singles outsold cd’s, and sales continue to rise in 2007 at a growth rate of 54 percent (189 million units). Digital singles are outselling digital albums by the ratio of 19 to 1. With album sales dwindling, labels take less of a gamble by investing small amounts in new groups in hopes of finding that digital single or ring tone hit that makes it big. (Leeds) Meanwhile, by recognizing the consumer’s trend away from albums, Universal dropped its own cd prices to $12.98, in a market where albums range from $9.99 to $19.99 (or more). With label artists ranging from Mary J. Blige (R&B), U2 (Rock), Shania Twain (Country), Louis Armstrong (Jazz), Mariah Carey (pop), Universal feels their move will help bring customers back to the record stores. "Our new pricing policy will allow us to take the initiative in making music the best entertainment value and most compelling option for consumers," said Doug Morris, Chairman and CEO, Universal Music Group. "UMG is responsible for almost 30% of all album sales in the U.S. so we are uniquely positioned to try this new strategy. We strongly believe that when the prices are dramatically reduced on so many titles, we will drive consumers back to stores and significantly bolster music sales." ( Technology Impacted by Consumer Behavior With consumers and innovation dictating a preference for music in digital form, Universal has positioned itself to continue to be a trendsetting leader by pioneering the release of a large portion of their catalogue in digital format, as well as their partnering with industry leaders such as iTunes,, and startups such as who offer both free and purchasable downloads of digital music. 3
  5. 5. The wisdom within a move such as offering free music downloads to Spiralfrog in exchange for revenue sharing, is that Universal is reaching and profiting from both the consumer who pays for music, and the ones who don’t. "In the future, you are going to see this as a new advertising model for the Internet as advertisers desperately chase this elusive bunch of teenagers and 20-somethings," Ford said. ( Rather than being replaced by a generic substitute (i.e. illegal downloads), Universal has positioned its products to generate revenue from the substitute consumers. Political After years of battling against profit losses due to the consumer behavior of online peer to peer trading of digital music files, companies such as Universal benefit from court rulings, such as the recent Grokster verdict, which forced the peer 2 peer facilitator to shut down use of its software and site where millions of music files were obtained without license agreements with the owners. The key element of this settlement is “a permanent injunction prohibiting infringement – directly or indirectly – of any of the plaintiffs’ copyrighted works.” This injunction means, in part, that record companies may be les s inhibited about releasing their licensed music digitally online, as well as helping to legitimize the already flourishing online entertainment community. ( With the precedent set in this ruling, Universal has taken advantage of this position by, tuning their marketing strategy to include teaming with online music sites to satisfy the consumer’s demand for downloadable music, rather than taking litigation against them. 4
  6. 6. Cultural With a diverse set of artists spanning each genre, and an aggressive marketing strategy that keeps pace with consumer behavior driven technological innovations such as ring tones, peer to peer networking, and digital downloads, Universal Records has kept the consumer satisfied. No better demonstration of this then an astounding 250,000 plus downloads of Universals diverse offering of digital records from their previously unavailable European artist catalogues. This type of action once again signifies that Universal is in step with the cultural needs of its fans, and for representing its artists as well in an ever changing playing field. ( Task Environment Consumer Markets New music fans, and market segments, are “born” nearly every day as signified by the recent 54% surge in digital single sales, and 250,000 euro digital downloads, which was a previously undefined market for Universal Music Group. With the onset of the internet as a musical marketplace, fans are becoming familiar with artists from a wider variety of genres and locations. This means unlimited potential growth and demands for distribution locally, nationally, and internationally, as well as an accompanying diverse set of market segments. The primary market segments for the music industry are sales of Full Length Compact Discs, Music Videos and DVDs, Digital Versatile Disc (DVD) Audio, Music Singles (all types), Full Length Cassettes, Digital Download (singles and albums), Vinyl LPS. ( Customers 5
  7. 7. Currently music entertainment customers are looking for unlimited access to any media related to their favorite artists, as well as exposure to both new and old recordings by other artists as they expand their own collections. Customers expect to be able to purchase media in familiar ways (I.e. retail store, vinyl, cd, cassette), as well as the new media generation who expect to be able to download ring tones to their mobile unit, as well as their laptop and mp3 player. Universal is the undisputed leader in the music industry because they meet consumer’s needs and expectations. Judging by their continued domination in market share, and high demand for their artists products, consumers view Universal in high regards, and continue to look to them for innovative music offerings. The music industry is often a veil of subsidiaries, and parent companies, therefore prospects and consumers don’t always know they are dealing with, or purchasing from Universal (unless they read the fine print). For example, Island Records, run by former “So So Def” CEO Jermaine Dupri (producer of Mariah Carey, Kriss Kross, etc.), is actually a subdivision of Island Def Jam Records, which is owned by Universal Music group. (Associated Press) According to Jupiter Research, Teen girls are a major market influencer with the purchase of new music. Jupiter reports that during a three month period, 78 percent of teen girls purchased music both off and online, while spending $31 on average. Comparatively, 69 % of the teen boys segment made purchases, and only spent an average of $27. The studied showed that girls did a great deal of research online about their favorite bands and artists, while boys spent more time researching and playing video games, which they were more likely to buy. (Anfuso). 6
  8. 8. The Jupiter report also showed that these influencers were strongly relied upon by their peers in determining what music selections they made. One suggestion was to offer these consumers free downloads, pre-loaded gift cards, and other perks to keep them contempt, and informed. (Anfuso) Never one to be left out of a market segment, Universal Music Group licenses its music to video games also, and is often a primary target for launching new, or re- establishing artists. Examples of these games include Grand Theft Auto, Knockout Kings, and NBA Live where the sound track helps to drive the game. Distribution and Dealers The main trade channels for bringing music products to customers are Retail stores, online, and show venues. In order to place product within a retail store, a strong relationship with a key distributor is vital. The distributor is responsible for negotiating pricing, managing product placement, transporting, storing, and restocking your product. Their relationship with the retailer ensures that the product will be prominently displayed, and that any related marketing campaign/material is implemented. For a major company such as Universal, distribution channels are well funded, monitored by channel executives (and their teams), and highly efficient. With the legalization of the digital music revolution, the retail distribution channel is on the borderline in regards to growth. The determining factor here will be what type of business model companies choose to adapt in order to best meet, and profit from, the demands of their technologically savvy consumers. A key concept here may be the integration of “bricks and mortar” with the “a la carte” or “subscription bundle” business 7
  9. 9. models described in Torbay’s “Business Models for Music Distribution after the p2p Revolution.” In this self-concocted version, a retail store may base their profits on selling an artist’s merchandise, while offering free downloads (or cd’s) of their music. This could be integrated with online promotions, whereas the consumer is encouraged to come into the store to receive the free cd or download, and possibly receive discounts on the merchandise, or able to purchase the merchandise online, and pick it up at the store. (Dubosson-Torbay) The online distribution channel is booming. CDBaby, Itunes, Spiralfrog, and many other popular sites boast thousands of available downloads. Partnering with both majors such as Universal, and thousands of independent artists, these sites offer not only music downloads, but music videos, documentary and interview footage, and artist merchandise. Cutting out the cost of cd production, packaging, transportation/shipping, and storage, online distribution is as cheap to set up as the cost of a computer, internet access, web hosting, and e-commerce setup. With some sites registering 10,000 downloads per minute (and more), and the online population of music consumers growing exponentially, the growth potential for this distribution channel is unlimited. (Dubosson-Torbay) Show venues are also a primary way of selling product to consumers. Both artist merchandise and music can be sold heavily at a performance. With performances continuing to be the primary way for an artist to actually get paid, this will continue to be a key channel for distributing product. Suppliers 8
  10. 10. With energy prices rising, large production facilities are looking to downsize, and more compact facilities (all in one studio/cd duplication houses) are emerging. At the same time, with the cost of online distribution becoming far more appealing than traditional cd distribution, the trend is to go directly to the online retailer from the production house with a licensed digital master of the recording. Merchandise can be handled in the same way as sites such as offer artists the ability to sell merchandise by simply choosing the styles, and providing the digital art work. This eliminates the need for a company to manage transporting materials, shipping, billing, etc. With SEC filings showing that UMG is the leader in not only digital music sales, but also the trend setter in business models, it is clear that their advertising and marketing research are paying off as Universal continues to reach it’s consumers in the right way, with the right product offerings. (SECinfo) Marketing Strategy Driven by Consumer Behavior Business Mission Universal Music Group’s business mission is to continually create and present the best music entertainment packages to its global fans while working steadfastly to meet the changing demands of the consumer’s tastes and values, as well as technological and environmental innovations. ( This business mission is stated in market- oriented terms as it identifies the specific product, the global market segment (as Universal serves all genres of music, and is internationally encompassing), and reflects their determination to continually expand their market as trends, technology, and the environment changes. 9
  11. 11. Universal has been a pioneer in the music industry, the digital music revolution, and continues to capture the majority share of the market. This reflects the feasibility, and success of their market driven business mission, as well as the fact that their analysis of consumer behavior greatly impacts their strategy. Strategy Universal is strategically divided into genre and location based subdivisions responsible for producing and promoting artists and products that are within the overall marketing objectives of the firm. (Umusic) Over the years, through acquisition, alliance, and in house development, Universal has compiled some of the industry’s finest executives, producers, advertisers, marketers, and distributors, as well as vast resources to support their endeavors. (Bnet) It has established partnerships with the media, relationships with the fans (through its artists, street teams, and producers), and is the leader in defining the new business models and market segments, rather than a firm that struggles to find the right segment. As its SEC filings and industry recognized market shares show, Universal clearly is executing a winning strategy on all planes, as it continues to lead the music industry in every pertinent category. (SECinfo) With the ever changing technological playing field, it will be vital for the marketing department to stay abreast of trends in technology such as the way consumers prefer to receive and utilize media, as well as the expected package (I.e. DVD’s featuring exclusive artist interviews, backstage footage etc. over a traditional audio cd). Marketing Systems Are Key to Monitoring Consumer Behavior Consumer Trends Monitored and Analyzed 10
  12. 12. Universal’s IT CIO, Scott Belmont (formerly of EDS) has worked over the years to ensure that UMG’s Information systems provide timely, accurate, consumer behavioral data, integrated over all global business divisions to ensure that all components are in sync. During a nine year period (1998-2007) in which Belmont headed the IT transformation at UMG, they have gone from a ranking of sixth to number one in the industry, and account the IT systems as the heart of their core operations. (CIOCIS) Universal’s division heads have stayed on top of the current consumer behavior trends, and actively use the IT systems to monitor consumer sales, revenue, and even digital piracy statistics as related to UMG’s interests. Recently, UMG signed an agreement with Microsoft to share profits from Microsoft’s new online venture and device, the Zune, which allows consumers to download and play songs. Universal forced Microsoft into the agreement after refusing to license its media to Microsoft without a percentage compensation for each Zune sold, as well as traditional music licensing fees for consumer downloads and subscriptions. (MacDailyNews) Future Marketing Based on Consumer Behavior The consistent past successes of UMG’s artist promotions have provided an ongoing basis for current and future campaigns and strategic models. UMG’s executives, such as Island Records president Jermaine Dupri, have shown they know how to properly release and promote a product, and have tried and proven means to do so. They also rely on benchmark figures to determine where resources are allocated. A promotional campaign which does not reach expected figures, backed by research showing limited consumer interest will be shelved, and written off as a loss. A campaign which shows 11
  13. 13. potential in another market will be re-routed, and effectively re-launched as needed. (Green) Cost-Effective Analysis of Consumer Behavior Universal continues to cut back costs by reducing supply line distribution, handling distribution and marketing in-house, and channeling more future business towards digital online markets, as well as the implementation of their state of the art IT system implemented by Scott Belmont which has increased integration and re-usability of consumer data inter-departmentally across their global operations. One suggestion would be to cater less to young artist’s desire to project flamboyant lifestyles in the production of excessively high cost music videos, and other extras such as inordinate usage of limousines, and private jets for travel. Music is an art in itself, and the true music lovers appreciate the final product more than the fancy wrapping (no pun intended). Universal’s trend towards more digital supply driven business models, and less towards the support of retail store distribution of cd’s is likely a trend setting cost cutting step which will be an indicator to other majors that the digital revolution is more than a fad, and will be incorporated more and more into evolving business models. Marketing Function in Response to Consumer Trends Products Determined by Consumer Trends Universal’s product line objectives are to continually produce music and supporting media which entertains its consumers while expanding profitability globally. These objectives are sound, and in line with the overall mission of the firm. Universal’s current artist roster, as shown in figure 1.3 dominates each musical genre worldwide, and 12
  14. 14. is representative of the appeal their artist’s products have with the varying market segments. As mentioned in the Kenswil piece, Universal is constantly looking for new products and technologies to meet the demands of their consumers. The entertainment industry is fickle, and at times, some formerly popular artists may be marketed less than a newer, hotter artist, however, with the evolution of digital technology, even an “aged” artist can still generate interest with new, and old fans, through digital compilations, remasters, remixes, and innovative pieces such as box set dvd’s featuring backstage footage, interviews, etc. documenting their career. Music consumers are easily educated on current and past offerings in the industry via the internet, music outlets, word of mouth, etc. As the market shares and global revenue show, the consumers have quite favorable attitudes towards Universal’s products, although in the music industry, the consumer is likely less aware of the major company behind the artist, and smaller label, so Universal’s approach is more a factor than a brand style, which will vary with each individual. Universal will need to continue to stay one step ahead of the digital revolution, and the online consumer to keep their foothold on the market. Consumer Behavior Sets the Price Universal has readily recognized that with consumer digital downloads so prevalent, traditional pricing of their cds was no longer viable. With consumers forcing the action, they set the standard by lowering their MSRP across the board on cds, and partnered with online vendors to offer their songs in not only single, and album format, but even for free (I.e. Spiralfrog), while still garnering profits through upfront fees, and 13
  15. 15. advertising revenue sharing. These strategies have been the result of careful monitoring of consumer habits, industry trends, and sales results (i.e. declining album sales). Consumers have set the trend for making digital singles a viable option, over the traditional method of purchasing a full album. Therefore, it is clear that Universal has, once again, stayed in line with the customer’s needs by making these options available. With the industry being self-regulated, Universal has been a trend setter, rather than follower when it comes to pricing, and has even spear-headed the forcing of some new regulations such as de-legalizing some peer 2 peer devices, forcing profit sharing with Microsoft’s “the Zune,” and even bringing MySpace to court. Distribution to the Consumer With the use of mp3 players and online downloads, the consumer has forced a change in the way music is distributed, and Universal has objectives of being a leader in the evolution of the digital distribution model for the music industry. (SECInfo). As stated by Kenswil, they are working with the licensing agencies, other majors, and entities, to ensure that distribution and licensing of new media, and related technologies, can happen rapidly. Similar to the alliance of portal competitors IBM and BEA/Plumtree to develop common development standards for portal components, Universal has shown that their interest is not only in profit, but in rising the standard for the entire industry while enabling artists to quickly release their products to the fans. (Kenswil) Universal has both in-house, and third party distributors in its international network. They have recently made efforts to cut the supply line, as they shift more towards digital distribution of their products, and this is reflected in their profitability, and digital revenue growth illustrated in figures 1.1 and 1.2 (SECInfo). With such 14
  16. 16. current success, while there is always a need to stay alert, they are headed in the right direction with their models. Reaching the consumer: Advertising, Sales Promotion, Publicity, and Direct Marketing The Universal Music Group has a global network of advertising, sales, pr, and marketing staff who work along with other third party agencies to ensure that Universal artists, and their products, continue to stay atop the leader boards of sales, and accessible by their fans through merchandise, performances, and information disbursement. Universal promotes its artists through various forms of media including radio, TV, online, print and billboard ads, contests, integrated advertising, appearances, and performances. Depending on consumer trends, and their artist’s past and forecast success, Universal determines how much to spend on each artist’s campaign, and judging by their current success, as reflected in the SEC filings, they are doing a solid job at that. As online promotion continues to grow, it will be important for Universal’s agencies to analyze the consumer’s buying behavior, and adapt to the changing environment, as independent labels, and competitors, constantly show new and innovative ways to promote a project without spending a large sum of money. Universal combines its offline campaigns with online partnerships, advertising, and direct mailings to consumers to bolster its efforts. Conclusion Consumer Behavior Drives the Market While the consumer has spearheaded the adaptation of technology to change the way that music is obtained, delivered, and marketed, the Universal Music Group has been a pioneer, and successfully moved into the digital age of the entertainment industry as a 15
  17. 17. proven market leader on a global scale. In order to continue this success, they will need to utilize a key marketing component described in Kotler as ‘Integration of Communication Channels.’ With mass media playing such a large role in the influence of consumer’s behaviors towards products, and related purchasing decisions, Universal needs to be sure that they are “hitting the Bull’s Eye” with their marketing campaigns as they seek to reach the consumer in every way possible. Determining what trends in communications media are in play is vital. What means are consumers using to access data on artists? What device is compatible with media format? What is the hottest new wave of option in the entertainment world from sharing files across devices, to accessing videos via a phone or 2way device. (Kotler) In order to stay on top, Universal must continue to keep their ear to the pavement, and constantly stay in line with the behavioral trends of their technologically savvy, demanding consumers. A Solid Product Meets the Consumers Demands Business plans and marketing campaigns have their merit, but in the end, when it comes to music and entertainment, and responding to the changing behavioral demands of today’s consumer, it helps to have a stellar cast of artists with vast catalogues of hit records from tomorrow, today, and into the future. With the likes of U2, Mariah Carey, Jermaine Dupri, to name a few, in their catalogue, Universal has shown a knack for either obtaining or cultivating successful artists, and for the most part avoiding conflict and controversy along the way. Continuing to promote a tasteful element of product, and providing it in a quality, marketable format, should keep Universal amongst the leaders in the industry for years to 16
  18. 18. come, and allow them to continually keep up with the trends depicted by the consumer’s behaviors towards how, where, and why they purchase music. References Anfuso, Dawn. ‘Tiffany buys more Britney than Boys Do” as retrieved on the world wide web on November 20, 2007 at: Associated Press. ‘Dupri heads Island Record Urban Music.’ 02/07/2007 As retrieved on the world wide web on November 18, 2007 at: Associated Press. ‘Sheryl Crow Tours to Raise Global Warming Awareness.’ April 10, 2007. As retrieved from the world wide web on November 20, 2007 at: Belmont, Scott. Bio. ByCIOS. April 2007. As retrieved on the world wide web on November 19, 2007 at: Dubosson-Torbay, Magali, Pigneur, Yves, Usunier, Jean-Claude. Business Models for Music Distribution after the P2P Revolution. University of Lausanne. 2001. As retrieved on the world wide web on November 17, 2007 at: Green, Maxine. ‘Jermaine Dupri Takes New Artists Under His Wing.’ AceShowBiz. March 21, 2007. As retrieved from the world wide web on November 17, 2007 at Ibisworld. ‘Prerecorded Tape, Compact Disc and Record Stores in the US.’ Feb-23-2007. As retrieved on the world wide web on November 17, 2007 at: Kenswil, Larry. ‘Digital Music Licensing and Section 115 of the Copyright Act.’ Oversight Hearing. Judiciary.Gov. March 8, 2005. As retrieved from the world wide web on November 18, 2007 at: ID=301 Kotler, P., & Keller, K. (2006). Marketing Management 12e. New Jersey: Pearson Prentice Hall. Leeds, Jeff. ‘The Album, a Commodity in Disfavor.’ New York Times. March 26, 2007. As retrieved from the world wide web on November 20, 2007 at: oref=login&pagewanted=all 17
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