Firm Analysis: Universal Music Group

What better way to find out about the music industry and analyze its economics, then to do an in-depth study on the best competing firm within the industry; Universal Music Group. What follows is a complete analysis of Universal Music Group and the factors that drive their success.

Overview of Performance

Universal Music Group (UMG) is the world’s leading music company and is comprised of two core businesses: recorded music production and music publishing. All of the other music companies that make up the “Big Four,” including Warner, EMI, and Sony-BMG primarily engage in these two business activities. For the purposes of this section of the report I will analyze the players in the music industry, including Universal Music Group, based upon their performance within the United States. I believe this limitation is fair because each of the “Big Four” have large scale operations in the United States and these operations are representative of each company’s overall performance. In addition, the United States is the largest territory for recorded music sales, contributing 37% of the total world sales in 2007.

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Universal Music Group is the market leader in the United States, both in terms of recorded music production and in terms of music publishing. In 2007, Universal had a market share of 30.3% for recorded music production in the U.S., compared to 27.1% for Warner, 15.9% for Sony-BMG, and 6.7% for EMI. Similarly, in 2006, Universal had a market share of 23.2% for music publishing in the U.S., compared to 19.7% for EMI, 14.2% for Warner, and 5% for Sony.

The table to the right shows total revenue (in millions of $) in recent years for all of the major music groups. Again, Universal leads the way and exhibits the best financial performance among the “Big Four.” With the highest market share in both recorded music production, and music publishing, along with the highest total revenues, Universal Music Group has proven itself to be the best performer within the music industry.

Background Information

To identify what strategic factors have led to UMG’s excellent performance within the music industry, some additional background information on the firm must be provided. UMG’s business discovers, develops, markets, and distributes recorded music through a network of subsidiaries, joint ventures, and licenses in 75 countries. UMG also sells and distributes music videos and DVDs, and licenses recordings, encouraging the legal distribution of music online and over cellular, cable, and satellite networks. UMG includes Universal Music Latin Entertainment, the world’s leading Latin music company. In addition, UMG owns and operates Universal Music Publishing Group (UMPG), the world’s leading publishing business. UMPG owns and acquires rights to musical compositions and then licenses them for use in recordings including films and advertisements. Furthermore, UMG includes Bravado, its own merchandising company, as well as Twenty-First Artists, Trinifold, and 5B, some of the world’s leading full service artist management businesses. Another business division of UMG is Helter Skelter, its live music agency. Universal Music Group is clearly a very large and diversified company, encompassing many smaller specialized business segments that make it the largest and most efficiently run of the “Big Four” music groups. For more background information, check out "universal music group" on wikipedia.

In addition to their specialized business segments, Universal Music Group has the largest and most expansive catalog of music in the world. UMG is the market leader in terms of its collection of classical, Broadway/contemporary, and jazz music. Similarly, UMG employs a full spectrum of some of the most popular and well known artists of this time period; including Bon Jovi, Mary J. Blige, Jay-Z, Lil Wayne, Sting, Kanye West, and Mariah Carey. UMG’s rosters of artists for Europe, Latin America, and Asia are just as long and impressive.

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Business-Level Strategy

Given Universal Music Group’s specialized business segments and unbeatable catalog of artists and songs, it is fair to say UMG is exercising a business-level strategy of product differentiation. Universal Music Group’s product mix, through the firm’s selection of artists and songs, is unmatched in the industry and is what highly differentiates UMG from small and large competitors. The uniqueness of these songs and artists, as well as the integration and history behind them, provide a source of competitive advantage for UMG that is costly to duplicate.

Similarly, UMG differentiates itself from others in the industry with its internal links across business functions. Every artist under a label needs access to the best recording technologies, merchandising services, management services, and live music services, in addition to many others. No other large music groups and certainly no smaller music companies provide access and assistance of this superior nature to their artists in the way that UMG can. This linkage across related functions really allows Universal Music Group to build each artist’s “brand” providing a great source of product differentiation.

Corporate Strategy

The evidence presented suggests that Universal Music Group has a corporate level strategy of related diversification. UMG is not only diversified on a product front, but also on a geographic front, as the company’s operations span the globe. UMG creates and sells many different types of products within the realm of music, including CDs, DVDs, vinyl albums, merchandise, licenses, as well as various downloadable formats including mp3s and ringtones.

In addition, Universal Music Group is diversified through its global operations. UMG has signed artists and sold CDs and other forms of media on every major continent. People everywhere listen to music and UMG has taken advantage of this fact more than anyone else. By having a highly diversified business model, UMG is able to maintain a lot more stability and be subject to less risk compared to other competitors within the music industry.

Part of Universal Music Group’s diverse business model includes a division known as eLabs. This division is responsible for handling the company’s electronic commerce initiatives, internet exploration, and new technology opportunities worldwide. eLab’s business development staff supports all of UMG’s e-business initiatives, including digital downloads, subscription services, webcasting, and interactive radio through all digital channels of purchase. It is with the help of this division that UMG has been able to maintain its market share and save face as the overall industry’s sales and attractiveness have declined due to digital downloads and piracy.

In 2007, the volume of physical albums sold for the music industry declined by 17% due to digital downloads, causing a significant decline in revenues and profits for the “Big Four” and other record labels. Although, UMG’s total revenue fell by 11.7% in 2007, this was not nearly as bad as some of the other music groups like Sony and EMI, whose revenues dropped 27.7% and 13% respectively. Much of this relatively superior performance in light of the declining music industry was due to efforts put forth by UMG’s eLabs division. With these efforts, legal digital distribution of UMG’s music has continued to increase due to the company’s partnerships with Apple’s iTunes and other digital download retailers, such as Napster, RealNetworks, and Wal-Mart. In 2007, UMG made an investment in hip-hop music portal Loud.com, and in the same year the company began selling its music catalog online in unrestricted mp3 format through Amazon.com.

It is through strong related diversification that Universal Music Group has been able to maintain its market leadership even as the music industry declines and becomes less attractive. UMG’s diverse group of business divisions has allowed the company to respond quickly and capitalize on the changing music industry. For example, as sales for a particular artist or genre of music decline in one global market, UMG counters with expansion in another global market, contributing new revenues and putting the company back in balance.

Resources and Capabilities

There are several specific resources and capabilities that Universal Music Group possesses which have enabled the firm to outperform the rest of the music industry, including; the interdependence of different business functions and divisions, excellent corporate integration and acquisition skills, and a tremendous ability to attract top talent. Different business divisions at UMG work together in great harmony throughout the whole process of publishing and eventually selling an artist’s music. The synergy that is created across these business divisions is what allows Universal Music Group to be profitable while at the same time, uniquely brand its artists.

Under UMG, the music publishing division creates the content which Universal Music Enterprises manages with the music catalog. Next, one of four major divisions under Universal Music Group Distribution handles sales across different channels including the internet. Then, every artist is managed closely under one of UMG’s full-service artist management businesses like Twenty-First Artists, Trinifold, and 5B. A full merchandising campaign must be launched for an artist to reach his or her full potential, which UMG can do under its Bravado division. In this way UMG is able to control many of the important factors that determine the success of any artist or song. This resource of cross-functionality and interdependence between different business divisions is not only valuable and rare, but also hard to copy given its social complexity.

Universal Music Group also has the great resource of excellent corporate integration and acquisition skills. Throughout the company’s history and especially in recent years, UMG has successfully completed several business acquisitions. In 2001, UMG acquired an online subscription music service, EMusic.com, which it used to help grow digital sales and internet related operations. From 2003 to 2008, UMG made over six acquisitions of different record labels which helped the company achieve the largest music catalog in the industry. More importantly, in 2006, UMG acquired BMG Music Publishing and in turn became the world’s largest music publisher. The acquisition of Univision Music Group in 2008, expanded UMG’s reached to nearly 50% of the Latin music market. Universal Music Group has an obvious history of making successful acquisitions. The company’s ability to make acquisitions is a highly valuable and rare resource that others in the industry would find costly to duplicate.

Finally, Universal Music Group possesses the great resource of being able to attract the top talent in the music industry. UMG has the largest palette of the most popular artists in every music genre. The reputation that UMG has within the industry for really jumpstarting and growing artists’ careers is well known. Even UMG’s CEO, Doug Morris, is known for his ability to find common bonds with top artists and bring them into the company. This resource of UMG is again, valuable, rare, and costly to duplicate.

Recommendations

In order for Universal Music Group to stay on its current path and remain the leader of the music industry, the company must do a two things. The music industry as a whole is in a restructuring phase right now, as the trend towards digital delivery continues. UMG needs to continue to scale back the firm’s physical unit sales and strike up new ways of capitalizing off the internet and digital forms of music. Taking command of digital sales is one of the biggest success factors that will determine a firm’s placement within the music industry moving forward.

Another important thing UMG must continue to do is make great acquisition decisions. The music industry as whole is consolidating as what was once six big music groups, is now four. In the past, Universal Music Group has made excellent decisions regarding acquisitions and this has helped them become a well-diversified company and also the leader of the music industry. Continuing to make the right acquisitions will likely help UMG stay on the forefront of the digital market and sustain Universal Music Group’s top position within the industry.

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