CASE 12
Sony Music Entertainment and the
Evolution of the Music Industry
A. J. Strickland
The University of Alabama
Andrew Pharaoh
2015 Undergraduate,
The University of Alabama
“A
t such a pivotal time for music, it’s more
important than ever to develop a fertile,
creative environment that generates the
highest quality of artists and music, while seeking to
fully exploit the many opportunities that new digital
services and products provide in reaching audiences
around the world.”1
The remarks of Sony Music Entertainment CEO
Doug Morris in 2011 illustrated an accurate under-
standing of the environment of music sales. Morris,
a globally influential executive and music innovator,
agreed to join Sony Music Entertainment as chief
executive officer effective July 1, 2011. In a time of
great change in the music marketplace, it was abso-
lutely necessary that Sony take active steps to remain
competitive. Morris took the job graciously, but he
placed himself into a business whose margins were
becoming thinner and thinner. With a declining
industry that had been made less lucrative by the
wide availability of substitutes, Morris was forced to
develop a strategy to contend with industry change
and unfavorable competitive forces in 2014.
HISTORY OF SONY MUSIC
ENTERTAINMENT
American Record Company, the company that would
later become Sony Music Entertainment, was founded
in 1929 and then acquired by Columbia Broadcasting
Company in 1938. In March 1968, Sony, at that time
Seth Kennedy
2014 Undergraduate,
The University of Alabama
a Japanese company, began a joint venture with the
American company CBS to form CBS/Sony Records
Inc. In September 1976, Sony introduced the optical
digital audio disc, now known as the compact disc
(CD). In 1983, CBS Inc., as an American company,
allowed introduction of the CD to American markets.
In January 1988, CBS Records Inc. was absorbed,
and in January 1991, the new company was renamed
Sony Music Entertainment Inc.
In August 2004, Sony BMG Music Entertain-
ment was established as a new joint venture with Ber-
telsmann AG. Later, in August 2008, Sony acquired
BMG’s 50 percent stake in Sony Music Entertain-
ment and began operation once again as Sony Music
Entertainment, a wholly owned subsidiary of Sony
Corporation. In July 2012, Sony/ATV Music Publish-
ing, a joint venture between Sony and the Michael
Jackson Family Trust, along with a consortium of
other investment firms, bought the publishing arm of
the EMI Group, which solidified Sony’s position as
the world’s largest music publisher.
OVERVIEW OF THE MUSIC
INDUSTRY
Before the 1900s, music and entertainment media had
a strong emphasis on performance. If theater, magic,
or music was wanted in a certain venue, individuals
Copyright © 2014 by A. J. Strickland. All rights reserved.
 CASE 12 Sony Music Entertainment and the Evolution of the Music Industry
who could perform the art personally were found and
paid to do so. At the beginning of the 20th century,
music began to become ownership-driven. Listen-
ing to music was still done live, but, as the quality
of technology improved, artists began to produce
recordings of their music. Recordings initially made
the music industry more efficient, because artists
were able to receive royalties on physical recordings
and were able to reach a wider audience with their
songs. This allowed more time to be spent on cre-
ating new music, and the field became more lucra-
tive and more attractive. However, after a short-lived
heyday came a long decline, beginning in the early
2000s, as a result of piracy (discussed later) and digi-
tal distribution.
The 1993 release of the MP3 algorithm enabled
the reduction of song files to a size that made Internet
broadcasting and uploading and downloading fea-
sible. Shortly afterward, in 1994, WXYC (89.3 FM,
Chapel Hill, North Carolina) became the first tradi-
tional radio station to announce broadcasting on the
Internet. In 1998, the newfound portability of music
was coupled with a naming service and comprehen-
sive databases of music information developed by
Gracenote (later purchased by Sony in 2008 for $260
million), making it possible to retain the information
associated with the song files. Technologies like these
opened the floodgates of digital distribution. Napster,
the popular (illegal) file-sharing service, was started
shortly afterward, in 1999, and iTunes, a legal online
music store, was launched by Apple in 2001.
In February 2003, Warehouse Music, a retail
music store selling physical albums, declared bank-
ruptcy. The following year, in February 2004, Tower
Records filed for the first of three bankruptcies, which
ended with the closing of its 93 stores across the
United States. Virgin and Circuit City lasted some-
what longer, until 2009, but were also eventual fod-
der to digital music. Sellers of other types of physical
media, such as Borders (books) and Blockbuster
(DVDs), also chose to shut their doors in the 2000s
as a result of the digital music and video age. These
companies, however, tended to blame piracy for their
financial downturn, not digital media, and certainly
not an outdated business model.
Album sales continued the decline that put
brick-and-mortar record stores out of business, with
sales falling from about 575 million in 2006 to about
290 million in 2013. Internet and digital track sales,
on the other hand, continued to rise, topping out
C-179
at an estimated 1.34 billion tracks in 2012. Digital
sales declined slightly in 2013 to 1.26 billion. This
roughly 6 percent decline was the first decline in
digital sales since the iTunes store debuted more
than a decade earlier. However, industry revenues
steadily declined from a peak of $17 billion in 2000
to $7.9 billion in 2013.
Copyright Infringement and Piracy
The early 2000s saw a huge increase in copyright
infringement in the music world. For products such
as Rolex watches and Gucci bags, imitations had
always existed. Third-party manufacturers, especially
abroad, re-created the look of the original product
with cheaper raw materials and sold the counterfeits
at a discount. With music, however (and most digital
media, for that matter), the duplicates were identical
in quality, simple and costless to the duplicator, and
able to be redistributed digitally. To make matters
worse for the profitability of the industry, the likeli-
hood of being held responsible for the crime was quite
low. Sharing music was so easy, so ubiquitous, and so
socially acceptable that it was not long before it gave
birth to popular file sharing on a much larger scale,
like that through Napster (1999), LimeWire (2000),
and Kazaa (2006)—not to mention sharing by indi-
viduals who burned physical CDs to give to friends.
As of May 2014, two bills were under consid-
eration by the U.S. Congress that addressed digital
piracy. The Stop Online Piracy Act (SOPA) and the
Protect IP Act (PIPA) aimed to stop copyright infringe-
ment and to stop the trafficking of copyright material
by requiring that search engines abstain from linking
to websites violating copyright laws and that Internet
service providers block access to these websites. Both
bills were met with public opposition, and votes on
the bills were postponed until the issues regarding the
bills could be resolved.
The Institute for Policy Innovation estimated
that “global music piracy causes $12.5 billion of
economic losses every year, 71,060 U.S. jobs lost, a
loss of $2.7 billion in workers’ earnings, and a loss
of $422 million in tax revenues, $291 million in per-
sonal income tax and $131 million in lost corporate
income and production taxes.”
Music Publishing
Record labels scout for promising musicians and
bands, sign them to publishing contracts, and help
C-180 PART 2 Cases in Crafting and Executing Strategy
them through the process of creating and marketing
their music. Record labels (or the artists themselves)
will typically own all rights to the master recordings
that their artists produce and then compensate the
artists according to the amount of sales that the spe-
cific sound recording produces. Labels record the
music of artists in studios, manufacture recordings,
and promote and distribute that music by various
means to the consumer. Through copyrights, labels
are responsible for the protection of the music and
artists they sponsor.
There was an increasing simplicity to digital
music distribution, and it was becoming easier and
easier for artists to record, publish, and promote
their music themselves without the help of corpora-
tions. The trend of using the Internet and technology
that was more accessible than ever had initiated a
bypass of the middlemen and was a difficult obsta-
cle for music companies to overcome.
In January 2014, Sony Music Entertainment
was the second-largest record label, with 20 percent
of total industry market share. In terms of total
album sales, Sony Music Entertainment was posi-
tioned with 30.4 percent of market share, behind the
leader Universal by 7.3 percent; however, Sony’s
artist Justin Timberlake was the top-selling artist
in 2013. In digital sales, Sony still lagged behind
Universal by 6.2 and 9.5 percent in album sales
and individual-track sales, respectively. Sony/ATV
Music Publishing was the largest music publisher,
with 16.9 percent of the total market share.
Whereas record companies owned the physi-
cal sound recording, publishers (or the artists
themselves) typically owned the rights to license
and collect royalties on the specific melody, lyr-
ics, rhythm, and so on, every time they were used.
A “use” of a song was typically classified as fall-
ing under one of three “rights” controlled by a pub-
lisher: Mechanical rights represented the ability of
an owner to collect royalties when the song was dig-
itally downloaded; performing arts royalties were
collected when a song was played on the radio; and
synchronization royalties would be collected when
a song was used in a movie or commercial. Pub-
lishers typically worked closely with record labels
in the same way that a hardware store might have
worked with a carpenter or plumber. In the case of
Sony Music Entertainment and the other two lead-
ing music industry giants, both the publisher and
the label were vertically integrated as subsidiaries
of the same parent company. Publishers also helped
to market recordings and performed services for a
musician much as a bank did for a businessperson—
providing advances and loans with future income as
collateral.
DIGITAL MUSIC
DISTRIBUTION IN 2014
In 2014, there were three main methods of digital
music distribution: digital download, Internet radio,
and interactive streaming. For the digital purchases
of music, iTunes was the clear leader, accounting
for 63 percent of digital music sales in 2013, and it
had facilitated over $25 billion in digital music sales
since its inception. According to Apple’s 2013 10-K
report, filed October 30, 2013, the iTunes Store gen-
erated a total of $9.3 billion in net sales during 2013,
representing a 24 percent increase over 2012 sales.
The iTunes sales figure included digital music down-
loads through iTunes, purchases through the App
Store, and purchases on iBooks. In September 2013,
iTunes had launched its own free Internet radio ser-
vice, iTunes Radio. The service tailored radio sta-
tions on the basis of users’ iTunes libraries and user
input. The service was available in Australia and the
United States and boasted over 20 million users.
Self-Publishing in the Music Industry
The same technologies and social environment that
facilitated the rise in digital distribution through
services like iTunes and Amazon were also facili-
tating self-publishing, and in 2014 the allure to
an artist was strong. The creator had control over
the creation; the profit margin was much higher
and paid monthly, in contrast to the annual roy-
alty remuneration typical of labels; and the whole
process was completed much faster. Avoiding the
30 percent cut that distributors like iTunes and
Amazon took was an incentive in and of itself, if
avoiding the typical 10 percent cut to record labels
wasn’t enough.
For example, the band Radiohead digitally self-
published two albums, In Rainbows (October 2007)
and King of Limbs (February 2011), by means of
the band’s website, radiohead.com. Additionally,
In Rainbows was released on a donation-based sys-
tem, which effectively allowed fans to download
the album free. In the first month after its release,
 CASE 12 Sony Music Entertainment and the Evolution of the Music Industry
40 percent of the approximately 1 million fans who
had downloaded the album paid an average of $6,
earning almost $3 million for the band.
Artists without a substantial preexisting constit-
uency also had options to bypass the record labels
through a growing number of services such as Ama-
zon’s Create Space and CD Baby. Exhibit 1 presents
a breakdown of the split in royalties with CD Baby.
Interactive Streaming
and Internet Radio
There were many Internet radio and subscription
streaming services in 2014, but Spotify, Slacker
Radio, Rdio, Pandora, Last.fm, Beats Music, Napster,
Zune Marketplace, Grooveshark, Myspace, iTunes
Radio, and Rhapsody were among the largest. From
2008 to 2013, Internet radio grew at an annual rate of
42 percent, to a $767 million industry. It was projected
that Internet and streaming radio would continue to
grow at an annual rate of 12.7 percent a year until 2018
and that in 2016 almost 161 million consumers would
be subscribing to a streaming music or Internet radio
service. Increasingly, many music companies saw
revenue from music streaming and Internet radio as
a substitute for sales. This meant that, instead of pur-
chasing a physical CD or even downloading a CD on
iTunes, the consumer would instead turn to a cheaper
(in many cases, free), more convenient Internet stream-
ing source. A business model that relied on scarcity to
EXHIBIT 1 Split of CD Baby Royalties
How Much CD Baby Pays You
Type of Sale You Get
CDs and vinyl Your chosen purchase
(includes sales through our price minus $4
distribution partners)
CDBaby.com downloads 75% of your chosen
(single tracks and full-album) purchase price
Digital distribution sales 91% of net income
(from iTunes, Amazon MP3,
Rhapsody, and many more)
Credit card swiper sales 87.2%
Source: CDBaby.com.
C-181
force consumers to buy, download, or have ownership
of the product in any way waned in efficacy.
Despite manifold flaws in licensing models and
remuneration of artists (Grooveshark, another popu-
lar interactive streaming service, had been sued by
all of the Big Three record labels over licensing
problems since its inception), the period from 2010
to 2012 saw rapid growth of Internet distribution.
Possibly stimulated by the threat of file sharing
and reductions in physical CD sales, record labels
and music publishers were willing to look to new
monetization methods, such as streaming services,
that might save their profitability. A common goal
of salespeople was to make their product as attrac-
tive and accessible as possible to the consumer. In
the early to mid-2000s, the constraints of technology
were still a problem, but advancements quickly pro-
gressed to reduce these constraints. Music streaming
services weren’t a new idea by any means, but in
2010–2011 new streaming services were accompa-
nied by the ubiquity of the smartphone. In 2014, any
smartphone, computer, and Internet-enabled auto-
mobile (as of January 2014, Pandora had partnered
with 140 different car models to offer its in-car
radio service) was able to stream music directly and
quickly. It was estimated that, in 2014, 58 percent of
Americans had a smartphone and 63 percent of cell
phone owners used their phones to access the Inter-
net. Content owners had been reluctant to embrace
the services because of very low profit margins, but
Our Cut
We keep $4 per unit sold. If your album sells for $13,
you get paid $9.
We keep only 25% and pay you a whopping 75%
per download sold on our store—more than iTunes,
Amazon, and other retailers. So if you set your single-
song download price at 99¢ you’ll get paid 74¢ per song!
We keep 9% of the net income paid to us by our
partners and you keep the rest.
We keep 9% plus 3.8% for credit card fees (12.8% total).
C-182 PART 2 Cases in Crafting and Executing Strategy
it had become clear that consumers were enjoying
the services’ flexibility, freedom, and access.
Interactive streaming services like Rhapsody
and Spotify licensed music from artists and record
labels and then provided it to users through a client
available on their respective websites. Spotify and
Rhapsody were very similar in terms of business
model, as both companies relied most heavily on
payments from subscribers in order to fund their
high cost of sales, or licensing fees. The main differ-
ence was the content available to unsubscribed users.
Whereas Rhapsody allowed a short, 30-day trial of
its premium service, nonpaying Spotify users were
able to listen to much of its paid content for free,
as long as they were willing to listen to ads played
between every few songs.
Spotify seemed to be off to an inauspicious start in
October 2008, with heavy losses totaling $42 million.
Exhibit 2 shows the change in the number of paying
customers for Spotify. Since its inception, Spotify
had not turned a profit but had seen explosive revenue
growth. The company increased its revenues from
$99 million in 2009 to $578 million in 2012.
YouTube
YouTube was an unlikely but very significant player
in the music industry. An integral part of YouTube’s
success in the music scene was the introduction of
Content ID, a service that identified the music in vid-
eos posted by users. With this information, instead of
removing videos that contained a song whose use was
a copyright infringement, YouTube simply identified
the owner of the copyright and paid a royalty to the
record label or artist after a short verification process.
Like Spotify and Rhapsody, YouTube paid licens-
ing fees to record labels and artists, and it was better
able to absorb the costs paid to content owners because
EXHIBIT 2 Change in Spotify’s Number of Paying Subscribers, 2010–2013
2010
Number of paying subscribers 8m
Source: online.wsj.com/news/articles/SB1000142405 2702304791704579212152163448852.
of the higher price advertisers paid for video ads.
Below the video would be a link to a digital distributor,
such as iTunes or Amazon, from which the song could
be purchased, as well as a link to the YouTube account
run by the artist. In this way, YouTube was somewhat
able to harness what was once copyright infringement
in order to gain legal entry into the market of interac-
tive streaming. Of course, the technology was still
flawed, but it had come far. YouTube is also rumored
to be planning to unveil a subscription music and video
service to directly rival Spotify, Rdio, and other com-
petitors. YouTube would offer a free version along with
a premium service for a monthly fee of $9.99.
To put the rivalry between YouTube and stream-
ing services in perspective, Spotify announced in
February 2014 that its most popular song was Avicii’s
“Wake Me Up,” with more than 200 million plays
since it was released in June 2013. On YouTube,
“Wake Me Up” had over 450 million plays and that
number did not include other uploads featuring the
song, such as uploads from fans, live performances,
or remixes.
SONY MUSIC
ENTERTAINMENT’S BUSINESS
MODEL AND STRATEGY
In 2007, Sony Music Entertainment, in collabora-
tion with BMG, focused on two things: finding
promising new talent and collecting more fans for its
stars such as Daughtry, Alicia Keys, Avril Lavigne,
Celine Dion, Bruce Springsteen, and Foo Fighters.
The year 2007 was an excellent one for innovation.
Sony began Myspace Music as a joint venture “as
an interactive online platform for music sales, sub-
scription services and ad supported entertainment”;
access to many of the company’s artists’ greatest hits
2011 2012 2013 2012–2013 Change
13m 20m 28m 140%
 CASE 12 Sony Music Entertainment and the Evolution of the Music Industry
was included on stock mobile phones, and an agree-
ment was made with Amazon to sell MP3s, which
were compatible with iPods and other MP3 players.
All this was accompanied by the promise in Sony’s
2008 annual report that the company would maxi-
mize the potential of the digital distribution age.
A change in strategy came on October 1, 2009,
when Sony Music Entertainment became a wholly
owned subsidiary of Sony Corporation. Previously,
the company had been a 50-50 joint venture with
Bertelsmann AG, but the remaining 50 percent stake
was acquired by Sony for $1.2 billion. This was
done to lower costs through increased efficiency,
and, according to Sony’s 2009 annual report, it was
envisioned that the acquisition would allow the com-
pany to work more effectively with the electronics,
game, and pictures businesses.
VEVO
In December 2009, Sony Music entered into a joint
venture with Abu Dhabi Media and Universal Music
Group to form VEVO, a music video licensor and
aggregator. The videos were uploaded by VEVO,
and users viewed and listened for free as advertise-
ments scrolled simultaneously. The company oper-
ated at a loss in 2010 and 2011, but it was projected
to be profitable sometime in the middle of 2012, with
revenue jumping from $150 million in 2011 to $280
million in 2012. In 2013, VEVO had 227 million
viewers from 13 countries and 5.5 billion monthly
video views. The company had seen a transition from
videos being viewed on smart TVs and computers to
65 percent of videos being viewed on mobile phones.
The company was valued at $500 million in 2013.
Music Unlimited
In December 2010, Sony Music announced Music
Unlimited, a cloud-based music streaming service
powered by Qriocity, the company’s video distribution
platform. Music Unlimited had a library of approxi-
mately 15 million songs and allowed both radio and
interactive streaming capabilities. In January 2012,
Music Unlimited had more than 1 million active users.
Sony was not the first to develop a cloud-based music
listening service, so the company made use of its mar-
ket share in consumer electronics to bundle the soft-
ware with Sony-made devices, like gaming systems,
Blu-ray players, and TVs, in order to gain an initial
audience. Holding true to the strategy of October
C-183
2009, Sony aimed to blend the business of Sony Music
Entertainment and Sony Corporation for the sake of
efficiency. This strategy paid dividends, with nearly
38 percent of all song streams occurring on Sony’s
PlayStation 4 gaming device as of January 2014.
On June 15, 2011, Sony introduced the Music
Unlimited app for Android-enabled devices; the app
was, therefore, compatible with all Sony Corporation
tablets and smartphones. Sony Corporation also part-
nered with various other music services, most notably
Pandora and Slacker Radio, whose applications were
compatible with Sony TVs, MP3 players, smartphones,
and tablets. The Sony Entertainment Network allowed
linking of devices, so the same preferences, library, and
account could be used on multiple machines.
Upon creation of an account, Music Unlimited
provided certain benefits free, with progressive ben-
efits based upon the subscription type. New users
were given a free 30-day preview of premium ser-
vice. There were two subscription levels:
• For $4.99 per month, the basic subscription
included Spotify-like full interactive streaming
from a consumer’s home PC and game console.
• For $9.99 per month, the premium subscription
included Spotify-like full interactive streaming
from the devices covered in the basic subscription
as well as Androids, iPhones, and tablets.
Interestingly, Music Unlimited was not Sony’s
first attempt at a digital music medium. In December
2001, Sony Music (then Sony Music Entertainment
Inc.) and the Universal Music Group began Press-
play, an online, subscription-based music service
that allowed tracks to be streamed, downloaded, and
burned onto a CD while protecting artists’ rights.
Pressplay had many of the features that characterized
subsequent popular services such as Spotify—for
example, playlist sharing and access to music charts
and new release information. However, the initiative
was discontinued in mid-2003 because of intense
criticism of the heavy-handed implementation, shal-
low variety of music, and inefficient licensing.
Beginning in 2012, under new CEO Kazuo Hirai,
Sony launched a four-part plan to save the company,
which was hemorrhaging cash. Hirai wanted to focus
the company on its core business, which he identi-
fied as gaming, mobile products, and digital imag-
ing, while curtailing the company’s diverse business
portfolio and exiting the LCD TV market. In 2012,
Sony Publishing completed the purchase of EMI
C-184 PART 2 Cases in Crafting and Executing Strategy

Music Publishing for $2.2 billion. The purchase gave
Sony Publishing access to 1.3 million songs, raising
its total to over 2 million songs. In 2012 and 2013,
Sony sold Gracenote, an ownership stake in M3, and
Sony Chemical.
Sony Corporation’s revenues from the sale
of music increased from ¥441.7 billion in 2012 to
¥503.3 billion in 2013, and its operating income for
the division increased from ¥37.2 billion to ¥50.2
billion over the same period. This increase in operat-
ing income was mainly the result of lower restruc-
turing costs than in previous years and growth in
digital revenue. A summary of Sony Corporation’s
financial performance between 2009 and 2013 is
presented in Exhibit 3. Exhibit 4 presents the reve-
nue and operating profit contributions for Sony Cor-
poration’s various divisions for 2011 through 2013.
COMPETITION IN THE
DIGITAL MUSIC INDUSTRY
In the record label business in 2014, Sony Records
was second in terms of market share, with 20 percent.
Universal Music Group boasted a slight edge at
25.5 percent, and Warner Music Group lagged
somewhat behind, with 11.6 percent. The Big Three
music companies collectively held 57.1 percent
of the industry market share. In music publishing,
the same players held 35.9 percent of the industry
market share: Sony/ATV had 16.9 percent; Univer-
sal Music Group, 13.9 percent; and Warner Music
Group, 5.1 percent. In 2013, Universal Music
Group (a 100% Vivendi subsidiary) had revenues of
$6.7 billion and employed 6,500 employees. On
November 11, 2011, Vivendi announced that it had
signed a definitive agreement to purchase EMI’s
recorded music division for $1.9 billion, which was
seven times EBITDA prior to synergies.
Mobile Applications
In the age of data streaming and smartphones, mobile
application downloads were an apt way to track the
success of services. For comparison with the ratings
below, Clash of Clans, the most popular free app in
the Apple Store in 2014, received 752,024 ratings
with an average of 4.5 stars.

EXHIBIT 3 Financial Summary for Sony Corporation, 2009–2013 (in millions of yen,
except per share amounts)
2013 2012 2011 2010 2009

Sales and operating revenue ¥6,800,851 ¥6,493,212 ¥7,181,273 ¥7,213,998 ¥7,729,993

Operating income 230,100 267,275 199,821 31,772 2227,783
Income (loss) before income taxes 245,681 283,186 205,013 26,912 2174,955
Income taxes 141,505 315,239 425,339 13,958 272,741
Net income (loss) attributable to Sony
Corporation’s stockholders ¥43,034 2¥456,660 2¥259,585 2¥40,802 2¥98,938
Data per share of common stock:
Basic ¥42.80 2¥455.03 2¥258.66 2¥40.66 2¥98.59
Diluted ¥40.19 2¥455.03 2¥258.66 2¥40.66 2¥98.59
Cash dividends ¥25.00 ¥25.00 ¥25.00 ¥25.00 ¥42.50
At year-end
Net working capital (deficit) 2¥668,556 2¥775,019 2¥291,253 ¥64,627 2¥190,265
Long-term debt 938,428 762,226 812,235 924,207 660,147
Sony Corporation’s stockholders’ equity 2,197,766 2,028,891 2,547,987 2,965,905 2,964,653
Common stock 630,923 630,923 630,921 630,822 630,765
Total assets 14,206,383 13,295,667 12,911,122 12,862,624 11,983,480

Source: Sony Corporation 2013 annual report.

 CASE 12 Sony Music Entertainment and the Evolution of the Music Industry C-185

• Pandora. Pandora received 811,124 ratings with
an average of 4 stars at the Apple Store and
1,428,724 ratings with an average of 4.5 stars at
Google Play in 2013. As of the first quarter of
2014, Pandora had over 250 million registered
users, who listened to 4.8 billion hours of music,
and had total revenue of $194.3 million. Pandora
had been downloaded more than 1 billion times
and claimed 73.6 percent of the market share of
streaming Internet radio listening in 2013.
• Music Unlimited. At $9.99 per month, Music
Unlimited was far less popular than Pandora. It
received 688 ratings with an average of 3 stars at
the Apple Store and 24,029 ratings with an average
of 3.7 stars at Google Play. Music Unlimited had
approximately 10 million downloads by 2014.
• Spotify. Spotify had 303,200 ratings with an aver-
age of 4.5 stars at the Apple Store and 568,870
ratings with an average of 4 stars at Google Play
in 2013. It was estimated that Spotify had been
downloaded more than 100 million times by 2014.
In May 2014, Spotify had over 24 million active
users, 5 million of whom were paying for the inter-
active streaming service. The company was based
in Sweden and operated globally in 56 countries.
The bulk of an average band’s or artist’s income
in 2013 came from live performances—this was true
even for a band like Radiohead, which was able to
self-publish a CD that earned almost $3 million.
Under such circumstances, the publishing industry
still continued to struggle with monetizing stream-
ing music and saw an average annual growth of

EXHIBIT 4 Sony Corporation’s Revenues and Operating Income, by Division,

2012–2013 (in millions of yen)
2013 2012

Sales and operating revenue

Mobile Products & Communications ¥1,257,618 ¥622,677
Game 707,078 804,966
Imaging Products & Solutions 756,201 785,116
Home Entertainment & Sound 994,827 1,286,261
Devices 848,575 1,026,568
Pictures 732,739 657,721
Music 441,708 442,789
Financial Services 1,002,389 868,661
All other, corporate and eliminations 59,716 21,547
Consolidated ¥6,800,851 ¥6,493,212
Operating income
Mobile Products & Communications 2¥97,170 ¥7,246
Game 1,735 29,302
Imaging Products & Solutions 1,442 19,641
Home Entertainment & Sound 284,315 2199,461
Devices 43,895 222,126
Pictures 47,800 34,130
Music 37,218 36,887
Financial Services 142,209 129,283
All other, corporate and eliminations 137,286 2102,177
Consolidated ¥230,100 2¥67,275

Source: Sony Corporation 2013 annual report.

C-186 PART 2 Cases in Crafting and Executing Strategy
negative 3.8 percent from 2008 to 2013. This was
only slightly better than the performance of its big-
brother industry, record labels, which recorded a
negative 4.3 percent growth rate from 2009 to 2014.
Prior to CD duplication and digital distribution, con-
sumers either paid the price to hear the entire album
(even if they liked only five songs on it) or didn’t
hear the music at all. In the same scenario in 2014,
consumers were likely to simply download the
music illegally from a file-sharing site. The small
number of people who purchased music legitimately
would buy only the five songs they liked.
Whatever the model of access to music, some-
thing that seemingly was dropped by the wayside
was remuneration of artists. In an industry where
the consumer was becoming increasingly important,
it was equally important for record labels like Sony
Music Entertainment to keep in mind that with-
out the promise of profitability, sustainability, and
means of financial support, artists might return to
their roots, heavily focused on live performances,
whereby the product was much harder to steal. The
stimulation and motivation for an artist to record a
song decreased significantly if there was no way to
support oneself financially, and, although the world
would never stop making music, profitability incen-
tives and disincentives were just as real in the music
industry as they were in any other industry that pro-
duced a product for sale.
Although the way of the future seemed to be
interactive streaming and Internet radio funded by
subscription or advertisements, there was much
debate in the music community about the effects that
such a shift would have on the industry. Streaming
services were growing very rapidly, as evidenced by
the success of a wide variety of new services and
the continued decreases in physical and digital CD
sales. While these services were growing rapidly, in
2014 they still represented only 6.6 percent of the
total revenue to labels and even less to the average
artist. A subscriber had no idea where his or her
$9.99 subscription went, but it certainly didn’t go
straight to the artist. Label agreements with artists
were traditionally confidential, so it was difficult to
discern exactly how much money was being trans-
ferred to the original creators of the product, that
is, the music. This was why many popular artists,
such as Coldplay, Adele, and the Black Keys,
resisted or even denied access to their music through
subscription-based services.
However, despite the downside risk of the shift
in the way that music was monetized, subscription
services still represented significant opportunity.
They were much more accessible and convenient to
the consumer than was purchasing an MP3, and such
convenience represented an addition in value. Addi-
tions in value were typically commensurate with an
increase in demand and therefore an increase in rev-
enue, and most agreed that an increase in the “rev-
enue pie” of the industry would help solve problems.
Subscription services also proved to be helpful to
new bands whose focus was more on promotion and
development of a fan base than on immediate profit.
Exploring new music on a Pandora radio station or
through the Related Artists feature on Spotify was
much more accessible, as it was not necessary to
purchase each individual song. Streaming had also
proved to be an excellent medium for advertising and
publicity for concerts, downloads, and merchandise.
Rhapsody, a subscription service available only
in the United States, had been around for nearly
10 years and had experienced slow, steady growth.
Rhapsody had been stagnant at 800,000 subscribers
for several years, but in December 2011, the com-
pany experienced tremendous growth, hitting 1 mil-
lion paying customers for the first time. Since the
large increase, Rhapsody made only incremental
gains, reaching an estimated 1.2 million subscribers
in 2013. With Spotify and other streaming services
posting wild growth increases, the only question
was the sustainability of such increases.
According to David Hyman, CEO of Beats
Music and former CEO of MOG (a popular interac-
tive streaming service that shut down in 2014), an
average iTunes user spent $40 a year on music, the
average American spent $17 a year on music, and
premium subscribers to MOG paid $120. Hyman
attested, “When it comes to individual deals between
artists and labels, I do know that the content owners,
the labels and the publishers are getting a lot more
money out of these subscription services than they’re
getting from iTunes.” Like iTunes, MOG had for-
warded an average of 65 percent of income to labels.
In another interesting use of technology to mon-
etize music, Denison Witmer, a solo artist who got his
start playing with Sufjan Stevens, began what he called
an “Everywhere at Once” tour in 2012. By paying $25
at his website, fans were able to order a personal show
of one to two songs played by Witmer himself live
from his kitchen over Skype or Apple’s FaceTime.
 CASE 12 Sony Music Entertainment and the Evolution of the Music Industry C-187

In terms of forecasting the future of the music
industry, the movie industry offered some clues,
especially with services like VEVO and YouTube
blurring the line between video and music. Quite
recently, Netflix superseded physical DVD stores,
driving companies like Blockbuster and Movie Gal-
lery to Chapter 11 bankruptcy in September 2010
and February 2010, respectively.
In the words of Sony founder Masaru Ibuka, “Cre-
ativity comes from looking for the unexpected and step-
ping outside your own experience.”2 Sony as a company
showed great innovation and clever execution in the
past, earning a significant market share in many diffuse
markets, both in terms of geography and in terms of
products. The question of the future was always: How
would the current position be used to press forward?

ENDNOTES
1 2
As quoted in a Sony Corporation press Quote from Masaru Ibuka at quotes.lifehack
release, March 2, 2011. .org.