Bmg Financial Analysis

Executive Summary

The music industry has experienced dramatic shocks that will ultimately transform its structure. The transformations have been sparked by new technologies and Internet use distributing music as a digital good. The MP3 audio format and the wide distribution network that has become available via the Internet are driving changes in the recorded music market structure and, thus, are simultaneously having significant impacts on the players in the traditional recorded music value chain. Global retail sales of recorded music dropped from $39.8Bn in 1996 to $38.5Bn in 1999 while the popularity of digital music has grown. This reflects digital music's new role as a "strategic necessity" of the music industry. It is obvious that the digital music format is here to stay and, indeed, is quickly becoming the preferred product choice of music customers. Our group will examine the internal and external factors responsible for shaping this new marketplace and analyze BMG's roles in the move to distribution of digital music.

Financial Analysis

BMG Entertainment, a subsidiary of Bertelsmann media, is a privately held company; therefore we can not study its market performance. However they do release financial statements to the public allowing industry performance to be measured (See Figure 1). To measure BMG's financial health and profitability three tests were performed. These tests were also applied to the other major players in the music industry. An excellent way to determine BMG's financial health is a quick ratio, also known as the acid test ratio which was calculated and compared to it rivals. The quick ratio is calculated by taking a firm's current assets minus inventory divided by current liabilities; this allows you see how well the firm can pay back its debts in a timely matter. BMG, with a ratio of 2.39, only trails Sony, and along with Sony they are the only ones to have a ratio over one, meaning the other three firms have more debt than cash and cash equivalents. This is good sign of financial health because BMG has more than twice the amount of liquid assets to cover its immediate debts; unlike its competitors who find themselves quite short. The final two tests net profit margin (net profits over sales) and return on assets (net profit before taxes over sales), measure firms profitability. Net profit margin measures how much profit is generated on one dollar of sales and BMG's ratio of .04 is consistent with its competitors with only Sony again being head and shoulders above the industry. Finally, BMG's return on assets ratio of 1.03 again stands up to the competition. In conclusion, BMG, compared to its peers, is in good financial shape only trailing Sony.

External

The Music industry has certainly been struggling: sales of recorded music shrank by a fifth between 1999 and 2003. Small record labels are reaching many more people via the Internet. When this new future will arrive and if it will dominate is the most urgent issue for companies that dominate the production and distribution of music: Universal, Sony/BMG, Warner and EMI (see chart 1). Collectively, these companies are known as "the Big Five." In achieving their dominance in music sales, the big five each own a large portfolio of labels, from formerly independent labels to large regional operators on different territories. Many well-known smaller labels are owned by one of the big five companies. While these small labels continue to exist, they become increasingly unable to grow without becoming part of one of "The Big Five" companies.

Until recently the music industry has been slow to embrace the Internet, which has seemed to them not an opportunity but their adversary. Rather than putting their product on file-sharing applications, they are prosecuting free-download users for theft. BMG has been a leader in using the Internet to bring fans closer to their favorite artists. In addition to establishing GetMusic, an online site dedicated to bring music closer to its fans, BMG's online presence includes more than 30 music and lifestyle sites worldwide, in addition to associations with ARTISTdirect, Riffage.com, Egreetings Network, Listen.com and Eritmo.com, among others. Similar to how rock changed the world and the music structure, MTV did nearly the same; the internet today reshaped how music is shedding new light on the distribution channel. In 2000, BMG began selling music online during the holiday season in 53 countries.

Since the advent of the Internet as a distribution channel Porter's Five forces model describes how the rivalry among firms is high in the music industry. Independent labels created a high threat of substitutes as well as the ability for new entrants to placing their product on file sharing markets. Price drop and ease of use allows for greater bargaining power of buyers. BMG must be sensitive to this external environment in order to increase profitability as they try to gain a new market share in the digital music environment.

Internal

Though digital music has advantages over physical formats, the product is incomplete. Digital music does not include some of the important attributes of the physical CD. These include artwork, lyrics, linear notes, and additional content found in enhanced CD's, (video games, desktop wallpaper, video clips, etc.). Digital music's only distribution channel is the Internet. BMG can advertise and attract customers online to this channel, and explore the creation of strategic alliances. Online digital music retailers can form exclusive alliances with artists or record labels to attract a fan base to their store.

BMG's resources come from there publishing division under Nick Firth. Through some 150 acquisitions, it had accumulated the catalogs of diverse artists such as the Beach Boys, B.B. King, Barry Manilow, and Santana, which is why millions of consumers enroll in the music club. Some of BMG's online capabilities consist of starting online efforts in 1995 and spending $1 million per year on their websites. They started their websites mainly for promotion, exclusive information about BMG artists, interviews with the artists, live broad casts, chat rooms, and promotional downloads. They attracted interest by placing the web sites address on their artist's albums. BMG not only sells songs to customers, but they have also been able to generate royalties from its copyrights by placing songs in films, television, and advertising. These resources and capabilities were very rare due to the fact that there are only so many