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Challenges Opportunities in the Traditional
Market

• Slowdown in projected market growth
• Challenging Economics
• Signing and Recording Costs
• Marketing Costs
• Pricing
• Emerging markets (China, India, Russia) still
  long term prospects
• Growth of local repertoire continues

2
Technological Challenges Opportunities

• Technological advances are leading to new
  business opportunities and new competitors
• Direct selling to consumer on demand
• Technology-driven start-ups appearing throughout
  the traditional value chain
• Content owners must meet more complex and
  evolving needs of artists and consumers
• Proliferation of new and emerging channels
• Increased consumer interactivity
• Expanded product offerings

Enormous potential carries enormous risk and
demands an aggressive, flexible strategy
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Strategic Overview
Strategy of Continuity
Strategy of Change
Strategy of Transition

• Successful development of technologically-
  enabled business models demanding new skills

• Maximize efficiency and margins in the short to
  medium term

• Refine, strengthen and expand our core operations

Must execute across these three strategic fronts
simultaneously
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Strategy of Continuity

• Build the broadest, strongest, deepest base of
  our core strength -- content ownership
• Entrepreneurial local companies to compete with
  majors and indies alike
• Particular focus on strengthening repertoire in
  Germany, Spain, Latino and Asia
• Expand geographically when and where prudent
• Dramatically raise the sophistication, intensity
  and effectiveness of frontline and catalog
  marketing
• Improved coordination of international artist
  marketing

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Strategy of Transition

• Rationalize manufacturing and distribution to a
  more efficient, cutting-edge operation
• Shift fixed to variable costs wherever possible
• Serve needs of evolving pan-European customers
• Maximize margin recovery through appropriate
  pricing
• Increase prices and rationalize terms for
  physical product both in the US and across Europe
• Minimize trans-shipments and control evolution of
  Euro-pricing

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Strategy of Change

• Maximize the value of our existing rights and
  those of our artists
• Lead industry to adopt robust standards for
  protection
• Fight both passive and active piracy
• Position ourselves for flexibility in a rapidly
  changing environment
• Continuously forecast future shape of industry
  avoid exclusivity
• Leverage technology to enhance our core assets
  new product development, lower operating costs,
  digital storage, etc.
• Develop / acquire new skills and assets to
  maximize our ability to compete under new
  business models
• Direct-to-consumer / interactive marketing and
  selling
• Acquire and replicate practices of potential
  disintermediators
• Create our own e-currency in the stock market

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The Transforming Value Chain
Marketing Promotion
AR (Content Creation)
Manufacturing
Distribution
Administration
Retailing

• Convergence of marketing, promotion and retail
• Geography proximity not a source of strength
• Pull marketing wins over push
• Service is differentiator
• Direct / personalized experience demanded
• If it can be digitized it will be distributed
• Rate of change is exponential

• Traditional sources of value greatly diminished
  by connectivity
• New competencies required to play

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New Value Chain is Uncertain
Promotion / Marketing / Retail
Consumer
AR
Pipeline
Clearing-house
Player / Storage
AR
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New Players are Positioning for This Future
Promotion / Marketing / Retail
Consumer
AR
Pipeline
Clearing-house
Player / Storage
AR

• Nigel
• Microsoft
• Liquid Audio
• Real Networks
• MEI
• Sony
• Creative Labs

• UBL
• MP3.com
• Riffage

• ATT
• IBM
• NTT
• Deutsche Telekom

• NatWest
• Reciprocal
• Credit Card Cos.

• AOL
• Yahoo
• CDNow
• GetMusic
• eMusic
• NetRadio
• Amazon.com
• RioPort

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Yesterdays News

• Sony to sell music online
• Bowie in Virgin territory with full album on
  Internet
• Net radiocasting streams to 2,615 stations
• Yahoo! Launches music portal
• Amazon.com to sell music for download
• New Sony Walkman downloads Net music
• Ovitz enters the MP3 dimension
• CDNow to merge with Columbia House
• eMusic, BMI pair up for Net music downloads

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Internet Penetration

• Online households estimated to grow worldwide by
  27 pa through 2002
• By 2002, U.S. to account for 53 of all online
  households v. 77 in 1997
• Supply of demand exciting content could
  accelerate roll-out
• Infrastructure competitors driving adoption
  forward - cable vs. phone vs. data companies

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U.S. Broadband Penetration (MM Households)
70
60
50
40
30
20
10
2008
1998
00
02
04
06
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New Channels and Offerings
Today Channels
Tomorrow Channels Products
Physical Retail
Consumer
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From a Music Company to a Music Services Company

• We must expand the services we provide to artists
  to continue to offer a compelling source of value

AR
Artist Development
Fan Base Management
New Channel Promotion / Distribution
Publishing
Web Site Development /Hosting
Community Building
Ticket Sales
Merchandising
If we do not provide these services, others will
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Evolution of Consumer Interface
PUSH
PULL

• Unfocused, mass market
• Expensive
• Intermediaries
• Lost sales (stock outs)
• No effectiveness measures
• Standard products

• Focused, tailored messages
• Less costly
• Direct and interactive
• Unlimited supply
• Instant feedback
• Flexible purchase options

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One Vision of the Future
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Organizing e-Business Efforts
DEFENSIVE
OFFENSIVE

• Leverage e-tools to increase performance
• Innovative product development
• Strong relationships across multiple distribution
  channels
• More effective direct and interactive consumer
  marketing
• Lower costs through technological efficiencies

• Extend existing strengths
• Robust protection standards and business models
  favorable to content owners
• Long-term contractual artist relationships

Internal to Core

• Aggressively pursue new opportunities in e-space
• Innovate with Internet-based business models
• Cannibalize core business if necessary
• Fund arms-length businesses

External to Core
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Secure Digital Music InitiativeSDMI

• 110 member companies from worldwide recording,
  consumer electronics, and information technology
  industries
• Goal provide positive consumer experience while
  facilitating secure environment for digital
  distribution of music
• First SDMI specification published this summer
• Future SDMI-compliant content to be watermarked
• Portable devices sold during Phase 1 will have
  software that upgrades automatically to Phase 2
  when watermarked content is available
• Upgrade is not mandatory, but will be required to
  play new music that includes Phase 2 SDMI
  protection
• SDMI-compliant portable devices will also play
  unprotected content

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GetMusic

• Music destination site based around genres,
  supported by two majors, in order to
• Build compelling content-rich and high-traffic
  aggregation sites which speak to specific
  lifestyles and music communities
• Develop a robust consumer database for use as a
  marketing tool and for expanded interactivity
• Create a retail capability to complete promotion
  / marketing / retail convergence

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Operational Implications

• Accounting issues
• New royalty structures
• Affiliate commission structures and payment
• Structural and linking issues
• Data warehouse of all transaction information,
  linked to consumer database
• Automation of online feeder systems
• Content issues
• Contractual clearances
• Prioritized collection and digitization
• Global coordination

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Closing Thought
Think big start simply grow fast
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