before itunes, pandora, et al...transitioning to digital: emi, 2002

Transitioning to DigitalProblems and OpportunitiesEMI Group plcMarch 3, 2002

Topics

• Market environment• Fighting piracy • Enabling legitimate services

34.431.3

33.733.7

15

20

25

30

35

40

Retail recorded music market

35.833.6

35.035.2

15

20

25

30

35

40

19991998 2000 2001

Source: IFPI

Value (US$ bn) Units (bn)

19991998 2000 2001

Commercial CD Piracy

Source: IFPI

% of Global Sales (units)

14 1417

20

28

0

5

10

15

20

25

30

1997 1998 1999 2000 2001

30

50 50 55 60 65

85 90

0102030405060708090

100

SpainGree

ceTaiw

anBraz

ilMex

icoRuss

iaIndo

nesia

China

2001 Piracy as % of Sales (units)

510

815

991

2000 2001 2002

9

64

KazaA

10

89

Morpheus

14%

60%

1999 2002

CD-Rs used for home recording in US (m)

P2P users (m) 2001 v. 2002 CD burner ownership among music consumers

Online digital piracy

Source: RIAA, IFPI, Understanding and Solutions

Consumer demand

0.4

3.3

4.2

5.3

10.3

10.5

10.7

33.6

0 5 10 15 20 25 30 35 40

Paid to stream / download

Went to live concert

Streamed music

Downloaded music clip

Downloaded whole track

Purchased music in store

Burned music CD

Played music on computer

Source: NPD, Nov 2002 fieldwork

Music consumption increasing

2.7 3.7

1.2

4.5

2.8

1.6

0.4

02468

1012

1996 2002

CD tracks sold Commercial CD piracy Downloads Other

Monthly acquisition of music tracks (bn)

5.9

11.0

Source: Jupiter; IFPI; EMI research

Topics

• Market environment• Fighting piracy• Enabling legitimate services

Piracy

• Commercial physical piracy– organized crime– virtually identical to legitimate product– returning to high levels last seen in 1980s

• Online digital piracy– file sharing and CD burning– perception that “not really” stealing– yet supports commercial enterprise

Anti-piracy strategy

• Commercial physical piracy– better laws– improved enforcement

• Online digital piracy– copy control– tighter pre-release management– technical counter measures– consumer awareness– legal / regulatory initiatives

Philosophy of copy control

• Make it more difficult to rip and burn CDs

• Make decision to rip and burn a conscious violation of copyright laws

• Deploy copy control technologies that are consumer friendly

Copy control – percentage of total EMI sales

05

1015202530354045

July 2002 Dec 2002

%

Europe

Japan

LatinAmericaSEA

Pre-release management

• One leak can provide digital source for international piracy

• Forensic watermarking • Process redesign at four different levels:

– studio– initial advance copies– press and promotional copies– radio play

Technical counter-measures

• Experimenting with alternative approaches

• Impact greatest before street date, but value in longer campaign

• Expectation: 50+% of download attempts ineffective

Artist support in consumer education• India.Arie• Mary J. Blige• Sarah Brightman• Steven Curtis Chapman• Sheryl Crow• The Dandy Warhols• Dirty Vegas• Eminem• Enrique Iglesias• Janet Jackson• Mick Jagger• Elton John• Lenny Kravitz• matchbox twenty• Kylie Minogue

• Nelly• N*E*R*D• ‘NSYNC• OK Go• Keith Richards• Rolling Stones• Diana Ross• Shaggy• Britney Spears• Sting• Thalia• Keith Urban• The Vines• Brian Wilson

Legal / regulatory progress

Legislative / legal:• EU proposes harmonised sanctions against piracy• Italian government passes key anti-piracy law• Victory in first online piracy legal case in Japan• Preliminary ruling against Verizon

Enforcement:• Spanish police arrest 40 in one of largest ever anti-piracy

operations• Major CD-piracy ring smashed in Manila• Stolen Beatles tapes recovered in joint UK / Dutch operation

Topics

• Market environment• Fighting piracy • Enabling legitimate services

Enabling legitimate services

• Understanding the consumer: preliminary results

• EMI’s digital download strategy• Additional sources of revenue growth

Downloads by age group

16%

11%

10%

24%

35%

4%

13-15 16-17 18-21 22-29 30-49 50+

Five segments of downloaders

Already own15%Might

buy47%

Will buy13%

Won't buy12%

Non-category buyers

13%

Source: NPD, Nov 2002 fieldwork

15% download when already own CD

14.4

15.1

21.4

23.3

36.7

44.0

53.8

0 10 20 30 40 50 60

Wanted it for MP3

Wanted to hear song

It was easy

I was curious

Wanted to burn CD

Wanted specific song

Wanted it oncomputer

Source: NPD, Nov 2002 fieldwork

%

25% will not buy the CD

9.4

13.8

20.5

30.5

31.7

33.5

38.4

0 5 10 15 20 25 30 35 40 45

Don't like

Already own

Value perception

Can burn later

Don't want whole CD

Have only track I want

Download goodenough

%

Source: NPD, Nov 2002 fieldwork

60% will or might buy the CD

4.1

6.4

18.2

18.9

30.9

33.8

59.2

69.2

0 10 20 30 40 50 60 70 80

Need another copy

Saw promotion / sale

Easier

Enhanced features

Booklet, insert, artwork

Quality of recording

Want more music by artist

Want entire CD

Source: NPD, Nov 2002 fieldwork

%

Behavioural drivers

• Age / demographics• Intensity of downloading behaviour• Physical music purchase behaviour• Music consumption patterns

Enabling legitimate services

• Understanding the consumer: preliminary results

• EMI’s digital download strategy• Additional sources of revenue growth

EMI’ s strategy

• Make available 100% of our repertoire• Allow portability and burning• Make our music available through every

legitimate retailer• Enable retailers to use own preferred

business model• Ensure fair return for EMI and artists by

setting wholesale price• Integrate digital distribution fully into EMI

Status

• US launched November 2002• European launch coming soon• Global roll out over the year

Growing digital download business

Source: EMI research

0100002000030000400005000060000

1-De

c-02

15-D

ec-0

2

29-D

ec-0

2

12-J

an-0

3

26-J

an-0

3

9-Fe

b-03

23-F

eb-0

3

1 Dec 02 = 100

Growth in legitimate services

0

10000

20000

30000

40000

50000

60000

02-Nov-02

09-Nov-02

16-Nov-02

23-Nov-02

30-Nov-02

07-Dec-02

14-Dec-02

21-Dec-02

28-Dec-02

04-Jan-03

11-Jan-03

18-Jan-03

25-Jan-03

01-Feb-03

08-Feb-03

15-Feb-03

22-Feb-03

Source: EMI research

Enabling legitimate services

• Understanding the consumer: preliminary results

• EMI’s digital download strategy• Additional sources of revenue growth

New revenue sources

• Internet physical sales• DVD music video• Internet radio• Ring tones, improving to ring tunes• Digital downloads

Further revenue sources identified

• DVD audio• Pre-loaded content• Additional wireless services

– IVR dedications– SMS– multi-media message services

• B2B services– music clip art– corporate communication– placed base services

• Other non-recording income

New business models

• Consumer subscription• “Traditional retail”• Advertising supported• Blended / hybrid

– bundled– marketing supported– revenue share– combinations with retail

Summary

• Traditional retail market under pressure• Wide range of attractive alternative services• We need to bridge the gap:

– making progress on piracy– understand consumer behaviour – aggressively moving forward to enable legitimate online

models – pursuing other revenue streams

• Challenges significant, but opportunity enormous