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Chapter 130 Online Music

In the CEO's office at MGM, the secretary gently placed a coffee cup on a coaster. Water droplets condensed on the rim of the cup slid slowly down the body of the cup, leaving a small damp patch on the dark coaster.

Ernst nodded his thanks, and the other person left the room. The heavy door closed with a dull thud, completely isolating the quiet inside from the noise of the outside world.

Robert Iger rose from his leather swivel chair and placed a stack of reports nearly five centimeters thick in front of Ernst.

"Here is the record industry research report you requested, but I'm curious, do you really intend to revive MGM's record business?"

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MGM originally had a record company under its umbrella, establishing its own record label, MGM Records, in 1946.

Initially, it primarily distributed soundtracks for MGM films, but later expanded its business to all music genres.

In the 1950s, with the rise of country music, this record company ushered in its golden age.

They signed Elvis's early producers, released his first stereo record, and even established a dedicated country music production center in Nashville.

In 1957, MGM's record division accounted for 17% of the group's total profits, a remarkable achievement among major Hollywood studios at the time.

However, the scripts of rise and fall are always similar, just like MGM movies.

After the Beatles arrived in the United States in 1962, the entire music industry underwent a dramatic change.

MGM's management remained obsessed with the glory days of big bands, missed the rock and roll wave, and even claimed that electric guitars were nothing more than fleeting noise.

As a result, MGM Records suffered losses for five consecutive years, had no funds to update its recording studio equipment, and many singers left the company.

Finally, in 1972, MGM Records was sold to PolyGram.

In 1986, MGM re-established MGM Music, acquiring the music licensing rights to MGM films, focusing on licensing soundtracks, and managing the music and music distribution rights for MGM films after 1986.

In reality, it mainly deals with music for film and television, and doesn't have any signed singers.

They don't even have a proper recording studio, and their revenue last year was only $280 million.

A week ago, Robert Iger suddenly received a call from Ernst in New York, who was collecting information on the current state of the record industry. It was clear that Ernst had become interested in the record industry.

"Indeed," Ernst had no reason to hide, "I intend to bring MGM into the industry and restart the record business."

By flipping through the documents in his hand, Ernst gained a general understanding of the record industry.

The 1990s can be described as a period of major mergers and acquisitions in the global record industry.

Universal Music acquired MAC, and Sony acquired Columbia's music division.

Warner expanded rapidly, acquiring the French record label Pro Records, the classical record label Ursto, the Spanish record label Del Rothschild, the Hungarian record label Magnus Records, the Swedish record label Stockholm Telegraph, the Brazilian record label Continental Records, and the Finnish record label Fazel Music.

Warner Music is now the undisputed number one record company in the world, holding one-sixth of the global record market share.

Besides these American labels, EMI in France, Bertelsmann Music in Germany, PolyGram in the UK, and others are all global record giants.

"I agree with MGM entering the record industry. The record market has been booming in recent years, and major record companies have made a fortune. If MGM were to develop a record business, it would be a good way to generate profits."

Making a fortune? They've made a killing!

The report in Ernst's hand was currently flipped to a chart showing the music growth rate over the past five years, with the business curves of the major labels showing an exponential increase.

When Time Warner acquired Continental Records in Brazil last year, it paid a premium of 280% of the company's net assets, demonstrating the enormous profit margin involved.

"However, I suggest entering this industry through acquisition. Although the technology of sealing records is simple, it is more cost-effective to acquire a small or medium-sized record company than to build a new factory and buy equipment. Once you buy it, you can start using it immediately."

record?

equipment?

Sealing and irrigation?

Ernst didn't enter this field to sell physical records.

Ernst wanted to disrupt the entire record industry, or rather, to control it.

Currently, the global annual record sales volume is around 22 billion copies, and the record business alone is a major industry with an annual output value of over 140 billion US dollars.

The entire record industry chain is divided into upstream, midstream, and downstream. Upstream, record companies and singers provide music content; midstream, music producers bear the responsibility of copyright maintenance; and downstream, retailers.

But Ernst wants to disrupt this industry chain and reduce it to two ends.

His promise at Goldman Sachs to create another Google was not just empty talk; his confidence was based on the music industry.

Google's latest project has been approved: music playback software, namely the online music store Google Tunes.

In the future, the upstream will consist of record companies and singers providing content, while the midstream and downstream will be integrated together.

Only Ernst knows how quickly digital music has risen; it gave traditional record companies almost no time to react before they were utterly defeated.

Historically, 1999 was the peak year for the record industry, with more than 23 billion records released throughout the year.

However, in the ten years that followed, record sales dropped to 500 million copies.

Why did the booming record industry suddenly decline? It all started in 1999 when the first music software was launched.

In 1999, a man named Sean Parker developed a software called Napster, which could not only convert music from CDs to MP3 audio format, but also allow users to download a huge amount of music for free.

This is like opening Pandora's box all at once. What did we use to listen to music before? CDs, cassettes, and the more advanced ones were record players, all of which were quite expensive.

But now? Popular music has suddenly become readily available and free.

The high computer penetration rate in Europe and America makes the promotion of internet music effortless, naturally causing a severe blow to the sales of traditional records.

However, Napster was later sued for piracy and eventually went bankrupt, but this led to a proliferation of pirated music websites around the world, which even became a business.

Some people specialize in helping others download songs from pirated music software, earning more in a month than many white-collar workers in companies.

As a capitalist, Ernst certainly didn't want rampant piracy.

Therefore, he needs to establish industry standards from the very beginning and cultivate users' willingness to pay.

However, Google Tunes' control over the midstream and downstream sectors is not enough; major record companies can certainly follow suit.

Therefore, Ernst wanted to establish his own record company, and his first priority was to cultivate singers, because music is always a sunrise industry.

Most importantly, it involves other people's music copyrights.

The concept of online music copyright does not yet exist, and major music companies are still indulging in the dream of the ever-increasing popularity of the traditional record model.

Everyone is fighting tooth and nail for market share in physical records, and nobody is looking up at the sky.

The CEO of Sony Columbia recently predicted that the physical record industry would grow by at least 20% within five years, and even 30% growth would not be surprising.

If MGM can seize the opportunity to acquire the online copyright libraries of major companies, it will have the confidence and capital to do so.

As for why it's MGM and not Google, the reason is simple: MGM has its own record label.

When online music exploded, MGM became the world's largest and only provider of online music copyrights.

As traditional record sales bring singers less and less income, while online copyright revenue increases.

If you were a singer, when choosing to switch companies, would you choose MGM Music, which has proven itself in online copyright and holds a monopoly, or would you choose another company?

When Ernst laid out his ideas, Robert Iger was stunned.

"You mean you want to acquire the online music rights to as many songs as possible?"

Robert Iger thought Ernst was crazy.

Although his description of online music was very appealing, Robert Iger himself was also very excited and felt that online music would definitely have a bright future.

They can acquire all music copyrights? Isn't that absurd?

"Even if, as you say, no major record companies are paying attention to online music copyrights right now, the sheer volume of music can't keep up with the low prices."

He picked up the calculator on the table, the sound of the keys pressing rapidly and heavily. "Do you know how much this will cost? For example, a 20-year copyright term would cost at least 10 billion US dollars. In other words, MGM would have to pay them no less than 500 million US dollars a year."

"At least $5 million in royalties every year," Robert Iger's voice trembled with disbelief. "MGM's current cash flow simply can't sustain it. If the market doesn't react in time, we'll be dragged into bankruptcy."

How much is MGM's market value anyway? A project worth tens of billions of dollars at once? Robert Iger felt that Ernst was being a bit presumptuous.

Moreover, traditional record tapes and CDs cannot be sold quickly, and the number of internet users worldwide has not yet reached 100 million.

If we calculate based on 100 million internet users using online music, each person would have to pay at least $5 for MGM to break even. But that's not how it works. 100 million internet users doesn't mean there are 100 million users using online music.

Google will definitely take a cut from the sale of MGM's online music copyrights.

In other words, the online music market is worth no more than one billion US dollars a year, making it difficult for MGM Records to make a profit.

Robert Iger saw a promising future, but in reality, it was a losing business.

Ernst tossed the documents in his hand onto the table, smiled confidently, and said, "Trust me, Michael will not only not lose money, but will actually make a fortune."

"What about the funding?" Robert Iger asked.

This isn't a matter of belief, it's a matter of funding.

Ernst had planned for this all along. It was impossible for Citigroup to acquire MGM's shares through Marvel, but financing was another matter entirely.