Booz-Allen Report Anticipates Major Changes And Opportunities for the Music Industry.

Business & Entertainment Editors

NEW YORK--(BUSINESS WIRE)--June 20, 2001

Report says major music labels can profit from adopting

film industry's "windowing" strategy

New business models will emerge as risks and rewards are

more broadly shared with digital intermediaries

The advent of digital music, once thought to be the death knell for the record labels, will actually propel them to higher profits in the future - but only if they adopt strategies pioneered in the film industry, according to a new report by Booz-Allen & Hamilton.

Major record labels can remain the central and dominant force in the music industry, the report notes, by embracing Hollywood's distribution strategy known as "windowing" - releasing theatrical films to video, pay-per-view, pay cable and broadcast TV during carefully sequenced time periods. This approach allows films to reach an expanded audience while limiting cannibalization on the initial release. In the music industry, the combination of sequenced releases and digital technologies will create new revenue streams, increase profits and position the music industry for the long-term growth experienced by the film studios.

In the wake of MP3 compression technology and Napster's file sharing software, many predicted the Internet and digital music would lead to the demise of record labels. However, Booz-Allen believes that the major labels will continue to dominate the music industry. As digital music becomes a reality, the record labels' artist and retailer relationships, their marketing and promotional prowess and their music libraries will maintain their position as the drivers of this industry.

The Booz-Allen report, Windows Into the Future: How Lessons from Hollywood Will Shape the Music Industry, suggests that a reconfigured label model will emerge from the current shifts in the digital music marketplace. Labels will reduce their role in physical distribution and concentrate on the new digital channels. At the same time, new intermediaries such as AOL and pressplay will emerge as key players in the music industry, acting as the primary point of contact for consumers.

"New technology platforms, such as home video and pay television shook up the film business, but in the end, they created a much larger pie," said Ross Honey, a Principal in Booz-Allen's industry-leading Media & Entertainment Practice. "The film studios fought the VCR tooth and nail before home video became more than half their business. We expect the same sort of evolution to occur in music. New distribution channels, innovative pricing structures and better information about consumer preferences will create a larger audience and help the entire industry to grow."

A windowing distribution strategy for music would start at the same point it does today, with a CD release, which would appeal to avid fans and command a premium retail price. After an initial burst of sales, the first online window would open, allowing digital music fans to download certain singles or the entire album for a fee. The next window would include subscription services, offering access to a selection of music for a monthly fee. The last step would include record clubs, extending sales to price-conscious consumers.

"The new intermediaries are going to give music fans a range of attractive options for listening to and buying digital music," noted Booz-Allen Vice President Richard Gay. "A more complex business model will emerge, as intermediaries add significant value in packaging, promoting and distributing a wide array of music services. As these intermediaries grow, it is likely they will enter into co-financing and output deals with the labels, spreading the risks and rewards. In this environment, intermediaries will claim significantly more of digital revenues than the typical 25 percent retailers currently retain from physical sales."

The Booz-Allen report noted other potential benefits to record labels from the digital revolution:

-- Talent development. The labels' talent hunters (the artist and repertoire,
or A&R, staff) may find promising artists on the Internet, reducing the need to
gamble on unknown acts. As a result, A&R could work with fewer, but stronger
acts overall, and focus on nurturing and retaining those artists.

-- Customer understanding. Labels also will have access to better customer data
from online channels. Today, the labels know relatively little about their
customers -- who is buying what music, in what format, where, and what are the
most effective marketing vehicles to reach these customers. This customer data
will ultimately be a key battleground when labels and intermediaries negotiate
content licenses and create new services.

"Just as the music industry can learn from the revolution in film distribution, these broad lessons will apply to other media segments, such as book publishing, where content digitization heralds a significant change in accepted business models," concluded Mr. Honey.

About Booz-Allen & Hamilton

Founded in 1914, Booz-Allen & Hamilton pioneered the business of management consulting. Today, it is one of the world's leading international management and technology consulting firms, with more than 10,000 employees in over 100 offices worldwide and sales in excess of $2 billion. Booz-Allen & Hamilton corporate headquarters are located in McLean, Virginia.

Booz-Allen's Media and Entertainment Practice has worked alongside senior management of many of the most successful media and entertainment companies in developing strategies and helping implement change. As the leading management consulting firm to the media and entertainment industry, Booz-Allen has been at the forefront of the digital music revolution, helping both established companies and new entrants create and capture value from digital distribution.

Consistent with its position as a business thought leader, Booz-Allen sponsors strategy+business, a quarterly journal containing the best ideas in business. Visit the Booz-Allen Web site at www.boozallen.com or the strategy+business Web site at www.strategy-business.com.

Full copies of the report are available from Booz-Allen & Hamilton. Please contact Reed Martin at 212-551-6802.