INTRODUCTION TO THE ONLINE MUSIC MARKET

June 11th, 2003

16th Bled Electronic Commerce ConferenceJune 9-11, 2003

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23,6%

17,4%

10,9% 10,1%

7,4%

Fnac Carrefour Auchan Virgin Leclerc

Source: Xerfi 2001, Capital (mars 2003)

- French Retailers off-line Music market share - 2002

ABOUT FNAC

The Clic & Mortar Leader on the French Music market with a 23,6% off-line shareThe Clic & Mortar Leader on the French Music market with a 23,6% off-line share

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INSIGHTS

This presentation is a digest of the latest short and middle term foresights we share about the On-Line Music Market *.

Looking backwards a few years ago about the « Promise Land » all actors are now very careful whenever talking about Eldorados to come and « possible » break-evens.

Indeed, the « Old Economy » rules are well-alive and shareholders are more than ever requiring Business Models with profitable customers and low costs as a premium source of value creation.

Existing or Upcoming actors are all preparing for the next years’ fights and no unique model has emerged yet.

* May, 2003

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Summary

1 – Internet & Music, consumer behavior

2 – Typology of the Online Music Market

3 – Consumer uptake

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37%

44%

62%

68%

Use FinancialServices

Download Music

Buy

ExchangePictures

– Internet usage in Europe – (% of Internet users having done it at least once in 2002)

Source: Ipsos Reid, 2003, 6 600 individuals in 12 countries

Internet & Music, consumer behavior - Europe

44% of European Internet users download Music44% of European Internet users download Music

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7%

7%

37%

52%

71%

Transfer toportable devices

Send to a friend

Burn a CD

Keep on PC only

Listen on PC

Source: Forrester, sept 2002

- Usage of a downloaded Music track -

Internet & Music, consumer behavior - Europe

37% of music downloaders like to burn it on CDs37% of music downloaders like to burn it on CDs

7Source: Forrester January 2003

Internet & Music, consumer behavior - Europe

Connected but don't download Music

33%

Not connected54%

Download Music13%

- European behavior towards Music Downloading -

1 European out of 7downloads Music…1 European out of 7downloads Music…

- From 15% to 50% of European Music “downloaders” buy less CDs -

Heavy “downloader”

…which seems to impacttheir purchase of physical CDs

…which seems to impacttheir purchase of physical CDs

0% 20% 40% 60% 80% 100%

Heavy CD consumer

Light CD consumer

Occasional CDconsumer

Heavy CD consumer

Light CD consumer

Occasional CDbuyer

Buy more CDs Have no impact Buy less CDs

Light “downloader”

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Number of Internet users downloading Music 35 millions

Average number of tracks downloaded per user and per month 6

Number of tracks downloaded in Europe in 2002 2 billions

Internet & Music, consumer behavior - Europe

Music & Internet : What do Europeans do ?Music & Internet : What do Europeans do ?

Source: Forrester Research - 2002

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Summary

1 – Internet & Music, consumer behavior

2 – Structure of the Online Music Market

3 – Consumer uptake

10

12

,0

8,3

5,7

3,0

1,6

1,6

3,0

4,6

7,8

9,4

0,6 0,7 1,0

1,82

,3

4,9

7,2

1,1

0,8

0,5

3,1

2,9

1,7

3,8

0,8

T1 2001 T2 2001 T3 2001 T4 2001 T1 2002 T2 2002 T3 2002

Napster Kazaa Audiogalaxy Morpheus

- Number of monthly American users of P2P services in the US (millions) -

Source: ComScore, nov 2002

Structure of the Online Music Market

Kazaa leads the P2P market with almost 10 million users in the US (2002)Kazaa leads the P2P market with almost 10 million users in the US (2002)

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Record labels ( MusicNet, E-Compil,…)

DSPs (OD2,…)

Pure Players (Amazon) Clic & Mortar Retailers (Fnac, Virgin Ent., Tower,…)

Hardware manufacturers (Apple,…)

Software companies (Roxio, …)

Specialists and portals (Vitaminic, MSN,…)

ISPs (Tiscali, Wanadoo,…)

Structure of the Online Music Market

Typology of online Music Actors : everybody’s trying to enter / lead the gameTypology of online Music Actors : everybody’s trying to enter / lead the game

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Rhapsody the online music service from SF Start-up Listen.com has been bought by RealNetworks for 36 millions $ and starts selling tracks for 79 cents

Roxio, the CD burning software specialist, has acquired Pressplay for 39.5 millions $ and plans to rebrand service thru NAPSTER

Musicnet has raised an additional 10 $m from founders

Apple has launched iTunes Music Store and sold 2 millions tracks during the first 2 weeks

A consortium of seven US retailers including Best Buy, Tower Records and Virgin have created Echo, a digital music distribution platform

Structure of the Online Music Market

* Updated May 2003

Legal online Music – An American driven market *Legal online Music – An American driven market *

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A complex legal environment, high VAT rate and reluctance from Record Labels to widely open their catalogue result in a very slow take-off .

In April, EMI has launched a major online program and cleared over 140,000 tracks for digital distribution

OD2 has established itself as the leading independent European DSP, distributing digital music through a wide range of portals, ISPs and commerce sites including Fnac.com

Universal Music France testes online music distribution via E-Compil, its fully owned subsidiary and distributes over 30,000 tracks each month

Structure of the Online Music Market

* Updated May 2003

Legal online Music – The European market *Legal online Music – The European market *

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Structure of the Online Music Market

Combined revenue from pay-per-track Downloading and

Subscriptions should raise from 65 m$ in

2003 to 774 m$ in 2007

By 2007, legitimate downloading should largely replace the revenue lost from

Piracy(10% of the overall illegal

market)

The Global Digital Download Market 2003-2007 – The Enders Analysis forecasts *The Global Digital Download Market 2003-2007 – The Enders Analysis forecasts *

* May, 2003

89198

396

624

3060

90

120

150474

117

35

702742

628

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007

Legal Pay per track Revenue (m$) Subscription Sales (m$) Lost Revenue from Piracy (m$)

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Summary

1 – Internet & Music, consumer behavior

2 – Typology of the Online Music Market

3 – Factors of market development and consumer uptake

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Record Labels might choose to intensify the licensing of their catalogues to third parties rather than pursue their efforts to distribute directly their content (global cost estimate : $ 2 billions)

Hardware manufacturers and software companies start investing heavily (Apple, Roxio, Microsoft?)

Traditional Retailers and especially Clic & Mortars such as Fnac will leverage their Music distribution expertise to package new digital content for their existing customers

ISPs might push the subscription model to raise their ARPU

DSPs will help other actors with turnkey solutions

Factors of market development and consumer uptake

An endless stream of creativity : new plateforms/multiple actorsAn endless stream of creativity : new plateforms/multiple actors

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Factors of market development and consumer uptake

Digital Music will have to be more affordable (less than 1€ / 0,5 € per track ?)

Easy and fun to buy (micro-payment,…) and download…

… in a secured transactional environment

Easy to transfer to multiple devices

Time to market Pricing & appropriate formats….

Time to market Pricing & appropriate formats….

…combined with the launching of new Portable Digital Devices

…combined with the launching of new Portable Digital Devices

High and cheap storage capacity

Compatibility with most formats

Multi-functional devices (Mobile phones, PDAs, car stereos…)

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More Pre-releases (the Madonna experience)Enable to start making revenue before a record hits the stores, also great marketing tool

Original Bundles with hardware or physical CDs (such as digital Bonus track)

Unreleased tracks and re-editions sold via digital downloads exclusivity

…

Factors of market development and consumer uptake

Attractive marketing offers from Editors and RetailersAttractive marketing offers from Editors and Retailers

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Lawsuits against P2P services (tough to implement, see recent US court ruling in favor of Grokster and Morpheus because of the fact that they don’t operate centralized services)

ISPs vs file sharers themselves (possible breach of customers’ privacy rights)

SpoofingIntensification of P2P networks pollution with poor quality/trapped tracks

EducationMaking piracy less attractive as an option by creative negative association with the activity combined with a time-to-market pricing

Factors of market development and consumer uptake

Fight against illegal services, consumer educationFight against illegal services, consumer education

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CONCLUSION

A new Eldorado, when….A new Eldorado, when….

• Majors widely open their catalogues to any DSP

• Pricing is adapted to mass digital diffusion

• Piracy containment is efficient

• Telcoms harvest a tax on MP3

• Broadband Access becomes really cheap and then widely adopted

• Powerful and cheap Mobile Players are massively adopted by consumers

• Copyright matters are solved (eg private copy in France)

• E-retailers can bundle digital content and On-demand CD/DVD burning

• Taxes are lowered (VAT)

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THANK YOU FOR YOUR ATTENTION