Challenges & Opportunities in the Traditional Market

1. Margins= 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

3. 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

4. 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

5. 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

6. 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

7. The Transforming Value Chain Marketing & Promotion A&R (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

8. Convergence of: Point of Demand Creation Point of Information Point of Sale • Radio play • Videos • TV ads • Written reviews • Store clerks • Talk shows • Retail counter • Mail order New Value Chain is Uncertain Promotion / Marketing / Retail Consumer A&R Pipeline Clearing-house Player / Storage A&R

9. New Players are Positioning for This Future Promotion / Marketing / Retail Consumer A&R Pipeline Clearing-house Player / Storage A&R • Nigel • Microsoft • Liquid Audio • Real Networks • MEI • Sony • Creative Labs • UBL • MP3.com • Riffage • AT&T • IBM • NTT • Deutsche Telekom • NatWest • Reciprocal • Credit Card Cos. • AOL • Yahoo • CDNow • GetMusic • eMusic • NetRadio • Amazon.com • RioPort

10. Yesterday’s 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”

11. Internet Penetration 80 U.S. Broadband Penetration (MM Households) • 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 70 60 50 40 30 20 10 1998 00 02 04 06 2008

12. New Channels and Offerings TV (Digital Set-tops) PC (Cable/ DSL Modems) • e-albums • e-singles • e-videos • DVD-A • Subscriptions • Rent-to-own • Timed-out content • Play on demand • Online remixing • Etc! Super-Distribution (e-mail) Locked Content on discs Online Retail & Websites Digital Radio (with buy button) Kiosks Radio Promotion Wireless Devices Etc! Today Channels Tomorrow Channels Products Physical Retail Consumer

13. 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 A&R 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

14. 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

15. One Vision of the Future Today “Tomorrow” 2005 • Focus on e-commerce • Translation of offline business models • Comprehensive business transformation • Deconstruction of current models • World-class skills for a new e-world • Disintermediation or death for slow movers

16. 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

17. 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

18. 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

19. 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

20. Closing Thought “Think big; start simply; grow fast”