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The Evolution Of The Music Industry  The Effect Of Technology And Law On Strategic Management And Sustainability  Kilmer 2010
 

The Evolution Of The Music Industry The Effect Of Technology And Law On Strategic Management And Sustainability Kilmer 2010

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    The Evolution Of The Music Industry  The Effect Of Technology And Law On Strategic Management And Sustainability  Kilmer 2010 The Evolution Of The Music Industry The Effect Of Technology And Law On Strategic Management And Sustainability Kilmer 2010 Document Transcript

    • Table of Contents Subject Map…………………………………………………………………………...……………6 Introduction…………………………………………………………………………..………….....7 The Industry Today……………………………………………………...…………7 Incremental Innovations from Within the Industry………………………… ..……….....9 Disruptive Innovations from Outside the Industry……………………… …..………...13 Industry Resistance to Outside Innovation……………………………………….………….……14 Recording Industry Association of America…………………………………….…14 Digital Rights Management (DRM)……………………………………..………....17 ISP‟s and Legislation…………………………………………………………...….18 Consumer Adoption of Innovation ...............................................................................19 Industry Adoption/Legitimization of Disruptive Innovation.......................................20 Mobile Music…………………………………………………………………...…21 Future of the Music Industry…………………………………………………………….24 Social Media…………………………….………………………………………....24 Case Study: Apple Inc…………………………………………………………………….26 [Industry In Action] “The Future of Cloud Computing and Music.”……………....27 Grooveshark Case Study………………………………………………………………….28 Analysis……………………………………………………………………………………30 Conclusion Strategic Direction…………………………………………………………….……..30 2
    • List of Figures RIAA: CD Sales (1999- 2008)…………………………………..…………………………………13 IBIS World: Revenue of US Recording Industry…………………..………………………………14 Quote: Yves Riesel,President, Abeille Musique France ……………...………………………….…14 Quote: John Kennedy, Chairman and Chief Executive of IFPI………...……………………….…14 Quote: Chris Ancliff, General Counsel, EMI………………………………..………………….…14 Quote: Martin Mills, Chairman, Beggars Group……………………………..………………….…14 Quote: Simon Renshaw, LA-based artist manager………………………………...…………….…14 Quote: Harris Research……………………………………………………………...………….…15 RIAA Initiated and sponsored educational campaigns………………………………………….…15 Figure 2: RIAA US Lobbying Expenses……………………………………………….………..…16 RIAA US federal Political contributions (1990-2004) …………………………………………….16 Quote: Bono, singer songwriter, in New York Times, January 2010…………………………….....18 Services that US Online Households Use to Download Music from the Internet, 2003-2005 (% of respondents) …………………………………………………………………………………...…19 Online Content for Which Internet Users in North America Would Pay, Fall 2009 (% of Respondents)……………………………………………………………………………………...19 US Recorded Music Spending, by Segment, 2008-2013 (billions and % of total)………………......19 US Music Sales, by Format, 2007, 2008 & First half of 2009 (% of total)……………………….....19 Worldwide Recorded Music Spending, 2006-2011 (billions)…………………………………..........19 Quote: Thomas Hesse, President, Global Digital Business, Sony Music Entertainment…………...20 Quote: Douglas Merill, President, Digital Business, EMI Music…………………………………...20 Quote: Rob Wells, Senior Vice President, Digital Universal Music Group International…………..20 Quote: Greg Turner, Creative Licensing Manager, Film & Computer Games, Universal Music UK.......................................................................................................................................................................20 Quote: Eric Daugn, Senior Vice President, Commercial Strategy, Warner Music International EMEA.................................................................................................................................................................20 Quote: Ron Were, President, EMI Music Services……………………………………………........2- US Music Industry Revenues, by Format, 2010 (% of market share) …………………………...…21 3
    • Digital Music Revenues (2008). ……………………………………………………………………………………………………21 Quote: Tero Ojanpera, Head of Entertainment, Nokia…………………………………………………………………………………………..….21 Quote: Eva Berneke, Senior Executive Vice President & Chief Strategy Officer, TDC……………21 Quote: Edgar Bronfman, Chairman & Chief Executive Officer, Warner Music Group…………....21 US Mobile Music Revenues, by Type, 2005-2008 (millions) ………………………………………22 Worldwide Music Industry Revenues, by Segment, 2005-2010 (millions) …………………………22 Mobile Music Spending Worldwide, 2006-2011 (millions) ……………………………………...…22 Subjects Most Blogged About by Bloggers in Select Regions, April-May 2009 (% of respondents)..24 Online and Mobile Activities of Internet Users Worldwide, Q3 2008 (A% of respondents)…….....24 Topics of Their Blogs According to Blog Writers Worldwide, March 2009 (% of respondents)…...25 Prodcutcs/Services Purchased Online by US Social Network users, by Network, May 2009 (% of .respondents in each group) ……………………………………………………………………………………………………25 Quantacast: Daily Users of Grooveshark 09/10/09-03/08/10……………………………………29 4
    • Acknowledgements I would like to thank my committee for all their support and guidance throughout the process of composing this thesis. A special thanks to my advisors David Cavazos and David Cottrell as well as my readers, Daphyne Thomas and Cynthia Martin. 5
    • Introduction Incremental Innovations from Within the Industry Disruptive Innovation from Outside the Industry Industry Resistance to Innovation Consumer Adoption of Innovation Industry Adoption of New Innovation Changing Business Model 6
    • Introduction Within the last twenty years, the music industry has experienced a world of change. Revolutionary technology has evolved almost every aspect of the industry, from the artist to the label to the publisher. Like other media industries, music has been forced to roll with these changes, which has resulted in a much different experience for the industry and the consumer. This paper will address specifically the changes in technology and law, along with inspecting two major innovators, in order to establish trends and implications of a viable business model in the future of the music industry. The industry has shifted from on in which the supplier groups hold all the power to an industry in which the buyer groups hold the majority of the power. The Industry Today According to Michael Porter, there are five forces which may help to determine the attractiveness of an industry, from a strategic perspective. These forces include the threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products or services, and rivalry among participants (Porter, 1986). Within the industry the players are defined as follows. New entrants may consist of any entity on the content creating, distributing, or promotional aspect of the industry. Suppliers consist of any entity involved in creating music, distributing music, promoting music, playing music (electronics), or selling music. Buyers consist of any entity involved in commerce with suppliers at any point along the value chain. For the purposes of this paper buyers will mostly be framed as end user consumers. First, the threat of new entrants for almost all of the different segments is fairly high as a result of low barriers to entry. The internet has reduced barriers to entry by lowering the capital 7
    • intensity required to successfully operate, as well as reducing the advantages of economies of scale for physical items through changing directly to digital copies of music. Scaling involved with physical production of units is no longer as applicable because digital copies are available that level the playing field. Thereafter, the bargaining power of customers has gone from low to high. Buyers today can get their music from a wide variety of different suppliers, and can change from supplier to supplier without any switching costs. Even though the industry has become much more consolidated than it used to be, buyers‟ purchases represent all of a supplier‟s music related revenues. Because there is a wide variety of music choices, and easy accessibility, major labels no longer hold the power they once did. Power in the industry has shifted from the supplier to the consumer. Next, the threat of substitute products or services is very high. Music buyers not only can switch from supplier to supplier, but their attention for entertainment can be taken by other media such as movies, printed materials, etc. Because other media have very large resource bases, their product offerings demand consideration when discussing substitutes to music. Most importantly, suppliers have gone from very powerful to relatively low power as a result of many smaller suppliers gaining more traction through internet distribution. While there are just a few dominant suppliers (major labels), their product offerings are becoming less and less differentiated as independent labels are able to deliver comparable product and compete with distribution by means of the internet. Other supplier groups such as artists also have lower power as a result of market saturation. Suppliers of physical listening devices also have lower power because there are so many options for listening. Finally, within the entire industry, rivalry among participants is very high. There are many competitors of equal size and power which leads to competing for the same market share. Beyond 8
    • that, the industry is an whirlwind of many hungry competitors trying to figure out how to monetize music once again. Distribution companies pop up every day, stealing business functions away from existing labels, and technology is making it easier for artists to integrate forward. As a result of this industry consolidation, the competitive space in the market is very intense. Overall, the main strategic takeaways are that power has shifted from the supplier to the buyer, and that the playing field for distribution channels is being leveled as more end users look to the internet for their point of purchase. As a result, the industry is becoming increasingly more fragmented, resulting in less market space for each competitor. These implications must be considered when addressing a solution for the future. Incremental Innovations from Within the Industry Up until the 90s the development and proliferation of music technology and law was under the influence of the industry itself. Innovation was developed and introduced by key players, allowing for a period of control and stability, regulated from within the industry. From 1857 to 1990, the industry was calculated and predictable; thereafter things began to change. The earliest known sound recording device dates back to 1857 when Leon Scott invented the phonoautograph which transcribed the fluctuations of air pressure on a cylinder with a stylus. However, the phonoautograph was not able to replay sound (Rosen, 2008). The same year Thomas Edison invented the first phonograph, which did emit sound, using tin foil cylinders on which the sound was recorded by making indentations on tin. By 1886, Edison developed a wax coated cylinder for the phonograph which enabled the reuse of cylinders for new recordings once they were worn out (Read, 1959). In the meantime Emile Berliner had invented the Gramophone which functioned similarly to the phonograph. By 1887 Berliner developed the first vinyl record which 9
    • made mass production of the original sound source possible (Congress, 2002). From the 1890s through the 1900s vinyl discs and cylinders fought hard against each other to win the market share; by 1925 the cylinder was completely phased out (Howe, 1995). Up until around the mid 1920s all sound was recorded acoustically; the sound was collected by a horn which vibrated the cutting stylus (Read, 1952). In 1926 the Victor company released the Orthophonic Victrola which was designed to play music recorded by electronic recording. Electronic recording used microphones to capture the sound frequencies, which then used their electronic signals to drive the cutting stylus. This was the beginning of recording as we know it today. Around this time the major record distributers/early record labels were Edison, Victor, and Columbia (Millard, 1955). In 1935 magnetic tape began to be used for sound recordings, increasing the sound fidelity that studios could reproduce (Engel, 2006). This technology was developed in pair with stereo recordings. By 1963 Philips introduced the first Musicassette. Car manufacturers popularized this technology by standardizing 8 track players within their vehicles (Morton, 2004). By ‟77 cassettes began to dominate the market share, leaving vinyl LP‟s in the dust (Duke University, 2000). [Law in Action] By this time Congress had passed the Copyright Act of 1976 which stated: “ (a) Anyone who violates any of the exclusive rights of the copyright owner as provided by sections 106 through 122 or of the author as provided in section 106A(a), or who imports copies or *phonorecords into the United States in violation of section 602, is an infringer of the copyright or right of the author, as the case may be.” [*A phonorecord is defined as "[M]aterial object[ ] in which sounds are fixed and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.] The rights provided to artists included: 1) The right to reproduce the song and make copies 2) The right to distribute copies 3) The right to perform the song in public 4) The right to make derivative works 5) The right to display musical works These rights are afforded to the artist with an original work once they fix their work in a tangible medium (ie. a cd, music score etc.) but are substantially easier to defend in court when the work has been registered with the copyright 10
    • office. Works that were created before 1976 are protected for a total of 75 years, if the copyright is renewed in it’s 28th year. Without this renewal an additional 47 years are not secured (US Copyright Department, 2010). This copyright act helped keep power with the content creator and or their label in order to make sure incentives were there to create content such that these content creators could keep control of their creations and earn profit from their work. Just two years later Sony introduced the Walkman- the first hand held music player known to man (Thomas, 2006). In 1983 Sony and Phillips joined forces to release the Compact Disk (CD) and player into the United States (Sony Group, 2010). The CD rapidly became the industry standard, out selling LP records by 1988 (University of Minnesota, 2008). In 1989 Sony released the Digital Audio Tape (DAT) which allowed variable quality recording, above or below a CD‟s sampling rate (Sony Group, 2010). The DAT became very popular among the professional recording industry throughout the 90s. In „92 Phillips released the Digital Compact Cassette in response to the DAT. The DCC was compatible with regular cassette decks (Phillips , 1997). Sony quickly responded with the release of the Mini Disk (MD) which was a standalone format and allowed for high quality recordings with the convenience of a tape deck (Sony Group, 2010). [Law in Action] In 1992 the Audio Home Recording Act was passed which forced importers and manufactures of DAT blank tapes and recorders to pay royalties to the Licensing Division of the Copyright Office which are then distributed by the Copyright Arbitration Loyalty Panel to copyright holders including record companies, featured artists, songwriters, music publishers, musicians, and background vocalists. The idea was that copyright infringement was sure to happen as a result of these recordable tapes, therefore to put a blanket percentage royalty on the manufacture of DAT would help ease that hardship put on copyright holders by the DAT. (US Copyright Office, 2010) Among these new releases, the CD became the most popular and widely used (Sony Group, 2010). As CD‟s became cheaper, they became the dominating force in the market for all record labels. In 1990 the CD-Recordable (CD-R) was introduced to the consumer market- presenting the first opportunity for people to pirate music without losing much quality (O'Malley, 1998). By that 11
    • time 28% of all US households had CD‟s, and 288 million CD‟s sold in the US in 1990 (Amoah, 2005). [Law in Action] In 1995 Congress passed the Digital Performance Rights in Sound Recording Act which amended the Copyright Act to establish that artists that perform on digital transmissions must get performance royalties for doing so. (US Copyright Office, 2010) The purpose of this act was to account for the internet when considering copyright laws. In reference to CD-R‟s, its quite relevant to mention how computers began to play a role in consumer behavior. Although personal computers were introduced to the consumer market by 1975, people didn‟t use their computers to listen to music until the early 1990‟s. Ad Lib and Creative Labs were some of the first to release soundcards, their initial models released in 1991 (Dixon, 2010). At the same time the internet, which had been in development since the 1970s, began to be commercialized and available to the general public (Computer History Museum, 2006). Due to the internet and the introduction of the compression format MPEG, MP3‟s began growing in popularity. On November 26, 1996 the MPEG-3, otherwise known as the MP3 was released (Belis, 2010). Along with the advent of the MP3 format, came the MP3 player. The first MP3 player released came in 1998, the “MPman” by Elger labs. It cost $250, and held about 8 songs, a far cry from the modern player. By 2000 Creative Lab debuted a 6 GB MP3 player, and in 2001 came the dominating force of all MP3 players- Apple‟s IPOD (Menta, 2004). From there the market took off and there‟s been no looking back since. [Law in Action] On October 27th 1998 the Copyright Term Extension Act was passed as an amendment to the Copyright Act of 1976 which allowed for a total of 95 years of protection; 28 years initially, and an additional 67 years with a renewal. The amendment also established that all works created after 1976 belong to the author for their whole lifetime plus 70 years. If the work was written by two or more persons than the rights last 70 years past the last surviving author’s lifetime. For commissioned works, that are specifically stated as “work for hire” the work is only protected 95 years from its publication, or 120 years from creation, whichever is shorter. Once a copyright expires, the work is considered “public domain” and fair game for anyone to use (US Copyright Office, 2010). 12
    • Disruptive Innovations from Outside the Industry With the advent of Compact Discs, Personal Computers, the Internet, and MP3s, came the birth of Peer to Peer (P2P) file sharing, the beginning of the end of traditional record sales. In 1999 Napster was released- the poster child of P2P (Bloomberg L.P., 2009). Suddenly the music market changed from one in which the only way to get an album was at the store or borrow it from a friend, to one where you could “share” music with the entire world wide web. Napster grew in leaps and bounds, and by July 2000 the Recording Industry Association of America (RIAA) successfully shut down the service through court order (Riedel, 2006). While the RIAA was able to effectively shutdown Napster they have not been able to stop the flood of torrent based programs which facilitate P2P file sharing. Torrent is much harder to pin point and trace because the downloader gathers parts of the file from many different “seeds” (people that are sharing the file), as opposed to having one centralized server. Since the conception of P2P the sale of physical CD‟s has been steadily declining every year. [DATA PROVIDED BY RIAA] *units in millions Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 CD 938.9 942.5 881.9 803.3 746 767 705.4 619.7 511.1 384.7 Units Revenu 12,816. 13,214. 12,909. 12,044. 11,232. 11446 10,520. 9,372. 7,452. 5,471. e 30 50 40 10 90 .5 20 60 30 30 13
    • Figure 1 IBIS REPORT: Revenue of US Recording Industry Industry Resistance to Outside Innovation These quotes indicate a general consensus; the industry feels that a fight against piracy is the noble fight- protecting what is rightfully theirs. This effort has been disseminated through the RIAA, DRM, and ISP legislation efforts. Recording Industry Association of America The Recording Industry Association of America, is a trade group, that effectively represents the entire recorded music industry, with members including all the major record labels, as well as a 14
    • very large number of independents (RIAA, 2010). Therefore it can be ascertained that their actions represent the interests of the entire industry at large. When these disruptive technologies became prevalent enough to affect consumer trends, the RIAA immediately jumped in to intervene. They began by launching educational initiatives to attempt to convince target segments of the public that illegal file sharing is unequivocally wrong, and damaging to artists. 15
    • Aside from educational initiatives they launched themselves, they also continued to fund special interest groups in order to get protective legislation in motion. 16
    • Around 2004, the RIAA recognized their educational and legislative efforts were not effective, and discontinued this strategy. As this resistance was short lived, as was another form of industry resistance, digital rights management. [Law in Action] On October 28th 1998 the Digital Millennium Copyright Act was passed which criminalizes software, devices, and any other technology that is used specifically to get around DRM. This act also increased the penalties for copyright infringement on the internet (US Copyright Office, 2010). Digital Rights Management (DRM) In 2002, record labels like Arista, BMG, & RCA began using DRM on CD‟s for the first time. DRM enables the distributor to put a set of rules on the file as to how the end user can copy, play, and otherwise redistribute the original file. This would solve the problems associated with music piracy if online retailers were the only means to music, and there weren‟t counter technologies that allow consumers to sidestep DRM as only a minor inconvenience, an extra step between them and a fully maniputable music file (Electronic Frontier Foundation, 2010). Seemingly, Apple and the major labels recognized this and on January 6 2009, discontinued DRM altogether (Apple Inc, 2009). With this discontinuation, they introduced a three tier price system, that allows for Apple and record companies to capitalize on consumer surplus demand, and potentially make more money than they would otherwise (Sadun, 2009). Because there are lower prices to match lower demand and higher prices to match higher demand, more users are likely to purchase music, as the price more closely matches demand—especially on the lower priced songs. 17
    • ISP’s and Legislation The Music Industry and other media segments have been trying to encourage Internet Service Providers to help stop media piracy on their networks. So far there has been little success with US comprehensive legislation demanding such an approach. This is not the case for all countries though. “A number of governments however, including France, UK, New Zealand, South Korea and Taiwan, have enacted legislation to require such cooperation or are in the process of doing so.” (IFPI. Digital Music Report. 2010). Most countries currently use a “graduated response system” which basically means that copyright infringers get warnings, with graduated consequences. Making the consequences proportionate to the actions seems to be the most reasonable and effective way to help slow media piracy (International Federation of the Phonographic Industry, 2010). 18
    • Consumer Adoption of Innovation With the internet leading to an ever expansive means of communication and distribution platforms, there are more options for artists and consumers than ever before. Sites like: Youtube, Myspace, Facebook, Grooveshark, and many others, have led to a revolution among artists known as Do it Yourself (DIY) (Enyclopedia Britannica, 2010). Not only are consumers able to gain free exposure to a vast quantity of music, it also enables artists to get their music out there without the aid of major record labels. This has taken money out of the pockets of major labels on both sides, 19
    • the consumer and the artist. Consumers are able to listen to music they want for free, with the click of a button, whether its streaming music, or downloading it illegally. This is beginning to diminish a large venue of power for major record labels; the radio. Independent labels have been on the rise, because they have the power of the internet, which allows for copious amounts of free or cheap marketing to target audiences. Overall these viral means have been beneficial to the consumer, and up and coming artist for purposes of exposure. For the major label and the well established artist, this progress has not been all that beneficial as it has reduced their value proposition, thereby reducing their sales. Industry Adoption/Legitimization of Disruptive Innovation 20
    • These figures indicate a change in attitude among power players in the industry and indicate a shift in strategy as well. The new industry is looking to discover new business models that capture all the consumers otherwise missed by the current model. Some of these strategies include product placement and bundling. As shown, the internet is beginning to make a large segment of revenues for the industry. While overall sales are on the decline, digital downloads are on the rise. A sucessful application of these ideas has been embodied in the mobile phone industry. From about the late 90s to around 2004, the industry as a whole was still in denial, seeming to think that they could simply scare people with the law back into their traditional means of sales. As the light dawned on major labels and associated distributors that the glory days were never coming back, real changes were made in the system. Labels began to retail music online through various distributors, as well as license it through a multitude of subscription models, and focus on product placement in games, commercials, and movies in order to make up for lost revenues. As it stands today, the biggest opportunity for music sales is through bundling within preexisting services. So far the mobile phone industry has been the most successful at this model. Mobile Music 21
    • Between the internet, mp3 player, and mobile phone has evolved mobile music. Although the cellphone was introduced in the late 80s, computing power and high speed wireless networks were not up to par for consumer consumption of music until around the last decade. Since then, mobile music sales have taken off- providing another venue for music sales. Cellphones are providing music services on two venues: music streaming and mp3 storage capabilities. With almost the entire US population owning a cellphone (IBISWorld projects by 2009 92.2% of the US population will have a cell phone), this is a rapidly expanding market for both music and cellular services. The mobile industry is one of the first to introduce music bundling packages with preexisting service plans. Ringtones, and ringback tones have been a nice cash cow for the industry and people are interested in listening to music content on their phone, whether its through streaming or using their mobile device as an mp3 player. 22
    • Whereas ISP's have no real incentive to package web services such as music streaming into their existing model-- the cell phone industry can use such services as real differentiators to leverage specific phone models or service plans. The future for mobile music is bright! Future of the Music Industry: The archaic major record label is becoming less and less pertinent to the average consumer for a number of reasons. Internet exposure has become and will continue to become easier to use, and more effective to reach the music consumer segment. Social networking websites and internet retailers make it extraordinarily easy for artists to market and distribute music on their own. For this reason, independent labels are growing at a rapid pace, while major record labels continue to consolidate with mergers and acquisitions in order to increase sustainability. Another factor that comes into play is the ability of artists to record and produce their own music. Recording technology has gone from expensive and big, to cheap and compact- easily accessible to the average consumer for just a couple hundred dollars. This alleviates the need for the artist to be funded by a major label in order to get their music recorded. With today‟s technology, artists can produce a professional sounding album from the comfort of their home studio. Aside from this, the once popular record store is dying quickly as a result of the drastic drop in the sale of physical albums. This leaves album sales in the hands of superstores like Walmart or Best Buy, neither of which have detailed collections. These stores are only interested in stocking merchandise that flies off the shelf; therefore, serious music listeners do not frequent these retailers to get their music. As a result of these factors a void has been left in the market; a calling quickly answered by online distributors. While this shift is fairly predictable, the future of law is not. As of late, changes have been decided on a case by case basis. As more innovators get sued, the picture will become a little more clear as to where the law is headed. 23
    • Social Media One of the biggest changes for the future of the music industry, from a marketing standpoint, has and will be the shift to viral. In terms of viral marketing for the music industry, social media has opened up many opportunities for more legitimate, interactive, niche marketing. The major players in this new approach include Myspace Music, Facebook, and Twitter. More and more music listeners and consumers are using these networks to let others know about their preferences/tastes, as well as looking towards tools like blogs, microblogs, and network fan pages to find to discover new music, tour dates, etc. Aside from the consumer aspect, social media has enabled artists to make a presence for themselves without the aid of a label or promotional firm “Going directly to the fans without any kind of middleman… that‟s what I‟m relying on now.” —Jill Sobule, independent recording artist, in an interview with eMarketer, April 29, 2009 24
    • Artists and music related events alike use these tools. John Mayer was one of the first artists to amass a million followers on Twitter (eMarketer, 2009). A survey done by the NPD Group found that “the percentage of teens who downloaded or listened to music via social networks increased from 26% in 2007 to 46% in 2008.” “It makes complete sense for mobile music services to allow consumers to socialize while they‟re interacting with music,” said Debra Aho Williamson, eMarketer senior analyst. “People like to share playlists and discuss their favorite bands with their friends. This doesn‟t mean that music services need to have their own dedicated social networks. Linking up with existing networks makes much more sense.” 25
    • Case Studies One of the most relevant ways to show the discussed changes and trends, is by exploring some examples. The following companies have been selected because they represent most promising business models and strategic direction of any other companies in the industry today. Both Apple and Grooveshark have taken into account the shift of power from supplier to buyer, and adapted by creating models which are attractive to the consumer, but also give suppliers a platform from which to leverage their products. Apple Inc. This online distribution market was first successfully pioneered by Apple‟s introduction of the iTunes Music Store. iTunes provides a venue for major labels, independent labels, and independent artists to sell their music through a service that has become a household name. First popularized by their MP3 player, the Ipod, iTunes has grown by leaps and bounds since it first took off in 2003 (Music Supervisor, 2009). As of April of 2008 iTunes has become America‟s No. 1 music retailer, a position formerly held by Walmart and contested by Target and Best Buy (Dawn, 2008). Apple Inc was incorporated in 1976 as Apple Computer as a personal computer company. Struggling to gain a competitive advantage over a market flooded with cheap PC‟s, Apple began to develop their strengths in software development by the late 90s. When Steve Jobs took over Apple began more vigorously engineering their multimedia capabilities with sound and video applications such as Garageband and iMovie (The Apple Museum, 2009). In 2001 Apple Computers released the Apple Ipod which quickly took the market for MP3 players by storm (Apple Inc., 2007). The easy to use interface and integrated iTunes software 26
    • reflected the branding that sets Apple apart from it‟s competitors. Thereafter Apple continued to hold the market‟s attention with new versions of the Ipod like the nano, shuffle, and mini. By 2003 the iTunes Music Store was launched. Before launching the service, Steve Jobs had already made deals with the US four major labels: Sony BMG, Universal Music Group, Warner Music Group, and EMI (Borland, 2003). The year after launching it contracts were made with three of the largest independent music labels in Europe: Beggar Group, Sanctuary Records Group, and V2. By 2004 iTunes was available to the US, UK, France, and Germany, Belgium, Italy, Austria, Greece, Luxembourg, Portugal Spain, Finland, Netherlands, and Canada (Apple Inc, 2004 ). Aside from retailing music, iTunes retails tv episodes, movies, radio broadcasts, ringtones, and more. This type of one stop shop multimedia outlet is the future of media sales. [Industry In Action] : The Future of Cloud Computing and Music *cloud computing is the idea of having content stored on the internet instead of on physical devices “[Apple] could accelerate the move to media in the cloud more quickly than any other company can. [The acquisition of Lala] tells us they’re doing it.” —David Pakman, partner, Venrock and former CEO, eMusic, in The New York Times, December 15, 2009 While it would appear that services in general are moving in this direction,with more and more application based web pages, there haven't been any huge jumps forward in the public eye. The closest the modern world is coming to this idea is on demand streaming from cellphones and ipod touches. Everyday internet and cellphone network coverage get better. PMP's get smaller and powerful, lending towards a more favorable climate for full access subscription models, yet no one service has dented market share from superforces like Apple's iTunes. Until now...Sort of. Apple just recently acquired music startup La La. At first glance Lala looks like any other on demand music streaming site, so how is that useful to Apple? What Lala holds that others don't (except Grooveshark) is a music storage service that allows users to store their personal library of music on the internet so that they can access their music from anywhere. It is speculated that Apple will leverage their hardware (Ipods,Itouch's, Iphone's) and software (iTunes,iTunes Store) to incorporate an update which automatically loads user's library of music to their own URL, giving users a viewing space for their music thats accessible anywhere. The very witty part about this is that Apple wouldn't be required to get any new licensing because this music thats loaded to the web, is the user's personal collection. This not only gives the user a more convenience and utility, but also allows Apple to enable the user to sidestep the technology curve of media player storage space. This is an extraordinarily smart move by Apple,as it fortifies their monster market share, protecting them from any subscription models that might steal customers away. If anyone can pull this one off, it would certainly be Apple,and this model of incorporating the user's existing music collection is pretty revolutionary. It will interesting to see how this plays out. 27
    • If youd like more detail on this check out Michael Robertson's post @ http://www.techcrunch.com/2010/01/19/apples-secret-cloud-strategy-and-why-lala-is-critical/ (Kilmer, 2009) Grooveshark While iTunes has successfully done a good job of locking down a market that is still willing to pay for music, there is still a vast number of people who are simply unwilling to pay for music they can get for free, but P2P/torrent is illegal, and doesn‟t bring the artist any money. This is where Grooveshark comes in. This group is the first to successfully figure out and model what the entire industry has been struggling with since the conception of P2P. No one wants to pay for music, or any other media content accessible from the internet, plain and simple. No amount of litigation, ad campaigns, or education can reverse the financial losses the music industry has suffered and will continue to suffer. With this in mind, Escape Media Group created Grooveshark, which has successfully modeled a legal, revenue creating, easy to use, attractive service. Grooveshark is a full access on demand music streaming utility with music recommendation and preference customization features. Grooveshark has an extensive library, and if a user can‟t find their music, they may simply upload their own music to the account, in order to facilitate holding a complete collection online. Grooveshark was founded in in 2006 in Gainsville Florida, by three University of Florida students, operating as Escape Media Group. Grooveshark launched beta in 2007, as a paid music download service, positioned as a legal P2P network, competing with companies such as Limewire. In 2008, Grooveshark changed their business model to an on demand music streaming service, which is what they‟re today (Escape Media Group, 2010). 28
    • While Grooveshark is picking up pace quickly, their market potential is tremendous. This service is very unique from every other streaming for two reasons. 1) Front End Design: The application like interface of Grooveshark is very well put together. The service is packed choc full with features, presented in a way that‟s intuitive, and straight forward. This application based feel is the future of Web 2.0. Other prominent leaders with similar interface include Google and Facebook. 2) Features: Grooveshark is offers much more than a slick user interface. It not only allows you to stream almost any music you want at breakneck speed, you can share and organize your music to suite your preferences with equal ease. This is where most other media streaming falls short. All for free. 29
    • Grooveshark makes their money primarily through ad revenue, as well as selling VIP memberships for more features, and offering promotional services for independent artists. Using this revenue they pay royalties to the artist/label for their content. Aside from being accessible through a computer, Grooveshark has applications available for all major cell phone platforms. This model works well for everyone as it provides incentive for the consumer to stream music which generates revenue, as opposed to illegally downloading which provides no revenue to the content creator. Analysis In the recent past, technological innovation for the music industry has been a negative; the new dominant design for music consumption leaves the artist/label/distributor with no money. Music streaming and P2P came as a competence destroying innovation for the industry rendering the knowledge of an old business model obsolete. While major labels currently still hold a competitive advantage through their superior catalogues of music content, they will lose this edge if they don‟t respond quickly. The avenues controlled by major labels, such as the radio, are becoming less and less important, while the internet, as a tool for music discovery, is becoming more and more relied on. Therefore, if major labels want to remain a sustainable model, they must take a chance with forward integration. Conclusion: Strategic Direction Where are We Now? The Recorded Music Industry is currently in a state of turmoil and will continue to be for the next several years. From the consumer end, the industry has been turned upside down by the shift from exclusively physical means of attaining music, to a wide variety of ways to access music digitally. Thus the old model of doing business is rapidly approaching obsolescence. From the artist end, 30
    • artists are now able to record & proliferate their own content without the aid of capital intensive service agreements. Thus, labels are becoming less and less relevant to the artist. As business stands today, music has changed from a money maker, to more of a promotional tool for other sales including merchandise & ticket sales. The most promising way of attracting revenue directly through music are bundling schemes as well as full access subscription models. Where Should We Go? The future of the music industry lies in bundling, cloud computing, and product placement/promotion. People want to access music, whenever and however it is most convenient for them at that point and time. The easiest way to do this is to provide services that allow full access from a wide variety of devices ie. PMPs, cell phones, computers, etc. In terms of monetizing music within this model there must be incentives to pay a subscription fee that allows for revenue streams beyond advertisements. Furthermore, this music must be leveraged to promote sales of physical items such as t shirts, concert tickets, etc. How do We Get There? This question is less easy to make a general answer but there are a few essential ingredients needed. Music library (acquired through licensing and A&R), Unique value proposition, and multiple distribution channels (leveraged through the internet.) People want a great User Interface(UI) that fosters intuitive and enjoyable use. Beyond these ingredients the only way to find a winning model is trial by fire. The time is of the essence for the industry. 31
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