1. The development of MP3 compression allowed for easy sharing of music files over the internet, fueling the growth of services like Napster. This threatened the business model of record labels. 2. Apple launched the iTunes store in 2003, offering individual song purchases using the popular MP3 format. This became very successful due to factors like its large catalog and integration with the iPod. 3. New music distribution models have emerged since, such as creative commons licensing that allows independent artists to self-publish, and podcasting which gives exposure to lesser-known musicians. Streaming services now dominate the industry.

1. By Husna
Email: Husnanana315@gmail.com
Protecting Innovation
Strategic Management Of Technological Innovation
Melissa Schilling
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2. The Digital Music Distribution Revolution
1. Compressed digital audio to 1/10th the of the original size with minimal compromise in audible qualitya so
ng was now a file that could be shared over the internetfranuhofer pursued a partially open licensing approa
ch by partnering with thomson multimedia as the exclusive licensing representative of MP3 patents in 1995
thomson then negotiated agreements with apple, adobe, creative labs and microsoft to name a few.
2. This gave consumers easy access to the technologyother companies developed competing technologies son
ywith atrac and ms with wma but mp3 was dominantin 1999, shawn fanning releases napster, a free softwar
e program that allows users to easily share mp3 files (“peer-to-peer”)the riaa starts to worry about illegal tra
de of copyrighted music. In 2001 it gets a court ruling against napster, taking it offline.However, new peer-t
o-peer music services began to sprout up to meet the demand of the large population of “music pirates.
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3. The Digital Music Distribution Revolution
Napster offered to partner with the RIAA and develop a legitimate digital distribution model. The RIAA tur
ned down the offer, won the legal battle but were still challenged by a new business model that they were not prepar
ed for.
Warner Music and Sony Entertainment developed their own subscription services but they used proprietary
digital file formats and very restrictive digital rights management schemes that frustrated the users. They also had a
limited selection of recordings.
In 2003, Apple opens its iTunes Music Store – a one-stop-shop for music files from the five major record l
abels. Now record industry is earning significant revenues from MP3s.Began with a catalogue of 200,000 songs for
99 cents each. 50 million downloads the first year.Built security features (Fairplay DRM - digital rights management
)to prevent illegal sharing which was not as restrictive as the older modelA number of factors lead to iTunes success
cool” imageUsed MP3 format Attractive priceSuccess of the iPodLarge selection of songs due to licensing
agreements with all five major labels
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4. The Digital Music Distribution Revolution
In 2006, France pushes Apple to loosen its restrictions on iTunes music and iPods and allow songs
downloaded from the French iTunes Music Store to be played on non-iPod MP3 players and that iPods sho
uld play competing file formats.
May 2006, The French government reconsidered a proposal to force Apple Computer to make the s
ongs it sells through its iTunes Music Store playable on devices that compete with its iPods.Aug 4, 2006 Ap
ple's rivals can now request information necessary to make their services and MP3 players interoperable wit
h iTunes and iPods, but Apple must be compensated. (Cnet news.com)
Sept 2007 Amazon launches DRM free music storeMarch 4, 2008 Warner Music has signed a deal
with media site 7digital.com to offer its music without copy protection. Apple’s Itunes Plus offers DRM fre
e music but only EMI tracks (bbc news)
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5. The Digital Music Distribution Revolution
Many independent musicians welcomed MP3 and digital distribution tools to promote their musicpr
eviously, musicdistribution was costly and required capital, typically provided by record labels. It was diffic
ult to get a record deal and the terms were not attractive to the artists
New models of digital distribution were emerging:creative commonslicense agreements to make fil
es public, legal, and freemusicians can advertise their music and sign away certain copyright privileges so t
hat the music can be downloaded and distributed without risk of infringement suitspodcastingwhole “shows
” could be downloadedmusicians pass up immediate potential revenue for the opportunity to gain exposure
and a fan basenpr introduced podcasts on aug 31, 2005 and by nov 8, 2005, there were 5 million downloads
As of feb 2006, more than 13 million downloads have been generatedforrester predicts podcasting
will grow from 700,000 households in the us in 2006 to 12.3 million households in the US by 2010
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6. Appropriability
• Appropriability: The degree to which a firm is able to capture the rents from its innovation.Ap
propriability is determined by how easily or quickly competitors can copy the innovation.
• Some innovations are inherently difficult to copytacit: knowledge that cannot be readily codifi
ed or transferred in written formsocially complex: arises through complex interactions betwee
n people (team of uniquely talented research scientists); sum of group effort is greater than the
individual contributionsMany innovations are relatively easy for competitors to imitateFirms
attempt to protect these innovations through patents, trademarks, copyrights or trade secrets.
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7. Patents, Trademarks & Copyrights
• Most sources attribute the origin of formalized protection of IP to 15th century England where the monarchy grante
d certain privileges to manufactureres abd traders as signified by “letters patent” which were marked by the king’s g
reat seal
• The 1st internationational trademark agreement was reached in 1883 at the Paris Convention for the Protection of In
dustrial Property
• rights granted by the government that excludes others from producing, using, or selling an invention.Must be useful,
novel, and not be obvious.Utility patents protect new and useful processes, machines, manufactured items or combin
ation of materials.Design patents protect original and ornamental designs for manufactured items.
• Patent Cooperation Treaty (PCT)Inventor can apply for patent in a single PCT receiving office and reserve right to a
pply in more than 100 countries for up to 2 ½ years. Establishes date of application in all member countries simultan
eously. Also makes results of patent process more uniform.
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8. The Effectiveness and Use of Protection Mechanisms
1. In some industries, legal protection mechanisms are more effective than otherse.g., in pharmaceutical
patents are powerful; in electronics they might be easily invented around.
2. It is notoriously difficult to protect manufacturing processes and techniques.Nov 2002, P&G sued Po
tlatch Corp for stealing trade secret methods for producing Bounty and Charmin products by hiring t
wo of P&Gs paper manufacturing experts.
3. Settled out of courtIn some situations, diffusing a technology may be more valuable than protecting
it (open source software)However, once control is relinquished it is difficult to reclaim. Fragmentatio
n of the technology may result
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9. IBM and the Attack of the Clones
• BM and the Attack of the ClonesIn 1980, IBM was in a hurry to introduce a personal compute
r (PC). It used off-the-shelf components such as Intel microprocessors an operating system fro
m Microsoft, MS DOS.It believed that its proprietary basic input/output system (BIOS) would
protect
• the computer from being copied.However, Compaq reverse engineered the BIOS in a matter o
f months without violating the copyright, and quickly introduced a computer that behaved like
an IBM computer in every way. Compaq sold a record-breaking 47,000 IBM-compatible com
puters its first year, and other clones were quick to follow.
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10. The Effectiveness and Use of Protection Mechanisms
• Wholly proprietary systems may be legally produced or augmented only by their developers. May not be ad
opted as readily due to higher costs and inability to mix and match components
• Proprietary systems offer greater rent appropriability.Rents can be used to invest in further development, pr
omotion, and distribution.Give the firm control over the evolution of the technology and complementsMicr
osoft Windows
• rotected by copyright and only MS can augment the softwareDoes allow access to portions of the source co
de to facilitate development of complementary goods, licenses the rights to such providers to produce comp
lementary applications and licenses OEMs to distribute the software by bundling it with hardware
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11. Sun Microsystems and Java
Sun developed a software programming language called Java that enabled programs to be run o
n any operating system (e.g., Windows, Macintosh).
This would lessen pressure for one operating system to be dominant.Members of the software
community felt that Sun should make Java completely “open” – they argued that “Java is bigger than a
ny one company.”However, Sun was afraid that if Java were completely open.
companies would begin to customize it in ways that would fragment it as a standard.Sun decid
ed to distribute Java under a “community source” program: no license fees, but all modifications to Ja
va required compatibility tests performed by Java’s own standards body (Java Community Process)
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12. Production Capabilities, Marketing Capabilities, and Capital
• When JVC was promoting VHS, they knew they were at a marketing and manufacturing disadvantage com
pared to Sony. They pursued OEM and licensing agreements with Hitachi, Matsushita, Mitsubishi and Shar
p to boost the technology’s production rate
• there industry opposition against sole source technology?Sony and Philips jointly created the original CD fo
rmat and split the royalties. The other leading consumer electronics producers and record producers joined f
orces to develop the DVD technology
• important is it to prevent the technology from being altered in ways that fragment it as a standard?If a tech
nology needs standards, then retaining some degree of control is critical (Java)How valuable is architectural
control to the firm? Does it have a major stake in complements for the technology?The ability of a firm to d
etermine the structure, operation, compatibility and development of a technology is even more important w
hen the firm is a significant producer of complements
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13. Strategic Management Of Technological Innovation
Melissa Schilling
1. What industry conditions led to the revolution in audio distribution described above? Which stakehol
ders stand to benefit most (or least) from thisrevolution?
2. Why did the music stores created by the record labels fail to attract many subscribers? What, if anyth
ing, should the record labels have done differently?
3. What factors led iTunes to be successful?
4. What new models of music distribution have emerged, and what do you think will influence whether
they endure?
• Discussion Questions:
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