The document discusses the history and evolution of the online music industry from the development of the MP3 format in the 1990s to modern streaming services. It describes how MP3s and platforms like Napster disrupted the industry's traditional business model and forced adaptation to digital distribution. While illegal downloading surged, legal services like iTunes store eventually gained popularity through partnerships with major labels and convenient access on devices like the iPod. Modern streaming platforms like Spotify, YouTube, and Apple Music now dominate the industry through subscription and ad-supported models. The internet has created new opportunities for artists and fans to connect while also introducing new challenges around royalty payments and copyright enforcement.

1. Innovation in the Online Music
Industry: Past, Present & Future
TM6006
Student ID: U1338360
(Online Music Library, 2014)

2. The music industry’s entry into the digital realm
may be traced back to 1991, when the first
compressed audio file was perfected. (Knopper,
2009) It would become commonly known as the
MP3 file in 1995. (Fraunhofer, 2016) Both the
Erlangen Nuremberg University and the Fraunhofer
Institute for Integrated Circuits worked on the
research project which was funded by the
European Union. (Fraunhofer, 2016)
An MP3 reduces the size of the original file by 90%,
thus an MP3 requires much less storage space and
allows for fast transfer via the Internet. (Fraunhofer,
2016) Mainstream connectivity to the Internet was
very much on the horizon when the MP3 was
developed and a new era for the music industry
was set to begin. (Silver, 2013)

3. The development of the MP3 proved to be a ‘disruptive
technology’ to the sale and distribution of music in physical
formats and shared common common traits with other
disruptive technologies in that it was: “cheaper, simpler,
smaller, and frequently, more convenient to use”
(Christensen, 1997: 19).
Meanwhile, from the mid 90s onward, dial-up access to the
Internet became increasingly popular. It seems music
executives were given ample opportunities to ‘tap in’ to the
rapidly developing online environment, but were either
reluctant to be involved with or in utter denial about the
eminence of the disruptive technologies. (Christensen,
1997 and Knopper, 2009).
(AZ Digital Transfers, 2014)
(Early Internet Memories, 2015)

4. In 1990, for every 100 people in
the world, 2.5 owned personal
computers. By 2001, there were
nearly 9 computers for every 100
people in the world. (Chinn &
Fairlie, 2006)
At the beginning of the 90s close
to 0% of the entire population
were connected to the Internet;
by 2001, however, 8.1% of the
world’s population were capable
of connecting to the Internet.
(Chinn & Fairlie, 2006)
(International Telecommunications Union, 2001 cited by Chinn and Fairlie, 2006)

5. Throughout the 1990s, there are numerous reports of meetings
taking place between different online music entrepreneurs, who
were each keen to demonstrate their concepts for legitimate
consumption of music through the Internet; however, executives
within the music industry were apparently reluctant to disturb
what had become a lucrative and established business model by
venturing into the emerging digital market. After all, CDs were
still being ‘snapped’ up by the mass market at premium prices.
(Silver, 2013 and Knopper, 2009) By the end of the 1990s,
however, the MP3 format was reaching critical mass and was
well on its way to becoming the dominant format for music.
(Silver, 2013 and Knopper, 2009) (Wikipedia Commons, 2015)

6. For music enthusiasts with Internet connectivity, there was
a notable absence of legal access to online music service
and consequently, illegal peer-to-peer file sharing services
became increasingly popular. (Knopper, 2009)
Without doubt, Napster was the most notorious of the
illegal online music sharing services in the late 90s and early
2000s. (Knopper, 2009) Despite Napster’s blatant disregard
for copyright infringement laws, Shawn Fanning and co-
founder Shawn Parker attracted a number of major
investors and at the peak of Napster’s popularity, it had
attracted around 57 million users. (Knopper, 2009 and
Lamont, 2013)
(History-Computer, 2016)
(God is a Geek, 2015)

7. Instead of recognizing the potential revenue that could
likely be gleaned from licensing Napster in order to
profit from a legal version of its service, numerous
music corporations along with the Recording Industry
Association of America (RIAA) initiated litigation against
Napster. (Silver, 2013 and Knopper, 2009)
Notwithstanding numerous attempts to save the
company, Napster ceased to offer its service in 2001
and filed for bankruptcy in 2002. (Knopper, 2009)
(sdcitybeat.com, 2012)
(via Newser, 2010)
(P2P Filesharing History, 2010)

8. With Napster no longer a concern, the ‘majors’ sought to conquer
the digital music environment with two completely separate
alternatives, Pressplay and MusicNet. (Silver, 2013) Each platform
offered users a limited number of legal downloads, some ‘CD burns’
and low quality streams in exchange for a monthly subscription.
(Tynan, 2006) Some artists and catalogues were available on one
service but not the other due to the services’ corporate rivalry.
(Tynan, 2006) The overall restrictive and confusing nature of both
platforms resulted in their complete failure to compete with the
unrestricted excesses that were available for free elsewhere, online.
(Tynan, 2006)
$15 p/month with limitations and
restrictions
“Stealing music became more
convenient, and the Napster
audience was fragmented all over
the internet” (Knopper, 2009: 143).
(bbcnews.co.uk, 2001 and Tynan, 2006)
$10 p/month with limitations and
restrictions

9. While illegal music downloads and copyright
infringement ran rampant, Apple Computer’s Steve
Jobs was apparently acutely aware of the music
industry’s failing attempts at capturing the masses
and monetising a suitable digital music retailer.
(Knopper, 2009) Under Jobs’ direction, Apple
Computers developed an MP3 player that could
easily synchronise with a legal, online ‘one-stop-
shop’. (Knopper, 2009)
Apple’s iPod hardware effortlessly integrates to
iTunes software and securely links to debit or credit
card to facilitate impulse purchases. (Knopper, 2009)
(Steve Jobs, 2016)
(UK Business Insider, 2013)

10. The convenience of Apple’s iPod hardware and iTunes
software seemed to force the hands of the ‘majors’ to
license their catalogues and accept Apple’s retail price
point of 99 cents per track download. (Knopper, 2009)
Apple’s original, slick and aspirational marketing
campaign turned the iPod and its unconventional
white ear buds into an entire generations’ ‘must have’
functional fashion accessory. (Knopper, 2009)
When iTunes launched in 2003, its global success stood
as proof that consumers were willing to pay for music
online. (Knopper, 2009) Statistical data has shown that
iTunes increased demand for individual tracks, but in
turn, purchases of entire albums declined. (Elberse,
2009 cited by Tschmuck, 2012)
(D&AD- Silhouettes Research,
2014)
“…the industry hitched its wagon so completely
to Apple and its iTunes online store as to make it
the default digital sales outlet for music in the
Western world for a very long period until
around 2006 when the first streaming services
started to offer another means of accessing
music” (Silver, 2013:9).

11. (Zilio, 2014) (Anon, 2016) (freelargeimages, 2016)
Social media exploded into popular culture around 2005.
(Tschmuck, 2012) Through MySpace and YouTube, Artists were
able to directly engage with their audiences in ways that were
never possible before. (Tschmuck, 2012) Through YouTube,
viewers are access millions of recordings for free in exchange
for watching a short advertisment before the commencement
of their selected video; meanwhile, YouTube’s earns its revenue
through advertising. (Tun, 2015)
(MTV, 2007)
(YouTube Logo, 2016)

12. (Msfitmag.com,2016)
Digitalisation has also impacted upon the way in which some Artists gain
funding for projects. (Silver, 2013) In recent years, some Artists have been
able to secure investment for projects through non-traditional means.
Instead of making deals with record labels to finance their albums,
projects, etc., thanks to the Internet, Artists now have the option of
asking their fans to provide them with capital. (Freedman and Nutting,
2015) Usually based around a tiered reward system, crowdfunding
involves the collection of many small contributions in order to finance a
project or product. (Freedman and Nutting, 2015) Kickstarter reports that
54.1% of music pitches launched through its platform are reportedly
successful in reaching set targets. (Ronen, Sanderse and Rusman, 2012)
Of course, it is likely that in many of the cases where Artists have been
particularly successful with their campaigns, they had previously been
signed to a record label that had at one time significantly invested in the
Artist and their brand. (Silver, 2013)
(CrowdFund Beat, 2014)

13. As music distribution models continue to adapt in order to meet customer
needs that are based upon access to music instead of ownership of music, a
series of tiered premium and ‘freemium’ subscription based streaming
platforms have emerged in the last decade, including the leading tiered
streaming subscription service provider, Spotify. (Stutz, 2015)
Other services have since entered the streaming market including Amazon
Prime Music, Tidal and Apple Music. Apple’s launch of its streaming service in
2015 saw the platform amass more than 10 million paying subscribers within
a period of 6 months; the same milestone which took Spotify six years to
achieve. (Garrahan, 2016) The instantaneous popularity could be attributed
to Apple’s clever marketing or a general heightened consumer awareness of
streaming in general. While music downloads are in a state of steady decline,
streaming may be categorised as a definite growth area for the music
industry, with demand for streaming increasing by 50% in 2014. (Nielsen
2014, cited by Financial Times, 2016)
(Amazon Prime Music Logo, 2016)
(Rotunda Media, 2015)
(Stutz, 2015)
(iPhone No Sound, 2015)

14. Spotify marked 2015 with the introduction of its personalised,
suggested listening playlist ‘Discover Weekly’ which is compiled
using recent listening activities of each user. Spotify’s recent
innovation has reportedly changed users’ listening habits and
within the first 10 weeks of its introduction, users had streamed
over 1bn recordings from the personalised playlists. (Ogle, 2016
and Hu, 2015) Also in 2015, Spotify implemented its ‘Fresh Finds’
playlist, which has allowed new artists to grow their Spotify
listener base, exponentially after their record has been featured.
(Ogle, 2016) (Spotify, 2016)
(Ogle, 2016)(Ogle, 2016)

15. Spotify’s annual ‘Year in Music’ feature demonstrates a clear move away
from marketing music as a highly personal, individual experience and
instead, veers towards the notion that music is more so enjoyed as a
shared experience, not unlike the medium of terrestrial radio. Not only
does the ‘Year in Music’ tool track personal streaming habits, it also
records macro trends within music listening, consequently mapping
historical events. (Hu, 2015) Within hours of David Bowie’s death in early
2016, Spotify had published a 49 song playlist, accurately predicting that
millions would seek to listen to and celebrate the influential artist’s vast
body of work. Over the past 10 years, the instant access to entire
catalogues of popular artists’ recordings on streaming platforms such as
Spotify and Apple Music have apparently driven sales and chart-positions,
posthumously. (Willens, 2016)
(Hu, 2015)
(Spotify, 2016)

16. YouTube should be recognised as the behemoth of music
streaming, with over 1 billion users visiting the site each day,
many of which are allegedly visiting to watch music videos.
(Graham et al., 2015) YouTube has been accused of exploiting
safe harbor laws that were designed to protect Internet
service providers from suffering any liability from their
customers’ infringement of copyright laws. (Cooke, 2015)
YouTube’s parent company, Google, credits YouTube’s success
as a a key factor in the corporation’s ability to achieve
impressive growth, year-on year. With the launch of ad-free
app’s, YouTube Music and YouTube Red, Google seems
determined to continue in its focus to dominate and profit
from the digital music industry. (Graham et al., 2015)
(Google.co.uk, 2016)
(YouTube logo, 2016)

17. YouTube has been referred to as the ‘elephant in
the room’ during debates about fair royalty
payments to music rights holders. (Cooke, 2015) In
2016, the IFPI quantified the ad-funded streaming
service’s average revenue per user (ARPU) for 2015
at just $0.70 for each of its 900 million users,
generating a total of just $634 million in revenues
for the record industry per annum. This is a
miniscule (ARPU) when compared with the $29.41
(ARPU) from each of the 68 million paid subscribers
to streaming services which generated a total of $2
billion for record companies in 2015. (Graham et
al., 2015)
(YouTube Logo, 2016 and Adapt Learning Framework, 2016)

18. Major record labels may be looking towards closing
the ‘value gap’ which results from ad-funded
YouTube streaming, soon. All three of the major
labels’ licensing agreements with YouTube have
either expired or in Universal Music’s case, the two
corporations are currently operating on a ‘rolling
contractual basis’. The remaining two labels’
agreements are also due to expire shortly;
therefore, renegotiation of higher rates for ad-
funded streaming of the majors’ catalogues has
been predicted by some music industry insiders.
(Ingham, 2016)
(Cross, 2016)

19. The development of music recognition algorithms have resulted in
the launch of one of the most popular smart-phone applications
available, Shazam. After ‘listening’ to a 20 second audio clip,
Shazam consults its database and reverts back with the name of
the recording and the relevant recording artist. (Jovanovic, 2015)
Shazam has become one of the most popular smart phone app’s,
boasting over 100 million monthly users. (Apple App Store, 2016) It
seems that entrepreneurial opportunities may exist within the
context of music identification tools, with Apple apparently
investigating ways to integrate the software with their OSX
operating system. (Dignan, 2014)
(Apple App Store, 2016)

20. Music is an integral part of most of the major video games produced over the last
10 years and clever marketing campaigns from the largest game developers often
include compilation albums that are released to coincide with the game’s launch.
Activities such as these make a positive contribution to the music industry, with
one of the growth of 2014 being revenues from synchronisation deals, which rose
by 8.4% in 2014. (Ifpi.org, 2016) Digital technologies and the Internet have
created a vast number of new mediums that are likely boosting the demand for
synchronisation licensing.
(EASports, 2016)
(Rockstar Games, 2016)
(Invision Community, 2012)

21. Designed as a video streaming platform for gamers,
Twitch is also used by recording artists who are able to
deliver live streamed shows to their fans. (Tom's
Guide, 2016)
Twitch is owned by Amazon Inc., and the service
allows viewers to donate or commit to tiered monthly
subscription options in order to receive premium
access to content and downloads from favorite artists,
a medium that likely could not have been conceived of
20 years ago. (Tom's Guide, 2016)
While Twitch allows artists to connect with fans live
and online, Bands In Town helps fans to find all the
necessary information they need in order to attend
live performances by their favourite touring artists and
offers yet another example of an innovative online
tool for artists, fans, venues and promoters. (Herstand,
2015)
(Twitter, 2016)
(Bands In Town Logo, 2016)

22. Although there is no doubt digital technologies and the
Internet have irrevocably changed the way in which the
industry operates, the Internet and associated digital
technologies have also produced new mediums which have
provided opportunities for new businesses to emerge and
operate within the new environment.
The Internet allows artists and music businesses to engage
with fans in ways never before thought possible, whether it
be through video streaming platforms such as YouTube and
Twitch, crowd-funding campaigns or social networking sites
such as Facebook, Twitter and so on. All of these platforms
have produced potential revenue earning opportunities
which have only become possible as a result of the online
economy that has developed over the past two decades.
There have been some ‘casualties’ along the way, however
the new music economy has produced some very clear
winners, with companies such as Apple, Google and Spotify
leading the way for effecting innovation and ongoing
transformation within the context of the digital music
industry and beyond.
(Support.apple.com, 2016)
(Google.co.uk, 2016)
(YouTube logo, 2016)
(Commons.wikimedia.org, 2013)

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