Can the Music Industry Change Its Tune?

Can the Music Industry Change its Tune?

Introduction

The music recording industry has been rocked by the peer to peer file sharing technology. The distribution of music is now available as a digital product (Blockstedt, Kauffman, Riggins 2004). The industry claims that the file sharing technology has caused a reduction in their profits. The increase in popularity of devices that play the digital music, such as the MP3 player, Apple iPod and the Dell JukeBox, are driving the demand for MP3-formatted music. The digital music format is here to stay and is fast becoming the preferred product choice for music customers (Blockstedt, Kauffman, Riggins 2004).

1. Apply the value chain and competitive forces models to the music recording industry.

U.S. retail sales of recorded music dropped from $13Billion in 1999 to $10.6Bn in 2003 (Keagan 2004), while the popularity of digital music has grown. Meanwhile, Apple 'iTunes' customers grew from 861,000 in July 2003 to 4.9 million in March 2004 (Borland and Fried 2004), reflecting digital music's new role as a "strategic necessity" of the music industry. Analysts predict that in five years 20% to 33% of all music sales will shift from CDs to digital distribution (Keagan 2004).

With this in mind the music recording industry may have to change its value chain and business models to adapt and survive in this modern digital world. The following figure demonstrates the traditional value chain.

Figure 1: Traditional Music Industry Value Chain:

Figure 1, shows the main drivers for value in the traditional recorded music value

chain include copyright and licensing, production, distribution and inventory, and promotion and marketing costs (Blockstedt, Kauffman, Riggins 2004).

For digital music, there is no longer a physical product to manufacture. Instead the product itself is information: the digital music recording (Blockstedt, Kauffman, Riggins 2004). The nature of the new digital music format is a key driver of the new virtual value chain in the industry. The following figure illustrates a new outlook on the digital music value chain.

Figure 2: Digital Music Industry Value Chain

Figure 1 2:

Figure 2, shows the added value to the music product from manufacturing and distribution is decreasing, but digital music retailers add new value. With Internet distribution and music piracy, they can now add value through marketing, promotions, copyrighting and licensing. There is also value added through enforcement of IP rights and piracy prevention (Blockstedt, Kauffman, Riggins 2004).

The competitive forces model can be used to evaluate the music recording industry's current situation and what business strategy they may employ to maintain and generate new sales.

Figure 3: Porter's competitive forces model

Figure3: Forces Driving Industry Competition. Source: M. Porter, 'Competitive Strategy: Techniques for Analysing Industries and Competitors', New York: Free Press, 198.

The Internet has completely remodelled the competitive forces model for music industry over last few years. Digital technology meant that media, including CD's, could easily be copied without loss of quality. The arrival of MP3 meant that the copied version could be compressed without any noticeable drop in quality, this makes the distribution much easier.

The internet offers a network where the copies can be exchanged. After Peer-to-Peer programs such as Napster were invented the general population was able to obtain a near-perfect copy of a CD for nothing. The competition arises from:

Industry competitors:

Five major recording labels EMI, Sony Music, BMG, Universal Music Group and Warner Music Group account for about 75% of the market share worldwide. The companies which embrace new business models/strategies will gain a competitive advantage which ultimately will help them to survive in the new digital music environment.

Potential Entrants:

The five major labels can not take their market share for granted anymore as many artists are cutting out the record companies and establishing their own website from which they can promote their music, the competition naturally becomes more ferocious. Companies such as Napster, Grokster and Apple limits the recording label's profit as the sales of CDs drops and the downloading of digital music rapidly increases.

Substitutes:

If a record companies' product isn't priced right, or not delivered in the right format, the

consumer will find an alternative way to obtain the product such as download it from the internet or burn the CD from a peer.

Buyers:

The power of the consumer has increased due to the availability of music online.

Consumers can now download music for free, instead of having to make a lager purchase

for a CD in a traditional music store. This requires record companies to sell their product at a lower price and through different channels. Luckily, they have begun to do this (iTunes from Apple for example). Record companies need to listen to the wishes of consumers as they cannot prescribe a format or a channel.

Suppliers:

Due to the introduction of the internet, artists have become less dependent

on the traditional networks of the record companies. Authors can directly promote their material through their own website. Some completely by-pass the record company all together. The author gains more control over their own product and the record company now has less control.

2. What role did the Internet play in changing value propositions and the competitive environment? To what extent has it been responsible for declining CD sales? Explain your answer.

The value proposition of CDs has decreased due to the increase in music