Managing the music industry`s crisis

Transcription

Managing the music industry’s crisis: A new strategic approach
to developing artists and their music
Auteur: Jochen Kreusser
Tuteur:
Prof. Dr. Serge Besanger
soumis le 20 juin 2008
École Supérieure du Commerce Extérieur (ESCE), Paris
Table of Contents
Methodology. 4
Executive Summary5
Introduction: The music industry in crisis
................................................................................................................
1
Part I: Industry overview, history and origin of the crisis
................................................................................................................
3
1. Economic growth in the industry in 2007.3
2. Economic situation major labels...4
3. The cause of the crisis: Internet and illegal downloads...7
4. Substitute products and sub-markets emerge 11
5. The industry’s major companies’ current strategies.13
6. The death of a business model.18
6.1 An unprofitable product 18
6.2 A failed strategy 20
Part II: Strategic Management: A Market Analysis
................................................................................................................
23
1. A changing competitive environment 23
2. Business models to serve the market.24
2.1 Existing business models in music distribution. 24
2.3 Introducing the new business model 30
3. A strategy for the artist development model.33
3.1 The Mission: How does an agency empower artists? 33
3.2 The Strategy: Focused differentiation 36
3.3 The Vision: What kind of company? 39
3.4 Objectives 42
4. Industry and Competitive Analysis .45
4.1 Industry and competitive conditions 45
4.1.1 The industry’s dominant economic features: Segments and
competition 45
4.1.2 The industry’s dominant economic features: Openings in distribution
channels to access consumers 52
4.1.3 The industry’s dominant economic features: Industry profitability 60
4.2 Intensity of competition in the music industry 61
4.2.1 Rivalry among competitors 62
4.2.2 New entry of competitors 63
4.2.3 Substitute products 63
4.2.4 Suppliers’ power 65
4.2.5 Buyers’ power 67
4.2.6 Strategic implications of the five forces 68
4.3 What is causing the industry’s competitive structure and business
environment to change? 69
4.3.1 Different sales and promotion approaches 69
4.3.2 Product innovation 74
4.3.4 Changing societal concerns, attitudes, and lifestyles 75
5. Conclusion.77
5.1 Strategic moves of competitors 77
5.2 What are the key factors for competitive success? 81
5.3 Future Prospects 82
Bibliography. 85
II
Index of Tables
Table1: Evolution of the download market
p.6
Table 2: Bypassing music labels
p.17
Table 3: Technological evolution in the music industry
p.28
Table 4: Top-earning artists 2005
p.36
Table 5: Record label activities
p.53
Table 6: Most popular download sites
p.59
Index of Figures
Figure 1: Growth of unit sales by country in %(pyhsical&digital)
p.1
Figure 2: Growth of global physical unit sales in %
p.2
Figure 3: Market share physical/digital media in %
p.2
Figure 4: Growth of sales digital media in billion Euro
p.2
Figure 5: Evolution of Warner Music stock price
p.5
Figure 6: Three vicious circles
p.6
Figure 7: Value chain of a music distribution company
p.25
Figure 8: Repartition du marché numérique global par format
p.27
Figure 9: The business model
p.32
Figure 10: Distribution deals
p.33
Figure 11: Market share of total sales of the “Big Four” and independent labels
(“Indie”)
p.46
Figure 12: Value chain physical distribution
p.46
Figure 13: Market shares of physical formats in 2005
p.47
Figure 14: Life Cycle of the CD
p.49
Figure 15: Market share online formats 2007
p.50
Figure 16: Visitors on 1000 selected sites in March 2008
p.57
Figure 17: Value chain of online distribution of digital content
p.66
Figure 18: Growth/share matrix of musical formats
p.74
Figure 19: Strategic moves of rivals
p.78
III
Methodology
This dissertation’s purpose is to argue how the players in the music distribution
industry (music industry; labels) have failed to avert and put behind the crisis
which has affected the sales of their products (music, physical media) by:
1. overprotecting their products
2. not adapting to changing market conditions
3. failing to develop innovative strategies to halt or reverse their declining sales
and eroding profits.
After analyzing in detail the short-comings in strategic management within the
companies in question (part 1), the industry’s new competitive environment is
analyzed and a new business model introduced (part 2). New ways of developing
artists without dependence on labels will be demonstrated using existing small
companies as benchmarks for their innovation and revolutionary strategic
approaches.
The principle instruments used in the dissertation are the principles relying on
Strategic Management and Strategic Marketing.
IV
Executive Summary
The music industry is in a veritable crisis after years of losses and declining sales.
In 2007, negative growth in terms of unit sales and total value of music sold
peaked at -20% - a record since the advent of the Internet era and the rise of filesharing networks (“P2P”). Sales are falling in all national markets and distribution
chains and retail stores are abandoning the physical product which accelerates the
decline. Music companies (recording and publishing) experience serious financial
troubles and are neglecting the development of new artists.
The rapid growth of online sales of more than 40% annually has not been enough
to compensate for the decline of CDs and other physical media. The cause of the
crisis is attributed to the widespread use of file-sharing applications on the Internet
and piracy through copying. There are, however, other causes to the problem,
namely the lack in strategy and vision from the part of the record labels who failed
to adopt the digital format and seize the opportunity of new distribution channels.
Meanwhile new sub-segments and substitute products for the CD have appeared
with numerous business models to serve different customer needs. Since demand
for music is still very healthy, there is a potential to profit from developments in
technology and distribution methods by avoiding to further alienate the customer
through overly protecting the products and rather keeping the focus on developing
artists. New distribution channels and different marketing approaches must be
used to communicate directly with consumers.
To pursue this strategy, the new business model of an Artist Development Agency
can make use of numerous partners and online companies dedicated to emerging
artists by bypassing traditional companies such as record labels. The foundation of
the model is the artists’ music as a powerful promotional tool, a service-oriented
approach rather than employing the traditional value chain, the perfection of ecommerce, and the focus on core competencies such as communication through
graphic and web design.
V
Jochen Kreusser - ESCE - Mémoire “L’industrie musical en crise”
Introduction: The music industry in crisis
The industry of music recording and distribution is in a veritable crisis. Since the
advent of the Internet era, the widespread use of the MP3 files which compress
music tracks into a format that is convenient to carry, store, share, duplicate, and
distribute, as well as the popularity of technological devices such as MP3 players,
MP3 phones, CD burning devices, file-sharing applications, and online music
streams, sales of all major record labels and music publishing companies (“major
labels”), as well as small
independent labels, retail,
and wholesale distributors
of music have been in a
constant decline in the most
important markets for music
(see figure 1). In public, of
Figure 1: Growth of of unit sales in % (source: IFPI 2002-2008)
10
4
-2
-8
c o u r s e , t h e l o b b y i n g -14
association “International -20
Federation of the
2000
2001
2002
world
France
Phonographic Industry“(IFPI) and
2003
2004
US
Japan
2005
2006
Germ.
2007
UK
executives with the major labels
have been downplaying the apparent crisis: recovery was just around the corner,
they argued, and digital downloads would rescue the music business. But the
results from 2007 confirm what numerous studies published by consumer research
groups and industry focus groups such as The Leading Question and Jupiter
Research have argued for some time: that the record industry's main product, the
CD, which up until 2006 accounted for over 80% of total global sales, is rapidly
fading away. “In 2007 it became clear that the recorded-music industry is
contracting and that it will be a very different beast from what it was in the 20th
century,” says Mark Mulligan, an analyst at Jupiter Research (The Economist
2008). In fact, in 2007 it became obvious to everyone that a 50-year-old business
model is dead. The negative growth of music sales peaked at -20 per cent in just
one year (without digital revenues; see figure 2), the highest ever recorded.
1
Jochen Kreusser - -ESCE 2008 - Mémoire “L’industrie musical en crise”
Compared to the first bad year in the industry of 2002, revenues have shrunk by
over 50 per cent. The online market with paid downloads may have grown rapidly
recently (see figure 4), but not enough to cover up losses of the traditional product,
albums and physical media.
Furthermore, margins of the online sales have eroded and continue to do so. A
Figure 2: Growth of global
physical unit sales in %
(source: IFPI 2002-2008)
Figure 3: Market share physical/
digital media in % (source: IFPI
2002-2008)
100
0
80
-7.5
-15.0
-22.5
03-04
05-06 total 03-07
725
580
60
435
40
290
20
145
0
-30.0
98 95 89 85
2004
2
11 15
5 2006
Figure 4: Growth of sales digital
media in billion Euros (source: IFPI
2002-2008)
0
03-04 04-05 05-06 06-07
download of a single track now costs €0.99 against the €4.95 a CD single cost in
2000.
At the same time, there has been an increased consumption of music as part of
the entertainment industry. Music is being used and consumed in various shapes,
occasions, industries, or parts of a consumer’s leisure time. Music not only
appears as MP3 file or physical medium, but as part of daily Internet life (as online
streams or internet radio), in video or online games, on DVDs, as a playlist to
share and identify oneself on social network sites, or as ringtones and profiles for
mobile phones. Technological innovation has helped getting music on many
different stages, all of which require different sets or playwrights, or in other words,
different strategies. The failure of the major companies SonyBMG, Warner Music,
Universal, and EMI, as well as most independent labels to stop the fatal trend of
decreasing sales and increasing illegal downloads indicates that they lack in a
clear vision and strategy of what the future of their business might look like and
where future revenues are supposed to come from. The death of the current
business model has been spelled out by many artists, executives, experts, and
commentators of the music scene and various alternative strategies to the
traditional distribution of music already exist. In fact, in 2007 and 2008 many
examples of successful business models have surfaced in the industry. In the
following, the new challenges and transformation this industry is facing shall be
2
analyzed and on the basis of these findings a new strategy to adapt the former
business model will be introduced.
Part I: Industry overview, history and origin of the crisis
1. Economic growth in the industry in 2007
2007 is turning out to be a terrible year for the music industry. Or rather, a terrible
year for the music labels. For example the French market for music: In 2007,
French music labels - including market leader Universal Music, a division of
Vivendi - announced that their sales figures for albums in France have fallen
another 20 per cent compared to the previous year. Sales of single albums (the
short format; “singles”) have fallen a staggering 61%. Nowadays, singles represent
a mere 4% of total sales, compared to 12% in 2003. Comparing music genres,
sales of classical music have fallen by 14%, French music by almost 24%, and
international music by 22% (SNEP 2008).
In retail distribution, stores in France sold 11.4% less CDs than the year before.
Again, the figures for sales of singles are shocking: a decrease of 46.2%. Physical
media (CDs, vinyl), which still accounted for 92% of the market for music,
accounted for sales or 409 million Euros in the first 9 months of 2007, which
translates into a loss of €117 million. Compared to sales in 2002, this market has
shrunk more than 51% (SNEP 2008).
Overall, recorded music sales have declined by 22%, the most striking insight
being the huge difference between the formats: -61% for singles and -20% for
albums.
Table1: Evolution of the download market in
The rapid growth of legal downloads billion Euros (source: IFPI)
represents new opportunities for record
companies. Compared to the worldwide
download market, though, growth in France
is relatively weak. Downloads of digital
format/ 2006
market
single
1.1
title
albums
1
download
2.1
market
market
11%
share
2007
evolution evolution
in %
1.7
+0.6
+53
1.2
+0.2
+29.9
2.9
+0.8
+40.1
15%
+4%
music (mp3 and other files) represented 7%
of the overall music market in 2007 (15% worldwide), compared to 5% in 2006, 3%
in 2005, and 1% in 2004. 2007 album sales of 34.6 million euro means an
increase of 8.1% (€2.9 billion, 40% worldwide). (SNEP 2008; IFPI 2008).
3
However, as the French example shows, the music market having lost €114.5
million in sales, even the increase of digital sales couldn’t make up for the effective
loss of €117.1 million (SNEP 2008).
In fact, album sales are currently in a freefall all over the world. Globally speaking,
album sales were down 9.5 percent. Contrary to the music industry in France,
however, overall music sales in retail were up 14 percent in 2007. Most of that
growth, however, was due to the sale of digital tracks bought online (IFPI 2008).
Effectively, global music sales – in terms of units and total value sold – dropped by
roughly 20% from 1999 to 2003 (from USD 38.6 billion to USD 32 billion). Except
for the new music video / DVD and MP3 revenue streams which have been
increasing in terms of revenue, all music formats have lost in terms of units sold
and in terms of total revenue. Given the naturally decreasing popularity of LPs and
compact cassettes, it is the drop in CD sales which is most conspicuous, because
it coincides with a surge in illegal downloads. The single format (especially CD
singles) has been the first to lose. After an initial decline after 1985 – and thus
unrelated to file-sharing networks – the single picked up again in 1991 (due to the
increase of Maxi-CDs), but, in line with other CD sales, dropped even more rapidly
after, thus consumers purchasing full albums being responsible for the bulk of
industry revenues. The single format dropped by nearly 50% from 1999 to 2003
(OECD 2005). This drop is partly due to inadequate pricing on the part of record
companies (up to €5 for a single) for whom the single format has no high priority
compared to “bundled” formats such as albums or compilations. The success of
legal download providers since 2003, namely iTunes and others who followed, has
accelerated the decline of the single as a single track now costs between €0.89
and €1.29.
2. Economic situation major labels
In retail, in the United States, about 2,700 record stores have closed since 2003
(Washington Post 2006), among them the eighty-nine-store Tower Records chain,
which represented 2.5 percent of overall retail sales, and Musicland, which
operated more than 800 stores under the Sam Goody brand. In Europe, the CD
retail chain Fopp filed for bankruptcy in 2007 and was rescued by HMV (The
Times July 2007), who later that year announced that its profits halved in the first
4
six months of 2007 (The Times Oct. 2007), and Richard Branson decided to dump
the Virgin Megastores – which have reportedly lost him more than £50m in 2007
(The Times Oct. 2007). In 2008, Woolworth, a major music retailer in the UK and
US, has begun to clear its shelves off single CDs (Digital Music News 2008).
Woolworth established a download site which could be a strategy to abandon the
distribution of physical media altogether. These are only the most visible signs of a
crisis that may alter the game forever.
Record and music publishing companies are strongly affected by the
disappearance of outlets for their most important product, the CD. In the case of
Sony BMG reduced headcount and operations are producing some financial gains.
Slimmed-down operations carry smaller overhead costs, and that translates into
stronger margins. As the company reported, during the fiscal year ending March
31st 2008, profits reached $257 million, up from $135 million earlier - and despite
a slight drop in revenues (Digital Music News 2008). Nevertheless, the company
also pointed to a recent-quarter loss, and continued reductions ahead.
The smallest major labels, EMI and Warner Music, are struggling most visibly. In
February 2008, Warner Music Group (WMG) released its quarterly earnings report
for the last 3 months of 2007. For the three-month period ending December 31st,
the major label lost $16 million, and operating
Figure 5:Evolution of Warner Music
stock price (source: Yahoo!Finance)
income dropped 45 percent to $44 million.
Revenues actually improved during the
30
period, along with digital sales. Total revenues
24
increased 7 percent to $989 million, digital
18
revenue reached $141 million, a 41 percent
12
gain over to the year before. On Wall Street,
6
shares of WMG fell to $6.94 in February, a
0
near-21 percent drop. By May 2008, Warner Music's share price has fallen to
$4.75 – 72% lower than its IPO price in 2005 (The Economist 2008), and has
accumulated considerable debt. Its stock price has been trading under the 10dollar mark since 2006 (see figure 5) and a worsening recording industry forecast
is driving its value further downward. Although, according to Paul Resnikoff,
publisher at DigitalMusicNews.com, other factors than fading sales and outlets are
in play. The top executives at Warner Music Group command serious, multi-million
5
dollar annual compensation packages, despite personnel reductions and mediocre
financial results (Digital Music News 2008). And chief executive and chairman
Edgar Bronfman, Jr. has been criticized for depleting a massive family fortune by
carrying out failed investments in times of serious crisis.1
In August 2007, the private equity firm Terra Firma bought EMI and it paid about a
third what the company nearly fetched 10 years ago when a sale to its competitor
Universal seemed possible (The Sunday Times 2007). The two biggest majors—
Universal, which is owned by Vivendi, a French conglomerate, and Sony BMG, a
joint venture between Sony and Bertelsmann, a German media firm—derive some
protection from their parent companies. Universal is the strongest and is gaining
market share. But it is speculated that Bertelsmann may want to sell out to Sony
soon.
Apart from internal financial problems due to bad investments and fading sales,
three vicious circles have set in for the recorded-music firms. First, because sales
of CDs are tumbling, big retailers such as those described above are going
bankrupt, or others, such as Woolworth, Wal-Mart in the U.S. and Media Markt in
Germany, are cutting the amount of shelf- Figure 6: Three vicious circles(source: own
space they give to music, or, as in the
case of Bill Branson’s Virgin Records,
abandon the product altogether, which in
turn accelerates the decline. Richard
graphic)
retail:
bankrupt
exit
cut shelf
companies’
sales
decline
Investors:
no risk
cut costs
Greenfield of Pali Research, an
independent research firm, reckons that
retail floor-space devoted to CDs in
Artists:
no support
development
America will be cut by 30% or more in
1 In May 2008, Goldman Sachs analyst Ingrid Chung. critized WMG for “outrageous executive compensation packages (Digital Music
News 2008).
Rich Greenfield, an outspoken analyst at Pali Research, criticized Warner Music Group and its CEO Edgar Bronfman in January 2008
for what he considered to be wasteful spending on an under-the-radar deal when it acquired the Bulldog Entertainment Group, a
promoter of high-end performances. Bulldog was the firm behind “Hamptons Social at Ross”, a five-show concert series in August
2007, that included Prince, Dave Matthews and Billy Joel - and whose tickets reportedly cost as much as $15,000.. The purchase price
for Bulldog was $16 million, and the deal ultimately crashed with losses estimated at $30 million (The New York Times 2008).
The blog site idolator.com published Greenfield’s comment: “We find it very difficult to understand why WMG acquired Bulldog. How
does selling (effectively) $3,000 concert tix help Warner Music sell CDs and digital downloads (...)? While it may be fun for WMG
management to attend ultra-luxurious parties with their celebrity friends, it is unclear why WMG and their investors had to own and
therefore foot the bill (losses) for all these events? WMG needs to be slashing costs and investing in its A&R efforts, not "partying" with
the Hamptons' crowd on the company's bill, as if the recorded music biz was vibrant.” (Idolator.com 2008)
6
2008 (The Economist 2008). The pattern is likely to repeat itself elsewhere as
sales fall and retailers abandon the product.
Second, because the majors are cutting costs severely, particularly at EMI and
Warner Music, artists are receiving far less marketing and promotional support
than before, which could prompt them to seek alternatives. “They've cut out the
guts of middle managers and there are fewer people on the ground to promote
records,” says Peter Mensch, manager of the Red Hot Chili Peppers and Shania
Twain (The Economist 2008). Most of the time, labels stick to the present
repertoire and fail to develop talents due to their reluctance to invest in times of
crisis.
Third, record companies face such hostile conditions that their investors, whether
private equity or corporations, are reluctant to spend the sums required to move
into the segments of the music industry that are thriving, such as touring,
merchandising or the online market. This reluctance is obvious in the case of EMI
and its new investor Terra Firma which started out by cutting 2000 jobs but still
lacks a vision of the future.
The mood of panic is palpable, and labels are only slowly coming up with new
solutions. Whether those can be found in the traditional product of albums, in
digital music or other segments is uncertain. New business models and strategies
are developing as an alternative to the music label. They are numerous as we will
see, and one in particular will be developed in the following.
3. The cause of the crisis: Internet and illegal downloads
Despite more than 20,000 lawsuits filed against music fans in the years since they
started finding free music online rather than buying CDs from record companies,
the recording industry has utterly failed to halt the decline of the
record album or the rise of digital music sharing (The Washington
Post 2007). Since the file-sharing network “Napster” was launched
back in 1998 and introduced the world to peer-to-peer file sharing
networks, many more so-called P2P networks have developed and attract
hundreds of millions of users every day, all over the world. These sites have
gravely exacerbated the problem of sharing music free of charge, giving people a
way to speed up the process of creating free copies at an immense speed and
7
quantity. In 2003, the International Federation of the Phonographic Industry (IFPI)
estimated the number of illegally downloaded music files at 600 million that year
(www.e-recht24.de 2007). In 2007 those estimates have increased by 30 times to
20 billion (Der Spiegel 2007). Even though teenagers and other music consumers
are well aware that it is illegal to share music online it seems like nothing could
stop them from doing it. In a Los Angeles Times poll, 69 percent of teenagers
surveyed said they thought it was legal to copy a CD they own and give it to a
friend. That’s how it has been done for as long music consumers can think back.
Why should there be a difference now between copying cassettes or CDs (for
which other industries provide the resources such as rewritable CDs, CD-burning
hard- and software, etc.) and bypassing the use of these materials altogether by
downloading the music off the Internet immediately? According to a study cited by
the Recording Industry Association of America (RIAA) more than half of current
American college students download music and movies illegally (The Washington
Post 2007).
Principally, the problem with illegal downloads revolves around one major point:
The product which the music industry is offering its customers, the album in its
physical form of a CD, is a product which today’s teenagers and other important
music consumers who have taken to illegal downloading nowadays no longer want
in its current form. Instead, they demand affordable music, conveniently offered
song by song, not bundled on a single medium. Why spend their tediously saved
pocket money on an expensive CD if they will only like on song on it? Quickly and
easily downloading this song off the Internet seems to be the much smarter and
cheaper solution. Nevertheless, the industry’s current business model is founded
on copyrights. But this underlying foundation is called into question by current
developments in information technology - hard- and software. As Wilfried Dolfsma
explains (Dolfsma 2005), in order for copyrights to be protected, they require the
relative impermeability of geographical boundaries. But the Internet’s greatest
impact is the dissolution of geographical boundaries and more and more control
over intellectual property across national or other geographical frontiers is being
lost2 . Thus, the negative impact of globalization has hit the music industry very
hard. The underlying idea of copyrights is to encourage and protect the artist’s
2 This notion of the negative impact of globalization is also supported by the OECD in its music report 2005 (OECD 2005)
8
creativity. However, as Dolfsma and the singer Courtney Love (Love 2007)
explain, depending on the type of agreement with the record company, the artist
typically receives only a minor percentage of copyright royalties collected, because
they are licensed to the label3. Dolfsma goes on to argue that music distribution
and publishing companies are administrative organizations with no creative
function and receive cash flows from copyrights which in turn they distribute to
various stakeholders or re-invest in the value chain. Usually publishing companies
deal with and manage artists’ copyrights, and all of the four major labels are record
and publishing companies at the same time (Dolfsma 2005, Byrne 2007).
Therefore the question must be asked whether the general assumption holds true,
that a system without copyrights would kill creativity. It can furthermore be argued
that the current system of copyrights favors the major players in the industry by
keeping barriers to entry high, killing innovation.
Lobby associations such as the IFPI and the RIAA are fighting to protect the
foundation of their business model and are unimpressed even by many recent
studies such as the one released by Harvard associate professor Felix
Oberholzer-Gee and Koleman Strumpf from the University of North Carolina who
found that sharing digital music files has no effect on CD sales (Oberholzer/
Strumpf 2004; Harvard Gazette 2004). Another research conducted by digital
music research firm The Leading Question found that people who illegally share
music files online are also big spenders on legal music downloads (BBC News
2005). In fact, they spent four and a half times more on paid-for music downloads
than average fans. The industry is also stubbornly blind to the fact that other
products, such as sales of music DVDs, have experienced a veritable boom in
recent years, even though those files, too, are shared on the Internet with the
same file-sharing tools (www.e-recht24.de 2008). Thus it is very difficult to prove a
causal relationship between the size of the drop in music sales and the rise of file
sharing. It is also likely that a combination of factors has led to the decrease of
sales. Next to file-sharing, other factors, which are exogenous to the music labels,
could explain the fall in music sales: physical music piracy (counterfeiting,
bootlegging, CD burning), economic factors that point to fall of GDP growth after
1999 in many countries (OECD 2005), demographic factors such as the the fall in
3 Dolfsma and Love both claim that artists are typically paid between 30 to 35% of royalties.
9
the number of high-spending teenagers in OECD countries, or increased
competition for consumer attention from other entertainment sources (Internet,
movies, computer games). But, even more than file-sharing and other external
influences, it can be easily argued that it was the labels’ internal shortcomings that
caused the problems: the absence of new music formats that like the CD lead to a
new spurt of music revenues (a direct failure in terms of strategy and vision to
innovate the product), and a drop in music releases (number of titles) with music
labels concentrating even more on existing artist rosters rather than on the
development of young artists The OECD, too, in its 2005 music report (OECD
2005) identified this factor as the consequence of decreased risk taking due to
decreased revenue, price increases of CDs and, lack of innovation (OECD 2005) a result of the vicious cycle the industry is fighting.
But the bosses in the music industry have been unsusceptible to self-criticism and
have all but shown great efforts to think of innovative and legal alternatives to filesharing networks such as Napster, Morpheus, Kazaa, Bittorrent, and many others,
not to mention using their popularity to develop a clear strategy to safeguard their
revenues or adapt their current strategies.
This is not to deny that most of these “unofficial“ file-sharing sites distribute files
without the consent of the owner of the intellectual rights and as a result the latter
is deprived of any remuneration. In the past, not only the industry but artists, too,
tried to defend themselves against the free and unauthorized distribution of their
works by providers and users of these networks (e.g. Metallica, Dr. Dre, Madonna,
Fred Durst/Limp Bizkit). Nowadays, however, there are more examples of artists
who have understood the potential which the Internet is able to provide when it
comes to the distribution and the marketing of their music (Radiohead, Prince,
David Bowie, George Michael, Pearl Jam). Those artists have offered their fans
online concert albums and recordings free of charge and have even encouraged
fans to share these files with other users. The results were fierce disputes with
their record companies who usually are the main beneficiaries of the proceeds
from the music rights and would have preferred to sell rather than distribute them
free of charge.
The new business model will therefore concentrate on generating added-value
and revenues for artists without wholly relying on copyrights. The model’s strategy
10
will be to respect customer demands and to value customers instead of
prosecuting them, and at the same time support the development of artists.
4. Substitute products and sub-markets emerge
With the rise of the Internet and the opportunities and challenges it provides,
especially the music industry has been affected gravely. This does not mean, a
priori, that there is a need to panic. The industry simply finds itself in a period of
repositioning and rethinking of its strategies. And apart from the fading popularity
for the product of albums, there are still possibilities for a label and its artist to
promote the music while generating sales.
The online market is now the fastest growing market (compare table 1). According
to the music industry’s own figures, legal downloads have tripled during 2005. Any
business model, format or technology which enables music fans to gain fast and
easy access to digital music experiences enormous growth, according to IFPI’s
digital music reports 2007 and 2008 (IFPI 2007, 2008).
More needs to be done to capitalize on the power of the peer-to-peer networks
that many music fans are using to get their songs. “Research clearly shows that
music fans who break piracy laws are highly valuable customers," said Paul
Brindley, director of The Leading Question (BBC News 2005). In fact, hardcore
fans "are extremely enthusiastic" about paid-for services, as long as they are
suitably compelling, he said. Which means that the technological features of online
music sites need to be made attractive along the example of Apple’s iTunes and
the pricing needs to be adequately changed. Some labels have started to offer
their entire music catalogues online to customers at a flat rate, such as Rick Rubin
from Columbia, others license theirs to advertisement-based subscription or
streaming services.
Next to online business, another important sub-market emerging is the mobile
phone. There is a huge potential market for MP3 phones. The survey conducted
by the Leading Question found that 38% were interested in downloading full tracks
to their mobile phones (BBC News 2005). With the appearance of Apple’s iPhone
and other similar phones offered by Apple’s competitors, there is an imminent
need to develop the perception of the phone as a credible entertainment device.
Labels and phone providers need to cooperate to develop this market. In
11
December 2007, Universal struck a deal with Nokia, the biggest mobile-phone
maker, to supply its music for new handsets. These approaches have been
dubbed “Comes With Music”. It will allow customers to download all the music they
want to their phones and PCs and keep it – even if they change handsets when
their year's subscription ends. Instead of charging consumers directly, Universal
will take a cut of the price of each phone. The other majors are expected to strike
similar deals. “Comes with Music”, just like putting online a company’s whole
music catalogue, is another recognition that music has to be given away for free,
or close to free, on the Internet.
The growing popularity of online social music networks and Internet radio
(“streaming”) further marks the direction in which the industry is headed. There are
hundreds of these sites with last.fm, Imeem, and Myspace being the leaders. They
offer advertising-supported streamed music free at the point of delivery to
consumers. While paid-for download services will continue, ad-supported music
and subsidized services where people do not pay directly for music will become
more widespread and will become by far the most popular. In June 2008, EMI
licensed its catalog to Spiralfrog and Qtrax, two startups who distribute and stream
music through their website. The license covers both streams and downloads and
is financed by advertising. The DRM-protected downloads can be ported onto
three compatible players, though users must visit the Qtrax destination at least
once every 60 days to keep the songs alive (Digital Music News 2008). All major
labels have followed EMI’s example, though DRM protection remains.
One of the most important opportunities to emerge, however, is the market for
concerts and live performances. There has been a the re-prioritization in recent
years of live music over the recorded variety. In the U.K. for example, attendance
at arena shows rose by 11% in 2007. In the United States, total concert ticket
sales climbed to a record $3.9 billion, up 8% from $3.6 billion in 2006 (Forbes
Magazine 2008). Two examples of artists who have sensed the change and seized
their new opportunities: Madonna, the well-known and acclaimed pop icon and
Jay-z, most successful rapper in terms of revenue and established business
owner. Madonna left her label Warner Music in 2007 and Jay-z announced his
departure from Def Jam Records in April 2008 (Time Magazine 2008), of which he
used to be the president until last year. These moves marked their exit for good
12
from the recording business. They will now wholly focus on live performances for
which they’ve struck deals with “Live Nation”, a live events company from
California. Stars like Madonna, Jay-z, or the Rolling Stones earn vast amounts of
money with live performances. Madonna’s „Confessions Tour“ in 24 cities
worldwide generated $193,7 million. Touring also opens up many possibilities to
generate other revenues. In July 2007, Prince arranged for 2.8 million copies of his
new album to be cover-mounted on the Sunday edition of London’s popular
newspaper “Daily Mail” (Wired Magazine March 2008) and issued several hundred
thousand more free of charge to anybody attending his London concerts in August.
Not only did he gross revenues from the licensing fee of £0.15 (ca. £420,000), but
each one of his 21 shows in London were sold out (ca. £12mn). To grab a share of
the profits their artists make elsewhere (for example concerts) is what major labels
hope for. When Robbie Williams resigned to EMI in
Table 2: Bypassing music labels
2002 for a reported £80 million this new deal
Artist
guaranteed the label a share in Williams’s highly
lucrative concert tours and in merchandising
revenues.
However, many young artists since have become
wary of such composite arrangements, which in the
industry are widely known as 360-degree deals. Some
have decided to bypass the major record companies
altogether (see table 2). Tim Renner, a former boss of
Universal Music in Germany, says the majors should
have acted years ago. “Then they had the money and
former labelnew
distribution
method
Radiohead EMI
own
distribution
Prince
Warner
Wal-Mart
David BowieSonyBMG own label
“Iso”
Madonna Warner
„Live Nation“
Paul
EMI
McCartney
Joni Mitchell EMI
Enter Shikarinone
Starbucks
The Eagles Warner
Starbucks
own label
“Ambush
Reality”
Wal-Mart
Clap Your none
Hands Say
Yeah!
Tori Amos SonyBMG
MySpace/
own
distribution
?
could have built the competence by buying concert agencies and merchandise
companies,” he says. Now it may be too late.
5. The industry’s major companies’ current strategies
The emergence of new opportunities and the sub-markets described above call for
a differentiated strategy to serve these niche markets of various customer groups.
But the music industry currently does not seem to have any solutions at their
hands how to stop the crisis. Only slowly music executives are tackling their
problems and try to gain back market share from competitors who have served
13
niches. Strategies of diversification into sub-markets and vertical integration of
emerging distribution channels through acquisition or partnerships are also being
pursued. As Laurent de Wilde, Paris’ most famous jazz pianist, puts it in his
column for Jazz Magazine, “Après avoir hurlé, menacé, lobbyfié, trépigné,
poursuivi, verouillé, et autres activités constructives, une grande compagnie
universelle du disque a fini par prendre une position diamétralement opposée à
celle qu’elle défendait jusque-là.” (Jazz Magazine 2007). What Mr. de Wilde is
referring to is Colombia’s and Universal’s move to offer their musical catalogues
online for unlimited download. In view of the availability of free music online
(Internet radio, social music networks), a move long overdue.
However, Mr. de Wilde’s hopes of a change in strategy in the music business are
only very slowly taking shape. The fact that their customers are no longer willing to
buy whole albums or physical media such as CDs and singles has not been
accepted by the top management at any of the major labels. And for now they are
clinging to their old business model and strategies with all their might by protecting
their market and erecting barriers with the help of national governments. The IFPI,
in its digital music report (IFPI 2008), celebrates the new French law against
Internet piracy, submitted to French Parliament in April 2008, and IFPI President
John Kennedy “thanks President Sarkozy and Fnac Chairman Denis Olivennes
more than anyone” for “making the year 2007 the year where ISP responsibility
becomes a reality”. Indeed, the bill called “loi Olivennes” is the farthest-reaching
legislative action against file-sharing worldwide. It requires Internet Service
Providers (ISP) to collect and screen data of their customers and report any illegal
file-sharing activity to the government who, in a three-strikes policy, will order the
ISP to cut the Internet connection of the user. However, the bill, heralded around
the world as the most effective measure against piracy, has drawn massive
criticism from consumer groups, privacy advocates 4 but also from other EU
governments, that it is becoming more and more unlikely to pass the Conseil
4 La “loi Olivennes” foresees the establishment of a powerful new government body, the High Authority for the Distribution of Works
and the Protection of Rights on the Internet (La Haute Autorité pour la diffusion des œuvres et la protection des droits sur Internet, or
HADOPI). The High Authority acts on reports of suspected infringement and based on those accusations alone it can contact, warn,
suspend and finally deny Net service to any French citizen. They have the right to obtain the records of Internet users of one year and
can order ISPs to include new filtering systems into their infrastructure. Means to monitor a user’s illegal activity include governmentrequired spyware at the ISP and home level which intrude into the private records of ordinary French citizens. The French Internet
trade group ASIC, which includes AOL, Yahoo, Google, Wikipedia, MySpace and others complained about the disproportionality and
injustices in the HADOPI procedure. (EFF 2008)
14
d’Etat who is to review the bill before it is ratified. In April 2008, in response to
Sarkozy’s bill, EU members of Parliament voted for a resolution which would
declare any such laws a violation of human rights and the constitution5.
These efforts go so far as to spy on the private life and threaten to cut Internet
access of customers, and along with prosecution these litigation strategy has been
supported by all major labels. But not only private users are prosecuted. Startups
who offer new business models for distributing music in a way that satisfies the
modern music listener’s demands are being made subject to immense obstacles
in pursuing innovative distribution solutions.
One example is Deezer, a Paris-based, ad-supported startup that just secured the
licenses to Universal Music Group content. But before that deal, the start-up
formerly know as Blogmusik was shut down on infringement charges brought
against them by Universal. The service was launched in 2007, and also carries
content from Sony BMG. Today Deezer offers a catalog total of 2.5 million, and an
active user base of roughly 2 million (Digital Music News 2008). Another start-up,
Project Playlist, is being sued (as of May 2008) by the major labels (Digital Music
News 2008), an all-too-familiar result for music-related startups. The Project
Playlist business model allows users to create playlists by linking to content hosted
across the internet in order to link the massive - but highly decentralized and
chaotic - library of media content online, trying to give consumers a chance to
organize and explore the music available. The business model is not the type of
file-sharing network that promotes the unauthorized distribution of copyright music.
The lawsuit, backed by three of the four majors, accuses Project Playlist of
massive copyright infringement.
In Spain, major labels are suing file-sharing company MP2P Technologies,
pursuing damages of $20 million, but the company is fighting back. "We intend to
vigorously defend ourselves against this shakedown attempt by the major label
cabal," their CEO declared. "Litigation is in itself not a valid business model . For
5 In a motion for amendment of paragraph 22a, of resolution 2007/2153(INI) “Cultural industries in Europe”, EU members of Parliament
call on “the Commission and the Member States to recognize that the Internet is a vast platform for cultural expression, access to
knowledge, and democratic participation in European creativity, bringing generations together through the information society; calls on
the Commission and the Member States, therefore, to avoid adopting measures conflicting with civil liberties and human rights and with
the principles of proportionality, effectiveness and dissuasiveness, such as the interruption of Internet access.” (EU 2008)
15
them, however, it has been a dogged and futile pursuit of theirs since the advent of
P2P." (Digital Music News 2008)
The litigation strategy on the part of music labels and publishing companies has
become a major thorn, not only for the private consumer, but for music-focused
startups, too, hindering their growth especially given the heavy pressure on
available funds. Like MP2P Technologies, other industry executives, too,
especially at social network companies such as Imeem or Rhapsody, wonder
whether the major label licensing approach makes sense as a long-term business
model. "They think there is going to be this indefinite period of getting paid $30
million upfront,", said Charles Quirk, CEO of Rhapsody (Digital Music News 2008).
The problem with illegal downloads and file-sharing (including copying CDs, social
music networking and Internet radio – all of which have been the target of fierce
lawsuits) is the violation of copyright and intellectual property which has been the
traditional income of the industry. A new idea to preserve this income surfaced last
year and was voiced by some music executives and managers: a music tax to
create guaranteed revenues. The principle of this proposal is a general tax, called
ISP tax (French: “licence globale”), on all Internet users, levied by Internet Service
Providers, the proceeds of which are to be distributed among music producers.
Efforts have been made in Canada to introduce this tax when in 2007 the
Songwriters’ Association of Canada called for a mandatory $5/month ISP music
tax. A mandatory monthly tax in the European Union on broadband Internet and
mobile phones of around €4/month that allows consumers to download and
consume all the music they want without DRM has been the goal of many
lobbyists in the past months (www.techcrunch.com 2008). This idea, however, is
very unlikely to be further developed and quite unfeasible, too. Unfeasible,
because it is not known, how the revenue of this tax is to be evenly and fairly
distributed to the artists and labels. It is also not mentioned, who is supposed to
levy and collect this tax. In addition to that, the idea of a ISP tax died with the
implementation of the new laws against piracy and illegal downloads because now
P2P-networks are outlawed anyway.
In addition to the technical difficulties of the implementation of this tax another
question mark is raised. Forcing people to buy music whether they want to or not
is not a solution to this problem. The incentives created by such a system are
16
perverse – guaranteed revenue and guaranteed profits will remove any incentive
to innovate and serve niche markets. The product itself, the music, is not being
developed and remains just as it has been for the past 50 years. Incentives to
innovate will evaporate. Instead of building new brands and encouraging talented
artists to succeed, they’ll harvest profits off of existing big names and work hard to
keep anything new - labels, artists, and songwriters - out of the market. And this is
true: Early 2007, Universal bought the French independent label V2 only to shut it
down by the end of the year (Le Monde 2007). This has caused an outcry in the
indie scene, but it wasn’t the first time that smaller competitors are squeezed out
of the market. A music tax will only lead to competition for market share, with no
attempt to build the size of market or serve less-popular niches.
In another attempt to protect their income from copyright was the infamous digital
rights management (DRM) which aimed at protecting music files from being copied
– whether from CDs or the MP3s available online – with encryption and codes,
leaving the product dysfunctional if copied or distributed. Furthermore, DRMprotected files cannot be played on all digital music players (MP3 players). This
strategy, however, infuriated music fans all over the world as they could not accept
the fact that the labels still want to control what the consumer does with the
product even after the consumer has legally bought the CD or MP3 file. ITunes, in
2007, was the first one to stop this practice and announced the end of its DRM
policy. However, failing to obtain the consent of all major labels, they obtained the
full rights to distribute music uncoded and unprotected only from EMI. The reason
for the refusal of the other majors was their determination to become more
independent from iTunes, as the Apple store controls most of the online market.
In January 2008, however, Amazon struck a deal with all four major labels (EMI,
Sony BMG, Universal and Warner) for the right to offer DRM-free music on its site.
Others, such as BMG’s online music download site Napster were also granted this
right. This change of policy can be attributed to the growing realization that DRM
has more harmed the sale of digital music than it has helped to capture the market
for the labels. Market experts, retailers and even some managers from the music
industry – not to mention the majority of consumers – have long argued that sales
figures could be more easily boosted without DRM and that current DRM
17
regulation have been going too far, infringing consumer rights and making it
difficult for users to play music on the hardware of their choice.
Apart from overly protecting their products and apart from some attempts to
capture some of the growth in digital music sales from its competitors iTunes and
Amazon, there has really been only one other strategy by music executives:
threaten and persecute consumers and lobby legislators to implement stricter laws
against violation of copyright.
6. The death of a business model
In view of failing strategies which focus on unfeasible protection (DRM, ISP tax)
and alienating the industry from their customers, it is safe to say that the major
labels have maneuvered themselves into a losing position. There are two reasons
why we can claim that the music industry’s current business model is broken.
6.1 An unprofitable product
The deals struck by Madonna, Jay-z (contract with Live Nation), Prince, The
Eagles (distribution via WalMart), Paul McCartney and Joni Mitchell (distribution
via Starbucks) were isolated, unusual deals, by artists whose careers had already
brought years of profits to the big music companies. But they made the labels look
irrelevant, expose their failures, launched a debate among artists regarding their
use, and will no doubt prompt other artists to think about leaving them, too (see
table 2). The scale of this epidemic can be measured by browsing the Free
Albums Galore blog that lists more than 800 albums by a range of artists – from
the Beastie Boys to classical music to unsigned metal bands – all of which are free
to download (http://freealbums.blogsome.com/).
What looks like commercial suicide is, in today’s reality, sound business sense.
Records, CDs or downloads now have all become downgraded to the status of
promotional tools.
The reason for the loss in value of digital music and music production in general is
because their marginal production costs are zero: Like software, it doesn’t cost
anything to produce another digital copy that is just as good as the original as
soon as the first copy exists, and anyone can create those copies (meaning there
is perfect competition and zero barriers to entry). Unless effective legal (copyright),
technical (DRM) or other artificial impediments to production can be created,
18
simple economic theory dictates that the price of music, like its marginal cost, must
also fall to zero as more “competitors” (in this case, listeners who copy, P2P
networks, social network communities) enter the market. The evidence is
unmistakable already. In April 2007 the benchmark price for a DRM-free song in
the United States was $1.29. By the end of the year it was $0.89, a drop of 31% in
just six months (www.techcrunch.com 2007).
First, other revenue sources and substitute products can and will be exploited, as
described above. Particularly live music, live music recordings, merchandise and
limited edition physical copies of music will be the future source of revenues for
artists. The signs are already there. Live music industry is booming this year.
Releases of special edition box sets like the one by Radiohead for €65.00
simultaneous to the release of their “free” digital album, or limited and special
editions on iTunes gain in popularity. Recorded music will become a marketing tool
to draw people’s attention and get them to pay for concerts and merchandise.
Overall the music industry will be smaller in terms of revenue. But the artists who
are driven to create their art will continue to do so, and many will make a very
good living from it.
With zero marginal costs, the product is ubiquitously available and its price is
unattractive to consumers due to changing consumer tastes and habits. Artists and
labels will have to stop thinking of digital music as the main source of revenue and
start thinking about it as a way to market their real products. Users will be
encouraged (even paid, as radio stations are today) to download, listen to and
share music. Passionate users who download music from the Internet and share it
with others will become the most important customers, not targets for ridiculous
lawsuits.
Zero marginal cost plus competition plus no barriers to entry (anyone can create a
copy of a song) results in a zero price, unless government creates artificial barriers
to a free market.
All the big labels have now given up on DRM. They haven’t yet given up on trying
to charge for their music, but it’s becoming more and more clear that as long as
there is a free alternative (file sharing), the price of music will have to fall towards
free.
19
6.2 A failed strategy
The death of the music labels’ business model is not only to be attributed to the
erosion of profits as a result of illegal downloading or music fans rejecting their
product, but it is a result of 1.) music managers’ failure to adapt to the change in
market conditions, and 2.) their deference from their original mandate and raisond-être: developing artists.
Basically the problem with illegal download is the fact that the music industry with
their albums are offering a product which many – mainly teenagers – do not want
anymore. These teenagers don’t feel any moral guilt with illegally downloading
because they feel that the artist – who in their eyes should be the main beneficiary
of revenues - does not see enough of it. Furthermore, what is called the music
business today, however, is not the business of producing music anymore. At
some point it became the business of selling CDs in plastic cases without
innovation and adaptation to consumer tastes. As Marc McCaughan said in a
conversation with David Byrne (Wired Magazine 2007): "Major labels aren't doing
well because they put out terrible records for years and years and kept raising the
price of those terrible records and finally people were like, 'Screw you’.” Quality, as
mentioned by McCaughan, is another factor responsible for peer-to-peer networks.
Many consumers consider contemporary music to be rather bad. This is a direct
result of major labels focusing on promoting formats such as TV shows like
“Popstars” or “Starsearch”. This is to say that there is something fundamentally
wrong with the music itself. Labels invest very little time in developing artists these
days (in part due to falling revenues, as mentioned above). Instead, they go for the
big money, the mega selling single for the mass market. If the album becomes a
success, great, and if it doesn't, that artist is done. The reason people are still
listening to those old songs played on the radio is because those artists were
nurtured by labels who took a long term view towards their career development.
The problem for music consumers is that the product is either a CD in a plastic
case or an MP3 file that cost absolutely zero to produce (and zero to obtain).
Music consumers will always use music as part of their social fabric: to congregate
at concerts and in bars, to pass music from hand to hand (or via the Internet), to
build temples for their heros (opera houses and symphony halls), to want to know
more about them - their love lives, their clothes, their political beliefs. This betrays
20
an eternal urge to have a larger context beyond a piece of plastic. Labels need to
get back into the business of releasing good music and quit selling lifestyles and
images. People want to buy music - you just have to give them something worth
buying. Years of failed strategy has created a whole market of people who
specifically look to buy independent goods so as not to deal with the big record
companies. And with regard to the legal crusade they are waging it becomes clear
that the industry is clinging to a business model that has collapsed and every
problem they're trying to solve becomes worse by the lack of a clear vision and
strategy.
Concerning changing market conditions, their strategy has not been bold enough
to pursue the new business opportunities that have been presented to them by
emerging substitute products and technologies. For the past 50 years or so, their
strategy has not emphasized on growth and sustainability by out-innovating its
competitors, mainly because they didn’t have any competitors from outside of the
music industry. This has changed with the rise of the Internet and file-sharing
networks. The music industry’s wait-and-see approach as well as their strategy of
protection and prosecution towards the Internet and e-commerce has led to their
downfall.
A mixture of lack of visionaries among managers and a good deal of arrogance in
this highly concentrated industry has prevented music companies from letting their
strategies evolve over the past decades in order to:
• foresee the shift in industry and competitive conditions
• capture emerging buyer preferences and requirements
• recognize file-sharing networks and new technologies to distribute and share
music instead of watching these rivals take away market share
• make use of advancing technology instead of remaining with what they thought
was the latest technology, the CD
• re-evaluate or refine their strategy of a business model that was founded more
than fifty years ago.
According to Gary Hamel (“Strategic Management”/Thompson/Strickland),
“strategy is something to be modified whenever it is propitious to do so and
unfolding events dictate”. Slowly managers in the industry are realizing their
failures and the need for a change in strategy. As “Big” Jon Platt, Vice President
21
Creative for EMI Music Publishing, puts it: “I don’t know if fixing is the right
question ... it’s more, what can we do to build on a new business model? That’s
the problem, is that everyone is trying to fix the old model, and that’s obviously not
working, so we need to build on a new model”. Edgar Bronfman, chairman and
CEO of Warner Music admitted that "by having stood idle or having moved at
glacier-like speed we have unintentionally started a war with our clientele. We
refused to provide them with what they wanted. The customers have won that
war.”
The problem isn't that music itself has ceased to be profitable because people
don't care about music any more - the problems rather seem to be associated with
out of date business models, poor money management, and ineffective artist
development. That’s why a new strategic approach to artistic development and the
distribution of artists’ musical products has become necessary. The following part
will introduce the new business model and analyze its opportunities for success
and profitability.
22
Part II: Strategic Management: A Market Analysis
The purpose is to analyze the existing business model of the music label, how it is
facing major challenges in the digital era, and point out how strategies need to be
adapted. There are new strategies and business models which have surfaced in
the year 2008, some of which will be defining the future distribution of music and
the development of artists. These will serve as benchmarks. The results of the
comparison of traditional and new strategic approaches will be used to develop a
new strategy, one that focuses on a defined segment of the music market and the
development of artists.
1. A changing competitive environment
The market for music is experiencing a time of rapid transformation after years of
losses and stagnation. The existing business model of music distribution is being
replaced by new methods and strategies from new entrants to the market, each of
which is focusing on different customer segments. As of the last quarter of 2007,
major labels, too, are making moves to adapt new strategies by acquiring and
partnering with rivals and online-based companies.
Usually, in the past, the music industry has never had difficulty adapting to major
transformation of their industry or
technological breakthroughs (see
table 3). But the way in which
consumers interact with music has so
fundamentally altered over the past
Table 3: Technological evolution in the music industry
(source: OECD 2005)
period
format
m a r k e tmobility
s h a r e
1890
1930
iPods to music streams and social
networks - that this time the
industry’s majors find themselves in a
crisis, be the cause illegal downloads
-today
-
low
LP records,
20 years – as described above, from
the invention of MP3 players like
home phonograph
Radio
magnetic recording
1948
1958
1963
1979
1982
2001
1999
1999
2000-2005
vinyl
0.30%
Juke record
Box
Stereo/Hi-Fi
audio cassette
14.70%
Sony Walkman
Compact Disc
73%
Digital Video Disc
4%
first distribution MP3
15%*
first MP3 player
online streaming media/
internet radio
MP3 phones
or the failure to adapt.
high
The download market marks the
most fundamental transformation: While physical media still represent the largest
share of music sold, digital downloads doubled in 2006 and 2007 (+40%), and the
23
portable phone market is gaining market share rapidly. Digital sales of music
represented 15% of the total worldwide music market in 2007, up from 12% in
2006 and up from 6% in 2005 (IFPI 2008). According to a market study released
by research firm In-Stat, digital music sales will represent an impressive 40% of all
music purchased worldwide by 2012. Factors contributing to this change in music
distribution growth include the global expansion of broadband, increasing demand
for single-track downloads, and the availability of entire music catalogues on social
networking and music stream internet sites.
Hence, distribution is shifting from specialty shops and brick-and-mortar retailers
to mass-market online retailers. This shift in its turn enforces alterations in the
behavior of consumers, producers, and distributors alike. In order to still reach the
consumer, distributors have to alter their old channels, make large investments,
and embrace new technologies and trends. This is how sub-markets have
emerged and with them new actors entering the market of music distribution. As a
result, not only the competitive landscape changed, but also the value chain of the
competing companies.
2. Business models to serve the market
2.1 Existing business models in music distribution
There are numerous business models to serve the existing segments as well as
new segments in the music industry. The music market cannot easily be
segmented into certain niches or fragments as there are a large number of
possibilities. There are many niches of musical genres which are defined by
lifestyles, culture, social class, ethnicity, demographics, and so on. The market for
music distribution, however, can be split into 3 major segments: physical media,
online and digital music, and concerts.
Traditional
The traditional business model in the past has been the distribution by the music
labels. Their main activities have been the funding of recording sessions, the
manufacturing of the physical product, its distribution and marketing, giving loans
and advance money for expenses (concert tours, videos) to the artists, advising
and guiding artists on their careers and recordings, and handling the accounting.
24
With the rise of the digital
area, this value chain has
Figure 7: Value chain of a music distribution company (source:
Thompson/Strickland 2003)
changed.For example,
recording costs have
declined to almost zero.
Artists used to need the
labels to pre-finance their
recordings, to pay an
engineer and producer. For
many artists – maybe even most – this is no longer the case. Albums can now be
recorded on computers and there are more and more recording studios offering
their services. Manufacturing and distribution costs are approaching zero. There
used to be a break-even point below which it was impractical to distribute a
recording. With LPs and CDs, there were base manufacturing costs, printing costs,
shipping, and so on, and therefore economies of scale were crucial. But no more:
digital distribution and recording CDs have become very inexpensive thanks to
new technology. It's no cheaper per unit to produce and distribute a million copies
than a hundred. Finally, the increase in concert sales shows that touring is not just
promotion, as it has been seen by music labels. But bands who are starting out
without the help of labels are starting to see live concerts as their major source of
revenue and, more importantly, as a distribution channel for their music.
The two major problems with this model:
1. The traditional value chain is focused on producing this product - the album with which consumers no longer identify themselves. The product’s quality,
through aggressive and capital-intensive marketing by the record companies,
has deteriorated to a point where consumers are no longer willing to pay the
price for a CD (or a digital album). The CD has deteriorated to a cheap plastic
case easy to copy and distribute. The value of a whole album is not as big as it
used to be in the era of The Beatles or Pink Floyd (who had surprisingly few
chart hits) but single tracks, song clips, and sound bytes (e.g. for mobile
phones) have become the dominant form of music and listening culture. That’s
why sales have been constantly decreasing but the record company’s value
chain still incurs high overhead costs. Many record labels are moving away from
25
a record-centric model and diversifying their revenue streams across a much
broader range of products and platforms. Digital is no longer a separate entity in
the operation of a record company but it is wholly integrated into all the products
and services being offered. Therefore, a release from an artist today may
appear in dozens of different products, such as a download, a CD, a ringtone or
wallpaper for the mobile phone, a master tone, an e-ticket for a concert, a music
video, the membership of a fan base on a social network platform, or a
subscription service.
2. As a consequence of the arrival of new revenue streams, products, and
distribution platforms, and due to the presence of a huge variety of different
types of artists, genres, sub-cultures, niches, and tastes, each artist requires a
set of services individually tailored to his or her needs. Most record companies,
however, apply the entire process of the traditional value chain to all artists, and
are therefore unable to take advantage of cost savings and growth in addedvalue which a deconstructed value chain offers. Artists serving particular
segments or niches can best be developed by offering services of certain “selfcontained” segments (Koch 2006) because for these musicians, only some
layers of the value chain provide real added value while other services become
irrelevant. Already, new competitors have become leaders in specialized
segments in a value chain. Through specialization, they are able to both
differentiate their products and services and achieve cost savings.
Online distribution
Most business models today focus entirely on the online distribution of digital
music. This means that no other activities of the value chain are pursued, and the
focus has entirely shifted to investing in distribution.
A very innovative and modern business model is presented by INgrooves, a startup company based in San Francisco, U.S.A. INgroove specializes in the
distribution of digital music and has established an online platform from which
artists have access to an extensive network of online dealers. The services they
offer are distribution, customized marketing and promotion, and support in
administrative issues such as licensing. Their model is an important step towards
a strategy of providing support to the development of artists different from how
26
record labels do it, by focusing on selected elements of the value chain and
thereby reducing costs.
Regarding online distribution, Apple’s iTunes holds by far the largest market share
with 70% of all digital music sold worldwide. Since its launch in 2003, Apple's
iTunes Store has sold more than 4 billion songs, and in the next five years it may
still account for a 28 percent of all music sold worldwide (Wired Magazine April
2008). However, competitors such as Amazon, MP3.com, and WalMart already
offer downloads up to 10 percent cheaper than iTunes, and with marginal costs of
digital music approaching zero, not ownership of music is the key to success in
this industry, but the right to access entire libraries of digital music tracks through
subscription- and advertising-supported businesses. This strategy is already the
the focus of online competitors such as Napster (SonyBMG), eMusic.com,
Rhapsody.com, or Yahoo!, only to name the few biggest.
The evolutions described above have provoked recording
Figure 8: Repartition du marché
numérique global par format
companies into exploring the rapidly expanding digital
market. As of 2008, all major record companies have
entered partnerships with rivals with various business
models or from different industries. In December 2007,
Universal Music, and in April 2008, Sony BMG struck deals
subscriptions
5%
online
48%
mobile
47%
with phone maker Nokia to provide their entire catalogue for
phone users to download (Financial Times, April 3 2008). In a similar deal of
“comes-with-music”, Apple, in March 2008, started discussions with all major
labels to give customers free access to its entire iTunes music library in exchange
for paying a premium for its iPod and iPhone devices (Financial Times, March 18
2008).
The latest and by far boldest move, which will be defining the music market to
come, is a project planned by the social networking site MySpace, which is owned
by News Corporation, together with the three biggest major labels – Universal,
Warner, and Sony BMG – all of which receive an equity stake in the newly formed
company called “MySpace Music”. Negotiations with the outstanding company,
EMI, are under way. The goal is to gain market share from iTunes (Financial
Times, April 8 2008) . The service, which will probably be launched in summer
2008, is an attempt to connect MySpace’s vast online audience (more than 100
27
million users) and its social networking capabilities to the catalogues of the largest
music companies (Financial Times, March 23 2008). The new MySpace Music site
will use existing band pages from the original MySpace site and stream full-length
songs and videos for free. The record companies will provide DRM-free
downloads, ringtones, concert tickets, T-shirts and more (Wired Magazine, April
2008). The partnership reflects record companies’ new embrace of the sort of
internet sites that they used to shun. Now, with MySpace Music, they are trying to
achieve revenues from long-term, all-encompassing deals, the so-called 360degree deals, which means that, if the project proves to be successful, it will help
record companies to move beyond their reliance on CD sales and diversify into all
other music-related revenue streams. It will probably take some time and more
investments until numerous small revenues can compensate for the receding CD
revenue, but major labels have learned that the Internet is not only a way to give
away music free of charge but that the mass distribution of music may prove to be
very lucrative, too.
Live performances
Live Nation is an example for the third major business model of music distribution,
namely the focus on a single product, segment, or distribution method. Live Nation
is a concert promoter based in Los Angeles, California (USA), and last year
famously has begun to capture market share from traditional record labels by
signing artists such as Madonna, U2 and Jay-Z to 360-degree deals. Those artists
have realized that they are able to exploit their brand image more efficiently
through concerts and touring and have chosen partners other than a major label.
In terms of revenue, event promotors such as Live Nation have already overtaken
the labels: Total primary-market concert ticket sales climbed to a record $3.9
billion, up 8% from $3.6 billion in 2006 and representing the ninth consecutive year
that combined concert grosses in the U.S. and Canada have hit an all-time high
(Forbes 2008), in Germany, concert revenue will reach €2 billion, and only €1.8
billion for CDs (Wirtschaftswoche 2007). Live Nation CEO Michael Rapino
estimates revenues surpassing $1 billion from the contract with Madonna over the
next ten years, $800 million from concerts, $100 million from CD sales, and the
rest merchandise and advertising (Wirtschaftswoche 2007). There are numerous
other examples of how new business models focus on concerts: CTS Eventim AG
28
(Germany), Europe’s leading concert promoter, has introduced a new way of
developing artists that exists in various forms: on their website, fans vote for their
favourite bands, make them popular, and the most popular ones receive support to
go on tour. Majors are pushing aggressive diversification strategies to jump on the
bandwagon, too. On the artist level, deals are moving towards all-encompassing,
360-degree structures. On a broader business level, acquisitions are also
becoming commonplace. In 2008, Universal for example has invested in promising
startups Buzznet and INgrooves, the British artist management and merchandising
enterprise Sanctuary Group in April 2008, and BMG Music Publishing in May 2008
(Digital Music News 2008).
“Comes-with-music”
Yet another business model is the “Comes-with-music” or “bundled music” model
of distribution. At the end of 2007 there emerged a new subscription model based
on the concept of “bundling” music with other services or devices – be it an ISP
subscription, a mobile phone or a portable player. While the music comes virtually
“free” to consumers under this model (consumers buy the device and receive a
subscription for free), record companies and artists get paid out of the sale of
services or devices. These partnerships also create opportunities for more
marketing and promotion of music services in the bundled offer to both the maker
and the producer (music label) (IFPI Digital Music Report 2008). In December
2007, Nokia announced a new subscription venture, in partnership with Universal
Music, to offer millions of songs to Nokia phone users. The “Comes with Music”
programme is due to launch in the second half of 2008 and will offer 12 month
access to Universal’s entire catalogue to consumers who buy selected Nokia
music phones. Also in late 2007 Universal partnered with French Telecom
company and Internet Service Provider (ISP) Neuf Cegetel, whereby for a monthly
fee of €29.90 the ISP offers high speed internet, fixed line telephony, HD TV
service and an unlimited music download service with Universal’s catalogue. In a
similar deal EMI partnered with Alice, an ISP owned by Telecom Italia, in
December 2007 (IFPI Digital Music Report 2008).
Artist development
A courageous and innovative move and benchmark example of how a record label
has altered and adapted its strategy is a small net label (=online based) based in
29
Mainz, Germany. The company is called
“Phoniclux” and it specializes on offering online
services to artists (www.phoniclux.de). In 2002,
its two founders started out as a classic
recording company, today, however, they have
extended their offer to publishing, advice in
sound engineering, film production, mobile
entertainment, and distribution. They are building
on their experience in the production of music
and film, as well as a network in online
distribution. These services are detached from
the traditional value chain of producing and
licensing artists, and are offered individually. In
terms of artist development, Phoniclux offers the
renting of their recording studio, music production,
the handling of licensing, online distribution, and
what they call format innovation. Especially by
offering a product called “format innovation”, the
founders show their innovative approach to new
challenges in the industry. With endless
possibilities of distributing the product to the consumer and the ever changing
ways in which it is consumed, adapting and re-designing the format in which music
is delivered is a key factor for success. In terms of technological innovation and a
new approach to marketing and promotion, Phoniclux has adapted the idea behind
social networking sites such as MySpace and has established a website where
musicians (and film makers) can upload their work, present themselves to the
public through music and video streams, and eventually find their type of
distribution channel (www.stageclip.com) - with the help of the services and
products the company offers.
2.3 Introducing the new business model
Most of the above new business models aim solely at the distribution of an artist’s
recorded music, with the exception of INGrooves, MySpace, and Phoniclux. The
growing importance of digital music and the economics of zero marginal cost will
30
make it increasingly difficult to generate real value from the pure distribution of
music. If subscription-based services or the business with music for mobile phones
cannot make up for the loss in sales of CDs, record companies will be in trouble
and only those competitors who serve very specialized niche markets will survive
and continue to draw music listeners.
This is because some segments of the value chain generate more revenue than
others depending on the artist. The new strategic approach is therefore not a onesize-fits-all marketing plan of a record label, but a specialization in core
competencies, a selection of services offered, and the deconstruction of the
traditional value chain in order to grow in the most profitable segments and to be
able to provide individualized artist development. There are numerous examples of
artists who have become successful and popular without the help of any label independent or major. It is often said that these are exceptions who got lucky by,
say, finding a large Myspace audience, but possibilities are infinite on how to
promote an artist using today’s technological opportunities. And the fact that there
are still acts who receive nine-digit deals from record labels and the success of
touring despite excessively high concert ticket prices is prove that the music
business is healthy6 (compare table 4). It
is the distribution business that is
Table 4: top-earning artists 2005 (source: Forbes 2005)
Artist
major revenue
net earnings 2005
The Rolling Stones
touring
€141 million
U2
touring
€125 million
Kenny Chesney
touring/records
€92 million
others have shown, where the future
Green Day
touring/records
€83 million
The Eagles
touring/records
€70 million
business model is to be found: outside of
Paul McCartney
touring
€69 million
a label. Their strategies have shown that
Celine Dion
performing (Las Vegas) €68 million
Dave Matthews Band touring
€46 million
there are plenty of ways to earn money
Van Halen
$94 million
undergoing a crisis.
Radiohead, Madonna, Prince, and many
touring
because people are still enthusiastic about music and more music than ever
before is being consumed by an increasing number of people. The problem with
other business models is that they focus on selling albums or tracks and not on
developing the artist - with the exception of certain social music networks and
blogs. Of course, that is how you earn money as a business: by selling the product
6 Madonna receives $120 million over the next 10 years, rapper Jay-z receives an all-time record $150 million over the next 10 years,
both signed with LiveNation in 2008; R.E.M. signed a deal with Warner Music over $80 million for 5 albums in 2007, Robbie Williams
received €64 million for 3 albums with EMI in 2002, Mariah Carey will receive $7 million per album under the agreement signed with
Universal in 2008.
31
to the consumer and reinvesting profits in marketing and distribution. But this value
chain is out of date in the internet era (as will be shown later) and the artist does
not profit enough from the proceeds of his work.
Demand for music is up but modern music and artists have many faces. It is
becoming difficult for a music executive to pick artists and award contracts to
those that they think will have success. But with so many fragmented music styles
- and tastes - and with so many new ways to promote an artist, the new business
model must take the shape of an artist development company, a so-called artistled approach. If an artist can be accompanied and assisted throughout his career
on the basis of rendering him service and counsel, then all his interests and skills
can be fine-tuned and coordinated. If the artist isn’t successful in selling CDs, then
other markets will be exploited in which he or she has competencies (stage
performing, songwriting, composing, etc.). There is no one single way of doing
business these days. There are many ways to distribute and promote music and
that variety is good for artists; it gives them more ways to get paid and make a
living. And it's good for audiences, too, who will have more - and more interesting music to listen to. "It's awesome, and that's not anything disrespectful about the
great bunch of people up at Warner Bros. Records," Metallica drummer Lars Ulrich
recently told San Francisco radio station KBS, "But it's just exciting to be able to
communicate directly with your fans, and having the opportunities to do it." (Digital
Music News 2008).
Figure 9: The business model of the Artist development agency
(own graphic)
management
and consulting
Artist
Development
Agency
Design and
Corporate
Identity
web hosting
distribution
concerts
Artist
Production
32
marketing
and promotion
manufacturing
of media
3. A strategy for the artist development model
3.1 The Mission: How does an agency empower artists?
As a result of shifting market conditions and altered customer needs and
preferences, it is necessary to develop a new model to serve these. As we can see
from strategic maneuvering of rivaling firms in the industry, the Internet and
internet technology have changed the competitive landscape, and along with that
the services and type of corporation today’s artists need. Newly emerging
opportunities and threats for artists and record companies alike have appeared.
But fresh thinking and new strategies will allow artists to stay in the business
despite threats from substitute products or internet piracy.
Major labels - not at least after Madonna’s deal with LiveNation - are pursuing
strategies to diversify their revenue streams into other sources from which artists
derive added value. But instead of “milking” the artist repertoire, an “artist
development agency”, lending expertise, resources, and logistics to the artist, will
be able to circumnavigate the
Figure 10: Distribution deals between artists and record
companies (source: Byrne 2007)
understandable reluctance of artists to
sign 360-degree deals or yet other
licensing deals in which artists lose
large parts of their revenues and give
up control over their product (see figure
9)7. But the artist himself, with the help
of consultants, is able to exploit the full range of his abilities and repertoire by
establishing relationships with other parties that are best suited to their own music,
commercial needs, and artistic development. The agency will consult and support
the artist in all parts of the value chain and be the first point of contact in the
7 These artist deals were identified by David Byrne, well-renowned musician and record-company executive:
360-degree deal: or equity, deal, where every aspect of the artist's career is handled by producers, promoters, marketing people, and
managers. The idea is that you can achieve wide saturation and sales, boosted by a hardworking machine that stands to benefit from
everything you do.
Standard-distribution deal: The record company bankrolls the recording and handles the manufacturing, distribution, press, and
promotion. The artist gets a royalty percentage after all those other costs are repaid. The label owns the copyright to the recording.
Licensing deal: Similar to the standard deal, except in this case the artist retains the copyrights and ownership of the master recording.
The right to exploit that property is granted to a label for a limited period of time
Profit-sharing deal: Profits are shared equally among artist and label (common at independent labels, less practiced at major labels)
Manufacturing and distribution deal: The artist does everything except manufacture and distribute the product. The company offers
services, e.g. marketing, distribution.
(source: Byrne 2007)
33
industry to launch a career. In pursuit of development of the artist and giving the
artist power and control to fully benefit from the value he or she generates, the
value chain activities will be deconstructed into the essential segments and layers
of the value chain. Figure 8 shows how artists will be able to pick the service that
suits best his or her goal. However, any collaboration will start with the core
business: development through communication and consulting - online and on the
street.
• First, the Internet (MySpace, lastfm, blogs, own website) and P2P file-sharing
networks will be used to distribute the artist’s music for free. Users including
fans, journalists, blog-writers, and label executives will be encouraged to
download and share the files distributed, taking full advantage of the promotional
power the artist’s music offers. As a result, the artist’s popularity and notoriety
increases which will be used to sell other products such as concert tickets,
special edition CDs and LPs, digital playlists, high-quality MP3s, digital booklets
with song lyrics, photographs and behind-the-scenes material, and videos on
DVD.
• Next, graphic and media designers will be engaged to work towards launching
the career by crafting unique communication campaigns and help establish the
artist’s identity.
• Furthermore, partnerships can be established with all kinds of local or regional
media such as newspapers, party guides, music magazines, radio, but also bars,
clubs, etc, as well as any online business. Partners of the artist may offer the
artist’s music or concert tickets as a gift to their customers. The popularity of the
artist will be measured in terms of number of downloads, number of hits on the
website, frequency and intensity of fan participation and interaction, and concert
attendance.
• All other services shown in figure 8 are available to artists at all times thanks to
partnerships with companies like Phoniclux whose business model provides a
unique, one-stop service to enable careers in music.
As the artist’s popularity increases, the offer will be extended into an integrated
online distribution model. Apart from free downloadable music, quality products,
physical media, concert tickets and more are offered and are just one click away
from the customer’s order. The agency’s website will look like an e-commerce
34
kiosk, where customers get discounts if they buy more than one product. A
possible way to fill concert venues is to offer a bundle of items: the download of a
whole album for free including digital booklet and a video, etc. But just like
Radiohead, the artist can count on the customer’s goodwill to pay for higher
quality. Partners in distribution and sponsors will be charged relative to the artist’s
popularity and along the model of Prince who charged a license fee for the
inclusion of his album in the Daily Telegraph on Sunday. There are numerous
examples that these strategies work. In June 2008, Trent Reznor, renowned
rockstar with a large fan community, is offering a totally-free, no-strings-attached
album, a move that will undoubtedly boost fan loyalty. "Thank you for your
continued and loyal support over the years - this one's on me," Reznor wrote on
the band’s website (www.nin.com, June 2008). A deluxe package, offered for
$300, quickly produced revenues of $750,000, and initial sales disclosures
indicated that the artist’s initiative most likely netted several million in revenues
(Digital Music News 2008). Product bundles or secondary products do offer a big
potential once fans are attracted to the music and the website.
With growing popularity and an increasing fan (=customer) base, artists will be
more and more able to reach out to lucrative elements of the classic value chain,
the same record labels are employing. However, the artists being in charge of the
investment they are willing to make, they are also in control of profit margins they
are willing to give up to work with certain partners in the value chain. Nowadays,
however, artists have a larger choice than ever before:
• depending on the music genre, production costs have fallen to produce one
album and marginal costs for manufacturing are falling towards zero;
• there is a sheer endless list of marketing and promotion tools at hand, most of
which do not cost anything - most importantly live performance and the Internet;
• distribution via the Internet has facilitated the process and eradicated almost all
costs;
• new market entrants specialize in distribution (last.fm, social networks,
Starbucks, magazines)
• the concert industry is growing, demand is booming, fans want to get in touch
with artists
35
This unique choice calls for a reliable partner who consults the artist in the efficient
exploitation. As figure 8 shows, the Artist Development Agency partners with the
artist because it is quite difficult - even impossible - for any successful artist to
handle the whole business of generating value from his or her music by making full
use of each segment of the deconstructed value chain. The agency therefore acts
as a consultant to the artist by managing his or her daily business and the
communication with buyers and suppliers. Core competencies of the agency will
be the design of the artist’s products (concert flyers and posters, web design,
merchandise, communication), management of the network of suppliers,
distributors, and customers who the artist may want to refer to for the production,
marketing, and promotion. The agency will also provide, design and maintain the
server and website on which the artist’s music can be stored and distributed, just
like the kind of virtual platform INgroove and Phoniclux operate. This serves the
artist and the agency alike to measure success and popularity, communicate with
fans, as well as to lay the foundation for potential revenue streams.
These core competencies provide the foundation for emerging artists to grow and
become successful.
3.2 The Strategy: Focused differentiation
In order to outperform competitors, generate value for the artist, and at the same
time revenue to grow the business, the agency’s strategy is to obtain sustainable
competitive advantage over the other existing business models. Innovative and
dynamic companies such as Phoniclux serve as the benchmark because they
offer valuable hints for improvement.
To differentiate itself from the vast amount of competitors (labels, download sites),
the agency must focus on its core competency of providing council and support in
the activities the artist requires, and on developing those artists that target the
segments that suit them best. Artists are diverse in requirements and objectives,
appeal to different listeners, have special needs, and therefore their cost behavior
and capabilities relative to expenses vary considerably. Other business models do
not take into consideration either of these factors. Some distribution channels
charge the artist a licensing fee or royalty fee for the distribution of his music even
though sales are not guaranteed. Others offer vast catalogues of music on their
sites such (MySpace, iTunes, or Napster) but are unable to promote to the music
36
fan the particular niche that artist is targeting because they are simply too vast.8
Differentiation may thus be based on the geographical scope, promoting artists on
a local, regional, or national level which allows fans to keep a better overview and
experience tighter connections to their favorite musicians.
Differentiation may further be achieved simply on the basis of a business model
that immediately grabs the artist’s attention because the benefits are convincing.
Artists are in need of all revenue streams right from the start to be able to develop
themselves. The advantage of focusing on developing artists instead of taking a
share from their marginal profits is the fact that artist are able to manage and
decide for themselves how much of their revenues they are willing to give up in
order to be promoted. To be able to offer this arrangement to the artist is crucial
especially in the artist’s development stage where revenues aren’t high yet and the
artist is therefore unable - or unwilling - to give up revenue to support a distribution
company’s value chain. By breaking down the traditional value chain and offering
selected services that artists really need, this model allows the agency to grow by
generating value from individual activities of different value chains based on
individual services. With this strategy focused on differentiation through exploring
suitable elements of the deconstructed value chain, the agency will be able to
charge less for their services and create more value in the artists value chain than
traditional labels due to a reduced cost structure.
At the early stage of development, this added-value and competitive advantage
will be achieved through the cooperation with media designers specialized in
communication.
The breadth of customers (artists) served is therefore narrower than the one of
competitors such as major labels and online music distribution sites. These
competitors usually try to sign deals with any successful artists, based on how
profitable the artist is expected to be. Since they have to make large investments
in marketing, administration, and technology, economies of scale are crucial in
order to be able to eventually offset expenses for less successful artists.
Independent labels do focus on a narrower selection of customers (e.g. focus on
musical genres), the number of bands which they are serving sometimes being as
8 Napster and iTunes offer 6 million digital tracks for download; MySpace has more than 8 million registered artists and bands. Napster
and iTunes charge licensing fees for the distribution, MySpace charges a royalty fee for the registration (source: C-Net News.com)
37
small as five. This focus on a certain market niche, however, is in most cases not
enough to cover their expenses of value-chain activities as sales of products are
declining. The artists, on the other hand, are no longer dependent on their
products or services due to the changing competitive environment (described in
Chapter 1), their inability to adopt to changing consumer habits and preferences,
and new opportunities to grab a larger part of their own revenues. That’s why the
focus of the service agency will not revolve around the breadth of customers or
any particular market niche served, but around the needs of a certain type of
artists who are creating music for their market niche, needing support and
counseling in order to do so, but wanting to retain control over their success. The
essential focus of differentiation is the breadth or range and type of services
offered.
Major and independent record labels offer all possible services and activities
needed to market an artist’s product as illustrated in table 5 and figure 7(value
chain).
Table 5: Record label activities (source: industry classification of NAICS and NACE)
Primary activity NorthAmerican Industry
EU classification (NACE)
Classification System (NAICS)
Publishing
Publishing of sound recordings
Sound recording industries and radio
services
Record Production
Integrated Record Production/Distribution
Reproduction
Music Publishers
Sound Recording Studios
Other Sound Recording Industries
Reproduction of sound recordings Reproduction of recorded media
Value chain activity
selection of artists
management of artists
production of artists
manufacturing of media
Manufacturing and Reproducing Magnetic marketing of media
and Optical Media
Pre-recorded Compact Disc (except
distribution of media
Software), Tape, and Record Reproducing
As described in Chapter 3, however, this value chain no longer functions in the
sense that all artists profit from the value generated. Due to the changing market
conditions and technological innovation, not all of the activities of the value chain
are needed and those who are need to be adapted to each artist individually. With
large overhead costs, of course, record companies are currently unable to deliver
this adaptation. In the case of online music distributors, as explained above, the
model focuses entirely on the service of distribution of music. At iTunes, emusic,
WalMart, Amazon, and Napster, for example, artists are charged fees for the
distribution but are not offered help to be promoted or developed. The result is a
38
low sale of music tracks for unknown artists, while only big artists profit from the
growth in downloads and ringtones. New entrants to the market of distribution that,
besides distribution, focus more on promoting and supporting emerging artists,
however, base their revenue on advertising and their capabilities are therefore
limited9. Not only do they have limited resources regarding other value chain
activities, but they cannot offer the artist substantial revenue10. These models can
thus only be a stepping stone in the artist’s career, an outlet for their products to
become notorious.
3.3 The Vision: What kind of company?
Environmental influences
The make-up of the new business model is shaped by the industry’s new
environment that is posing such a threat to traditional business models. Several
crucial external trends and factors determine the direction in which the agency
needs to move.
Political. The inability of industry lobbyists to solve the problem of file-sharing by
pressuring politicians and national governments into laws which would preserve
the foundation on which traditional labels place their success as well as entry
barriers to new competitors necessitates a radical new approach. Artists need to
move away from the notion that through copyrights alone revenue can be
generated. The solution an artist development agency provides is the
diversification of distribution channels and marketing and promotion approaches.
Instead of taking legal action against valuable customers, the idea is to accept the
current trend of the devaluation of music and generate revenues from sources
other than selling albums or single tracks. Numerous sub-markets can be served
and once consumers start valuing the artist’s work, the added value will be
recognized, appreciated, and remunerated. Through innovation and adaptation to
meeting consumer demands, the artist’s revenues from his or her products can be
9 Social music networks such as imeem.com, ilike.com, and lastfm.com license music catalogues from record labels in order to stream
music or offer subscription-based unlimited downloads. These offers are based on advertisements, donations, and consumer good-will.
(Digital Music News 2008)
10 In terms of royalties through copyright, Wilfried Dolfsma (Dolfsma 2005) argues, based on industry figures, that companies, who are
recording and publishing companies, collect royalties from national collecting societies (e.g. Société des Auteurs, Compositeurs et
Éditeurs de Musique / SACEM in France; Gesellschaft für musikalische Aufführungs- und mechanische Vervielfältigungsrechte / GEMA
in Germany) and of those revenue streams only 32.5% are paid out to authors. Musician Courtney Love (Love 2007) claims that, in a
standard distribution deal with record companies, musicians are granted 20% of royalties collected.
39
protected without relying on the instrumental institution of copyrights 11 or artificial
barriers and legal protection.
Social. Society is changing and with it its music. The way
and the type of music listened to has changed a lot with
regard to the beginnings of, say, Rock’n’Roll, jazz or pop
music. Norbert Bolz, Professor of Media Sciences in Berlin
Led Zeppelin (Berlin ‘08)
and Philosopher, notes (Wirtschaftswoche Dec. 2007) that
music has altered from being an oeuvre or art form to being
a medium which is being consumed differently, albeit more
intensely. Music is less and less consumed consciously but
more and more physically which may explain increased
personal star cult and increased concert attendance.
Evidence for this are comebacks of rock bands of the 70’s
such as The Rolling Stones, Led Zeppelin, AC/DC, Pink
Floyd, and others. Even the young generation is fascinated by the magnitude of
those megastars. There is a growing affection for celebrities and musical artists
are once again celebrated and worshipped as the German example of the band
“Tokio Hotel” shows 12. Therein lies the chance for concerts and live performances,
an ever-growing segment in music business, but also the opportunity to draw large
fan bases by online presence.
Technological.The business model of an artist development agency is an onlinebased business model since digital content and digital delivery of content and
information are becoming increasingly ubiquitous. Online distribution is driven by
the expanding technological capabilities and performance of delivery platforms,
the rapid uptake of broadband technologies at the disposal of both the supply and
the demand side. Increasingly ubiquitous access to broadband and technological
11 The notion of the “ceremonial and instrumental institution of copyrights” is described by Wilfried Dolfsma (Dolfsma 2005). Copyrights
are thought to be an instrumental institution for creative artists. In reality, however, they provide cash flows to administrative institutions
on the basis of their licensing agreements with artists. The institution of copyright has the tendency to encourage collusive behavior and
rent-seeking with the effect of creating an environment in which incentives for innovation and price-setting are based on these premises
(profit). This leads to the vertical integration of dominant firms in order to preserve and control these cash flows.
12 This band of teenagers has been a phenomenon on the public scene, greatly influencing teenage culture. They have been attracting
fans aged 8 to 15 for three years now in their home country, not selling millions of albums but with live appearances and presence on
TV and online. They are now beginning to reach fame in other countries such as France and Great Britain. In France, according to a
survey by the Goethe Institute France, heard on radio in November 2007, Tokio Hotel is the reason for a massive increase in demand
for German languages courses - demanded by kids who are eager to learn what Tokio Hotel’s lyrics are saying.
40
developments have lead to the rapid creation of online music services that change
the way music is accessed and consumed. Even though sales of physical music
are declining, time spent listening to music has increased and music is thus an
area in which the transformative impact of digital distribution is strong for both the
supply side (artists and the music industry) and the demand side (new music
consumption styles, consumer choice and network users as content creators)
(OECD 2005). Internet allows for new forms of advertising and possibilities that
lower the entry barriers for artistic creation and distribution.
Computers allow musicians to produce a broader range of sounds. And radio or
television no longer serves as the gateway for the listening public, but many other
platforms have appeared, such as the Internet and portable listening devices.
These platforms can be used by artists and music industry executives (e.g. A&R
managers) to conduct market research to divide consumers into narrower and
narrower slices.
Segment focus
These changes call for a focused strategy that aims at taking advantage of
emerging opportunities to develop artists and satisfy consumer needs. Low entry
barriers for artists to create their products and market them to consumers provides
growth opportunities for the agency. Consumers spend an increasing amount of
time listening to music, but buy the products in different forms or through different
channels. On MySpace it can be observed how music has become much more
diversified and thus fragmented. Today’s artists must absolutely connect to their
particular fan bases and satisfy the individual demand in these segments by
providing adapted products to any niche, segment, or consumer habit, and
technology and innovation have lowered the barriers to do so. The agency will
therefore provide services to enable the artist to satisfy consumer expectations in
any market segment or niche.
Geographical scope
While there are no limits to the scope of market segments served, there are,
however, limits to the speed at which the company can grow. Therefore the initial
geographical focus will be the regional music market. The reason to develop
artists on a regional level is the fact that artists usually do not reach global fame
41
right from the beginning13, but start out by building loyal fan bases locally or
regionally.
Future make-up of the company
The goal for the future of the agency is to alter the value chain of the industry, or
the way in which the value of music is generated altogether. The vision is to
convince artists of the benefits of distributing their music by cooperating with a
service agency rather than entering deals with music labels. If artists seize full
control of their music and its distribution according to their needs, the agency will
become the first point of reference for emerging artists who wish to earn money in
the music industry but still need support in achieving their music careers. From
their own investment in building up a consumer base and developing revenue
streams according to their needs, their marginal profit will be much higher than the
licensing deal they strike with a label, because they obtain all cash flows from their
products or performances By starting out with developing emerging artists and
accompanying them to their success, the agency will be able to expand their
service offers as the artist’s success increases, broaden the range of activities,
and capture the needs of established artists who recognize the benefits of the
model over the traditional deals. This arrangement will put all the power and
dynamics in the artists’ hands, involving them in investing in their careers, and
enabling to put together a personalized business model for their own career.
3.4 Objectives
This will lead to the objective of the agency of enabling artists to build up revenue
streams and grow with each investment by working with the service agency.
Naturally, artists and the agency have differing objectives, the final goal is a
common one: achieve a relatively large fan base and increase notoriety. The way
to get there is using the music as a unique means of communication, given the
infinite possibilities to do so - with low costs and high profitability.
13 There are some examples of artists who reach instant international notoriety through channels such as MySpace, blogs, and
YouTube. In 2004, rock artists Clap Your Hands Say Yeah! and Cold War Kids received multi-million record label deals after their band
websites received millions of hits and bloggers helped spread the fame. In 2007, American rock band Vampire Weekend chose not to
enter any deal with a label and used their success in touring and on MySpace to start their own distribution (Spin 2008). In 2008, former
rapper, now producer and record company owner Jermaine Dupri signed a 14-year-old female artist after she received almost 1 million
hits on YouTube under the name Phatfffat. Fans from all over the world have been posting their requests regarding a new album and
behind-the-scenes material. (Dupri 2008)
42
Artists. After the development phase, the objective is to achieve a notoriety at
which the artist is able to generate sales in any segment and distribution channel
available. Finding sponsors (for touring, other performances), partners for public
relations (newspapers, companies) and exclusive distribution deals (with online
portals, mobile content providers, concert promoters) will be the long-term
objectives of the partnership between artist and agency. Of course, once an artist
has reached above-average popularity, he or she will have the attraction of a
record label and eventually be offered attractive deals. The agency has then
fulfilled its mission of the development of an emerging artist and may offer consult
regarding record deal terms. In this regard, too, musicians nowadays are offered
many possibilities. Musicians should try to retain control over royalties and rights
by employing services rather than submitting to the full value chain of a record
label, for example by carefully choosing the publishing company. At Phoniclux,
artists can choose from individual services by keeping full control over their
revenues and dealing with competent industry insiders. This “label” is much more
focused on offering services rather than generating profits from an artist’s success.
Agency. The first step in the creation of the artist development agency is the
establishment of an online platform on which artists present their products. The
target is to reach wide-spread awareness for this site among all music fans of the
local or regional scene. High brand awareness for either the site or the agency will
be a key factor to success. It will be measured by traffic and number of downloads
(which are free). These data will give clues to the potential of certain artists and to
potential revenue streams that may be explored. High interaction (=time spent on
the site) and a high number of downloads will provide growth opportunities for the
firm in the sense that they create high awareness for its mission.
Specific performance targets in order to be profitable will be the sales of services
stemming from the core activities of the value chain. These will be the design
products for promotional purposes such as concert posters, CD covers, web
design, audio engineering, and the design of superior physical products.
Commissions charged for the successful organization of events in which the artist
generated revenue thanks to the agency’s efforts, as well as fees on sales
generated thanks to the agency’s management of supplier network will additionally
ensure profitability and cover overhead expenses and reimbursement of initial
43
investments. As the agency’s core competencies - can be applied to different
corporate customers, sales achieved elsewhere allow for long-term objectives
regarding the careful development of and investments in artists. A constant level of
cash-flows will benefit the speed at which both the artist and the agency can grow.
As there will be initial investments in e-commerce and technology, the objective
being to lay the foundation for superior e-commerce capabilities, the business
model and the platform must be rapidly developed and promoted in order to
achieve a return on investment close to 100% during the first year from profits
made from working with the artists. If this kind of growth is not achieved it will be
difficult to further invest in the key element of the business model - the online
platform. Cash flows from services will push this ambitious project but if it doesn’t
become profitable within the first year, partner agreements should be made with
providers of online portals.
The first objective is to use this business model as a marketing plan for a creative
company. Musicians are to be the main customers who buy the communication
and counseling services. Working with professionals in design and concentrating
on a core competency allows to clearly communicate the agency’s mission.
Strategically, the target for the agency is to build up an online platform for
musicians (see for example www.stageclip.com) that is as extensive as possible
and offers a large variety of artists to the local or regional music enthusiasts. The
platform is to become widely known for its trend-setting and up-to-date overview of
the local or regional music scene. The online portal is to attract all artists who
record music or perform live as well as sponsor and advertisers such as news
magazines, party guides, concert venues, ticket vendors, or small businesses
offering artist development services (recording studios, CD manufacturers,
producers, publishers, online portals, and so on). The site run by the agency will
be the gate to the public (and the industry) for artists, a one-stop entertainment
and shopping portal for fans to stay aware of what’s going on on the local music
scene, and, for the agency, a communication platform to build and maintain
relations to customers, suppliers, and distributors. The means - and competitive
advantage - to achieve this kind of popularity of the site is through offering free
music and convenient services to purchase other products than albums or single
tracks.
44
4. Industry and Competitive Analysis
4.1 Industry and competitive conditions
It used to be, and still is, that a few record companies dominate the music industry
(see figure 11). However, the foundation of the music industry, the copyright of
music, is fairly quickly eradicating or permanently infringed, which plunges the
current players into financial problems and breaks down barriers to entry. The
music industry, more than any other market, has been affected by the force of
globalization. But more importantly, music has lost in value. Producing,
reproducing, and distributing music has become so cheap, making it possible for
many small and independent record companies, but also for new business models
to enter the market. But more music than ever before is being consumed, artists
still receive multi-million euro deals, and concert prices and attendance are at an
all time high. That means, the industry is still profitable, only its competitive
conditions have changed, as will be shown in the following. And for the artist
development agency conditions are promising to successfully carrying out its
mission and implement its objectives.
4.1.1 The industry’s dominant economic features: Segments and competition
Important indicators for the industry’s profitability and attractiveness are growth,
market size and major competitors. As mentioned before, the music industry can
be divided into three principal segments: physical, digital, and concerts or touring.
Particularly the digital segment offers a variety of sub-segments, all of which offer
different revenue streams, partners (suppliers, distributors), competitors,
distribution formats, etc. These sub-segments are referred to as “a-la-carte
download services”, mobile download services, subscription-based services, and
music streaming sites 14.
Physical
The market for the distribution of physical media is characterized by a high
concentration of competitors, with the dominance of four large companies who
have integrated into their value chain publishing (A&R, management of rights and
licensing, signing of artists), producing, and distribution (see figures 11 and 12).
14 Referred to by, e.g. music experts and commentators such as writers at digitalmusicnews.com. Also, the OECD and IFPI use these
terms.
45
The four music labels are Warner Music (sold by Time Warner to a financial
consortium in 2004), Universal Music Group (a division of the French media group
Vivendi Universal SA), EMI Recorded Music (a division of United Kingdom-based
EMI Group), /BMG Entertainment (a merger of
German media conglomerate Bertelsmann AG
and Sony Music Entertainment) and they
Figure 11: Market share of total sales of
the “Big Four” and independent lables
(“Indie”) (source: OECD 2005)
account for 72% of the total global market. Currently,
Universal Music Group is the world’s largest music
UMG
25.5%
company (OECD 2005). These major global record
companies have developed a large degree of
influence over the major physical distribution chains
and noteworthy impact on the promotional value
Indie
28.4%
SonyBMG
21.5%
EMI
13.4%
WMG
11.3%
chain and influence on product positioning and
Figure 12: Value chain physical distribution (source: Byrne 2007)
A&R
Prod./
Recording
Manuf.
Sales &
Marketing
Distrib.
(Shipping)
Wholesale
Retail
pricing. Independent record companies often have rely on these international
distribution networks and are often strongly affiliated to or strongly dependent on
the major15. The labels’ dominance and vertical integration of the entire value
chain of the industry apart from distribution to the end user has led to high
overhead costs and thus the decline in sales since 1999 has caused the current
crisis. Cost-cuttings, layoffs, consolidation and shrinking budgets for development
of new artists have been the result. In particular, according to news reports (Digital
Music News 2008), the four music majors have consolidated further and will cut
costs with Sony BMG targeting annual savings of about USD 350 million in 2008,
mainly by shedding more than 2000 jobs or 25% of the total workforce. Warner
Music Group carried out 1000 job cuts since 2004, representing 20% of its
workforce. And EMI’s new owner, venture capitalist TerraFirma, in May 2008,
15 Some indies are part owned by a major (maybe to such an extent that they are technically a major label). Some indies collaborate
with majors on certain artists, in order to optimize various elements of the value chain, e.g. bigger marketing budgets. Some indies use
a major label's distribution department to distribute their releases, especially outside their home territory. For example, Warner Music
(WMG) operates a department called Independent Label Group in which it provides resources such as promotion, marketing and sales
support. WMG owns an indie label called Asylum Records for which it handles distribution completely. (http://www.wmg.com/
recordedmusic/)
46
announced a further reduction of its workforce of 1000 to 1500 jobs, reducing the
workforce from 4500 to 2000 since the takeover in August 2007.
The drop in revenues from physical sales coincided with the rise of file-sharing
networks and therefore a causality was quickly established. Which may or may not
be true. It is more likely, though, that the product has passed the peak of its life
cycle. Profit margins are eroding fast. For many consumers, the price of a CD is
too high. Evidence for this is the rapidly fading sales of CD singles, now being
downloaded in digital format for 94 cents
on the WalMart website16 or 99 cents on
Figure 13: Market shares of physical formats in 2005
(source: OECD 2005)
i Tu n e s . B u t t h e a l b u m , t o o , i s
experiencing a sharp decline, but it is
difficult to say why. Physical sales still
CD
LP
cassette
DVD
mini disc
2%
4%
15%
1%
represent 75% of all music sold and
digital downloads’ growth is slowing
78%
down. But innovation is crucial in view of
changing consumer tastes and listening habits and the physical medium, too,
needs to be adapted. Therefore, the product life cycle model offers a valuable tool
to explain why consumers are buying fewer and fewer CDs.
As figure 14 shows, the development phase of the compact disc began with its
launch onto the market in 1982. Sales of CDs immediately hit above the two-billion
mark in terms of units sold and continued to grow thereafter steadily. Sales of CDs
hit their peak in 1998 in most OECD countries (OECD 2005). During this growth
period, the CD being an instant success, other products’ market share sharply
declined (cassettes, vinyl LPs) and the CD captured its current market share of
78% (see figure 13). Competitors to the CD started developing new products. In
the 1990s, Sony started developing the MiniDisc, and near the end of the 1990s
the Digital Video Disc (DVD) made its first appearance. These formats however
have never been able to capture substantial market shares (OECD 2005). The
most important invention during that period, however, was the MP3 file. Developed
in 1992 by the German research institute Fraunhofer, it gradually became an ever
wider spread format until in 1999, with the first appearance of the MP3 player, it
almost entirely replaced the walkman and discman. Before the CD reached its
16 http://musicdownloads.walmart.com
47
peak in terms of units sales in 1998, the vinyl LP rapidly lost market share and
soon it became hard to find as retail stores started abandoning the product. But
then, the decline of the CD started setting in, and since the year 2000, sales have
been declining at an average rate of more than 6%; between 2000 and 2005 and
between 2005 and 2007 at 20%.
It is very important to note that the record labels have never seen this trend
coming. Throughout the years, they have stubbornly focused on physical media
and completely ignored digital music. The decline in 2000 was in part triggered by
Shawn Fanning and his invention of the P2P-file-sharing. His company, Napster,
attracted millions of users, albeit users who were sharing files illegally17 . But it was
precisely during this phase of maturity, when consumers got dissatisfied with the
high price of the CD and competitors from the entertainment industry (computer
games, video, DVD, Internet) draw more and more on their attention, when record
labels should have re-invented their product. This should have been done by
innovation concerning product features (digital videos, booklets, other information
on the CD), design (special editions), or bundling (associating the purchase of a
CD with other services, offers). But more importantly, the industry should have
embraced this new digital format, realized its potential and popularity with
consumers. Instead of starting a war with consumers, file-sharing networks and
other soft- or hardware manufacturers, that was their chance to build a visionary,
long-term, and sustainable strategic alliance. Now, of course, it is too late. The
market is crowded with competitors and rivals trying to grab market share. Profit
margins are under heavy pressure from the sheer number of distributors and high
investments are necessary to keep up with the well-advanced technology.
The traditional market segments are still alive, though, physical products still make
up 75% of the market. And even the weakest segments, for example the vinyl
record, present opportunities. Music lovers and aficionados who buy vinyl records
and rarities represent a unique market segment, one that is vividly being
commercialized online. Many bands still issue special-edition vinyls that start at
€50 and are sold out rapidly, only to reappear on eBay. ArkivMusic.com
(www.arkivmusic.com) specializes on classical music and jazz and delivers ondemand, out-of-print orders alongside more popular, circulating titles. That model
17 The company, which never made any money, was then shut down in 2003 after a court ruling.
48
produced top-line revenues of $8 million last year, enough to attract the interest of
instrument manufacturer Steinway Musical Instruments. Arkiv Music.com was
acquired in May for $4.5 million.
Figure 14: Life Cycle of the CD: 1982: launch, 1998: peak, 1999: first MP3-player (sources: IFPI,
OECD)
phase
development
growth
shakeout
matur
-ity
decline
4.00
sales volume
in
3.75
billion
units
3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1982 1984 1986 1991 1995 1997 1999 2000 2001 2003 2004 2005 2006 2007
Competitive
conditions
f
w
entry of
shake-out
empha
competitors
e
competitors
o
sis on
f
weakest
exit of competitors, harvesting, divestment
r e launch
/inno-
Digital
Digital content and digital delivery of content and information are becoming
increasingly ubiquitous, driven by the expanding technological capabilities and
performance of delivery platforms, the rapid uptake of broadband technologies and
improved performance of hardware and software. Access to broadband and
technological developments have lead to the rapid creation of online music
services that change the way music is accessed and consumed. Overall the
digitization of music has brought about a change in listening to music, the
diversification of delivery platforms, and intense file- and music-sharing. According
to the OECD and Wilfried Dolfsma, digitization of music is likely to have increased
49
the time listened to music (OECD 2005; Dolfsma 2005). Which is true, of course,
given the possibility to listen to music anytime and anywhere and with unheard of
storage quantities.
The market of digital music consists of downloads off the Internet, or “a-la-carte”
services, which, in France, make up 32% of total sales, mobile phones (ringtones,
other downloads; 64%), and streaming and subscription flatrates (4%).
Interestingly, in France, the market share of downloads via mobile phones is
higher than online downloads, whereas in the US online downloads make up the
majority with 66% (including subscription and streaming), and mobile downloads
only 34%. In Japan, however, the mobile
download market represents a staggering
Figure 15: Market share online formats 2007
(source: IFPI 2008)
91% of total digital downloads. Globally, the
download market is split 50:50 (SNEP 2008; IFPI
2008) (see figure 15). The sub-segment of mobile
download services provides substantial
opportunities for the diffusion of music. Both digital
and mobile assets - which include ringtones,
online
48%
mobile
47%
subscriptions/stream
0%
5%
downloads, and ringback tones - will soon account
for 50 percent of recorded revenues at Sony BMG
(Digital Music News 2008). Mobile services providers and phonemakers such as
Nokia and SonyEricsson have entered the music market with their “Comes-withmusic” business model. However, the growth in sales of ringtones, once-booming,
have decelerated considerably.
The global digital market for online and mobile music downloads varies by
countries. In Europe, France’s and Germany’s online and mobile markets are
relatively weak, but the UK has the most advanced mobile music market with the
highest penetration of music phones and the highest percentage of people using
their mobile phones to listen to music (IFPI 2008). In Japan, the biggest digital
market behind the US, mobile downloads were even able to offset losses in
physical sales, the only country in the world where this happened (IFPI 2008). As
the IFPI reports, though, however successful the mobile market in Japan may be,
an old familiar problem is recurring: More and more users use file-sharing sites to
illegally download music to their mobile phones, too. In 2007, according to IFPI,
50
more than 400 million tracks were downloaded illegally. The outlook despite
slowing growth can be described as rather positive though: technological progress
in hardware (phones) and communication (mobile internet access through 3G or
OTA)18 could establish the mobile phone as an important carrier for music and
other entertainment sources.
The digital market is not controlled by the major labels, but by new entrants to the
market of music distribution who very early realized the potential of digital music.
That’s why companies like Napster and Apple with its iTunes store achieve high
profit margins by commercializing digital music based on their low-cost business
models. Major labels are still stuck with their large overhead costs and only
receive licensing fees from distributors.
The benchmark business model is provided by MySpace. On this site which
attracts 15 million unique visits by its 75 million registered users, sees 30 billion
monthly page views, has 75 million registered users, and is growing by 240,000
new users per day (Patriquin 2008)19, more than 750000 artists and bands present
their music to fans (Howe 2005). Each band has an own website for presentation
and can provide all kinds of information with the help of widgets 20 embedded into
the site, ranging from general information to music, video, chat, photos, tour dates
etc. Many success stories can be told of bands who got famous on MySpace and
went on to either receive a record label deal or try it on their own. A band’s
popularity is measured by clicks on the website21. MySpace is a serious competitor
to record labels and services as an important benchmark as it entirely bypasses
18 In its “Digital Music Report 2006”, the IFPI describes how the mobile music market will grow thanks to increased mobile internet
speed made possible by the technology 3G. 3G mobile phone subscriptions tripled in 2006. There are a number of different access
points for music and over-the-air(OTA) is the most convenient for impulse purchasing of consumers who are on the move.
19 Compare with the most frequented online sites: Yahoo!, Facebook, Google. MySpace is the most frequented website in terms of
“unique” visits. Unique visits measures the daily, weekly or monthly logins of users who stay on the site and dedicate their attention.
This measurement is more important for social networking sites as well as their advertisers than the otherwise used “page views”
because online traffic measured in page views does not tell anything about the time spent looking at the site. In terms of page views,
Yahoo! is still the most frequented site, before MySpace, Facebook, Google, and YouTube. (Arrington 2006)
20 Widgets are small applications that can be added to make the website more attractive. They are either offered by MySpace or from
third parties who provide the html-code. They can be music players, photo slide shows, calendars, news tickers, voting and visitor
tracking buttons, and so on.
21 But not only emerging and unknown artists use MySpace, virtually every pop-act has an appearance on MySapce. Jean-Louis
Murat, French singer/songwriter (chanteur), said in an interview with Le Monde: “Sur MySpace vous allez voir 45 000 nigauds, les 45
000 artistes ratés qui ont ouvert leur page - j'y suis aussi, parce que sinon on me vole mon nom.” Apparently, this man has not
understood the potential of the Internet. (Le Monde 2007)
51
record labels by linking consumers and artists directly. The social networking giant
is already an important stop for music fans and bands, and now they are planning
a totally new approach (i.e. commercial) of music engagement, one that includes
major label equity stakes, tightly-integrated content (everything from music to
concerts to merchandise), and stepped-up e-commerce (Digital Music News
2008). MySpace will be incorporating an online music store, social music network,
and ad-supported subscription and streaming site and compete directly with record
labels because the labels are still dependent on their physical products and an
outdated business model incurring high costs.
Concerts/Touring
The segment of live concerts is experiencing a strong revival, as described in
chapter 4, page 11 and table 4, page 27.
The tours of reunited rock groups attract crowds of more than one million, many
too young to remember the hits from the first successes. "The tours of Van Halen,
the Rolling Stones, or Led Zeppelin swept through the country, thrilling fans who
grew up with their music and converting a new generation seeing them for the first
time," said Jason Garner, chief executive at Live Nation (Digital Music News
2008). Apart from that, they are a reminder that most of the music industry’s
success is tied to recordings AND live performances. Still, mega-tours from older
acts - whether the Eagles, Stones, Led Zeppelin, or Van Halen - should not lead
younger bands into expecting equal levels of cash - now or in the future. But rising
attendance and ticket prices indicate that there is a new generation that is
attracted to seeing their heros live. Not only that - with so much access to music
and the ubiquity of music in their lives, teenagers might be looking for a real
musical experience. Just to repeat what Professor Bolz said, music is being
consumed differently, but more intensely (Wirtschaftswoche 2007). And that may
explain a booming concert industry and offer potential to develop artists’ revenue
streams.
4.1.2 The industry’s dominant economic features: Openings in distribution
channels to access consumers
This part will deal with the opportunities for the new business model of an artist
development agency regarding distribution.
52
As figure 12 (value chain of music distribution) shows, the traditional path of the
work of a creative artists 22 starts by finding a music publisher or an artist &
repertoire (A&R) manager of a record company. If this initial intermediary finds the
music promising, negotiations start and eventually a contract is signed with a
label 23. Recording is undertaken and then copies of the recording are pressed and
promoted to both retailers and the media. After recording, a marketing plan is
drafted for diverse audiences. In this value chain, record labels have always
played a crucial role because they provided financial means and industry contacts.
These are used to attract other, in the industry important actors’ attention to new
releases and thus create demand. Intermediary actors that need to be passed
before an audience is reached include the media (radio, television, music press),
retail business, the Internet, and organizations that control schedules and venues
for live performances (Dolfsma 2005).
However, all this has changed with the rise of the Internet, technological
innovation, and a dramatic shift in consumer preferences and tastes. Internet and
technological progress now offer a extraordinary large variety of possibilities of
how effective distribution can be achieved differently and more cheaply.
In addition to this, regarding the traditional marketing plans and strategic
approaches of targeting consumers, it must be noted, that music segments and
audiences, who vary depending on social, demographic, or lifestyle factors, cannot
be targeted and influenced in the traditional way (traditional media, marketing
campaigns, etc.). Nowadays lifestyles and other trends are changing so quickly
that a large number of segments has evolved, with many different musical styles,
different listening habits, and so on, all that impossible to oversee for a single
company and their A&R managers, be it a large one. Different marketing
strategies, radically new approaches and fresh ideas will be THE key factor of
success, as will be shown.
The new business model will be Internet-based and therefore the online
distribution of music is a key focus. However, all segments can and will be served
22 The “traditional path” described is adopted form the website about.musicians.com, which assists artists in finding a record label or
publisher and gives advice on how to deal with labels.
23 For types of contracts common in the industry, see chapter 3, page 28
53
in order to achieve maximum results for the artists and be able to offer artists the
distribution method that suits them best.
Physical
Apart from record companies, who control the distribution network of physical
media, other players entered the market and propose their services. When
Starbucks entered the music market by founding a
publishing branch called Hear Music, many people where
surprised. But it showed that by serving only a particular
element of the value chain, new entries to the music
market are possible. Starbucks distributed artists who
were unsigned and record their music independent of
music labels 24. In April 2008, Starbucks decided to step
away from a non-core, music and entertainment
Table 6:Most popular download
sites (a-la-carte service)
(source: Patalong 2008)
site
catalogue DRM
iTunes
6 million yes
Napster
6 million no
WalMart 4 million yes
MP3.com 3 million yes
Amazon 3 million no
Musicload 3 million yes
eMusic
3 million no
AOL
1.5 million yes
Spiralfrog 1.5 million yes
program, a move that comes alongside slipping profits
(Reuters 2008). Now, Whole Foods, is intensifying its commitment towards music,
but in a different way than Starbucks (Digital Music News 2008). Allegedly, the
higher-end supermarket is pushing an initiative to bring undiscovered talent to
buyers across the United States. The hand-picked CDs will be featured throughout
the store, and at checkout. Initiatives like this could be a promising opportunity for
an independent artist to distribute his music and the artist development agency
could manage the communication between the two.
One distribution model that seems to prove another efficient alternative is the
cover-mounting of CDs on newspapers or other print media, just as Prince did in
2007. On May 18, 2008, it was the London's Mail on Sunday which included a
Paul McCartney CD (Digital Music News 2008). Once distributed exclusively by
Starbucks, the coffee chain failed to achieve serious sales for the album “Memory
almost full”. Now, still signed to Hear Music, Paul McCartney apparently tries the
Prince approach. It is undisclosed how much revenue Sir Paul McCartney
achieved, but it’s clear that the promotional effect of the gift to fans will lead to
higher sales elsewhere. It’s a win-win situation for both sides: Mail on Sunday sold
24 Artists released under Hear Music included Paul McCartney and Joni Mitchell who are not signed to any label but have their own
recording studios. Ray Charles, Jimi Hendrix, and Bob Marley (all deceased) were artists of which Hear Music bought the rights from
their publishing companies.
54
2.4 million copies at newsstands, the Prince album, Planet Earth, resulted in
nearly three million newspapers sold.
Online
Just like the market for physical products, the market for the distribution of digital
music, too, is relatively concentrated, depending on the country. Apple’s iTunes
Store has established itself as the preeminent global digital sales vehicle for music
and media with a market share of roughly 80% (Kravets 2008). In Germany, the
market is shared between iTunes (42% market share) and Musicload (38%) (IFPI
2008). Since its launch in May, 2003, Apple has sold more than four billions tracks
(van Buskirk 2008), and diversified into movies, television, podcasts, and, since
recently, into ringtones. The driver for its sales has been hardware, though,
namely the iPod, which has received numerous upgrades, eventually evolving into
the iPhone in 2007. This hegemony has been bothering major labels who are
unable to force changes in pricing and or control packaging as they did with
distributors in the value chain of physical sales. On the contrary, with its 80%
market share, it is Apple who is in control of prices, packaging, and content. The
majors have attempted to counterbalance this hegemony by handing DRM-free
content to emerging rival Amazon MP325 in 2007 (Patalong 2008). Since then,
each label enters into individual negotiations with download portals concerning
DRM. Warner Music Group licensed MP3s to Wal-Mart's online music store in May
2008 (Digital Music News 2008). Just recently, Wal-Mart had shifted to MP3s,
abandoning almost completely physical media.
EMusic is a large online music store specializing on independent music and niche
genres. The company carries a catalog of roughly 3 million tracks from 33,000
independent labels and audiobook publishers (Digial Music News 2008) and
focuses on regional content and local audiences. This focus also provides eMusic
with a catalogue of DRM-free music since independent labels and local artists
consider the online distributor as a valuable partner. To major labels, however,
online distributors are often regarded as rivals. This can be explained by eroding
profit margins in the business of digital music.
25 Since 2007, Amazon sells MP3s on its American website. The link is http://www.amazon.com/MP3-Music-Download/. This service is
currently offered to US customers only (as of June 10, 2008)
55
Some of the above mentioned sites offer besides a-la-carte downloads
subscription-based downloads as well. Napster, AOL, Yahoo, Rhapsody, only to
name the biggest few, charge up to €10 per month for the unlimited download of
songs. All labels have licensed their catalogues to these sites, though DRMprotected. Napster currently has 750000 subscribers but has been unprofitable
since its foundation in 2003. Subscription sites are also run by independent and
major labels. This market segment is growing more slowly than others (see figures
15 and 16). The biggest problem is the incompatibility with the iPod due to DRM
restrictions.
Besides a-la-carte and subscriptions, another sub segment of the online business
is the streaming of music. It used to be called internet radio, but nowadays
listeners can choose and select any song or playlist they want to hear. Music
streaming networks are an increasingly important partner in the distribution of
digital music. Most of these sites are tailored around the concept of a social
networking site. These sites gain rapid popularity and the most frequented sites
attract hundreds of million of users. Although this may lead to users’ inability to
master the wide array of services, there are services for each and every niche and
segment - across all genres and musical tastes. Most of these sites finance the
licensing fees they have to pay to publishing companies through advertising. Many
labels have entered licensing agreements with streaming sites. Their bargaining
power, however, makes it difficult for startups to become profitable. And copyright
infringement lawsuits are increasing (Digital Music News 2008) (see example
“Project Playlist”, “Deezer”, page 13). In December 2007, Universal Music was the
last one of the major labels to agree on providing its entire catalogue to startup
company imeem (Schonfeld 2007). Imeem now offers more than 6 million songs to
their users, more than iTunes - to whom major labels have not licensed all their
music - but for free. The site has advanced to the leader in the streaming music
space, according to a ranking of streaming music destinations compiled by the
web analytics company Compete (www.compete.com). Imeem topped Yahoo,
AOL, MySpace, and Last.FM. "As the music industry seeks to reassemble in the
wake of digital distribution, it should recognize social streaming communities as
the fastest growing opportunity in its evolution," explained Compete analyst Alex
56
Patriquin (Patriquin 2008. During the
month of March for example, Imeem
Figure 16: Visitors on 1000 selected sites in March 2008
(source: www.compete.com)
attracted 10.3 million visitors, an
increase of 58 percent from last year
(Patriquin 2008). Yahoo Music was
not far behind at 9.7 million, but AOL
Music, MySpace Music and others
trailed considerably. Other important
visitors in March 2008 in million
30
25
20
15
10
5
0
28
10
P2P
streaming sites are Project Playlist,
5
5
legal download streaming subscription
MSN Music , Pandora, iLike, Last.FM, Live365, and many others.
As figure 16 shows, online streaming of music has become a major outlet and
distribution channel for music. Many independent labels provide these sites with
their music in order to boost their artist’s popularity.
There are a number of examples of online portals for the distribution of music.
However, once MySpace owner News Corporation launches MySpace Music
together with the major labels, this site will most probably top any other competitor
in this market and serve as the benchmark for the future of the music industry
because it alters the value chain for both music publishing (what the labels do) and
distribution.
Mobile
Meanwhile, the market for mobile music is growing and opportunities for artists are
appearing. Apart from Nokia’s entry into the market with its “comes with music”
offer, in which the phone manufacturer struck deals with major labels to offer
unlimited music upon purchase of a mobile phone, other partnerships are possible,
too.
Sony Ericsson, the joint venture between Sony and Swedish phone manufacturer
Ericsson, is pushing aggressively into the North American market (Digital Music
News 2008). For this, the company entered an artist partnership with the American
mega star Usher (Soul, R&B, Hip-Hop) who will be the face and spokesman for
the marketing campaign of the Sony Ericsson Walkman Phone (Abramovic 2008).
The aim of the campaign is to introduce music fans to the world of mobile
downloads via the well-developed Walkman Phone series. The artist will benefit
from the agreement through tour sponsorships and promotion of his albums on the
57
Sony Ericsson’s online music store, PlayNow Arena (www.playnow-arena.com).
The company’s engagement in the music industry was announced in January
2008 at the MIDEM26
conference in Cannes. Deals with record labels and
publishers were announced, adding over five million new, and mostly DRM-free,
tracks to the PlayNow arena catalog. PlayNow arena will allow end-users to
access a range of other formats of the artist’s music via their mobile phone or
computer including games, ringtones, and full-track music, either by over-the-air
(OTA) downloads to the phone or from a computer using a transfer software (Sony
Ericsson 2008). Of course, only very popular artists who have profited from the big
marketing machine of major labels will truly benefit from this service. But Sony
Ericsson also launched a platform called PlayNow Uncut which new and
developing artists may use to promote their music using Sony Ericsson’s
distribution channels. The PlayNow Uncut service was launched in Sweden,
Denmark, Norway and Finland in May 2008 with expansion planned in Europe, the
Americas and Asia (Sony Ericsson 2008).
Nokia, too, aims at supporting emerging artists on their online store
(www.music.nokia.com/). According to the website, many artists from independent
labels are to be features, particularly Swedish newcomers will benefit from this
platform.
Independent services for artists and distributors
Apart from online stores for the distribution of digital music, there are a number of
start-ups that offer innovative services to artists who are looking for modern ways
to get their physical and digital products to the consumer. DigStation is a site that
promises independent artists “100% of your revenue generated from music
sales.” (www.digstation.com). Their mission is to provide an indie-friendly business
model with which artists achieve the revenues they need in order to grow. With
ITunes for example, this is difficult for emerging artists since shares are taken off
of licensing fees by iTunes and the record label, leaving only a fraction to the
musician. Using the DigStation service, artists may either offer downloads on
digstation.com or connect the payment and download service to the own band
website by embedding the shopping cart link. CD manufacturers such as Oasis
26 MIDEM, short for Marché International du Disque et de l'Edition Musicale, is the world's largest music industry trade fair, which has
been held annually at the Palais des Festivals in Cannes, France, since 1967. (Wikipedia)
58
Disc Manufacturing, CD Baby, and Disc Makers entered partnerships with
DigStation for the shipping and handling of CDs, once the order is placed online.
Other companies pursue the same business model - providing help for emerging
artists - and services range from digital distribution to retail and online marketing,
brand campaigns, licensing, royalty clearance services. The market leader,
according to the company’s information, is The Orchard (www.theorchard.com).
Competitors aside from DigStation include MusicIP, Javien Digital Payment
Solutions, Dropcards, BMI, RightsFlow, or emusu.com. Naturally, these companies
offer their services worldwide.
A unique concept is provided by startups such as WeMix (www.wemix.com),
Slicethepie (www.slicethepie.com), or Sellaband (www.sellaband.com), all
privately held companies. Unique because they pursue an innovative new
approach to marketing and promotion of young artists in an (Internet) environment
where fans can easily get lost in the vast jungle of available music, musicians
fighting for attention, and distributors offering diverse ways to obtain music. The
concept is based on fans voting for their favourite bands - their music, videos, or
web profiles. Their mission is to push the process of the search for new talents
and help them to kickstart their careers, something that is usually done by the
labels and their A&R agents. But the recent appearance of online sites taking into
their hands this process of crafting artists shows that in a more democratized,
digitized music environment leaving that process entirely to fans could potentially
lead to finding better acts. This idea has surfaced all around the world - for
example in the globally successful TV shows called “American Idol”, (or “French”,
“German”, “Indian” and so on), “Making the band”, “Popstars”, or “Superstars”.
These shows, although heavily funded by TV stations and executives at the major
labels 27, are based on the simple principle of letting fans choose the winner of a
selection process which leads to the best acts receiving contracts to release an
album. The major problem with these shows, however, is that by participating,
these new artists are forced to sign contracts that grant any of the proceeds from
the eventual success of the artist to whoever owns the franchise in each country
(TV station, music publisher). It has become obvious that the hosts of these shows
27 American idol is part of the Idol franchise founded by British entertainment executive Simon Fuller. The German version, called
“Deutschland sucht den Superstar” is funded by TV station RTL and Bertelsmann Music Group (BMG) who owns the franchise in
Germany. (Wikipedia)
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do not have in mind the “crafting” and development of artists, but seek profits and,
once again, “milk” the newcomers until they lose in value or popularity. The
mission of startups like WeMix, however, is to play a role in driving the music
business with fresh ideas. Says founder of WeMix, multi-million record selling,
Grammy-winning artist Ludacris: “The old way of making records is a thing of the
past. A&Rs, marketers, the radio game, million-dollar videos, predictable
producers — this system makes it really tough for new blood or new ideas to rise
to the top." (Digital Music News 2008). WeMix allows artists to build profile pages
and upload songs for review by an enthusiastic community. The best-rated
material theoretically rises to the top, and gains exposure to either receive label
contracts, sponsorships, or other kind of help.
The same concept applies for slicethepie. This site in turn is very ambitious in
financing and raising money for artists to professionally record an album. To do
this, users are turned into investors - so called “believers”. These, again by voting,
identify the best new artists. The top 2% of artists are then showcased on the site
and every artist or band is now required to raise money from investors to
professionally record and release an album - typically $10 until $50000 are
collected. Once this is accomplished, slicethepie steps in and provides for every
necessary assistance in the process of recording an album. The most important
differentiation from traditional label contracts is that artists keep all of their
copyright and publishing rights, paying a royalty to Slicethepie on the first two
years of album sales. Slicethepie funds the support of artists through revenues
from royalties from sales of albums, advertising, and commission it charges to
investors. The site sellaband works almost the same way.
4.1.3 The industry’s dominant economic features: Industry profitability
On May 23, 2008, Digital Music News cited figures released by the Mechanical
Copyright Protection Society (MCPS), a UK-based songwriters association. The
figures show that publishing royalties from broadcasting and digital formats are
now larger than those drawn from physical goods 28. This may not come as a
surprise given the 20% decline in physical formats, but these results show the
increased use of music in other segments of the industry.
28 The link to access these figures is http://www.digitalmusicnews.com/stories/052208mcpsprs
60
Digital Music News, in the same article, cites a study by research firm iSuppli
which expects the global market for digital recorded music, delivered via
broadband and over mobile phones, to grow nearly 600% from $$2.7 billion in
2005 to reach $14.9 billion by 2010 according to iSuppli research. That would
mean an annual growth rate of 40.7%.
However, it is not certain that this trend will continue. ITunes has accumulated
more than four billion paid downloads since mid-2003, but file-sharing networks
deliver several billion transfers every month. This could mean that the average
download price will keep falling. But not revenues for artists from royalties or other
distribution channels.
Big bands, nurtured by the major labels during the good years, are starting to
accept that trend and begin to diversify and innovate their products. They also
reassess their approach towards fans by offering free downloads, and
experimental, name-your-price approaches. For which they are ridiculed, criticized,
and left alone by labels. Radiohead, Coldplay, even newcomers, and the bands at
MySpace simply position the recording as a teaser towards potential revenue
streams like touring, merchandising, and sponsorships. And the bands have
proven that the strategy works which means the industry is still profitable for
talented musicians.
Chapter 4.1 has shown the intensity of competition among music producers and
distributors. Intense, because the industry’s product is heading towards an
uncertain future. A new entry to the market of an artist development agency,
however, can make use of various product innovations and technological progress
as well as openings in distribution channels. Finally, it was argued that the industry
in general has the potential to offer profitability. The next chapter will continue to
deal with the industry’s new environment.
4.2 Intensity of competition in the music industry
As Michael Porter described (Porter 1985), there are five forces that determine the
intensity at which companies in an industry rival each other. The transformation of
the industry by factors described in Chapter 4.1 and later in Chapter 4.3 has an
impact on how rivaling firms, new entrants, suppliers, and buyers deal with each
other, but also on how substitute products threaten the musical product.
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4.2.1 Rivalry among competitors
What we have seen so far is that the value of the recording is being diminished
which has triggered a crisis. Especially in the physical segment, less consumers
are paying for pre-recorded albums, and therefore record labels and retail stores
overly focused on recordings are either losing money, going out of business, or
diversifying into other, more profitable entertainment areas. But even the new
formats see considerable pressure with regard to pricing and profit margins. This
is for the most part due to file-sharing which, if legal barriers aren’t erected, could
one day lead to zero prices for these formats. But even before that may happen,
mega-retailers, such as Wal-Mart, Target, or Amazon.com are pushing album
pricing into sub-$10 territory, and single-track prices further below one Euro or
Dollar, prices that reflect more current consumer expectations.
With so many big corporations competing on the market, there is already the
problem of concentration. In recent years the number of competitors for the
distribution of music has increased and competitors have become more equal in
size and capability. All of the above named online stores have adapted iTunes’
business model which still sets the benchmark as the market leader. Smaller
companies, too, are trying to grab market share from record labels, but the vast
offer makes it difficult to increase market share (=more users). Indeed, it is the
hegemony of Apple’s iPod and iTunes that makes it so difficult for competitors: It
is imperative that downloaded music be playable on iPods and moved from
computer to computer - which requires DRM-free files. Major labels are still
exercising power over smaller companies with less bargaining power than iTunes
by lifting DRM restrictions. But major labels are coming under enormous pressure
with every year where sales decline. Other market niches than mainstream and
independent music offer lower prices. Streaming and social music network sites
offer music for free. And then there are competitors pushing into the market that
before had been totally unconcerned with music: phonemakers and coffee chains
intensify competition with new product features, special promotions, bundled
products, and diverse distribution channels. Major labels further put themselves
under pressure with their latest moves of acquiring startups and thinking of big
projects (MySpace Music) and strategic alliances.
62
The rivalry is therefore strong, not because demand for the product is not growing,
but because customers have a large choice of switching between offers and
record labels do not have a strategic solution at their hands, making it difficult to
predict the future of the industry. However, a company with a radically different
approach such as the presented business model do stand a good chance of
attracting business because, again, demand is still up for music and always will
be.
4.2.2 New entry of competitors
Of course, the inability of the major labels to solve the problems has triggered a
wave of new firms entering the market. Traditional record labels have missed the
chance to adapt to consumer trends, product innovation, technological progress.
New competitors, applying different strategies, now have cost and resource
advantages. For example, online distributors and startups who take more care of
the development of artists have a strong online presence and developed a network
of partnerships with customer-pleasing outlet channels. And large corporations
such as WalMart, Starbucks, or Nokia are diversified to a degree where they are
able to make large investments and offer lower prices due to revenue streams
stemming from their core businesses. A new competitive environment was also
established in defiance of the major labels’ strategy of litigation and hindering
innovation.
The level of threat of new entrants is therefore strong for the traditional players in
the industry and those relying to heavily on products for which demand is
declining. For those companies who embrace the new opportunities given and use
the Internet to build strategic partnerships, the level of threat is considerably less
menacing. This is true for innovators such as MySpace or Phoniclux, but also for
the artists themselves whose reactions are bold enough to connect to fans and
count on their appreciation of music.
4.2.3 Substitute products
Is there really a substitute for music? Well, it depends on the format or product.
Economic, social, and technological factors clearly pose a threat to physical sales
because consumers worry about their buying power, change their lifestyles, and
are attracted to new technologies for which they spend large parts of their income,
63
leaving little for a CD priced at €15 euros. This means that the music industry is
under heavy pressure from developments and product innovation in other parts of
the industry. But even buying the equipment to listen to music already commands
a steep price: iPod, iPhone, and other music players or mobile music phones are
expensive.
But even digital music, more convenient for consumers than anything else, face
threats from other entertainment products. While music is affected by piracy, filesharing, and a less-than-expected growth in digital sales, the gaming industry
flourishes. Game consoles like the Playstation or Wii attract all the attention of
young consumers. And this target consumer group spends a lot on video games:
Grand Theft Auto IV rallied first-week revenues of more than $500 million (Digital
Music News 2008). Compared with the music business, this kind of success
compares with Hollywood figures. At first glance, the gaming and music industries
might seem different. Games are video-based and highly interactive. They require
the total attention of the user. By comparison, music is largely passive, and allows
the listener to consume while on the move, surfing the Internet, or travelling.
However, since games are tremendously time-consuming, they drag attention
away from activities like music discovery. They have thus contributed to changing
consumer listening habits which nowadays have abandoned the discovery of an
album and go for the single track, smash hit. And who could blame them? In
contrast to recorded music, which gives the consumer a fixed, pre-determined
playlist with minimal artwork and extras, a video game offers exciting interaction
and much room for creativity. In addition to that, the simple plastic case or digital
playlist no longer connects people like it used to. But games can be played with an
literally infinite number of people connected via the Internet. Then again, music is
an entirely different form of entertainment, one that allows multi-tasking and use in
different situations: playback during driving, jogging, working, and even sleeping.
And regarding the social aspects of being connected to friends: live performances
breathe life into this form of entertainment and music fans are able to experience
real emotions and personal exchange with their heros. Social networking sites and
file-sharing, as we have seen on page 50, too, command a big share of users’
spare time.
64
Again, for some competitors, like retailers such as HMV, Woolworths, or Virgin
Records, substitute products now offer better growth opportunities and they are
exiting the market. For record labels, of course, exit barriers are too high, so they
struggle while clinging to old strategies. Some consumer segments, too, like
teenagers, are hard to win back from the gaming industry. But generally, there is
no evidence that video games or other industries of the entertainment sector have
taken away notable market share from musicians.
4.2.4 Suppliers’ power
For the business model in question, an artist development agency, the main
suppliers are the artists. Other suppliers concern the various elements of the value
chain, depending on which one is employed: Recording studios, CD
manufacturers, concert promoters or venues, marketing and promotion channels,
and distributors all exercise certain power.
Figure 12: value chain physical distribution (source: Byrne 2007)
A&R
Prod./
Recording
Manuf.
Sales &
Marketing
Distrib.
(Shipping)
Wholesale
Retail
Artists as suppliers probably are limited in their bargaining power. The choice they
have to record an album and generate revenues from selling music are record
labels, sponsors, or online-based companies such as WeMix, Sellaband, or
Slicethepie who are focused on artist development. The artist is dependent on a
reliable partner assisting him in his development process before he achieves
popularity and notoriety. Unlike bands such as Radiohead or Madonna, emerging
artists have not been nurtured by major labels and do not have a recording studio
or network of industry contacts. It’s only with increasing popularity and a growing
fan base that artists obtain more bargaining power. Then their alternatives multiply
and this provides a challenge to ambitious business models such as Phoniclux.
Their model aims at generating profits from artists’ sales - either from licensing, or
from taking shares off revenues. Of course, the services they offer include
production, recording, research and development, and entertaining a network of
suppliers. This is the dilemma that small labels face: overhead costs demand
certain prices that artists are charged which emerging artist are unable to come up
65
with. The artist development agency will therefore focus on core competencies
and start from a different level in an artist’s career: It will offer services that are
basic to artists such as promoting concerts, advice and handling of management
issues, and a platform for marketing, promotion, and distribution. Slowly artists are
developed until they are able to explore more and more distribution channels.
Before that, music will be the promotional tool and design and management
potential revenue streams of the agency.
Figure 17: Value chain of online distribution of digital content (source: OECD 2005)
Once the artist is ready to sell and distribute music, other suppliers enter the
picture. Both brick-and-mortar and online distributors of physical products will
charge fees for their services. But distribution partners with the focus on artist
development offer great opportunities for innovative distribution. The Orchard and
Digstation do not demand a high price: starting at $20 per month, artists are
provided a platform, a secure payment system that is convenient to use for
customers, a large distribution network, and partnerships with CD manufactures
and shippers.
Online distribution offers a vast range of business models and channels, as
described earlier. Figure 17 shows the key elements of the process that creates
value in the production and distribution of digital music and content. Some
elements of the above value chain will be “outsourced” by the artist development
agency and will not be included in its core activities. The infrastructure and
creation of digital content (audio files, websites, visual content) will be handled by
software service companies. This would require initial investments in hard- and
66
software for the agency. However, it can be free, too: music as a promotional tool
will find many platforms, including the enormous MySpace community and other
social networking and streaming sites. For the sale of music, services of secure
payment may be employed for which expenses are minor.
Expenses for communication activities are approaching zero, as there are so
many platforms with already established audiences that welcome the presence of
artists.
The creation of a company-operated platform for publishing, distributing, and
storing the artist’s music necessitates further investments. With its platform
stageclip.com, Phoniclux has made an important investment, which serves as a
solid foundation to conduct online business.
Possibilities of distribution nowadays have become numerous. Therefore, if
companies like iTunes are avoided, then the artist and the agency will have no
problems in finding a suitable partner.
4.2.5 Buyers’ power
The music fan’s choice of music has never been larger, thanks to the ubiquity of
music online and on the go. People who love music will find their favorite artists’
music anywhere, anytime. Platforms where music is available and formats in
which to obtain it are numerous - online, over the air, streamed, or live. More
importantly: at the price they want - deluxe, regular, cheap, or free. Even though
today’s consumers, in their pursuit to fill their 80-gigabyte iPods, sometimes act
illegally, they still are in control of how much they obtain and at which price,
because at present nobody can stop them. The trend is leading towards free
music everywhere, hence new business models offering free music via streaming
or advertisement-supported. It’s a buyers’ market with every competitor searching
for new ways to attract consumers to their products. Innovation is driven by the
need to offer the full range of the listening experience even if profit margins are
eroding. All competitors bargain with major labels for their key factors for success
in the industry:
1. To offer the full range of available music by obtaining licensing agreements with
all major labels (Imeem is the competitor who offers the biggest music catalogue
with 6 million tracks).
2. To offer DRM-free music, even if this means enabling consumers to share.
67
The Internet fosters buyers’ power in providing them with all the information where
to find the cheapest music and where to obtain it most conveniently. After more
than 50 years of high CD prices and outrageous profits for music companies and
some artists, buyers of music are finally in the driver’s seat and empowered to
uproot the whole industry.
Finally, a major threat for record labels is the fact that their services are
increasingly bypassed as musicians sell their music directly to consumers. At the
moment, this threat is only materializing, not yet real. However, new business
models such as the social networking and streaming sites aim for exactly this
scenario. For them it would be much easier in dealing with providers of music and
consumers if no record label or publishing company were involved. For the artist
development agency, this trend does not pose a threat, but the competitive
advantage: Artists will be supported to be able to communicate directly with their
fans and strike their own deals with distributors and sponsor.
4.2.6 Strategic implications of the five forces
The collective impact of the five forces on the industry’s profitability is enormous due to increased buyer power alone. The evolution of the download market and
the failure of DRM and legal and political restrictions, has led to strong rivalry
among competitors who have to rethink strategies and reposition themselves.
Some labels as well as competitors in distribution might not survive because the
current competitive structure in the industry is unfavorable for traditional business
models. The market has become less profitable as we can see from the struggle of
distributors who are exiting the market. Napster, the BMG online service, for
example, has been unprofitable ever since it became a legal download provider.
This year it announced another loss of $3.4 million, the seventh year in a row that
the company reported losses (Digital Music News 2008). But new entrants, too,
have not proven yet that they will be able to survive in the long-term. Most of the
download sites (imeem, emusic) and other business models (lastfm, deezer,
slicethepie) are projects backed by venture capital and individual investors. If
these don’t see any profits soon, the bubble which is the online download market
may eventually burst. This wouldn’t be the first time that advertisement-based
business models fail.
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For others, the industry is still attractive, even if the competitive forces are strong.
By concentrating on the development of artists and offering customers direct
access to music, this market position and strategy provide a good enough defense
from competitive forces. If sales in the industry continue to slide and the price for
music continues its fall towards zero, this could be the defining business model for
the industry.
4.3 What is causing the industry’s competitive structure and business
environment to change?
This chapter will show the strategies with which a company should be able to
survive in this difficult business environment. The changes in the competitive
structure turn out to be revolutionary. New entrants to the market for the first time
in history innovate ways and means to offer free music to customers. These sites,
as we have seen, attract record numbers of visitors and registered users. But how
does that help artists who want to earn money from making music? How do artists
in the future make sure that other revenue streams materialize? How to attract
customers to these new ways of selling music?
Apart from technological changes or the change in consumer behavior, we can
identify three important revolutions that have taken place to alter the way music is
distributed:
• new approaches to sales and promotion,
• product innovation,
• and changes in societal attitudes.
The business model which embraces and incorporates these developments will be
able to re-establish the broken link between customers and artists.
4.3.1 Different sales and promotion approaches
In a business environment where the rules have been set by a few big
corporations for a long time, new ways of marketing can spark renewed buyer
interest in the product and widen demand.
As Digital Music News reports on May 20, 2008, American R&B mega-star Usher's
latest album was “accidentally” leaked to the public by insiders of the record label.
Figures cited by Usher’s managers already reveal substantial piracy volumes.
Before the release date, the total number of pre-release album downloads crossed
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half-a-million. The full-album download is available on the illegal file-sharing
network mininova.org, which is part of the BitTorrent network29. The first listing of
the album on the file-sharing network apparently appeared one full week ahead of
the scheduled release date in the United States. Interestingly, Usher’s producer
Polow da Don confirmed to MTV News that he was responsible for leaking at least
one track. The producer explained that this single track, "Love In This Club," went
on to receive considerable attention, solid radio play, and strong chart positioning.
"Radio stations were getting it off the internet and playing it," Polow da Don
explained. While the source of the entire, finished album leak remains unclear, one
question arises: Doesn’t the release of this single track constitute a well-calculated
move, as media attention shows? The next day, on May 21, 2008, Digital Music
News continue their report on the leak of the album and reported that the album is
available at BitTorrent in several versions, including “a high-fidelity, 320kbpsencoded version with bonus content, metadata, artwork, and an accompanying
video”. Despite the leak, the album scored first-week sales of 433,000 units, a
number one chart album. Usher is signed to SonyBMG.
Exactly the same situation with multi-million selling band Coldplay and their latest
album. Before it went on sale by EMI Music, the album appeared at BitTorrent and
other networks to be downloaded. It nevertheless became the hit album at iTunes
in the week of June 17th.
While these artists officially condemned the leaks, another question is raised:
What is the negative sales impact of a pre-release leak and the unintended
availability on file-sharing networks? Conventional thinking argues that a prerelease leak damages sales, especially if the leak delivers high quality and extras
like video and artwork. But as the examples of Usher and Coldplay show, this isn’t
always the case. And we shouldn’t think that only with the advent of internet
technology has there been leaking and so-called boot-legging (the illegal sales of
copied physical media by street vendors). In an exclusive interview with Rolling
Stone Magazine in 2006 (Lethem 2006), the famous artist Bob Dylan explained
how in the beginning he struggled against boot-legging and the illegal distribution
of his records. According to his own admission, Dylan is the world record holder for
29 www.bittorrent.com is one of the most popular file-sharing networks. They have set up a complicated system and network of servers
to avoid being closed down by governments. The network of servers is searched anytime a users begins a search. These servers are
called “trackers” and are located in various countries and regions in the world, such as Russia (mininova) or Togo.
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unofficially released albums. Boot-leggers published albums of Dylan’s b-side
music and live appearances. Eventually, these records received cult status in the
fan community, even though it had never been intended by neither the artist nor
his record company to ever publish such an album. Bob Dylan then realized the
importance and the dynamics such releases carry. He then officially endorsed and
authorized albums that circulated “illegally” and even commented on them, judging
them good or bad.
Radiohead, in 2007, chose to proceed pro-actively. Having huge experience in the
ways the business works, the band used the industry’s language and termed their
experiment their “leak date". This was a reference, too, to the fact that in the past,
every record of Radiohead and its members’ solo albums have been leaked to the
public before official release, just like Usher, Coldplay, and many more other
albums. So the idea was to intentionally leak the album to the public. Traditionally,
the marketing approach for the product was to fix a “leak date” on which advance
copies were sent out to the press and other reviewers at other media (e.g. blogs).
The way the game worked was to please the reviewers by sending free copies and
giving interviews, in an attempt to draw readers’ attention to the publishing of the
new album. The strategy for most musicians is to coordinate these marketing
efforts with prerelease items and activities until the moment a record comes out so
that, due to all the media attention, it goes into the charts. That's what major labels
do, but for a band like Radiohead, this marketing strategy doesn’t do any good,
since their music is not intended for the large public or mainstream listeners, as
their music is intended for a very special genre. To Tom Yorke, “...it's totally the
luck of the draw whether that person (the reviewer) is into us or not. It just seems
wildly unfair, I think.” (Byrne/Yorke 2007). So their releasing the album on the
internet for free bypasses all those reviewers and goes straight to the fans.
Radiohead was able to concoct this strategy mainly because they already have an
established fanbase, accomplished by their working with a major label (EMI). But
also because they dispose of a recording studio and a web server, which was all
they needed to publish their album. This model shows there are ways to bypass
the labels and retain full control over marketing30.
30 This has been described by Tom Yorke, leader of the band, in the interview with David Byrne, published in Wired Magazine in 2007
(Byrne/Yorke 2007)
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It turns out the strategy was a savvy business move. In the first month, about a
million fans downloaded In Rainbows, roughly 40 percent of them paid for it at an
average of $6 each, netting the band nearly $3 million (Brunner 2007, Anderson
2008). Plus, since it owns the master recording (the first time for the band after it
quit its label), Radiohead was also able to license the album for another record
label to distribute the old-fashioned way on CD. While pay-what-you-will worked
for Radiohead, though, it's hard to imagine the model paying off for musicians who
are less established and famed. In fact, Radiohead was heavily critized by fellow
artists for what they view as creating for consumers the impression that music can
be given away for free, thus de-valuing the product, when in reality it only worked
for them as a already successful band. But that wasn’t the band’s intention. The
experiment simply was to prove there is plenty of room for innovation in the music
business - this is just one of many new paths.31
And now, many more artists embrace this marketing approach and experience the
benefits. Offering music and hit singles for free before a new album comes out has
become an increasingly popular way to attract fans. The shift to gratis makes
sense for many artists, especially against a backdrop of freely-available content.
A Google search with “free single download” or “free album download” produces
an immense number of responses. Artists who, in 2008, offered free downloads of
their music before their new album hit the stores32:
Coldplay, Babyshambles, Trent Reznor/Nine Inch Nails, Chef Dave (jazz), The
Mars Volta, Less Than Jake, Talib Kweli and Madlib, Starski (Rap), We are the
Fury, Pennywise and... Metallica! Lars Ulrich, drummer of one of the most
successful rock band of all time, was quoted in Rolling Stone Magazine, as saying:
“It’s great to see more famous artists going for the internet to release their music.
Bands and artists don’t always have to release albums on CD, the internet is the
way to go in my opinion.” (Schlütter 2007) Before their expected new release in
31 According to Rolling Stone Magazine (Hentschel 2008) critics argued that the band contributed to the devaluation of digital music
and showing off their popularity they had achieved with the help of a major label. Critics include Trent Reznor from Nine Inch Nails (who
himself offered the band’s album completely free of charge in May 2008), Gene Simmons (Kiss), L.A. Reid (CEO of Def Jam Music
Group), as well as the band’s former managers Chris Hufford and Bryce Edge.
32 This selection of artists with free downloads is based on the top 100 results produced by the Google search “free single release” and
“free album release”
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summer 2008, the band has set up a website33 where fans can listen to excerpts
of the new album, live performances, and behind-the-scene info as to the progress
of the new album.
Major labels have been fighting against free content distribution for years. But
these established artists are embracing the gratis giveaway, finding ways to
achieve revenues in self-controlled areas (i.e. no licensing fees to labels), and
defining the best practices in this process.
The major gain in this marketing strategy is the ability to measure popularity and
fan anticipation. In March 2008, the punk rock band Pennywise offered their new
album for free download online (Digital Music News 2008). The band attracted
640000 fans participating in the album giveaway driven by MySpace Records.
MySpace Records sponsors these online events which have led to more than
20000 free album downloads worldwide in 2007. The MySpace campaigns involve
sponsorships from other companies and some bands are paid for their
participation in response to fears of product cannibalization (free downloads kill
potential CD revenues). Once again, executives are defining the benchmark model
for the music industry.
For Pennywise, the campaign meant some good results: a well-charting single,
significant jumps in concert tickets, tour guarantees, and merchandise sales according to the initiator at MySpace, John Scalvo (Digital Music News 2008). "If
you ask them, their career has been revitalized far beyond their expectations,"
Scavo said to Digital Music News.
With stageclip.com, Phoniclux offers bands a platform on which to offer streams
and downloads of their music. As can be seen on the website, very few musicians
are using this opportunity and access to the songs is not convenient enough for
music listeners. The download links and announcements of free music downloads
should be in the forefront of the website. Currently, the site is designed for
musicians (“suppliers”) to access easily and not for listeners (“customers”). In fact,
the home page welcomes bands, not users. In addition to that, public awareness
to this site is very low. To be valuable as a marketing tool, more music must be
offered, the range of artists and musical genres extended, and free downloads
33 www.missionmetallica.com
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made public and known. Once there is sufficient traffic on the site and frequent
downloads, sources for revenue for the bands from sponsors can be sought.
4.3.2 Product innovation
As music and its products keep losing in value - value as perceived by consumers
- the industry needs to consider revaluation. Does a single track or one ringtone
for €0.99 (price at iTunes) really constitute any value for the customer? One of the
reasons why single discs are rapidly diminishing is because listeners are no longer
constrained to buy a single of song which was picked by the label as the chart hit
everyone must have. And even on that single, there is a “bundle” of songs, usually
3 to 4 tracks, different versions of the song. But since file-sharing networks,
listeners can pick whichever song they like, whichever version, and as many as
they want to. The full version, the album on CD or vinyl or the digital album, is the
record company’s bundled offer. But this product is also losing market share
because of the availability of so many, cheaper formats. Even the record
companies now service more formats than ever before, across more platforms
than ever before. The song is available in a physical or digital format, chopped up
into a ringtone, ringback tone, bundled into a subscription plan, or reformatted into
an OTA download. These multiple formats are now considered from the onset by
of the format constitutes an asset of
its own and this fragmentation of the
Figure 18: Growth/share matrix of musical formats
concert
tickets
+
many artists and producers. Each
product group constitutes some
MP3
difficult to keep offering physical
formats for which demand is low
and growth uncertain. The slow
market growth
problems. It is for example very
bundle
ringtone
visual
bonus
growth and per-unit costs may be
offset by growth and profits margins
CD
vinyl,DVD
costs are very low (marginal costs
-
in digital formats for which per-unit
75%
relative market share
5%
zero). Another issue with this
fragmented product portfolio is the fact that consumers of music in most cases do
not shop by product, but by artist. A fragmented choice with different pricing can
74
therefore be frustrating for shoppers and expensive, too. As figure 18 shows, there
is a high potential for some formats to become substantial revenue sources due to
high market growth. But even traditional products whose growth is negative are
still in demand and must therefore absolutely be part of the portfolio. The goal
should be to provide an offer to customers in which all products are included and
can be used according to consumer habits. Then all products will have the same
market share and growth of sales are driven by either the established products
with high market share or the new products with high market growth. This calls for
a bundled offer: coupling products together when customers purchase or start
downloading. The advantage of a bundle is further that additional bonus features
and material can be included: album artwork, lyrics, and videos, etc.
Due to a change in listening habits, consumers do not value the preset format o f
an album. But with a smartly-packaged bundle that offers a healthy collection of
assets at a great value, buyers may be satisfied because:
• they can shop conveniently at one location in on stop
• they can explore their favourite artist’s music at a bigger range of possibilties
• they obtain a package that is really an asset on their hard-drive
• they are encouraged and motivated to buy high-priced individual items such as
concert tickets or physical media if they receive other formats in a bundle.
For the artist or company who offer the bundle this could mean the ability to offer a
variety of assets within one at great value to the customer, convenient purchase
and e-commerce solutions, lower per-unit costs per product, and an increase in
the overall transaction amount - i.e. higher profit margin.
4.3.4 Changing societal concerns, attitudes, and lifestyles
There is a news report that perfectly highlights the way in which society would like
to see the music heading. Desmond Tutu, South African archbishop, is now
involved in a music discovery startup, digitalmusicnews.com reported in May 2008
(Digital Music News 2008). The startup is yet to be officially announced but
apparently the goal is to shift the power in the music industry from major record
labels, media conglomerates and radio program directors toward artists and music
fans. The website is welovefreemusic.com, and currently features content from a
limited group of artists - for free. The fact that this venture involves such a
prominent person as Desmond Tutu indicates how music in the form of digital
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content has lost in value. Consumers really do not want to pay for the bare digital
format, but they love music. And with so many file-sharers and listeners on free
streaming sites, the trend is obvious: music will be available for free to fans. In the
future, MP3s and CDs are promotional tools, revenues are generated through
other products and channels. This fate was also predicted by Chris Anderson in
his article for Wired Magazine “Why $0.00 is the future of business” (Anderson
2008).
It would be naive to say that this isn’t a problem for artists and the music industry.
The market size will shrink considerably. There will be by far fewer artists. And
there won’t be large corporations achieving huge profits. But maybe it will be a
more democratic environment where any artist has the chance to be heard and
attract the kind and size of audiences he or she deserves.
Maybe the industry will not be as profitable and any competitor including the new
business model will be struggling to survive. But if high overhead costs are
avoided and the focus is kept on developing artists, there is a good chance for
moderate growth. In some areas of the music, where different listeners have
different consumer habits, the availability of free music will not make a difference
in their spending money on physical products or bundled packages. As Laurent de
Wilde notes in his article for Jazz Magazine:”...j’ai réalisé qu’arrivé à l’âge adulte...
(son fils) aurait une collection de livres, de BD, de baskets, de T-shirts, mais il
n’aurait pas des collections de disques. Que des fichiers mp3 quelque part dans
des disques durs. Depuis la Renaissance et les ‘ars memoriae’ les spécialistes de
la mémoire ont découvert que celle-ci conserve les connaissances d’autant mieux
qu’elles ont une existence concrète dans l’espace. Autrement dit, on se souvient
mieux du contenu d’un livre dont on sait qu’il est rangé dans telle bibliothèque que
de la teneur d’un blog comme celui-ci lu dans un ordinateur sur l’Internet.” It is
quite a philosophical question: Don’t we prefer to have material objects to preserve
the memory of something so emotional as music? How should music enthusiasts
organize the knowledge of the music and artists with which they grow up and on
which they develop their lifestyles personality? If there is no spatial collection (of
discs), how will listeners be able to talk about and remember who played what in
which band formation and in which moment in time? It is true that an MP3 file in
most cases doesn’t even contain the name of the artist, the recording date, the
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composer, the band members, or anything that the true fan connects to and
reminisces about. Granted, this information is readily available on the Net, but
immaterial and scattered throughout the maze that is the Internet (not to mention
the reliability of this information and the potential of lost or mixed-up details). There
is no danger for quality music to disappear due to digitalization and ubiquity. And
live performances are completely oblivious to this problem. As mentioned before,
there is a good chance that fans who attend concerts will want to take home a
memory with them and buy a CD. There is evidence for this assumption: Alex
Dutilh reports in the magazine Jazz Man that jazz music and classical music have
resisted to the current trend of declining sales: They are the only genres that
report increasing sales because their listeners value the composition of tracks on
an album as well as the possibility to see the musicians’ live performances (Dutilh
2008). In France, SNEP confirms these data: Jazz albums sales have increased
by 2.8% and classical music by 4.9% (SNEP 2008).
5. Conclusion
5.1 Strategic moves of competitors
In view of a very difficult competitive environment, the rivaling companies in the
music industry have to re-assess their strategies. As we have seen, nowadays the
market is very different from the era before the Internet and there are new
challenges, threats, and opportunities. Principally, the industry is still profitable,
because demand for music is still up. Despite attempts to rescue old business
models by employing questionable measures such as protecting market shares by
erecting or maintaining legal barriers, all competitors are jockeying into new
positions and new business models appear. Strategies to build competitive
advantage vary according to the type of business.
Record labels
The labels are trying to stop eroding sales by offering improved quality and
service, which in the music industry means DRM-free music and online
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distribution. Almost all labels nowadays offer e-commerce on their websites.
However
, compared with the benchmark business model in online distribution iTunes, the
companies are far away from achieving the convenience and facility for which
consumers frequent Apple’s download service. Furthermore, since they have long
clung to their physical products a
nd ignored digital formats, their
Figure 19: Strategic moves of rivals
e-commerce capabilities are
other online stores.
Record labels have also realized
the need to widen the product
line and offer all products to
consumers. Now they sell digital
formats such as mp3, ringtones
and mastertones to their
price range in terms of product range
underdeveloped compared to
majors
indie
labels
online
stores
Phoniclux
MySpaceMusic
distributors.
In order to be able to offer the full
range of the listening experience,
distribution channels and marketing opportunities used
major record labels are pushing
aggressive diversification strategies, either on the artist level, where deals are
moving towards all-encompassing, 360-degree structures. Or on a broader
business level, where acquisitions and venture capital-style investments are
becoming commonplace.
In both cases, serious concerns arise. Instead of controlling distribution and
promotional pipelines, majors are now navigating within an increasingly
democratized - and digitized - environment. Artists (developing and established)
can identify, retain, and monetize fan bases directly and autonomously. This trend
among artists of bypassing record deals with labels and the decreased importance
of physical distribution means that almost anyone can enter the market of
distribution (for example, Live Nation, Starbucks, and online providers).
On the acquisition side, labels are understandably interested in broadening
beyond the recording, but due to financial troubles, eroding profits, and, as in the
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case of EMI Music, standstill on the management level, the cash reserves for
these deals are limited. Of the four majors, Universal Music possess the most
cash, and therefore the best basis to diversify. As described, they are investing in
various startups such as online distributor Imeem, social networking sites Buzznet
and INgrooves, and merchandising specialist Sanctuary Group. Warner struck
similar deals including a stake in the ad-supported P2P file-sharing network Qtrax,
and the streaming music site Lala. As figure 19 implies, the labels’ position on the
strategic group map is the one of a high-priced and of a yet little-diversified
approach to distribution and marketing. 360-degree deals and acquisitions indicate
that their strategy is to adapt to the new competitors with different approaches to
reaching out to the customers. Indications for this strategy change are their slowly
abandoning DRM and offering unlimited downloads (Universal, Columbia) at a
fixed monthly rate.
Online distributors
Online portals and start-up companies who focus on the distribution of digital
content have the advantage of offering lower costs. Evidence for their ability to put
considerable pressure on the industry’s prices was the launch of iTunes, after
which the price for a single fell from approximately €5 to €0.99. And new
competitors like Amazon and Wal-Mart are pushing prices even further down.
These companies have developed superior e-commerce capabilities and dispose
of sophisticated technology for online distribution of music. Some of their
competitive advantages further include the ability to more easily serve customers
on a global basis, and, like in the case of Emusic, the ability to serve market
niches or very specific groups of buyers. With their established online presence,
Emusic has succeeded in penetrating niche markets on the local and regional
level.
However, these online-based companies themselves are under enormous
pressure from falling prices and from file-sharing networks, even though digital
sales are growing rapidly. That’s why they are also repositioning themselves at
present, as can be observed at Napster. Napster started as a provider of download
tracks and now offers subscription-based services and streaming music.
Subscriptions and music streams are likely to grow, as discussed, and therefore
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the inclusion of these services may be an option for all online portals to put even
more pressure on the labels.
New business models
Innovative business models which take a very different approach to developing
artists and distribute their music include the ambitious MySpace Music project,
net-label Phoniclux (and slicethepie, sellaband), and the artist development
agency.
In order for small companies with innovative ideas to survive in this market, they
must develop key functional strategies to build competitively valuable resource
strenghts and capabilities. That’s because the established companies, namely
record labels, already possess these resources and have powerful skills to
squeeze smaller firms out of the market. Despite the threats traditional business
models face, it is unlikely that big record labels will go out of business and exit the
market. Because they dispose of large capital resources, they will be able to
implement the necessary change in strategy and therefore artists will still be
inclined to strike deals for the recording, publishing, and distribution of their
albums.
The transformation of the industry has opened up new opportunities in developing
sales, marketing, promotion, and distribution strategies. By focusing on the
development of artists and connecting them directly with their fans, an artist
development agency will be able to reach competitive advantage. First, because
the artists profit from the collaboration with the agency by being able to realize and
retain larger profits. Second, because consumers will embrace the service and
product range by being able to obtain music for free and purchase other products
according to their needs and lifestyle.
The strategic intent of a project such as MySpace Music serves as the benchmark
model. Once the agency operates and controls a platform from which consumers
have infinite access to artists’ music and products, this business model will offer
growth opportunities in terms of cash flow as well as innovation in ways of
distribution. The differentiation focus will be the provision of tailored and
individually adapted services, thereby achieving low costs and high profits margins
for artists and the company.
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5.2 What are the key factors for competitive success?
As this analysis has shown, key factors that constitute the basis on which
customers choose between the competing products of sellers are the product
attributes and the way customers are provided access to obtaining music. The
agency’s mission is to offer artists a new way to become successful in the music
industry and to provide their fans with easy access to new music. To do so, the
company must exhibit managerial skills in organization and maintaining networks
in suppliers (=artists) and distributors. Another core competency is the design of
the communication of artists, a fundamental factor for them to become successful.
For this, the agency must include media and graphic designers who are dedicated
and experienced in promoting the music.
The foundation of the company will be the online portal or platform which will serve
as the information and communication system. Crucial data can be extracted
concerning the market for emerging artists, the distribution market, and the
customers. These data will provide the ability to respond to shifting market
conditions and developments in e-commerce and consumer behavior.
Other than these skills and basics, three important success factors can be
identified:
• Technology
The new business model will be able to achieve sustainable competitive
advantage through expertise, innovation and creativity in sound engineering and
product design. The perpetual development of the musical products into new
formats and the adding of new attributes will generate the value which customers
expect. Technological expertise is further crucial in setting up the platform from
which the music is distributed and communicated to the listener. The site will
eventually feature many artists and bands who each have a website to which they
upload their products. The maintenance and development of this portal will require
knowledge in web hosting, web design and programming, as well as the skills to
attract sponsors, advertisers, and partners.
• Distribution
A very important element in the long-term success is a strong network of
wholesale distributors and dealers, as well as the electronic distribution
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capabilities via Internet, as described above. Apart from making use of all the
distribution channels, the company may save expenses by being able to distribute
the music on its own website. However, all other sites which offer free distribution
of music and which are dedicated to supporting artists must be used. Streaming
sites, social networks, and file-sharing providers do not charge for the distribution
of music and are valuable as promotional tools as well as revenue streams.
Then there are new ways to distribute the physical products via newspapers and
magazines, concert venues, or other partners who participate in supporting the
artist.
• Marketing
New ways to market the product are provided by the new distribution outlets. Just
like with the use of new distribution methods, in marketing, too, costs can be
saved. The fundamental marketing tool is the artist’s music. This is the artist’s
unique selling proposition and the trigger that makes people buy the products. By
promoting the music aggressively to the public and attracting a large fan base,
revenue streams open up and growth opportunities appear.
Once a fan base is established, consumers will be looking to choose from a broad
product line, attractive product attributes, styling and packaging. The main
marketing tool is the agency’s online portal from which it communicates and draws
market data.
5.3 Future Prospects
Amidst the turmoil and transformation in the music industry today, opportunites for
artists to thrive financially, creatively, and with total independence exist. And the
new business model captures the needs of these artists and provides just the right
services for their success.
Independent and unsigned artists now have unprecedented mechanisms for
connecting and cultivating niche audiences. And loyal fans are powerful customers
who gladly pay for products that suit their lifestyle and taste. Fans will attend
shows, which provides the basic income for the artist and the agency and they will
spread the popularity of the artists over the web.
For the agency, a variety of easy-to-use, inexpensive services now exist to place
the products on e-commerce sites, communicate its mission across multiple
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networks, and sell physical products or merchandies. Effective management and
the right mix of services can develop an artist into a lucrative business partner.
There is no need to overprotect the artist’s music or found the business on
copyrights, P2P applications are valuable in the word-of-mouth process.
But those opportunities set the stage for a possible breakthrough for the artist,
they don’t necessarily guarantee success. Even if an artist has established a
targeted audience, cultivating a loyal following takes repetition, continued word-ofmouth, and lots of time. Therefore, not all artists are willing or able to make
continued investments in their own career. Maybe they do not have the energy to
do so or lack the creative capital to truly make it in the music business. This will be
the main problem for the new business problem, because it is founded on talented
artist who grow quickly and generate cash flows which pay for the services
provided. This is the same problem traditional record labels face. There are just
too many bands, too many options for potential fans, and way too many
distractions in the current, fragmented media landscape. And, a large percentage
of new music is uninteresting, unoriginal, or uninspiring.
Nevertheless, the artist development agency’s competitive advantage is the ability
to avoid large expenses for A&R, finding promising talent, and filtering the mass
for profitable cash cows. This traditional approach is what needs to be modified
completely. Because everyone has a different definition of success. Some artists
are happy to be making a modest living off their work, selling a few downloads,
some CDs after a great concert night, a t-shirt to their most loyal fans, enjoying the
thrill of performing live and using that revenue to re-invest. And why not? The era
where record labels defined success being over, suddenly this existence is
possible - assisted by the collaboration with the artist development agency.
And for those who seek a higher level of artistic existence? Truly breaking out and
enjoying both financial and critical success demands committment and hard work.
Numerous examples have shown that it’s possible - some have been mentioned in
this analysis but there are many more artists who made it on their own, touring,
performing, and investing everything in their future careers. Some of them were
initially denied by record labels - they won’t be denied by this agency. These
examples showed that success stories are sometimes unpredictable and the
83
notion of record labels to have the recipe in duplicating these are no longer true in
today’s business environment.
New business models have been defined and proven successful by musicians with
a strong will to take risk or in defiance of the static record labels. Their bold and
revolutionary strategies having at first been ridiculed within the industry, they have
shown what it takes: proper distribution and promotion, determination to succeed,
and truly amazing and valuable content.
84
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Managing the music industry`s crisis

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