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Audio and Music Sector

A Report on Industry Analysis and Feasibility

Submitted by:
Sujit Kumar Singh 09BM8054
Shilpa Gautam 09BM8085
VGSOM, IIT Kharagpur
Contents
Contents ..................................................................................................................................................... 2
Introduction ............................................................................................................................................... 3
Old vs. Digital Industry ............................................................................................................................... 4
Big players in industry ................................................................................................................................ 8
Types of online music business .................................................................................................................. 9
About Players ........................................................................................................................................... 10
Comparison of Major Players................................................................................................................... 13
Piracy Issue............................................................................................................................................... 14
Digital rights management (DRM) ........................................................................................................... 15
Porter’s 5 Forces Analysis ........................................................................................................................ 16
PESTEL Analysis ........................................................................................................................................ 19
Way Ahead – To tap new Market. ........................................................................................................... 20
The Value Chain and Evolving Business Models ...................................................................................... 20
Conclusion ................................................................................................................................................ 22
References ............................................................................................................................................... 23
Introduction
Music industry includes the song recordings, its composition and performance on stage.
Music industry started in 18th century and boomed in last late 20th century. Initially music was
in the form of just performance on stage and compositions and printing of music. In 19th
century records came as the popular way of listening music. But in 20th century with the
invention of phonograph it became as one of the most popular widespread radio
communication and a way to listen to music. In 21st century consumers expenses on music
declined on recorded music than in other formats, ie cassettes and vinyl or CDs or digital
downloads. The economist reported that in 2013 the music revenues of US will decline much
far to 9.2Billion dollars which was once 38.6% in 1999. There has been a great los to the music
industry with this, but also the file sharing technique has given rise to pircy of music which is
another set back to the music industry. One such business model like Napster was closed
down due to free file sharing where all music lovers can share music for free.

Now with time there has been an increase of the paid digital download but it has not
been able to make up for the music industry the loss made up by the decline in sales of CDs.
With time piracy is growing its arms in some countries while others are taking aggressive
steps to stop it. 80% of the people in Britain P2P music service where half of the respondents
said they want paid music. There has also been a great lose for these new debuts who are not
given a chance since the record studios might not be able to fetch much profits with the sales
of their albums since most of it will be pirated. And since they are debuts so the album price
can’t be put high, therefore cut shorting their profit margins.
Above we can see the major consumers are from United States and other countries like
United Kingdom,
om, France, Germany, Australia, and Japan and so they are the major players
who are taking steps forward to mitigate the effect of this major parasite-
parasite-Piracy.

Old vs. Digital Industry


Old industry followed a simple chain of the singer/artist developing the
the music/song which was
recorded at the record label and then several copies depending upon the demand in the
market was distributed in the market through the mono retail channels and finally would
reach the fans.

Today the market is very different from


from before and everything revolves around internet/web,
it has open doors for number of tasks associated from first identifying the artist to the
consumer listening music. There are several tasks like: Licensing, Recording, Merchandising,
DVDs, Appearances, Touring, publishing that are now a part of digital music industry.
Industry in numbers:
The IFPI’s al Music Report 2011 shows that consumer choice for accessing music via digital
channels continued to grow in 2010. The report shows that consumer choice for accessing
music via digital channels continued to grow in 2010. Global digital music trade revenues
reach US$4.6 billion, up 9.5% in 2010 with 400 services licensed worldwide by music
companies with ISPs, mobile and other partners. Where at one point f time, piracy is
increasing, action to stop digital music piracy is gaining momentum worldwide, with
implementation by ISPs of warnings and deterrent sanctions taking effect in three countries in
2010 and governments in other countries expected to implement measures in 2011. Digital
music, as defined by the Recording Industry Association of America (RIAA), includes mostly
music downloaded over the Internet for a fee, music downloaded from subscription sites, and
music downloaded to cellular phones and other mobile devices.

With new music, new sites to share music, digital piracy, and the lack of adequate legal tools
to fight it, remains the biggest threat to the future of creative industries. Great new music
offerings exist all over the world, but they will not survive if the market continues to be
massively rigged by piracy. “Music at the touch of a button” captures just how far we have
come in a few years in response to consumers. Yet we also need an internet guided by the
rule of law. There are several was through which governments can seize this opportunity to
stop the piracy in 2011 and in future.

The digital music market is evolving and there is still plenty of room for growth, which is
reflected in surveys conducted in 2010 in two of the most advanced digital markets. In the US,
only 16.5 per cent of internet users aged 13+ purchased digital music in the third quarter of
2010, according to NPD Group. In the UK, 14 per cent of internet users aged 16-54 frequently
purchase music online (Harris Interactive, 2010).

There is almost 33 % decline in the profits of the record studios, while online distribution
channels have a growth of more than 1000% in 2004-10. 95% of the music downloaded online
is not legally obtained. The digital supply chain for music Is becoming dominant in the music
industry. Sales of music downloads, the dominant revenue stream in digital music, are seeing
steady growth. Single track download sales increased by an estimated 10%, while digital
albums rose an estimated 20% in 2009. The report shows that, while the music industry has
increased its digital revenues by 940% since 2004, piracy has been the major factor behind
the overall global market decline of around 30% in the same period

Digital Music Summary:


13 million are licensed by the digital music companies from the record companies

400+ digital music services have license to sell online music worldwide

US$4.6 billion is the total market trade value in 2011, worldwide

There has been 6% increase in the digital music revenues from 2009 in 2010

29% revenue of the global music record companies comes through digital sales.

Almost in a decade from 2004-10 there has been an increase of 1000%+ music industry in
case of sales.

But the revenues have declined with -31% during the period 2004-10

16.5% – proportion of internet users purchasing digital music in the US

US$5 billion– the estimated amount record companies invested in artists in 2009

30%– the percentage of their revenues record companies invest in A&&R and marketing
There has been fall of -77% in the debut unit sales in global top 50 2003-2010

There is a projected loss of 1.2 million jobs in 2015 due to piracy.

4240 billion– estimated cumulative lost retail revenues to the European creative industries
from piracy 2008–2015

There is almost 33 % decline in the profits of the record studios, while online distribution
channels have a growth of more than 1000% in 2004-10.

Changes in the music industry in the recent years:


In the beginning of the era when the cassettes were started to be used as the mode of
listening music rather than the records the digital music industry was very minimal and had a
very less market share. With time after 2004 when the computer were used in every home
and when it became cheaper then people moved to the digital music. And from then on till
2007(given data), the market share of digital music industry increased with time and in 2007 it
was almost 25% of the total music industry. But the revenues in the music industry have
dropped subsequently due to the piracy of the music. As we can se with the increase in use of
PC and download of digital music, more ways to download free or cheap music has been the
reason for the loss in the industry.

16000

14000

12000

10000
physical
8000
digital
6000 total

4000

2000

0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
The decline in the sales of the album is clearly visible from the diagram, where in 1999 almost
900M records were sold only 500M albums are sold in 2007, and still till date there has been a
decline in sales in 2011.

Above is the comparison of the music industry digital landscape between 2004 and 2010.
There has been a drastic change in case of licensed music services available in between 2004
and 2010 which has increased from 60 services to 400. In fact the number of catalogue
available online has increased from 1 million tracks to 13 million songs in 2010. Also it is
clearly visible that the industry digital revenue has increased from 420 million dollars to 4.6
million dollars in 2010. Apart from that the % of the industry revenues from digital channels
have increase from just 2% to 29% which accounts for almost a third of the total revenues in
2010.

Big players in industry


There are several music service players in the industry who sell licensed music online and
accounts for the major sales of music industry. The players are : 7digital, Amazon MP#, Amie
Street, Beatport, BuyMusic, CD Baby, Ditto Music, eMusic, Rhapsody, Playnow, Last.fm,
Walmart Music, Ubetoo, Soundcloud, Spotify, CD Baby, we7, Zune Marketplace, etc.
Today there is no end to the list of these players but there are major key players that
are identified like: emusic, music downloads, 7digital, amazonMP3, Warner music group,
yahoo music, rhapsody, iTunes, napster. Most consumers prefer digital music because it is
easy to reach and mostly free. In fact due to the advancement of the technology the
downloading doesn’t take much time and is normally 5sec per song.

There are several advantages and disadvantages to this service facility provided by these sites
like: they follow copyright laws, they give a high quality and consistent music which pirated
songs don’t provide. These companies are accountable for all the files they share. These sites
have such a big data (songs) bank that you van almost get any song at tip that you have ever
wanted. Finding songs is easier is any aspect.

But there a few disadvantages to this as well like: they provide in the format which
might not be compatible with your device as in case of iTunes which can only be played on
iphone, ipad or such compatible device. There are different kinds of services that can’t not be
used if subscription expires. Users don’t use the hard copy of the music; in case of system
crash they may loose all data. Some music is not available in specific geography. Some music
is operating system dependent.

Types of online music business

1) Subscription service as provided b Raphsody, online radios, where the consumer


subscribes to its service and uses the service for that period of time. As in case of
raphsody ther is unlimted access to the users to large library of sigital music for a flat
monthly fees. It is also called open music model.
2) Revenue model as provide by grooveshark, the users can listem to the music for free.
But the revenues are generated from the advertisement clicks of the users/listeners
on this site. As per the report of groove shark their daily advertisement revenues
accounted for 308.5 dollars and annually it rounded to be almost 112657 dollars.
3) Pay per tune model is used by iTunes. This model is also known as a la carte which is a
French word and means according to menu, ie the consumer picks, choose and buys
the individual tracks. It helps in keeping the consumer focus on the short term costs
and desire for the song. It also helps in reducing the bill of the consumer.
4) Strreaming service with application on mobile ia another model used by major mobile
brands where they provide an application( ovi store as in case of nokia smart phone
users) where the consumers can stream the music online and the charges are
deducted from the telecom service like Airtel GPRS, Vodaphone GPRS, etc
5) Artist communities online provided by myspace works both on the grooveshark and
itune model and is a little different from all. It keeps a track of all the threads of
communities that are mostly used ie where most users are online and there is tries to
identify this quality community and connects to leverage for advertisement targeting
so that most users click the adv. there.
6) Music tax, is a little different from all, rather than these services charging for the
music, the internet service provider charges the same for the streaming or download
of music which cant be escaped in any case. However this is a little complicated but
saves a lot of money lost in piracy. ISP will impose bill on you if you download music.
Music companies nowadays are deling with the major service provider and develop a
partenership with device manufacturers and establish quality audio at attractive price.
There are several ISP providers like in case of TDC in Denmark and Terra in Brazil and
sky in UK where there is most piracy across the world they have deal with vodaphone
and other mobile operators and handset makers like nokia, sony ericsson to deal with
the issue of piracy. With the launch of the TDC braoadband in Brazil it was noted, 6.1
million songs were downloaded at high speed of which 50% where through TDC-B.
This helped in reducing priacy upto 40% in Brazil.

About Players

• eMusic

▫ Catalogue now approaching three million track


▫ Everything is in MP3 format, with no copy restrictions
▫ If your subscription lapses the tracks you’ve already bought remain yours
▫ $9.99/month for 30 songs

• Yahoo Music Unlimited

▫ The service is doing a lot of things right and trying hard


▫ Downloads in WMA format, which means iPod won’t handle them
▫ To listen subscriptions are dirt at $5.99 a month
▫ The subscription lapse, you can’t listen to them anymore
▫ $0.99/track, albums $8.00 and up. Subscriptions cost $5.99/month, which
allows users to download tracks for $0.79/tune.

• Apple iTunes

▫ biggest selection of music tracks on the planet


▫ over 6 million collections available
▫ biggest downside is that the vast majority of the music is in the .MP4/.AAC
format, and that means it will only play on the provided digital player or an
iPod
▫ Prices: $0.99/track, ~$9.99/album
• Napster

▫ become one of the powerhouse download destinations.


▫ download individual tracks and entire albums from the service at $0.99
and $9.99, respectively
▫ once your subscription lapses, they’ll no longer play on computer
▫ $0.99/track, $9.99/album, Subscriptions: $9.99 and $14.95.

• Rhapsody

▫ currently has the second-largest catalogue of any download service, with


around four million tracks.
▫ the application includes an excellent search facility
▫ program also allows you to listen to a number of songs completely for free
▫ $12.99 and $14.99, respectively. With the former, you can only play tracks
on your computer, but the latter allows you to transfer them to your
portable player
▫ $0.99/track, ~$9.99/album. Subscription rates are $12.99 and $14.99

• Amazon.com Music

▫ Amazon’s a late entrant to the music download market


▫ Downloads are simple too
▫ Allows dumping to and playing it on compatible devices like the iPod
▫ $0.89/$0.99/track, albums from $4.95

Comparison of Major Players

Selection Geographic
Store (approximately) restrictions Platform DRM Preview Trial

11,000,000 Platform Independent for MP3 30


7digital songs Some songs No seconds None

Platform independent for


Amazon 14,815,786 US, UK, and individual tracks and browsing 30
MP3 songs Germany only the store, Amazon MP3 No seconds None

1,000,000 Windows 98 or above, IE 5.01 or


BuyMusic songs United States above10 Yes Unknown None

6,000,000 25
songs, 100,000 Varies by Windows 98 or later;Linux; Mac 30 downl
eMusic artists track OS 9/X11 No seconds oads

Mac OS X 10.4.11 or later;


14,000,000 Windows XP Service Pack 2 or 90
iTunes Store songs Some later. No seconds None

10,000,000 Windows 98 or later, Mac OS X, Parti 30 14


Rhapsody songs United States Linux30 al seconds days

Walmart 1,000,000 30
Music songs United States Windows 98 or above No seconds None

subscripti
United States, on-Entire
Canada, song,
Germany, or Napster Web application Purc unlimited
12,000,000 United (Windows/Mac/Linux), Internet hase: Store-30
Napster songs Kingdom Explorer 7.x (Recommended), no sec 7 days
Piracy Issue

Definition of Piracy:
Indicates the activity that consists in making non-authorized copies of protected
material equipments, and to distribute them
• A proportion from 5 to 7% of world trade is based on piracy
• It represents 200 to 300 billion euro of commercial damage)
• In 2005, more than one third of CD's sold around the world were a pirated product.

Definition of Copyright:

Copyright is a form of intellectual property which gives the creator the exclusive right to
control its distribution.

• Thanks to the evolution of technology we can find a variety of programs :


• Peer to peer: it uses a diverse connectivity between participants in a network and the
cumulative bandwidth of all network participants

Evolution of P2P and File sharing

• First application of P2P: Napster in June 1999


• New applications: Kazaa, Grokster, iMesh, Morpheus, e-Donkey
• File sharing: which refers to the providing and receiving of digital files over a network,
has also grown in popularity with the proliferation of high-speed internet connections,
and the relatively small file size and high-quality MP3 audio format.

Technologies - Enabling piracy:

• CD-R piracy : it is the illegal copying of software using CD-R recording technology
• LAN: it involves users who are connected via a local area network
• Mobil Music: can be used to obtain free music, for example by means of Bluetooth
transfers that enable files to be transferred from phone-to-phone.
• Digital Stream Ripping
• The speed of copy of the engravers

Technologies - Limiting piracy:

• Secure Metric Technology


• Secure Dongle
• Internet Service Providers (ISPs)
• Digital Rights Management (DRM)

Digital rights management (DRM)

Digital rights management (DRM) is a term for access control technologies that are used by
hardware manufacturers, publishers, copyright holders and individuals to limit the use of
digital content and devices. The term is used to describe any technology that inhibits uses of
digital content that is not desired or intended by the content provider. The term does not
generally refer to other forms of copy protection, which can be circumvented without
modifying the file or device, such as serial numbers or key files. It can also refer to restrictions
associated with specific instances of digital works or devices.
DRM technologies attempt to control use of digital media by preventing access, copying or
conversion to other formats by end users. Long before the arrival of digital or even electronic
media, copyright holders, content producers, or other financially or artistically interested
parties had business and legal objections to copying technologies. Examples include:
player rolls early in the 20th century, audio tape recording, and video tape recording (e.g., the
"Betamax case" in the U.S.). Copying technology thus exemplifies a disruptive technology.

• DRM, often referred to as copy protection, limits what functions a user may
perform with digital media.
• It provides a way to control if and how many times a digital music file can be
copied.
• Apple, for example, reserves the right to change at any time what you can do with
the music you purchase at the iTunes Music Store. For instance, in April 2004,
Apple decided to modify the DRM so people could burn the same playlist only 7
times, down from 10.
• Microsoft, similarly, utilizes Microsoft's Windows Media Audio (WMA) DRM.
• The future: Sony has announced that it plans on shipping CDs with DRM built-in.
• DRM has become and will continue to be an essential element to control access of
downloadable music.

Porter’s 5 Forces Analysis

We will analyse the industry attractiveness of mobile application industry using the fives forces
model given by Porter.
• Bargaining power of customers – High

▫ Many alternatives with fairly low switching costs

▫ Music piracy is also a legitimate option for many consumers

Corporate customers in the music industry include online & offline retailers who
purchase albums in bulk from the music label. They may include stores such as
HMV & Game and online music stores such as iTunes, AmazonMP3 & Zune. The
bargaining power of the corporate customers can be said to be low due to prices
being agreed between them and the labels at the time of contract signing.

• Bargaining power of suppliers – Low

▫ Increased size and power of the online distribution channel compromises


supplier’s bargaining power

▫ Labels are losing traditional revenues, forcing them to move into online music
distribution

Music Industry is different than other industries, unlike other industries; the main
suppliers for the music industry consists of sources through which music labels get
access to music. They include the artists and their managers. In addition, due to the rise
of the reality shows, producers of shows have also become suppliers for music labels
with new talent. The bargaining power of artists is high as it can be said that the voice
and ability of each artist is unique and cannot be substituted. Due to the demand for
new talent from a wide range of record labels, the options for artists are high which
makes signing of new artists for a record label very difficult.

• Threat of new entrants – High

▫ No fixed assets

▫ Advertising, Marketing and Pricing can allow companies to gain a quick


foothold in the industry

The music industry is a highly specialized sector. Typically selection of a talented


artists and turning him/her to a success requires a lot of skilful application of marketing,
talent management and investment. Established music labels spend millions in
undertaking image development campaigns, recording and test marketing before the
work of an artist is released to the public. These areas require specialist skills and
having access to money. In addition they might need an extensive distribution network,
including online partners for online distribution, which is handy in immediate
distribution of albums to points of sale. Industry contacts are handy in organising
concerts and shows for promotion of albums and creating a buzz for the artist.
It will be difficult for a new entrant to the music industry to undertake all above
activities and beat the competitors in a short time. Due to the experience of industry
giants such as EMI and Sony music and their financial power in the industry, it is very
difficult for a new entrant to capture a significant share of the UK music market.
Therefore it can be said that the threat of new entrants is very low when considering the
music industry.

• Threats of substitutes – Medium

▫ Many alternatives including physical CDs, traditional radio and satellite radio

▫ But online format is increasingly appealing to consumers

A substitute product or service can be identified as a rival product or service which


meets the same customer needs approximately in the same way as the product or
service of the firm. In music industry the substitutes for paid music purchases or
downloads can be identified to be free streaming music online, pirated music
downloads online and the TV & Radio channels playing 24 hour music.
Pirated music sites which offer music free of charge are the clearly identifiable
substitute for the music industry. The choice of a customer to purchase music or to
download it remains to be a battle in their conscience. Therefore the threat of this
substitute is very high.

As part of the entertainment industry, music can also be substituted by other channels of
entertainment such as movies and games. Although they may not be direct substitutes
for music, they still provide similar services in entertaining the consumer. It may be
said that compared to music, movies and games have a larger utility although the prices
are set higher than music. In terms of gaming, the complementary products required
such as game-stations are higher priced than a regular MP3 player, but the price to
performance ratio is still higher as the utility is higher. Therefore it can be said the
threat of other entertainment sources are also posing a mid to low level of threat of
substitution to music industry.

• Competitive Rivalry in industry – High

▫ Numerous services are popping up

▫ Partnerships and shakeouts are prevalent

The product differentiation achievable in the music industry is very low due to all
genres being represented by artists being common. The differentiation may be achieved
through the formats of music provided such as CD, DVD, Blue-ray and online formats
such as MP3, WMV, etc. With digital downloads being more popular than the regular
visit to the music store, music industry has continuously reduced number of outlets and
focused on developing an online strategy. Through that they have been able to reduce
high fixed costs such as outlet rentals and salaries of high number of outlet staff which
has helped with their margins.

PESTEL Analysis

• Political

▫ Some countries and locations may not offer ways to expose your music.

▫ Possibility of rejection due to copyright law.

• Economic

▫ There should be enough disposable income with the people to use such services.

▫ Useful to new entrants to the sector, as very low initial investment is required.

• Social

▫ Industry is very dynamic, demand will change with changing consumer patterns
and music formats.

▫ The demographics, particularly age of the target segment is very limited.

▫ Action, Opinion and Interest of People are shifting towards online form of
music.

• Technology

▫ Penetration of Internet in percentage terms is still very low.


▫ Technology is changing continuously.

• Environmental

▫ Moving towards online form of music from physical form positively affect the
environment

• Legal

Privacy Issues –

▫ Digital piracy is choking revenues

▫ The net effect of illegal file-sharing is reduced purchasing of music, Overall


music sales fell by around 30 per cent between
2004 and 2009.

Way Ahead – To tap new Market.

• In order to take the business to the next level and capture the enormous potential that’s
still untapped, we need new services to truly break through to the mass market. To do
that, an attractive user interface, a strong value proposition and a clear marketing
message are essential, as is an effective way of curbing piracy.

• Consumer education has a vital role to play, and the music industry is currently
involved in more than 70 awareness programmes across the world.

• A graduated response model is used involving escalating warnings to infringers


culminating, as a last resort for those who refuse to stop, in he sanction of temporary
account suspension.

The Value Chain and Evolving Business Models

• Independent and unsigned artists are using the digital channels to distribute their
content directly to the listeners, bypassing the traditional intermediaries
• Music companies are increasingly using their music along with other media and
entertainment forms such as TV, mobile games, advertisements, etc

• Music companies are also partnering with ISPs and mobile handset manufacturers and
portable music device manufacturers to broaden their customer reach

Source: The Digital Music Market Outlook, Business Insight 2009


Conclusion

• The industry need to embrace the inevitable of Online Music Distribution Channel
through integration of the channels

• The internet as delivery medium and innovations of handheld devices will continue to
be the key to growth

• Piracy is expected to widespread among younger generation

• Key to success shall be execution speed and flexibility to adapt to consumer demand
References

Literature References:

1. Online Sales, Internet Use, File Sharing, and the Decline of Retail Music Specialty
Stores, Alejandro Zentner
2. How Copyright, Contract, and Technology Shape the Business of Digital Media Study
Berkman Center for Internet & Society at Harvard Law School Research Publication
No. 2004-07
3. IFPI digital music report 2011
4. The Future of Music and Film Piracy in China
Berkeley Technology Law Journal, Vol. 21, p. 795, 2006
5. Digital Music and Online Sharing: Software Piracy 2.0?
Communications of the ACM, Vol. 46, No. 7, pp. 107-111, July 2003
6. The Economics of Digital Goods: Selling vs. Renting Music Online
DIME Intellectual Property Rights Working Paper No. 13

Web references:

1. http:// http://www.ifpi.org
2. http://en.wikipedia.org/Online_music_store
3. http://www.musicunited.org/
4. http://www.riaa.com/
5. http://en.wikipedia.org/wiki/drm
6. https://www.google.co.in/

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