Music value chain

Music value chain 1. Introduction The music industry has been facing radical changes during the last few decades due to the introduction of IS technologies which have reshaped it in depth. More particularly the music value chain has been experiencing an intensive change and evolution in many aspects: the distribution to consumer is more direct, intermediating parties are reducing and prices are constantly changing. The internet, an open information system, legally and illegally paves the way to the creation of a fresh music product, offering more choices to consumers. Consumers are now able to listen to music in electronic forms: MP3s and ringtones are procured in a large scale through internet. The IS delivery vehicle has undoubtly added value to the consumers. But what about the â€Å"Big 4† music companies?[1] How have they accepted this major shift in their business industry? Have they tried to resist or more essentially are they able to resist and is that kind of reaction to their best interest? The industry that celebrated its success in the Nineties now has to restate its position. The numbers are alerting: â€Å"Die Welt† newspaper reports a 16% dropping turnover for sound storage media. Nonetheless the music industry story has not yet ended. It is rather being written from the beginning. Since the old business model does not function at all under the shade of the IS, companies have to use the new technologies and cope with the fast pacing development. In my opinion what is most of the times considered as danger could be proved a great opportunity. The music industry is not perishing; it is just reforming. People will always need music and music companies will continue to exist as long as they decide to adapt to the new IS reality. We are referring to a reformation of something that could be an entirely innovative business opportunity. Apple with the first online music store, i-Tunes, paves the way to a new era and steals a big piece of the music market pie. 2. The music industry: A continuously reshaping industry The music industry history is mainly a story of innovation that goes back to the 18th century. Music creation is as old as human existence but the effort to market and commercialize music counts only a few centuries; In the mid 18th century composers like Amadeus Mozart started searching ways to sell their music and performances to the general public. In the 19th century sheet music, a hand-written or printed form of musical notation, was the core product sold by the music industry but it conveyed an important limitation: it was addressed to a particular audience, people who could read music notation. In the 20th century the sheet industry was replaced by the â€Å"record industry†. The source that led to this reshaped environment was technological innovation. The label corporations commonly known as the â€Å"Big 6†: BMG, EMI, MCA, PolyGram, Sony and WEA, dominated the music industry. Today the â€Å"Big 6† have transformed into the â€Å"Big 4† after Sony merged with BMG. The following graph depicts each labels share[2]. The most important stages in music industrys evolution in the 20th century were: The introduction of cassettes (around 1960). The introduction of walkman: The era of transportable music begins (around 1980s). The introduction of CDs: CDs opened a window of wide capabilities for music consumers. (1990). At this point the music industry boomed: the market growth was huge and mark ups were fairly large. Nevertheless the CD fairy tale would soon come to an end: After 1995 the market started inevitably shrinking. The increasing internet penetration along with the large price decline of hardware and software enhanced the IT industry development. The music industry was not unaffected by the emerging transmission possibilities of digital information, which could take the form of music information as well. It was time for digital distribution and digital production to take the lead. The technological improvements created a safe ground for entrepreneurs to step in: They had the tools and it was about time to put them together and create the opportunity. Further on we will refer to two successful business models that give us a good idea of what the future music industry will be all about: Napster and Apples i-tunes. 3. Recent trends and challenges emerging from the use of IT and IS in the music industry.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  As stated the music industry has been experiencing a variety of challenges because of the fast pacing technological development. New forms of competition have entered the business game antagonising the â€Å"Big 4† and deeply transforming the music value chain. All major stakeholders in the business -artists, consumers and companies- have been affected in numerous ways. The music companies are on the side of the losers: They have tried to resist and have won some battles but they knew from the start that eventually the war would be lost. The technological development cannot be stopped as the earth will not stop revolving around the sun. a. Digital technologies. Which where the core technological developments that have led to the reformation of the music industry? According to Nguyen-Khac T. Q.[3], the parallel evolution of the following four technologies has created an amazingly new business environment: Software development has enabled a fast exchange of data through internet. Compression technology and encryption solutions are only some of the tools currently used by consumers. Additionally, the use of user friendly operation systems (like Windows in contrast to MS-Dos) has enabled people of different backgrounds, ages and abilities to take advantage of all benefits offered by a PC. Hardware development. Personal PC was not always a massive product due to its high cost. Throughout the years prices declined thanks to the decreasing costs that led to massive production (economies of scale). Transportation technology development and more essentially the appearance of internet. The innovation of P2P and network technology. The impact of the above development has been severe for the music industry. A demonstrative example concerning the way P2P affected the music industry was Napster. The illegal download platform Napster was a file sharing service which took advantage of the P2P file sharing technology. The way P2P works is depicted below.[4] Napster became popular in college campuses. The main idea was that each person connected to the network had to share a portion of his private music library in exchange to download everything anyone else had made available. The transaction costs were limited to the connection fee. The result was that all of a sudden an enormous library of music, of all kinds, was created. RIIA brought Napster to court and Napster eventually lost the trial however its pattern has been the source of inspiration for other similar concepts. Although Napster was shut down the decline of the â€Å"Big 4† revenues did not stop. In contrast it was enhanced by the negative publicity emerging by the law sue against Napster. In addition to Napster and P2P networks, the general hardware and software development has enabled consumers copy and save digital music data for private use on their computers. This phenomenon was called piracy but some consumers have considered it as a fair game since the music companies have gained millions for decades now by imposing prices with high profit margins taking advantage of the oligopoly they have created. Moreover consumers in the past were obliged to buy songs in the form of â€Å"album batches†, paying an entire album even though they were truly interested to obtain 2 or 3 songs which were worth spending money for. The use of new technologies enables consumers to resist to this type of constraints, imposed by the music companies. The music companies have iteratively launched campaigns against piracy nevertheless they cannot bend the existing consumer behavior which is based on the perception that exchanging music is a non harmful procedure containing no ethic al dilemmas. b. New technologies leading a new business model: The traditional model versus the new e-value chain model. Under the shade of IS and IT the music value chain has been transformed to an â€Å"e-chain†. In the traditional model there was a tangible product the CD but in the new model the product is intangible; it is the information itself. In the Australian Conference on Information Systems the following conceptual model was presented.[5] As depicted, in the new model, the MP3 file -now considered as the product- is distributed to consumers through online music stores, mobile content providers or artist websites. Moreover music can now be recorded in home studios instead of professional recording studios and be distributed in the already described ways instead of being sold in the form of CDs, through retail stores. The benefits acquired by this new model concerns mainly consumers but also the â€Å"music product† suppliers. First of all the cost of production is substantially reduced and the manufacturing costs are completely eliminated. Also intermediaries, mainly distributors are kicked out of the supply chain since they are not needed. All these changes have as a result a minimum cost for the music provider, easy and fast access to the product for the consumer who also has the chance to pick products (music tracks) in an appealing price and according to his preferences. This dynamic and flexible structure will eventually lead to the proliferation in the number of people involved in the supply chain. Additionally the role of the consumer and artist is now more essential. It is not anymore a game of four since there are no barriers (high production cost, competitive advantage due to full vertical integration) to enter this reformed music industry. c. Current market trends: The financial impact of IT and IS on the ‘Big 4 As previously analyzed the â€Å"Big 4† have developed an aggressive strategy against the new business environment emerging from the development of IS and IT. Even though they managed to shut down Napster practically they are unable to stop the creation of similar models. Even worse they insist on retaining the traditional model and hesitate to take the next step. Agility seems to be one of their least considerations and thats why it is no surprise each year their revenues are dramatically declining. Even if the music market is facing a shrinking trend, the digital sales piece of the pie is getting larger. According to IFPI revenues for cassettes, CDs and vinyl in the world dropped 25%, from $38.6 billion in 1999 to $29 billion in 2007.[6] Analysts at Forrester Research state that â€Å"music sales in the US will decline to $9.2 billion in 2013, from $10.1 billion in 2008†[7]. 4. The future While the music companies remained oblivious to the technological changes the music economy was reshaping and a company unrelated to music made the decisive step to create an innovative business model based on online legal distribution taking advantage of the benefits provided by mp3 files. This company was Apple who literally took the bread out of the mouth of the music companies. In 2003 it officially launched the first online music store: i-Tunes. The price model used was very attractive to consumer: each download cost 0.99 cent. Apple managed to offer a one stop shop to customers by exploiting the internet and digital distribution options. This awe inspiring impetus in the music industry panicked the music companies. They tried to defend their market share against digital distribution through law sues and merges instead of being flexible and adoptive to the increasingly transforming environment and making use of the new tools offered by the development of IT and IS. That enabled Apple to made the check mat move. The core competencies of Apples platform are speed, usability and cost effectiveness. Apples success was remarkable; in its first two online weeks it sold over two million songs[8]. This fact was largely due to the highly integrated system used. The music companies, now more than ever, have to create their own business model of an online music supply pattern. The use of IT in music industry can be considered an order winner for Apple whereas for the â€Å"Big 4† an emerging necessity to keep them in business. Current trends show that the use of IT will become an order qualifier. While executives of the music companies like John Rose, a former executive of EMI appear reluctant, believing that nothing ensures â€Å"that digital economics can make up for the drop in physical†[9] Atlantic, a unit of Warner Music Group claims that half of its sales come from digital music product sales. The future belongs to the digital music business and even if the core product music tracks in the form of mp3- does not make up for the losses from CD sales there are many supportive products such as: ringtones, ringbangs, subscription services that can compensate. 5. Conclusion As analyzed the use of IT and IS has brought a revolution in the music industry: Customers attain more bargaining power since the monopoly of â€Å"The Big 4† converted into a world of many â€Å"dot† choices. The exploitation of the benefits created by the recent developments has proved profitable; i-Tunes and Atlantic are the most prominent examples. Hence, there is a great opportunity ahead, if innovation is perceived to generate revenues and if more direct distribution options are used to cut off costs. The music companies have a negative perception about the use of open information systems in selling music and tried ineffectively to fight back. Instead they should have tried to respond to the challenge and reform their business model in order to survive in the music market. Being reluctant to adopt the new technology only gives way to companies such as Apple to take the lead along with their business share. 6. Bibliography Arango T., November 26 2008. â€Å"Digital Sales Surpass CDs at Atlantic† New York Times. Emerson G. M., 2007. â€Å"The Apple iTunes Music Store: How Apple Got it Right†, Advertizing and marketing report. http://www.admarketreview.com/public_html/air/ai200308.html (Glen Emerson Morris has been a senior consultant for Yahoo!, Ariba, WebMD, Inktomi, Apple, and Adobe.) Moloney, Belinda; Cybulski, Jacob; and Nguyen, Lemai, â€Å"Value Perception in Music Information Systems† (2008). ACIS 2008 Proceedings. Paper 73 Nguyen-Khac T. Q., 2003. The music industry in a dilemma (research paper for the ITS conference Helsinki, August 2003. http://en.wikipedia.org/wiki/Music_industry#History Sony BMG, Universal, Warner, EMI World music market sales shares, according to IFPI (2005) from http://en.wikipedia.org/wiki/Music_industry#History Nguyen-Khac T. Q., 2003. The music industry in a dilemma (research paper for the ITS conference Helsinki, August 2003 Nguyen-Khac T. Q., 2003. The music industry in a dilemma (research paper for the ITS conference Helsinki, August 2003. Moloney, Belinda; Cybulski, Jacob; and Nguyen, Lemai, â€Å"Value Perception in Music Information Systems† (2008). ACIS 2008 Proceedings. Paper 73 http://en.wikipedia.org/wiki/Music_industry Arango T., November 26 2008. â€Å"Digital Sales Surpass CDs at Atlantic† New York Times. Emerson G. M., 2007. â€Å"The Apple iTunes Music Store: How Apple Got it Right†, Advertizing and marketing report. http://www.admarketreview.com/public_html/air/ai200308.html Glen Emerson Morris has been a senior consultant for Yahoo!, Ariba, WebMD, Inktomi, Apple, and Adobe. Arango T., November 26 2008. â€Å"Digital Sales Surpass CDs at Atlantic† New York Times.