Can The Music Industry Change Its Tune?

Case Study 1B ÐŽV The questions

The online downloading of music from the Internet has ripped apart the old business model of record companies controlling the production of albums which are purchased through record shops. The last few turbulent years have seen many high profile law suits; some of which went in favour of the music industry and some of which went against.

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

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

3. Analyse the response of the music recording industry to these changes. What management, organization, and technology issues affected this response?

4. What is the current business strategy of the music industry? Do you think it is viable? Explain your answer.

5. What is the effect on an author if people download copyrighted material from the web? If you were an author how would you feel?

Introduction:

For many years the recording industry has been threatened by the impact of technology. Before the CD and the internet, in the 1970ÐŽ¦s there was the cassette tape, which began the issue of illegally copying music by individuals.

Steven Hannaford (2003) says that music is in transition from being a tangible commodity to becoming an intangible one and ЎҐThis ÐŽ§de-materializationЎЁ of music has the big five companies worried, and with good reason.ÐŽ¦

To address the issues in the recording industry it is necessary to describe the industry business models bearing in mind the managerial, organisational and technological impacts in todayÐŽ¦s society.

The value chain model is an organization's set of linked, value-creating activities, ranging from securing basic raw materials and energy to the ultimate delivery of products and services. The model is used to address specific business activities where strategies can be used to the best competitive advantage for the business (such as lowering cost to provide better value to customers, producing a different product or, enlarging or narrowing the current market.) The primary activities of the value chain model include the production and distribution of products and services and the support activities include organizational infrastructure, human resources, procurement and technology (Laudon and Laudon 2006, p.91).

In the music industry the value chain model can be seen in the growth of companies which use the Internet as their medium ( eg.Kazaa, Morpheus, Grokster, limewire, torrent download sites).

The internet has made it possible to create a new online digital product compared with the physical product in a store. Following from this is the ease of new entrants in the market due to price rivalry by providing lower cost products to consumers who enjoy the ease of use and the accessibility of the product.

PorterÐŽ¦s competitive forces model (Laudon and Laudon 2006, p.99), outlines the need for businesses within an industry to cooperate to achieve strategic advantage due to market threats and opportunities which affect the firm. These threats include:

„X New entrants

„X Substitute products

„X Bargaining power of customers

„X Bargaining power of suppliers

„X The positioning of traditional industry competitors

Hannaford (2003) is concerned about the way that the five major record labels (Universal Music, Sony Music, Warner Music, BMG and EMI ) have continued to take over the minor labels. They belong to the Recording Industry Association of America (RIAA). They also control about 80% of all titles produced, own distribution companies that control over 80% of the wholesale market and often have the rights to much of the copyrighted music ÐŽV and often not the original artists (Hannaford, 2003).

Despite the efforts of the five major record labels the success of new entrants and products is overwhelming. The new products are cheap and easy to use and are market driven due to the bargaining power of customers who want value for money and suppliers who aim to maximise profit with lower costs. Constantly, new substitute products are introduced to the market (eg. iPod and MP3 players, MP3 files replacing CDÐŽ¦s and tapes).

The Role of the Internet

The internet is fast becoming the way in which consumers do business, where consumers once went to a retail store to select their product or any service they needed, now they only need to log onto the internet and make a purchase. The internet has cut the time between production and sale by allowing distribution direct from warehouse to consumer.

In turn the internet has reduced cost of marketing, information storage and to make their products or services more widely available and at reduced cost to consumers.

This is having an effect on old business models and thus creating a new business model. For the music industry this has meant that consumers are not physically going into their stores but using the internet to obtain their information. They can order music over the net, see what is topping the charts and even find information about their favourite singer.

This has also led to consumers legally and illegally downloading music for their iPOD or MP3 players or burning CDÐŽ¦s with their favourite songs.. This has also meant that some authors/artists are not receiving the royalties from their music.

Research by BigChampagne LLC state more than 1 billion songs per week are downloaded from file-sharing programs (Laudon and Laudon 2006, p. 143). These programs are legal, however, they do allow the individual to illegally copy and download.

There is a consumer belief that the internet is available for all and downloading is a natural part of the internet.. Only a small handful of people ever get caught for illegal downloading and it is a very difficult area to control. Consumers are attracted to ЎҐfreebiesÐŽ¦ or bargains and find the downloading option very appealing. NAPSTER had 80 million users until