Contents: Page
Number
1.0 Is the recorded
music industry experiencing strategic decay? 2
2.0 What are the key
drivers of the decline? 4
2.1 The day music became intangible asset 5
3.0 What are the new
sources of competition? 6
4.0 Are there way to
revitalise the industry? 7
5.0 References 8
Is
the recorded music industry in strategic decay?
Figure 1: Supposed Strategic Decay of
Music Industry
“For seven years running,
sales of compact discs have fallen due to the seismic shift in the way
consumers obtain their music. Though C.D.s still account for more than 85 per
cent of all music sold, the sharp decline in their sales as a consequence of
digital downloads has dramatically outweighed increases in C.D. revenues”
-
Smith (2007)
Ethan Smith was not incorrect in his statement about the music
industry market according to the perspectives of the “big traditional” of the
music industry. There was not a record company in the market that was not
concerned about the electronic form that was taking over the industry. However
the music industry was not suffering slump that was being perceived by large
recording companies, contrary to popular belief – the music industry was
booming.
Several young companies had gone from strength to strength, riding a
wave of new artists, using a new medium.
Technology and Global Markets had finally caught up with the
international music industry and the music market had been opened up to an established
international customer base, as well as new customer base which could not be
accessed through existing channels.
What
are the key drivers of the decline?
As stated earlier – new technologies and more open global markets
had left the music industry vulnerable to attack.
But it was through new mediums that dissolved the market – and that
inflexibility of the market leaders to change to combat these new mediums that
eroded their sales margins.
Figure 2: Decay vs. New Mediums
While Cassette tapes had been around since 1964, they were not
considered a valid recording medium since the mid-1970. At this point Tapes
themselves did not directly damage L.P. sales, and in many instances subtly
promoted sales of L.P.’s.
Quite often songs were recorded off the radio on to tapes, to be
played back later. This in turn promoted the sales of the L.P.’s which quite
often contained songs not played on radio stations. This also promoted concerts
of live bands as tapes were a valid medium that could be easily transported
into personal players or vehicle based players, (portable L.P. players were
often cumbersome and did not operate well without optimal conditions).
However with the advent of ‘Dubbing’ – the music industry suddenly
had to compete with sales of blank medium, most of which could be purchased at
a substantially lower price than the original items.
Dubbing used technology that was previously only available via
industrial means and it placed recording technology into consumer based
product. It was the blatant copying of one medium onto another (often copying
of L.P.’s onto Cassette, or even Cassette onto Cassette). Unlike previous
recording functions – it was completely autonomous, even changing the sides of
the cassette automatically to clone the original completely. However this also did not damage recording
sales immediately – as often the ‘copy’ was inferior in quality in comparison
to the original. This frustrated many customers who often purchase the original,
after the copies failed.
However it still prompted a response from the recording industry who
promoted slogans such as the one below:
Figure 3 – Anti-Dubbing Slogan
(Courtesy of Wikipedia.com)
It was not until the advent of ‘High-Speed-Dubbing’ in the 1980’s,
where tapes (which were the popular medium at the time) could be copied at many
times the original speed – that music industry sales dropped off dramatically. Thankfully at this time the music industry
already had a replacement in mind, in 1982 – the first ‘Audio Compact Discs’
and their players hit the consumer markets. By the 1990’s C.D.’s had become the
medium of choice of many consumers – offering superior quality sound and build,
and a longer shelf life. While C.D.’s could be copied onto Tapes – many
consumers opted to purchase C.D.’s then to copy them on to a tape.
While recordable C.D.’s were available in the early 1990’s. Piracy
of C.D.’s was relatively limited until the late 1990’s; as it was too expensive
to purchase the hardware required to copy (or dub) a C.D., and most of the time
this equipment was computer based requiring a slightly higher skill level than
the average music consumer.
There were however mass-markets of illegal C.D. copies being
distributed throughout Asia, Europe and America.
However, as computers became more integrated into society, the
prices for their component substantially dropped. This combined with the extra
skill levels acquired in modern society meant that a larger number of consumers
were able to create their own C.D. copies. This combined with an even more
expanding and more open global market for music, opening a large market for
cheap counterfeit C.D.’s.
This brought many of the music industry’s biggest players to their
knees – and forced many survival mergers between previously rival
companies. Ironically the Pirate C.D.
epidemic that plagued the music industry – suffered the same problem as the
Pirate Tape industry. The quality of the pirate C.D. was often sub-standard; fading
through repeated use, due to the operation of a C.D. using a laser. Also more
often than not – the C.D. was scratched or poorly recorded making for a poor
audio experience.
But the then “Big 5” of the music industry could not simply sit by to
watch their market collapse. A plea was made out to the public, through the
voices of the artists – that music piracy was directly affecting the pockets of
the artists themselves. While this was not a lie – the music industry still
continued to make money, even at the expense of artists who were losing money
via label deals that paid commission via album sales and concert tours. This
eventually lead to many artists dropping their label, and forming their own
label – in many instances such as 7Brothers Recording Co were re-integrated
into the ‘Big 5’ (in 7Brothers case –
Tower Records, http://www.tower.com/music-label/7-brothers-records) via
contract re-negotiations. But some remained separated and became successful.
However the Pirated C.D. industry was just the beginning of the
onslaught that was to hit the music market.
-
The Day Music became an Intangible Asset
Electronic mediums for had been in development since the 1950’s,
however it was not until the age of the consumer computer had been reached,
that software based music had even been considered an option.
By the mid-90’s not only had the data compression algorithms for
sound at a realistic level, but the equipment and software to record, copy and
play back the sounds on a PC were becoming cheaper by the day. PC’s using operating systems no longer had to
operate on their PC’s only hearing simple ‘midi-based’ sounds, and many operating
systems had used this new hardware and software packages to make their product
a more entertaining tool.
With computer based soundcards reaching levels suitable for home
Hi-Fi. Consumers started looking for ways to put music on their PC’s. While
‘wave’ files were common on many operating systems – quality and compression
was usually lacking, requiring large hard-drive space on PC’s (not cheap at the
time).
Using a format used in the camera and image industry – JPEG (Joint
Photographic Experts Group), a similar group was formed called Moving Picture
Experts Group (Wikipedia: MPEG).
Formed by a group of members of the German organization – the
Fraunhofer Society (Fraunhofer, 2010), they set about to make advanced, high
quality, high compression, digital versions of film and sound.
The final result for the audio codec was aptly named MPEG1, Layer
3……or MP3 for short.
MP3 was approved as an ISO/IEC standard in 1991 (Wikipedia: MP3) –
but was still not sufficient in quality, compressing a file down to a very low
128kbs. This meant that nearly 600 mins of recording time could fit onto a C.D.,
substantially more than the usual 70 mins and audio C.D. offered. It also meant
that a reasonable amount of songs could fit onto a home PC.
By 1996, the quality of the codec had improved, removing common
frequencies and frequencies outside normal audible range. There were also a
large number of free computer based players and copiers available on the
market. The software had got a lot
easier – as with the trend towards windows based PC’s for home and office, the
pirating software had become almost second nature to some users.
Ignoring the situation for many years, the music industry leaders
became defiant that there was a problem – and failed to notice the new
competitors entering the market, taking advantage of this new medium.
When they did respond to try and capture this new medium, they had
already lost a very big chuck of the market share to these new competitors.
They had also lost a very large percentage of the market due to social attitude
changes towards music piracy.
As music was no longer something you had to go to the shop to buy –
it was something you could simply download from another computer over the
internet.
Technology had eroded the value of a product. Similar to how the
encyclopaedia industry had experienced a little earlier. Going from Encyclopaedia
Britannica, to Encarta (on a C.D. Rom at 1/10 the cost) to Wikipedia completely
online (and free). (Evans, 1997)
What are the new sources of competition?
When MP3 was first released, it was only initially used by a very
select group of people. It was not until late 1990’s that a substantial amount
of the population understood what MP3 files were, and how they could benefit
from them.
From 1997 onwards there were multiple vendors offering MP3 players
and rippers (ripping = dubbing a C.D. to mp3).
Winamp and Windows Media Player competed for this new market, attempting
to outperform each other with improved features and more fantastic graphics
packages. Windows Media Player had an automatic following due to being the
default media player in Microsoft windows.
Whereas Winamp had accumulated a strong following as being one of
the first vendors to market to have compatibility with the MP3 format.
Winamp was seen as a good medium for new artists to get themselves
noticed, and also had created a global community of music through a global
universal product that could be adapted to suit any country and be customized
to suit any consumer. Soon many international forums around the world gained
#mp3 or #winamp chat rooms where members could swap songs and winamp
applications and skins. www.winamp.com
became a shopping ground for new music and new music player applications.
Seeing an open door for an international market distributing music,
many sites started operating ‘peer-to-peer’ sharing sites, catering for music
fans. This escaped legal loop holes, mitigating legal risks involved in these
vendors hosting the files themselves. Peer-to-peer vendors such as MIRC and
Kazaa became overnight multimillion dollar business due to showing advertising
to an international market to members who used their global software for free.
The music cost nothing – therefore held no value, completely undercutting the
price of music internationally. The music industry started to notice this
market gaining momentum, but concentrated more on attempting to develop its new
DVD-based format further to suit the customers.
Portable music players existed that could play MP3’s, but most were
cumbersome, had very little storage for music – meaning that traditional
portable music players were still the more viable option. However a lot of the
time this gave no solace to the music industry as the tape/C.D.’s in these
players was becoming increasingly pirated.
2000 saw the immergence of fully functional, portable MP3 players –
MP3 had then become at this point the second most popular audio medium in the
world, displacing tape. C.D. sales still continued – but were not gaining any
market share. Many in the music industry attempted to develop protection
systems for their Music C.D.’s, DVD music had become an expensive failure as
DVD players were still quite expensive to buy.
Creative and Sony had created a new range of devices to suit this
market and many of the large music companies had become integrated with movie
manufacturers and hardware companies to ensure a guaranteed market for paid
music.
In 2001, Apple Inc, a computer company that was having issues
competing against Microsoft based PC market, released the iPod. An expensive
MP3 player that had advance technology. (Ipodhistory, 2001). Aiming at a style savvy
target group, and despite not working on PC based machines, the iPod was a huge
success. Within a year Apple Inc had set up its own music store, iTunes – which
was gaining huge popularity due to being one of the largest legal ways to buy mp3 music.
Fearful of losing this new market completely, “In June 2002, three of the five major music labels – Universal, Sony
and Warner Music – announced that they would make thousands of songs available for
download over the internet at the discount price of 99 cents each.”
(Walker, 2009, p92)
By 2006, iTunes, had sold more than 1 billion downloads. (Walker,
2009, p267) – And online bookseller had changed their catalogue not only stock
normal C.D. based music, but also downloadable MP3’s.
Many free MP3 websites had spawned, where funding was found through
other means (site advertising etc) and artist could host their songs free of
charge. Some even paid the artists for every download the song achieved.
By 2007, thanks to stores like cafe press (www.cafepress.com) and YouTube
(www.youtube.com) artist could completely manage themselves and promote their
own work. The music industry was not only losing its customer – but its
suppliers also.
Are
there ways to revitalise the industry?
As far as the consumer is concerned, the industry is fine. It is
only from the supplier’s side that it is slightly in jeopardy. In previous
attempts to destabilize the music industry, the major players would attack the
counterfeiters head on – using a new medium that was far superior. With MP3
being an intangible, heavily used medium, the music industry cannot combat this
head on, and minor attempts to stop counterfeiting (via encryption) have only
frustrated the customer based, and have not hampered this new mediums growth.
There needs to be a change of thinking from the heads of the music industry.
They need to reanalyse what business they are in.
“It’s not all about the music”
-
Ann Powers (January 31, 2010)
New ways of thinking have to be introduced, the sale of C.D.s/DVD’s
does not seem to be dead just yet – but it needs to be acknowledged it has lost
a very large market share of the recorded music industry. However the remaining segment could be
maintained and generate better revenues simply by up selling or cross-selling.
If the music has no value due to being available for free very easily – chances
are the purchaser of a C.D. /DVD is buying it due to superior quality or
perceived value. This can be increased and sold at a higher price by adding
perceived value to the product. Limited editions, signed albums or even
interesting collectors cases could add an additional intangible value.
There is also the option to take this to the mp3 versions as well
with “Limited collector’s edition band theme” MP3 players with preinstalled
albums.
Also music can generate revenue via other means:
-
Using brand sponsorship or
product placement in Music Videos
-
Getting band members to promote
products
-
Using music in advertising and
promotions (under leased licenses)
-
Using music in movies and
events (under leased licenses)
-
Licensed products and apparel
-
Live concert ticket sales
-
Band interviews/stories
-
Website advertising
-
Leased music to public areas
(Gyms, pubs, clubs)
-
Concert sales
-
Music Tourism
Even the negative concept of music piracy has positive sides, as
positive ratings can be generated for an album pre-release creating support for
an album before it is available.
There needs to be a shift in concept from moving music off shelves.
The music industry is not just about the music. Due to MP3 being a heavily
counterfeit market – music medium has lost value overnight, but additional
value can be created complimenting the ‘new’ music industry.
References
Smith, E,. (2007) For the
Music World, the Tunes Gets Sadder
Wall Street Journal European Edition, March 22, 2007, p. 16
Evens, P. and Wurster, T. “Strategy and the New Economics of
Information”,
Harvard
Business Review, Sept/Oct 1997.
Walker, O, Gountas, J, Mavondo, F, Mullins, J. (2009). Marketing
Strategy: A Decision-Focused Approach
N.S.W. Australia: McGraw-Hill
Ann Powers on the Grammy Awards,
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