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Announcements
Group assignments– Due Friday at 5pm
• Hand in hardcopy to 346 Sage and email to me (dph2)
– Will contact by email if want brief in-class presentation 3/27
Change in due dates for remaining two short papers– #4 from 3/27 to 4/1 (handed out 3/25)– #5 from 4/8 to 4/10 (handed out 4/3)
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Today’s Class
Finish discussion of darknets– Likely evolution of darknets based on current
legal, social and political environment (in US)
Clemons paper on newly vulnerable markets for information goods– Competitive strategy theories– Application to music and newspaper industries
Your analysis – Applying theories of newly vulnerable markets
and co-specialized assets to music industry
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Likely Evolution of Darknets
Large-scale file sharing will be limited– For music, RIAA and labels will identify hosts
that share lots of data• Shut down through legal means
– File sharing will become more subject to viruses and corrupted files• As more mainstream will become larger target
However small-scale sharing hard to stop– Sharing only with friends
• Can’t prohibit without alienating users• Less problem with trusting content
– But harder for users to find new things
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Leaves Room for Online Sales
Make it easy for friends to share music, while still encouraging purchase– Systems such as Threedegrees do this by
enabling shared listening but not copying– Perhaps leading to reduced costs for
radio/video promotion
Supplement with easy means of making online purchases– Many purchasers of music under age 18 and
don’t have credit cards• Could be good for Paypal and other prepaid
payment services
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Large Opportunity
Safe, secure, easy purchase online a viable alternative to illegal downloads– Make easy to find music
• Search, sample, online community, reviews
– Can be provided by industry or retailers– Value more than being easy and safe
• “Tipping point” phenomenon, people willing to pay for perceived value
Not just to avoid other costs such as viruses and corrupted files
Offering wide variety of pricing models– Per song, per “album”, per listen, subscription
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Information Goods Strategy
Clemons identifies theory of newly vulnerable (contestable) markets– Newly easy to enter– Attractive to attack– Difficult for incumbents to defend
Considers two information industries– Music and newspapers
Also draws on Teece’s theory of resource-based value retention– Other required resources make entry difficult
• Co-specialized assets
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Market Vulnerability
Newly easy to enter – due to changes in– Regulatory rules– Technology– Consumer preferences
Attractive to attack– Cross subsidies
• Some customers subsidizing others; pricing not reflective of costs
E.g., credit card industry
• Some products or services subsidizing others
– Also: decoupling of co-specialized assets• Clemons views this as a kind of cross subsidy
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Market Vulnerability
Difficult (for incumbents) to defend– If incumbents can respond in-kind then profits
competed away– Regulation can be stricter for incumbents
• E.g., landline vs. cellular telephony• E.g., banks offering credit cards
– Channel conflict issue for incumbents
Similar problems if too easy for new entrants– Many entrants will compete away (at least
their own) profits
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Digital Goods Industry Players
Content creators– Composers, writers, artists, performers, actors
• Often contractors not employees
Content producers – packaging, promotion– Record labels, newspapers, studios
Reproduction facilities– Printers, CD/DVD/tape duplication
• Often owned by content producers
Distributors– Wholesalers, retailers, broadcasters
• Close relations with content producers
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Roles of Digital Content Producers
Identify and develop individuals and works Certify “value” or credibility of work
– More important for information than entertainment (e.g., news vs. music)
Control or have relationships with distribution channels
Promote and advertise work– Including branding, promotional copies, etc.
Control sale and reproduction of work– Including defending copyright of the work
• Most important for items of long term value
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Music Industry Vulnerability
Cross-subsidies of talent– Different products (artists) provide large
differences in profitability– In principle subject to pick-off of talent,
traditionally combat with• Long-term contracts• Not many record labels to turn to
All providing similar services at similar costs
– Internet provides potential for successful artists to distribute content on their own• Bypass the record labels once contracts expire• Leaving only less profitable acts to labels
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Music Industry Structure
Value creation and revenue production are co-specialized assets in music industry
Value creation– Done by artists – Realized by labels
• Finding acts, producing recordings, promotion
Revenue production– Largely through selling physical copies
• Reproduction and distribution of those copies controlled by labels
Internet threatens decoupling
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Challenges for Incumbents
Where to find revenue with changes in control of reproduction and distribution– Fight to maximize life of current model
• Challenge online services
– Try to control reproduction and distribution over internet• Copy protection technologies and strict laws
– Investigate new revenue models
How to keep most profitable acts– Demonstrate value of services other than
reproduction and distribution• Probably share more revenue with best talent
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Several Industry Scenarios
Clemons models various cases– Base case of late 1990’s structure– Defection of big groups from labels
• Defecting groups enjoy more profit but labels become less profitable
• Depending on degree, labels become unprofitable and decrease promotion
Fewer new bands and lower consumer choice
– Rapid proliferation of pirated copies• 75% of top acts content stolen, 25% of others
Artists and labels lose money, fewer new bands, lower choice
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Will We See Reduced Choice?
Clemons’ simulations illustrate current structure doesn’t adapt well to Internet
Do consumers value choice– If so business opportunities in identifying and
promoting new bands• Labels that become known for exciting new
artists in some genre Value in reducing search costs
Simulations also don’t consider large scale adoption of online distribution by labels– As predicted by Forrester study
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Newspaper Industry
Reporters don’t have star power of musical acts– Not much cross-subsidy of talent like music– Newspapers play larger brand and certification
role than music labels
News a very different experience from entertainment– Likely to want to experience once rather than
many times• Less desire to make a copy
– Care more about credibility, viewpoint – brand
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Newspaper Industry Revenue
Again presence of co-specialized assets– Value creation done by reporters and editors– Revenue production from printed copies
• Mainly circulation-based advertising not sales According to Newspaper Assoc. of America
81.5% of revenue from advertising
Printed copies less important than packaging of advertising with content– Consumers unwilling to view ads alone– Consumers want news but generally not willing
to pay costs– Advertisers want to reach these consumers
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Newspaper Industry Vulnerability
Widespread defection of content creators not viable– Value of newspaper brand, news gathering
ability and lack of star power
New entrants such as weblogs may over time provide brand competition– Editorial and viewpoint value
Advertising bundled with content adapts well to the Web– As long as content not widely pirated
• Seems likely to be the case given time sensitivity
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Newspaper Industry Vulnerability
Substitute sources of information that reduce newspaper readership– Reducing advertising revenue– Recent Web news sites compete with papers
Substitute advertising channels– Ways of reaching desirable audience not
through news• Recent Web sites provide substitutes for
classified ads (e.g., eBay, monster.com)
Risk of death spiral if such revenue reductions cause reduced value creation
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Possible Defenses
News businesses not easy to enter– Brand is important to get viewers/readers
• And thus advertising revenue
– Quality news product not easy to create
Easier for incumbent to go online than for new online news service to arise– Largely bringing together competitors from
different branches of news• Television, newspaper, magazine
Using new technologies for more targeted and thus valuable advertising
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Strategies for Music Industry
Newly vulnerable markets theory– How important is cross subsidy– What barriers are there to widespread new
entrants– How applicable is this to illicit copying– What predictions relative to Forrester report– What defensive or offensive actions should
incumbents take– Will artists go it alone and why
Other strategic models and applicability to this industry