2

Table of Contents

Subject Map…………………………………………………………………………...……………6

Introduction…………………………………………………………………………..………….....7

The Industry Today……………………………………………………...…………7

Incremental Innovations from Within the Industry………………………… ..……….....9 Disruptive Innovations from Outside the Industry…………………………..………...13

Industry Resistance to Outside Innovation……………………………………….………….……14

Recording Industry Association of America…………………………………….…14

Digital Rights Management (DRM)……………………………………..………....17

ISP‟s and Legislation…………………………………………………………...….18

Consumer Adoption of Innovation ........ ........ ........... ........ ........ ........ . ........ ... ........ ........19 Industry Adoption/Legitimization of Disruptive Innovation........ ... ........... ........ . ....... .20

Mobile Music…………………………………………………………………...…21

Future of the Music Industry…………………………………………………………….24

Social Media…………………………….………………………………………....24

Case Study: Apple Inc…………………………………………………………………….26

[Industry In Action] “The Future of Cloud Computing and Music.”……………....27

Grooveshark Case Study………………………………………………………………….28

Analysis……………………………………………………………………………………30

Conclusion Strategic Direction…………………………………………………………….……..30

3

List of Figures

RIAA: CD Sales (1999- 2008)…………………………………..…………………………………13

IBIS World: Revenue of US Recording Industry…………………..………………………………14

Quote: Yves Riesel,President, Abeille Musique France ……………...………………………….…14

Quote: John Kennedy, Chairman and Chief Executive of IFPI………...……………………….…14

Quote: Chris Ancliff, General Counsel, EMI………………………………..………………….…14

Quote: Martin Mills, Chairman, Beggars Group……………………………..………………….…14

Quote: Simon Renshaw, LA-based artist manager………………………………...…………….…14

Quote: Harris Research……………………………………………………………...………….…15

RIAA Initiated and sponsored educational campaigns………………………………………….…15

Figure 2: RIAA US Lobbying Expenses……………………………………………….………..…16

RIAA US federal Political contributions (1990-2004) …………………………………………….16

Quote: Bono, singer songwriter, in New York Times, January 2010…………………………….....18

Services that US Online Households Use to Download Music from the Internet, 2003-2005 (% of respondents) …………………………………………………………………………………...…19

Online Content for Which Internet Users in North America Would Pay, Fall 2009 (% of Respondents)……………………………………………………………………………………...19

US Recorded Music Spending, by Segment, 2008-2013 (billions and % of total)………………......19

US Music Sales, by Format, 2007, 2008 & First half of 2009 (% of total)……………………….....19

Worldwide Recorded Music Spending, 2006-2011 (billions)…………………………………..........19

Quote: Thomas Hesse, President, Global Digital Business, Sony Music Entertainment…………...20

Quote: Douglas Merill, President, Digital Business, EMI Music…………………………………...20

Quote: Rob Wells, Senior Vice President, Digital Universal Music Group International…………..20

Quote: Greg Turner, Creative Licensing Manager, Film & Computer Games, Universal Music UK.......................................................................................................................................................................20

Quote: Eric Daugn, Senior Vice President, Commercial Strategy, Warner Music International EMEA.................................................................................................................................................................20

Quote: Ron Were, President, EMI Music Services……………………………………………........2-

US Music Industry Revenues, by Format, 2010 (% of market share) …………………………...…21

4

Digital Music Revenues (2008). ……………………………………………………………………………………………………21

Quote: Tero Ojanpera, Head of Entertainment, Nokia…………………………………………………………………………………………..….21

Quote: Eva Berneke, Senior Executive Vice President & Chief Strategy Officer, TDC……………21

Quote: Edgar Bronfman, Chairman & Chief Executive Officer, Warner Music Group…………....21

US Mobile Music Revenues, by Type, 2005-2008 (millions) ………………………………………22

Worldwide Music Industry Revenues, by Segment, 2005-2010 (millions) …………………………22

Mobile Music Spending Worldwide, 2006-2011 (millions) ……………………………………...…22

Subjects Most Blogged About by Bloggers in Select Regions, April-May 2009 (% of respondents)..24

Online and Mobile Activities of Internet Users Worldwide, Q3 2008 (A% of respondents)…….....24

Topics of Their Blogs According to Blog Writers Worldwide, March 2009 (% of respondents)…...25

Prodcutcs/Services Purchased Online by US Social Network users, by Network, May 2009 (% of .respondents in each group) ……………………………………………………………………………………………………25

Quantacast: Daily Users of Grooveshark 09/10/09-03/08/10……………………………………29

5

Acknowledgements

I would like to thank my committee for all their support and guidance throughout the process of

composing this thesis. A special thanks to my advisors David Cavazos and David Cottrell as well as

my readers, Daphyne Thomas and Cynthia Martin.

6

Introduction

Incremental Innovations from

Within the Industry

Disruptive Innovation from

Outside the Industry

Industry Resistance to Innovation

Consumer Adoption of Innovation

Industry Adoption of New Innovation

Changing Business Model

7

Introduction

Within the last twenty years, the music industry has experienced a world of change.

Revolutionary technology has evolved almost every aspect of the industry, from the artist to the

label to the publisher. Like other media industries, music has been forced to roll with these changes,

which has resulted in a much different experience for the industry and the consumer. This paper

will address specifically the changes in technology and law, along with inspecting two major

innovators, in order to establish trends and implications of a viable business model in the future of

the music industry. The industry has shifted from on in which the supplier groups hold all the

power to an industry in which the buyer groups hold the majority of the power.

The Industry Today

According to Michael Porter, there are five forces which may help to determine the

attractiveness of an industry, from a strategic perspective. These forces include the threat of new

entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products or

services, and rivalry among participants (Porter, 1986).

Within the industry the players are defined as follows. New entrants may consist of any

entity on the content creating, distributing, or promotional aspect of the industry. Suppliers consist

of any entity involved in creating music, distributing music, promoting music, playing music

(electronics), or selling music. Buyers consist of any entity involved in commerce with suppliers at

any point along the value chain. For the purposes of this paper buyers will mostly be framed as end

user consumers.

First, the threat of new entrants for almost all of the different segments is fairly high as a

result of low barriers to entry. The internet has reduced barriers to entry by lowering the capital

8

intensity required to successfully operate, as well as reducing the advantages of economies of scale

for physical items through changing directly to digital copies of music. Scaling involved with

physical production of units is no longer as applicable because digital copies are available that level

the playing field.

Thereafter, the bargaining power of customers has gone from low to high. Buyers today can

get their music from a wide variety of different suppliers, and can change from supplier to supplier

without any switching costs. Even though the industry has become much more consolidated than it

used to be, buyers‟ purchases represent all of a supplier‟s music related revenues. Because there is a

wide variety of music choices, and easy accessibility, major labels no longer hold the power they

once did. Power in the industry has shifted from the supplier to the consumer.

Next, the threat of substitute products or services is very high. Music buyers not only can

switch from supplier to supplier, but their attention for entertainment can be taken by other media

such as movies, printed materials, etc. Because other media have very large resource bases, their

product offerings demand consideration when discussing substitutes to music.

Most importantly, suppliers have gone from very powerful to relatively low power as a result

of many smaller suppliers gaining more traction through internet distribution. While there are just a

few dominant suppliers (major labels), their product offerings are becoming less and less

differentiated as independent labels are able to deliver comparable product and compete with

distribution by means of the internet. Other supplier groups such as artists also have lower power as

a result of market saturation. Suppliers of physical listening devices also have lower power because

there are so many options for listening.

Finally, within the entire industry, rivalry among participants is very high. There are many

competitors of equal size and power which leads to competing for the same market share. Beyond

9

that, the industry is an whirlwind of many hungry competitors trying to figure out how to monetize

music once again. Distribution companies pop up every day, stealing business functions away from

existing labels, and technology is making it easier for artists to integrate forward. As a result of this

industry consolidation, the competitive space in the market is very intense.

Overall, the main strategic takeaways are that power has shifted from the supplier to the

buyer, and that the playing field for distribution channels is being leveled as more end users look to

the internet for their point of purchase. As a result, the industry is becoming increasingly more

fragmented, resulting in less market space for each competitor. These implications must be

considered when addressing a solution for the future.

Incremental Innovations from Within the Industry

Up until the 90s the development and proliferation of music technology and law was under

the influence of the industry itself. Innovation was developed and introduced by key players,

allowing for a period of control and stability, regulated from within the industry. From 1857 to

1990, the industry was calculated and predictable; thereafter things began to change.

The earliest known sound recording device dates back to 1857 when Leon Scott invented

the phonoautograph which transcribed the fluctuations of air pressure on a cylinder with a stylus.

However, the phonoautograph was not able to replay sound (Rosen, 2008). The same year Thomas

Edison invented the first phonograph, which did emit sound, using tin foil cylinders on which the

sound was recorded by making indentations on tin. By 1886, Edison developed a wax coated

cylinder for the phonograph which enabled the reuse of cylinders for new recordings once they were

worn out (Read, 1959). In the meantime Emile Berliner had invented the Gramophone which

functioned similarly to the phonograph. By 1887 Berliner developed the first vinyl record which

10

made mass production of the original sound source possible (Congress, 2002). From the 1890s

through the 1900s vinyl discs and cylinders fought hard against each other to win the market share;

by 1925 the cylinder was completely phased out (Howe, 1995).

Up until around the mid 1920s all sound was recorded acoustically; the sound was collected

by a horn which vibrated the cutting stylus (Read, 1952). In 1926 the Victor company released the

Orthophonic Victrola which was designed to play music recorded by electronic recording. Electronic

recording used microphones to capture the sound frequencies, which then used their electronic

signals to drive the cutting stylus. This was the beginning of recording as we know it today. Around

this time the major record distributers/early record labels were Edison, Victor, and Columbia

(Millard, 1955).

In 1935 magnetic tape began to be used for sound recordings, increasing the sound fidelity

that studios could reproduce (Engel, 2006). This technology was developed in pair with stereo

recordings. By 1963 Philips introduced the first Musicassette. Car manufacturers popularized this

technology by standardizing 8 track players within their vehicles (Morton, 2004). By ‟77 cassettes

began to dominate the market share, leaving vinyl LP‟s in the dust (Duke University, 2000).

[Law in Action] By this time Congress had passed the Copyright Act of 1976 which stated: “ (a) Anyone who violates any of the exclusive rights of the copyright owner as provided by sections 106 through 122 or of the author as provided in section 106A(a), or who imports copies or *phonorecords into the United States in violation of section 602, is an infringer of the copyright or right of the author, as the case may be.” [*A phonorecord is defined as "[M]aterial object[ ] in which sounds are fixed and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.] The rights provided to artists included:

1) The right to reproduce the song and make copies 2) The right to distribute copies 3) The right to perform the song in public 4) The right to make derivative works 5) The right to display musical works

These rights are afforded to the artist with an original work once they fix their work in a tangible medium (ie. a cd, music score etc.) but are substantially easier to defend in court when the work has been registered with the copyright

11

office. Works that were created before 1976 are protected for a total of 75 years, if the copyright is renewed in it’s 28th year. Without this renewal an additional 47 years are not secured (US Copyright Department, 2010).

This copyright act helped keep power with the content creator and or their label in order to

make sure incentives were there to create content such that these content creators could keep control of their creations and earn profit from their work.

Just two years later Sony introduced the Walkman- the first hand held music player known to

man (Thomas, 2006). In 1983 Sony and Phillips joined forces to release the Compact Disk (CD)

and player into the United States (Sony Group, 2010). The CD rapidly became the industry

standard, out selling LP records by 1988 (University of Minnesota, 2008). In 1989 Sony released the

Digital Audio Tape (DAT) which allowed variable quality recording, above or below a CD‟s

sampling rate (Sony Group, 2010). The DAT became very popular among the professional

recording industry throughout the 90s. In „92 Phillips released the Digital Compact Cassette in

response to the DAT. The DCC was compatible with regular cassette decks (Phillips , 1997). Sony

quickly responded with the release of the Mini Disk (MD) which was a standalone format and

allowed for high quality recordings with the convenience of a tape deck (Sony Group, 2010).

[Law in Action] In 1992 the Audio Home Recording Act was passed which forced importers and manufactures of

DAT blank tapes and recorders to pay royalties to the Licensing Division of the Copyright Office which are then distributed by the Copyright Arbitration Loyalty Panel to copyright holders including record companies, featured artists, songwriters, music publishers, musicians, and background vocalists. The idea was that copyright infringement was sure to happen as a result of these recordable tapes, therefore to put a blanket percentage royalty on the manufacture of DAT would help ease that hardship put on copyright holders by the DAT. (US Copyright Office, 2010)

Among these new releases, the CD became the most popular and widely used (Sony Group,

2010). As CD‟s became cheaper, they became the dominating force in the market for all record

labels. In 1990 the CD-Recordable (CD-R) was introduced to the consumer market- presenting the

first opportunity for people to pirate music without losing much quality (O'Malley, 1998). By that

12

time 28% of all US households had CD‟s, and 288 million CD‟s sold in the US in 1990 (Amoah,

2005).

[Law in Action] In 1995 Congress passed the Digital Performance Rights in Sound Recording Act which

amended the Copyright Act to establish that artists that perform on digital transmissions must get performance royalties for doing so. (US Copyright Office, 2010)

The purpose of this act was to account for the internet when considering copyright laws.

In reference to CD-R‟s, its quite relevant to mention how computers began to play a role in

consumer behavior. Although personal computers were introduced to the consumer market by

1975, people didn‟t use their computers to listen to music until the early 1990‟s. Ad Lib and

Creative Labs were some of the first to release soundcards, their initial models released in 1991

(Dixon, 2010). At the same time the internet, which had been in development since the 1970s,

began to be commercialized and available to the general public (Computer History Museum, 2006).

Due to the internet and the introduction of the compression format MPEG, MP3‟s began growing

in popularity. On November 26, 1996 the MPEG-3, otherwise known as the MP3 was released

(Belis, 2010).

Along with the advent of the MP3 format, came the MP3 player. The first MP3 player

released came in 1998, the “MPman” by Elger labs. It cost $250, and held about 8 songs, a far cry

from the modern player. By 2000 Creative Lab debuted a 6 GB MP3 player, and in 2001 came the

dominating force of all MP3 players- Apple‟s IPOD (Menta, 2004). From there the market took off

and there‟s been no looking back since.

[Law in Action] On October 27th 1998 the Copyright Term Extension Act was passed as an amendment to the Copyright

Act of 1976 which allowed for a total of 95 years of protection; 28 years initially, and an additional 67 years with a renewal. The amendment also established that all works created after 1976 belong to the author for their whole lifetime plus 70 years. If the work was written by two or more persons than the rights last 70 years past the last surviving author’s lifetime. For commissioned works, that are specifically stated as “work for hire” the work is only protected 95 years from its publication, or 120 years from creation, whichever is shorter. Once a copyright expires, the work is considered “public domain” and fair game for anyone to use (US Copyright Office, 2010).

13

Disruptive Innovations from Outside the Industry

With the advent of Compact Discs, Personal Computers, the Internet, and MP3s, came the

birth of Peer to Peer (P2P) file sharing, the beginning of the end of traditional record sales. In 1999

Napster was released- the poster child of P2P (Bloomberg L.P., 2009). Suddenly the music market

changed from one in which the only way to get an album was at the store or borrow it from a friend,

to one where you could “share” music with the entire world wide web. Napster grew in leaps and

bounds, and by July 2000 the Recording Industry Association of America (RIAA) successfully shut

down the service through court order (Riedel, 2006). While the RIAA was able to effectively

shutdown Napster they have not been able to stop the flood of torrent based programs which

facilitate P2P file sharing. Torrent is much harder to pin point and trace because the downloader

gathers parts of the file from many different “seeds” (people that are sharing the file), as opposed to

having one centralized server. Since the conception of P2P the sale of physical CD‟s has been

steadily declining every year.

[DATA PROVIDED BY RIAA] *units in millions

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

CD

Units

938.9 942.5 881.9 803.3 746 767 705.4 619.7 511.1 384.7

Revenu

e

12,816.

30

13,214.

50

12,909.

40

12,044.

10

11,232.

90

11446

.5

10,520.

20

9,372.

60

7,452.

30

5,471.

30

14

Industry Resistance to Outside Innovation

These quotes indicate a general consensus; the industry feels that a fight against piracy is the noble fight- protecting

what is rightfully theirs. This effort has been disseminated through the RIAA, DRM, and ISP legislation efforts.

Recording Industry Association of America

The Recording Industry Association of America, is a trade group, that effectively represents

the entire recorded music industry, with members including all the major record labels, as well as a

Figure 1 IBIS REPORT: Revenue of US Recording Industry

15

very large number of independents (RIAA, 2010). Therefore it can be ascertained that their actions

represent the interests of the entire industry at large.

When these disruptive technologies became prevalent enough to

affect consumer trends, the RIAA immediately jumped in to

intervene. They began by launching educational initiatives to

attempt to convince target segments of the public that illegal file

sharing is unequivocally wrong, and damaging to artists.

16

Aside from educational initiatives they launched themselves, they also continued to fund special

interest groups in order to get protective legislation in motion.

17

Around 2004, the RIAA recognized their educational and legislative efforts were not effective, and

discontinued this strategy. As this resistance was short lived, as was another form of industry

resistance, digital rights management.

[Law in Action] On October 28th 1998 the Digital Millennium Copyright Act was passed which criminalizes software, devices, and any other technology that is used specifically to get around DRM. This act also increased the penalties for copyright infringement on the internet (US Copyright Office, 2010).

Digital Rights Management (DRM)

In 2002, record labels like Arista, BMG, & RCA began using DRM on

CD‟s for the first time. DRM enables the distributor to put a set of rules

on the file as to how the end user can copy, play, and otherwise

redistribute the original file. This would solve the problems associated

with music piracy if online retailers were the only means to music, and

there weren‟t counter technologies that allow consumers to sidestep DRM

as only a minor inconvenience, an extra step between them and a fully maniputable music file

(Electronic Frontier Foundation, 2010).

Seemingly, Apple and the major labels recognized this and on January 6 2009, discontinued

DRM altogether (Apple Inc, 2009). With this discontinuation, they introduced a three tier price

system, that allows for Apple and record companies to capitalize on consumer surplus demand, and

potentially make more money than they would otherwise (Sadun, 2009). Because there are lower

prices to match lower demand and higher prices to match higher demand, more users are likely to

purchase music, as the price more closely matches demand—especially on the lower priced songs.

18

ISP’s and Legislation

The Music Industry and other media segments have been trying to encourage Internet Service

Providers to help stop media piracy on their networks. So far there has been little success with US

comprehensive legislation demanding such an approach. This is not the case for all countries

though.

“A number of governments however, including France, UK, New Zealand, South Korea and Taiwan, have enacted

legislation to require such cooperation or are in the process of doing so.” (IFPI. Digital Music Report. 2010).

Most countries currently use a “graduated response system” which basically means that copyright

infringers get warnings, with graduated consequences. Making the consequences proportionate to

the actions seems to be the most reasonable and effective way to help slow media piracy

(International Federation of the Phonographic Industry, 2010).

19

Consumer Adoption of Innovation

With the internet leading to an ever expansive means of communication and distribution

platforms, there are more options for artists and consumers than ever before. Sites like: Youtube,

Myspace, Facebook, Grooveshark, and many others, have led to a revolution among artists known

as Do it Yourself (DIY) (Enyclopedia Britannica, 2010). Not only are consumers able to gain free

exposure to a vast quantity of music, it also enables artists to get their music out there without the

aid of major record labels. This has taken money out of the pockets of major labels on both sides,

20

the consumer and the artist. Consumers are able to listen to music they want for free, with the click

of a button, whether its streaming music, or downloading it illegally. This is beginning to diminish a

large venue of power for major record labels; the radio. Independent labels have been on the rise,

because they have the power of the internet, which allows for copious amounts of free or cheap

marketing to target audiences. Overall these viral means have been beneficial to the consumer, and

up and coming artist for purposes of exposure. For the major label and the well established artist,

this progress has not been all that beneficial as it has reduced their value proposition, thereby

reducing their sales.

Industry Adoption/Legitimization of Disruptive Innovation

21

These figures indicate a change in attitude among power players in the industry and indicate a shift in strategy as well.

The new industry is looking to discover new business models that capture all the consumers otherwise missed by the

current model. Some of these strategies include product placement and bundling. As shown, the internet is beginning

to make a large segment of revenues for the industry. While overall sales are on the decline, digital downloads are on

the rise. A sucessful application of these ideas has been embodied in the mobile phone industry.

From about the late 90s to around 2004, the industry as a whole was still in denial, seeming to think

that they could simply scare people with the law back into their traditional means of sales. As the

light dawned on major labels and associated distributors that the glory days were never coming back,

real changes were made in the system. Labels began to retail music online through various

distributors, as well as license it through a multitude of subscription models, and focus on product

placement in games, commercials, and movies in order to make up for lost revenues. As it stands

today, the biggest opportunity for music sales is through bundling within preexisting services. So far

the mobile phone industry has been the most successful at this model.

Mobile Music

22

Between the internet, mp3 player, and mobile phone has evolved mobile music. Although the

cellphone was introduced in the late 80s, computing power and high speed wireless networks were

not up to par for consumer consumption of music until around the last decade. Since then, mobile

music sales have taken off- providing another venue for music sales. Cellphones are providing

music services on two venues: music streaming

and mp3 storage capabilities. With almost the

entire US population owning a cellphone

(IBISWorld projects by 2009 92.2% of the US

population will have a cell phone), this is a

rapidly expanding market for both music and

cellular services. The mobile industry is one of the first to introduce music bundling packages with

preexisting service plans.

Ringtones, and ringback tones have been a nice cash cow for the industry and people are interested

in listening to music content on their phone, whether its through streaming or using their mobile

device as an mp3 player.

23

Whereas ISP's have no real incentive to package web services such as music streaming into their

existing model-- the cell phone industry can use such services as real differentiators to leverage

specific phone models or service plans. The future for mobile music is bright!

Future of the Music Industry:

The archaic major record label is becoming less and less pertinent to the average consumer for a

number of reasons. Internet exposure has become and will continue to become easier to use, and

more effective to reach the music consumer segment. Social networking websites and internet

retailers make it extraordinarily easy for artists to market and distribute music on their own. For this

reason, independent labels are growing at a rapid pace, while major record labels continue to

consolidate with mergers and acquisitions in order to increase sustainability. Another factor that

comes into play is the ability of artists to record and produce their own music. Recording

technology has gone from expensive and big, to cheap and compact- easily accessible to the average

consumer for just a couple hundred dollars. This alleviates the need for the artist to be funded by a

major label in order to get their music recorded. With today‟s technology, artists can produce a

professional sounding album from the comfort of their home studio. Aside from this, the once

popular record store is dying quickly as a result of the drastic drop in the sale of physical albums.

This leaves album sales in the hands of superstores like Walmart or Best Buy, neither of which have

detailed collections. These stores are only interested in stocking merchandise that flies off the shelf;

therefore, serious music listeners do not frequent these retailers to get their music. As a result of

these factors a void has been left in the market; a calling quickly answered by online distributors.

While this shift is fairly predictable, the future of law is not. As of late, changes have been decided

on a case by case basis. As more innovators get sued, the picture will become a little more clear as

to where the law is headed.

24

Social Media

One of the biggest changes for the future of the music industry, from a marketing standpoint, has

and will be the shift to viral. In terms of viral marketing for the music industry, social media has

opened up many opportunities for more legitimate, interactive, niche marketing. The major players

in this new approach include Myspace Music, Facebook, and Twitter. More and more music

listeners and consumers are using these networks to let others know about their preferences/tastes,

as well as looking towards tools like blogs, microblogs, and network fan pages to find to discover

new music, tour dates, etc.

Aside from the consumer aspect, social media has enabled artists to make a presence for themselves

without the aid of a label or promotional firm

“Going directly to the fans without any kind of middleman… that‟s what I‟m relying on now.” —Jill

Sobule, independent recording artist, in an interview with eMarketer, April 29, 2009

25

Artists and music related events alike use these tools. John Mayer was one of the first artists to

amass a million followers on Twitter (eMarketer, 2009).

A survey done by the NPD Group found that “the percentage of teens who downloaded or listened

to music via social networks increased from 26% in 2007 to 46% in 2008.”

“It makes complete sense for mobile music services to allow consumers to socialize while they‟re

interacting with music,” said Debra Aho Williamson, eMarketer senior analyst. “People like

to share playlists and discuss their favorite bands with their friends. This doesn‟t mean that

music services need to have their own dedicated social networks. Linking up with existing

networks makes much more sense.”

26

Case Studies

One of the most relevant ways to show the discussed changes and trends, is by exploring

some examples. The following companies have been selected because they represent most

promising business models and strategic direction of any other companies in the industry today.

Both Apple and Grooveshark have taken into account the shift of power from supplier to buyer,

and adapted by creating models which are attractive to the consumer, but also give suppliers a

platform from which to leverage their products.

Apple Inc.

This online distribution market was first successfully pioneered by Apple‟s introduction of

the iTunes Music Store. iTunes provides a venue for major labels, independent labels, and

independent artists to sell their music through a service that has become a household name. First

popularized by their MP3 player, the Ipod, iTunes has grown by leaps and bounds since it first took

off in 2003 (Music Supervisor, 2009). As of April of 2008 iTunes has become America‟s No. 1

music retailer, a position formerly held by Walmart and contested by Target and Best Buy (Dawn,

2008).

Apple Inc was incorporated in 1976 as Apple Computer as a personal computer company.

Struggling to gain a competitive advantage over a market flooded with cheap PC‟s, Apple began to

develop their strengths in software development by the late 90s. When Steve Jobs took over Apple

began more vigorously engineering their multimedia capabilities with sound and video applications

such as Garageband and iMovie (The Apple Museum, 2009).

In 2001 Apple Computers released the Apple Ipod which quickly took the market for MP3

players by storm (Apple Inc., 2007). The easy to use interface and integrated iTunes software

27

reflected the branding that sets Apple apart from it‟s competitors. Thereafter Apple continued to

hold the market‟s attention with new versions of the Ipod like the nano, shuffle, and mini.

By 2003 the iTunes Music Store was launched. Before launching the service, Steve Jobs had

already made deals with the US four major labels: Sony BMG, Universal Music Group, Warner

Music Group, and EMI (Borland, 2003). The year after launching it contracts were made with three

of the largest independent music labels in Europe: Beggar Group, Sanctuary Records Group, and

V2. By 2004 iTunes was available to the US, UK, France, and Germany, Belgium, Italy, Austria,

Greece, Luxembourg, Portugal Spain, Finland, Netherlands, and Canada (Apple Inc, 2004 ). Aside

from retailing music, iTunes retails tv episodes, movies, radio broadcasts, ringtones, and more. This

type of one stop shop multimedia outlet is the future of media sales.

[Industry In Action] : The Future of Cloud Computing and Music

*cloud computing is the idea of having content stored on the internet instead of on physical devices “[Apple] could accelerate the move to media in the cloud more quickly than any other company can. [The acquisition of Lala] tells us they’re doing it.” —David Pakman, partner, Venrock and former CEO, eMusic, in The New York Times, December 15, 2009

While it would appear that services in general are moving in this direction,with more and more application based web pages, there haven't been any huge jumps forward in the public eye. The closest the modern world is coming to this idea is on demand streaming from cellphones and ipod touches. Everyday internet and cellphone network coverage get better. PMP's get smaller and powerful, lending towards a more favorable climate for full access subscription models, yet no one service has dented market share from superforces like Apple's iTunes. Until now...Sort of. Apple just recently acquired music startup La La. At first glance Lala looks like any other on demand music streaming site, so how is that useful to Apple? What Lala holds that others don't (except Grooveshark) is a music storage service that allows users to store their personal library of music on the internet so that they can access their music from anywhere. It is speculated that Apple will leverage their hardware (Ipods,Itouch's, Iphone's) and software (iTunes,iTunes Store) to incorporate an update which automatically loads user's library of music to their own URL, giving users a viewing space for their music thats accessible anywhere. The very witty part about this is that Apple wouldn't be required to get any new licensing because this music thats loaded to the web, is the user's personal collection. This not only gives the user a more convenience and utility, but also allows Apple to enable the user to sidestep the technology curve of media player storage space. This is an extraordinarily smart move by Apple,as it fortifies their monster market share, protecting them from any subscription models that might steal customers away. If anyone can pull this one off, it would certainly be Apple,and this model of incorporating the user's existing music collection is pretty revolutionary. It will interesting to see how this plays out.

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If youd like more detail on this check out Michael Robertson's post @ http://www.techcrunch.com/2010/01/19/apples-secret-cloud-strategy-and-why-lala-is-critical/ (Kilmer, 2009)

Grooveshark

While iTunes has successfully done a good job of locking down a market that is still willing

to pay for music, there is still a vast number of people who are simply unwilling to pay for music

they can get for free, but P2P/torrent is illegal, and doesn‟t bring the artist any money. This is

where Grooveshark comes in.

This group is the first to successfully figure out and model what the entire industry has been

struggling with since the conception of P2P. No one wants to pay for music, or any other media

content accessible from the internet, plain and simple. No amount of litigation, ad campaigns, or

education can reverse the financial losses the music industry has suffered and will continue to suffer.

With this in mind, Escape Media Group created Grooveshark, which has successfully

modeled a legal, revenue creating, easy to use, attractive service. Grooveshark is a full access on

demand music streaming utility with music recommendation and preference customization features.

Grooveshark has an extensive library, and if a user can‟t find their music, they may simply upload

their own music to the account, in order to facilitate holding a complete collection online.

Grooveshark was founded in in 2006 in Gainsville Florida, by three University of Florida students,

operating as Escape Media Group. Grooveshark launched beta in 2007, as a paid music download

service, positioned as a legal P2P network, competing with companies such as Limewire. In 2008,

Grooveshark changed their business model to an on demand music streaming service, which is what

they‟re today (Escape Media Group, 2010).

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While Grooveshark is picking up pace quickly, their market potential is tremendous.

This service is very unique from every other streaming for two reasons. 1) Front End Design:

The application like interface of Grooveshark is very well put together. The service is packed choc

full with features, presented in a way that‟s intuitive, and straight forward. This application based

feel is the future of Web 2.0. Other prominent leaders with similar interface include Google and

Facebook.

2) Features: Grooveshark is offers much more than a slick user interface. It not only allows you to

stream almost any music you want at breakneck speed, you can share and organize your music to

suite your preferences with equal ease. This is where most other media streaming falls short. All for

free.

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Grooveshark makes their money primarily through ad revenue, as well as selling VIP

memberships for more features, and offering promotional services for independent artists. Using

this revenue they pay royalties to the artist/label for their content. Aside from being accessible

through a computer, Grooveshark has applications available for all major cell phone platforms. This

model works well for everyone as it provides incentive for the consumer to stream music which

generates revenue, as opposed to illegally downloading which provides no revenue to the content

creator.

Analysis

In the recent past, technological innovation for the music industry has been a negative; the new

dominant design for music consumption leaves the artist/label/distributor with no money. Music

streaming and P2P came as a competence destroying innovation for the industry rendering the

knowledge of an old business model obsolete. While major labels currently still hold a competitive

advantage through their superior catalogues of music content, they will lose this edge if they don‟t

respond quickly. The avenues controlled by major labels, such as the radio, are becoming less and

less important, while the internet, as a tool for music discovery, is becoming more and more relied

on. Therefore, if major labels want to remain a sustainable model, they must take a chance with

forward integration.

Conclusion: Strategic Direction

Where are We Now?

The Recorded Music Industry is currently in a state of turmoil and will continue to be for the next

several years. From the consumer end, the industry has been turned upside down by the shift from

exclusively physical means of attaining music, to a wide variety of ways to access music digitally.

Thus the old model of doing business is rapidly approaching obsolescence. From the artist end,

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artists are now able to record & proliferate their own content without the aid of capital intensive

service agreements. Thus, labels are becoming less and less relevant to the artist.

As business stands today, music has changed from a money maker, to more of a promotional tool

for other sales including merchandise & ticket sales. The most promising way of attracting revenue

directly through music are bundling schemes as well as full access subscription models.

Where Should We Go?

The future of the music industry lies in bundling, cloud computing, and product

placement/promotion. People want to access music, whenever and however it is most convenient

for them at that point and time. The easiest way to do this is to provide services that allow full

access from a wide variety of devices ie. PMPs, cell phones, computers, etc. In terms of monetizing

music within this model there must be incentives to pay a subscription fee that allows for revenue

streams beyond advertisements. Furthermore, this music must be leveraged to promote sales of

physical items such as t shirts, concert tickets, etc.

How do We Get There?

This question is less easy to make a general answer but there are a few essential ingredients needed.

Music library (acquired through licensing and A&R), Unique value proposition, and multiple

distribution channels (leveraged through the internet.) People want a great User Interface(UI) that

fosters intuitive and enjoyable use. Beyond these ingredients the only way to find a winning model

is trial by fire. The time is of the essence for the industry.

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