Competitive Distribution Strategy To Repel Music Piracy

Transcription

1 Competitive Distribution Strategy To Repel Music Piracy D.J. van Helden ABSTRACT The decline in music albums sold continues to increase with the diffusion of increased bandwidth, improvements in music compression technologies by advent of MP3 and file sharing networks. This paper describes a bottom-up approach towards a competitive distribution strategy to repel music piracy. Starting at the bottom, this paper will briefly summarize the causes and solutions already taken. The main goal will be to present a competitive distribution strategy as a tool to neutralize piracy. By use of a literature study this paper shows opportunities by means of a digital distribution strategy, a new economic model called The Long Tail, a recommendation system and future multi-media barebones. Keywords Piracy, digital distribution strategy, innovation. 1. INTRODUCTION Nowadays a lot of research is performed on music piracy. In this resource paper music piracy will be described as the illegal download of digital music. More than one in three of all music around the world is thought to be obtained by means of piracy. The IFPI estimates the trade of pirate music was worth $4,5 billion globally in 2005 [IF06]. Besides IFPI, Liebowitz [Lie06] illustrates a decline, that begins in 2000, in full-length albums sold in the United States since Section will pursue Liebowitz s findings. 1.1 Overall problem From the music industry s point of view the overall problem is the decline in music albums sold since 2000 caused by piracy. The decline continues to increase with the diffusion of increased bandwidth (e.g. broadband), improvements in music compression technologies (e.g. MP3) and file sharing networks (e.g. P2P). This paper investigates possibilities to stop this decline. Before starting research it is important to find out what is already known about the subject. That is why the following two questions will be answered in section 2. What causes the decline in music albums? Which actions against the decline are being taken? By doing so we will be able to get a lucid exposition of the state of the art and solutions taken so far. Furthermore we can learn from the past and work towards a solution. This paper will briefly summarize the causes and actions taken against piracy, briefly because it will be an introduction to the main research question: Permission to make digital or hard copies of all or part of this work for personal or classroom use is granted without fee provided that copies are not made or distributed for profit or commercial advantage and that copies bear this notice and the full citation on the first page. To copy otherwise, or republish, to post on servers or to redistribute to lists, requires prior specific permission. 6th Twente Student Conference on IT, Enschede, 2nd February, 2007 Copyright 2007, University of Twente, Faculty of Electrical Engineering, Mathematics and Computer Science What is a suitable distribution strategy to neutralize piracy? To answer this question section 4 will examine several opportunities Opportunities by means of Information Technology The proposed solution is based on the applicability of information technology (IT). According to Daft [Da99] information technology consists of the hardware, software, telecommunications, database management, and other technologies used to store, process, and distribute information. Instead of fighting against IT the music industry needs to collaborate and profit by means of data-mining techniques, customer recommendation systems, encryption techniques, broadband internet, to achieve a new competitive distribution strategy to repel music piracy. 1.2 Innovation Nowadays solutions against the decline of music albums sold are being taken by means of copyrights, a legislative solution, or by technological solutions like digital watermarking and encryption. [PW05] Nevertheless these solutions aren t sufficient to deal with piracy, this will be discussed in section 2.2. At this point we will stress out the insufficiency of digital watermarking and other solutions stated above. Defining innovation as the total set of activities leading to something new, resulting in strengthening the competitive advantage [Me06] this paper investigates an innovative way of dealing with piracy. A detailed description of the set of activities will be given in section 4. At this point the following two paragraphs will briefly elucidate this set of activities, there relationship with IT is worth mentioning. Currently there exists a lack of demand for physical music. [GSO04] Music can be ordered via Peer-to-Peer (P2P) file sharing networks very easily. Moreover with the increasing diffusion of high bandwidth connections, online music reaches a sufficient alternative for physical distribution. In the beginning the music industry seems only to see the danger of online music distribution and not its opportunities. This paper will discuss opportunities by means of digital catalogs and data-mining techniques( e.g. customers recommendations). For example, online retailers are capable of offering a much larger product variety than normal stores. Amazon for instance is over 57 times larger than the number of books at the shelves of a normal bookstore. [BSH03] 1.3 Assumptions To restrict my research I focused on innovative subjects concerning a digital distribution strategy to repel music piracy. Nevertheless I think it is worth mentioning I assumed the following is well-known by the public: Aside from any legal risk, music obtained by piracy is a time-consuming business. File-sharing networks are slow in comparison with legal downloads. In assumption, legal digital music files will be hosted on fast servers in secure data centres like GlobalSwitch ( in Holland. Moreover in case of

2 illegal download, quality varies and labelling is inconsistent. In addition viruses in file-sharing networks are a great risk too. 2. THEORY 2.1 Alterations in production processes The process of contracting new artist, recording music, manufacturing music and finally the promoting and advertising of music can been seen as a production process. Alterations in this production process can be found by the production of songs on physical media. Physical media like CDs, nowadays the dominant format for recorded music [PW05], can be shift to a high digital quality format suitable for digital distribution. The CD needs packaging and physical distribution. Digital music files need some disk space on a server, by comparison a much cheaper option, as shown in section 4.1. According to Peitz and Waelbroeck [PW05] the decline in CD sales depends not solely on alternations in production processes. Instead several explanations exist. First, the economic environment, a decrease of GDP (BBP in Dutch) relates to a drop in sales during the period , but cannot explain the continued sales decline. Second, substitution occurred between different types of media. There was a strong demand for new media, such as DVD audio and portable MP3 devices. Third, a decline in the number of new releases occurred, fewer releases results in fewer purchases. Last but not least Peitz and Waelbroeck consecrate the downturn in music sales to piracy. Current findings from econometric studies, like IFPI [IF06], Liebowitz [Lie06], RIAA [RI06] and Zentner [Zen06] present piracy as a main reason for the decline in music sales. That is why this research deals with piracy. 2.2 Causes of Decline Before starting research it s important to find out what is already known about the subject. Moreover it creates a lucid exposition and clarifies the connection with IT Internet In the last decades rapid advances in information technology have taken place, the invention of the microprocessor and the personal computer. In supplement the development of ARPANET found place, a project by order of the U.S. department of defense (Pentagon). ARPANET made it possible to link several personal computers and in cooperation with the Internet Protocol (IP) the world wide web (WWW, the internet) was born. Via internet personal computers from all over the world are linked up by means of a digital network. In most developed countries a large percentage of the population has access to a personal computer: so they are able to send data to each other Broadband By means of the internet people were able to send data to each other. The amount of data is dependant on the bit rate. The higher the bit rate, the quicker the amount of data will be delivered. Broadband made it possible to send 8 times more data. Nowadays bit rates of broadband and other techniques are still increasing.[lt01] Moreover broadband was available without data limits for a standard price/month. Since it didn t care how long personal computers were connected to the internet, time limit with former dial-up connections was history Compression technologies: MP3 Normal CD files were too big for transference over the internet. Compression technologies like RealAudio 5.0 [Ra99] made it possible to create smaller music files. Nevertheless the sound quality was not perfect by any means. The audio portion of a video compression standard MPEG Audio Layer III, shortened MP3, [GSO04] changed al of this. MP3 made it possible to reduce the size of traditional standards by a factor of 10.[LT01] Introduction of MP3 was a breakthrough in compression technology. Proliferation of ripper (encoder) programs, responsible for the transformation of CD files to MP3. And the development of player (decoder) programs has resulted into a fast increase of MP3 music files File-Sharing Networks Higher bit rates and the disappearance of a data limit, by means of broadband, led to continuous connectivity with Internet. This is an important prerequisite for file-sharing networks, also called Peer-to-Peer networks (P2P networks). File-sharing software needs to be run continuously and consists of a search engine capable of searching through each connected user (Peer), looking for specific files. Users are able to upload there own files and download files from other users, in other words they share there files. MP3 enormously lends itself to file-sharing networks, a massive diffusion of MP3 files became reality. Without MP3, digital audio file sharing would not happen. [GSO04] Zentner [Zen06] performed empirical research by use of a stochastic model to estimate the effect of file-sharing networks on the probability of buying music. He used an European consumer mail survey conducted by Forrester Research. The methodology is meant to ensure a representative sample of 27.8 percent of international music sales [IF06]. The survey contains more than 70 questions. The results suggest that the impact of file-sharing networks reduces the probability of buying music by 30 percent. In summery Zentner s results: if music downloading reduces the probability of buying by 30 percent, if 15 percent of the population downloads music, if down loaders are twice as likely to buy music than nondownloaders, and if conditional on buying downloaders and nondownloaders buy the same quantity of units, then sales in 2002 would have been 7.8 percent (0.3 * [(0.15*2)/115)]) higher. Besides Zentner et al, Liebowitz [Lie06] illustrates a decline, in full-length albums sold per capita in the United States since Figure 1 uses data from the Recording Industry Association of America (RIAA) [RI06]. Solid squares, inside the circle, represent the continued growth at the same average rate since Figure 1. Albums sold per capita The decline since 2000 begins the year after the arrival of Napster, a file-sharing software program. The birth of file-sharing followed by the unusually large decline is a strong clue that file-sharing is responsible for the sales decline. The sales increase in 2004 matches a reversal in the amount of file-

3 sharing activity and could be seen as being a random fluctuation, since sales decreased once again in In short file-sharing has brought significant harm to the music industry. 2.3 Actions to prevent piracy Protection is an action to prevent piracy. Various protection mechanisms for protecting the intended usage of digital content exist. This paragraph will treat encryption, watermarking, protection by law and Digital Right Management (DRM). It appears these mechanisms are not sufficient to prevent piracy. This doesn t suggests that protection of digital content is irrelevant. It remains a first barrier for consumers and contributes to the awareness of committing an illegal act. Step by step we will work to an innovative approach described in the next section Encryption Several systems are available that support protection by encryption methods such as Secure Digital Music Initiative and Serial Copy Management System. SDMI and other systems were developed with the objective of developing secure standards for music files in such a way they can be distributed over the internet without being subjected to piracy. [LT01] Nevertheless protection by encryption has a number of weak spots. First, it is always possible to make copies by reassembling the analog output. Only the first reassembling is coupled with a small quality loss, all subsequent copies can be made without further loss. Second, it is possible to intercept the decrypted bit stream, in other words it is possible to intercept the digital file content and save this as a file. A digital copy can be made without any loss. Finally, the encrypted content can be altered Watermarking A watermark consist of an digital mark embedded in content. With a digital watermark it is possible to identify the digital content, to identify the original producer and the consumer who sold the rights to use the digital content.[pre03] This information is useful in court to prosecute violations. Once again a number of weak spots exist. First, techniques which removes the watermark without harming the content. Second, techniques which manipulates the watermark in such a way a watermark detector cannot find it anymore. Finally, techniques exist which try to mislead detectors by adding a second watermark into the content Law & Digital Millennium Copyright Act The Digital Millennium Copyright Act (DMCA) passed into law in 1998 [LT01] defines copyright infringements and penalties for piracy. Nevertheless protection of digital content by law is quite difficult. First, law differs between countries. Second, if the violator lives in another country it is difficult to prosecute. Finally, a large number of small violators exist and it is not feasible to sue all these violators individually. [PW05] Digital Right Management DMCA legally enabled Digital Rights Management. According to Peitz and Waelbroeck [PW05] DRM is a small piece of software that can detect, monitor and block unauthorized use of copyrighted material. DRM can protect any digital content. It can force consumers to listen to content that is not desired, such as advertisements. Moreover it can protect over an infinite amount of time. By means of DRM payment systems would become reality. A successful example of DRM is itunes in combination with Apple s ipod. DRM has a lot to offer but has proved to be quite unpopular due to the lack of consumers rights. Consumers claimed that some of the legitimately purchased music would not play in old stereos or in cars. Supplemental, DRM needs to be implemented in hardware, in operating system and also in music players. All provided by a large diversity of firms. Platforms need to be compatible and all firms should be in agreement with setting up standards and protocols. Compatibility and consumers rights are major disadvantages of DRM. [PW05] 3. METHODS As the previous section provides some information and insight into the problems about piracy it may be clear that piracy is a big problem. As stated above, solutions against the decline are being taken by means of protection mechanisms. Nevertheless these solutions aren t sufficient enough to deal with piracy. That is why the next section Results investigates an innovative approach of dealing with piracy. The following illustration was meant to be a guideline during research. Moreover figure 2 provide some extra insight into used research methods. Problem statement Layer 1: Analyze environment Basic concepts Causes of Layer 2: Useful Concepts / Theory Layer 4: Reality Scientific libraries: like Scopus, Web of Science, ACM Layer 3: Deepening research Digital distribution strategy Deduction Solutions to prevent piracy Economic Models Refutation Empirical Research & Data Figure 2. Research methods and guideline for this paper In order to create a clear overview this paper will evaluate and compare different causes and solutions for the decline in music sold. By doing so the general aim will be to examine the interrelationship between different types of literature. Empirical data will be used to substantiate the

4 overview. Besides a clear overview of current research and proposed solutions the objective of this literature study is to elucidate the potentials of another distribution strategy in combination with recommendation systems and future media centers. As a result the music industry should become aware of added-value by digital distribution strategies with use of information technology. 4. RESULTS 4.1 Distribution strategies This paragraph looks into the strategies to distribute music through the supply chain. To improve efficiency in the supply chain various strategies will be discussed and argumented. These strategies will be described following Prem Premkumar [Pre03]. An arrow like represents the relationship between successive supply chain members Current Supply chain: Physical distribution According to Prem [Pre03] there are three major categories of players in the music industry: content creators, content developers, and retailers. Content creators consists of composers, lyrics and artists. Content developers, which include the music publishing and recording companies are central to the industry, illustrated by the dotted circle in figure 3. They purchase the musical rights, discover new talent, record music in studios, manufacture and distribute the music, and advertise and promote the music. Finally, the retailers bring the music to the customers. Figure 3. Traditional Supply Chain, source [PW05] Distribution from record company to customer Music is digitally distributed from record company to the customers. The retailer disappears in this strategy. Cost savings can be expected, mostly from reductions in manufacturing, retail operations and distribution, as shown in figure 4 column 3. Besides cost savings this strategy needs additional costs for web server operations, figure 4 point b. Nevertheless a number of weak spots exist. Nowadays copyright violations are a major drawback for record companies, they are concerned digital files will facilitate illegal copying. Moreover since multiple record companies exist, customers must visit multiple websites to get their music. a All values are approximate averages to illustrate the breakup of costs. The actual figures may vary from album to album. b Assumes there is no retail operation; includes cost for online website operation c Assumes there is some efficiency in advertising due to 1:1 relationship d Assumes some saving in overhead due to reduction in record company operations e Assumes no traditional advertising; includes some independent advertising Figure 4. Cost breakdown of digital distribution, based on average from [MS01], [Mei00] Distribution from record company via intermediary to customer In the previous strategy customers must visit multiple websites to get their music. An intermediary could consolidate music form record companies and provide the customer with additional information. Such as recommendations, this will be discussed in detail in section 4.3. Even at the expense of sharing profit margins with an intermediary, record companies may find this strategy useful to broaden their reach. Since customers aren t familiar with direct contact with record companies Distribution from Artist to customer This strategy will undoubtedly be the cheapest of all. As shown in figure 4 (column 4) cost savings can be expected in almost every operation. Although this sounds very promising, barriers exist. Record companies are responsible for promoting new artists and songs. Well-known artists may be able to sell directly to customers, newer artist may struggle to reach customers and do not have the funds for advertisement campaigns like record companies do Distribution from artist via intermediary to customer Intermediaries can provide additional value by creating online communities with similar music interests, much like record

5 company intermediaries. But, if sales do not take off and extensive advertising becomes essential this strategy fails, just like the previous strategy. In short, because of the risk in direct sales, and the extent of marketing and promotion required to reach customers artists cannot survive without record companies. In general, record companies are powerful supply chain members and strategies without them are least likely to succeed [Pre03]. An other important observation remains: digital distribution results in cost savings, as shown in figure 4! These savings could be used to reduce the price of music. Doing so will stimulate the consumer to buy more. 4.2 The Long Tail Besides cost savings a digital distribution could profit by an entirely new economic model called The long tail. It is described in July 2006 by Chris Anderson [An06]. The curve illustrated in figure 5 is called the long tail, due to his shape. Smith and Hu et al. [BSH03] conducted research about internet book markets with use of empirical data. By applied mathematics they found that increased online availability of obscure books represents a positive impact on consumer surplus, the difference between the maximum that consumers would be willing to pay for a good and the actual price [Ne97]. Since digital music files are comparable with books [BSH03], it is likely music will also show a positive impact. Furthermore, gains with digital music will increase even more than physical books since physical limitations would be gone, applicable to pure digital retailers as shown in figure 5. Currently each normal retailer is limited to a local population( e.g. a quarter, a city) and each millimeter of shelve space should be used as efficiently as possible to generate sufficient demand. Nowadays, that s why normal retailers will only carry content that can generate sufficient demand. Obscure content will be readily discarded due to lack of profit. Moreover, in the current situation hits will stimulate hits, hits will be promoted and demand will rise further. This is illustrated by the physical retailers in figure 5 who primarily sell top 10 titles. As a consequence demand for obscure content will fall further. In short, currently there is little room for obscure content. By means of digital distribution through the World Wide Web it is possible to offer greater product variety. Due to global reach the limitation to a local audience will be gone, in consequence due to a larger audience, little demand will be sufficient to offer obscure content via online services. What matters is not where customers are, or even how many of them are seeking a particular song, but only that some number of them exist. [An06] Since cost for a few megabytes of storage on a server and web site operation will be much lower, figure 4 point (b), retailers have no economic reason not to carry everything available. By this, digital distribution allow companies to offer more and more songs. As a consequence hybrid and pure digital retailers offer products that gets down the long tail, figure 5. Popularity no longer has a lock on profitability. Physical retailers: sell physical products in physical stores. Hybrid retailers: sell physical and digital products online. Pure digital retailers: sell digital products online. Figure 5. The Long Tail, source [An06], adapted by D.J. van Helden (2006) In summary, the long tail opens a new market to sell obscure content as well. 4.3 Recommendation systems Pure digital retailers have no reason not to carry everything available, they don t need shelf space due to the digital products. Following, this section explains one way to drive demand for all that content. This is done by research on how influential person-to-person recommendations actually are over a wide range of products. Leskovec, Adamic and Huberman [LAH06] conducted research on the effectiveness of recommendations by studying a large online retailer. The research population consist of 4 million distinct users who made 16 million recommendations. Important findings are the probability of buying versus the number of recommendations. As excepted, a person is more likely to buy a recommended product. Moreover a saturation point is reached. If a person has not bought a product after a number of recommendations, they are not likely to buy after receiving even more recommendations. Besides the increased probability of buying there actually exist a positive relationship between recommendations and purchases, figure 6. Figure 6. Variation in intensity by time of day for recommendations (left) and purchases(right), source [LAH06] Not all purchasers also decide to give recommendations. Discounts can be used to stimulate consumers recommending any of its purchased products to others.

6 4.4 Future expectations: multi-media barebones Currently personal computers are late in entering the game as music listening devices [GSO04] Normal HIFI-sets are still number 1. That is why it should be an enormous boost for digital distribution when barebones will be acceptable for many people in a living room to replace normal HIFI-sets. Barebones are personal computers with a integrated Media Center, capable of playing music, songs, television and normal PC features. Barebones are also connected to the internet and looks like normal HIFI-sets. By means of barebones digital ordering will be possible by sitting on a couch in the living room. 5. DISCUSSION & CONCLUSION From a industry s point of view this paper investigates possibilities to stop the decline in music albums sold. To fight the decline at the source and to find out what is already known, research on basic concepts was conducted to answer the following questions: What causes the decline in music albums? Which actions against the decline are being taken? IT technologies like internet, broadband and Mp3 led to piracy through file-sharing networks, which brought significant harm to the music industry. It appears the music industry could not fight the decline at the source. Countermeasures like encryption, watermarking and protecting by law weren t sufficient to prevent piracy. All countermeasures had a number of weak spots. This doesn t suggests that protection of digital content is irrelevant. It remains a first barrier for consumers and contributes to the awareness of committing an illegal act. Although Digital Right Management (DRM) isn t perfect it still has some potential. DRM can be used to control music files by setting restrictions. For example it can force consumers to listen to content that is not desired, such as advertisements. Moreover payment systems would become reality. itunes is a successful example of DRM but DRM-based solutions aren t sufficient to repel music piracy because lack of consumer s right and compatibility. In short, countermeasures doesn t work very well. Therefore this research showed opportunities leading to something new and resulting in strengthening the competitive advantage. By answering the following question instead of another countermeasure an innovative alternative for piracy was born: What is a suitable distribution strategy to neutralize piracy? By means of synergy [Da99], the whole is greater than the sum of its parts, the combination of a digital distribution strategy, a new economic model called The Long Tail, a recommendation system and future multi-media barebones, will encourage consumers to switch from illegal downloads to legal downloads. In general a suitable distribution strategy consist of record companies. Because of the risk in direct sales, and the extent of marketing and promotion required to reach customers artists cannot survive without record companies. It will be tempting to predict which strategy will prevail over the others but it is more likely that several will coexist in their own market. For example, the artist customer strategy is, even without record companies, suitable as a promotional channel. An important observation remains: digital distribution results in cost savings! These savings should be used to reduce the price of music. Doing so will stimulate the consumer to buy more. To entice consumers even more a cost-saving digital distribution strategy could benefit from the long tail. A surplus value since the long tail is solely applicable for digital products and not for pure physical products due to lack of shelf space. Nowadays hits will stimulate hits, hits will be promoted and demand will rise further. That is why physical retailers in figure 5 primarily sell top 10 titles. As a consequence demand for obscure content will fall further. In comparison, by means of digital distribution it is possible to offer greater product variety, not only top 10 titles but obscure content can be sold as well. In short, the long tail opens a whole new market to sell obscure content as well, illustrated by the gray area in figure 7. Figure 7. Sales above rank , source [BSH03] To offer more and more songs is one thing, finding demand is another. Recommendation systems, once again excessively applicable to digital content, are a way to drive demand for all that content. They provide real-time information about buying trends and recommendations of other buyers become available. Research conducted by Leskovec et al. pointed out that besides an increased probability of buying there actually exist a positive relationship between recommendations and purchases. All of the above opportunities coupled with multi-media centers in substitution for normal HIFI-sets will supply a long-felt want: a competitive distribution strategy to repel music piracy. By means of barebones, digital ordering will be possible by sitting on a couch in the living room. Eventually, due to lower prices, greater product variety, recommendation systems and new music made readily available to consumers, the production of songs on physical media like CDs, nowadays the dominant format for recorded music [PW05], will shift to a high digital quality format suitable for digital distribution. 6. FUTURE RESEARCH It would be interesting to test the proposed digital distribution strategy and conducting thorough research to identify how to make music readily available to consumers. For example by close collaboration between music, software and audio companies. 7. ACKNOWLEDGEMENTS I would like to thank my course tutors, W. Bandsma and R. Middel, for imparting the necessary knowledge and for guidance during the process of making this paper. I would also like to thank my friends and reviewers for their comments and suggestions.

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