WHICH FACTORS LEADING TO DECREASING SALES IN THE MUSIC INDUSTRY CAN BE INFLUENCED BY ONLINE MARKETING TOOLS?

Transcription

1 BUDAPEST BUSINESS SCHOOL FACULTY OF INTERNATIONAL MANAGEMENT AND BUSINESS INTERNATIONAL BUSINESS ECONOMICS COURSE SPECIALISING IN INTERNATIONAL ENTERPRISES AVANS HOGESCHOOL INTERNATIONAL BUSINESS SCHOOL BREDA BUSINESS ADMINISTRATION COURSE WHICH FACTORS LEADING TO DECREASING SALES IN THE MUSIC INDUSTRY CAN BE INFLUENCED BY ONLINE MARKETING TOOLS? Prepared by: Kata Fohl

2 TABLE OF CONTENTS Executive Summary... 2 Introduction... 4 Part 1: Research Rationale Situational Analysis Theoretical Background Conceptual Model Research Design Research Results Conclusion and Recommendations...24 Part 2: Practical Work...27 Part 3: Additional Theoretical Background Marketing and Arts Computer-mediated Communication, Hypermedia and Interactivity Shift in Today s Marketing Communications Model Integrated Marketing Communications and Online Marketing The Importance of Direct and Online Marketing Benefits of Direct and Online Marketing Online Marketing as the Fastest Growing Form of Direct Marketing Ways of Conducting Online Marketing The Future of Online Marketing The Concept of Web Bibliography...49 Appendices...52 Appendix 1: Questionnaire...52 Appendix 2: Analysis of the Questionnaire Results...54 Appendix 3: Analysis of the Sell-A-Band Website and the Concept Behind It...58 Appendix 4: Sell-A-Band Interviews...61 Appendix 5: Analysis of Facebook Marketing Activity

3 EXECUTIVE SUMMARY This report examines the problem of copyright infringement through illegal downloads on today s music market and intends to discover methods with which this phenomenon could be rolled back or alternative solutions to support economically harmed artists could be more well-known. For this reason, a research constituted by the distribution of a questionnaire, the analysis of a website, in-depth interviews with experts and targeted online promotional activities was conducted during my five-month internship at Monkey Music, an independent Austrian music label dealing with the thorough marketing of artists. As the first step of this research, the problem of illegal downloading was identified and examined in detail. Recent economic data about the music industry was collected, on the basis of which a conceptual model was set up. In this model, five variables having an influence on the problem of copyright infringement and decreasing music sales were identified, namely: technology advancement, Internet usage, economic rationality and prices, regulation, and culture. Since it was found that the first four variables could not be influenced in the frame of the research, further attention was paid only to culture. In connection with this factor, two hypotheses were set: illegal downloaders might change their behavior if they were better educated about the harmful effects of copyright infringement, and the number of live performance visitors could be increased with the help of targeted online promotion. These hypotheses were tested with various research methods with an unfortunately low internal and external validity due to the anonymity of online data collection. As one part of the research, a questionnaire examining Internet usage and downloading behavior, providing information about the illegality of file-sharing and testing the respondents willingness to change was distributed. The results of this questionnaire showed that the initial hypothesis of influencing infringers behavior by informing them about its illegality and harmful effects might be wrong: pure information is unlikely to change this behavior, and probably more radical steps are required. Another part of the research was the analysis of the Sell-A-Band website, a platform for donating money to musicians online. Together with the interviews made with three music industry experts, this analysis showed that online donation is not popular and not well-known enough, partly due to the fact that it is weakly promoted. According to the results of the research, when supporting a music group, people prefer attending live concerts or buying merchandise products to donating money to them. This preference for live performances was further indicated by the third part of the research, when live concerts of a music group marketed by Monkey Music were promoted with small contests in social media. Although users responsiveness appeared relatively low to these contests at the end of which they could win free concert tickets, these online marketing activities had an inevitably positive effect on the popularity of Monkey Music, and bearing in mind the fact that they did not require any financial resources, they were worth the effort. 2

4 They also indicated that the hypothesis about increasing number of live concert visitors and users responsiveness to online marketing might be correct. Based on the results of this complex research and the professional experience and knowledge gained at the company during the internship, the following recommendations were made: Instead of selling CDs and encouraging illegal downloaders to buy CDs, today s record labels and music companies should turn away from this traditional form of distributing music. Record labels should offer exclusive packages in the form of a CD together with an extra DVD about a live concert, with a poster about the band, or with a coupon for special online downloads or merchandise products. It is possible that more CDs would be purchased on today s music market, if a higher value was attached to them. Based on this above described concept of exclusivity and on the experience gained at Monkey Music, the production and promotion of traditional vinyl records could be advantageous in the future. Since CDs in themselves have become obsolete and uninteresting in the competition against other data carriers, the music industry may experience the return of vinyl records. Based on the sales statistics of Monkey Music for example, traditional records combined with modern technology can have a relatively great consumer base. As for Sell-A-Band, although the website is not convenient for its original aim (exploring new talents is nearly impossible, since financial targets are rarely reached), it might be useful at a later stage of an artist s career and should be applied when a sufficient fan base is already provided. For financing smaller projects, video shootings or the recording of a new album Sell-A-Band can be a helpful tool, if enough attention is drawn to the website. Organizing simple, trendy and interactive online contests on a regular basis to advertise live events might significantly help artists and music companies. Although the research indicated that music consumers behavior and perceptions about illegal file sharing can barely be influenced, online marketing tools might have advantageous effects on another segment of consumer culture: live concerts can be effectively promoted with their help. That is why increasing attention should be paid to online communications and to maintaining a closer relationship with fans through the Web. This report contains a detailed description of the above mentioned research steps and results, and provides additional information about the practical work performed at Monkey Music and a strong theoretical background about online marketing. Although the problem examined in it is definitely too complex to be solved with the help of this research, this report can still provide useful information and a few interesting facts about today s music industry. 3

5 INTRODUCTION This report concentrates on the effects of the high proportion of illegal downloads in today s music industry and examines the extent to which infringers behavior might be changed and to which their attitude towards alternative methods of supporting artists can be influenced. For this reason, a part of the research described in this report is constituted by online marketing activities on Facebook, one of the most popular social media websites nowadays. Besides that, this research was conducted with the aim of gathering information and gaining an overall insight into the functioning of the music industry as well, that is why the distribution and analysis of a questionnaire, the monitoring of the Sell-A-Band website, and personal interviews with music professionals about the possibilities of online donations in today s industry also constituted a great part of the research. During the research, the five-month internship done at Monkey Music, an independent Austrian music label proved to be of great help. To test whether visitors of live concerts are responsive to targeted online promotion, small contests to win free tickets for the concert of Bauchklang, a music group managed by Monkey Music were organized on Facebook. Simultaneously, these contests had the aim of increasing the popularity of Monkey Music as well. The company assisted in the organization of these lotteries, and also provided professional help and knowledge in the analysis of the Sell-A-Band website, a platform for online donations to music groups. The distribution of the questionnaire was also facilitated by Monkey Music, through the company s extended network of music lovers and business partners; however, the greatest and most important input to this research proved to be the practical work done during my internship. Thanks to the fact that my everyday tasks performed at Monkey Music were very diverse ranging from administration and inventory control until promotion, management and event organization, I gained a professional insight into the functioning of today s music industry and a strong basis of practical experience and professional knowledge in this field. This report contains the detailed description of the above mentioned research methods and a great amount of theoretical information as well. In Part 1: Research, firstly the problem of illegal downloading is discussed and demonstrated with the practical analysis of the present state of the music industry. A small theoretical background about the functioning of this industry is also provided, followed by the description of the model based on which the research was conducted. Part 1 is closed by the description of this research, the analysis of its results, and the recommendations of the researcher based on them. Part 2: Practical Work contains a brief description of the tasks which I performed at the company during my internship. Part 3: Additional Theoretical Background contains extensive theoretical information on online marketing, which constituted a part of the research activities. Finally, the Appendices are constituted by detailed analyses of the research results and the interviews made about Sell-A-Band. 4

6 PART 1: RESEARCH 1.1 Rationale The aim of my research in the field of arts promotion and online marketing is to examine the economic effects of the wide-spread usage of online channels on artists, especially musicians and all other members of the music industry. Recently, music industry players have been faced with the problem of losing a substantial amount of their income because of the easy access to their products which is provided by the Internet. As a frequent visitor of concerts and a dedicated music lover, I consider myself involved in this situation. I chose this topic because I find the relationship between arts and business interesting, and I agree with Hans Abbing s words related to this. Hans Abbing, artist and economist, lecturer at the Erasmus University in Rotterdam says: The economy of the arts is exceptional. Although the arts operate successfully in the marketplace, their natural affinity is with giftgiving, rather than with commercial exchange. People believe that artists are selflessly dedicated to art, that price does not reflect quality and that the arts are free (Hans Abbing 1). My objective with the help of this research is to reach a desired situation, the definition of which I formulated as fair economic treatment of artists and their works. Fair economic treatment can be defined as an ideal situation in which artists receive a sufficient amount of remuneration in return for the efforts and costs they dedicated to their works. This situation would resemble the purchase and sale of usual consumer goods, involving producers on the one side selling their artistic products at a price that includes their profit margin as well, while customers on the other side would pay that price and enjoy the benefits that the given piece of art provides. Thus the assumption mentioned above regarding the gift-giving affinity of arts would be replaced by a commercial point of view, and all market players of the music industry would partake in their deserved benefit of sales of copyrighted music. This way, my research will concentrate on the problem of illegal file sharing on the Internet and the application of this medium in favor of the arts, by introducing new ways of online arts promotion at Monkey Music. Illegal file sharing is an important term in this case, and can be defined as the downloading and uploading of copyrighted materials from a peerto-peer network ( What makes some downloading illegal and some legal? ). Other definitions, such as that in line with the Canadian regulation for example, state that downloading of these materials is legal, and only uploading activity should be in the central focus of lawsuits ( When Is Downloading Music on the Internet Illegal? ). In my view, most of those consumers who use peer-to-peer softwares for file sharing are already aware of the fact that peer-to-peer programs defined as a convenient way to share public domain music, audio, images, documents, and software programs over the Internet have recently changed, and besides public domain materials, the proportion of copyrighted materials is increasing continuously ( P2P file sharing: Know the risks ). Users of peer-to-peer programs deliberately download given softwares which allow them to connect to computers of other 5

7 users (peers) online and download their files ( Filesharing ). That is why I prefer the first definition of illegal file sharing, and consider downloading of copyrighted materials just as illegal as the uploading of those. In line with this definition, downloading is only legal when the person from whom the files are received has a permission from the copyright owner to further distribute the given material. In order to change this present situation, in which Internet can rather be considered as an enemy of artists, the objective of my research is to discover different means of online marketing which can be used to increase the income of music industry players. Consequently, my research question can be formulated as: what factors leading to decreasing sales in the music industry can be influenced by online marketing tools? 1.2 Situational Analysis The Problem Decreasing Sales in the Music Industry; Examples from Britain and the US In these days, many voices in the music industry claim that Internet piracy has reduced sales of legitimate CDs and that illegal downloads have become a substitute for legal CD purchases (Peitz and Waelbroeck 71-79). Since the launch of Napster, the first widely adopted file sharing service in 1999, the sources of unauthorized music to download for free from the Internet have proliferated. According to Professor Stan J. Liebowitz, when a downloaded copy is a good substitute for a purchased original, there is little reason for the listener to purchase the copyrighted work unless the continued use of a copy provides some disutility due to, say, the possibility of being punished for violating the law or the guilt from not supporting one s favorite artists. This substitution effect can only work to reduce the effective demand in the market facing the seller of sound recordings, and can only harm the financial position of the sound recording companies (Liebowitz 15). Thus economic effects of this phenomenon on artists are inevitably negative, resulting in lack of remuneration for their works. Indeed, since the end of the 1990s, the trade value of music sales in the UK, for example, has fallen by 25% ( The Impact of Illegal Downloading 1). According to an article published in the Guardian in May 2009, at least 7 million people used illegal downloads in Britain, costing the economy billions of pounds and thousands of jobs. Shared content on one network was worth about 12 billion a year according to the research commissioned by the Strategic Advisory Board for Intellectual Property. In the article discussed, David Lammy, minister for intellectual property, says: illegal downloading robs our economy of millions of pounds every year and seriously damages business and innovation throughout the UK. While creative industries provide about 8% of British GDP, as early as in 2004, digital copying of their products already resulted in the estimated loss of 4,000 jobs. 6

8 Number of paid vs illegal free music downloads (millions) Paid downloads Illegal free music downloads Source: Cost to British Economy of Free Downloads is Revealed Interestingly, according to the estimations of the International Federation of the Phonographic Industry there were 890 million illegal free music downloads through filesharing in the UK in 2007 compared with 140 million paid downloads. This puts unauthorized access at a ratio of six to one, before offline sharing like disk burning is even considered. This ratio is likely to increase, since the SABIP report indicates that music downloading had become part and parcel of the social fabric of our society despite its illegal status. It claimed that 70% of those aged 15 to 24 did not feel guilty about downloading music for free from the Internet and 61% of the age group did not feel they should have to pay for the music they listen to, according to a survey ( Cost to British Economy of Free Downloads is Revealed ). A survey conducted in the US in 2007 came to similar conclusions. This study claims that the US economy lost 8.7 billion USD annually due to piracy and is based on the assumption that around 20 billion illegal downloads took place worldwide during one year, and 66% of the downloaded content was US recorded music. Besides these figures, it is assumed that one fifth of these downloaded songs would have been purchased in a legal way if piracy did not exist. From these figures, it was concluded that 49,337 jobs had been lost due to piracy, of which 18,649 belonged directly to the sound recording industry and 30,688 accounted for other US industries. Considering concrete monetary loss, 1.87 billion USD was claimed to be lost by US workers in annual earnings. Of this, 771 million USD would have been earned by workers in the sound recording industry or in downstream retail industries, while 1.11 billion USD would have been the remuneration of workers in other US industries. Consequently, US federal, state and local governments were found to lose a minimum of 293 million USD in tax revenues per year ( New Study: Illegal File Sharing Costs the US $8.7 Billion Annually ). Such enormous figures, even if they are not perfectly accurate, indicate that the problem of illegal file sharing deserves greater attention worldwide. 7

9 Other Sectors and Market Players Involved in this Issue As it is mentioned above, it is the sum of creative industries which are economically hurt by illegal file sharing. This issue affects not only the music industry, but also those market players which provide videos, movies, games, books and different pieces of art to the public. As it is depicted on the graphs below, the value of both the European music and video and movies and entertainment markets has decreased for five years, and growth figures, indicated with the blue line and scaled in negative terms on the right side of the graphs, have been continuously negative. According to reports of Datamonitor issued in June 2009, in Europe both the music and video and the movies and entertainment segments' revenues have considerably decreased since 2004, and this tendency is likely to continue in the future. The ease of switching for consumers, due to wide spread illegal file sharing, creates a buyer's market and puts suppliers at a disadvantage ( Movies & Entertainment in Europe 9-13). Similarly, e-books, which can be read for free on the Internet represent a potential threat for publishers, making the publishing industry also involved in this issue (Greco 38). Concentrating on the music industry, it can be stated that all members of the channel between the musician and the final end user are hurt by illegal file sharing. Starting with the artist creating a piece of art with commercial value, other market players such as sound engineers and recording studios are involved and interested in the future success of that given piece of art. After them, companies dealing with the publishing of music labels and managers responsible for the promotion of artists are also concerned about sales figures. Finally, music stores offering the records of musicians for sale and organizers of live performances are also interested in selling the highest possible amount of CDs and concert tickets. Looking at the problem this way indicates that many players have to face the fact that the music market is dominated by inequality, where demand is well satisfied, but suppliers are not rewarded for their performance and their costs can be covered only with more and more difficulties. 8

10 Besides channel members suffering from the negative effects of illegal file sharing, there are parties involved in this issue who support and try to protect these players. Governments in association with specialized organizations such as the Music Publishers' Association, World Intellectual Property Organization and local copyright offices try to fight this problem and work on a stricter and more effective regulation on intellectual property rights ( What is WIPO? ). As an important step, the Digital Millennium Copyright Act was signed into law by US President Bill Clinton in 1998, which implemented and strengthened the effects of two World Intellectual Property Organization treaties, namely the Copyright Treaty and the Performances and Phonograms Treaty ( The Digital Millennium Copyright Act of 1998 ). One decade later, in February 2009, the Legal Affairs Committee of the European Parliament agreed on the extension of copyright term for music recordings from 50 years to 95 years from the first publication of the given song ( Music copyright to be extended to 95 years ). Such steps among many others also indicate the importance of this issue, and can be considered good initiatives; however, so far they alone have not been able to reverse the negative growth figures in the music industry. Reports Written about this Issue During the past few years, many studies were written which examined the relationship between illegal file sharing and decreasing music sales and most of them suggested that online channels influenced sales in the music industry negatively. A few of these studies are briefly introduced in this section. The first is The Effect of Napster on Recorded Music Sales: Evidence from the Consumer Expenditure Survey written by Seung Hyun Hong, Stanford University, USA in This study quantifies the changes in household expenditure on recorded music in the USA and blames Napster for 33% of the decline in spending on music in In the same year, David Blackburn of Harvard University, USA, published his paper Online Privacy & Recorded Music Sales, in which he concluded that file sharing reduces sales for well known artists relative to unknown artists, and such an impact becomes increasingly negative as popularity grows. Based on industry data from the IFPI World Report in 2003, Peitz & Waelbroeck (USA) analyzed 16 countries in their empirical study The Effect of Internet Piracy on Music Sales, and found that music downloading could have been responsible for a 20% decrease in global music sales between 1998 and Rochelandet and Le Guel from France investigated the behavior on peer-to-peer networks of more than 2,500 households, of which 74% stated that they had downloaded via peer-to-peer. In P2P Music Sharing Networks: Why Legal Fight Against Copiers May Be Inefficient they concluded that copying behavior is negatively correlated with the willingness to pay for an original when a copy is available. In 2006, Alejandro Zentner used 15,000 responses to a consumer mail survey in seven European countries, and suggested that peer-to-peer usage reduced the probability of buying music by 30%. In his study Measuring the Effect of Music Downloads on Music Purchases, he also estimated that music sales without illegal downloads would have been 8% higher in

11 Professor Stan J. Liebowitz (University of Texas at Dallas, USA) discussed this issue in several papers. In 2006, File sharing: Creative Destruction or Just Plain Destruction? contained an evaluation of the impact of other factors on decreasing album sales, such as competition from DVD, format replacement cycles, prices and so on, but file sharing was still cited as the key factor. In the same year he wrote the study How to Best Ensure Remuneration for Creators in the Market for Music? Copyright and its Alternatives jointly with Richard Watt (University of Canterbury), in which he covered the economic theory of copyright as a remuneration and incentive for creativity, and analyzed the associated literature, especially with regard to the effects of copying music on the legitimate market. He concluded that most of the studies previously written in this field had found some degree of negative relationship between file sharing and sales of sound recordings. Two studies were published by Jupiter Research (UK) about music industry losses and future opportunities in 2007 and The study Music Industry Losses based on a consumer survey with 1,000 UK respondents concluded that online music piracy was likely to cost the UK music industry 1.6 billion GBP between 2001 and 2012; and in 2007, online music piracy resulted in million GBP of foregone spend. The Analysis of the European Online Music Market Development and Assessment of Future Opportunities was based on face to face interviews with 5,000 people from five different European countries, which resulted in the conclusion that the markets with the highest incidence of music peer to peer are also those with weakest per capita music spending. Although this list of relevant studies is far not complete, there is only one more paper that is mentioned in this section. Interestingly, Ups & Downs Economic and Cultural Effects of File Sharing on Music, Film and Games, a study commissioned by the Dutch Ministries of Education, Culture and Science, Economic Affairs and Justice in 2009, also established the link between the fall in sales and downloading, but claimed this was offset by improved consumer welfare. Based on this point of view, consumers end up with a net benefit due to the fact that they can acquire more music at low or even zero cost ( The Impact of Illegal Downloading 2-8). However, this consumer welfare does not help the supply side of the market, which continues suffering from the negative effects of illegal file sharing. Falsifications Organizations supporting music sharing are constantly attacking the statistics on which artists claims are based. According to for example peer-to-peer file sharing software producers, it is obvious that the music industry loses some money due to Internet music file sharing, but finding the exact amount lost due to music downloading is not a simple task. Indeed, a few studies can be found which indicate no adverse effect of file sharing on music sales. Probably the most well-known among these papers is the study of Oberhulzer & Strumpf from The Effect of File Sharing on Record Sales stated that downloads have an effect on sales which is statistically indistinguishable from zero. Similarly, Tatsuo Tanaka 10

12 (Keio University, Japan) came to the same conclusion in the paper Does File-sharing Reduce Music CD Sales in 2004, stating that little evidence had been found which could show that file sharing reduces music CD sales in Japan. Finally, in 2009, the BI Norwegian School of Management prepared a study called Consumer Culture in Times of Crisis, and conducted a telephone survey of almost 2,000 individuals. This research indicated that file sharers were more likely to have used paid download sites, 75 times compared to seven times of free sites ( The Impact of Illegal Downloading 1). Besides illegal file sharing, other frequently mentioned reasons for declining sales are poor macroeconomic conditions, mismanagement and bad business decisions, growing competition from other forms of entertainment such as video games and DVDs, and the fact that the number of new releases greatly exceeds the number of releases that are played on the radio (Oberhulzer and Strumpf 24). In other words, only an extremely small percentage of music gets airplay today, and thus reaches the consumers effectively. This way, consumers are simply not being exposed to the same amount of new music they were years ago ( Illegal Music Downloading: Look at the Facts ). Based on this, it is important to point out that illegal file sharing is not the only variable influencing music sales. Although the relationship between file sharing and decreasing sales is probably a cause and effect relation, thus more than simple statistical correlation, the other possible causes mentioned above should still not be overlooked. The studies listed above led to similar results in their field and were supported with clear evidence. However, when conducting research about an issue like this, doubts can occur about the honesty of respondents and the representative nature of the sample. Since most of the studies were based on face to face interviews, telephone surveys and mail questionnaires, there is a high probability that some respondents had forged their answers and had given false responses about their downloading habits because of the fear of being punished afterwards. That is why these studies and statistics can probably never lead to perfectly true results, however, it can still be stated on a simple logical basis that the possibility of free downloading attracts rational consumers and makes them choose free music files instead of expensive CDs. New Business Models and Distribution Channels to Tackle the Problem As it is described in the Digital Music Report 2009 of the International Federation of Phonographic Industry (IFPI), in order to tackle the problem of decreasing sales on its own, the music industry has recently transformed its business models and is now offering consumers an increasing range of new services with leading technology partners. The industry has shifted its approach from one based only on unit sales of music to monetizing access to music across a multitude of channels and platforms ( IFPI Digital Music Report ). As a new means of music distribution, the digital music business internationally saw a sixth year of expansion in 2008, growing by an estimated 25% to 3.7 billion USD in trade 11

13 value. Digital platforms in 2008 accounted for already 20% of music sales, up from 15% in After that, in 2009, more than one quarter of record companies revenues came from digital channels, accounting for an estimated 4.2 billion USD globally. Recorded music is at the forefront of the online and mobile revolution, generating more revenue in percentage terms through digital platforms than the newspaper, magazine and film industries combined. Parallel with this, a new generation of music subscription services, social networking sites and new licensing channels is emerging. These were led in 2008 by services like Nokia Comes With Music, MySpace Music and a raft of partnerships with Internet Service Providers, such as TDC in Denmark, Neuf Cegetel in France, TeliaSonera in Sweden, Terra in Brazil and Sky in the UK. With the help of these, consumers can acquire tracks and albums in ways inconceivable a few years ago from download stores, streaming sites, subscription services, free-to-user sites, bundled with their broadband or a mobile phone headset. Despite these achievements, the digital music business still faces many barriers to its growth, which include the lack of marketing by services in some countries, problems with publishing rights, consumer reluctance to make online payments and the complex challenge of creating services that are user-friendly to different consumer groups. As a few means to solve these problems, Thomas Hesse; president, Global Digital Business, US Sales & Corporate Strategy, Sony; mentions an attractive user interface, a strong value proposition and a clear marketing message ( IFPI Digital Music Report ). Besides introducing new channels to access music, Digital Music Report 2009 also shows how the digital age is expanding the role of music companies in developing and marketing artists, and it outlines the progress being made internationally in getting Internet Service Providers to cooperate to curb mass-scale copyright infringement on their networks. 1.3 Theoretical Background This section is a brief introduction of the music business and how arts promotion fits into it, while the second subject covers the theoretical aspects of online marketing in detail in Part 3. Arts Promotion in the Music Industry Professor Dr. Peter Tschmuck, faculty member of the Institute of Culture Management and Culture Studies at the University of Music and Performing Arts Vienna, lecturer, and author of the book Creativity and Innovation in the Music Industry, gave a clear overview of the actual state of the music industry on one of his lectures in Vienna ( Copyright, Contracts and Music Production ). In his presentation, he introduces the functioning of the music industry as a whole with the help of the following flow chart (Peter Tschmuck 4). Based on this chart, according to Dr. Tschmuck, the music industry is based on a main value-added network and several support structures which help the successful and profitable functioning of the main network. My research will take place within the support structures; however, 12

14 proper knowledge of the main value-added network is also essential in this case. The Main Value-Added Network The main value-added network starts with artists and repertoire (often referred to as A&R), which often constitutes a separate division of a record label company that concentrates on discovering new talents and overseeing the recording process and the progress made by a given artist. This division works in close cooperation with the marketing department of a record label, and could be considered very powerful in the past, when A&R executives had significant influence on listeners tastes and preferences. Nowadays, with the emergence of digital music distribution, the maintenance of A&R s influential role is questionable ( Artists and repertoire ). Pieces of a selected artist s repertoire have to be made public in order to enter the phase of music production. Consequently, if an artist decides not to publish a song, and keep it for his/her own use, that given song does not represent a part of the value-added network, and is out of consideration for the further steps. Once a published song entered the music production phase, it is recorded and becomes available for the public. This recorded song may then be distributed online or in mobile ways and can also be performed live during concerts in front of an audience. This main value-added network described above shows how a song is born in one individual's mind and is made officially available for a considerable public at the end. This network based on pure artistic value can hardly be successful and profitable for all of its members without any support structures. The functioning of the network has to be organized and controlled, rights and obligations of parties have to be clearly defined, and once a song is recorded, it has to be introduced to the public in a way which arouses interest. Support structures are responsible for these tasks, among which online means probably have a constantly increasing importance. 13

15 Support Structures Artist management deals with the organization and control of the value flow through the main network. Managers of artists are responsible for adequate planning and timing, they take part in networking and lobbying, and organize proper financing as well. They share a mutual interest with the artists they manage, since they usually receive a certain percentage fee of the artists' revenues, thus they are motivated to organize as many successful live performances and album releases as possible. This way, managers guide the artists through this value-added network by providing everyday help and using a wide personal network, while property rights systems help artists in a more formal way. These systems serve the protection of artists by granting them exclusive rights to copy, distribute or adapt a given piece of art ( Copyright ). This form of protection of the rights of performers, producers and broadcasters contributes to the cultural and economic development of nations. As defined by the World Intellectual Property Organization, the purpose of copyright can be viewed as twofold: to encourage a dynamic creative culture, while returning value to creators so that they can lead a dignified economic existence, and to provide widespread, affordable access to content for the public ( Copyright and Related Rights ). Once artists' rights are protected, the given piece of art should be distributed and promoted successfully, which then benefits all members of the network. Phonograms are fixations of sounds and performances on a data medium, such as tape, CD or DVD. These phonograms are the tangible end product of an artist's performance, offered for sale to the public. Distribution of these phonograms happens through retail merchandise, furthermore, music merchandisers also design and distribute products that aim at popularizing a given artist or group of artists, such as T-shirts, posters, and all kinds of accessories ( Music Merchandising and Management ). Finally, arts promotion, in this case in the form of online and multimedia promotion plays an important role in supporting artists, by using various advertising techniques. This support structure focuses on arousing public interest, generating sales, attracting visitors of live performances, and communicating actualities and new releases, so that the public stays informed and committed to a given artist. With the wide spread of the Internet, online promotion nowadays has a potential greater than ever before, and direct marketing of music becomes possible. Recent Trends and Theories Dr. Tschmuck also emphasizes the paradigm shift in today s music industry, and makes several statements in connection with the changes taking place. He states that traditional production, distribution and reception routines are broken, and a new era of digital sales more important than record sales begins. This theory is supported by the tendency of decreasing record sales and a growing interest in digital distribution, described in the 14

16 Situational Analysis above. Keeping this in mind, it is reasonable to concentrate on live performances and heavily promote these events, since Dr. Tschmuck identifies the liveperforming sector as a boom segment nowadays. Finally, the professor also states that music recipients do not stay passive anymore, but start to participate in both the production and the distribution of music with the help of web 2.0 applications, which again emphasizes the continuously increasing importance of online channels in the music industry. Bearing these recent trends in mind, online promotion tools appear to be of great potential value in the communication between music lovers and artists. 1.4 Conceptual Model In order to conduct a meaningful research about illegal file sharing, independent variables which lead to the current problem need to be defined first. This conceptual model considers illegal file sharing as the dependent variable and concentrates on the following independent variables, which were identified with the help of the situational analysis: Technology advancement Technology is one of the basic elements of the current problem. The ever increasing number of illegally uploaded and downloaded records has its basis in the fact that technology enables users to commit illegal file sharing actions. Until an easy access is provided to peer-to-peer file sharing programs, users tendency to use these programs is likely to grow in the future. Continuous technological development resulting in higher download speed and greater storage space further facilitates illegal file sharing ( Illegal filesharing could cost 215 billion by 2015 ). Obviously, until such technology was not given, the problem of illegal file sharing did not exist. With the introduction of Napster, the first file sharing service, the basic technology was created, which is likely to further exist and improve in the future, since creators of file sharing programs have commercial interest in developing and marketing their products; and a guaranteed demand for these products on the market is obvious. From the point of view of this research, technology advancement is considered as a variable which cannot be influenced and is expected to be present during and after the research as well. Wide-spread usage of Internet Internet usage can be considered a container variable, since many aspects such as user behavior, income, education, other leisure activities etc. have an effect on it. Besides that, this is again a variable that serves as a basis of illegal file sharing. Obviously, one without an Internet connection is not capable of sharing files illegally online and has zero chance to commit this crime, compared to an Internet user with a functioning connection. Once a user goes online, he is provided with the possibility of illegal file sharing. Given that the number of Internet users is continuously increasing, the number of records shared 15

17 illegally will probably also rise, which leads to the assumption that there is a positive correlation between Internet usage and illegal file sharing ( World Internet Usage and Population Stats ). It is not a cause and effect relationship, since Internet usage does not necessarily lead to illegal file sharing; however correlation between the two variables exists. Similarly to technological advancement, this variable cannot be influenced by any means during this research, and in fact, it should not be affected. Although technology and Internet provide the basis of illegal file sharing activities, they also make the use of online promotion tools possible, thus can be considered advantageous for the purpose of this research. Regulatory problems There is a lack of effective regulation in the field of intellectual property rights. As a container variable, regulation is again strongly connected to governmental issues, Internet Service Providers, courts, financial resources etc., which may limit or increase its effectiveness. In its present form, regulation on punishment of illegal file sharers is weak and appears to exist in theory only. Very few cases are dealt with by the court in this field and the end result of these cases is only rarely published in the media. This way, users of file sharing programs do not fear the consequences of their illegal activity, since regulation is unclear and seemingly ineffective. Filtering technology to tackle the problem of file sharing is not used widely, and Internet Service Providers do not support the idea of cooperation in taking action against infringers either, although governments would suggest that ( Government Response to a Consultation on legislative options to address illicit Peer-to- Peer (P2P) file-sharing ). Unfortunately, these disadvantageous regulatory circumstances cannot be influenced within the frame of the present research. Economic rationality and prices Rationality in consumption inevitably leads to people downloading music illegally for free, if other variables are not considered. According to Professor Liebowitz, if a free substitute in the same quality exists for a given piece of music offered for sale, rational consumers tend to prefer the free piece to the other which has a price. If we take into account that the price of music CDs is increasing from time to time, similarly to any consumer good, the gap between the actual price and zero (a free copy) will be greater as well. This is likely to cause a further increase in the number of rational consumers choosing free access to music. Despite of the fact that major music industry players like Universal Music Group discovered the problem of this increasing gap and are trying to cut prices now, this strategic step is too late and is not likely to change users music consumption behavior anymore ( Years late, Universal cuts CD prices to combat poor sales ). Obviously, rationality cannot be changed in this case, and prices are likely to stay relatively high as well, given the production costs and the fact that all members of the music industry chain are expecting a share of the profit on the CD that is sold. 16

18 Culture Finally, the fact that users of peer-to-peer programs do not consider illegal file sharing as a crime also constitutes a part of the conceptual model, and is referred to as culture here ( Cost to British Economy of Free Downloads is Revealed ). Culture can definitely be considered a container variable, since not feeling guilty about an illegal activity can be dependent on family background, age, education, IQ etc. People are likely to consider illegal file sharing a normal everyday activity, in which they are not hindered by regulation or detailed education on the negative effects of their activity. As a part of this research, people s perception about illegal file sharing and their values and habits concerning supporting artists may be influenced with online marketing tools. To sum up, if the question why illegal file sharing exists and became so wide-spread is put, the answers, and consequently the variables in the conceptual model, are: 1. Technology advancement makes it possible. 2. Wide-spread Internet usage keeps it alive and makes it even more common. 3. Regulation cannot fight it effectively, thus infringers have no fear of punishment. 4. Economic rationality and high CD prices make users prefer free (although illegal) substitutes. 5. Culture appears to accept and tolerate this illegal behavior of file sharers, causing no twinge of conscience of infringers. When these variables are depicted on a conceptual model, the graph is the following: Technology advancement Internet usage Economic rationality Illegal file sharing Regulation Artists income Culture Live boom segment 17

19 This conceptual model depicts how each of the five variables affects wide-spread illegal file sharing. Furthermore, technology advancement stimulates Internet usage by providing ever improving possibilities of browsing the world wide web, while Internet users expectations continuously encourage technology providers to develop their products and services, for example by increasing bandwidth. Such a mutual relation is present between regulation and culture as well: weak regulation suggests that a common overall culture will further tolerate illegal file sharing behavior. When this cultural attitude becomes commonly known, regulatory bodies are trying to fight it with new and improved means, which again will have an effect on people s culture. As a result, two pairs of independent variables in this model are likely to affect and stimulate each other continuously. When looking at the dependent variable in this case, illegal file sharing leads to a significant decrease in music sales, hurting many industry players. As a result, instead of CD sales, live performances constitute a boom segment on today s music market. This key role of live performances can be approached from the point of view of music business and can be viewed as a substitute for CD sales, while this live boom segment is affected by one of the independent variables, namely culture, as well. Taking into account the ever increasing number of music festivals and various events for which tickets are successfully sold for rising prices every year, there are reasons to believe that attending live performances constitutes a great part of people s culture nowadays. The research will concentrate on the highlighted items, namely the problem of decreasing sales (artists income), and the solution of this problem by influencing people s cultural attitude to illegal file sharing and by supporting live performances with online promotion, represented by broken lines in the model above. The model can be translated into two action hypotheses: a) If people are confronted with targeted and intensive online promotion, users can be responsive and interactive, and the number of live concert visitors is likely to increase. b) If users are better educated about the illegality of their behavior and the possibility of supporting artists in alternative ways, they are likely to change this behavior and let artists benefit from their activities. 1.5 Research Proposal To test whether the above listed two hypotheses are correct, a research will be conducted, which, in line with the concept of parsimoniousness, will only deal with the highlighted items of the conceptual model. Since technology, Internet usage, economic rationality and regulation can be considered exogenous variables in this model which cannot be influenced in the given context, it will be the users cultural attitude towards illegal downloading and their concert visiting habits which the research will concentrate on. These two factors will be targeted by online promotion tools and researched with the help of a 18