Online Music Distribution: R.I.P. the Music Industry?

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1 Online Music Distribution: R.I.P. the Music Industry? Online music distribution is altering the very foundations of the international music industry. Consumers have flocked in droves to the Internet, to download, to rip and burn copyrighted music material. The digital music revolution has changed the way people listen, use and obtain their favourite music. With album and CD single sales in decline, and with legal and illegal downloading booming the music business is rapidly changing. In the wake of these changes many independent record stores are closing, major record chains are altering their retail proposition, major record labels are downsizing culling artists on their roster, and are extremely concerned that the massive amount of money that they have invested in recording artists may not yield a return. The very business model that has worked for decades, buying a single or album from a high street store is going to alter fundamentally. Music executives are questioning on whether the Internet will kill the music business altogether? According to the British Phonographic Industry, it estimated that 8.0m people in UK are downloading music 92% of them doing so illegally. In 2003 alone, sales of CD singles fell by a colossal 32%, with album sales falling by 3%. For a key market to be eroded by nearly a third in the space of a year highlights that enormous changes are taking place in the industry, and during the first six months of 2004, legal downloads topped the 500,000 mark in the UK. Consumers are buying their music through different formats, and also listening to their favourite songs though digital media rather than through standard CD, cassette or vinyl formats. The cassette single has ceased altogether as a format. Vinyl records are still popular with a small number of select consumers who enjoy the high fidelity recordings and mixing on their turntables. The emergence of MP3 players and in particular, the immensely popular Apple ipod has transformed the music landscape. These small handheld devices allow music lovers to download and play huge music libraries with ease that hold vast collections of songs. The original ipod can hold up to 5,000 songs. Consumers are now downloading songs electronically from the Internet, and storing them on these digital devices or burning them onto rewritable CDs. The typical record buyer browsing through rows of shelves for their sought-after band or song on a Saturday afternoon may soon be a thing of the past.

2 The Internet offers a number of benefits to music shoppers such as instant delivery, access to huge music catalogues, provision of other rich multimedia material such as concerts or videos, cheaper pricing (buying songs for 99p rather than an expensive single), access to samples of tracks, but above all convenience. For the music industry itself, the Internet has raised a number of positives and negatives. On the positive side, they now have access to a wider global audience, it has opened up new revenue streams, it has diminished the bargaining power of large retailers, is a cheaper distribution medium than traditional forms and finally they can now create value laden multimedia material for consumers. However the biggest problem for music companies and artistes is that of piracy and copyright theft. Millions of songs are being downloaded from the Internet illegally with no payment to the copyright holder. The Internet allows surfers to download songs using the mp3 format, which doesn t have inbuilt copyright protection, allowing the user to copy and share with other surfers, with ease. The major record companies have finally woken up to the fact that huge numbers of surfers are using the Internet to source their music, illegally. The real wake up call for the music industry was the emergence of Napster during the dotcom boom. An 18-year-old university drop out named Shawn Fanning created a killer Internet application called Napster. It was basically a file-sharing program allowing music files over the Internet to be shared. The program allowed users to find their desired music files through the use of a central computer server. The system worked whereby a user would send in a request for a song, the system would check where on the Internet that song was located. Then that song is directly downloaded onto the computer who made the request. Napster never actually held the physical music files, just facilitated the process. At its height of its popularity the service had over 100 million users. In 2002, the company collapsed due to the mounting legal challenges faced by the company over copyright infringement. Bands like heavy metal rock group Metallica sued the company directly over what they saw as Napster assisting the piracy of their songs. Internet websites popped up urging Napster to pay Metallica, whilst others thought that the metal band had sold out to commercialism. Napster as a company lost millions due to litigation despite a late rescue bid by ironically one of the big five music groups, whose very existence it threatened. Even more ironically, Shawn Fanning (the enfant terrible of the recording industry who created this severe headache) is now trying to launch a start-up venture, selling the industry tracking software that finds copyrighted material being distributed on the Internet illegally outsider turned informer.

3 Napster went into liquidation in the summer of But the brand was resurrected as a legitimate music download site in late A company called Roxio who had acquired the backing of two major recording labels Sony and Universal Music Entertainment, relaunched the brand. It had bought the Napster brand for $5 million. Now surfers can legitimately stream songs onto their personal computer by paying a monthly subscription of $9.95 and can burn songs onto CD for 99 cents a song. However in the wake of the collapse of illegal Napster, P2P networks such as Kazaa and Grokster emerged and posed an even deadlier threat to the music industry, an enemy even harder to track and contain. Figure 1 Glossary of Online Music Jargon Streaming Allows the user to listen or watch a file as it is being simultaneously downloaded. Radio channels utilise this technology to transmit their programming on the Internet. Rip n Burn Means downloading a song or audio file from the Internet and then burning the song onto a rewriteable CD or DVD. MP3 format mp3 is a popular digital music file format. The sound quality is similar to that of a CD. The format reduces the size of song to a tenth of its original size allowing for it to be transmitted quickly over computer networks. Apple ipod The digital jukebox, which as transformed the fortunes of the pioneer PC maker. By the end of 2004 it is expected to sell close on 5 million units of this ultra-hip gadget. It was the must have item for The player can hold over 5000 songs. Other hardware companies have launched competing devices such as Dell & Creative Labs. Peer-to-Peer Networks (P2P) These networks allow users to share their music libraries with other net users. There is no central server, rather individual computers on the Internet communicating with one another. A P2P program allows users to search for material, such as music files on other computers.

4 In the wake of Napster, as both an illegal and its now legal reincarnation, a plethora of other music download sites and software have emerged. A large number of legal download sites have been launched, where surfers can either stream their favourite music or download them for future use in their digital music libraries. This has been due to the rapid success of small digital media players such as the Apple ipod. The success of this device has turned around the fortunes of this company and has also led to the firm s success in other markets such as laptop computers, where ipod users are now attracted into buying the firm s other products. The legal downloading of songs has grown exponentially during In the UK alone, at the start of the year the figure was 100,000 downloads a month, in August 2004 that figure had grown to 500,000 a month. À-la-carte download services and subscription-based services are the two main business models. Independent research reveals that Apple s itunes service has over 70% of the market with, the now legitimate Napster obtaining just 11 %. Highlighting this growing phenomenon of the net as an official channel of distribution, music charts are now being created such as the Official Download chart. A core issue of the business is that of compatibility. Some digital music players will only be able to play certain music file formats from certain online music retailers. The music industry is hoping that a dominant digital format, an industry standard emerges.

5 Table 1 The Major Legitimate Online Music Providers Name Details Pricing Apple itunes Huge catalogue of over 750,000 songs. Compatible with Apple s very hip ipod system. Offer free single of the week and other exclusive material 79p per track & 7.99 per album Napster The now legitimate website offers over 1,000,000 songs. Offers several streaming radio stations also. Subscription based, where subscribers pay 9.99 a month to stream any of the catalogue, plus another 99p to download onto a CD. Sony Connect Over 300,000 songs from the major labels. Excellent sound quality but only compatible with Sony products due to proprietary file formats From 80p per track & 8 to 10 per album Bleep.com Small catalogue of 15,000 songs with focus on independent music labels. High quality downloads due to media files used. 99p per track & 6.99 per album. Wippit UK based service. 175,000 songs to download. Gives a selection of free tracks every month. From 30p to 1 to download. Or alternatively people can subscribe to service for 50 a year to gain access to 60,000 songs. OD2 System (used by) Mycokemusic.com HMV.com These online sites use the OD2 system for music downloads. They look after encryption, hosting, royalty management and the entire Varying product bundles, typically 99p for track download, and 1p for streaming

6 MSN.com TowerRecords.co. uk Big Noise Music ecommerce system. Provides access to nearly 350,000 tracks from 12,000 recording artists One of the biggest difficulties faced by these music download retailers is that customers have to possess a credit card, in order to purchase. Thereby a large portion of the music market, under 18s, are unable to use these legal services. The only way they could use these services in the past was through using their parents credit cards or alternatively illegally download music files through P2P networks. Teenagers had a huge impact on the sale of CD singles in the past, whereas album sales originated typically from older customers. In an effort to tackle this problem, online music retailers are issuing top-up cards similar to the pay-as-you-go mobile phone market. Consumers can buy their Napster cards at regular shopping outlets. Theses cards reveal a code, which gives them credits to use on the system (e.g for 15 tracks). Napster has teamed up with retailers such as Dixons, Currys and PC World to launch this initiative. Big Noise Music is an example one of the legitimate downloading sites running the OD2 system. The site is different in that for every 1 download, 10p of the revenue goes to the Oxfam charity.

7 Industry sources suggest that out of a typical 99p download, the music label gets 65p, while credit card companies gets 4p, leaving the online music store with just 30p per song download. Bricks and mortar retailers are getting increasingly worried about their business model and revenue streams. Music retailers are now even threatening music labels over them distributing free music CDs in national newspapers as giveaway discs. Newspapers are using music CD giveaways to boost their circulation figures, with some promotions boosting circulations by up to 20%. Retailers are furious that the music labels are giving away songs, which hurt their businesses. Consumers are not buying CDs due to the sheer quantity of free music they are receiving. It is estimated in excess of 25 million CDs are distributed for free through joint promotions with the UK national newspapers. Bootlegging has always been an issue in the music and entertainment industry. The entertainment industry vehemently opposed the introduction of the VCR, saying that it would decimate their industry at the time. Similarly the introduction of cassette tape recorders opened up huge bootlegging operations in the Eighties. However with the development of the Internet and the varied digital media formats, the sheer size, scale and speed at which original material can be copied is staggering. Due to this the industry has had to be more vigilant in issuing new releases, so that pirate copies do not emerge on the market before the official release date. In some cases, new release dates have been pushed forward due illegal copies cropping up on the marketplace. In a bid to counter the threat of illegal music distribution, some record companies have published music CDs that would not work in personal computers, using copyright protection devices. However using a simple magic marker on the CD easily circumvents these much-lauded devices. The popularity of P2P networks remains the biggest threat to the music industry. Consumers can easily source and download illegal copyrighted with considerable ease. Some of the most popular P2P networks are listed below in figure 2. Advertising supports these networks predominantly, with some networks offering ad free versions for a small fee. Kazaa is the most popular of these P2P networks.

8 Figure 2 Peer to Peer Networks Used for File Sharing - Kazaa - Gnutella - Grokster - Morpheus - edonkey - Imesh - Bearshare - WinMX The music industry is ferociously fighting back by issuing lawsuits for breach of copyright to people who are illegally downloading songs from the Internet using P2P software. The American recording industry has started to sue thousands of people who illegally share music using P2P. Examples include a twelve-year-old girl whose parents had to reputedly pay in excess of $2,000 dollars in an out of court settlement with the recording industry. These types of headline cases act as major deterrents to those contemplating illegal downloading. European industry bodies have started in a similar vain, by starting legal proceeding against illegal Internet downloaders, who are heavily involved in the activity. These hardcore elements are responsible for the majority of the bootlegging activity. They are issuing warnings to Internet surfers who are using P2P software that their activities are being watched and monitored. Also instant Internet messages are sent to those who are suspected of offering songs illegally. In addition, they have been awarded court orders so that Internet providers must identify people who are heavily involved in such activity. In some cases Internet service providers are actively helping the industry in combating piracy. The music industry is involved heavily in issue advertising campaigns, educating prospective illegal downloaders of the repercussions of such an activity and the impact it will have on the industry, jeopardising future music production. The industry also strongly promotes anti-piracy websites such as promusic.org to educate people on the industry and the impact of piracy on artists. This website is heavily subsidised by the music industry. These types of public awareness campaigns are designed to show the true implications of illegal downloading. However small independent music labels view P2P networks as vital in achieving publicity for their acts. These firms simply do not have the promotional resources or

9 distribution clout of the big five record companies. They see P2P networks as an excellent marketing tool, creating a buzz about a song or artist that will quickly spread and ultimately lead to wider mainstream and commercial appeal. They use the Internet to create communities of fans who are interested in their music, providing them access to free videos and other material. The major labels still see that the major route to success is to get a video on rotation on MTV and that this in turn encourages greater airplay on radio stations, ultimately leading to increased purchases. Some musicians are equally divided on the issue saying that without these networks they wouldn t have got noticed in the first instance, whereas others see it as damaging their livelihoods and stealing their music for free. The reality is that despite the industry s best efforts these types of networks cannot be closed down unless the entire Internet is shut down, as these sites and software are moveable targets, constantly morphing and changing identities. For traditional music retailers the retailing landscape is getting more and more competitive with multiple channels of distribution emerging due to the Internet and large supermarket chains now selling music CDs. Supermarkets such as Tesco and Asda now sell a selection of the top selling albums. They view this market as quite lucrative due to the higher margins obtained rather than typical food items. Also due to their size and scale they can obtain heavy discounts from music publishers. Furthermore the Internet has given consumers greater choice. They now can buy albums from traditional Internet retailers such as Amazon.com, and also on websites that utilise access to grey markets such as cdwow.co.uk, and now through legitimate download retailers. The music industry has truly evolved into a multi-channel world. Increasing numbers of people are going to source their music through the Internet and supermarkets, leaving traditional music retail operations a severe conundrum, how can they entice more shoppers into their stores. Figure 3 overleaf highlights where typical shoppers source their music at present.

10 Figure 3 Where do people buy their music? Music Stores (Like HMV, Virgin Megastores) 16% Chains (Like Woolworths, WH Smiths) - 16% Supermarkets (Like Tesco, Asda) % Mail Order - 3.9% Internet Sales (Like Amazon.com) - 7% Downloads - Not yet measured Source: British Phonographic Industry Not only are the major music labels and retailers concerned about Peer-to-Peer Networks and online music distribution, but also they are worried at the impact of parallel importing from online music retailers, such as CDWOW ( These types of music sites are taking advantage of worldwide price discrepancies for legitimate music CDs, sourcing them in low cost countries, like Hong Kong and exporting them to European countries. Prices for music in these markets are considerable lower than the market that they are exporting to, and they don t even charge for the international delivery. It is not all bad news for the music industry. Technological improvements have led also to other revenue opportunities opening up for the industry. Development such as online radio, Internet streaming, tethered downloads (locked to PC), downloads (burnable, portable), in-store kiosks, ring tones, mobile message clips, video clips, and games soundtracks are great potential revenue sources. In an effort to unlock this potential the major labels have digitised their entire back catalogue for these online music retailers. In the wake of these dramatic environmental changes the industry has had to radically adapt. The Big Five music labels are consolidating, seeking out more mergers and acquisitions, developing a digital music strategy, and re-evaluating their entire traditional business model.

11 Table 2 The Big Five Music Labels Universal Music Sony Music EMI The largest music label with 26% of global music market share. Artists on their roster include; U2, Limp Bizkit, Mariah Carey, No Second largest music group. Organising merger with BMG. Artists on their roster include; Micheal Jackson, Lauryn Hill Artists on their roster include; The Rolling Stones, Coldplay, Norah Jones, Radiohead, Robbie Williams Doubt. Warner BMG Fourth biggest music group. Time Warner its parent company sold the business for 1.5 billion to a group of Canadian Merging with Sony to create Sony BMG. Artists on their roster include; Westlife, Dido, Outkast, Christina Aguilara investors. Artists on their roster include; Madonna, Red Hot Chilli Peppers, REM Consumers are now looking for more value laden music product rather than simply 12 songs with a album cover. Now they are expecting behind the scenes access to their favourite group, live concert footage and other content rich material. Highlighting this shift in expectations music DVDs are growing in demand by 27%, whereas the global demand for CDs has fallen by 2.7%. The industry has to rapidly adapt to these changing developments. The Internet may emerge as the primary channel of distribution for music, and the music industry is going to have to adapt to these changes. The move towards the online distribution of entertainment is still in its infancy, with more investment into the telecommunications infrastructure such as greater Internet access required, increased access broadband technology, and changing the way people shop for music will undoubtedly take time. Digital adoption will increasingly occur. This digital revolution will fundamentally change the way people purchase and consumer their musical preferences. In the forthcoming years the digital format will become more mainstream, leading to a proliferation of channels of distribution for music. However, like with most new channels or technology, catalogue-shopping never surpassed regular high street shopping, the Internet likewise, and despite the prophecy video didn t kill the radio star

12 Case Questions Q. 1 Discuss the possible strategies available to the music industry in combating piracy. Q. 2 Discuss the advantages and disadvantages associated with online distribution from a music labels perspective. Q.3 Discuss the possible implications for both music publishers and music retailers associated with online music distribution. Q.4 What are the strategic options available to both music labels and the affected bricks and mortar retailers in the wake of the developing online music distribution market? Furthermore recommend a course of action for the music labels, giving reasons for your answer. This case was written by Conor Carroll, Lecturer in Marketing, University of Limerick. Copyright Conor Carroll (2004). The material in the case has been drawn from a variety of published sources.