Consumers can transform, or "rip" compact discs into MP3 files, save the MP3 files on their own computer or a Web site, and make these files publicly available.
Downloading allows consumers to achieve other efficiencies as well, since users acquire only what most appeals to them. An additional attraction for those individuals who download music is that they can more readily customize their collections than they can with music that is pre arranged on a CD.
The advent of CD recordable (CD-R) devices similarly heightened the desirability of downloading music from the Internet. Using these devices users can download music and "burn" it onto a recordable CD (7). This disc can then be played in a traditional CD player (for example, on a stereo, portable CD player, or in a motor vehicle).
Historically, when analogue recordings were common, music labels were not greatly worried about piracy, due to the inferior copies that resulted from duplicating recordings. However, with the introduction of digital technologies (in particular, the compact disc and, more recently, MP3 and similar technologies) the music industry is more concerned than ever with the potential detrimental impact on revenues that this copyright infringement represents.
In sum, the advantages derived from the duplication of copyrighted music virtually guarantee that the practice will continue, since digital downloading provides a number of benefits for music listeners that recordings in traditional tangible formats (compact discs, digital audio tapes, and audio cassettes) cannot, or do not. The good news for the major labels is that they can offer the same benefits to consumers and be able to add more value for music listeners than the providers of free music can.
Overview of MPEG-1 audio encoding – Similar to that of MP3. (21)
Evolution of the Internet/convergence
The Internet continues to evolve rapidly. Further developments for the downloadable music industry include broadband technology that permits faster downloading and the integration of Internet technology into mobile devices (8). A normal connection carries one signal at a time, either high or low. Broadband carries multiple signals on a carrier wave with highs and lows sent as variations on the wave.
Jupiter Media Metrix (9) estimates that in the United States, eight million households currently have broadband access via their personal computers. This upswing is significant in light of the historical role that broadband has played in the popularity of downloading music over the Internet. A survey of students at the University of Southern California found that the downloading of MP3 files was significantly correlated with access to high-speed Internet connections. For example, only 52 percent of those with a bandwidth of less than 56k downloaded MP3s, compared to 85 percent of those with access to high-speed T1 connections (10).
In the year 2000, 18 to 25 year old males had the highest user penetration for Napster (9). However, the development of broadband technology will make downloading more popular among all consumers, given such technology's capacity to reduce the time involved with downloading.
In addition to the increased speed associated with broadband technology, the other major trend that has significance for the music industry is the combination of computers and telecommunications. This development is important because it increases the overall speed and flexibility of communications. As Robert Picard (11) observes:
"The most revolutionary aspect of the technology is that it creates new economies of scope and integration that change the economics of content distribution. New technologies permit the combination and integration of the other existing means of communications and allow readers/viewers/listeners more control and choice. It provides different methods for participating in and receiving communication. These changes ... create a significantly different relationship than exists between users and traditional media. It is ignorance or misunderstanding of this essential demand element that has made it so difficult for many firms to find ways to profitably exploit the potential of the new information and communications technologies and associated products and services".
This amalgamation takes on special meaning in the context of music listening devices. Also, these devices are increasingly able to store more and more music. The first mobile MP3 devices could only hold around one hour of CD-quality music (in the form of MP3 downloads). Today, the Rio MP3 player can store up to twelve hours of music, downloaded as MP3 files from CDs or the Internet. The development of in-car devices that will enable a driver to listen to a CD-R that contains 12 hours of compressed digital music presumably will fuel consumers demand for such instruments. Mobile telephones are also available for downloading and listening to music. For example, the Samsung Uproar allows consumers to download and listen to around ten hours of music (12).
In addition to the benefits associated with increased playing time, the availability of mobile devices enables consumers to have greater flexibility as to where they listen to music. One reason that consumers purchase music (as opposed to listening to it for free on the radio or elsewhere) is to gain temporary control, i.e., to control when and where we listen to music (13). Mobile devices have enabled downloadable music to be enjoyed and played anywhere. This development is important, as listeners are no longer tied to a single source, namely personal computers, for such music. Mobile devices are of particular interest to the music industry, given that the usage of such devices is even more widespread than that of PCs.
For example, the Gartner Group (14) predicted that in 2001 alone, global mobile phone sales would exceed 500 million units, if the predicted functional convergence between Persona Digital Assistants (PDAs) and mobile phones occurred (15). Also, wireless PDAs are expected to grow rapidly during the next three years (16). Popular PDA devices such as Palm computers can access the Internet and play MP3s.
These widespread technological changes - downloading, increased bandwidth, and convergence of technologies - provide the means by which music can be obtained in a different format than has historically been the case. However, the availability of free music poses a considerable challenge to the music industry in developing profitable and competitive business models.
Discussion and Conclusions
The major record labels, the so-called "Big Five" (BMG Entertainment, Sony, AOL Time Warner, EMI and Vivendi Universal Music Group), sell over 80 percent of popular music (17). Historically, the Big Five have effectively controlled most of the music supply chain. Also, contractual arrangements between record labels and artists have historically formed a major barrier to entry in the music industry as well. These arrangements, in essence, provide labels with monopoly rights to the artistic output of individual artists from which the labels can then generate revenues. In particular, copyrights held by music labels comprise a key means by which music labels protect their economic assets, i.e. their investments in artistic talent (18). Today, however, the revenue streams that grow to those who control musical copyrights are threatened by the increasing popularity of online music piracy.
Put differently, technological changes have increasingly resulted in heightened competition for the major labels. In fact, the distribution of music over the Internet only requires a single master copy, whereas distribution of music as a product requires distribution of numerous (physical) items, i.e., CDs, audio cassettes, etc. When music is stored and sold as a computer file, disintermediation occurs (the cutting out of middle layers of distribution channels). This is particularly harmful to the Big Five, who are also the major distributors of music to retail stores. Economies of scale in the distribution of physical music products have historically placed smaller, independent music labels at a disadvantage to the Big Five (19). However, the Internet significantly reduces the Big Five's market power in the area of distribution.
Downloadable music and its associated technologies have brought about a redistribution of power from major record companies to music consumers and, arguably, artists. In any event, digital technologies and the Internet have radically altered the value chain for the music industry in a number of ways that reduce costs and barriers to entry. Among other things, this shift provides many more opportunities for independent music labels to diminish the major labels' historical monopolisation over traditional distribution methods.
Historically, independent music labels have provided an alternative avenue to the Big Five for artists to get their music to the marketplace. True, owing to the high costs associated with promotion and distribution, it has been rare for independent labels to reach the large audiences of the Big Five (17). Furthermore, the independents have historically relied on the Big Five to distribute music products by independent artists. However, attracting talent, a major problem for start-up labels, has become easier in some respects owing to the cost reductions made possible through the distribution of music via the Internet.
In addition to providing higher royalties and additional opportunities to sign with independent labels, an enticing lure to would-be artists, digital technologies make the production and commercialisation of music easier and less costly.
Additional issues of relevance to the cost structure of music labels involves cost savings associated with inventory control and having a more informed basis for deciding which artists careers to invest in. Music labels presently need to forecast how many copies of a compact disc that consumers will purchase. Inaccurate estimates can lead to over- or under-production, a problem that would not occur were music distributed digitally via the Internet (20).
In summary, Internet-based business models appeal to the music industry because - even if they were to lower prices - they still could increase their present profit margins.
Bibliography
1 http://www.musicdish.com/
2 www.schneiderpfahl.com
3 http://news.bbc.co.uk/1/hi/entertainment/new_media/1809391.stm
4 http://www.clickz.com/tech/lead_edge/article.php/829761
5 R.M. Blunt, 1999. "Bootlegs and Imports: Seeking Effective International Enforcement of Copyright Protection for Unauthorized Musical Recordings.," Houston Journal of International Law, volume 22, number 1 (Autumn), pages 169-208.
6 http://eon.law.harvard.edu/h2o/property/MP3/main.html
7 http://www.richmond.edu/jolt/v7i1/note2.html
8 P.A. Gerbert, 2000. "Music - The Prototype for the Digital Economy," Highlights from the Digital Marketplace, volume 1 OC&C Strategy Consultants.
9 Jupiter and Media Metrix, 2000, "Jupiter: U.S. Online Music Market to reach $5.4 Billion in 2005, led by industry shift to digital subscriptions," at http://news.excite.com.
10 http://entertainment.usc.edu/publications/mp3.pdf
11 http://www.mediajournal.org
12 http://www.samsungtelecom.com/uproar/features.html
13 K.T. Lacher, 1989. "Hedonic Consumption: Music as a Product," Advances in Consumer Research, volume 16, pages 367-373.
14 http://www.gartner.com
15 http://www.mediajournal.org
16 J.A. Senn, 2000. "The Emergence of M-commerce," Computer, volume 33, number 12 (December), pages 148-150.
17 W.S. Coats, V.L. Freeman, J.G. Given, and H.D. Rafter, 2000. "Streaming into the Future: Music and Video Online," Loyola of Los Angeles Entertainment Law Journal, volume 20, pages 285-307.
18 D. Sadler, 1997. "The global music business as an information industry: reinterpreting economics of culture," Environment and Planning A, volume 29, pp. 1919-1936.
19 P. Alexander, 1997. "Product Variety and Market Structure: A New Measure and a Simple Test," Journal of Economic Behaviour and Organization, volume 32, pages 207-214.
20 http://www.law.harvard.edu/AcademicAffairs/coursepages/tfisher/Music.html
21 http://www.tnt.uni-hannover.de/project/mpeg/audio/faq/mpeg1.html#1-7
1 Good information on various aspects of the technological advances on the music industry
2 Looks at the legal side of music downloading such as the monopoly of Napster.
3 The latest news on what is happening in the music industry.
4 Reviews of the news affecting the industry.
5 Various bits and pieces on sound quality in existing music playing formats.
6 Why the internet is being used as it is now.*
7 Talks about CD-R.*
8 Good information on broadband technology.
9 Information on various predictions for future sale stats.
10 Explores the implications of the convergence of entertainment, commerce and society.
11 The International Journal on Media Management.
12 Info on the mobile phone use of music.
13 All about customer benefits of using the internet
14 Predictions for the next generation of convergence between mobiles and internet.
15 Same source as 11.
16 Info on wireless systems.
17 Gives good info on the ‘big five’.
18 All about legal copyrights
19 Economical affects caused by the changes in technology.
20 All about the problems with manufacture of music.*
21 Good info on MPEG systems and how MP3 came about.
* Web Site is no longer available.
