The Internet Changes the World of Music, But What Comes Next?

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Stockholm School of Economics

Quo Vadis Music Industry:

The Internet Changes the World of

Music, But What Comes Next?

Course: 2101

Market Systems

Fall 2002

. Major points of conflict

Today there are struggles between several different parts of the value chain. The labels are trying to stop customers from downloading free music from the Internet. This conflict is mostly between the sound carriers producers and the customers. Even the compositors of music, i.e. the artists are fighting against free downloading of their material. One example of this is Metallica who sued Napster for encouraging illegal use of their music. Napster responded by preventing the users who had downloaded Metallica songs from using the service. 1 We believe that these struggles will become more intense in the future.

Another aspect not covered in the value chain are the new competitors that have entered the market. One example of this is the Internet suppliers and the electronic industry. The electronic industry has been on the market for quite some time but first now they have become indirect competitors to the music industry by providing empty CDs, CD burners and MP3 players. These products are not illegal but are often used by consumers to get hold off, distribute and listen to illegally downloaded material. It is likely that conflict will arise between these actors and the traditional labels. In fact, as examined below this is already happening.

2. Strategies

Defining the business

A very important step in forming a strategy is defining the business. The reason behind the difficulties faced by the labels can be analysed by using the structure - conduct - performance paradigm. According to this model, performance by companies should measure up to certain criteria.

A company should provide products that are qualitatively and quantitatively what the consumer wants. Today the big music companies do not qualify on this matter. New technology makes it possible to individualize a CD. This is something that the consumer desires and that the big labels today do not offer.

A company should take advantage of progress in technology and science to provide a "superior new product" to the consumer. The big labels have instead been trying to decelerate the pace of technology progress in relevant areas.

Another area were the labels have not adjusted to changes is income equity. The labels and some artists earn large amounts of money.

In short, the music companies have not adapted to changes in demand and technology and thereby have not met the consumer demands. Instead other actors in the market have taken illegal or legal routes to do this.

Changes in basic conditions are mostly due to new technology; this has changed the market structure by increasing the size of sellers (and thus increasing their power) and has also introduced substitute products in the form of individualized, often homemade CDs. These changes are very negative to the big labels and therefore they have tried to alter the situation.

Below follows recommended strategies for some different actors in the value chain.

Compositors

The compositors now have the opportunity to skip the traditional Label part in the value chain. Smaller artists that have a big number of listeners spread on a large geographic area can use new services on the internet like mp3.com to deliver their music to the customer. For example Lagoona, a band from Porjus (a small town in the north parts of Sweden), published their first songs on the Internet in March 1997.2 The songs became very popular and today they have had over 3 million song downloads on the net.
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Their strategies are to release the most of their material for free on the net with help of services like mp3.com. They also release their full albums through that services but for a small cost for the customers that choose the download them ($3.99 for an electronically based netCD).

For a band of that size and with their type of non-commercial music this is a healthy strategy. No big label would contract them because of the cost involved with marketing them in a great number of countries and the fact that people that listens to that type ...

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