Challenges of Digitalization for the Music Industry

Seminar Paper , 2013 , 20 Pages , Grade: 1,3

Business economics - Offline Marketing and Online Marketing

This seminar paper analyses how the digitalization has changed the general set-up of the music industry. By analyzing studies and data, the paper illustrates several challenges that influenced record sales. Considering the different type of players in the music industry - record labels, online and physical retailers, and artists - this paper will only discuss the challenges and effects of the digitalization on the major record labels. The challenges of digitalization for artists will not be covered in this paper; digital music actually enhances the chance of being discovered and for reaching a larger audience (Ankeny 2012). In this sense, the digitalization is an opportunity, rather than a challenge for artists. This also applies for online retailers such as iTunes and Amazon. Since digital music does not require physical storage, online retailers can offer music at almost zero costs. Thus, online retailers benefit from the digitalization of music. Physical retailers presumably lose revenue because of the digitalization of music. However, their situation will not be discussed further, in this paper. The major record labels are highly vertically integrated (Neff and Blömer 2003, p. 104). Besides managing artists, the recording companies are also in charge of the publishing and copyrights of music. Additionally, they have enormous production resources and strong distribution networks. This gives the major record labels a significant competitive advantage. However, this advantage was partly ruined by the digitalization. In this paper, digitalization of the music industry is limited to the impact of MP3s on the industry. The introduction of the CD as the first phase of digitalization is not further discussed. Chapter two deals with the challenge of piracy for the record companies. In chapter three, the increased competition as a challenge will be described. The change of the product music is discussed in chapter four. Chapter five presents the changing con-sumer behavior, as the final challenge for the major record labels. Every chapter is concluded by presenting the reactions of the record labels to the respective chal-lenges. The paper is rounded off by a conclusion, in which the main points are sum-marized and a discussion of future strategies for the record labels.

Table of Contents

1 Introduction

2 Piracy
2.1 The Effect on Record Sales
2.2 Reactions to Piracy

3 Increased competition
3.1 Lower Barrier to Entry
3.2 Independent Labels Gain Importance
3.3 Annulling the Record Labels
3.4 Reactions to Increased Competition

4 Change of the Product Music
4.1 With the MP3 Came the Cherry-Picking
4.2 Lower Prices and Willingness to Pay for Digital Music
4.3 Reactions to Change of the Product Music

5 Change in Consumer Behavior
5.1 Profile of Music Consumers
5.2 More Digital less Physical
5.3 Reactions to Change in Consumer Behavior

6 Conclusion

7 Future Strategies
7.1 Piracy
7.2 Increased Competition
7.3 Change of Product Music
7.4 Change in Consumer Behavior

Index of tables

Table 1: Challenges of the digitalization for the music industry

Index of abbreviations

illustration not visible in this excerpt

Company, product, and brand names mentioned in this thesis may be brand names or registered trademarks of their respective owners. The use of these brand names and / or trademarks in this thesis does not justify the assumption that rights of third parties do not apply. All mentioned brand names and trademarks are subject without restrictions to country-specific protective provisions and the property rights of their registered owners.

1 Introduction

The term, 'digitalization' involves the process of converting information, such as texts, images, video, and audio, into a digital format that can be stored in, accessed, and transmitted through electronic devices. The new possibilities, that the digitalization brought with it, has changed how music is produced, distributed, and consumed. In this way, the digitalization has transformed the music industry. This transformation has caused severe challenges for the established record labels^[1]. For years, the overall record sales declined. In Germany, for example, overall record sales dropped from 1.8 billion in 2003 to 1.4 billion in 2012 (BVMI 2012a). Lately, digital sales are picking up. In 2012, 294 million revenue came from digital sales, whereas in 2008 only 144 million. However, record labels need to share the 'digital revenue' with new companies entering the music market: iTunes, Amazon, Musicload, and Spotify just to name a few. Blaming piracy as the only reason for the recent drop in sales would present this issue incompletely. The digitalization revealed the consumers' latent demand for purchasing single songs, rather than whole CDs. Whether the record labels were not able or not willing to adapt to the digitalization is disputable. However, several challenges emerged.

This seminar paper analyses how the digitalization has changed the general set-up of the music industry. By analyzing studies and data, the paper illustrates several challenges that influenced record sales. Considering the different type of players in the music industry - record labels, online and physical retailers, and artists - this paper will only discuss the challenges and effects of the digitalization on the major record labels. The challenges of digitalization for artists will not be covered in this paper; digital music actually enhances the chance of being discovered and for reaching a larger audience (Ankeny 2012). In this sense, the digitalization is an opportunity, rather than a challenge for artists. This also applies for online retailers such as iTunes and Amazon. Since digital music does not require physical storage, online retailers can offer music at almost zero costs. Thus, online retailers benefit from the digitalization of music. Physical retailers presumably lose revenue because of the digitalization of music. However, their situation will not be discussed further, in this paper. The major record labels are highly vertically integrated (Neff and Blömer 2003, p. 104). Besides managing artists, the recording companies are also in charge of the publishing and copyrights of music. Additionally, they have enormous production resources and strong distribution networks. This gives the major record labels a significant competitive advantage. However, this advantage was partly ruined by the digitalization. In this paper, digitalization of the music industry is limited to the impact of MP3s on the industry. The introduction of the CD as the first phase of digitalization is not further discussed. The following table illustrates the challenges, the affected players, and how these players are affected.

Table 1: Challenges of the digitalization for the music industry

illustration not visible in this excerpt

Source: Own illustration.

Chapter two deals with the challenge of piracy for the record companies. In chapter three, the increased competition as a challenge will be described. The change of the product music is discussed in chapter four. Chapter five presents the changing consumer behavior, as the final challenge for the major record labels. Every chapter is concluded by presenting the reactions of the record labels to the respective challenges. The paper is rounded off by a conclusion, in which the main points are summarized and a discussion of future strategies for the record labels.

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^[1] In this paper, the words: record companies, recording companies, major labels, majors, record labels, music labels, labels will be uses as a synonym for the major record labels (Universal Music Group, Sony Music Entertainment, Warner Music Group and EMI respectively).

• College: University of Münster
• Course: Digital Media Marketing Seminar
• Grade: 1,3
• Author: Moritz Müller (Author)
• Publication Year: 2013
• Pages: 20
• Catalog Number: V231543
• ISBN (eBook): 9783656477396
• ISBN (Book): 9783656483403
• Language: English
• Tags: Music Industry, Digitalization, Digitization, Challenges, Digital Media, Marketing, Record Labels, Music Labels, Piracy, Change in music consumption, music, social media