When was the last time you bought a CD? Have you actually ever bought a physical album from an artist? The music industry is a perfect example where technological innovations disrupted the market and led to new business models.
The traditional business model of the music industry is very simple. If people have heard a nice song, they could go to a nearby shop to buy the CD. This model includes mass production and distribution of the physical information goods. Sunk costs will arise because of mass production (or economy of scale).
Renegade business model
The music industry changed when internet became popular in the living room of families. It was possible to download illegal from p2p platforms. Because of the digitalization and the internet, information goods were still costly to produce, but extremely cheap to reproduce. Due to the availability of almost every song on the internet, music became commoditized, pushing the prices to zero for companies that sold the music legally.
New business model
Because artists and record labels didn’t earn money with the renegade business model a new business model had to be invented. The new business model includes legitimate online digital music services. This business model became a success in 2003, when Itunes was launched with a new pricing strategy, where consumers could just buy one song for 99 cents. A few years ago, music streaming services developped into a more popular way of consuming music with a different pricing and business model.
Spotify and Deezer
To make the technological innovation in the music industry as selling information goods online we have chosen two examples to make it more clear. Consumers don’t have to purchase physical CD’s where they can pay a monthly fee and stream all the music wherever and whenever they want. However, Spotify and Deezer they haven’t been able to make a profit out of it yet.
Both Spotify and Deezer offer two account options for users; the free-user account and the paid-user account. For the last one both streaming providers has a fixed monthly fee of €9,99.For the free-user account you only have to regristrate and you can already listen to music. The disadvantage of the free-user account is the advertising you have between the songs.
To gather revenue the companies have two different models for the two different options. For the free user account they have to gather revenue through advertising. With the paid-user account they generate money through the monthly fee of the users.
Future
We expect that less and less compact discs will be sold by unit. Streaming services will compete and prices will fall, since it’s hard to differentiate as music streaming company selling comoditized information goods. Artists and record labels will focus more and more on live performances, because in that way they can differentiate by delivering a more intens experience.
Selling music as an information good, is going to be hard.
Bibliography
Spotify for Artists. (2016). Spotify Explained. [online] Available at: https://www.spotifyartists.com/spotify-explained/#how-is-spotify-contributing-to-the-music-business [Accessed 22 Sep. 2016].
Tong, M. (2015). PwC Forecasts Music Industry Through 2019. [online] Music Asia. Available at: http://www.music-asia.com/2015/07/pwc-forecasts-music-industry-through-2019/ [Accessed 22 Sep. 2016].
Vaccaro, V. and Cohn, D. (2004). The Evolution of Business Models and Marketing Strategies in the Music Industry. International Journal on Media Management, 6(1-2), pp.46-58.
Written by group 46: Anne Merel Tolsma, Lotte van Lier, Puck van de Ven and Leon Graveland
