As a consequence of continuous innovation, the dynamics of the music industry have significantly changed between the 20th and 21th century. In 1963, the advent of the cassette, made music an information good – since it derives its value from the information it contains.
Using the framework of Porter’s five forces, the threat of new entrants and substitute products have significantly increased due to the rise of the internet. The industry has become less capital intensive and other media opportunities can claim the attention of music customers. Also, bargaining power of consumers and rivalry among competitors is nowadays very high. Customers have a highly varied demand and can choose from which supplier they want their music, while many competitors are competing for the same market share. Lastly, bargaining power of suppliers has gone from very powerful to relatively low power as a result of internet distribution. This changed the music market, from customers buying an album from a store or borrowing from a friend, to sharing your music through the worldwide web and particularly peer-to-peer file sharing.
However, there are multiple problems the music industry is facing. Specifically, it is challenging to protect music online. The online file sharing of copyrighted material has led to many problems with copyright infringement, costing creative content creators up to billions of dollars every year. Alternatives, respecting intellectual property rights of music and video, have developed rapidly in the recent years. Customers pay a fixed amount each month, giving them unlimited access to a complete music library. Still however, using a popular soundtrack in a video outside this environment, could already land you in trouble if posted on Youtube. If for example you attend the wedding of a friend and make a video of the event with Robbie Williams playing in the background, you theoretically lose the rights of this video, and any profits resulting from it. For your wedding video this won’t be a big problem, but when you rely on your Youtube videos to provide your income, it can be very difficult.
The characteristics of information goods have profound implications for competition strategies. For the music industry, these implications mostly affect the channels or media formats through which music is sold. We foresee three major channels of music sales in the future: The first are concerts, which follow a differentiation strategy. The second are streaming applications, which we expect to almost completely wipe out regular CD or even online MP3 sales. Their ability to compete on cost and convenience allows them to outcompete piracy. We also expect a few dominant players to arise, since the music streaming market benefits from network effects: A greater library of music attracts customers. Lastly, a niche market will continue to exist for high-quality conceptual albums that offer something beyond the ability to simply listen to the music. Think of the intangible pleasure of owning a vinyl, or adding merchandise or other exclusive content as part of the bundle.
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