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Wanted:A Survival Plan for the Music Industry -

Napster and the Consequences

Andreas BeckerManaging Consultant, “Media, Publishing & Entertainment”

Management & IT Consultancy Diebold, Germany

O’Reilly p2p ConferenceSan Francisco

15th February 2001

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About DieboldDiebold fingerprint.

Establishment of the Diebold Group: 1954

340 employees

Revenues

1999: 96 Million DM2000: 110 Million DM

Offices in GermanyFrankfurt-Eschborn (Headquarters), Berlin, Munich, Stuttgart, Saarbrücken

Offices worldwideAmsterdam, Budapest, Zurich, Vienna, Madrid, Singapore

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About the Business Unit “Media, Publishing & Entertainment”The following industries are at the center of the Business Unit “Media, Publishing & Entertainment“.

MPE

PublishingPublishing

• Publishers: newspapers, periodicals, books• Corporate Publishers• News agencies• Publishing suppliers

MediaMedia

• Film producers• Broadcasters• Internet (media) start-ups• Media suppliers

EntertainmentEntertainment

• Portals• Games producers• Music labels• Entertainment suppliers

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As an introduction...

"The great cultural war has broken out at last. Long awaited by some and a nasty surprise to others, the conflict between the industrial age and the virtual age is now being fought in earnest, thanks to that modestly conceived but paradigm-shifting thing called Napster.”

John Perry Barlow, Musician & Journalist, October 2000

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1.1. The current Internet strategies of the “Big Five”

2.2. The p2p pioneers

3.3. The Internet challenge for the music industry

4.4. Refocusing strategy and business models

6.6. Does a p2p business model for the media industry exist?

5.5. Examples of new business models

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1.1. The current Internet strategies of the “Big Five”

7

0

5

10

15

20

25

30

35

40

45

50

1995 1996 1997 1998 1999

Sales(billion $)

USA

J

F

D

GB

Rest of World

$ 38.5$ 38.5$ 38.6$ 38.6$ 38.6$ 38.6$ 40.0$ 40.0$ 41.5$ 41.5 $ 38.5$ 38.5 TotalMarket size(billion $)

71%71% 74%74%69%69% 69%69% 72%72% 74%74%Share of thefive largest na-tions (total %)

Source: Phonographische Wirtschaft,Year book 2000

1. The current Internet strategies of the “Big Five” (1)The world music market has been fairly constant for the last five years. Five countries account for about 75% of all revenues. The “Big Five” control about 70% of the total market.

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1. The current Internet strategies of the “Big Five” (2)By the end of 2000, all five major labels want to be represented on the Internet with download offerings.

Businessmodel

Sale of online music through dealers

Sale of online music through dealers

Sale of online music

Sale of online music through dealers

Sale of online music / subscription

Sale of downloadssince

# 511/2000

# 207/2000

# 105/2000

# 308/2000

# 410 / 2000

Offering Start with 100 songs; expand to 1,000 singles / albums

200 singles / 100 albums

175 songs60 songs Start with 100 songs; expand to 300 songs

Price pertitle

no information no information $ 2.49no information 0.29 DM (1x)2.99 – 4.99 (unrestricted)

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1. The current Internet strategies of the “Big Five” (3)

“An industry that goes to war with its customers is not an industry that will ultimately prevail.”

David Boies, Napster Chief Legal Counsel, October 2000

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2.2. The p2p pioneers

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2. The p2p pioneers (1)An overview of some key dates for the most important online competitors.

A

The Freenet Project

BusinessModel

Platform with free and chargeable offerings

None apparent and not intended

None apparent and not intended

Trying for subscription fees

None apparent and not intended

Online launch

# 111/1997

# 303/2000

# 404/2000

# 208/1999

# 508/2000

Strategy / Principle

•Products and services relating to music in general

•Platform for end cust-omers, artists and retailers

•Remote search on chain letter principle

•Not really open to attack

•Remote P2P file-sharing for all kinds of information

•Not open to attack

•Central server, on which songs are registered

•Remote downloads

•Plugin for the AOL Instant Messenger

•File-sharing among buddies, who decide who has or has not access

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2. The p2p pioneers (2)A recently published survey by Spin magazine shows that, in practice, many Napster users are downloading whole albums. Despite this, many users also claimed that using Napster prompts them to buy new CDs.

Spin.com, 6 September 2000, online survey among 480 Napster users

How many individual songs do you download from Napster onto your computer each week? 28.2

How many complete albums do you download from Napster onto your computer each week? 1.7

How many CDs have you bought because you heard the music on Napster? 7.2

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2. The p2p pioneers (3)Are services such as Napster really stealing profits? So far, it has been impossible to give a clear answer to this question, but it does appear that the formula ‘download song = lost sales’ is erroneous, as the following research suggests.

Yankelovich Partners, March 2000, online survey with just under 17.000 Internet users (Profile: aged between 13 and 39; 10 hours or more per week spent listening to music via

traditional and online media; expenditure on music in the last six months > 25$)

“Has online listening to a song persuaded you to buy the song or album in a shop?”

yes: 59%

no: 41%

“Do you believe that as a result of downloading music you would buy more, the

same amount, or less on CDs in shops?”

more: 31%

the same: 57%

less: 12%

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3.3. The Internet challenge for the music industry

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Create a sense of injustice

Intensify existing marketing activity

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3. The Internet challenges for the music industry (1)In order to charge for online music, the hi-fi industry will need to set itself four challenges. Each will in turn have consequences which need to be taken into account when planning Internet strategies and allocating relevant resources.

Challenge Consequence

Eliminate illegal offerings

Have ready supply of dedicated resources

&2

Obtain online copyright

Negotiations can be difficult and protracted

3

Create a cross-label offering Increased demands on co-ordination and agreement

4

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3. The Internet challenges for the music industry (2)The following theses are used to develop a worst-case-scenario, if the music industry fails to meet the challenges outlined above.

Low income target groups (e.g. teenagers) will not be prepared to pay for downloads charged for by record labels on the Internet.

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2 Even the high income target groups are only prepared to pay for music over the Internet if it is enhanced by significant benefits.

3 The time-to-market of large record labels will, in the medium term, be substantially longer than that of pure Internet enterprises, whose focus is on online activity alone.

4 In terms of music product enhancement through information and services, record labels and artists are clearly left behind by online providers.

5 The number of known artists circumventing record labels in favor of direct selling will significantly increase in the next years.

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4.4. Refocusing strategy and business models

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4. Refocusing strategy and business models (1)The Internet will have a lasting effect on the existing business models in the media industry. The music industry in particular will be affected by this. As a result it will need to rethink its current internet strategies and the SOPs (service offering portfolio) tied up with these.

Traditional media business models Internet business models

TV,radio

Adver-tizing

Media convergence

Content

Adver-tizing

Products

Services

(*) Distribution sharepurely for example

Newspapers, magazines

Adver-tizing

Content

Books,music

Content

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4. Refocusing strategy and business models (2)Successful business models for online music sales will need to be guided by the needs and attitudes of their target groups. With use of the following three criteria, two clearly distinguishable segments begin to emerge.

Money resources specificallyfor music expenditure

low – medium high

Attitudes to illegalcopying or downloads

‘I don’t care’/‘I think it’s good’

‘I’m against it’

Convenienceexpectationlow - medium

high

Qualitative NOT

quantitative representation

Qualitative NOT

quantitative representation

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4. Refocusing strategy and business models (3)The previously derived target groups will need to be targeted with different business models. The consequence will be sharply divergent strategies and SOPs.

Target group’s characteristics

Examples Businessmodel

• Accepts ‘illegal music’

• Low ‘music budget’

• Low service expectation

• Against ‘illegal music’

• High ‘music budget’

• Highly developed service expectation

• ‘Kids’

• Teenagers

• Classes C2, D, E

• ‘Freaks’

• Classics enthusiasts

• Collectors

• Charges for music not enforceable

• Primary refinancing possible with advertising

• Charges for music + service may be enforceable

• Advertising hardly accepted, if at all

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4. Refocusing strategy and business models (4)Will the breakdown be as follows? Provisional working hypothesis: The number of ‘non-payers’ will be substantially larger than the group of users prepared to pay for online music.

• Music for free

• Advertizing as source of revenue

Target group A Target group B

• Music and services for fees

• Advertizing unnecessary

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5.5. Examples of new business models

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5. Examples of new business models (1)Users will be prepared to ‘pay’ for free music with their profiles, which in turn will be bought by commercial enterprises and used as ‘enablers’ in targeted advertising.

Users

AA

BB

CC

Marketing platform

RockRock PopPop JazzJazz

ClassicsClassics IndieIndie FolkFolk

R&BR&B SoulSoul BluesBlues

My

Profile

Money33

BUYIT !

Advertizing44

Profiles Business Partners

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11

11

Music22

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Exponential growth of free song offering

Number offree songs

Questions answered

100

50

20

10 20 50

Modularquestionnaire

My

Profile

What I buy...

What films I go to...

Where I go on holiday...

Which TV programs I watch...

What clothes I wear...

5. Examples of new business models (2)The number of songs to be obtained free is dependent on the number of questions answered by the user.

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Desktop PC

Mobile devices

MP3 player

Notebook

Stereo

Own-label music content

Other-label music content

Other external content

Songs

Albums

Merchandising

Samples

Videos Concert clips

Songs

Albums

Merchandising

Samples

Videos Concert clips

Articles

Books

Merchandising

Peer information

otherDevotional objects

My personal music box

My own music

My collector‘s corner

My bonus points

Freely configurable individ. music archive with various ‘play options‘

Tools for the creation and manipulation of own music

Storage and management of music-related informationand ‘items‘

Bonus account with special exclusive offers

MyMusicAccount

5. Examples of new business models (3)‘My Music Account’ allows users to listen to their music any time and on a number of devices.

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6.6. Does a p2p business model for themedia industry exist?

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6. Does a p2p business model for the media industry exist? (1)In the area of conflict between artists, online players and music listeners on the Internet, the hi-fi industry is in danger of losing its central mediator role and being bypassed in the future.

Artists Online playersMistrust Competition

Non-acceptance

Music listeners

Co-operations

Direct selling Acceptance

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6. Does a p2p business model for the media industry exist? (2)The music industry is the first “victim” of p2p - others will follow.

“It’s not just pop music. Every industry that trades in intellectual property - from publishing to needlework patterns - could get Napsterized.”

Adam Cohen, Journalist, Time, 02.10.2000, p. 66

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6. Does a p2p business model for the media industry exist? (3)But will these models really work? Will users finally be ready to pay for contents or will they happily embrace p2p networks, enabling them to receive access to all kind of copyright-free materials? Will the current Bertelsmann / Napster deal determine tomorrow’s destiny of today’s media giants?

“As soon as Bertelsmann is trying to charge Napster users, we are going to copy the bloody thing - and call it ‘Obstler’ (= German for booze).”

Doc Summer, Computer Hacker, Handelsblatt, 08.02.2001, p. 62

• Will Napster users be willing to pay?

• Is a monthly fee of $15 way too high given the fact that the average German spends $30 a year on music?

• How can a centralized business-model work with a decentralized p2p community?

• Will the other music labels co-operate with Bertelsmann?

• How will musicians profit from the revenue generated?

• Will the music industry fight other online players like they fought Napster?

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IT specialists predict that within 10-years-time - due to progress in compression technologies - all of mankind’s recorded music could fit onto a convenient consumer storage device.

6. Does a p2p business model for the media industry exist? (4)

“This is the end, my only friend,the end” (Jim Morrison)

p2p-networks could playa key role in aggregating the

necessary contents.

JazzRock Classical Alternative

P

PP

P P

P

PP

...available on one consumerstorage device:

All the world’s music

Available atHong Kong’s

Night Markets:

US$ 10

Jazz

Rock

Classical

Alternative

All of mankind’srecorded music...

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Demand-side threat elements- long-term reusability- good, connected non-PC devices available- users want to manage library- collectibility- appeal to Net demographic- users already have free access

Supply-side threat elements- lots of independent artists- solo production easy- content bundled in clumsy packages- Internet-friendly file size

Threat of collapse of control

Music

535555

5555

5

Books

113513

5515

3

Movies

311331

1111

1

Games

531351

1313

1

The consequences of Napster & Co. will have a lasting impact on the other media genres on the Internet. This Forrester Research overview still seems to show cautious optimism about the prospects.

6. Does a p2p business model for the media industry exist? (5)

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“At the heart of the controversy is a clash that goes far beyond the music industry. What we're witnessing is the beginning of an epic struggle between two great economic systems. On one side lies the old market-based economy, made up of sellers and buyers. On the other side lies the new network-based economy, made up of servers and clients. In markets, the parties exchange property. In networks, the parties share access to services and experiences. (...)Today, Napster is an oddity. In the future, it will be the norm.”

Jeremy Rifkin, Los Angeles Times, 21.08.2000

As a closing...

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Recent Diebold PublicationsThis presentation is based on the current Diebold Study “Wanted: A Survival Plan for the Music Industry - Napster and the Consequences”. Watch out for the first world wide p2p-study which will be published by Diebold in May 2001.

2000

Wanted: A SurvivalModel for the Music

Industry - Napster andthe Consequences

The p2p Phenomenon: The Next

Internet Revolution for the TIME Industries

2001

P-t-P

Das Peer-to-Peer-Phänomen:Die nächste

Internet-Revolutionfür die TIME-Industrien

DummyDummy

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Thank you very much for your attention.

Which questions do you have?

Andreas BeckerManaging Consultant, “Media, Publishing & Entertainment”

Management & IT Consultancy Diebold, Germany

O’Reilly p2p ConferenceSan Francisco

15th February 2001

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Andreas Becker

Managing ConsultantBusiness UnitMedia, Publishing & Entertainment

Diebold Deutschland GmbHDessauer Strasse 6D - 80992 MunichGermany

Tel.: +49 (0)89 14326 - 218Cellular: +49 (0)171 7983 414Fax: +49 (0)89 14326 - 196

E-Mail: andreas.becker@diebold.de

Andreas Becker studied Business Management in London (UK) and Reutlingen (Germany), and then worked for two years as financial controller at the leading German educational publishers in Stuttgart (Germany). Since subsequently completing an MBA course in Edinburgh (UK) he has worked as a consultant for publishers and media firms. The emphasis in his consulting activities has been on topics such as eBusiness, Strategy Development, Business Planning, Controlling and Organization.

About Andreas Becker