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The New Value of Digital Music:Is Ownership Still Important to the Record Industry? Joseph S. Szczepaniak 09039728 Masters in Music Industry Management London Metropolitan University September 2011 0 The New Value of Digital Music:Is Ownership Still Important to the Record Industry? Joseph S. Szczepaniak 09039728 Masters in Music Industry Management London Metropolitan University September 2011 1 Table of Contents Abstract ..................................................................................................... 2 I. Introduction............................................................................................. 2 Today's Record Industry......................................................................... 3 Issues of Digital Music............................................................................ 4 II. Product Review...................................................................................... 5 The Growing Intangibility of Online Music............................................. 5 Consumers Perceived Risk..................................................................... 7 The Streaming Product: Complete Access............................................ 8 Case Study: Spotify................................................................................. 9 The Cloud: Netflix Case Study ............................................................... 10 The Value of Streaming......................................................................... 11 III. Qualities of Ownership....................................................................... 12 Ownership Tangibility............................................................................ 12 Ownership Value.................................................................................... 13 IV. Finding Demand................................................................................. 15 Conceptual Framework of Research.................................................... 15 Research Methodology.......................................................................... 15 Reducing Bias........................................................................................ 16 Choice of Method................................................................................... 17 Characteristics of Samples................................................................... 17 V. Results from Primary Research......................................................... 18 Respondent Behavior............................................................................ 19 Specific Channel Behaviors.................................................................. 19 The "Watch" Habit................................................................................. 21 Respondents Behaviors to Downloading............................................. 22 Behaviors and Trends of Specific Age Groups................................... 22 Heavy Downloader Trends.................................................................... 24 Preferences of the Respondents.......................................................... 25 The Cloud Model.................................................................................... 26 Respondents Attitudes.......................................................................... 27 Consumer Attitudes Toward Piracy...................................................... 27 Attitudes of the Underage Sample........................................................ 30 Attitudes Towards Downloading and Ownership................................ 31 Willingness to Pay................................................................................. 32 Donating to An Artist............................................................................. 35 Willingness to Pay for Streaming & Hybrid Models ............................. 36 VI. Application of Findings..................................................................... 37 Developing the New Supply Chain....................................................... 37 Multiple Channel Hierarchy- The HOME............................................... 39 The HOME Structure.............................................................................. 39 Pricing.................................................................................................... 40 Barriers to Entry Through Litigation.................................................... 41 VII. Conclusion......................................................................................... 42 Limitations & Further Research............................................................ 43 Acknowledgements............................................................................... 43 VIII. Bibliography..................................................................................... 44 Further reading...................................................................................... 46 Appendix................................................................................................ 48 2 Abstract:Inthechangingworldofdigitalmusic,thisstudylooksintothemultiple channelsofmusicconsumptiontofindwhetherownershipofdigitalmusicisstill valued by consumers.It investigates whether the demand of the consumer is being metwithinthelicensedsupplychainandhowconsumersdeterminevalueinthe digitalmusicmarket.Willownershipstillbevaluedwiththeintroductionofnew technologythatismoredependentontheserviceofstreaming?Isowningstilla suitablemeansofgeneratingrevenueandhowcantheindustryaddvaluetoa product with such high levels of intangibility & piracy?This study develops findings fromprimaryandsecondaryresearchtoconcludehowownershipfitsinthenew digitalecosystem,andlooksathowtodevelopnewstrategiesthatmeetthe consumer's demands of digital music. I. Introduction The impact of digitization and the Internet represents a profound change in the way musicisvaluedbytherecordingindustryanditsconsumers(Styven,2007).Throughoutitsbriefhistory,therecordingindustryhasadjustedtonewoutletsof media.Technologyhascontinuouslyreinventedthemediumthatcreatesmusical recordings,andthisnewgenerationoftechnologyhasproven,likeprevious technologicalinnovations,tobedisruptive(McDonough,2010).Fromone standpoint, there are many opportunities for the industry to grow and nurture a dawn of new products that are more compatible, more engaging, and more advanced than wehaveeverhadwithaudiorecording.However,thesesameopportunitiesalso giverisetotheproblemsandissuestheindustrymustfaceinordertopersevere (Nielsen,DigitalMusicConsumptionandDigitalMusicAccess,2011).These disruptive changes have altered the way business has been done for over 50 years, andthisnewtechnologywillbringanewindustrythatwillhavetoadheretothe growing demand of the consumer.These advancements in technology are shifting the power of control and freedom from the creators and owners of recordings to its consumers. Thus, it has changed the way business is run in the recording industry.Whiletheseadvancementsareseentodisrupttheindustry'snorms,changeis rarely ever entirely disruptive (Young, 2008).The consumer is now the driving force inthedigitalmusicrevolution.Byembracingdigitalmedia,byusingnewdevices and by changing the way they provide entertainment, record companies will need to reinvent themselves in order to keep up with the pace of the consumer (IFPI, 2011). 3 AccordingtoNielsen'sMDEMreportin2011,lessthan60%ofthedigitalmusic marketisusinganyonetypeofconsumption.Thisfragmentedmarketisdivided intomultiple,competingchannelsthatarecannibalizingeachotherandnot effectivelyfulfillingdemand.TheNielsenreport,whichstudiedover26thousand onlinerespondentsontheirmusicconsumptionhabitsonline,illustratedhowthis hyperfragmentationposesasignificantchallengeforidentifyingwheredemand actuallyexistswithinthemarket.Findingdemandisessentialforbestcapitalizing upon thebroadopportunitiespresentedby the newecosystem.Ifdoneproperlyit can effectively combat piracy and the illegal sharing of music (Nielsen, Fragmented Market,2011).Thereportfindstheusagehabitsofthethreemainchannelsof musicconsumption;(i)downloading,(ii)streaming,and(iii)videoservices,and helps determine what is most used and valued by consumers (2011). ThisstudyfollowsupontheNielsenreporttofindthereasoningbehindthe consumer's behaviors, and to better understand their attitudes towards the industry and piracy.By analyzing the consumer's preferences, behaviors, and attitudes, this studylooksatnewideasforproductmarketinganddistribution,andattemptsto developahierarchalsystemthatmeetstheconsumer'sdemandswhilealso providingartistsandcontentownerswithrewardingrevenuestopropelthemusic business into the next generation of the music industry. Today's Record Industry Numberssentoutbytheindustry'sassociationandinstitutesshowableak,dire timefortherecordingbusiness.Onlinesaleshavegrowninthelastdecade,but overall revenue is steadily declining, and the entire industry has felt the contraction caused by consumer's negative attitudes towards spending money on digital music (IFPI,DigitalMusicReport,2011).Forthemusicconsumer,thisisoneofthe greatesttimesofmusicalconsumptionsincetheinventionofthephonograph.Music recordings can now be found, accessed, and obtained in a matter of seconds, andpracticallyeverysongeverrecordedcannowbefoundonline,withlittletono cost(IFPI,2011).AccordingtotheInternationalFederationofthePhonograph Industry(IFPI),thereareover400+licensedservicesonlinethatproviderecorded music to fans in one way or another.Furthermore, there are countless unlicensed sites that undermine all of these services (IFPI, Digital Music Report, 2011). Music companies today license a range of services, not only in ownership of tracks andalbumsthroughdownloads,butalsoinuniversalaccesstoentiremusic libraries, such as streaming services, music videos, and cloud models. The range of 4 channelsandmethodstoconsumemusi