The Future for Digital Music Distribution · The Future for Digital Music Distribution – A study...

The Future for Digital Music Distribution

A study of existing and emerging legal initiatives

A N N I K A D I D R I C H S E N

Bachelor of Science Thesis Stockholm, Sweden 2009

The Future for Digital Music Distribution

A study of existing and emerging legal initiatives

A N N I K A D I D R I C H S E N

Bachelor’s Thesis in Media Technology (15 ECTS credits) at the Degree Programme in Media Technology Royal Institute of Technology year 2009 Supervisor at CSC was Roger Wallis Examiner was Nils Enlund TRITA-CSC-E 2009:047 ISRN-KTH/CSC/E--09/047--SE ISSN-1653-5715 Royal Institute of Technology School of Computer Science and Communication KTH CSC SE-100 44 Stockholm, Sweden URL: www.csc.kth.se

The Future for Digital Music Distribution – A study of existing and emerging legal initiatives

AbstractThere are many ways to sell digital music online today. Consumers can buy music piece bye piece (a la carte or pay-per download). They can choose services specialised in a certain genres (niche services) or subscribe to more general music services every month. Some might want to consume streamed music or bundle it with their ISP or mobile phone subscription.

A lively global current discussion involves finding a way to license file sharing via an extra fee included in broadband/mobile subscriptions, a kind of ‘legalisation’ of file sharing. The aim of the thesis has been to try to predict how well existing legal music services would cope with an eventual legalisation of file sharing and get a glimpse of how the online music industry is likely to develop in the future.

To achieve this goal, seven music services were analysed and interviews were conducted with researchers and important persons in the Swedish music industry.

The results are ambivalent. They indicate a small likelihood for the idea of a subscription solution to file sharing becoming a reality. The lack of enthusiasm for a flat rate solution may be explained with the music industry’s desire to sell CDs, or that there has not been any good explanation of how it would work practically. It could also be so that the idea is not viable in a foreseeable future, or that further developments in the technology field are a prerequisite for it to become a reality.

But there seems to be a future for all mentioned music services even if an eventual legalisation of file sharing should occur.

Framtidens Digitala Musikdistribution – En studie av existerande och nya lagliga initiativ

SammanfattningDet finns många sätt att sälja musik på internet idag. Konsumenter kan köpa låt för låt (a la carte eller pay-per-download). De kan välja tjänster specialiserade på en viss genre (nischad) eller prenumerera på en mer generell musiktjänst varje månad. Vissa kanske väljer att strömma musiken (streamed) eller att “bundla”, d.v.s. att baka ihop musiktjänsten med bredbands- eller mobiltjänsten.

Det pågår en diskussion runt omkring i världen just nu angående att hitta ett sätt att licensiera fildelning genom en extra avgift inkluderat i bredbandsavtalet, en sorts fildelningsprenumeration. Avsikten med det här examensarbetet var att försöka förutspå hur lagliga musiktjänster skulle klara av en eventuell legalisering av fildelning och få en idé om hur den digitala musikindustrin kommer att se ut i framtiden.

För att nå det här målet så har sju digitala musiktjänster blivit analyserade och intervjuer har gjorts med forskare och betydande personer inom den svenska musik industrin.

Resultaten var ambivalenta. De indikerar att idén med fildelningsprenumerationen inte är särskild trolig. Bristen på entusiasm för en licensiering av fildelning kan förklaras av musikindustrins strävan att sälja CD skivor eller att det inte har givits några bra förklaringar hur det skulle fungera praktiskt. Det kan också vara så att idén inte är genomförbar i den närmsta framtiden eller att vidare teknikutveckling är förutsättning för att den ska kunna förverkligas.

Men även om en legalisering av fildelning skulle inträffa så skulle samtliga nämnda musiktjänster ha stora chanser att överleva i framtiden.

ForewordThis thesis was made at the Royal Institute of Technology in Stockholm as part of the bachelor degree in Media Technology.

First of all, I would like to thank my supervisor Roger Wallis for support, inspiration and most valuable ideas.

I especially want to thank Daniel Johansson for inspiring discussions, great ideas and also for have becoming a good friend.

I would like to thank some persons in the music business for taking their time for my interviews; Magnus Mårtensson, Patrik Wikström, Martin Thörnkvist, Mattias Tengblad, Gareth Carter and Jason Diakité.

Finally, I want to thank my family and wonderful friends for support and for making me believe I can do whatever I want.

Annika DidrichsenNovember 2008, Stockholm

Table of ContentsIntroduction.......................................................................................................................... 1

Background...................................................................................................................... 2

Problem definition ........................................................................................................... 2

Purpose of thesis ............................................................................................................. 3

Delimitations ................................................................................................................... 3

Related Work....................................................................................................................... 5

Methodology........................................................................................................................ 6

Analyses of Music Services................................................................................................. 7

Pay-per-download based services.................................................................................... 7

iTunes Store................................................................................................................. 7

Niche music services........................................................................................................ 8

Beatport........................................................................................................................ 8

Subscription based services.............................................................................................. 9

eMusic.......................................................................................................................... 9

Streamed music services................................................................................................ 10

Spotify........................................................................................................................ 10

Chilirec (beta)............................................................................................................. 11

Bundled music services.................................................................................................. 12

PlayNow Plus (Sony Ericsson & Telenor)................................................................. 12

TDC Play.................................................................................................................... 13

Summarising table from analyses.................................................................................. 14

Findings.............................................................................................................................. 15

Pay-per-download based music services........................................................................ 15

Niche music services...................................................................................................... 15


Music subscription services........................................................................................... 17


Important qualities for legal music services................................................................... 17

Illegal file sharing VS legal music services................................................................... 18

Record companies and right holders responsibility....................................................... 18

DRM............................................................................................................................... 19

CD sale VS digital music sale........................................................................................ 20

Legalisation of file sharing ............................................................................................ 20

Best preconditions.......................................................................................................... 21

Discussion & Conclusions................................................................................................. 23

Pay-per-download based music services........................................................................ 23

Niche music services...................................................................................................... 23


Music subscription services........................................................................................... 24


Important qualities for legal music services................................................................... 25

Illegal file sharing VS legal music services................................................................... 26

Record companies and right holders responsibility....................................................... 26

DRM............................................................................................................................... 26

CD sale VS digital music sale........................................................................................ 27

Legalisation of file sharing............................................................................................. 27

Best preconditions.......................................................................................................... 28

Future Research.................................................................................................................. 30

List of References.............................................................................................................. 31

Books.............................................................................................................................. 31

Papers............................................................................................................................. 31

Websites......................................................................................................................... 31

Interviews....................................................................................................................... 32

Verbal sources................................................................................................................ 32

Appendix A: Screenshots................................................................................................... 33

Appendix B: Questionnaire................................................................................................ 37

Introduction

Introduction“Music itself is still miraculous. It is just that the science of recording isn’t that

remote, mysterious and awe-inspiring as it once was. Thanks to technology, the magic finally escaped the can.”

– Mark Coleman, journalist

“All hardware should have a reader that reads whether something is copyrighted or not, and if so, it should prevent from being duplicated or downloaded.”

– Louis J. Pearlman, Chairman & President, Trans Continental Companies

“I don’t know what people that don’t have an iPod business are doing because there’s not a lot of money to be made running an online store.”

– Steve Jobs, Chief executive, Apple

“The major labels were asleep at the switch. They are asleep no longer.” – Richard Parsons, president, AOL Time Warner, Inc.

“Why mourn the record business when we will have much bigger fish to fry in the music business?”

– David Kusek & Gerd Leonhard

“I think the CD system will be around for another 20 years. There is no reason for it to go away. Certainly not because of the internet – which will never represent mass

tonnage market for albums. It will only be good for singles or free music.” – Russ Solomon, Tower Records, 2001

“More than ever, artists recognize that online distribution is a powerful tool that can help them separate themselves from the clutter.”

– Alan McGladePresident & CEO, MusicNet

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Introduction

BackgroundFile sharing has been a contentious subject in many types of media businesses, not least the music business. Plenty of theses and books have been written about the topic of file sharing’s ‘to be or not to be’. At the moment of writing, Swedish legislators are working on a new and stricter law against file sharing via the implementation of the EU IPRED1 directive. To be for or against file sharing is not an interesting question anymore. It exists and will probably always do so. This report is not about file sharing even if this is a related subject since the main focus is on the illegal file sharing’s challenger – the legal digital music services.

Recent studies indicate a decrease in illegal file sharing during 2008. The underlying reason is said by some observers to be the strong growing range of legal initiatives in the digital music business (DN, 14-10-2008).

There is a big debate going on in the world about a variety of flat-fee solutions for file sharing. That, in short terms means that the users would pay a fee through their ISPs2 (or possibly mobile phone companies) and file sharing would thus become in effect legal.

Swedish STIM3 has produced a proposal for a subscription solution to file sharing. The idea is still ‘under construction’ and there seem to be many questions still needing answers. But this report will consider an eventual legalisation of file sharing while discussing the future of legal music services.

DRM is an abbreviation for Digital Rights Management and will be mentioned repeatedly in this report. DRM is a term for access control technologies and can be used to limit the usage of a media file. DRM has mainly three types of functions; encryption, watermarking and copy protection. Encryption may prevent un-authorized use or reproduction of a file. Watermarks can be used for identifying the file or get information about the purchaser and the copy protection does exactly what it says. The right holders decide what kind of DRM to put on the file or if to put any at all. Strong DRM may control how many times a file can be copied and on what platform it can be used and weak DRM might only identify the file. The main purpose of building in strong DRM control in files is to protect them against illegitimate usage but it can unfortunately be experienced as troublesome for users who do not have illegal intentions. DRM systems can also be used to monitor usage, thereby provide data for the distribution of revenue flows to copyright owners.

Problem definition There are plenty of methods of selling music online running in the world right now. On the surface they might seem similar but when digging deeper, they all have

1 Intellectual Property Rights Enforcement Directive2 Internet Service Provider3 Sveriges Tonsättares Internationella Musikbyrå (Swedish Performing Rights Society)

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Introduction

something unique that can distinguish them from all the rest. Some have a niche range of music, others provide streaming. We have pay-per-track basis, subscriptions or totally free music that comes when you buy a phone for example. Some put DRM protection on their music and some do not. The question is which methods and services have the potential to succeed in the future? The answer should also include the possibility of a legalisation of file sharing via a flat-fee solution for file sharing.

Purpose of thesis The first intention behind this report is to get an overview over the most important business models for selling digital music in the world today. Seven different online music services have been chosen and the selection was based on unique factors, which mean that no one of the services chosen uses exactly the same business model or technical solution. Some are similar but they have all something unique that makes them interesting for the purpose of this report. The intention is also to find out how well they will cope with an eventual legalisation of file sharing.

The other main purpose of the thesis is to get a glimpse of what the digital music business might look like tomorrow and what the music business thinks of a flat-fee solution for file sharing.

Delimitations This report focuses on five different methods and business models of selling music online. The methods are: Pay-per download, niche, subscriptions, streaming, and bundled services, or combinations of the different alternatives. The degree of advertising finance can vary in the different models. Every method has been exemplified with one or more services. One method does not necessarily exclude another method. The same service can use several methods. Beatport for instance, is included in this report under the category of niche services but it is a pay-per-download based service as well.

Pay-per-download based services

• iTunes Store represents the pay-per-download based music services. It is the biggest online music service in the world; they represent 70 percent of worldwide online digital music sales. The songs are DRM protected (although there is a version without DRM).

Niche services

• Beatport is specialised in the electronic music genre. It provides different types of formats such as MP3, MP4 and WAV. It has a pay-per-download based business model and the music is free from DRM.

Subscription based services

• eMusic is a free standing music subscription service. It supplies different subscription programs that allow the user to download a specific amount of

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Introduction

songs every month for a fixed price. The songs are free from DRM and come in MP3 format.

Streamed music services

• Spotify is a quite new type of music service. The music is streamed and the songs are not available for downloading. At the moment Spotify provides three types of versions; one free with commercial, one “day pass” and one without ads but with a monthly payment.

• Chilirec is also a streaming music service but the songs are recorded from radio stations and saved the in the users personal account. The songs can be downloaded to the users computer in MP3-format. The service is at the moment free and its legitimacy can be discussed.

Bundled music services

• PlayNow Plus (SonyEricsson & Telenor) represents a music service bundled into a device. In this case Sony Ericsson mobile phones. The service comes with a Sony Ericsson mobile phone and for six months and the user can download an unlimited number of songs for a monthly fee. (It is free the first six months.) The music is DRM protected and the service is only available in Sweden.

• TDC Play: The first telecom in the world to offer consumers unlimited music downloads bundled with private broadband or mobile subscriptions. The ability to play any downloaded tracks will expire automatically if the customer terminates their subscription.

The different variables studied for each service:• Who owns the service? • Pricing model• Protection of material – DRM protection?• Price• Range of music material• Quality – which formats?• Interface (user friendliness)• Business concept (business model) – is there another reason behind the

service except only selling music?• Experience – for how long has the company been in the business?• Software – does the service require extra software?

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Related Work

Related WorkIn this chapter, a selection of the literature behind the report is presented. All literature quoted can be found in the list of references.

The Long Tail (2007) by Chris Anderson discusses what will happen when everything becomes available for everyone. The Long Tail has become a concept for many new businesses, not to mention the music business. Online shopping makes it possible for products that do not sell in big editions to be a part of the supply. The total sale of those products might even level up to the ‘big hit’ sale. This change in the music business has taken some power from major labels and the ‘hit makers’.

‘Music like water’ has become a heavily discussed phenomenon. In The future of Music (2005), David Kusek and Gerd Leonhard write about how to define music. Is music a product or a service? They make the controversial comparison with water and predict a future when music becomes as ubiquitous as tap water. In other words, they suggest a flat-fee based solution for file sharing, which they are not alone to be thinking of. Many organizations are evolving ideas for how to make it happen.

Playback (2005) by Mark Coleman is a kind of music history book. It goes back about 100 years in time and explains how some inventions could succeed and why some did not make it. Understanding the future is a lot about understanding the past, so also in the music business. Many stories repeat, especially how the industry reacts on new inventions. New initiatives have almost always been met with rejection from the music business but the most of the time they become part of the whole industry and do even increase the profits.

In the doctoral thesis Exploring the Online Music Market (2007), Maria Styvén declares the results from the study of Swedish consumer’s perception of online music. It involves opinions about which functions a music service should have, what an acceptable price for a song is, what they think of DRM etc. One of the conclusions was that an important task for online music services is to increase the perceived value of downloaded music.

There are literatures that have not been referred to in the text but which have played an important role in getting informed about related areas. (Gordon, S. 2005) describes how to succeed with new digital technologies in The Future of the Music Business (2005). Reluctantly Virtual (Wikström, P. 2006) has given a good knowledge about how the music business relates to new technology. Also (Edström-Frejman, A. 2008), (Edström-Frejman, A. & Johansson, D. 2008) and (Selg, H. 2008) are papers which have been part of the literature study.

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Methodology

MethodologyThe methodology chapter describes how the research process was performed and how results were derived.

There are basically three ways to perform a research; qualitative, quantitative and mixed method approaches. Which method to use depends on the subject area and the purpose of the research. Qualitative research aims to gather an in-depth understanding while a quantitative approach is about numerical data and statistic analysis. Mixed method is a mix of both qualitative and quantitative research (Creswell, J.W. 2003). This study has a qualitative approach since it is based on opinions and views from a selected number of persons.

The report is divided into two main parts; the first one analyses seven existing and emerging music services, and the second one is built on interviews and discusses the future of the online music business in general but with an affiliation to the mentioned music services.

The sources in the first part were mainly from the Internet in the form of articles or FAQs4 from the services own pages. Since the music business is constantly in a state of flux, the answers in questions of numbers and values are not exact because of the risk that they have already become obsolete. The analysis aims to clarify the different existing methods of selling music online today. The report is more focused on the methods rather than the specific services. The services are only supposed to exemplify the methods.

The second part is based on interviews. The persons selected for the interviews represent different interests in the music business. The interviews were mostly accomplished via telephone but also through mail. The questions were written in English but the telephone interviews were spoken in Swedish. All conversations were recorded and the quotes in the report have been translated from Swedish to English.

After the interviews an iterative phase has been conducted involving analysing the services once again via a comparison with the results from the interviews.

4 Frequently Asked Questions

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Analyses of Music Services

Analyses of Music ServicesThis chapter describes seven, existing and emerging methods of selling music online. The chosen services just set examples for each business model this report is valuating. Screenshots of the services music stores and software can be found in Appendix A.

Pay-per-download based servicesiTunes StoreAboutThe iTunes Store opened its doors for online music sales in April 2003 and soon became the biggest online music service in the world. In June 2008 the company declared that the number of sold songs had passed five billion, which represent 70 percent of worldwide online digital music sales (iTunes, 2008).

It is important to separate iTunes and iTunes Store. iTunes is a free software, a kind of media player, developed by Apple but compatible with PCs as well. iTunes Store is an online music store, also from Apple. Apple is a multinational corporation supplying consumer electronics and software products and it is the company behind Macintosh computers, iPods and iPhones.

iTunes Store uses the pay-per-download model to distribute music. The music is DRM protected which in this case means that the user can copy a CD with music purchased from the iTunes Store utmost seven times. The files are only compatible with computers using iTunes or an iPod or iPhone. There is a restriction of accessing the songs to five computers, which could lead to considerable problems in the none-to-distant future when consumers have changed their computers more than five times, thus risking the eradication of their music collection.

However, there is an option to buy DRM-free music from the iTunes Store. It is called iTunes Plus and the prices are about 30 percent higher than the regular prices.

InterfaceiTunes has become a guiding star for how to compose the interface on a music site. Several of the services mentioned in this paper have layouts that are obviously inspired by iTunes. Just like Apple is famous for their clean design in computers and MP3 players, iTunes has a stylistically pure GUI5 (Figure 1, Appendix A). The page is very easy to navigate and it encourage the users to check out new music and the recommendation service suggests music built on data of what the user normally listens to and the user can pre-listen to a song for 30 seconds. It is not possible to browse further while a song is playing.

Business concept

5 Graphical User Interface

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iTunes is the most successful online music service in the world. It has probably a lot to do with that it was one of the first online stores to offer music from the four biggest record companies (Universal Music Group, Sony BMG Music Enter-tainment, EMI Group and Warner Music Group). Another big reason to the success is the great compatibility with the iPod, the most popular MP3 player in the world.

Many competitors have hard to keep up with iTunes low prices. In fact, Apple does not make much profit through the music sales though most of the money goes to labels and artists. But the sale of digital music files results in an increase of sold iPods, which is the business concept behind iTunes.

Niche music servicesBeatportAboutAs an example of a niche music service, we have Beatport, which also has a pay-per-download based concept. They are specialised in the electronic music genre and all their music is DRM free.

In January 2004, Beatport took its first swing in the online music business. With 79 record labels on board it soon became a recognized download service for electronic music. Collaborations with world top DJs and technology companies in the business lead to what Beatport is today; the global leader in Independent dance music with more than 8500 independent labels signed to them (Beatport, 2008).

All the music is DRM-free.

InterfaceThe Beatport site is designed with Adobe Flash and HTML (Figure 2, Appendix A). The browse function is placed top left, encouraging the user to browse for artists, tracks, labels etc. In the top middle, the player situated where the user can pre-listen every track for two minutes while navigating on the page. The most popular downloads are listed at the right and on the left side the user can find information about Beatport, music news, industry news, music reviews, podcasts, videos, DJ profiles, event listings, nightclubs etc. The middle part is dedicated to advertising of new releases.

As mentioned earlier, Beatport is specialised in electronic dance music thereof the particular genres available on the site. Pop and rock’n roll are not welcomed on this page however it has a huge range of material in genres like house, trance, dubstep, techno and minimal.

Business conceptIt is obviously not the quantity of music material that is the leading factor behind Beatport’s success. Of the seven chosen services, Beatport has the smallest number of available downloads and when that seems to be one of the biggest bragabouts in the business, Beatport focuses on the quality in the music itself but also in the

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formats. In the description of themselves, words like ‘premium-encoded formats’, ‘professional performance quality standards’ and ‘hi-speed’ can be read.

Subscription based serviceseMusicAbouteMusic is an online service that offers their customers monthly subscriptions (see subscription plans below). The service was released in January 1998, at that moment called GoodNoise, and is situated in New York City and San Diego, US. The owner behind the service is Dimensional Associates, LLC (eMusic, 2008).

eMusic was actually the first company in the world to launch a music subscription service in MP3 format and it focused on independent labels. The specialization in underground music and unknown artists was probably due to the resistance from the four biggest record labels. They did not approve to offer their music DRM free and for such a low price. The lack of DRM protection is probably an important motive to the sites popularity. eMusic has about four million songs and 27.000 independent labels in their library. It is the largest retailer of independent music in the world.

Subscription planseMusic Basic30 Downloads/ month€ 13.99 per month

eMusic Plus50 Downloads/ month€ 16.99 per month

eMusic Premium75 Downloads/ month€ 20.99 per month

InterfaceThe GUI is unfortunately quite messy (Figure 3, Appendix A). It is hard to know which are singles and which are albums since they use album covers for both. Every song can be pre-listened for 30 seconds but there is no player what so ever that shows which song is playing at the moment. The service suggests similar artist to what the user search for.

A software has to be downloaded to use eMusic. The point in that is a little unclear since the user can choose to put the downloaded music files directly in iTunes.

Business concepteMusic likes to point out that they allow the consumers to own the music. That the music is DRM-free is probably a very important factor behind the success.

As mentioned before, eMusic focuses in music from independent labels, and commercial mainstream music like Britney Spears etc. cannot be found. eMusic seems to function like a place where to find and explore new music rather than where to go when you know what you want.

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Streamed music servicesSpotifyAboutSpotify was released the 7th of October 2008, i.e. more or less at the time of writing of this report. The special thing about Spotify is that there are no files involved in the service. It is all about streamed music and as long as you have an internet access you can listen to your music wherever you are.

At the moment the service supply three different types of offers; one called ‘free’ that is financed by advertising in form of banners and audio commercial between the songs. Then there is the ‘Day pass’ that is commercial free and limits the usage for 24 hours. The third one is called ‘Premium’ and is a monthly subscription of the service and it is totally free from ads. The free and ad financed version is not yet launched for the public.

The service includes a small program, just like iTunes, which can be downloaded to the computer as soon as the user gets an account.

Spotify has license deals with the ‘big four’6 as well as with Merlin, Bonnier Amigo and The Orchard. The service is now launched in UK, Germany, France, Italy, Spain, Finland, Norway and Sweden (Spotify, 2008).

InterfaceThe layout behind the Spotify software seems well planned. It could be describe as ‘clean’ and very easy to overview (Figure 4, Appendix A). It differs from other services in both colours and shape, but it also has similarities with iTunes, which make it easy to understand and navigate in the program. Some observers have claimed that it has the “feel” of a typical file sharing programme.

In the left field, a navigation bar is placed. The user can see what has been searched for, its playlists and the album or single cover of the song that is played. The player is placed in the bottom and the whole big area in the middle is dedicated to the search result or the content of a playlist. It shows information about the artist, time, popularity and album and everything is clickable! Click on the name of the artist and a biography and all the albums show up.

It is also possible to compose your own radio channel based on genre, year and artist. The recommendation feature is based on what kind of music the user often listens to.

Business conceptSpotify is the first music streaming service in its kind and no one knows the worth in the service yet but only a week after launching, Spotify had more than 300.000 registrants. Their goal is to be the best music service in the business and to have

6 Universal Music Group, Sony BMG Music Entertainment, EMI Group and Warner Music Group.

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about 20 million of users in two or three years (DN, 31-10-2008).There are not yet any numbers of the range of music, but since so many record

companies are signed to them, they probably have the potential to grow as big as iTunes, if not bigger.

Rumours tell that a version for mobile phones is planned but no one knows when.

Chilirec (beta)AboutChilirec is a Swedish music service and a recording device intended for recording from radio stations. If it is legal or not can be discussed but for the present, law has not yet put any stick in the wheel for Chilirec. The company behind the service, Minborg Invent has requested patent on the technology (Chilirec, 2008).

Every user has to register to get an account. When that is done, the service starts to record songs from selected radio stations. At the moment Chilirec has about 160 available stations to record from. The recorded songs are stored on the users private account but there is no information about how much space every account has.

When a song is recorded it can also be downloaded to the users hard drive as an MP3 file with no sort of DRM. Unfortunately, like when you pressed ‘rec’ on your music player to record a song from radio on tape, some talk or jingles often come along.

InterfaceThe GUI of the Chilirec site could be described as quite Spartan (Figure 5, Appendix A). White, grey and dull shades of pink and blue make the colour scale on the site. It reminds a lot about iTunes (the software).

In the left area, the user navigates and orders the recorded material in either radio stations or artist. There is also a top-list of the most popular songs in different categories. The user can also create its own playlists. In the middle section, the chosen list appears and on the right, the player is situated. In the top middle section, a browse function is placed. The user can search in its private library for artist, title, genre or all of them.

Business conceptChilirec still exists as a beta version and there are a lot of questions about the business model that cannot be answered.

Carina Dreifeldt, CEO, says that at the moment she cannot give any answers about how the service is going to be financed. Neither can she say something about how many users the Chilirec has. But she informs that the alpha version is probably going to be launched the winter 2008/2009 (Dreifeldt, C. 2008).

If to speculate about the business concept, it is most likely that Chilirec is going to be ad financed.

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Bundled music servicesPlayNow Plus (Sony Ericsson & Telenor)AboutThere are two extremely similar bundled music services on the market right now; Sony Ericsson’s PlayNow Plus and Nokia’s Comes With Music. The first-mentioned one is the one to be analysed in this report hence it is available in Sweden. Comes With Music is for the time being only offered in the U.K.PlayNow Plus is an example of a music service bundled into a device. In this case a mobile phone. Sony Ericsson is a world leading mobile phone company and they have chosen to invest in a music service. PlayNow Plus is a collaboration with Telenor and was launched in Sweden the 14th of November 2008. The music is from PlayNow Arena, Sony Ericsson’s own music store that was released in the northern countries the 25th of August 2008.

As an introduction, the service is sold together with a Sony Ericsson W902 Walkman and the phone is preloaded with 1000 tracks. During the first six months, the user has access to download an unlimited number of songs at the for free and after that the cost is 99 SEK per month. Once the service terms, the user can keep 100 of the most played songs (Newsdesk, 2008), (Brusewitz, G. 2008).

InterfaceSony Ericsson’s own music store is called PlayNow Arena and the first thing that comes across the visitor at www.playnow-arena.com is a flash animation with a globe and clickable tracks spinning around it (Figure 6a, Appendix A). At a first glance it might look cool and innovative but when looking closer it has visible defects in form of album covers in poor resolutions and barely readable texts. It is not obvious where to click to listen to a song and the button that leads the user to the main page is placed down in the left corner. When clicking on that button, a typical ‘music page look’ shows up (Figure 6b, Appendix A). Top lists on the side fields, browsing function at the top and new music and games in the big, middle field.

With the smart function TrackID the user can find out the name of a song played in a disco or a store for example. It is also possible to pre-listen music for half a minute but unfortunately it is not possible to browse forward while listening.

It is possible to purchase music through VISA and sms.

Business conceptSony Ericsson is first and foremost a mobile phone company and just like Apple, the intention behind the service is to sell electronic devices. PlayNow Arena is very comparable with the iTunes Store. The music in both cases has some form of DRM protection and there are big companies behind the services. PlayNow Plus offers free access to music the first year, which on the surface may seem very generous. But the music is strictly tied to Sony Ericsson mobile phones and cannot be used in any other MP3 player.

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The intention with PlayNow Plus and the other bundled flat rate solutions is to stop the movement of customers. By taking away all the downloaded music when the service ends, makes the user think twice before changing mobile phone operator or ISP.

TDC PlayAboutThe first of April 2008, TDC, a Danish telecom, launched a new type of online music service called TDC Play. The service is bundled into broadband or mobile subscriptions, at no extra cost. An unlimited number of songs can be downloaded from their music store, TDC Music.

The songs are DRM protected which in this case means that the ability to play any downloaded tracks will expire automatically if the customer terminates their subscription. But there is a new element in the service that is called Play 10, which offers the user ten songs without any DRM protections. These ten songs can be burned to a CD or converted to MP3 files.

Play has more than 30 music companies contracted to them. The only big one who is missing out is Universal. TDC Play also offers a pay-per-download service (TDC, 2008), (Jensen, I.K. 2008).

InterfaceTDC Music, the platform where the TDC Play customers get their music from, looks also a lot like the iTunes Store. The colour is actually the only thing that really differs (Figure 7, Appendix A).

Just like its look-alike, TDC Play is very easy to navigate and makes it easy to discover new music through recommendation functions. The user can listen to every song for 30 seconds. A new window or tab opens and the user can continue to browse.

TDC Play is not compatible with Macintosh computers.

Business conceptThe idea behind this type of service is not to make money on music sales. The music service becomes a feature that will appeal broadband or mobile phone customers to choose a specific ISP.

The DRM protection was probably a demand from the record companies but the choice of removing all songs if the user decides to end its subscription is almost certainly a smart trick to keep the customers and has nothing to do with legal issues.

13


Summarising table from analysesTable 1: Results from analyses

Owner Apple Beatport, LLC Dimensional Associates, LLC

Spotify AB Minborg Invent Sony Ericsson & Telenor AB

TDC

Pricing model

Pay-per track. Pay-per track. Subscriptions. Streaming sub-scriptions.Free with ads.

Unknown. Probably ad financed.

Bundled into purchased Sony Ericsson & Telenormobile phone

Bundled into ISP

Price About €0,99/download

€1.49, €1.99 and €2.49 per track (Exclusive taxes). (€1.00 extra for WAV)

eMusic Basic:30 Downloads per month€13.99

“Free” is free, “Day pass” costs about €1 and “Premium” is worth about €10 a month.

Free Example: 24 months subscription, Sony Ericsson W902, 6 months free PlayNow Plus: 299 SEK /month.

Free with ISP subscription

DRM? Yes. No for iTunes Plus.

No. No. No No Yes. Yes - for the TDC Play serviceNo - for the 10 songs in the Play 10 offer

Range of choice

More than 8 million songs

185,000 tracks (2007)

About 4 million tracks

Unknown About 160 radio stations. Unlimited number of songs.

About 5 million songs

About 2 million songs

Format AAC (128 kbit/s). For iTunes Plus: AAC (256 kbit/s)

MP3 (320 kbit/s), MP4 (192 kbit/s) and Wav (44.1 kHz)

MP3 Ogg vorbis(streamed)

Streamed music and MP3

AAC+ (48 kbit/s) for mobiles and MP3 (320 kbit/s) for computers.

AAC/AAC+ (48 kbit/s) for mobile phones and WMA (192 kbit/s) for computers

Year started

2003 (2005 in Sweden)

2004 1998 2008 2008 2008 2008

Geo-graphical spread

Almost the whole world.

The whole world Almost the whole world.

Sweden, UK, Germany, France, Italy, Spain, Finland och Norway

Available in the whole world

Sweden Denmark

Software required?

Yes No Yes Yes No Yes. No

14

Findings

FindingsThe results from the interviews are compounded in this chapter. The questionnaire can be found in Appendix B.

Interviews have been made via e-mail and telephone. The persons interviewed are:• Magnus Mårtensson – lawyer at IFPI (International Federation of the

Phonographic Industry) in Sweden.• Patrik Wikström – media business scholar at Jönköping International

Business School. Writer of the thesis Reluctantly Virtual.• Martin J. Thörnkvist – creator of the Swedish record company Songs I Wish

I Had Written and one of the founders of The Swedish Model, an organisations consisting of 7 Swedish independent record labels.

• Daniel Johansson – Researcher and CEO, TrendMaze.• Mattias Tengblad – New Business Director, Universal Music, Sweden.• Gareth Carter – Partner Manager Music, Sony Ericsson Mobile

Communications AB.• Jason Diakité (Timbuktu) – Swedish rapper artist and founder of the indie

label Juju Records.

Pay-per-download based music servicesThe pay-per-download or ‘a la carte’ distribution model does have a future in the music business if to believe responses. It will probably not be the dominating method of selling music online but there will definitely be an urge for services that sells music piece by piece in the future.

An important reason to why these services most likely will continue in the music business seems to be that this is the way a lot of people know how to buy music online. “One should never underestimate the power of habit,” says Daniel Johansson. “Lots of people will use iTunes for many years although new and better service might be released, the human being is rather lazy”.

Gareth Carter believes that iTunes success reflects how the people at the moment want to buy music. They want the possibility to buy one or two tracks, not the whole album.

Niche music servicesThe views on the future for the niche music services differ quite heavily. But everyone believes there is a request for meeting points like forums or communities that specializes in certain genres. The main opinion in the interviews is that all services in the future will have almost all music ever recorded in their libraries.

15

Findings

Magnus Mårtensson (IFPI) is one of them who believe in the niche music services selling a limited range of genres. He is convinced that just like when the CD sale was strong there was space for the niche record stores along with the mega stores.

Gareth Carter (Sony Ericsson) thinks niche services are extremely important. “One thing emerging music services have to be aware of is that not to treat all music consumers the same”. He also says that it is impossible to satisfy every music taste with the small size of a web page. That is why there is a need for different niche services.

Mattias Tengblad (UMG music) does not really see a future for services specialised in one or a few genres. Instead he believes the existing services will develop niche features within the main service. He mentions the long tail effect, when selling less of more, is going to be more substantially in the future.

Streamed music servicesOn mentioning streamed music, all the respondents tend to talk about Spotify. Everyone interviewed has something, mostly positive, to say about Spotify. If it is the method of streaming, or Spotify itself that impresses people is hard to say but it seems like this is the kind of legal music service that the music business really believes in. Some also consider it could take market shares from the illegal file sharing. One thing that several persons mentioned was the capability of knowing exactly how many times a song has been played and that royalties can be shared fairly to labels and artists.

The only negative thing said about Spotify was that it is not yet compatible with mobile phones. It is not possible to use the service on a jogging run for example. But it was also mentioned that the service is rather new and is ‘under construction’.

“The streaming services are more attractive to the record companies than download services since there is no risk for copying the music.”

– Magnus Mårtensson, IFPI

However Chilirec, which also provides streamed music, did not get as sweet words as Spotify. The complaints were directed at the service itself rather than the streaming function and the legal aspects were mentioned in every interview. It is clear that Chilirec not is one of the most popular initiatives on the market. No one of the interviewed had something really good to say about the service. This quote by Patrik Wikström (researchers, JBS) summarises the views on Chilirec: “I can not really see the advantage with a service like Chilirec. Why would anyone choose that service when there are so much better options?”

The result from the interviews indicates that the most important advantages with streamed music are that the user, from every computer, always has access to its playlists and that there are no files involved.

16

Findings

Music subscription servicesSelling music through subscriptions may be one of the dominating methods of music distribution in the future. The results point towards a subscription based music business but not necessarily pure subscription models. Daniel Johansson (researcher) believes in a strong consolidation on the digital music market and that the large players are going to offer different types of services like pay-per-download, streamed music, subscriptions etc.

“I believe subscriptions in different forms are the future for digital music”, says Magnus Mårtensson (IFPI).

Bundled music servicesThis type of music service does also seem to have a bright future in the digital music business according to the results. Bundled music is a way for ISPs and mobile manufactures to add value to their products. Patrik Wikström claims that music bundled in ISPs or mobile devices eliminates the feeling of paying for music and that is an important factor for the users. It was also mentioned as one of the business models that could really compete with illegal file sharing.

Magnus Mårtensson is very optimistic about bundled music services and thinks these types of collaborations between mobile companies and labels will increase in the future.

“Both ISPs and mobile manufacturers have great interest in selling there core products, internet connections or mobile phones, and by ‘giving away’ the music bundled with their products they can probably position themselves as more interesting for customers”, says Daniel Johansson.

Important qualities for legal music servicesEveryone interviewed agreed on that the music range is an extremely important factor for a future music service. But they were also convinced that in a couple of years, all music services will have all the music ever recorded in their data base. So if that is true, it will not be possible to compete with a wide repertoire since everyone will have everything.

Other mentioned qualities a future music service should provide are: good interface, easy UI7, recommendation features, low threshold (free for the consumer in the basic design, paid for by advertisers), added value (biographies, lyrics, merchandise and editorial texts) and platform independent (compatible with the mobile, computer, car stereo etc.). A feeling that it does not cost has also been mentioned as an important factor.

Gareth Carter (Sony Ericsson) mentions trust, reliability and customer service as important qualities. He repeats the importance of not treating all consumers the

7 User Interface

17

Findings

same and there are two types of customers which the services have to deal with: the ones that come, buy and leave and the ones which want to browse around, check out recommendations and so on. The services should fit both types of customers.

In addition to a wide repertoire, good format quality is an important factor according to the artist Timbuktu, Jason Diakité. “Services should definitely offer formats like FLAC8, WAV and MP3 with a high bit rate.”

Illegal file sharing VS legal music servicesThe formulated question was: Research indicates that file sharers continue to download files illegally even though the same material is available for free on legal sites. Why do you think that is?

The answers shifted but ‘habits’ was one of the common denominators. People tend to do what they always have done and there is a tardiness of changing the users habits. One frequent mentioned reason was that the record industry has been more focused on defeating illegal file sharing than developing legal alternatives.

Jason Diakité released his single and music video ‘Tack för kaffet’ at the Pirate Bay, a Swedish Bit Torrent tracker. He claims that the record industry lives in the past and forces the consumers to pay money for an extinct format. But that was not the only reason he chose the Pirate Bay. “It is quite logical really. The Pirate Bay is one of the biggest media channels in the world. If I have made something I am proud of, I want to show it to as many as possible” says Jason Diakité. He also comments the music industries attempts to fight file sharing: “It is like inventing the wheel but forbidding people to use it. It is not the way the development works.”

Record companies and right holders responsibility

That record companies and other right holders have a great responsibility for the often somewhat slow growth of legal music services seems to be without any doubt. The record companies have to change the way of thinking about music. “Change the thinking of music being products and see that it is in fact not copies they are selling, they are selling access”, says Daniel Johansson.

“The record labels have to start to think of the Sony Ericsson customers as their own customers.”

– Gareth Carter, Sony Ericsson

Magnus Mårtensson (IFPI) explains the record companies tardiness in licensing new services with copyright issues. “The old contracts were not compatible with the new music business”, says Mårtensson. “The most important thing the record companies can do is to be more effective in licensing new initiatives.”

8 Free Lossless Audio Codec

18

Findings

Patrik Wikström believes there is a conscious reluctance towards digital music services: “The record companies still make almost all their income on CD sales and if they would do their utmost to facilitate for online services, the CD sale would probably decrease.” But Wikström is optimistic about the future and does already see big changes in the record companies way of thinking.

Mattias Tengblad at Universal Music Group acknowledges that record companies have been a little slow in letting the digital music become a part in the music industry but justifies it with that they are big and traditional organizations, which take a lot of time to reorganize. He believes that a close collaboration between record companies and licensees is one of the decisive factors for the growth of digital music services.

“Start corresponding to the factors of a digital era. The values of the analog era do not work in a digital world.”

– Martin J. Thörnkvist, The Swedish Model

Jason Diakité twists the question to what the services can do for the labels. ”The services should become to release the music much faster. Today it takes about six weeks to launch an album on one of the biggest online services and that is too long.”

What other right holders, like STIM (the Swedish Performing Rights Society), could do to facilitate the growth of legal music services is first and foremost to speedily develop licenses for new initiatives in the music business. Daniel Johansson thinks it is important that organisations in Europe work together instead of trying to position themselves for economic reasons.

Wikström gives credit to STIM for their initiative in investigating a flat-fee based solution for file sharing. But he is not that sure the idea is very functional.

DRM“The optimal DRM is only going to react when there is something obviously illegal going on. It should not be experienced as something troublesome for the user”, says Magnus Mårtensson. He believes we are going to see more of DRM in the future but they are going to be better and more user-friendly.

Daniel Johansson and Patrik Wikström agree on that opinion while Martin J. Thörnkvist (the Swedish Model) is totally against DRM in any form. He believes it harms consumer acceptance and trust in legal music services. Gareth Carter does also believe we are going to see less of DRM. “It is very little doubt that DRM has caused problems for the consumers. It is not very friendly to honest music buyers”, says Carter.

Mattias Tengblad is convinced that the DRM for downloads is going to disappear while the DRM for subscriptions is going to be stronger and more robust.

19

Findings

CD sale VS digital music saleThe asked question was: When do you believe the digital music sales will overtake the physical music sales? (Approx.)Daniel Johansson (researcher): “In the world: 2010-11. In Sweden: 2012-13.”Magnus Mårtensson (IFPI): “They are talking about in ten years but I believe it is going to take longer than that.”Martin J. Thörnkvist (The Swedish Model): “Mid 2010, when the fourth generation mobile network (LTE9) is released commercially.”Patrik Wikström (researcher): “I guess that the Swedish digital music sales will overtake the CD sales in turnovers in about five years. In the world it will probably happen sooner.”Mattias Tengblad (UMG): “In three to five years. Sweden will probably do it before the rest of the world.”Gareth Carter (Sony Ericsson): “In three years. Sweden will take the lead because of the new mobile subscription services.”Jason Diakité (artist): “In about five years. In the U.S. and the rest of the world it will happen sooner.”

Legalisation of file sharing The idea of legalise file sharing via some form of bundled fee in broadband subscriptions did not generate much applause from the interviewees.

“I do not believe in a legalisation of file sharing. It is easy to forget that file sharing is not only about music. It would affect so many other businesses and I do not se it realistic”, says Patrik Wikström. “There are so many problems with this idea and very few good solutions.”

Martin J. Thörnkvist is of the same opinion. “I think it would be a bad mistake. To me that is like saying that what we have today is the best we can get. I’m afraid that broadband subscription models or taxes may decrease the will of smart people to develop smart music services.”

Magnus Mårtensson believes the idea of a legalisation of file sharing would pull away the carpet for the legal music services. It may also be a huge problem with companies making money on copyrighted material. Also Mattias Tengblad rejects the idea. “The idea is history before it will be presented. It will become irrelevant when new type of services will launch.”

Neither does Gareth Carter see it very likely to make file sharing legal. “The copyright law has to change fundamentally if the idea is going to work. If nothing else would work it might have a chance.”

Daniel Johansson sees a little longer into the future and is not that pessimistic about the idea. “In the end I think bundled streaming services, file sharing, “a la carte” downloads, mp3 blog portals like Seeqpod, mobile free services etc. will merge

9 Long Term Evolution

20

Findings

into the same music delivery ecosystem. In the end I believe that there will be no ‘illegal’ distribution since every file ever published in any way automatically becomes a part of the legal system.”

Jason Diakité is really the only one optimistic about the idea of taxing the ISPs data traffic and maybe in the future also taxing MP3 players etc.

Best preconditionsSince the majority of the ones interviewed did not believe in a ’flat rate’ solution it became a little inappropriate to ask which ones of the mentioned services they think had the best preconditions to survive an eventual legalisation of file sharing. But the question was asked and the result was that almost everyone thought all of the services had good chances.

“I think all of the mentioned services have potential to survive in the case of a legalisation of file sharing.”

– Patrik Wikstöm

But the ones who interpreted the question to only choose one of the services picked Spotify as the service with the best preconditions to survive a legalisation of file sharing. That was mainly because it provides streaming instead of music files. But it has also a lot to do with the service itself. Spotify has been giving a lot of praise during the interviews.

In the interviews, several characters were mentioned as important qualities for a music service to have to succeed in the future:

1. A wide repertoire2. Good interface3. Recommendation features4. Low threshold (free for the consumer in the basic design, paid for by

advertisers)5. Added value (biographies, lyrics, merchandise and editorial texts)6. Platform independent (compatible with the mobile, different computers, car

stereo etc.)7. A feeling that it does not cost 8. Good format quality available

The table below valuates these characters for every service. Notice that the estimations were made on personal opinions.

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Findings

Table 2: Valuation of services

1 2 3 4 5 6 7 8

+ + + – – + – +

– + + – + + – +

+ – + – ok + ok ok

ok + + + + – + +

+ + – + – ok + –

+ ok + ok – ok + ok

+ + + ok – ok + ok

(–) = not so good, (ok)=ok, (+)= good

If to count every (+) as one point and every (ok) as half a point, the result is:1. Spotify (6,5 points)2. TDC Play (5,5 points)3. iTunes, Beatport & PlayNow Plus (5 points)4. eMusic & Chilirec (4,5 points)

Note that this result does not necessarily help one conclude which services are the best ones as regards current and future potential. It is only built on the most mentioned qualities a service should have to succeed in the future.

22

Discussion & Conclusions

Discussion & ConclusionsPay-per-download based music servicesPay-per-download services accounted for 86 percent of online music sales globally in 2005 (Styvén, M. 2007, p. 6) and there will probably always be a market for downloads. It might not be such a dominant way of selling music in the future but there will definitely be an urge for services that sells music piece by piece. What can be discussed is if it will be possible for a music service to survive on only selling downloads. Almost all pay-per-download services have another purpose of their business than selling music.

[…] the iTunes music store has shown strong potential, but it remains to be seen if Apple can indeed ever make money from the “content” itself, rather than using the music to drive the sell of hardware (Kusek, D. & Leonhard, G. 2005, p.91).

However Beatport, which in this report stands under niche music services, is a pay-per-download based service as well and do only make income on sold music. Their strength is on the other hand their specialisation in electronic music genre.

Niche music servicesIn the Long Tail, Chris Anderson writes about the market for niche products and niche music (Anderson, C. 2007). The music distribution on internet makes it possible for even the smallest niche to get a chance to sell. That was not possible in the era of the record stores where every CD case took up space on the shelf. But if every music service in the future will have all music ever recorded, why would there be any market for a country music service for example? Imagine a jazz music lover who only listens to jazz and nothing else. Will he ever get what he wants from a big music service that promotes the latest Beyonce or Britney song? Will the recommendation feature work for him? He would probably rather use a service focused on his niche, which provides him with the latest releases of Ella Fitzgerald or Louis Armstrong, lets him discuss it in a forum and get recommendations from the service itself but also from other jazz lovers.

There is certainly a market for niche music services specialising in smaller genres, but it does not say they have to be stand-alone businesses; they can also be part of a broader online service. Just like Gareth Carter (Sony Ericsson) says, it is important to not treat all consumers the same.

While the majors want to sell music like MacDonald’s sells hamburgers, we’d rather be a small chain of gourmet restaurant

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with a line going around the blocks, says a founder of an indie label. (Kusek, D. & Leonhard, G. 2005, p.112).

Streamed music servicesStreamed music is what the music business believes in. It solves a lot of problem with copyrights and it makes it easy to control exactly which song have been played. And the record labels seem to love control. The experience of not owning the music is taking new dimensions and is being perceived as an advantage compared to downloading every single song. Maybe a hard drive filled with terabytes of music is not the way to make use of music in the future? Spotify is the actor which appears to be making streamed music substantially more attractive. When everyone else focused how to decrease illegal file sharing with options similar to just file sharing, Spotify did a whole U-turn. Spotify will certainly grow and hopefully develop more features. It also needs to provide compatibility with mobile phones.

What is remarkable when comparing the Spotify GUI with regular music stores e.g. PlayNow Arena and iTunes Store, is the absence of the feeling that the service is ‘pushing’ the user into a purchase. The service does not make any profit of making the user listen to a special song. They just want to be a great service.

But not all streaming services, according to the respondents have the necessary qualities to succeed. The comments about Chilirec in the interviews have been quite harsh. Not only because of some uncertain legal aspects – should they really have an extra licence akin to the transmission right granted to cable companies - but also because of what is claimed to be the poor quality of the service.

If it is legal or not is a question for the legal system to answer but it is sure that no money will ever go to right holders or artists. The service itself has no great advantages since the quality of the music is rather low.

Music subscription servicesThe advantages with subscriptions is that it takes away a little of the feeling that there is a cost every time one listens, which was one of the mentioned qualities a music service ought to have. The difference between subscription and bundled services is very subtle in many senses. The bundled services can be seen as subscriptions as they often are included in other forms of subscriptions e.g. ISPs or mobile phone subscriptions. The results suggest a subscription-based future in the music business but it is unclear in exactly which form. One possibility, which Daniel Johansson among others mentioned, is options to subscribe, pay-per-download or stream in the same service. It is very likely that people want to have it all in the same place, despite of which way they want to consume music.

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Bundled music servicesThe two bundled services analysed in this report (PlayNow Plus and TDC Play) are both very similar. The idea with the services is to make the primary service more attractive to the costumers. The music in the three services does all include some sort of DRM.

The result indicates there are going to be more types of bundled services in the future. One of the persons interviewed joked about bundling music services in washing machines! That might not be the case but the trend with bundled services in ISPs and mobile phone subscriptions will most likely continue.

Important qualities for legal music servicesDuring the interviews, added value like extra features were brought up as important qualities for a music service. But according to Maria Styvén, extra features like communities, recommendation features and different play-list functions were the least desired benefit for music services. The users in the study preferred qualities such as a broad selection, flexibility in use and different payment methods (Styvén, M. 2007, p. 206). A lot of young people do not have access to credit cards and some do not like to use their cards on the internet. Styvén’s study also affirms that the price is a very important factor.

Trust, has been mentioned several times as a significant request. The users do not want to feel that they get tricked in any way.

Brendan Gregoriy, a DJ in Barcelona comments Beatport’s way of pricing the tracks:“It is the same numerical amount in dollars as in euros. So a track that costs $ 2.49 in America costs € 2.49 on the European site, which is blatantly robbing money.”

“No matter which way consumers prefer to get their music – they will want to purchase it from the brands they know and trust.”

– Alan McGlade, President and CEO, MusicNet

(Reid, A. et al. 2004, p.37)

These types of ‘dirty tricks’ might have disastrous consequences for the reliability of the service. Hidden DRM is also a way to make costumers dissatisfied. DRM is not always necessarily bad but not be honest and clear about it is just making the service unworthy of trust. A purchased song that proves not to be compatible with the car stereo will definitely make the customer never think of coming back. Mark Coleman (2005, p.217) says this about the importance of compatibility:

Without basic compatibility between formats, confusion reigns and consumers grow hesitant about the new technology. Then the

25


whole business suffers, and development grinds to a halt.

Illegal file sharing VS legal music servicesWhy people chose to use illegal networks to consume music when the same music is free and available on legal sites, has probably a lot to do with habits. Habits are an extremely important factor when it comes to moving users from an illegal to legal music consumption. It is very hard to change people’s habits and the music business should have acted much sooner in developing legal options. But it is easy become wise when looking ‘in the rear mirror’. As essential strategy for the music industry now would seem to be to focus on the future and collaborate with existing and emerging music services. Kent Wennman (2008) state this about what the music business should focus on:

I dare to say that worrying about piracy will steal attention from what they really need to focus on, which is to develop new business models. (Wennman, K & Boysen, P. 2008, p.184)

Record companies and right holders responsibility

The fundamental difference between the record business today and the record business twenty years ago is that they do not control distribution in the same way anymore. They still own the wholesale distribution organisation for CDs but the CD business is slow and certainly diminishing. It is not about record companies ‘helping’ online music services; they will very soon be completely dependent on them as distribution channels.

DRM restrictions on music from online music services usually result from demands from the record companies. The services themselves do not have any interest in putting any protection on their music.

Mark Coleman (2005, p.182) says this about the record labels intents to prevent the music to be used illegally:

Right or wrong, record companies can be seen as self-defeating zealots who treat consumers – that is, potential customers – as criminals. This isn’t very likely to stimulate CD sales.

DRMDRM is a complicated issue. The users normally do not like protected music while the music companies see it as a necessary precaution to avoid illegal exploitation of their music. It might be necessary to put DRM on music that is bundled but the record companies should really consider dismantling DRM even there. There is a big

26


risk that it does more harm than use.

“Unfortunately, to date there has been no DRM that does not also infringe on fair use doctrines […]. Music consumers […] will undoubtedly reject any limitations on the actual use of their music” (Kusek, D. & Leonhard, G. 2005, p.149).

CD sale VS digital music saleDigital music sales represent only ten percent of the total income in the music industry in Sweden. In the global market the equivalent figure is estimated to be fifteen percent. In the last couple of years, the digital sales showed a constant dramatic increase, but last year (2007) the upturn suddenly stopped without any apparent reasons (GP, 2008). That result does not really match with the results from recent studies that indicate a decrease in illegal file sharing during 2008. The underlying reason for the decrease is said to be the strong growing range of legal initiatives in the digital music business (DN, 14-10-2008).

It is hard to make any conclusions out of that but all the respondents in this study were quite optimistic on when the digital music sale will overtake the physical sale, the average guess was in 4.7 years.

Legalisation of file sharingThere is undoubtedly a certain risk that the question posed in the interviews could be misinterpreted, depending on the background knowledge of the persons interviewed. The idea is not fully developed and there are probably more questions than answers about how it would work practically. It should also be kept in mind that the phrase: ‘legalisation of file sharing’ does not have a good sound in many people’s ears and that it takes a lot of attention away from the idea itself. The question should maybe have been formulated differently.

Since it was people from the Swedish music business that were interviewed, it is most likely they referred the question to the initiative from the Swedish Copyright Society, STIM. It might be so that STIM has not explained its proposal in an understandable way, or that record companies (whose rights are not represented by STIM) had other ideas.

The lack of enthusiasm amongst those interviewed in this report for flat rate solutions such as the STIM initiative could be related to the complexion of the sample. The majority work or have worked for record companies where a natural desire is to control when and how consumers have access to particular recordings, according to current marketing plans and investments. STIM represents composers and music publishers whose general desire, presumably is for as much music as possible to be performed as often as possible and thereby generate revenues for individual rights holders.

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David Kusek and Gerd Leonhard write about ‘Music like water’ (Kusek, D. & Leonhard, G. 2005), that music will be thought of the same way we think about tap water; the expense has become a fact of life. Just like we pay the bill for water and electricity, we will pay our monthly music bill without complaining. Tap water symbolises the ‘flat-fee solution music’ and bottle water like Evian or Pellegrino represent ‘premium music’ or music you would consider paying a little extra for. They say that if 50 percent of the world’s internet users would pay two dollar per month, the industry would collect 6 billion dollar every year which constitute 20 percent of the current revenues from CD sales. The idea of thinking of music like water is terrifying for a lot of people in the music business, especially the record companies. Some even say it is disrespectful toward the musicians. Maybe the term ‘music like water’ is not the best way how to describe the idea of a flat-fee solution of file sharing, instead why not use the term: Music like cable TV? The president and COO of Napster (2003-2004), Michael J. Bebel says this about a flat rate:

I see music ending up with a model similar to cable TV, where specific programming of events, such as streaming live content, could be added on top of that basic fee, much as you have basic cable access with pay-per-view and video-on-demand models on top of that. (Reid, A. et al. 2004, p.114)

Kusek and Leonhard also mention what Daniel Johansson said; that files in the future might be identified by ‘fingerprints’ and provide a payment mechanism for files traded via P2P networks. That would make the idea of a legalisation of file sharing more real. But at this moment, there is not a big support for a flat-fee solution for file sharing.

Best preconditionsResults from interviews and literature indicate a future for all mentioned types of music services. Pay-per-download, niche, streamed, subscriptions and bundled were all nominated to have good possibilities to survive an eventual legalisation of file sharing. The form of how they would run might change a little from today.

If to make a parallel to the ‘music like water’ theory, the existing services might come to represent the Pellegrino water, i.e. the bottled water.

The key to success is to offer something that file sharing services do not have. Whether it is recommendations, forums, different formats or a discount on concert tickets is hard to say but some kind of extra value has to be added on top of the service.

Why Spotify was the service most thought had the best change to survive is probably because it differs so much from file sharing but has the same ‘feel’. The simplicity of clicking and listening immediately is quite appealing. The fact that Spotify got the best results from the valuating table (p. 23) might explain its

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popularity; it got a lot of the mentioned qualities to succeed in the future.The valuating table may also explain why Chilirec received such a negative

evaluation. If there is anyone of the mentioned services that will not succeed in the future it is probably Chilirec.

During the research on online music services, several services were not accessible from Macintosh computers. The formats of DRM preclude compatibility with both Mac and PC. This problem is especially visible for the bundled services. Neither do TDC Music or PlayNow Arena work on Macs. There are no publicly available statistics of how many percent of the worlds computers are Macintosh but it is certainly a big part of possible users that not have possibility to use these services. Apple do not want people to use bundled services since then their sales on iTunes might decrease and people will stop buying iPods. Hopefully the Mac users will put enough pressure on Apple so that they eventually become compatible will all music services. This quote by Alan McGlade, former President and CEO at MusicNet, will conclude this paper:

The online music industry is quite young, and its future holds great promise. To be successful in this new world, all parties in the music business will have to embrace change. This includes everyone from artists, labels, composers, retailers, publishers and concert promoters (Reid, A. et al. 2004, p.27).

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Future Research

Future ResearchWill the notion of ‘music like water’ (Kusek & Leonhard 2005) become a reality when mobile phone operators and broadband suppliers start doing what are in fact blanket licence deals with the four leading record companies? This would make up to 80 percent of all recording available via bundling in one form or another. This could provide first mover advantages for mobile phone/broadband operators in the short to medium term, but what happens when all offer more or less the same? Will some actors offer flavoured water in attractive bottles at a premium price? Or will music/water be used to sell other things, as we have already noted in the case of Apple (using music to sell iPods)? This will require further research and on going monitoring of business developments and consumer preferences.

It would also be interesting to follow up this study in a couple of years to see if the opinions about a flat-fee solution have changed.

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List of References

List of ReferencesBooksANDERSON, C. (2007). Long Tail. Bonnier Pocket. ISBN 978-91-0-011803-7

COLEMAN, M (2005). Playback. DaCapo Press. Paperback edition. ISBN 0-306-81390-4.

CRESWELL, J.W. (2003). Research Design. Sage Publications. Second edition. ISBN 0-7619-2442-6

GORDON, S (2005). The future of the music business. Backbeat Books. ISBN 0-87930-844-3.

KUSEK, D. & LEONHARD, G. (2005). The future of music. Berklee Press. ISBN 978-0-87639-059-7.

REID, A. ET AL. (2004). Inside the minds: The music business. Aspatore Books. ISBN 1-58762-366-8.

WENNMAN, K. & BOYSEN, P. (2008). Musik som levebröd, UR. ISBN 978-91-25-08003-6.

WIKSTRÖM, P. (2006). Reluctantly Virtual: Modelling Copyright Industry Dynamics. Universitetstryckeriet, Karlstad. ISBN 91-7063-075-5

PapersEDSTRÖM-FREJMAN (2007), A. On-line Consumers – What Do They Share, Download and Stream? Royal Institute of Technology, Stockholm

EDSTRÖM-FREJMAN, A. & JOHANSSON, D. (2008). Emerging and Conflicting Business Models for Music Content in the Digital Environment. Royal Institute of Technology, Stockholm.

SELG, H. (2008). Om fildelning: InternetExplorers – Delrapport 4. Uppsala University.

STYVÉN, M. (2007). Exploring the online music market. Luleå University of Technology

WebsitesBEATPORT (2008). About Beatport. Availale: https://www.beatport.com/enUS/html/corporate/document/detail/2/about_us. Accessed 10-10-2008.

CHILIREC (2008). About Chilirec, Available: http://www.chilirec.com/?page=start, Accessed 31-10-2008.

DN (14-10-2008). Piratkopieringen minskar när lagliga alternativen blir allt fler. Available: http://www.dn.se/DNet/jsp/polopoly.jsp?d=2198&a=840013. Published 14-10-2008. Accessed 15-10-2008.

DN (31-10-2008). Svenskar Apples mardröm. Available: http://www.dn.se/DNet/jsp/polopoly.jsp?d=3130&a=846127. Published 31-10-2008. Accessed 31-10-2008.

EMUSIC (2008). About eMusic. Available: http://www.emusic.com/about/index.html. Accessed 16-09-2008.

GP (GÖTEBORGS-POSTEN) (2008). Svagt intresse för digital musikförsäljning i Sverige, Available: http://www.gp.se/gp/jsp/Crosslink.jsp?d=286&a=405997, Published 05-03-

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List of References

2008. Accessed 04-11-2008.

ITUNES (2008). iTunes Store Tops Over Five Billion Songs Sold. Available: http://www.apple.com/pr/library/2008/06/19itunes.html, Published 19-06-2008. Accessed 07-10-2008.

NEWSDESK (2008). PlayNow Plus i Sverige - ett av världens största musikbibliotek i din ficka. Available: http://www.newsdesk.se/view/pressrelease/playnow-plus-i-sverige-ett-av-vaerldens-stoersta-musikbibliotek-i-din-ficka-240039. Published 24-09-2008. Accessed 24-09-2008.

SPOTIFY (2008). What is Spotify? Available: http://www.spotify.com/en/about/what/. Accessed 05-09-2008.

TDC (2008). Press release: TDC: More than 30 music companies in the PLAY agreement. Available: http://tdc.com/publish.php?id=16268. Published 31-03-2008. Accessed 19-10-2008.

InterviewsCARTER, G. (2008). Telephone interview with Gareth Carter, Partner Manager Music, Sony Ericsson Mobile Communications AB. 07-11-2008. Ca 50 minutes.

DIAKITÉ, J. (2008). Telephone interview with Jason Diakité (Timbuktu), Swedish rapper artist. 12-11-2008. Ca 20 minutes.

JOHANSSON, D. (2008). E-mail interview with Daniel Johansson, doctoral student in computer science. 15-10-2008.

MÅRTENSSON, M. (2008). Telephone interview with Magnus Mårtenson, jurist at IFPI (International Federation of the Phonographic Industry) in Sweden. 15-10-2008. Ca 30 minutes.

TENGBLAD, M. (2008). Telephone interview with Mattias Tengblad, New Business Director, Universal Music, Sweden. 31-10-2008. Ca 20 minutes.

THÖRNKVIST, M. (2008). E-mail interview with Martin Thörnkvist, creator of the Swedish record company Songs I Wish I Had Written and one of the founders of The Swedish Model, an organisations consisting of 7 Swedish independent record labels. 21-10-2008.

WIKSTRÖM, P. (2008). Telephone interview with Patrik Wikström, media business scholar at Jönköping International Business School. Writer of the thesis Reluctantly Virtual. 16-10-2008. Ca 50 minutes.

GREGORIY, B. (2008) Interview on facebook with Brendan Gregoriy, dj in Barcelona, about Beatport. 02-10-2008.

Verbal sourcesBRUSEWITZ, G. (2008). Telephone conversation with Gustaf Brusewitz, PR, Sony Ericsson Nordic countries and the Baltic States. Ca 5 minutes.

DREIFELDT, C. (2008). Telephone conversation with Carina Dreifeldt, CEO Chilirec. 03-11-2008. Ca 10 minutes.

JENSEN, I.K. (2008). Telephone conversation with Ib Konrad Jensen, TDC Denmark. 04-11-2008. Ca 10 minute

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Appendix A

Appendix A: Screenshots

Figure 1: Screenshot of the iTunes Store

Figure 2: Screenshot of the Beatport site

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Appendix A

Figure 3: Screenshot of the eMusic site

Figure 4: Screenshot of the Spotify software

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Appendix A

Figure 5: Screenshot of the Chilirec site

Figure 6a: Screenshot of the first page at PlayNow Arena

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Appendix A

Figure 6b: Screenshot from the second page at PlayNow Arena

Figure 7: Screenshot from TDC Music

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Appendix B

Appendix B: QuestionnaireQuestionnaire composed for:BACHELOR THESIS AT CSC, KTHTHE FUTURE FOR DIGITAL MUSIC DISTRIBUTION - A study of existing and emerging legal initiatives. Student: Annika Didrichsen

What are you views about the future for• pay-per-download based music services, like iTunes?• niche services specializing in certain areas, for instance Beatport?• streaming music services, such as Spotify and Chilirec?• music subscription services, for example eMusic?• services that are bundled into mobile or internet subscriptions?

What do you believe are the most important factors for a legal music service to succeed today?

Research indicates that file sharers continue to download files illegally even though the same material is available for free on legal sites. Why do you think that is?

What should record companies do to facilitate the growth of legal music services?

What can other rights holders do to facilitate the growth of legal music services (e.g. collecting societies such as STIM - composers, and SAMI - performers)?

When do you believe the digital music sales will overtake the physical music sales? (Approx.)

Do you believe technological protection methods such as DRM can assist or damage consumer acceptance for and trust in a legal music service? Will we see more or less of DRM in the future?

What is the likelihood of a legalisation of file sharing via some form of bundled fee in broadband subscriptions?

Which of the music services above do you believe have the best preconditions for surviving a legalisation of file sharing, and how?

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TRITA-CSC-E 2009:047 ISRN-KTH/CSC/E--09/047--SE

ISSN-1653-5715

www.kth.se

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