Introduction 2 Overview 2 Aims 2 Recorded music as a technological innovation 2 Recording sound 2 Radio and cassette tape 3 Compact disc 3 MP3 4 Apple and the iPod 4 The traditional recorded music industry value chain 5 Disintermediation 6 Re-intermediation 7 Summary 10 Glossary 10 Answers to self-assessment activities 11 2.1 E-business technologies: foundations and practice Block 1 Part 8: The effect of the Internet on an industry Introduction Overview Now that you have an understanding of what a value chain is and an idea of some of the benefits and challenges that e-business can offer, I am going to look at the case study of an industry that appears to have been rocked to its very foundations by developments on the Internet and Web. I have been looking at business process redesign or re-engineering as something challenging, but within an organisation’s control. However, imagine a product that could be turned into pure information and so moved electronically through the value chain; clearly, this would involve a radical move away from the traditional, physical business model. I am going to look at one such ‘pure information’ product, one that you should be familiar with as a consumer: music. You’ve probably heard a lot about the effect that the Internet has had on the music industry. In this part of Block 1 I am going to focus on the music industry value chain, starting with a brief history of the recorded music industry and moving on to look at the new opportunities and challenges to this business that the Internet presents. The central case-study resource will be a video programme consisting of a series of interviews with representatives of each stage in the traditional music industry value chain. I shall direct you to this at an appropriate point in the text. In the film and in this block I shall be looking out towards the competitive environment and seeing what opportunities and challenges are presented to organisations in one particular industry. As you will see, one organisation’s challenge is another’s opportunity. Aims The aim of this text is to introduce you to an important case study on the opportunities and challenges of e-business, that of the recorded music industry. When you have finished this part of Block 1 you should be able to: Explain what is meant by the terms disintermediation and re-intermediation. Apply heuristic models as part of an industry analysis. Understand the concept of a value chain ecosystem. Recorded music as a technological innovation When we talk about the music business or the music industry, what we often more specifically mean is the recorded music industry; that is, the industry that has grown up around the recording of music, its distribution and its sale. I am going to start by taking a very brief look at the history of the recorded music industry, in order to provide you with some context for current developments concerning the Internet and the Web. Recording sound The ability to record sound has existed since the late 1800s. Thomas Edison, the prolific US inventor, was a key figure in the development of the phonograph, a device that could record and play back sound. It was an innovation that was later superseded by Emile Berliner’s gramophone, which used flat discs (records) rather than the cylinders used by Edison’s machine. Neither Edison nor Berliner envisaged their inventions as becoming devices for entertainment: they saw them as primarily Block 1 Part 8 | 2 business dictation machines. It was the business innovators and early adopters that shaped the use of the gramophone for recorded music. Prior to these inventions it had been possible to store music only in our (human) memory or in written form. A large music publishing industry had previously grown up around the publishing of sheet music: music in its written form. Radio and cassette tape By the 1900s, the recorded music industry was burgeoning. The British company HMV opened its first retail outlet in 1921 in Oxford Street, London. About the same time other innovations, such as radio, began to pose a big threat to the established recorded music industry model. It was widely thought at the time that radio would supplant records as the distribution medium for music. However, things eventually settled down and the two technologies co-existed. Radio became primarily a means to market, rather than distribute, recorded music. The third Schumpeterian wave of technological revolution, which brought the widespread diffusion of electricity in the first half of the twentieth century, also facilitated the replacement of mechanical recording devices with electric counterparts. This improved the quality of the recording and playback of music, and led to the term hi-fi (high fidelity) to describe this new generation of consumer devices. Improvements in the quality and playback of recorded music continued with another innovation: the invention of stereo by Electrical and Musical Industries (EMI). EMI was formed in Britain in the 1930s after a merger involving HMV. Stereo saw widespread adoption by the early and late majority, replacing mono as the de facto standard used for records towards the end of the 1960s. It was only the laggards who stuck with their mono equipment in the 1970s. The 1960s saw the fourth Schumpeterian wave of technological revolution. Transistors replaced valves and this meant musical devices could be smaller. The transistor radio made music truly portable for the first time. But it was the advent of Philips’ compact cassette tape, a popular re-recordable alternative to the record, that posed the next significant threat to the traditional recorded music industry model. By the 1980s, the threat of the re-recordable compact cassette seemed so great that the BPI launched a campaign that proclaimed ‘home taping is killing music’. However, the industry survived and in a few years 12″ and 7″ records had been replaced by the compact disc as the de facto format for recorded music. Compact disc The compact disc (CD), another Philips innovation, was born in the 1970s and came to market in the early 1980s. After initial scepticism about the new format, a pivotal year for the record labels came in 1985 when Dire Straits’ Brothers in Arms became the first CD to sell more than one million copies. Brothers in Arms was the first commercially successful, fully digital piece of recorded music. Shortly afterwards, the rise of the current digital revolution (the fifth Schumpeterian wave) posed the latest and perhaps strongest challenge to traditional music industry structures. Prior to the commercialisation period of the Internet (1995 onwards), music existed in a digital form on CD. Those with computer hardware and software that could rip and burn CDs were able to do the digital equivalent of home taping using CDs, distribute copies to friends, etc. However, it was the prevalence of digital networking in homes that came with this commercialisation period that saw the distribution network grow as it moved from the physical to the virtual. Block 1 Part 8 | 3 MP3 It was another Philips-led invention, the MP3 compression format, that meant a typical track from a CD could be compressed down from about 50 MB to 5 MB. Even before home broadband had crossed the chasm and seen widespread adoption, it was possible to move an MP3 file about on the Internet in minutes. Although the MP3 standard (ratified by ISO as ISO 11172) is not a totally open standard because a licence is required for its incorporation in hardware and software products, it is much more open than closed. The open leanings of the standard and the absence of any DRM restrictions meant that it became the de facto standard for a digital music format. The widespread availability of software such as Winamp in 1997 gave the majority, not just the innovators and early adopters, the ability to play back MP3s on their home computers. The arrival of file-sharing networks such as Napster soon afterwards meant that the transaction costs associated with searching for and acquiring music were greatly reduced. Apple and the iPod Music in this digital form can be seen to be pure information. Once Apple popularised the MP3 player with the launch of its iPod in 2001, it had made pure music information portable. Apple did for the 2000s what Sony had done with the Walkman in the 1980s and the Discman in the 1990s. There was one big difference, however, that was a key part of Apple’s marketing strategy. The first iPod, which had a 5 GB hard drive, was able to hold 1000 songs. Or as Steve Jobs, Apple CEO, succinctly put it (2001), ‘you [could] now carry your entire music library in your pocket’. Apple did not endorse peer-to-peer sharing of music. In fact, each iPod came wrapped with a warning, ‘don’t steal music’. But the iPod could play a variety of digital music formats, including the DRM-free MP3. In 2003 Apple further enhanced its position in the digital music market by signing deals with the ‘big four’ record labels (EMI, Universal, Warner Bros and Sony BMG), which account for some 80% of all recorded music output. The deal allowed Apple to retail music owned by these labels through its iTunes store. Apple was now an innovative retailer in a music industry value chain containing new B2C and B2B relationships that were to have serious ramifications for those businesses that had grown up with the traditional recorded music industry. Activity 1 (Self-assessment) The previous discussion has been a very quick look at music as a series of technological innovations. I’ve taken a technological and business perspective, and touched upon a number of the models that I introduced you to earlier in the block. I now want you to go back through my account and identify which models I’ve used. Look back at these models and see how I’ve used them. Compile a list of the order in which they are used in my account. Comment My list can be found in the ‘Answers to self-assessment activities’ section. In my account above, I could (and should) have included pictorial representations of the models in order to clarify my points; I didn’t do this because I wanted you to identify the models yourself. When you do your assignment, the inclusion of pictures of any models you may draw upon (with modifications to highlight the key points in your argument) is crucial for good marks. Note also that I applied the models to help me make sense of the evolution of recorded music. Some of them could just as easily be applied to make sense of a current situation. Block 1 Part 8 | 4 The traditional recorded music industry value chain In my account of recorded music as an innovation I made reference to the traditional recorded music industry value chain; it was one of the models I employed so that I could position Apple as a digital music retailer with B2C and B2B relationships. I shall now have a look at this value chain and use it to illustrate the effect that the Internet and e-business may have had on traditional industry structures. Figure 1 is a representation of a simple value chain for the music industry. This could have been presented in other ways, with a greater or lesser amount of detail, but the level of detail I’ve chosen to show is just right for the amount of analysis I am going to perform here. creation composition and arrangement artist distribution marketing/shipping/selling record company/wholesalers/retailers selection and certification signing of artists record company production recording/mixing/cutting/manufacture/packaging record company consumption listening consumers Figure 1 Traditional music industry value chain Source: adapted from Clemons and Lang (2003) Each box in the model represents a value-adding stage in the traditional music industry value chain. The stages are labelled creation, selection and certification, production, distribution and consumption. I’ve also listed who has traditionally been responsible for each activity at the bottom of each box. In the middle of each box are some of the sub-activities involved in that stage: the sort of activities that I might have broken down into separate stages if I were looking at a lower level. Very shortly I want you to watch the video programme associated with this case study, which will raise and answer some issues to do with the stages and the relationships in this traditional value chain. You may already be thinking about how the Internet and e-business have affected this established way of doing business. For now, I’m going to introduce two ideas that will get you thinking even more and provide labels for some of your thoughts: disintermediation and re-intermediation. Block 1 Part 8 | 5 Disintermediation I have talked previously about the ability of the Internet and the Web to increase geographic reach and market size, and to reduce transaction costs. It’s quite possible, given the low transaction costs and use of the Internet as a distribution medium, for an artist at the beginning of the value chain to bypass the other stages in the traditional process and reach the consumers directly. The bypassing of intermediaries in the value chain is known as disintermediation. Artists could have done this before the Internet. The punk phenomenon of the late seventies had a strong DIY ethic that championed this kind of behaviour, but in practice artists could not easily record and distribute their music without relying on the traditional stages (albeit fulfilled by non-traditional businesses) of the value chain. Without these intermediaries, artists were limited to a small market that came within a limited geographical reach. The cost related to the availability of and access to technologies for reproducing the music was also prohibitively high. But now that the Internet is ubiquitous and sound-recording equipment comes with most computers, it’s perhaps not immediately clear why artists haven’t cut out the intermediaries and sold direct to the consumer. Why haven’t the record labels and retailers been disintermediated After all, we often hear about how much music costs to buy compared to how little the artist receives from the sale of the final product. Table 1 shows a breakdown of the typical revenue share from the sale of a CD through the traditional recorded music industry value chain. Table 1 Breakdown of revenue share on a typical CD sale Person or organisation Revenue share Composer and publisher 5.1% Artist 10% (+1.1% to The Musicians’ Union) Record company 28.8% (of which 10.6% is profit) Manufacturer 5% Promotion and advertising 15% Distributor 5.6% Retailer 29.3% (of which 5% is profit) Source: Rolling Stone, 2004 A solo artist who also composes and publishes his or her own music can possibly earn a share of approximately 15% of the sale price of a typical piece of recorded music under traditional recorded music industry arrangements. However, the Internet and a B2C e-commerce operation direct from the artist’s web site should enable the artist to take a much larger share, owing to the disintermediation of the record company, the manufacturer, the distributor and the retailer roles. So why isn’t everyone doing it The idea that this form of disintermediation was the main (legal) threat posed by the Internet to traditional industry structures was a popular one. It hasn’t materialised. Record labels add a lot of value that can’t be expressed purely in monetary terms. They invest money in new artists and develop them. They have very powerful marketing operations that ensure consumers get to hear about new artists. They have B2B relationships with physical and virtual retailers that mean the product is widely available through different distribution channels. They also have important B2B relationships with television and radio stations that play an important role in the discovery of new music for many people. But, you may say, what about those artists who have made a name for themselves by distributing their music and building up a large fan base on social networking sites Block 1 Part 8 | 6 such as MySpace There has been quite a lot of publicity around artists (such as Gnarls Barkley, The Arctic Monkeys and Lily Allen) who have had successful recording careers after they self-promoted themselves and built up a loyal following on MySpace. There was even an edition of the BBC Money Programme in 2006 called ‘The Online Music Revolution’, which covered the ‘artists are now able to do it for themselves’ story (Messenger, 2006). However, the reality is far more complex than it would first seem. Firstly, the disintermediation in these high-profile cases is temporary. Artists have used it in order to make a name for themselves and attract attention from record companies. In the main, they still see the long-term value in record companies and the traditional value chain. The video programme you’ll be watching soon highlights the case of a band called KOOPA, who employed a similar strategy in order to attract some much- needed publicity. Secondly, the story of some of these artists going it alone is not all it seems. It appears that record labels big and small were behind some of the artists, although as part of a sophisticated marketing strategy they may have made it appear as if they weren’t. This piece from the Guardian is worth a quick look (it’s available from the ‘Library resources’ section of the course web site): Webb, A. (2006) ‘Making a song and dance’, The Guardian, 25 May, Technology Pages p. 1. So although e-business has made disintermediation possible, it’s not always desirable. It would seem that the only artists who can wield enough power within the value chain to disintermediate those that lie between themselves and the consumer are those artists who are already well established and have made a name for themselves. I hope you have some thoughts now as to why the Internet and Web have not simply driven the disintermediation of the steps in the value chain and ended up with all artists selling direct to consumers. It’s all about the perception of value. Re-intermediation I’ve said that the Internet has offered opportunities for disintermediation (removing the middlemen) in traditional value chains. However, disintermediation also has an opposite, re-intermediation, which is the introduction of middlemen into the value chain. I’ve mentioned MySpace already. You may be familiar with this social networking site or you may not; but whatever your opinion of it, its e-business importance is hard to deny. Rupert Murdoch’s News Corp certainly thought it was important when it purchased the company for $580 million in 2005. At this time it was the fifth most visited site in the United States. News Corp possibly had its eye on the potential advertising revenue from such a frequently visited site. If I were a music consumer at the bottom of a disintermediated value chain, one of the problems I might face would be how to find new music that I liked. I said before that the radio has long fulfilled a marketing role for new music. The combined richness and reach of the Internet has allowed social networking sites such as MySpace to step into the space between the artists and the consumers and provide a service that adds value for the ‘long tail’. MySpace users can discover new music based on what their friends are listening to. Rather than searching the whole of the Web for music, MySpace users have a smaller network to search; and, importantly, that network is one of friends whose judgement they trust. Still, even MySpace can be too big an area to comfortably search. After all, we are used to the radio and TV pushing information at us, rather than us pulling information from other providers. This is where further re-intermediation can take place, as podcasts such as the iCast MySpace top 20 show. iCast aims to add value by Block 1 Part 8 | 7 selecting and certifying MySpace content for consumers. It adds value, enabling consumers to keep up to date with new music beyond the circle of their online friends without the enormous transaction costs associated with searching the whole of the Internet or MySpace on a weekly basis. MySpace and iCast are intermediaries that fill spaces between the content creator and the content consumer at either end of the value chain. Ditto Music, which is mentioned in the video programme you are about to watch, is another intermediary. It fulfils a very important role in the reconstructed value chain for the e-business music industry. Figure 2 is my interpretation of this new reconstructed value chain with KOOPA, the artist featured in the video programme, at the top; Ditto’s re-intermediated position in the middle; and the consumer at the bottom. Familiarise yourself with this value chain and compare it to the previous one. This will be a useful reference point for you before you watch the video programme. creation composition/arrangement/recording/mixing distribution relationship management/marketing Ditto Music retail selling consumption listening consumers KOOPA HMV Online/iTunes Music Store/7Digital Figure 2 Ditto Music’s place in a reconstructed music industry value chain The value chain shown in the figure bypasses the traditional record labels yet still gives KOOPA access to retailers such as HMV, iTunes and 7Digital. Without Ditto Music, who provided the services of a traditional record label but in the lean fashion of an e-business from the ground up, KOOPA would not have enjoyed the success they did. I’ve listed the activities of Ditto Music as relationship management and marketing. Relationship management was the best term I could think of that encompasses just what it is that Ditto did for KOOPA. As you will see from the video programme, Ditto connected KOOPA to the retailers by managing the B2B relationships in the chain, and so it is a key intermediary here. I’m treating the artist, KOOPA, as a business for these purposes; it’s the one they are closest to in our three-stakeholder transaction/relationship model, since they certainly aren’t a consumer or the government. Activity 2 (Video, self-assessment) Watch the video programme entitled ‘The music industry’, available on DVD 1. There’s a lot contained in just under twenty minutes. The film works on several layers and you’ll probably have to watch it a few times in order to gain a deep understanding. It’s well worth spending time over this. Block 1 Part 8 | 8 Before you start watching for the first time, I’d like you to think about the relationship that exists between technology and the music industry. Make some notes about how you think the Internet has affected your consumption of music. After you’ve finished watching, make some more notes about the effect of the Internet on those interviewed in the film. Are they passive ‘victims’ of technological progress, or are they shaping the future of the industry Which model from earlier in the block would be most useful in order to categorise some of the organisations represented in the film into idealised types, based on the interviewees’ responses Why do you think music as a product has been so affected by the Internet and the Web What is special at this present moment about the nature of music What other industries do you think have been, or soon will be, affected in this way Comment I’ve included some of my thoughts in the ‘Answers to self-assessment activities’ section. Activity 3 (Video, in-text) Now watch the video programme through again. This time I want you to use the industry value chain and the e-business relationships model (B2C, C2C, C2B, B2B) as a way of analysing the interviewees’ responses. Comment In Figure 2, I provided you with my interpretation of a constructed value chain, with KOOPA (the artist) at the beginning and Ditto Music as an intermediary between the artist and retailers such as HMV. However, this is not the only value chain we can draw from the information contained in the video programme; there are at least two others. The first is the traditional recorded music industry value chain, in which KOOPA and its manager see long-term value. This is the value chain I outlined in Figure 1. The second is one in which Last.fm plays a key intermediary role. Last.fm has reconstructed a value chain around its ‘intelligent recommendation system’. It takes Amazon’s recommendation system to the next level by recommending new music based upon what a Last.fm user has listened to rather than purchased. As the Last.fm representative puts it in the video programme, this is ‘music discovery for lazy people’. Users can discover new music in a ‘lean back’ rather than ‘lean forward’ fashion. This means that once the software has been installed on their computer, they need do no more than carry on listening to music in order for Last.fm to ‘scrobble’ (store details of) the tracks and provide added value via its intelligent recommendation system. Rather than presenting exclusive choices, I’d like to suggest that these value chains offer complementary alternative distribution strategies for digital music. Of course those businesses that have grown up with the traditional recorded music industry value chain as their business model are going to feel threatened by the emergence of new value chains. After all, some of them face disintermediation unless they are willing and able to adapt. However, innovative organisations both new (e.g. Last.fm) and old (e.g. Apple) will re-intermediate themselves and construct new industry value chains. They can only do this by forging new B2B, C2C, B2C, C2B relationships that are perceived to add real value for business and consumers alike. Block 1 Part 8 | 9 Summary In this part of Block 1 you have seen how the Internet offers opportunities for disintermediation and re-intermediation in the value chain. I looked at the example of the recorded music industry as my case study, but these opportunities apply to other industries too. New industry value chains made possible by these disintermediation and re-intermediation opportunities are viable only if they can be seen to add value to e-business relationships. Just because these disintermediation and re-intermediation opportunities are technically possible, it does not mean they can or should be realised from a business perspective. Existing ways of doing business have not been completely swept away by the new recorded music industry value chains facilitated by the Internet. Instead, there has been an incorporation of elements of established structures (albeit provided by new intermediaries in some cases) into new industry value chains. These elements are those that add value, such as selection and certification, marketing, and selling. Complete disintermediation (the artist selling direct to the consumer), whilst technically possible, has not proven viable from a business perspective. Glossary BPI Originally an abbreviation for the British Phonographic Industry, an organisation that was established in 1973 in the UK to fight music piracy. It now prefers to be known as just BPI and its purpose is to represent, promote and protect the UK recorded music industry. disintermediation The bypassing of intermediaries in a supply chain or industry value chain. Contrast with re-intermediation. DRM (digital rights management) The technologies and techniques designed to limit the use of copyrighted digital content such as music, films or software to authorised devices. MP3 A standard format for encoding digital audio that creates files approximately one tenth of the size of the corresponding track on an audio CD. podcast (iPod broadcast) An audio broadcast in a file format suitable for playback on a computer or digital music player. Podcasts are often made available to subscribers via RSS feeds. re-intermediation The reinstatement or creation of intermediaries in a supply chain or industry value chain. Contrast with disintermediation. rip and burn The processes of using a software program to convert digital content from an optical medium such as a CD, often into a compressed format for storage on a computer or portable media device (ripping); and writing digital content from a computer or other device to an optical medium such as a CD using software and/or hardware (burning). social networking The use of a web site that provides a virtual community to connect people who share similar interests. Block 1 Part 8 | 10 Answers to self-assessment activities Activity 1 Here’s the list of models in the approximate order that they occurred in my brief history of recorded music: technology adoption lifecycle model (innovators, early adopters, early majority, late majority, laggards) Schumpeterian waves of technological revolution open/closed, sponsored/unsponsored, de facto/de jure standards three phases in the development of the Internet: innovation, institutionalisation, commercialisation industry value chain e-business relationships (B2C and B2B). Remember that I did not include pictorial representations of the models in my account because I wanted you to identify them for this activity. You should always use figures where appropriate in order to clarify or emphasise points you make in your writing. Also note that I didn’t introduce the models in my account because of its brevity, and because I knew that I’d introduced them in previous parts of the block. In a stand- alone piece of writing it would be necessary to introduce and explain the models before you started using them. Activity 2 Recall that technological determinism postulates that technology shapes society rather than society shaping technology, and that technology follows a path driven by some inner autonomous logic. It would be difficult not to see the allure in this stance when we look at Internet technologies and the music industry. We must remember that business is a social enterprise. I suggest using the technology adoption lifecycle model to categorise those represented in the film into idealised types, ranging from innovator to laggard. The BPI spokesperson provides some technological reasons for the recorded music industry being currently most affected by the Internet. He mentions ‘the size of the files’ and ‘bandwidth issues’. As I mentioned previously, music tracks can be conveniently compressed into files of about 5 MB in size, small enough to be fairly quickly downloaded. With the advent of faster broadband connections other ‘creative industries’ whose outputs are readily digitised, such as television and film, are also now beginning to experience similar effects to those felt by the recorded music industry. Block 1 Part 8 | 11
