How has the music industry handled the transition from physical products to the digital media?

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Theoretical Framework

In this section we will present theories that for this study are relevant, when defining and measuring our research questions. These theories will then be used when analyzing the collected empirical data for our case, and as support when making conclusions. Every part in this theoretical framework can be related to the proactive methods such as a legal alternative to file sharing as Spotify. Each part has an impact on the legal alter-natives. This can be seen in figure 3.1 below.

Proactiveness

The organization’s view on recognizing new opportunities is known as proactiveness. The music industry is in a phase where seizing new possibilities are essential for survival in the business (Wiklund et al, 2006).

Risk-Taking

Risk-taking is a classic concept that relates to entrepreneurship (Wiklund et al, 2006). It is vital for organizations to be competent to take on higher risk alternatives than only focusing on the past. It is sometimes the only way to consider in order to be successful throughout entrepreneurship. Moreover, risk taking is the degree to which managers are willing to make costlier and riskier resource commitments than usual, which have reasonable results of failure. The music companies have struggled for over 10 years with new conditions regarding legislations and new technique, consequently force them to be more risk takers than before.

Innovativeness

Innovativeness can be conceptualized at an individual level and the level of the innovation implementation (Klein & Sorra, 1996). There is a positive correlation between innovation and performance and the relation between innovativeness, risk-taking and proactiveness is significant. Innovativeness could be described as one of the most imperative components within the entrepreneurial approach since it carries out creativeness and experimentation in order to discover new patterns and opportunities for the organization.
The music companies would gain from being innovative; however there are also risks since all investments might not always result in a positive way.

Legislation

According to David Lammy, responsible for implementation of intellectual property system in UK, no one should need legal training to surf the web. This is not the reality today since new legislations have invaded the electronic society. The newest law which was introduced in Sweden in April 1st 2009 is called the IPRED-law. The law gives the music companies the right to take legal action against illegal downloading. It provides the possibility to get access to IP numbers which have downloaded any copyright protected material and this for no cost. The government constantly follows the development in new technology and thus trying to stop the illegal alternatives with new legislations. The information gained could be used to put charges against the person being prosecuted (Swedish Ministry of Justice, 2010).
According to statistics gathered by Netnod, the internet traffic decreased immediately with approximately 44% in their own hubs, although Netnod themselves did not want to speculate if this was true since Swedish internet traffic can pass through different hubs. The 3rd of April, The Pirate Bay announced that they had only noticed a decrease of 3.5% compared to the previous week. Henrik Pontèn, the representative of Antipiratbyrån, said in an interview with Metro that most of the internet traffic is file sharing and that this was the reason for this big decrease of the Swedish internet traffic. This decrease did not last for long. In June the same year, the internet traffic was back at the same numbers as it had been in September 2008 (Stiernstedt et al, 2009).

Technique evolution

With the rapid development of technique over the last ten to fifteen years there has been several different ways to download music, movies, software etc. from the internet. Music has always been the most popular material to download because of the digital music format MP3 (MPEG-1 Layer 3) which allows people to compress the music files without affecting the sound quality. The compressed music files were smaller in size compared to other file formats which resulted in a faster download time (Gordon, 2005).

BitTorrent

BitTorrent is a protocol for peer-to-peer file sharing and is used for distributing large amounts of data. The BitTorrent protocol lets the user both download and upload (share it with others) at the same time. Today BitTorrent has become one of the most common ways of transferring files over the internet.
The advantage with BitTorrent compared to other techniques is that the downloading time is heavily reduced since the user is downloading the file from several other users at the same time (Gordon, 2005).

Peer-to-peer file sharing

In 1999 the way of downloading music was revolutionized with the creation of Napster. Napster was created by the 19 year old college student Shawn Fanning. Napster was a program that let the users share their music. This kind of file sharing is called peer-to-peer (p2p) file sharing. The peer-to-peer technology lets two or more computers to share files and information through the internet. Users of peer-to-peer networks can request information, provide information or both. The user who requests the information is called a client and the user who provides the information is called a server. The user that both requests and provides information is called a « servent » which is a mix of the names server and client.
Peer-to-peer file sharing grew enormously with the help of Napster and in February 2001 Napster announced that they had an average of 1.57 million simultaneous users per day. Napster later filed for bankruptcy.
The peer-to-peer technology does not only allow users to share music but other information such as movies, software and so on. The amount of options for file sharing is increasing with the popularity of the peer-to-peer technology. Peer-to-peer file sharing can be divided into three different types of networks:
Centralized network
Decentralized network
Controlled decentralized network
How each user finds the files they are searching for is determined by these three types of networks (Gordon, 2005).

Centralized P2P network

In a centralized peer-to-peer network there is a central server that handles and directs the traffic on network. The central server keeps track on which shared files are stored on each connected computer (node) and every time a new user logs on the list of shared files is updated. For example, when you log on to centralized P2P network the list of available files is updated to include your shared files and when you log off the list is updated again to remove your files. When a client places a request for a certain file is done, the central server compares the request with the list of available files and if there is a match the client is connected to the peer/node (the computer with the requested file) to download the file. The file itself is never stored on the central server. A centralized peer-to-peer network handles the search for files very quick and efficient (Gordon, 2005).

Decentralized P2P network

In a decentralized peer-to-peer network there is no central server. Instead every node has equal status and acts as both a client and a server, in other words a ”servent”. Every node in the network tries to keep from four to eight connections to other peers. The connected nodes transfer the communication (request and answers to requests) through the network. To be able to share files every user needs to have the same file-sharing program (Gordon, 2005).
A decentralized network can be both larger and stronger than a centralized network since it does not have a central server. But the downside with this is that search times can be longer and a request for a certain file might have to go through several thousands of users before a match is found (Gordon, 2005).

Controlled Decentralized P2P network

The controlled decentralized peer-to-peer network can be described as a mix of both the centralized and decentralized network. Within this network some nodes selected to be “super nodes”. The super nodes are often the powerful computers with a fast internet connection and they are selected by the system to run the network. Every client then keeps a small amount of connections open and a connection to a super node. The super nodes allow requests to be handled fast and it also receives a list of shared files from the connected nodes (Gordon, 2005).

Marketing Mix

In this section we will present different marketing factors that are related to the music industry and the sales of music.

Place

Focusing on the location where a product can be purchased, related to as the distribution channel. The music industry mostly focuses on how widely their product should be distributed and how much that is possible. Another aspect to consider is whether the distribution should be restricted to a few specialized outlets or not. Every decision is related to delivering the product to their target customers. Distribution decisions consist of channel member selection, market coverage, logistics and levels of service. When discussing place in the marketing mix context, storage such as physical store or virtual stores on the internet are important factors to consider (Internet Center for Management and Business Administration, 2007).

Promotion and Communication

It focuses on providing information to target markets. There are different forms of promotions but the major forms are personal selling, advertising, sales promotions and public relations. The important aspect is to convey the product/service benefits and features to the potential customer (Internet Center for Management and Business Administration, 2007).
Marketing communications is a management process through which an organization tries to engage with its various audiences. The important task of marketing communications is to differentiate one brand from another and position them so that consumers develop positive attitudes and make potential purchasing decisions. Another important aspect is to reinforce, in order not losing current customers. Key terms are to remind and to reassure which help retain customers and improve profitability. It is a cost effective approach when not constantly striving to gain new customers. The most important and most common form of marketing communications is to inform and make potential customers aware of the features and benefits the organization is offering. New technique and new business ideas must in most cases be explained and educated to the audience, to show them how to use the product/service (Baines et al, 2008).

Product

As a part of marketing’s 4Ps, product is what the consumer keeps after their purchase. It is important that the product meets the customer’s need or else the product will not survive in the market. When talking about meeting the customer’s need, there are different areas that are included in the product. The quality if the product is a big part, quality is one of the deciding factors for customers when it comes to buying the product or not. The product includes other important parts such as packaging and labeling. The purpose with packaging is to attract customers. Products that are packaged in a nice and appealing way will most likely attract more customers. While a product with poor packaging will most likely not attract as many customers as a nicely packaged product even if the quality might be a little better. The way you label your products will also play a part in attracting customers (Baines et al, 2008).
Differentiation is also an important part of the product. You want your product to stand out against your competitor’s products. Differentiating your product is way to attract customers to buy your product instead of your competitors’ products.
When it comes to the music industry, the products are the songs made and the albums released by the artists. It is important that the songs and albums made are good enough for people to buy. An artist can have a great song on an album but if the rest of the songs are bad, then the album will probably not be as appreciated by the fans. Album covers and music videos can also play an important role when it comes to attracting buyers.
Figure 4.3 describes the process of how an artist becomes successful in the music industry. The artist must first be discovered by producers in order to record and release their music. Some artists release their music on the internet-medias like YouTube and MySpace in order to be discovered. When an artist has been discovered and a record has been recorded it is time to release it. But to maximize sales there is a need for advertising and this can be done by employing advertising agencies. It is important for sales that the latest song is played on the radio since it is a perfect way of promoting the artist and his songs.

Price

Price is another important decision factor for customers. The price can be set differently depending on the product or strategy. If a company is new on the market it might be a good idea to set a lower price to penetrate the market and attract customers from competitors. After a while when the company is more established on the market it can raise the price to a more suitable price level compared to its competitors and to maximize profits. The price will also vary for the same product depending on what brand the manufacturer is. For some products you end up paying a little more because of the brand (Baines et al, 2008).
The most important thing when it comes to price is that the customer feels that he is willing to pay the amount and feels it is a fair price. Every customer has a perceived value of the product which determines if the product is good buy for them or not.
The price in the music business does not differ much. The price of CDs does not differ much depending on the artist. It is almost the same for every CD. The difference can be if a CD contains extra material, then the price might be higher. The same principle is used when it comes to the singles released. There is almost always a fixed price for one song.

Extended Marketing Mix for Services: The 7Ps

Since the traditional 4Ps approach of marketing planning is based on physical products, e.g. CDs, Toys, Food, it did not prove useful when it came to service offerings. It was not even very useful for physical products with a strong service component e.g. laptops with extended warranties. This is why the two American scholars, Bernard H. Booms and Mary J. Bitner, incorporated the 3Ps into the marketing mix (Baines et al, 2008).

Physical Evidence

Physical evidence covers the tangible parts of the service. It emphasizes that these parts are strategically important for the customers since they use these parts to make up their mind on how good the quality of the service might be. An example is that future university students might choose whether or not to attend a university or a certain course depending on the brochures offered and the course outlines or by visiting the campus (Baines et al, 2008).

Process

Process is included because the service delivery cannot be separated from the customer consumption. Process includes managing the customer expectations, interaction and satisfaction. Standardized processes make it easier to handle the customer’s expectations. Transfer companies have several standardized service offerings that the customer can choose from (Baines et al, 2008).

People

People include that the services are delivered by customer service personnel, which interact with the customer and sometimes in a more intimate manner (e.g. spa treatments and healthcare). These people are often experts in that certain field, like a doctor or a masseuse. How these people interact and treat their customers is also a direct result in the overall satisfaction with the service. This is why it is important to have service minded personnel that treat the customers in a nice way (Baines et al, 2008).

Service in the music industry

When it comes to the music industry there are now several services available. If we take Spotify as an example and relate it to these 3Ps, they have to provide the physical evidence of the service, the process and the people. In Spotify’s case the physical evidence is the music that they have to offer. They also have a relatively standardized process whereas if you want to become a user you can either pay a fee (monthly or all at once) or you can be invited and become a free user that has fewer privileges. The people in Spotify’s case are the service people that you have contact with if you have questions or problems. It is important that Spotify takes these 3Ps along with the original 4Ps and have them in mind when developing their service (Appendix 1: Spotify).

Summary of the Theoretical Framework

The theoretical framework focuses on the different aspects the music industry has to consider in order to be successful. We have discovered three major areas that have an impact on the music industry. These areas are marketing, technical aspects and legisla-tion.
The legislation has played an enormous part in the fight against illegal downloading. With the introduction of the IPRED-law the music industry has the right to take legal action on people they believe are downloading music illegally. This will give the legal alternatives a boost.
The technical evolution is still providing new ways of breaking the law in order or In-ternet users to download material that is copyright protected. It does also allow the legal alternatives to offer better services with new technical features.
Marketing serves as a major impact since it is through this the legal alternatives can reach out to the public and maybe attract several people to stop downloading copyright protected material and use their product or service instead without the risk of being prosecuted for file sharing.

Empirical findings

Compilation of interviews

This section will summarize our interviews with Patrik Wikström and Daniel Johansson.

Compilation of the interview with Patrik Wikström

Over the last couple of years there has been a serious growth of music being available on the internet and other digital media. With this development in mind it is interesting to see how this has affected the music industry and how they have dealt with this.

The four stages of transition

Patrik Wikström, author of Reluctantly Virtual: Modelling Copyright Industry Dynamics (2006), believes that the music industry, especially the record labels have managed this transition in a very bad way. According to Wikström the music industry has gone through four different phases with the beginning 10 years ago with the introduction of Napster, a new way for people to find and share mp3 files.
The first phase was denial; the music industry did not want to acknowledge Napster as a threat.
In the second phase, the music industry decided to go after the ones responsible. In the third phase, the music industry believed that they would go under
In the fourth phase, were they are now; they are trying to turn this into something positive.
“These phases are natural if you look at the history” says Wikström.
During these years the sales of CD’s have gone down by several percent and many record labels have gone bankrupt. Wikström has an idea on why it took so long for the record labels to start adapting:
“It is easy to say that the record labels should have acted differently in the beginning when the problem first arose now that you know how it all turned out but to drop everything they have been doing so fart and start doing things differently is not that easy” says Wikström.

Music indusry – a change in progress

Wikström is also of the opinion that the music industry has been doing very well if you compare it with other industries. Wikström continues by saying that the music industry is open to taking risks when it comes to music. An example of this is when several record labels decide to buy shares in Spotify and make their music available. Several record labels even launched their own online music service called Rhapsody but it did not go as well as expected.
The music industry is seen as very slow and inflexible but the reason for this that there are several contracts that needs to be re-negotiated before changes can happen. Some artists might not want to change their lucrative contracts and Wikström is of the opinion that the artists are slow and unwilling to change. Some artists have requested to be removed from Spotify’s library since it can be seen as a huge risk. For example, if people decide to listen to the artist on Spotify instead of buying the record that artist will lose income. Spotify also has a separate contract with the music labels and does not follow the directives of STIM. Instead Spotify, the music labels and the artists all share the income from paying users and the income from commercial.
Spiralfrog and Qtrax, competitors to Spotify, have another contract with the music industry. The two online music services both paid a large amount of money in advance to get access to the music, which is not as big a risk as the Spotify agreement.
Spotify has become an alternative to buy records but Spotify themselves claim that this is not the case. Spotify claim to be a form of promotion, where you listen to music and then buy the records that you like. Wikström believes that this is just a way of not making the record labels feeling threatened but it is obvious that Spotify has become an alternative to the traditional way of buying records. The income from online music is a small part of the total revenue, but the music industry must find a way to increase this because online music is increasing and the traditional record sales are decreasing for every year. In a couple of years, the traditional records will be gone, and the music industry must find a new way to make money.
Figure 4.1 shows the lifespan of different formats, which clearly points out that the units of the traditional CD is steadily decreasing. The music industry is well aware of this and is already planning for the future. There might also be changes in how music is recorded in the future. The music industry along with Wikström believes that only a couple of songs will be recorded at once and that the consumers will only buy the songs they like from an artist instead of buying an entire album. This will put more pressure on songwriters and artists to deliver good music.

A future with new technique and regulations

With the newly introduced IPRED-law in Sweden, legal alternatives to illegal downloading such as Spotify might get a boost. According to Wikström the IPRED-law has had a positive influence on the music industry because it has forced the record labels to change to survive. Wikström also states that Spotify or similar services should have been introduced earlier but the music industry might have had negative attitude towards this kind of technology a few years ago.
Wikström has a positive view on the IPRED-law:
“If the IPRED-law helps the music industry on the way to provide online music services that give the artists and songwriters a little money for their work, I think it is good” says Wikström.
Wikström also speculates that if Spotify and other legal alternatives are good enough then maybe people will choose them instead of taking the risks that come with illegal downloading. He continues by saying that there will always be a part that will keep on downloading copyright protected material but it is impossible to say how big this part will be. It is important for the music industry to find a way of making money even with piracy and Wikström speculates that if a sum of money can be added to the monthly fee for broadband that could give them the access of the music library. He clearly states that something needs to be done.
It is crucial for the medium sized record labels to find a new way of making money to survive. According to Wikström the most important thing is to be noticed otherwise it will be impossible to make money. The big record labels have the money to make themselves noticed and the smallest record labels, almost amateur level, can be noticed through websites as MySpace and YouTube. Therefore it is important for the medium sized record labels to find a way of reaching out to the audience and to do this they might need an external sponsor to help them with funding.

Table of Contents
Abstract
1 Introduction
1.1 Background
1.2 Problem Discussion
1.3 Purpose
1.4 Positioning our study
1.5 Interested Parties
1.6 Delimitations
1.7 Definitions
2 Method
2.1 Research Approach
2.2 Research Quality
2.3 Description of respondent
2.4 Development of our interview questions
3 Theoretical Framework
3.1 Proactiveness
3.2 Risk-Taking
3.3 Innovativeness
3.4 Legislation
3.5 Technique evolution
3.6 Marketing Mix
3.7 Extended Marketing Mix for Services: The 7Ps
3.8 Summary of the Theoretical Framework
4 Empirical findings
4.1 Compilation of interviews
4.2 Questionnaire answers
5 Analysis
5.1 How has the music industry handled the transition from physical products to the digital media?
5.2 Is there a possibility that the legal alternatives to illegal downloading will be successful or will the illegal downloading continue?
5.3 What proactive methods against illegal downloading can be effective?
6 Conclusion
6.1 How has the music industry handled the transition from physical products to the digital media?
6.2 Is there a possibility that the legal alternatives to illegal downloading will be successful or will the illegal downloading continue?
6.3 What proactive methods against illegal downloading can be effective?
7 Reflections
8 Future Research
9 References
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