1. Does the growing popularity of downloading music from the Internet give rise to a new music
industry value chain that differs considerably from the traditional value chain? Explain why or
why not.
The music industry has undergone some huge changes with new technologies and an increase in
Internet usage. Being able to get music has never been easier with music now becoming a digital good.
These changes have caused the significant changes in the traditional recorded music value chain. But
what factors have led to this change in the value chain from brick-and-mortar music to digital music
available at a click of the mouse.
U.S. retail sales of recorded music dropped from $13 billion in 1999 to 10.6 billion in 2003
(Keagan, 2004) while the popularity of digital music had grown. With the growth of Apple’s iTunes and
Amazon’s MP3 player digital music has gained a role as being strategically necessary for the music
industry. In 2004 “analysts predict that in five years 20% to 33% of all music sales will shift from CDs to
digital distribution” (Keagan, 2004).
With the increased popularity of devices such as Apple’s iPod, smartphones now with music apps
as well as driving demand for more digital music has increased market shares for both Amazon and Apple
in their digital music segments of business. It is very clear that digital music is here to stay and has
become the preferred product choice for music consumers. The change in the music industry in regards to
digital music distribution involves pricing, market structure, and value chain analysis.
There are two basic pricing strategies for digital music: the first being song purchases and the
second being subscription services. The most common sources for downloads being iTunes and Amazon
MP3 have similar pricing in their services. While sites such as Rhapsody.com and Spotify are only
subscription services sites that give listeners a good deal on access to their music libraries. The one that
stood out to me the most was MP3 Panda which has lower prices that both Amazon MP3 and Apple
2. iTunes but does not have as huge of selection of music but they are add hundreds of new albums every
month.
Provider Price
Per Song
Price Per
Album
Subscription Prices
Rhapsody.co
m
N/A N/A Unradio: Ad-free radio can be used on web or mobile devices
$4.99/month
Premier: Unlimited access to Rhapsody music library,
downloads, and Unradio can be used on web, mobile and home
audio devices limit 3 devices $9.99/month
Apple iTunes $0.99 $9.95 Single membership $9.99 access to Apple Music library,
recommendations and unlimited skips on their radio stations.
Family membership $14.99 up to six people access to Apple
Music library, recommendations and unlimited skips on their
radio stations.
Amazon MP3 $0.89 to
$0.99
$5.99 to
$9.99
Their MP3 service does not include a subscription option but
with Amazon Prime membership only costing $99.00/year not
only do you get free 2-day shipping, access to their movies and
TV shows database. This also includes access to their music
library for prime members.
Spotify N/A N/A They offers free service but by upgrade to premium for
$9.99/month gets you the added benefits of play any on-
demand songs, higher quality audio, uninterrupted listening,
and download music options.
EMusic $0.49 to
$0.99
$2.97 to
$9.99
Basic plan $11.99 for 24 downloads/month. Plus plan $15.99
for 34 downloads/month. Premium plan $20.99 for 36
downloads/month. Fan plan $31.99 for 73 downloads/month.
MP3 Panda $0.05 to
$0.20
Average
cost $1.50
N/A
The pricing of $0.99 per song is interesting since the providers such as Apple and Amazon are
not making little to no money on each song purchased digitally. While Apple iTunes store is running just
a little over their break-even point it is worth noting that while “music may not be a huge profit center…it
was definitely used to establish iTunes in the lives of consumers” (Smith, 2013). Digital music services
3. maintain databases of MP3s and their pricing involves low costs for their consumers. This lack of profits
suggests that the $0.99 price may be set to grow the market and each provider’s share in the market.
While we reason to believe that CDs are expensive and that by buying digital downloads we are
getting discounts. We are also left believing that the typical album only costs $9.99 the reality of this is
very different. “The average cost of a digital album is not $9.99. Its $12.16 at the iTunes Store, $10.52 at
Amazon MP3, and $8.22 for eMusic members, who get additional discounts based on which monthly
package they choose. Excluding double-CD packages, the average album at iTunes was $9.85 compared
with $8.06 at Amazon and $6.35 at eMusic” (Bott, 2010).
While some these service providers are no longer relevant since Napster was bought out by
Rhapsody. Rhapsody is now just a subscription service in the music industry and I did not include Zune in
my chart above. This survey that was conducted by Ed Bott gives us a lot of information and a good look
into the cost per album.
By offering music in the format the consumers want it people are less likely to engage in illegal
downloading. These online firms that offer digital music compete not only pricing but on non-pricing
elements such as customer service, promotions, advertisement, and ease of use in the downloading
process. While the audio quality of the MP3s purchased from a provider is practically the same as an MP3
from another provider.
4. A surprising conclusion that Bott came up with is that “sometimes a CD is a better deal than a
digital download” (Bott, 2010). While CD prices are still relatively high in price at most brick-and-mortar
stores the prices of CDs online has dropped to a level to where they can compete with their digital
counterparts.
The digital music market has created a new virtual value chain since there is no longer a physical
product to manufacture the product becomes information in the digital music recording. “Companies that
create value with digital assets may be able to reharvest them in an infinite number of transactions”
(Rayport & Sviokla, 1995, p. 82). A song may only be recorded once, but in its digital format it can be
replicated and distributed an infinite number of times with little costs for reproduction. In this changing
structure of the value chain consumers gain from lower prices and artist gain from being able to tap into a
new market and the ease of distribution. However record labels and production companies lose in terms
of profits.
These changes cause the underlying market structure to also change by allowing emerging digital
music providers the ability to cut out an unnecessary steps in the value chain. This is done by allowing
providers the ability to deal directly with the end customer. Gosain and Lee (2011, p. 144) have identified
five key difference between the physical and digital market channels: a decoupling of the digital content
from the physical carrier; easy unbundling and rebundling for digital goods; finer-grained control over the
customer experience and dynamic pricing; less importance placed on physical logistics and brick-and-
mortar infrastructure; and an increased role for value-added information and the support of information
processing tasks. Each of these is very apparent in the digital music distribution since the cost of
resources has drastically been reduced with the changes in technology. With information-based goods
such as digital music the majority of the costs are in the development of the first copy of the good. Once
developed, it can be reproduced and distributed at essentially zero cost.
5. In the tradition recorded music value chain include copyright and licensing, production,
distribution and inventory, and promotion and marketing costs. I this traditional value chain the record
labels make the most profit and have the most control.
With these changes in music format going to digital there are changes that are made in the
recorded music distribution value chain. Kauffman and Walden (2001, p. 5-6) argue that technology
enables products, business processes and markets. In addition, markets are defined by the business
process that permits transactions of specific products. With digital music, the new MP3 audio format
standards and the Internet have enabled new music products and distribution processes. This has caused
the existing market to be reshaped.
There are five activities that occur in the virtual value chain: gathering, organizing, selecting,
synthesizing, and distributing information (Rayport & Sviokla, 1995, p.76). Clemons and Lang (2003)
provide a detailed analysis of the impact of changing digital technologies on the five value added
activities identified by Rayport and Sviokla. For digital music, the creation and recording of music along
with the signing and promotion of artists represents the gathering and organizing steps that are now being
taken. Selection and synthesis occur when the artists and/or record labels produce digital recordings.
6. Distribution of information occurs over the Internet when consumers purchase digital music files from a
distributor and download or stream this content.
With physical retailers being replaced with digital music retailers manufactures and distributors
are becoming obsolete since record labels, producers and artists can now go directly to the digital music
retailers without needing a physical product. This not only reduces the distance between the artist and
consumer but also between the supplier and the consumer.
Digital Music Industry Value Chain
The added value to music products from manufacturing and distribution decreases as digital
music retailers add new value to the industry chain. With the added benefits of Internet distribution value
can be added through marketing, promotions, copyrighting and licensing. While value is added through
the enforcement of IP rights the value chain will be affected by issues that are related to this.
Manufacturing Inventory and Distribution and
Sales
Compose,
Produce and
Record
Copyright and
Licensing Marketing and
Promotion
Consumer
Increased Value
Contribution
IP Rights
Enforcement and
Piracy Protection
Digital
Distribution and
SalesDecreased Value
Contribution
7. As the roles of the players in the value chain shift new incentives are formed. Digital music
providers have profit incentives for differentiating themselves in their product versioning, services, and
brand. Digital music retailers can offer services such as recommendations based on downloads and
product extensions such as downloadable lyrics. By being able to separate digital music products this
provides an opportunity for the sellers to offer unique bundles to consumers.
Though digital music has advantages over physical formats, the product is incomplete. Digital
music does not include some of the important attributes of the physical CD. These include artwork, lyrics,
liner notes, and additional content found in enhanced CDs such as exclusive online content. But these can
be made available in a digital form for distribution purposes.
The value chain players should differentiate their digital music products and how they segment
the market. By providing digital single song products it has allowed for customization in bundling which
offers a unique product to customers in that they are now given their own bundles of music.
In comparison of the tradition value chain to the new digital value chain digital music has opened
up new unique ways for companies to do online marketing for digital music content. This redesign of the
value chain should address the issues that the industry faces in being better able to serve the different
needs of each customer segment. “It is important that the labels recognize how dramatically their power
has been reduced and how drastically their profits will be reduced if they attempt to continue their
existing business models (Clemons & Lang, 2003, p. 274). Since digital music’s only distribution channel
is the Internet. The main players in the music industry should consider opportunities to advertise and
attract customers online, as well as explore the creation of strategic alliances.
8. References
Bott, E. (2010, December, 6). iTunes alternatives: how do Amazon and other digital music services
compare?. ZDNet.com. Retrieved from
http://www.zdnet.com/article/itunes-alternatives-how-do-amazon-and-other-digital-music-
services-compare/
Clemons, E. K., & Lang, K. R. (2003). The decoupling of value creation from revenue: A
strategic analysis of the markets for pure information goods. Information Technology and
Management, 4(2-3), 259-287. Retrieved from http://ezproxy.nu.edu/login?
url=http://search.proquest.com/docview/194459376?accountid=25320
Gosain, S. & Lee, Z. (2001).The Internet and the Reshaping of the Music CD Market. Electronic
Markets, 11(2), 140-145. Retrieved from
http://aws.iwi.uni-
leipzig.de/em/fileadmin/user_upload/doc/Issues/Volume_11/Issue_02/V11I2_The_Internet_and_t
he_Reshaping_of_the_Music_CD_Market.pdf
Kauffman, R. J., & Walden, E. A. (2001). Economics and Electronic Commerce: Survey and Directions
for Research. International Journal Of Electronic Commerce, 5(4), 5-116. Retrieved from
http://web.a.ebscohost.com.ezproxy.nu.edu/ehost/pdfviewer/pdfviewer?sid=267a7865-54f5-411f-
8af1-130f1ca50982%40sessionmgr4002&vid=1&hid=4112
Keegan, P. (2004). IS THE MUSIC STORE OVER?. Business 2.0, 5(2), 114-118. Retrieved from
http://money.cnn.com/magazines/business2/business2_archive/2004/03/01/363569/
Rayport, J. F., & Sviokla, J. J. (1995). Exploiting the Virtual Value Chain. Harvard Business Review,
73(6), 75-85. Retrieve from
http://web.a.ebscohost.com.ezproxy.nu.edu/ehost/pdfviewer/pdfviewer?sid=d878fcb3-ac2a-420e-
9f57-dcdea924908e%40sessionmgr4002&vid=2&hid=4112
Smith, C. (2013, March 25). iTunes Sales Are Making Apple Money, No Longer Just A Lure For
Hardware. Hypebot.com. Retrieved from