1. Competitive Forces Analysis
Today a growing number of consumers are using the Internet to access music. The Internet has changed the distribution systems as well as raised many legal and ethical issues in the music industry. With the Internet making a presence in nearly every business, it is not surprising that the Internet is bringing about some changes in the $38 billion music industry. The onset of the Internet will demand change in the business model and overall strategy of those participating in the music industry.
1b. Industry Driving Forces
The introduction of the Internet into the music industry is the most influential driving force of change. The Internet significantly increases the size of the market because it is much easier to reach consumers that were not previously being reached. The number of people using the Internet to access music is continually growing for a variety of reasons. Consumers are using the Internet because they can acquire free or cheaper music. Consumers may also use the Internet to get music that is not available to them on the radio or in retail stores. The Internet also provides convenient shopping as many of the participants in the Internet music industry provide customer service measures such as chat rooms, instant messaging, secure credit card transactions, wish lists, reviews, order status checks, recommendations, and availability searches. Consumers may also just want to avoid overcrowded shopping centers and sales tax. The Internet also offers some incentive for use by artists. The Internet allows artists to reach customers that may have never accessed their music through the traditional distribution channels such as retail stores or concerts. The enormous market creates the opportunity for artists to produce and market their own music with little need for a record label. Furthermore, participants in the Internet industry also provide customer service measures to the artists such as preparing sound clips, monitoring inventory, sales information, and automatic re-ordering. The onset of the Internet as a driving force of change for the music industry goes hand-in-hand with the increasing globalization of the industry as a driving force of change. The Internet expands the music industry to a worldwide population. Marketing innovation is another driving force of change that is tied to the introduction of the Internet due to the increased market and the increased ability to reach consumers.
Another largely influential driving force of change in the music industry is the changes in the cost of purchasing the music. Before music became available via the Internet, the only way consumers could access music was through purchasing CDs at retail stores or listening to music on the radio, on television, or at concerts. Many consumers felt that buying overpriced CDs often for just one particular song was not a good option. When the Internet companies entered the music industry selling music and little or no cost, consumers were quick to react. The lower cost to access a larger variety of music attracted a very large market.
Product innovation and technological advancements are also driving forces of change in the music industry. The MP3 was a major invention for the music industry. The MP3 compressed digital audio information to a size that made is relatively practical to send it over the Internet. A large number of web sites were able to offer MP3 files for downloading at little or no cost. The MP3 invention offered near CD quality sound and files could be downloaded at a very fast rate. The creation of Napster is another major product innovation in the music industry. Napster enabled users to locate and share media files from one convenient, easy-to-use interface. Napster offered a wide variety of songs and also provided services to the customers such as instant messaging, chat rooms, host lists, and bookmarks.
Regulatory influence is a driving force of change that may make this industry less attractive. Due to piracy of copyrighted works and the lack of royalties paid to artists, many lawsuits have been filed. It is now up to the legal system to decide on the proper action to protect these rights. This decision will have major implications for the majority of the Internet participants.
The onset of music on the Internet has brought about dramatic changes in the competition of the music industry. Overall the competition is strong in the music industry due to the large market, low entry costs and barriers, the large number of industry participants as a result of the introduction of the Internet. Also, the competitors are all competing on similar factors including price, customer service, availability of music, and quality of sound. It is difficult to differentiate on these factors. With the onset of the Internet in addition to retail stores, radio station, music television, and concerts, there are relatively few substitutes to the music industry. The buyers in the music industry are extremely important because whether or not they buy music determines an artist’s success. Incorporating the Internet into the music industry works very well for an unsigned artist because they are given the chance to expose consumers to their music who may have never accessed the music previously. Traditional record labels are still effective for well-known artists who rely on extremely effective budgeting, marketing, and promotion strategies. The competitors may be subject to legal implications resulting from laws to protect copyright, intellectual property, and royalty rights due to the free sale of an artists work via the Internet.
The music industry will continue to grow in the future and the role of the Internet will become even more prevalent due to the convenience, high level of customer service and lower cost to consumers as well as the marketing options available to artists. However, their will be changes in the law to protect copyright, royalty and intellectual property rights.
The traditional record labels should continue to emphasis their ability to be the best provider of marketing, distribution and promotion strategies. They also have the option of developing digital transmission products to compete with MP3 as a high quality, high technology provider in the music industry. The traditional record labels could also establish a joint venture with an Internet superstore to sell their CDs at a discounted price. They could also create their own Internet store. The traditional record labels could design web sites that offer customer services such as chat rooms, artist information, instant messaging and a variety of others. The Internet Superstores should continue to offer a wide variety of music at a lower cost to attract the greatest number of customers. They should also continually improve their current customer services. The digital transmission sites should continue to offer a high quality, high technology product at a low cost to consumers. They should improve on their relationship with the artists to avoid further litigation and attract artist distribution. The peer-to-peer networks must come to an agreement with the artists and record labels in order to continue their operation. They will probably have to require that the customer make some sort of payment to access the music in order to pay royalties.
2. Strategic Group Map
The axes labels that I chose for my strategic map are the specific distribution channel and the cost of accessing music to the customer. I chose the distribution channels as one of variables because I felt that the various channels were the main contributors of change in the music industry. Before the presence of the Internet in the music industry, there was basically only one distribution channel so I felt it was important to further examine this new mix of distribution channels. The form of the distribution channel differentiates each firm from its rivals so I felt this was a good variable to examine. I chose price as the other variable because I wanted to pick something that was not highly correlated with the distribution channel. The cost of accessing music is an extremely important factor for the buyer and whether or not the buyer purchases the music determines the success of this industry so I felt this was also a good variable to examine.
Presently, Sony is in the traditional record label distribution channel which sells their artists’ recordings in a variety of manners. The cost of accessing music is high for the customer because each time they want to purchase a song they have to purchase the entire CD unless they happen to find a CD single. The average cost of purchasing a new CD is $16 so this could get quite costly if a consumer purchases a CD every time they want to purchase a new song. Amazon.com is currently in the Internet superstore distribution channel and offers music to consumers at a discounted or medium price. UP3.com is currently in the digital transmission distribution channel. The cost to the customer is low because consumers can access MP3 files at little or no cost. Napster and Gnutella are in the peer-to-peer file sharing distribution channel. The cost to the consumer is low because consumers can share the files for little or no cost.
In the future, Sony will have to gain more of a presence in the Internet music industry as it is unlikely that the Internet will exit the industry. This could be achieved through developing digital technology or selling recordings through Internet stores at a discounted price. Sony should continue to be the industry leader in marketing, promotion, and distribution. A potential consequence of this strategic map move is that their current artists will not agree with Sony selling their work at a discounted price. Amazon.com is in a good position in the strategic map. They should continue with their current strategy. MP3.com may have to increase the cost to the customer in order to pay adequate royalties to the artists and avoid litigation. Napster and Gnutella may also have to increase their cost to pay royalties and avoid litigation. The consequence of increasing the cost to the customer will be the potential loss of customers due to increased price.
3. Ethical Issues
Many legal and ethical issues are raised with the entry of the Internet into the music industry. The major issue is the free sale of an artist’s work. Digital transmission and peer-to-peer file sharing firms often allow consumers to access music for little or no money. This means that the artists are not receiving royalties for their work. The protection of copyrighted work and intellectual property is covered by law. However, the needs of consumers and unsigned artists also have to be considered. The Internet makes it possible for artists to distribute and promote their own music without the assistance of record labels. Record label firms fear that this will cause artists to break away from the label or will not want to sign with a label. Unsigned artists, however, can use the Internet to reach a large audience that they would not otherwise have access to. Successful artists may have a problem with the use of the Internet in the music industry because it allows consumers to access their music for free and they receive no compensation in terms of royalties. Consumers feel that music is often overpriced and the CD usually only has a few good songs but regardless you pay the same price, Consumers want access to a large variety of music which they can access at a low cost. Consumers feel the Internet gives them the ability to listen to music and participate in the music community. Studies have shown that these consumers just like music and will often still end up buying CDs. Each of these stakeholders has a real interest in the different issues presented with music on the Internet. It is very difficult to determine which stakeholder should be accommodated.
I feel that the majority of the music is owned by the artists and the record labels. The record label has a stake because they invest the money to move through the value chain process which includes recording, manufacturing, marketing, distribution, and retail. The artist has a major stake in owning the music because it is their creative vision, hard work, performance skills, and overall appeal that really sells the music.
4. Overall Summary and Conclusions
Through the introduction of the Internet into the music industry we have seen major changes. The industry is now available to a larger number of consumers as well as unsigned artists and entry into the industry is much easier due to decreased cost, barriers and the increased number of participants in the industry. This industry will continue to grow and the legal and ethical issues will have to be addressed until a suitable agreement is reached between the record labels, the artists, and the consumers. I feel that Amazon.com is currently in the best strategic position because they are capturing customers by selling music at a discounted price but are still maintaining their ethical responsibilities by ensuring the return of royalties to the appropriate stakeholders. I feel the other firms will move toward this strategy in the future. Therefore, I would invest in the stock of Amazon.com at this point in time. The Internet is an element of our business world that will create the need for change and the re-development of strategy; however, I feel the Internet is an incredible opportunity for our world.
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