DID IT KILL
THE MUSIC
INDUSTRY?
JUI RAMAPRASAD
TEACHING PLAN
U N I V E R S I T Y O F C A L I F O R N I A , I R V IN E
JUNE 8, 2012
LEARNING OUTCOMES
1. Understand the impact that information technology has
had across the multiple players in the distribution
channel of music.
2. Examine emerging information-technology enabled
business models in light of the changing music industry.
3. Generalize the example of the music industry to other
digital goods industries.
STRUCTURE OF THE
LECTURE
1. Pre-Class:
1. Students fill out survey on their music consumption habits
and Radiohead NYOP strategy (adapted from the HBR
Radiohead case).
2. Readings: “Information Rules” by Shapiro and Varian;
“Free” by Chris Anderson
STRUCTURE OF THE
LECTURE
1. Pre-Class:
1. Students fill out survey on their music consumption habits
and Radiohead NYOP strategy (adapted from the HBR
Radiohead case).
2. Readings: “Information Rules” by Shapiro and Varian;
“Free” by Chris Anderson
2. In-Class:
1. Set up the problem: Shift in music consumption and
question on ethics of piracy.
HOW DO YOU GET MOST OF
YOUR MUSIC?
0%
0%
he
r
0%
Ot
0%
ts
0%
en
0%
rr
0%
To
Other
ire
7.
Bi
t
Bit Torrents
eW
6.
Lim
LimeWire
ps
te
r
5.
Na
Napster
s
4.
un
e
iTunes
iT
3.
s
CDs
CD
2.
s
LPs
LP
1.
HOW DO YOUR PARENTS GET
MOST OF THEIR MUSIC?
0%
0%
he
r
0%
Ot
0%
ts
0%
en
0%
rr
0%
To
Other
ire
7.
Bi
t
Bit Torrents
eW
6.
Lim
LimeWire
ps
te
r
5.
Na
Napster
s
4.
un
e
iTunes
iT
3.
s
CDs
CD
2.
s
LPs
LP
1.
IS MUSIC PIRACY DETRIMENTAL
TO ARTISTS?
0%
0%
0%
nd
s.
It depends.
ep
e
3.
It
d
No
No
2.
s
Yes
Ye
1.
IS MUSIC PIRACY DETRIMENTAL TO
THE MUSIC INDUSTRY AS A WHOLE?
0%
0%
0%
nd
s.
It depends.
ep
e
3.
It
d
No
No
2.
s
Yes
Ye
1.
STRUCTURE OF THE
LECTURE
1. Pre-Class:
1. Students fill out survey on their music consumption habits
and Radiohead NYOP strategy (adapted from the HBR
Radiohead case).
2. Readings: “Information Rules” by Shapiro and Varian;
“Free” by Chris Anderson
2. In-Class:
1. Set up the problem: Shift in music consumption and
question on ethics of piracy.
2. Talk about the “traditional” structure of the music industry
and the two (current) information technology shifts that
apply to the music industry: music is an information good
& online distribution of music.
MARKETING
CHANNEL FOR MUSIC
Artist
Label
Retailer
Consumer
Information Technology has changed the way music
is produced, distributed, and consumed.
CHARACTERISTICS OF
MUSIC
Physical good  Information good:
• Before: marginal cost of producing an additional album > 0.
• Now: can be reproduced at a marginal cost = 0.
Experience good:
• Must consume the good to value it!
INFORMATION
GOODS: MC = 0
Role of Information
Technology
Transformed music to
a pure information
good
Internet as a
distribution channel
Music Producer
(Artist, Label)
Music Consumer
INTERNET AS A
DISTRIBUTION CHANNEL
Information
Technology
Music Producer
(Artist, Label)
Transformed music to Less costly to
a pure information
produce (multiple
good
copies of) music
Internet as a
distribution channel
Less costly to
distribute music, both
physical CDs and
digital albums/tracks.
Music Consumer
THE NUMBERS: OFFLINE
VS. ONLINE MUSIC
No shelf space
No manufacturing
costs
Low distribution
fees
PHYSICAL VS.
DIGITAL
IT & MUSIC
CONSUMERS
Information
Technology
Music Producer
(Artist, Label)
Transformed music to a
pure information good
Less costly to produce
music
Music Consumer
Internet as a distribution Less costly to distribute 1) Easier to find music
channel
music, both physical
(search costs are
CDs and digital
reduced)
albums/tracks.
2) easier to “sample”
music (can experience
the experience
good).
THE LONG TAIL
Three drivers:
1. Democratization of production
2. Democratization of distribution
3. Decreasing search costs
“Demand is shifting from a small number of hits in the head
of the demand curve to a large number of niches in the tail of
the demand curve.”
ANATOMY OF THE
LONG TAIL
RECOMMENDATION
SYSTEMS
INFORMATION
GOODS: MC = 0
Information
Technology
Music Producer
(Artist, Label)
Music Consumer
Transformed music to a
pure information good
Less costly to produce
music
Easier to pirate music
 drives the consumer’s
willingness to pay
down.
Internet as a
distribution channel
Less costly to distribute
music, both physical
CDs and digital
albums/tracks.
1) Easier to find music
(search costs are
reduced)
2) Easier to “sample”
music (can
experience the
experience good).
What’s one of the major issues the music industry is facing now?
Consumers want everything for free (and can get it for free!).
STRUCTURE OF THE
LECTURE
1.
Pre-Class:
1.
2.
2.
Students fill out survey on their music consumption habits
and Radiohead NYOP strategy (adapted from the HBR
Radiohead case).
Readings: “Information Rules” by Shapiro and Varian; “Free”
by Chris Anderson
In-Class:
1.
2.
3.
Set up the problem: Shift in music consumption and question
on ethics of piracy.
Talk about the “traditional” structure of the music industry
and the two (current) information technology shifts that apply
to the music industry: music is an information good & online
distribution of music.
Given this, what are the options  move into Radiohead
case & bring in pre-class survey.
PRICING OPTIONS
1. Fixed: Standard $10 - $14 per album pricing plan?
2. Free: Giving the album away for free?
3. Flexible: Flexible Name-Your-Own Price (NYOP) pricing
plan?
RADIOHEAD: NAME
YOUR OWN PRICE
In 2007, Radiohead introduced their new album “In
Rainbows” to the public in a new way – they allowed
consumers to download the entire album from their website
for whatever price the consumer chose.
In addition, they offered an $80 deluxe edition available for
consumers to purchase.
MARKETING
CHANNEL FOR MUSIC
Artist
Label
Retailer
Consumer
NYOP - ECONOMICALLY
RATIONAL?
Under a Regular Release Plan,
Radiohead earns…
On physical albums: Around $2.25
(15% of $14.99)
On digital albums:
Around $1.40
(14% of $9.99)
NYOP - ECONOMICALLY
RATIONAL?
Under a Regular Release Plan,
Radiohead earns…
Under its NYOP Release Plan,
Radiohead earns…
On physical
albums:
Around $2.25
(15% of $14.99)
On the deluxe
album:
An unknown share
of $80
On digital
albums:
Around $1.40
(14% of $9.99)
On the digital
album:
Close to 100% of
the unknown
average price
HOW MUCH WOULD
YOU HAVE PAID?
1. Nothing
20%
20%
20%
$0.01 - $1
More than
$1, ...
20%
20%
2. $0.01 - $1
3. More than $1, less than $5
4. More than $5, less $10
Nothing
More than
$5, ...
More than
$10
27
5. More than $10
WHY NOTHING?
Never heard of them
I'm not too sure that I will like the album.
(25 cents) Because i don't really know much of radiohead's
music, but for a quarter i'd give it a listen.
I think I can download it for free
I didn’t ever pay for music in 2007…poor newly graduated
student.
Because my boyfriend will download it for free
WHY A LITTLE?
Have heard the band earlier but do not know what are their
recent songs
I listen to a lot of music but have only paid for it on a couple
of occasions during my life. I know that I can obtain the
album freely but I value the artist and would be willing to pay
some money for it.
29
I don't have much money right now. If I did, I would pay
more. I download all my music and hardly ever pay for it. I
would (and have) paid for Radiohead music, however
because the band gave me the option... and because they're
awesome.
WHY A LOT?
I feel it's a fair price to cover the cost of manufacturing the
CD, plus a decent profit for the band.
Because I like Radiohead and it is worth it to pay for it. I also
think the artists should be paid for the music they provide for
us.
First of I am a big fan of the band. Second, I was waiting for
this album for months. Third, they were the first to take the
initiative to relay in their fans to price their music.
30
iTunes price
OTHER COMMENTS
I will always search for free music of a given artist, and if I can't
find, THEN I go and buy it.
I generally buy music as I've had bad experiences with
downloading free, and just gave up. I love music, so I don't
really see a problem with supporting artists through purchases,
though I am not sure the percentage that goes to the artists.
I "pay" for music through XM Radio, through publicity on the
radio, through concert tickets ... etc ... to charge 16$/album or 1$
per song is highway robbery when looking at historical margins
of the music industry. A monthly amount / unlimited streaming
would make sense... at a reasonable price.
Try keepvid.com - they have a link that you can rip music out of
youtube videos. Classic.
31
I never get music illegally anymore. Too scared...
OTHER COMMENTS
I would pay more for music if I knew more of the profits
ended up in the hands of the artists.
Make music free and get to more people and that way you
can take advantage of more people going to concerts and
you could charge more for them.
I believe that eventually, all music will be free and artists will
make their money through other venues (concerts, t-shirts,
etc.).
If I like a band, I am more apt to spend money to purchase
their album. new bands I prefer to somehow get it free either
from getting it from a friend or finding it online. But if I get a
couple songs from a new artist for free, and I really like them,
then I would be willing to purchase the whole album, but I
wouldn't just spend money on a few songs I didn't know.
DID RADIOHEAD MAKE
MONEY FROM THE NYOP
STRATEGY?
1. Yes
2. No
0%
No
Ye
s
0%
SO, WHAT HAPPENED?
US
Non US
Worldwide
Percent of people
who paid for
download
40%
36%
38%
Percent of people
who downloaded
for free
60%
64%
62%
Average amount
spent per paid
download
$8.05
$4.64
$6.00
Average amount
spent per (paid or
free) download
$3.23
$1.68
$2.26
COULD ANY ARTIST BE
AS SUCCESSFUL AS
RADIOHEAD (NYOP)?
Yes
No
0%
No
Ye
s
0%
IS THERE STILL A ROLE
FOR RECORD LABELS?
Yes
No
0%
No
Ye
s
0%
RECORD LABEL
TASKS
Discover artists and develop their repertoire
Generally advise and guide artists
Advance artists’ living and other expenses
Enlist collaborators (e.g. producers)
Fund recording sessions
Produce and manufacture songs and albums
Distribute the music
Market the music
Handle royalty payments and other accounting issues
STRUCTURE OF THE
LECTURE
1.
Pre-Class:
1.
2.
2.
Students fill out survey on their music consumption habits and
Radiohead NYOP strategy (adapted from the HBR Radiohead
case).
Readings: “Information Rules” by Shapiro and Varian; “Free” by
Chris Anderson
In-Class:
1.
2.
3.
4.
Set up the problem: Shift in music consumption and question on
ethics of piracy.
Talk about the “traditional” structure of the music industry and the
two (current) information technology shifts that apply to the music
industry: music is an information good & online distribution of music.
Given this, what are the options  move into Radiohead case &
bring in pre-class survey.
Other emerging IT-enabled business models (discuss the “Free”
reading here).
WHERE ARE
WE NOW?
39
CONCERT TICKET
SALES
11/10/2011
41
EMERGING BUSINESS
MODELS
MUSIC CONSUMPTION:
COMPETING WITH FREE
pre-napsterization: radio, live show, purchase CD
post-napsterization
Source: Kristin Thomson, Future of Music Coalition
42
• [sharing] free, robust music catalog built by users, portable
format (napster)
• [sampling] free, music fans want to discover new music
based on existing musical tastes, simple interface, robust
music catalog (pandora).
• [subscription/streaming] feels free (monthly charge),
seamless user interface, robust music catalog, music “on
demand,” portable (rhapsody, the new napster, MOG,
Thumbplay)
44
45
I completely agree with Lily Allen. We're
[Radiohead] certainly not going to suffer. A lot of
people have downloaded our music for free, but
ultimately we don't suffer as much as a small
band.
--- Radiohead Guitarist, Ed O’Brien
47
SUMMARY: IT AND
MUSIC
Search costs are reduced  drive consumption to the tail
IT has altered the marketing channel  not all musicians
need labels, but some do!
IT and the Internet as enabled free consumption  changed
business models
• Use “free” to the artist’s advantage…
• But also, compete with free!
STRUCTURE OF THE
LECTURE
1.
Pre-Class:
1.
2.
2.
Students fill out survey on their music consumption habits and
Radiohead NYOP strategy (adapted from the HBR Radiohead case).
Readings: “Information Rules” by Shapiro and Varian; “Free” by Chris
Anderson
In-Class:
1.
2.
3.
4.
5.
Set up the problem: Shift in music consumption and question on ethics
of piracy.
Talk about the “traditional” structure of the music industry and the two
(current) information technology shifts that apply to the music industry:
music is an information good & online distribution of music.
Given this, what are the options  move into Radiohead case & bring
in pre-class survey.
Other emerging IT-enabled business models (discuss the “Free”
reading here).
Generalize to other digital goods industries (discussion).