QUESTION 1 Draw the “bricks and mortar” value chain by which records, tapes and CDs are created
, distributed, and sold in retail stores. Use formats similar to Exhibits 2.1 to 2.5, and write a one-page description of how this value chain works and how each player makes money.
Traditional Music Distribution Value Chain (Bricks and Mortar)
Content Creation: Artists / Producers / Composers / Ghostwriters
Production / Publishers (Recording)
Sales & Marketing (Publicity)
Distribution (Pack & ship)
Wholesale (Sales to Retailers)
Retailers (Sales to customers)
Customers (End Users)
The process begins with the talent pool which includes artists, producers, composers, ghostwriters and among others. These artists are then contracted to a international record label to produce music recordings such as Sony BMG, Universal, Warner and EMI are examples of large music companies that own smaller record labels. The rest of the record label industry is made up of independent labels such as Sub-Pop, Epitaph, and Muse Music. Record labels add to the artist’s product by augmenting it with marketing campaigns, promotions, concerts, and most importantly, access to and bargaining power with distributors. Artists often find it beneficially to leverage the resources of a record label in order to reserve shelf-space amongst retailers. Best Buy and Wal-Mart are the two largest brick and mortar (versus digital) music retailers. The big four own their own distribution channels while smaller independent record labels rely on separate systems of distribution. Finally, the music is finally delivered to the end-user or the consumer. Though there are many separate steps in the value chain, many record labels and music groups, including the “Big Four” participate in several of these stages. For instance, Sony BMG may enter into a contract with an artist, then publish, manufacture, and distribute that artist’s work. Please refer the diagram for more details.
Digital (Online) Distribution Value Chain
Online Music Store Rights clearance and royalties
Artists and record industry
Content Creation: Artists / Producers / Composers / Ghostwriters
Hosting in server /proprietary & digitised format
Network and Device Provider
Production Sales & Marketing (Publicity) Digital record encoding Delivery over networks Device: Handphone / iPod / Portable Device etc
Jukebox sotware / iTunes / RealPlayer etc. and justify your recommendations. abd write a one-page description of how this value chain works and how everyone makes money. The adoption and diffusion of digital music.5.1 to 2. Use formats similar to Exhibits 2.
Billing / Fee
Digital Content Creation
Digital Asset Management
Digital technologies in the music market will drive changes in the underlying market structure and value chain.QUESTION 2
Develop an alternative value chain structure for this industry. wide distribution networks through the online channel. reduction in “distance” between artists and consumers. reduced costs of
lyrics. Selection and synthesis occur when the artists and/or record labels produce digital recordings. and additional content found in enhanced CDs (video games. Manufactures and distributors are becoming obsolete as record labels. video clips). reducing the “distance” between the music supplier and the consumer. but digital music retailers add new value. The changed value chain is likely to be affected by issues that relate to IP rights. Their role in the music market is changing as a result of the digital music format. supply information and coordinate transactions. There is also value added through enforcement of IP rights and piracy prevention. With Internet distribution and music piracy. Digital music does not include some of the important attributes of the physical CD. They set market-clearing prices. make purchase and sales decisions. the creation and recording of music and the signing and promotion of artists represent the gathering and organizing steps. manage inventories.
For digital music. they can now add value through marketing. Though digital music also has advantages over physical formats. Physical retailers are being replaced by digital music retailers.replication and production and copyright protection and piracy issues will affect the music market structure. Distribution of information occurs over the Internet when consumers purchase digital music files from a distributor and download or stream content. the channel power dynamics change. there will be new incentives as the roles of the players in the value chain shift. Plus. As a result.
The added value to the music product from manufacturing and distribution is decreasing. But these can be made available in a digital form for
. producers and artists can go directly to digital music retailers without producing a physical product. liner notes. desktop wallpaper. copyrighting and licensing. promotions.
Intermediaries are economic agents that facilitate transactions between suppliers and buyers. These include artwork. the product is incomplete.
There are many opportunities to explore consumers’ willingness to pay in the context of illegal file sharing and piracy in the digital music value chain. Under the income derive from digital music which is the two main pricing strategies for digital music: pay per song download and subscription services. these also should include monthly subscription and pre-payment credit.value chain distribution of digital music and the price digital music offer much cheaper compared to analogue music and easy excess to the consumers.
Explain and compare the role of operations in the two value chain structures you developed in question 1 and 2. Grokster. that person is acquiring a product that represents all contributions of a chain that are part of the music industry. and the like. Gnutella. which are all based in peer to peer networks or just selling music without taking care of the copyrights.
There are two main value chains structures :
Brick and Mortar Value Chain For Traditional Music Industry
Artists / Producers / Composers / Ghostwriters
Brick and Mortar Value Chain For Digital Music Industry
Artists / Producers / Composers / Ghostwriters
The principal physical distribution channel of the recording music industry value chain has been standardized with a final physical media as CD's among other products. Unfortunately with the Internet and digital technology the recording music industry has been one of the most affected by companies like KAZZA. The price that is paid for a CD compensates all the
. When a person buys a CD. Morpheus.
Packaging from manufacturing to distributors. Apple’s performance in
. concerts. It is important to know that there are other types of distribution channels like radio stations which use music to make profits.
Retailing: Carried by major label and internet superstores until products become popular with particular segments. tours.
Indirect distribution through traditional channels: chain music stores and chain bookstores. The value chain for the music recording industry consists in basically a few components:
Artists or Singers
Publisher / Recording: Studios such as Universal Music. These companies are known as professional users of music and in order to use any kind of music they have to pay fees for doing so. BMG or EMI
Manufacturing: CD Manufacturers
Marketing: Advertisement. The current bullish global digital music market is attracting a flock of industry heavyweights. etc
Distribution: Transportation. independent business entity. Warner Music.
Indirect distribution through nontraditional channels such as gift stores. Sony Music.
According to the forecast of iResearch. the global digital music market will remain on the fast track. In this way some of the factors that make part of the recording music industry value chain are facing decreases in their sales and revenues. and the market value by 2010 is expected to hit a record high of USD12 billion. Backed by the success of its iPod music player and iTunes music store. catalogues. Interviews.contributors involved in the production of the CD.
is expected to reach USD 9. that the digital music market is abuzz with various kinds of players. the potential of the digital music market will certainly continue to be further explored and exploited. Hence. as well as a wide variety of value-added services. which will be centered on “Plays for Sure”. carriers are also beginning to tap into the digital music gold mine (market).3 billion. one might say. a new sales model based on the sale of a single track. by 2009. So. the revenue for mobile music alone. indubitably. digital music also features greater pricing flexibility. digital music will become a virtual gold mine for telecom carriers and the music industry. has likewise thrown its hat into the competitive digital music arena by recently launching its MSN Music online music service.the marketplace has been nothing short of spectacular. With the development of value-added telecom services. making it the envy of all its rivals. and have quickly found their feet in this highly lucrative market with the introduction of their knockout product – the Ringtone. It further plans to establish an industry chain alliance. The software giant. Apart from these household names. As a conventional
retailer. When compared with conventional music. According to the report. as well as allowing people to listen to music on a trial basis and buy downloads anytime and anywhere.
Thus. have also emerged in recent months to join the ever growing digital music competitive arena.
. with the continuous development of the 3G & 4G network. Microsoft. Wal-Mart has also taken a hand in digital distribution. a wide array of professional service providers.
Member of the Value Chain
The artists themselves: Central to production. home stereo. transactions (for now lets not worry about the credit card processing companies. driving demand The artists themselves: at the center of what the fans want. and: A&R – refine product to meet market demand Marketing – present message through appropriate channels Advertisement. tuning consumers
Performance Recording Editing Programming content style and content. presenting music to the market through appropriate channels. but also a key enabler for promoting music to the mass market.Herewith the summary of comparison the value chain for music industry : Elements Production Marketing Distribution Function Invention Understanding what the Delivery of music to Writing market wants. instore marketing.
Consumption Playback. catalogues. customer support. etc) Distributors: move content to retailers Duplication
CE: CD players. tours. Wholesalers business into itself but tshirts and posters play a Labels: fund a large part big role in marketing of this process Print media: business also provides reviews and advertisements that drive consumer adoption and information Retail channels: in-store marketing can be very important Grassroots / street teams: increasingly important The labels: provide funding. Value added providers: make the content better Songwriters: as important as the artists in many cases Set musicians Sound / studio engineers The labels: provide funding to bring the right elements together
Retailers: shelf space. PC/IT: software players Automotive: as integrated into the car and other transportation
Merchandisers: again. and live performance is a key method of marketing Live venues: same Radio: a business unto itself. etc. May be involved in any or all of the functions Producers: enhance the quality of the created work through understanding of the creative process and bringing together the right people to make it work. POS software.
etc. Under any circumstances. Interviews.com) Streaming radio – to the extent that programming is done by humans this is virtually identical to existing broadcast radio Value of analog value chain segments can be completely eliminated in a strong DM scenario. informed market P2P: can enable nearly costless presentation of content to marketplace Portals and filters: similar to print media in the analog world – but can have broader reach at much lower costs Filters and matching techniques (Amazon effect) – can radicalize segment by dramatically increasing the quality of match between consumers and product and can be virtually costless at scale (see Launch. etc Targeted product. costs of marketing can be reduced considerably (and effectiveness of existing marketing channels and techniques diluted by alternative channels)
A CD on the shelf.)
Effect on Analog Model
Costs of production reduced Greater supply at higher levels of quality possible (particularly at the bottom-end of the spectrum)
Everything except for retail undermined Retail at risk or at center depending on business model
Devices no longer tied to media or content De-prioritize value or even location of medium in favor of content
. Leverage commodity IT equipment for storage media Convergence makes everything into an audio device (cell phone.Output
A musical work of varying degrees of quality Software enables production at lower costs and higher rate. transactions to consumers Can enable costless copying and distribution of content to all consumers
Digital Music Marketing
Consumption in multiple locations including traditional and digital Increased storage and portability – virtually all the music you could ever want can be carried in the palm of your hand. digital camera. increased demand. More people can have access to more powerful tools – increase quality of offering at a much lower final cost
concerts. coffee maker.
Digital Music focus on unique product quality which is personally satisfied or meet the needs of certain market consumers and increase in volume of sales.
Currently it costs millions (assume $2.
In principle. Music everywhere.5 MM) to bring a CD through the value chain to retail. download and share the music thru various devices so it increase total sales or revenue to the related industry.
Using Digital Media production tools.
Socio/Psychological factors aside.
Expanded consumption mechanisms can increase the ways and locations for music consumption. all but the highest levels of production can be achieved for a fraction of the price.Digital Music Value Chain : Opportunities
Total cost structure can be greatly reduced throughout the value chain which is interference from middle parties had been cut off. More people listen.
. estimate that total costs could be reduced certain extent for a mid to high end album
Enhanced marketing and distribution can dramatically increase both the quantity of music consumed as well as the quality of the experience.
Eliminating marketing and distribution costs can more than cut this in half. cost-structure can be reduced to the amount necessary to provide incentive to human factors in production.
not on most efficient production and dissemination.
Digital Music: Conclusion and Recommendation
An effort should be made to catalyze the key elements of Digital Music necessary to make it into a vital force.
Any effort that requires participation from the existing major copyright holders will be suboptimal due to their vested interest in Analogue Music (and need to dominate any Digital Music value chain). that same efficiency could also dramatically decrease the size of the pie.Digital Music Value Chain: Obstacles
Cannibalization: Analoge Music is a billion-dollar industry. To the extent that Digital Music cannibalizes that industry. Disintermediation or risk of disintermediation due to Digital Music will cause strong resistance (or modification of Digital Music)
Copyright: existing copyright laws put emphasis on maximum exploitation of content.
Recommendation that Digital Music focus on building a Digital Music market that is beside and alternative to the Analogue Music (and Analogue Music-derivative markets). labels have a strong position in Analoge Music.
Power Struggle: because they are the principal source of risk funding (and marketing). content owners will resist transition to Digital Music which is give the power of choose to the consumers. This Digital Music market will attempt to start from the core strengths of Digital Music and build-out rather
. This could prevent adoption of Digital Music.
Although efficiency provided by Digital Music should increase margins for music distribution.
PLAYER CONVENTIONAL Artist VAS DIGITAL MUSIC VALUE FLOWS POWER CHANGE
More control of production. Potential increase in profits Decreased copyright protection
Copyright enforcement Label and Production Company Produce. promotion. Specifically. of recorded music Distribution.
An economic model targeting total value of compensation to the production elements in the value chain for the equivalent of an "album" at some degree of scale.
A critical-mass of content and consumer participation with this technology..
CONVENTIONAL VALUE FLOWS Music composition (creativity) Recording of music Performances and appearances
DIGITAL MUSIC VALUE FLOWS Composition. promotion
Loss of control over production and distribution Potential decrease in profits
. mfg. performance (creativity) Recordings. mktg. appearance Production and distribution arrangements Copyright enforcement Marketing. this market will consist of the following:
Key technologies for costless marketing and distribution of digital music. distr.
As comparable of value chain in music industry herewith the different and similarity of the both products in the music industries and the change of business structure in the global era.than using Digital Music as an add-on to the Analogue Music world.
IP Rights Enforcement Body
Limited intellectual property rights enforcement
Intellectual property rights enforcement Piracy prevention Prosecution of music piracy cases
Increase control over the legal distribution of digital music
Traditional Retailer Digital Music Retailer
Distribution to customer Advertising None
Loss of customers/sales
Distribution to customer Advertising Services (recommendations. search. etc.)
Growth of digital music market Potential increase in profits Increased competition
Purchase music in physical format
Choice: purchase physical format or digital format or pirate digital format
New supply channel More product choices More power over prices