Cepek and Salerno 1

Padraic Cepek and Stephanie Salerno

MLS 692
Mr. Boyle
15 November, 2010

The Digitalized Music Industry

Since the advent of the phonograph and other technological wonders that have advanced

recorded music in the 20th century, music is around us constantly - in stores, elevators, at home,

in the car and woven into other forms of entertainment like television, movies and sporting

events. The infiltration of MP3 players and digital files within the music industry has made it

even easier to be plugged in and listening to almost any piece of recorded music imaginable,

anywhere, anytime. The rapid adoption of technology, however, has brought heartache to the

traditional music industry business model. The only way for it to survive the influx of new

technologies in the 21st century is to create a new model. This revitalization will occur as a

result of the digitization of the industry and the overwhelming response of consumers to it. The

exact shape it will take is yet to be known, but one thing is certain: the music industry will most

likely continue losing control of the music they back, and the current model will dissolve

completely to make way for the future.

Before the new model is outlined, it is vital to examine the music industry's varied and

detailed history going back several centuries involving printed music, performances, the advent

of recorded music and the injection of commercialization into the performance, marketing and

distribution of music. Reebee Garofalo writes that in recent years "the relationship between

corporate capital and musical culture has transcended national boundaries as the music industry

has become an increasingly global phenomenon" whereas previously it thrived mainly within the

United States (319). These recent rapid technological developments coupled with globalization
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have spawned an entirely different set of norms within every major recording label, forcing a

new organizational model for the industry. In order to better understand why, Garofalo breaks

down the three major phases of the old industry: 1) music publishing which stemmed from 15th

century Europe and the first copyright law in Britain in 1710, 2) recording companies which

replaced sheet music in the mainstream in the late 19th century and 3) "transnational

entertainment corporations" which included and capitalized on merchandise, advertising, record

sales and finally streaming music over the internet (319).

Connecting all three of these industry phases has been radio broadcasting. It first began in

the early 20th century with such broadcasts as phonograph music played from the Eiffel Tower

in 1908 and the great opera singer, Enrico Caruso, at the Metropolitan Opera in New York City

in 1910 (329). Radio has been so lucrative because of its relationship to the recording industry as

well as commercial advertising (332). Historically speaking, music's relationship with airwaves

has always been driven and supported by economic terms; in fact, radio is the oldest form of

electronic advertising (Lin 204) and looks like it will be here to stay. As the internet became part

of our everyday lives, radio broadcasts were converted into online streaming while traditional

radio remained a "background medium without losing popularity," both a popular means of

listening to music on demand as well as advertising (Van Dijk 206). Fast forward a few years

and online radio is not only accessible via one's personal computer, but through mobile

technology all over the world.

The technology which presented the real challenge to the music industry came along in

the form of tiny, compressed files called MP3s and a revolutionary file-sharing program created

by college student, Shawn Fanning in 1999 (Madden 6). The process of favoring MP3s over

older media like CDs has been described by Sarah Frere-Jones, a music critic, as “a small
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example of the enormous financial buckling that is now global” (6). Specifically it was the

compression of the technology that brought the music business to its knees. First the recordings

went digital, then they were shrunk and highly transportable, an impossibility with physical

records or CDs (6). "Napsterization" refers to "a massive shift in a given industry where

networked consumers armed with technology and high-speed connectivity disrupt traditional

institutions, hierarchies and distribution systems" (5). It is no wonder that the traditional business

model came to a screeching halt when millions of kids started downloading music for free via

Napster. It is but an age old part of technological history: old media was being usurped by the

new methods. Only in this case it happened faster than anyone could have imagined.

This kind of transformation has been consistent throughout new media's progression and

made possible by the very networks in which it exists. What was once manufactured, marketed

and distributed within the confines of a metal and concrete building now uses the multimedia PC

for these functions and many, many more (van Dijk 56). In 2006, Jan van Dijk discussed the

possibility of old media being usurped by new media, an idea, he argues, which has been proven

false several times over (205). Within the music industry, however, it seems a much more

feasible scenario would be that older media is simply phased out (e.g. the 8-track, vinyl records

and cassette tape) while newer technology (CDs, MP3s and their respective players) takes over

gradually over time. It is important to realize that vinyl, for example, is still alive and well in

many circles and more and more frequently artists are releasing their albums or singles in vinyl,

CD and MP3 forms, supporting van Dijk's argument quite well. As fast as technology changes

the mainstream majority moves at a fraction of that pace.

The current state of the recording industry has been described as fragile, still "hanging on

to their broken strings" (Madden 7). Record sales for the music industry have been continuously
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declining. The Nielsen Report shows "that total album sales, including albums sold digitally, fell

to 428.4 million units, down 14% from 500.5 million in 2007" (7). According to Pew's 2008

“Internet and Consumer Choice” report, 13% of music buyers reported their most recent music

purchase was a digital download (8). Even so, CDs are not dead quite yet. Though digital album

sales “increased 32% between 2004 and 2008 —to a record 65.8 million units— 362.6 million

physical units were sold” (8). The market for digital music is young yet, and people haven't

given up on buying CDs.

These statistics are just one part of the online music revolution and the problem it is

causing the current music business model. According to the IFPI (The International Federation of

the Phonographic Industry), in 2009 "the music industry transformed its business models,

offering consumers an increasing range of new services with leading technology partners" (“IFPI

publishes Digital Music Report 2009"). This was a result of an additional substantial problem:

95 per cent of music downloads are illegal and unpaid for, an enormous challenge for record

companies and their partners, as well as a perplexing situation for many artists. To date, recorded

music is the leader of the "online and mobile revolution, generating more revenue in percentage

terms through digital platforms than the newspaper (4%), magazine (1%) and film industries

(4%) combined" (“IFPI publishes Digital Music Report 2009"). The weight of these numbers

points to the social consequences of the decline in record sales seen in the music industry around

the world. It becomes not just a matter of who is listening to what using which device, but who is

making money from the deal and who is losing out significantly. Given the economic turmoil

the United States has gone through since 9/11, how people are spending their hard earned

money, or who is not, and how artists are being compensated for their contributions is of great

concern.
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Bands like Radiohead, Nine Inch Nails, Wilco and even David Bowie willingly jumped

on the digital download bandwagon, exhibiting their adoption of new media by releasing songs

free for download or publicly singing the praises of what MP3s have to offer, while other artists,

notably Metallica, have proclaimed the unfairness of downloading via file-sharing. Among those

who were both successful and struggling, the artists and musicians Pew surveyed in 2004 were

more likely to say that the internet had made it possible for them to make more money from their

art than they were to say it had made it harder to protect their work from piracy or unlawful use

(13). The report also revealed that most artists interviewed believed that "unauthorized online

file sharing was wrong, [but] few felt the industry was in peril because of the networks. When

asked about the threat peer-to-peer file-sharing posed to creative industries at the time, two-thirds

of artists said the activity posed only a minor threat or no threat at all to them" (13).

According to 'The State of Music Online: Ten Years after Napster," 75 per cent of

teenagers who download music aged 12-17 agree that “file-sharing is so easy to do, it’s

unrealistic to expect people not to do it” (Madden 15). It prompts the question of whether or not

a generation who knows little else save downloading music for free will ever see the value in

purchasing music. Also: is purchasing CDs vs. legally downloading MP3s as serious an issue as

the law makes it out to be? Certainly as more and more people take advantage of the new

technologies available (iPods, smartphones, subscription based online music services, etc.) and

artists continue to speak out about their views on the distribution of their material, lawmakers

will have to react and at least attempt to challenge the current laws (Lipschutz 255).

Currently the music business seems to be in a precarious position. The revolution is

already in progress, and it is clear that, very slowly, the music industry is coming to terms with

what they will need to contend with to revitalize how they do business in the 21st century.
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Music subscription services, social networking sites and new licensing channels are continuing

to become more popular among teens and adults alike, embracing new media and turning its

back very slowly on the old ways. In 2008 Nokia Comes With Music, MySpace Music and

several other partnerships with ISPs such as TDC in Denmark, Neuf Cegetel in France,

TeliaSonera in Sweden and BSkyB in the UK appeared, indicating that these types of services

will provide consumers with a legal way of obtaining digital downloads ("IFPI publishes Digital

Music Report 2009"). Touring will continue to bring in the most money, the way major players

like Madonna, U2 and Radiohead make up for declining record sales ("David K. Randall On The

Music Industry"). In addition, a research group based in New York City and London, Jupiter

Communications, has "urged record labels to embrace the online world as a marketing tool, as a

means of combating piracy, as a way to earn more revenue by cutting out retailers, and as a less

expensive distribution model" (Jones 222). Whether or not the industry takes the hint in time is

yet to be determined.

Negroponte argued that as we move into a digital state of being new business models

must arise. He argues just as television manufacturers felt that increasing the resolution of TVs

was the key to moving their industry forward, music executives feel that a more efficient

delivery of models that already exist are the key to the music industry. He writes:

Better and more efficient delivery of what already exists is what most media
executives think and talk about in the context of being digital. But like the Trojan
horse, the consequence of this gift will be surprising. Wholly new content will
emerge from being digital, as will new players, new economic models, and a
likely cottage industry of information and entertainment providers (18).
The splintering of atoms into bits introduced peer to peer sharing and bit torrent which birthed

various pay per track programs, most notably, iTunes. The pay per track model however is

nothing more than a more efficient means of delivery of an old economic model. To put it

bluntly it is treating a broken leg with a Band-Aid.

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As was illustrated earlier even with more efficient means of delivering music, the music

industry is still on a decline largely because of a refusal to develop a new economic model. There

have been examples of the direction to go, by both companies within the music industry and

companies (Netflix) outside of the music industry. Feinberg argues: “The exponential growth of

Internet bandwidth combined with the ability to significantly compress digital audio has

impacted the music industry in numerous ways” ("Rent vs. Own: The Streaming Music Debate

Continues"), the most important of which is the increased feasibility of an industry based on

streaming. Currently, the streaming music business is the flavor of the month in Palo Alto with

venture capitalists throwing their capital behind various start-ups. This has led to industry leaders

such as: Pandora, Last.FM, GrooveShark, Spotify, Rhapsody and even Microsoft. All of these

different companies have different models and they are all available on different platforms (some

being computer only and other platforms being exclusive to a certain manufacturer, an example

being Microsoft’s Zune platform only being available on Microsoft products), and this has led to

a fragmented marketplace.

When the consumer decides which platform to support, s/he has to answer a couple

questions: 1.) Which platform has the majority of the artists that I listen to (there isn’t a single

streaming platform that all of the studios support)? 2.) Is the company that answers question 1

available on my mobile device of choice? The difficulty for consumers to reconcile these

questions has been a major factor to the slow transition from owning music to primarily renting

music. In order for this new vehicle to gain foothold and not have the fragmentation of the

previous model three things need to happen:

1. The current system based around Studios must dissolve. With the Studio system intact,

there is consistently a high probability that a Studio will favor one music rental platform versus
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another, which will continue the fragmentation that we experience currently.

2. A service that develops deep market penetration and is available on the majority of major

platforms—Netflix would be an adequate model.

3. A tiered pricing system that allows for everyone to enjoy the service while still keeping

the company operational and the artists paid.

Analyzing the current situation with the music industry and the transition to an online

based system, it appears that the issue needs to be addressed mostly on a macro level, or as

Negroponte would say, atoms. The macro level will deal with the overall structure of the music

industry. With our solution, it is important to understand that we are operating from the

assumption that the Studios have collapsed.

In looking at a solution for the macro economy of the music industry, there are 5 different

groups of people whose interests need to be considered in this solution: the listeners, the

musicians, the company providing the rental service (Company X), the concert venues and the

companies producing the devices that consumers use to access the rental service. Breaking down

each of the 5 players, this is what the new economy would look like for each:

1. Company X—In order to gain market penetration, it would have to be a company that

was leading in the former economy, a company like Rhapsody or Spotify. Company X would

accept music submissions from any artist, with the only caveat being that they would have to

submit their songs in groupings (using EP’s and LP’s as examples). Company X would not have

any type of quality control. The listeners would provide the quality control through ranking

services and also by choosing to listen to the songs. Mark Mulligan suggests that a three tiered

pricing system must be instituted ("The Key To Making Free Music Services Work" )); where

we disagree is how they are implemented. Company X should provide three options for
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customers: option A would be a free option that would rely heavily on ads revenue, and ads

would play with the same frequency as they do now on the radio, and ads would show along the

side of the interface that listeners are using (Google and Facebook being models); option B

would cost the consumer $10 per month and the ad frequency would be reduced to banner ads

only; option C would be $30 per month and there would be no advertising of any kind for the

listener. All three options would have the same musical content. Company X would also become

a sponsor for the various concert venues allowing them to advertise their services at the different

venues, also providing an option to host the concerts on their server once the show was over.

2. Device Manufactures—The device manufactures would host Company X’s software on

their phones, mp3 player devices, computers, speaker systems, etc. The device manufactures

would also help sponsor the concert venues and advertise their particular devices at the different

concerts. This sponsoring would help to increase the frequency and amount of impressions they

can make on the consumers.

3. Musicians—Musicians would be able to submit as many groupings of songs as they wish

to Company X. Every time a musician submitted a grouping of songs, Company X would pay the

musicians a $1000 one time payout once that grouping of songs were played 100 times. After

that, the musician would receive $1000 for every 1000 plays of a particular track. Musicians

would also be encouraged to tour and would receive a percentage of the gross revenue of

concerts they perform at.

4. Concert Venues—Would receive money from Company X and the Device Manufactures

to help subsidize the cost of putting on shows and also to help keep ticket prices lower for

listeners. Concert Venues would give 20% of the gross revenue to the headlining act and 5% to

the opening act. These terms would be mandatory and enforced by Company X as a condition for
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Company X’s sponsorship.

5. Listeners—Listeners would benefit the most from this setup. The fragmentation that

listeners currently experience, such as Sony artists being available only on certain devices would

no longer exist. It would also increase the accessibility of bands of all different sizes since there

will no longer be a filter or gatekeeper preventing certain musicians from getting through.

Finally for the listener, it will also help to keep concert ticket prices lower because there would

now be sponsorships in place by Company X and all of the different device manufactures that

will help to reduce some of the cost on the listener.

In ensuring that the music industry remains viable, there are important transitions that

have to be made. Most importantly, we must move away from the idea that increasing efficiency

of delivery is the only means of progress. It is important that we transition to a musical economy

that is free from Studios. The first step is putting in place a company that will submit music from

anyone and that has the market penetration to be accessible on any device. Once that structure is

in place Company X must use a three-tiered pricing structure that allows all listeners access to all

music, but also allows for a large enough revenue stream to allow both the musicians and

Company X to be profitable. Finally it is important to maintain a robust concert experience. Live

performance has been the backbone of the music industry for ages and through our structure we

are able to maintain that while reducing the pricing of concert tickets that has seemed to steadily

increase overtime. If these three things are able to be accomplished, we will be well on our way

to transitioning to a digital music economy from an analog economy.

Works Cited

“David K. Randall on the Music Industry.” Forbes.com, 2010. Web. 7 November, 2010.
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van Dijk, Jan. The Network Society. 2ed. London: SAGE, 2006. Print.

Garofalo, Rafee. “Music Publishing to MP3: Music and Industry in the Twentieth Century.”
American Music 17,3 (1999): 319, 329, 332. Jstor. Web. 30 October, 2010.

“IFPI publishes Digital Music Report 2009.” Ifpi.org, 2010. Web. 7 November, 2010.

Jones, Steve. “Music, and the Internet.” Popular Music 19, 2 (2000):222. Jstor. Web. 30
October, 2010

“The Key to Making Free Music Services Work.” Paidcontent.org, 2010. Web. 7 November,
2010.

Lipshutz, Jeremy. “Digital Media Technology and Fair Use.” Lin & Atkin 243-255

Lin, Carolyn A. “Interactive Media Technology and Electronic Shopping.” Lin & Atkin 203-
222.

Lin, Carolyn A. and Atkin, David J., Ed. Communications, Technology and Social Change:
Theory and Implications. New York: Routledge, 2008. Print.

Madden, Mary. “The State of Music Online: Ten Years after Napster.” Pew Internet and
American Life Project 2009: 5-8, 13, 15. Web. 30 October, 2010.

Negroponte, Nicholas. Being Digital. New York: Vintage Books, 1995. Print.

“Rent vs. Own: The Streaming Music Debate Continues.” Pbs.org, 2010. Web. 7 November,
2010.