DID IT KILL THE MUSIC INDUSTRY?JUI RAMAPRASAD

TEACHING PLAN

UNIVERSITY OF CALIFORNIA, IRVINE

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?

1. LPs

2. CDs

3. iTunes

4. Napster

5. LimeWire

6. Bit Torrents

7. Other

HOW DO YOUR PARENTS GET MOST OF THEIR MUSIC?

1. LPs

2. CDs

3. iTunes

4. Napster

5. LimeWire

6. Bit Torrents

7. Other

IS MUSIC PIRACY DETRIMENTAL TO ARTISTS?

1. Yes

2. No

3. It depends.

IS MUSIC PIRACY DETRIMENTAL TO THE MUSIC INDUSTRY AS A WHOLE?

1. Yes

2. No

3. It depends.

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 = 0Role of Information Technology

Music Producer (Artist, Label)

Music Consumer

Transformed music to a pure information good

Internet as a distribution channel

INTERNET AS A DISTRIBUTION CHANNELInformation Technology

Music Producer(Artist, Label)

Music Consumer

Transformed music to a pure information good

Less costly to produce (multiple copies of) music

Internet as a distribution channel

Less costly to distribute music, both physical CDs and digital albums/tracks.

THE NUMBERS: OFFLINE VS. ONLINE MUSIC

No shelf space

No manufacturing costs

Low distribution fees

PHYSICAL VS. DIGITAL

IT & MUSIC CONSUMERSInformation Technology

Music Producer(Artist, Label)

Music Consumer

Transformed music to a pure information good

Less costly to produce music

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).

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 = 0Information 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 LECTURE1. 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.

3. 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

2. $0.01 - $1

3. More than $1, less than $5

4. More than $5, less $10

5. More than $10

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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.

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.

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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.

iTunes price

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OTHER COMMENTSI 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.

I never get music illegally anymore. Too scared...

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OTHER COMMENTSI 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

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

IS THERE STILL A ROLE FOR RECORD LABELS?

Yes

No

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 LECTURE1. 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.

3. Given this, what are the options move into Radiohead case & bring in pre-class survey.

4. Other emerging IT-enabled business models (discuss the “Free” reading here).

WHERE ARE WE NOW?

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CONCERT TICKET SALES

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EMERGING BUSINESS MODELS

11/10/2011

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MUSIC CONSUMPTION: COMPETING WITH FREE

pre-napsterization: radio, live show, purchase CD

post-napsterization

• [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)

Source: Kristin Thomson, Future of Music Coalition

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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

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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 LECTURE1. 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.

3. Given this, what are the options move into Radiohead case & bring in pre-class survey.

4. Other emerging IT-enabled business models (discuss the “Free” reading here).

5. Generalize to other digital goods industries (discussion).