Innovation in the Online Music Industry:

PRESENT

PAST

FUTURE?

Abstract

The digital economy has created a set of challenges that require different skillsets than what was to be expected pre-information age. Arguably for businesses of fast moving

consumer goods in particular, like the music industry.This submission seeks to summarize and shed light on the development and events that

has effected the music industry in particular as a consequence of technological change and innovation in the digital space. Lastly, this submission contains reflections on what the

future will arguably look like for the industry, based on innovative solutions that are receiving a substantial amount of attention at the time of writing.

PAST

Technological development - introduction.

Inventions that makes music more accessible by for example improving the format or introducing a cheaper alternative, will logically result in an increase in consumption. In his article, Dan Albright (2015) seeks to shed light on the way we’ve consumed music up until present day.

1877 – The phonograph.

Attribute: First commercial format forRecording andReproducing sound.

1920 – Commercial radio

Attribute: People no longer needed to buya physical product in order to consumeMusic in their home. Also served as aPromotional tool.

1958 – The cassette tape/1979 – The Walkman

Attributes: Allowed you to carry yourMusic with you, as well asThe opportunity to create Your own mix tapes

1980 – The CD

Attribute: More storage space and ableTo render high quality audio

2001 – The IPod & ITunes

Attributes:The IPod introduced a moreEfficient and tidier way toCategorize your music as wellAs more storage space.

ITunes made the act of purchasingRecorded music an effortless venture

But what happens when innovative ways to consume music alight as a result of an unattended need amongst consumers? In 1967, The Marine broadcasting offences Act (1967), became law in the United Kingdom. Its purpose was to put an end to offshore and unlicensed radio stations like radio Caroline that tended to the need which official radio stations like BBC Radio failed to. (Fleming & Wilby, as cited in Wikipedia 2016).The technological advancement in radio instruments made it possible for to broadcast sound from international waters. This is comparable to how peer-to-peer technology (P2P) allows anyone with a computer to effortlessly distribute and obtain recorded music. Thus when Napster emerged in 1999, use of the software was reffered to as “piracy” as it too infringed upon copyrighted material.

Disruptive innovation in recorded music.

“Systematic file sharing began with Napster. After its introduction in June 1999, Napster quickly became popular among Internet users. The number of users grew extraordinarily, and numerous music files were exchanged via Napster”. (Hong, S. p299. 2013)

The economical impact of music oriented P2P services.

Comparable to The marine broadcasting offences Act, the industry sought out to stop what Christensen (1997) refers to as a “disruptive innovation” through legal action, as it interfered with the industry’s current business model.The exact effect of illegal downloading is a discoursed topic. According To IFPI (2010), overall music sales dropped by 30 percent between 2004 and 2009 due to illegal file sharing. During that particular time period, the P2P service “Limewire” was in the spotlight. arguably due to it’s amount of users and therefore activity, As it claimed to have “50 million unique monthly users” at the time, according to Kravets (2010).It can be argued that this led to the case of Arista Records LLC v. Lime Group LLC, where the RIAA suggested that the Lime group owned them 75 trillion dollars in statutory damages.(Purewal, 2011). In the same article, Purewal brings up Judge Wood’s comment that the entire worlds GPD was somewhere between 59 and 69 trillion dollars.

Source: http://www.ifpi.org/content/library/DMR2010.pdf

75 tr. $ 69 tr.

$

PRESENT

Increased connectivity.

Even though both Napster and LimeWire's venture ended as a result of the music industry’s legal actions, they raised an important issue. Namely that there is a development in digital technology that affects the entertainment industry in particular and that it needs to be monetized.

Additionally, as Wikström argues in his book The music Industry (2009) there has been a shift in power from industry to consumer as a result of the internet. He introduces the concept of increased connectivity, which seeks to explain how the consumers now controls the flow of information, resulting in an information overload.

Thus, offering a service that focuses on personalized curation is more of a proper value proposition, being reminiscent of the record store employee who knows your personal taste.

In a world where information is abundant, people may not be willing to pay a premium for basic access to that information, but they are most likely willing to pay for services which help them navigate through the vast amounts of information. (p.7)

Streaming.

In 2003, Rhapsody was launched. As opposed to Napster, it sought out rights holders before it’s launch in order to legitimize their business. (Evangelista, 2002) Being a streaming service, it offers a flat fee per month in return for access to its catalogue of music. The daring revenue model is arguably why rhapsody failed to appeal to anyone outside the niche-segment, as it currently has a user base of 3.5 million paid subscribers. Spotify is at the time of writing, the leading music streaming service in the world, with 30 million paying subscribers. (Richter, 2016), It’s success is arguably due to it’s strategy, which adheres to the words of Wikström more so than rhapsody’s. By offering an ad-funded alternative to the flat fee, acquiring the customers whom have gotten used to not paying for music is more likely.In terms economical impact, streaming services like Spotify favours popular music. A right holder’s pay-out is determined by their “market-share”(Spotify, [no date]) , as opposed to when music was sold as a product with a fixed price. Therefore, one could also argue that the more the service is being used, the less a stream is worth.

https://www.statista.com/chart/3899/paid-subscribers-of-music-streaming-services/

http://www.spotifyartists.com/spotify-explained/

The value gap in streaming.

Another complication with the current online economy is value gap tied to the ad-funded model of streaming. In their latest report, IFPI (2016) points to YouTube as the biggest contributor to this issue with their estimated 900 million users.

Consumer behaviour in the online economy.With digitally driven revenues topping physical sales in 2015 (IFPI, 2016), the way consumers discover, consume and share music has also changed. The amount of activity-related playlists within services like Spotify suggest that consumers regard music as a means to complement an activity rather than a separate product requiring their full attention.

Consumers now also have access new channels for discovering music, for instance by using a streaming service’s own algorithm to filter out irrelevant genres and styles. The enclosed picture are findings from Eventbrite’s (2016) own survey on music discovery.

B2B Data companiesWith the importance of online consumption and promotion, came the importance of data. This need has given birth to a plethora of companies offering data-mining, processing, etc. The industry has come to realize that with music being more accessible, the marketplace is also subject to more noise. In a saturated market, accuracy is key and thus have these companies become somewhat desirable.In 2014 Spotify acquired Echo nest, arguably as an effort to better their understanding behavioural marketing. The same can be said for Apple, who acquired “Musicmetric” in 2015There has also been a growth in similar companies offering data directly to industry people, in return for a subscription fee. For instance “Big champagne” or “next big sound”.

Streaming has also revolutionised the ability of record labels and platforms to use data to understand their customers’ needs and inform marketing strategies. Record labels and services have more touchpoints of data than ever before and are able to see instantly when and where tracks are played, shared and stored, and the quality and depth of fan engagement. (IFPI, p.20. 2016.)

https://www.nextbigsound.com/profile/356

Alternative income streams

Additionally, The online economy has given birth to several alternative income streams that wouldn’t been possible before the digital age. The following are some examples:

Tone emulation, profilesand pre-sets

Music production has become more affordable and tone emulation more popular. Products like Toontrack’s “metal guitar gods” pre-set offers a means to navigate the vast amount of information in return for money. Just like a guitarist would endorse a guitar brand, he or she would endorse this particular pre-set.

Similarly, “The amp factory” is a company consisting of a single man who makes money of profiling amplifiers then selling them online for others to use.

Live concert streaming and VR.

With streaming solutions being adopted by commercial music festivals like Coachella and Tomorrowland, it has arguably already become an additional source of income. Not to mentioned the success of boiler room, which has a user base of 1.5 million active subscribers. (Wikipedia, 2016)With the current development in virtual reality technology and 360-degree video production, Promoters will arguably be able to offer an immersive alternative to those who can’t physically attend their events in the future.

For instance has Youtube at the time of writing recently announced that they will be streaming a selection of artists’ performances at this years Coachella in the 360-degree format. (Mohan, 2016)

http://www.forbes.com/sites/ericaswallow/2013/07/21/livestream-concerts/#6c7994e752d3

Teaching

Matt Halpern is the drummer of the band “Periphery”. He is also the founder of the service “bandhappy” which was shut down at the end of 2014. The service offered online music lessons and feedback by Matt himself, along with a selection of other well known artists. (Neilstein, 2014).

It wasn’t a particularly innovative service in itself, as there’s a plethora of services offering online education. However, for artists that depend on touring for income, services like bandhappy can provide another source of income that can be combined with touring.

FUTURE

The future of streaming

With the amount of paying subscribers increasing worldwide, It looks like streaming is here to stay.

As mentioned in IFPI’s report for 2016: countries Like Germany and Japan is having a harder time adopting the streaming services.

There also lies a considerable challenge with the older population. In 2014, 80% of the Norwegian population between the age of 15-29 years were using streaming services. As opposed to the age group of 45-59 where only 28% were familiar with these services. (Thorsby, p.5. 2014.) One could argue that this is an issue that will solve itself with time, as the current youth will grow old at some point.

Subscription services have seen dramatic expansion in recent years. An estimated 68 million people worldwide now pay for amusic subscription service, up from 41 million in 2014 and eight million when data was first compiled in 2010. (IFPI, p.17, 2016)

The growth in live music

In the UK, live music revenues for 2015 increased by 17 percent compared to the year before. (IFPI, p.34, 2016). It could be argued that the growth in live music is predominantly due to piracy and the loss of revenue that followed, forcing artists to tour for money. As previously mentioned there is currently a lot of technological development going on related to live music which might consequently result in even more revenue.The future for live music is promising regardless. The enclosed chart from PWC shows their prediction of the live market in the future. http://www.pwc.com/gx/en/global-entertainment-media-outlook/

assets/2015/music-key-insights-1-growth-rates-of-recorded-and-live-music.pdf

New innovation and alternative income streams

Considering the alternative income streams mentioned earlier, The growth in live music makes live concert streaming look the most promising, as the other two are arguably

unsustainable markets in terms of size. However, streaming concerts has it’s challenges too, according to Knopper (2014).

There is however little to stop the world from coming up with new solutions to further growth in all areas of the industry. One such industry cluster which has been important in

regards to entrepreneurship and innovation thus far, is the “Midemlab” start-up competition. Industry events like “Midem” or “SXSW” are important for the industry’s

growth in general, but with all start-up hubs surfacing regardless of industry, one could argue that clusters like Midmlabs have been a long time coming.

Reference list

Albright, Dann. (2015). The Evolution of Music Consumption: How We Got Here. Available at: http://www.makeuseof.com/tag/the-evolution-of-music-consumption-how-we-got-here/ (accessed the 10/04/2016)

‘Boiler Room (music project)’ (2016) Wikipedia. Available at: https://en.wikipedia.org/wiki/Boiler_Room_(music_project) (accessed the 22/04/2016)

CHRISTENSEN, Clayton, M. (1997) The innovator’s dilemma : when new technologies cause great firms to fail. The management of innovation and change series. Harvard Business School Press. ISBN 0-87584-585-1 

Evangelista, Benny. (2002). “Industry starting to endorse Net music / Listen.com to offer songs from all five major labels” sfgate. Available at: http://www.sfgate.com/business/article/Industry-starting-to-endorse-Net-music-2801248.php (accessed the 10/04/2016)

Eventbrite, (no date) From Stream to Ticket: Mapping the Value of Music Discover. Available at: https://www.eventbrite.co.uk/l/value-of-music-discovery/ (accessed the 22/04/2016)

Fleming, Carole. Wilby, Peter. (2002) Wikipedia. Available at: https://en.wikipedia.org/wiki/Pirate_radio_in_the_United_Kingdom#cite_note-Fleming_2002_32-5 (accessed the 10/04/2016)

Hong, S. (2013). MEASURING THE EFFECT OF NAPSTER ON RECORDED MUSIC SALES: DIFFERENCE-IN-DIFFERENCES ESTIMATES UNDER COMPOSITIONAL CHANGES. Journal Of Applied Econometrics, 28(2), 297-324. doi:10.1002/jae.1269

IFPI, (2010) Digital music report 2010 Aviliable at: http://www.ifpi.org/content/library/DMR2010.pdf (accessed the 22/04/2016) IFPI, (2016) Digital music report 2016 Available at: http://www.ifpi.org/downloads/GMR2016.pdf (accessed the 22/04/2016)

Reference list

Knopper, Steve (2014). ‘Why Live Concert Streaming Has Yet To Take Off.’ Billboard. Available at: http://www.billboard.com/biz/articles/news/digital-and-mobile/5915586/why-live-concert-streaming-has-yet-to-take-off (accessed the 22/04/2016)

Kravets, David. (2010) «LimeWire Crushed in RIAA Infringement Lawsuit». Wired. Available at: http://www.wired.com/2010/05/limewire-crushed/ (Accesed the 10/04/2016)

Marine, &c., Broadcasting (Offences) Act 1967, c.41 Available at: http://www.legislation.gov.uk/ukpga/1967/41 (accessed 10/04/2016) Mohan, Neal. (2016) ‘One step closer to reality: introducing 360-degree live streaming and spatial audio on YouTube’ Youtube official

blog. April 18. Available at: https://youtube.googleblog.com/2016/04/one-step-closer-to-reality-introducing.html (accessed the 22/04/2016)

Neilstein, Vince. (2014). ‘Matt Halpern is Shutting Down BandHappy.com’ Metalsucks.net. Available at: http://www.metalsucks.net/2014/11/19/matt-halpern-shutting-bandhappy-com/ (accessed the 22/04/2016)

Purewal, Sarah Jacobsson. (2011) “RIAA Thinks LimeWire Owes $75 Trillion in Damages” PCworld. Available at:http://www.pcworld.com/article/223431/riaa_thinks_limewire_owes_75_trillion_in_damages.html?_r=1&hp (Accessed the 10/04/2016)

Richter, Felix. (2016) “Where Tidal Stands 12 Months After Its Relaunch” Statista. Available at: https://www.statista.com/chart/3899/paid-subscribers-of-music-streaming-services/ (accessed the 11/04/2016)

Spotify, (no date). Spotify explained. Available at: http://www.spotifyartists.com/spotify-explained/ (accessed the 10/04/2016)  Thorsby, Marte. (2015). ‘Musikkåret 2014’. Available at: https

://dl.dropboxusercontent.com/u/26234926/%C3%85rsrapport_Ifpi_2014_low.pdf (accessed the 22/04/2016) Wikstrom, patrik. P.5-7 (2009) The music industry. Polity press.