usability factors in digital music distribution services and their

Joakim Landegren 780119-0070

[email protected]

Tutor: Roger Wallis Examiner: Nils Enlund

Usability Factors in Digital Music Distribution Services and Their Relationships with Established

and New Value Chains in the Music Industry

- A Study on Online Distribution Models Used by the Music Industry Today and Identifying of Important Factors for a Successful Service

A Master’s Thesis in Media Technology and Graphic Arts Department of Numerical Analysis and Computer Science

Royal Institute of Technology 17-04-2003

Joakim Landegren 780119-0070

[email protected]

Handledare: Roger Wallis Examinator: Nils Enlund

Användbarhetsfaktorer för digitala musikdistributionstjänster och deras relation till

etablerade och nya värdekedjor inom musikindustrin

- En studie av online-distributionsmodeller, identifiering av viktiga faktorer för en attraktiv tjänst samt konsumenters, musikskapares och

industrins intressen

Ett examensarbete i Medieteknik och Grafisk produktion Institutionen för Numerisk Analys och Datalogi

Kungliga Tekniska Högskolan, Stockholm 2003-04-17

Landegren, J. and Liu, P. Usability Factors in Digital Music Distribution Services and Their Relationships with Established and New Value Chains in the Music Industry Joakim Landegren

Abstract The findings in this report are the results of an evaluation of the available digital music distribution services over a longer period, and an analysis the underlying rules, mechanisms, theories and opinions within the music industry to find what factors are essential for a commercially successful service.

The music industry has now acknowledged digital music distribution services as a new channel, but there is still no successful commercial service today. Commercial services are competing with Peer-to-Peer services that offer a wide diversity of music at a minimal cost for consumers. So there is a great need for the industry to find a commercial alternative that consumers will accept.

A number of factors important for a successful service have been identified. These include a relevant music selection, availability virtually as conveniently as unprotected files. They also include usability in the form of a good search tool and logical categorisation as well as an efficient revenue control utilising alternative revenue channels. Other important factors are copyright rules that need to be revised to become more globally coherent. The industry also needs to develop a working copy protection system that does not impose too many limitations for consumers without losing the ability to generate revenue for content owners. New pricing models are needed for consumers to accept payments for music files, and subscriptions. Eventually an indirect payment method seems to be the best solution.

Digital music distribution promotes diversity in music genres and services, and ventures with superstars will be riskier and less lucrative in an uncontrolled music environment. There are a limited number of different customer groups, and services should focus on groups interested in a more diverse market offering. At the moment only P2P services offer such diversity.

Up to now, music industry strategy towards file sharing and services such as Napster and Kazaa has been counterproductive. The notion that downloading is free (and therefore involves consumers stealing from artists and record companies) is far from correct. The annual estimated spend by consumers on downloading, in the form of feeds to telecom firms and Internet Service Providers far exceeds estimates of the record industry’s net annual revenue (income - costs).

When adapting from the current physical value chain, based on sales of CDs, to one including digital music distribution there are redundant steps. Restructuring and streamlining of the value chain is necessary in the new environment. There is also the possibility to tap informa-tion from various stages of the physical value chain and take advantage of it to create new revenue sources.

Disintermediation of steps in the physical value chain can benefit creators by bringing more independence from the industry and by creating new possibilities for distribution of their music, although this is dependent on how established the artist is. New artists will still need third parties, but need not necessarily be as dependent on the industry as today.

Landegren, J. and Liu, P. Användbarhetsfaktorer för digitala musikdistributionstjänster och deras relation till etablerade och nya värdekedjor inom musikindustrin Joakim Landegren

Användbarhetsfaktorer för digitala musikdistributionstjänster och deras relation till etablerade och nya värdekedjor inom musikindustrin

Sammanfattning Resultaten från detta arbete kommer från utvärderingar av de nuvarande tjänsterna för musik-distribution gentemot konsumenter över en längre period och också en analys av underliggan-de regler, mekanismer, teorier och åsikter inom musikindustrin för att fastställa vilka faktorer som är nödvändiga för en kommersiellt framgångsrik tjänst.

Musikindustrin har erkänt digital musikdistribution som en ny kanal men ingen av deras kommersiella satsningar har hittills varit framgångsrika. De kommersiella tjänsterna konkur-rerar med P2P-tjänster som erbjuder musik till synes gratis. Där av finns det ett stort behov hos industrin att hitta ett kommersiellt fungerande alternativ som konsumenterna kan accep-tera.

Ett antal viktiga faktorer för en kommersiell tjänst har identifierats och dessa inkluderar ett relevant utbud av musik, en tillgänglighet jämförbar med den för oskyddade filer. De inklude-rar också användarvänlighet i form av goda sökmöjligheter och logisk kategorisering samt en effektiv intäktskontroll med hjälp av alternativa intäktskällor. Andra viktiga faktorer är upp-hovsrättsregler som måste ses över och synkroniseras globalt samtidigt som det bör utvecklas ett fungerande kopieringsskydd som inte inskränker användares rättigheter men ändå har möjlighet att generera intäkter för innehållsägarna. Ny prissättning behövs för att användare ska acceptera att betala för musikfiler och prenumerationer. Eventuellt kan indirekt betalning vara den bästa modellen att genomföra dessa betalningar.

Digital musikdistribution främjar mångfald inom både musikgenrer och tjänster och sats-ningar på superstjärnor kommer inte att löna sig lika bra på en mindre kontrollerad musik-marknad. Det finns ett begränsat antal konsumentgrupperingar och tjänsterna borde fokusera på den grupp som är intresserad av ett mer varierat musikutbud och erbjuda dem ett attraktivt utbud.

Fram tills nu har musikindustrins strategi gentemot fildelningstjänster, som Napster och Kazaa, varit att motverka dem. Uppfattningen om att nerladdning av musik är gratis (som då innebär att konsumenter stjäl från artister och skivbolag) är långt ifrån riktig. En uppskattning av konsumenternas årliga trafikavgifter till tele- och Internetbolag visar att det vida överstiger skivindustrins uppskattade nettointäkter.

När man gör om den nuvarande fysiska värdekedjan som är baserad på CD-försäljning till en som inkluderar digital musikdistribution blir en del steg överflödiga och därför krävs en omarbetning och optimering av värdekedjan i den nya miljön. Det finns också en möjlighet att utnyttja information från de olika stegen i den fysiska värdekedjan för att skapa nya intäkts-källor.

Borttagning av mellansteg (disintermediation) i den fysiska värdekedjan medför ett större oberoende från industrin för musikskapare och nya möjligheter för musikskaparna att sprida sin musik, även om möjligheterna beror på hur etablerad artisten är. Nya artister behöver fort-farande en tredje part, men inte nödvändigtvis i den utsträckning som idag.


Acknowledgements Foremost, I would like to thank my tutor Roger Wallis for all invaluable help with providing contacts with important people in the business and also for all information sources I would not have been able to acquire myself.

This report would have looked completely different (in a negative way) without the coopera-tion and support from my friend and colleague Patrick Liu. It has been great to have the opportunity to try ideas and get opinions from another person with a similar degree of knowl-edge on the subject, not to mention how much less enjoyable the writing process would have been.

I would also like to thank the people at Svensk Musik who let me and Patrick use one of their rooms to install an office in the first stage of the thesis.

Other people I would like to thank for being helpful during the course of this thesis are Thomas Stenmo for lending me the IFPI report and the sushi bar Dosanko for keeping our stomachs full during the writing process.


Table of Contents

1 REPORT STRUCTURAL DETAILS AND IMPORTANT DEFINITIONS ____ 1 1.1 Chapter Overview ........................................................................................................ 1

1.2 Division of the Report .................................................................................................. 2

1.3 Weaknesses in the Report............................................................................................ 2

1.4 Important Definitions .................................................................................................. 3

2 BACKGROUND ___________________________________________ 4 2.1 History of Digital Distribution of Music .................................................................... 4

2.2 Digital Distribution of Music Today........................................................................... 4

2.3 Events in the Music Industry during the Course of the Thesis................................ 5

3 PROBLEM DEFINITION_____________________________________ 6

4 RESTRICTIONS___________________________________________ 7

5 TARGET GROUP __________________________________________ 8

6 THEORIES_______________________________________________ 9 6.1 Copyrights and Revenue Flows in the Music Business............................................. 9

6.1.1 Copyrights 9 6.1.2 Music Publishers 10 6.1.3 Revenue Flow 11

6.2 Intellectual Property Rights ...................................................................................... 11 6.2.1 History of Laws and Agreements 11 6.2.2 Digital Rights Management on Music Files 14

6.3 Economics of the Internet.......................................................................................... 14 6.3.1 Network Effects 15 6.3.2 Economies of Scale 15 6.3.3 Winner-Take-All 15 6.3.4 Lock-In 16 6.3.5 EMH – Electronic Market Hypothesis 17

6.4 Value Chain ................................................................................................................ 19 6.4.1 The Physical Value Chain 19 6.4.2 The Virtual Value Chain 20 6.4.3 The Value Matrix 21

7 METHODS ______________________________________________ 22 7.1 Evaluation of Services................................................................................................ 22

7.1.1 Selection Models 22 7.1.2 Classification Matrices 23


7.1.3 Evaluation Methodology 25 7.1.4 Evaluation Factors 25 7.1.5 Music Bill of Rights 25

7.2 Interviews.................................................................................................................... 26 7.2.1 Service Providers 26 7.2.2 Interest Organisations 26

7.3 External Reports, Surveys and Statistics ................................................................. 26 7.3.1 Internet Connection and Digital Music Usage Statistics and Surveys 26 7.3.2 Music Sales Figures 27

7.4 Keeping Up to Date with the MP3 News and Web Log.......................................... 27

8 FINDINGS______________________________________________ 28 8.1 Evaluated Services Findings...................................................................................... 28

8.1.1 Selected Services 28 8.1.2 Briefly Investigated Services 29 8.1.3 Overall Impressions of Pay Services 29 8.1.4 Overall Impressions of P2P and Non-Licensed Services 30 8.1.5 Differences between Licensed Services and Non-Licensed Services 30 8.1.6 Interesting Observations during Evaluation of Services 31

8.2 Interview Findings...................................................................................................... 31 8.2.1 Interviewed Services 31 8.2.2 Interest Organisations 31

8.3 External Reports, Surveys and Statistics Findings ................................................. 32 8.3.1 Telecoms’ Revenues Compared to Record Companies’ Annual Profit 32 8.3.2 Trends for Single Sales versus Album sales 37 8.3.3 Other Sales Trends 37

8.4 Study of Important Factors for a Commercial Service .......................................... 38 8.4.1 Music Selection Control 38 8.4.2 Selection Difficulties 38 8.4.3 Copy Protection, Digital Rights Management and Other Limitations 38 8.4.4 Customer Groupings 39 8.4.5 Value vs. Fee 39 8.4.6 Extra Value 40 8.4.7 Offered Selection 40 8.4.8 Revenue Control 40

9 DISCUSSION ___________________________________________ 42 9.1 Discussion of Important Factors For a Commercial Service ................................. 42

9.1.1 Music Selection Control 42 9.1.2 Value vs. Fee and Pay-Models 42 9.1.3 Copy Protection and Copyright on the Internet 46 9.1.4 Revenue Control 48

9.2 Music Industry Interests............................................................................................ 49


9.2.1 Current Issues Facing the Music Industry 49 9.2.2 New Possibilities in a Digital Environment 51 9.2.3 Digital Distribution Effects on the Current Value Chain 51

9.3 Bringing Together the Industry’s, Consumers’ and Creators’ Interests.............. 53 9.3.1 Conflicts 53 9.3.2 Common Interests and Possible Solutions 53 9.3.3 Connecting the classification matrices 54

10 CONCLUSIONS __________________________________________ 56

11 RECOMMENDED CONTINUED WORK _________________________ 58

12 REFERENCES ___________________________________________ 59 12.1 Literature................................................................................................................ 59

12.2 Seminars.................................................................................................................. 60

12.3 Interviews................................................................................................................ 61

12.4 Web References...................................................................................................... 61

13 APPENDICES____________________________________________ 65 13.1 Appendix I – Summary of Industry Interviews .................................................. 65

13.2 Appendix II – Summary of Interest Organisation Interviews........................... 66

13.3 Appendix III – Interview with Musicnet ............................................................. 69

13.4 Appendix IV – Interview with OD2 ..................................................................... 71

13.5 Appendix V – Interview with Morpheus ............................................................. 73

13.6 Appendix VI – Interview with Niklas Zennström............................................... 75

13.7 Appendix VII – Questions to Alan Morris (Sharman Networks)...................... 77

13.8 Appendix VIII – Kazaa Bundle Acceptance........................................................ 78

13.9 Appendix IX – Interview with IFPI ..................................................................... 80

13.10 Appendix X – Second Interview with IFPI Sweden............................................ 81

13.11 Appendix XI – Interview with SAMI................................................................... 82

13.12 Appendix XII – Interview with STIM/NCB Internet group.............................. 83

13.13 Appendix XIII – Evaluation of Musicnet............................................................. 85

13.14 Appendix XIV – Evaluation of Pressplay ............................................................ 89

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1 Report Structural Details and Important Definitions

1.1 Chapter Overview Chapter 1: Report Structural Details and Important Definitions - This structural overview is meant to give brief descriptions of all chapters and clarify the structural design and correla-tions between them.

Chapter 2: Background - The introductory background covers a brief description on certain events that preceded this thesis and created the basis of some of the problems this report is trying to solve. It also gives a short summary of today’s situation with commercial services competing with Peer-to-Peer (P2P) services for the same consumers.

Chapter 3: Problem Definition – The problem definition describes what problems the record industry face and formulate the main questions to be answered by this report.

Chapter 4: Restrictions – Restrictions include all the restrictions made when choosing services to evaluate.

Chapter 5: Target Group – It explains what kind of readers the thesis is aimed at and what basic knowledge is needed for a good understanding of the material.

Chapter 6: Theories – The theories chapter include some theories that are of importance for an understanding of both the economic and commercial factors that are valid for digital distribu-tion of music. This includes an explanation of copyrights, intellectual property rights, economics of the Internet and the value chain concept.

Chapter 7: Methods – Methods gives an overview of how the evaluations and interviews of different services, creators and organisations were performed and what other research material has been used in the thesis.

Chapter 8: Findings – The findings have been structured into four subchapters where the first three have correspondent subchapters in the methods chapter. The methods chapter describes how the findings are achieved, and the findings chapter consequently displays what findings are achieved. From these findings several factors of importance for a commercial service are obtained and then presented in the fourth subchapter.

Chapter 9: Discussion – In the first subchapter of the discussion all the retrieved factors from the findings are discussed in accordance with theories from the theories chapter and other observations from the research. The subsequent subchapter gives a summary on the industry’s view of an attractive service, and in the last subchapter I try to bring these views together with the consumers’ and creators’ viewpoint presented in Liu’s report1 and find common interests and complications for all three parties.

Chapter 10: Conclusions – Conclusions presents the results and conclusions of this thesis.

1 LIU, P. “Usability Factors in Digital Distribution Services for Music - A Study of Online Distribution Services Today, Identification of Important Factors for an Attractive Service, the Interests of Consumers and Music Creators”

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Chapter 11: Recommended Continued Work – Recommendations include suggestions of possible subsequent work in the same area of interest as this thesis.

Chapter 12: References – Here all references from literature, interviews and web sites used will be collected.

Chapter 13: Appendices – The appendices will include complete transcripts of interviews and some outsourced evaluations of Pressplay and Musicnet.

1.2 Division of the Report This report is closely related to Patrick Liu’s thesis2 since we have performed the research together and achieved the same findings. From these findings we have treated the information differently and achieved different results and conclusions depending whether we look at it from the consumers’, creators’ or the industry’s interests.

Because of the above mentioned fact many chapters are common for both reports. Below are all chapters that are unique for this report. Remaining chapters are also included in Liu’s report.

6.1.2-6.1.3; 6.3; 7.2.1; 8.2.1; 8.4.1-8.4.2; 8.4.8; 9.1.1; 9.1.4; 9.2; 13.1; 13.3-13.5; 13.7-13.8

The theory chapter (chapter 6) has a clear separation of what subchapters have been written by whom while the methods, findings, discussions and conclusions chapters (chapters 7-10) are written in cooperation. Subchapters 6.1.2-6.1.3; 6.3-6.4 are written by Joakim Landegren, and subchapters 6.1.1 and 6.2 are written by Patrick Liu.

The intention is to bring together all material in one report later including all three players’ different views for a more complete picture of the problems involved.

Since most research and literature studies have been made together with Patrick Liu this report often refers to the author as “we”. This definition includes both me and Patrick since we have cooperated in acquiring and extracting the information.

1.3 Weaknesses in the Report Unfortunately, representatives from several of the services have been disinclined to partici-pate in interviews, and other contacts that did participate have been very restrictive with their answers to highlight themselves and not leak any negative information. We have chosen not to rely much on these interviews since their impartiality and relevance can be questioned. Most information of interest was omitted in the answers.

Another complication is that the music business currently experiences lots of changes on almost a daily basis and some events mentioned in this report might be inaccurate at the time of reading because of this fact.

Information concerning the music industry has been acquired from a large number of different sources. Same figures from various sources vary and we have chosen the information source we believe is the most reliable in consultation with our tutor Roger Wallis. 2 LIU, P. “Usability Factors in Digital Distribution Services for Music - A Study of Online Distribution Services Today, Identification of Important Factors for an Attractive Service, the Interests of Consumers and Music Creators”

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Because of limited resources (funds and time) user downloading behaviour figures have been taken from other companies’ studies and are not always exactly accurate for the desired purpose. A user survey could have revealed more accurate figures for the study on telecoms’ revenues made in chapter 8.3.1, but to get any statistically relevant information the number of users included would require a lot more resources than what was available.

1.4 Important Definitions There are a few terms used in the thesis that might need to be clearly defined since they are words often used in media but the meaning of the words is often very broad.

Free music – P2P file sharing is often claimed to be “free” but as shown later on in the report this is a false statement. There are very many revenue sources from P2P but not to the record companies, and consumers do not pay directly for the downloaded music but indirectly through other channels such as Internet Service Providers (ISPs).

Illegal – P2P services are often called “illegal“, but they are not illegal until convicted by a court. The definition of who carries the responsibility for illicit downloading has yet to be made.

Legal – The term “legal service“ is mentioned at several occasions in the thesis and it refers to a service run by the major labels or at least including licensed material from them.

Piracy – Piracy is a word frequently used especially in connection with statements from the recording industry. This term is not used in this thesis, other than in quotations, since we believe there is a considerable difference between a technology-loving teenager and an illegal CD-copying factory producing thousands of illegal copies to sell on the black market. Thus the term piracy should be applied on the organised illegal CD manufacturing for a commercial purpose and not to P2P.

There are some terms mentioned that have the same meaning. User and consumer are both commonly used in the thesis and refer to exactly the same group of people, i.e. the people consuming music. Creator, composer and songwriter are also synonyms for the originator of the musical works. In reality these terms refer to originators of music from different genres but that difference is of no importance in this thesis. An artist or performer also included in the definition of creator when speaking about creators’ interests but not when dealing with copyrights and revenues. In that context artists are subject to other legislation and rules.

Mainstream – Mainstream music is popular music that is on different hit lists and top-ten-charts and can be found in nearly all music retail stores.

Telecoms – This definition includes both telephone companies and ISPs and is often used in conjunction with revenues from P2P downloading. In that context telecoms include both the players providing the physical network and the companies responsible for Internet traffic in the network.

Digital distribution – The term digital distribution is often used in the thesis and is actually referring to digital online distribution since we only deal with services operating over the Internet.

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2 Background

2.1 History of Digital Distribution of Music The idea of digitally distributed music on the Internet was started by Jeff Patterson and Rob Lord with the Internet Underground Music Archive (IUMA), using the proprietary audio compression format MP3. The idea was picked up by others and distribution via other websites and ftp-sites began appearing3. It was nothing big, and for many years the music industry did not care much about the websites. A few established bands picked up on the idea (Grateful Dead among them), and even more underground bands caught on the idea. A few tried commercial efforts, but nothing really came out of it. Some key persons went to the big record companies with proposals, but no one actually acted on it. The music industry did not seem very interested at all, until they were forced to look into this new uncharted area.

The digital distribution system that startled the music industry was Napster, having something between 40 and 70 million users trading music in MP3 format. The estimation of the number of users varies very much depending on the source. But no matter what the exact number was, it was a significant number of users swapping files. File-swapping created a massive value in itself, both by teaching consumers new ways of appropriating music, and generating massive traffic for telecoms.

The industry reacted negatively, and attacked Napster by legal means. Established artists were split between the parties, and the Recording Industry Association of America (RIAA) has since had their hands full. After a few years Napster was finally closed down. Shortly after Napster was closed down a flood of new decentralised networks arose, most notable Gnutella and Fasttrack and all Peer-to-Peer clients together today, such as Kazaa, are building net-works larger than Napster ever was. At a certain point the industry realised they had to counter the P2P networks with their own services, and the majors developed new digital distribution services.

2.2 Digital Distribution of Music Today Today there are numerous P2P networks and even more clients. Some have been around for very long, in the current context and others emerge and fade away rather quickly. Users adopt and change new ways of trading files relatively quickly. The P2P networks are huge and it is possible to find virtually everything from movies, music and computer software to books in these networks. All can be downloaded for free, apart from the cost of being online. The downloaded material and the connections are not always reliable, but a lot of consumers apparently think it is worth the effort.

There are few large legal services today, and all of them are centralised. Pressplay and MusicNet are the ventures of the five major record companies. Rhapsody is another service that provides a large selection of music from the major companies. There have been very few services offering music from the majors, but the number is now increasing. All of the above services use a subscription model for providing the music, with the addition of buying additional separate tracks and albums for burning.

3 ALDERMAN, J. Sonic boom – Napster, MP3, and the new pioneers of music

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Most other services provide independent or underground music. MP3.com is an exception that also offers some larger artists, but only single tracks for marketing.

Internet radio stations have also caught the industry’s attention, since most of them are independent stations broadcast by individuals without a license. Most are not commercial stations, but still do not have the industry’s consent to broadcast.

2.3 Events in the Music Industry during the Course of the Thesis The music industry is moving very fast, and during the course of this work a lot of the condi-tions on the music market have changed. For example Pressplay, MusicNet and Rhapsody all have made great progress in increasing the size of their music selection and what is allowed in the agreements for downloading. Below are headlines in chronological order of a few P2P-related events from the last six months:

- October15th 2002: Songspy is closed down after a lawsuit.

- November 1st 2002: Court orders Madster to implement filtering technologies.

- November 6th 2002: BMG and EMI independently plan to only have copy-protected CDs in the future.

- November 8th 2002: New disc format announced with built-in copy protection.

- December 3rd 2002: Madster told to pull the plug.

- December 11th 2002: Canadian government subsidizes DRM, and decides to intro-duce a levy on CD media.

- December 14th 2002: Record companies pay for inflated prices. They were uncovered earlier that they have had a cartel to force higher prices on CD. They were convicted in court and have to pay back to buyers and/or donate huge sums to charity.

- December 23rd 2002: New Danish law prohibits music copying to MP3 format.

- January 3rd 2003: European copyrights expiring on recording from 1950’s. That means anyone can publish old recordings without having to ask for permission from the composer first.

- January 17th 2003: Apple silences iTunes P2P software.

- January 17th 2003: IFPI employee describes P2P sabotage activities. The industry is exposed trying to sabotage P2P networks with various methods.

- January 18th 2003: Rosen want to impose a type of fee on Internet Service Providers (ISP).

- January 18th 2003: Microsoft introduces CD copy protection ‘fix’. MS offers a new type of copy protection method that the industry finds quite attractive.

- January 22nd 2003: Rosen will step down as head of RIAA.

- January 31st 2002: EC proposes new antipiracy rules. The new rules are aiming at illegal copying for commercial purposes, and tones down the copying of individuals.

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3 Problem Definition The music industry today finds itself increasingly worried by the increasing number of Peer-to-Peer (P2P) users. Millions of people download music without any direct revenues for record companies or content owners. There have been efforts from the industry to compete with the P2P services but no commercial service has been very popular among consumers so far.

There have also been attempts to stop P2P downloading but we believe that it is impossible to stop these activities completely. The industry must find a way to live alongside P2P and exploit its possibilities instead of its disadvantages.

That leads to the two main questions for this thesis:

What factors are of importance for a commercial service that appeal to all parties involved (consumers, creators and the industry)?

How can economic efficiency be maximised for both music creators and the music industry in a digital environment?

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4 Restrictions In order to limit the scope of this thesis to a reasonable level, several restrictions listed below have been made.

• This thesis only deals with services specialised in distribution of music. Studies of Peer-to-Peer services will be limited to those functions related to music files.

• The evaluated services all have a target group consisting of ordinary music consumers. In some cases, for example OD2, the service itself is focused on other businesses, such as Internet portals, but the actual end users of the service are the consumers visiting the portal.

• The service evaluations are based on minor case studies of a selected sample of services that have been selected according to certain criteria described in the Methods section below.

• The sample of services is restricted to those whose distribution occurs over the Internet. The distribution occurs by transfers of files or as a digital transport stream (i.e. real audio streaming). No services providing mainly distribution by tangible products (CDs) are studied.

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5 Target Group This thesis is mainly of interest for people at record labels or new distribution services that need distilled and evaluated information of the recent changes in the market compiled and reviewed in one report. It is also aimed toward university students at Media Technology and Graphic Arts at the Royal Institute of Technology, or students with a special interest in digital distribution. Many terms and abbreviations used are implied that the reader understands and is well familiar with.

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6 Theories The theories below are needed to get a deeper understanding of how users behave and how business optimisation works in a digital environment.

6.1 Copyrights and Revenue Flows in the Music Business Below is a short explanation of the copyrights and revenue flows in the music business today.

6.1.1 Copyrights Publishing Rights Each time a songwriter creates a new piece a publishing right is created, representing the composer’s ownership of the music. Any subsequent use or exploitation of the piece requires a payment to the owner of these rights. The publishing rights must not be owned by the actual composer but can be sold and transferred to a new owner. Publishers often design contracts so that artists or composers must give up shares on their publishing rights when signing the contract. In exchange they get money in advance for past, present or future material.

Mechanical Royalties Whenever a song is reproduced by a mechanical device you have to pay a mechanical royalty. Even though this term’s validity is somewhat diminished with introduction of digital equip-ment it still refers to royalties for reproduction of songs reproduced on devices sold on a unit basis. This includes CDs, audiocassettes, audio greeting cards etc. File downloads is a special case where the rules and tariffs still are under development according to Maria Wande at STIM4. Today they have divided the royalties for file downloads into one mechanical royalty part when the first reference file is created, and one performance part where every subsequent download is treated as an Internet performance and hence performance tariffs apply5.

Synchronisation License Synchronisation licenses are used when songs are used together with a visual image. Music publishers issue synchronisation to for example TV advertisers, motion picture companies, video manufacturers and CD-ROM companies. Usually about 50% of the net proceeds are paid back to the songwriter.

Transcription License Because radio is not a visual medium synchronisation licenses do not apply. For songs used in radio commercials there are instead transcription licenses that correspond to synchronisation licenses.

Public Performance Royalty An exclusive right of the copyright owner is to authorise public performances of the copy-righted work. Thus radio and television broadcasters must acquire licenses from interest organisations such as STIM in Sweden and ASCAP in the USA. Performance rights organi-sations like those then collect incomes on behalf of the songwriters when songs are publicly

4 Interview with Maria Wande, STIM (Appendix XII) 5 Interview with Tobias Eltell, SAMI (Appendix XI)

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broadcast. Even though publishers do not collect any income from performance rights they are still entitled to a big share of the income from those organisations.

Exploitation of Rights Rights can be divided in several components for a more lucrative exploitation of the rights. A possible division is shown in Figure 1 below. A more concrete example is a local distributor in Germany that can be assigned the rights to distribute the CD and cassette version of a certain track for a five-year period in the German market.

International Agreements To simplify licensing of music internation-ally, and on the Internet as a global net-work, the Santiago agreement was estab-lished during the CISAC Congress 2000. In short it means that the collecting society in each country is the licensor for all music licensed in their respective countries. Licenses granted to content providers are then global on a non-exclusive basis, and the applied tariff is the one used in the country where the material is published. The revenues are then distributed between each country’s collection societies.

6.1.2 Music Publishers Music publishers’ role in the past was to

publish sheets of music from a composer6. Publishers have a less important role today but continue to perform several functions in the music business, such as administering copyrights, licensing songs to record companies and collecting royalties for the composers.

Publishers may also help promising artists to record demos and assist in the process of acquiring a record deal. In return they most often get shares of the mechanical royalties or public performance royalties.

Foreign countries often have different laws on music distribution and licensing and hence another role of the publisher is to enter into agreements with foreign publishers to collect mechanical royalties in that particular region. Publishers often have their own network within different countries and can much easier than the artist strike a profitable deal with the local publishers.

6 KORN, A. http://www.alankorn.com/articles/publishing_1.html

Figure 1. Exploitation of rights

Territory

Medium

Time

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6.1.3 Revenue Flow In order to better understand the current revenue system a visualisation might help. Figure 2 shows a map7 of the revenue generation before Internet made its impact, thus excluding revenues from digital distribution.

6.2 Intellectual Property Rights The relevance of Intellectual Property Rights (IPR) in this report is to briefly cover how pricing and copy protection of music in digital format works. IPR is a fairly wide term including musical work amongst others, and it is of use when looking into licensing issues, pricing and protection of the files.

6.2.1 History of Laws and Agreements Most experts agree that legislation has had difficulties keeping up with the development of technology. A few years back legislation was far behind technology, but the last few years much work has been done, not least international agreements that apply to digital distribution. A problem that now arises is to enforce the new laws, and the public is slow in adapting new laws, especially when law enforcement on the Internet is virtually impossible8. One reason for this is that the public is not informed about the specific rules that apply to music on the Internet. Laws on itself will not help much. They have to be enforced by some sort of tools, such as DRM technology. Below is some history of the laws and agreements that are today. Most of it began in the US, and the US has also experienced the most radical changes, far more extreme than the international treaties.

The first IPR organisation is the 1967 World Intellectual Property Organisation (WIPO) that administers, amongst other agreements, the 1886 Berne Convention. In 1991 a major revision

7 KLIMIS, G.M. March. Disintermediation and Re-intermediation In the Music Business – the Effect of Multimedia Technologies and E-commerce 8 Interview with Maria Wande, STIM (Appendix XII)

Sales of tangibles to wholesailers

and retailers

Radio, TV performance

Music used in films or TV

commercials

Recorded music used by licensees

or record clubs

Music publishing “the song”

Recorded music “the recording”

Royalty

Mechanical license

Synchronisation license License

Royalty

Performance rights

Royalty Royalty

Sales

Revenue

Figure 2. Revenue generation in the music industry before digital distribution

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was planned, but its negotiations failed for several years until 1996 when a treaty was agreed on, the 1996 WIPO Treaty, which directly addressed digital information.

The US The US had in 1992 introduced the Audio Home Recording Act to adhere to the Berne Convention. The Audio Home Recording Act requires levies on recordable media, and tech-nology in media to prevent serial copying (Serial Copy Management System). It has since been successful in implementation only on DAT tapes, which in turn never became very wide spread. The Act was brought up when MP3 players began to sell (the Diamond Rio case), and also in the case of CD burners. It has not yet been very effective. The Diamond Rio player won the case, with the argument that the device does not directly copy music, but data from a computer and thus they are considered parts of computers. Though, after the case Diamond freely agreed to cooperate in development of new protections.9

The US did not allow public performances in sound recordings, unlike most other European countries. That caused a problem when streaming on the Internet was considered perform-ances and not reproduction, so it was solved with the Digital Performance Right in Sound Recordings Act in 1995.

The EU The EU has since 1994 had the Rolling Action Plan (RAP) where copyright is but one of several issues addressed. When making a transfer from traditional physical media to the Internet it involves new actors that have no experience in copyright issues, such as Internet Service Providers (ISP) that are addressed by the RAP. There are a number of directives in the EU that already applies to digital distribution, although they were not created for these purposes.

The Rental and Lending Directive in 1992 provides a legal framework for cross-border trans-missions in a digital environment. The Term Directive in 1993 and Database Directive in 1996 also provide protection for phonogram producers and on-line databases. Most executive work is done in the member states, though.

In 1997 the draft Copyright Directive was presented. Compared to the US these rules were more general and open for interpretation. One of the most central issues was liability. After some reworking some rules for liability were made and the main points of it were setting different levels of liability depending on how the service providers stored the data. Intermedi-ary providers could not be liable. Cachers would need to send out notices to users and remove illegal data. Lastly, hosts need to actively find and remove illegal data. There still needs to be some clarification of how to define for example “caching” and “storing”. Another problem in the EU is that all member states have their own rules, and are not always willing to change in favour of the directives from the EU.

The enforcement part of the Copyright Directive was presented through the 1998 Green Paper on Combating Counterfeiting and Piracy in the Single Market. The same year the Condition Access Directive was adopted, which resembles the DMCA (Digital Millennium

9 MIDEM 2000. Legal and Commercial Effects of Digitisation on the Music Industry: Snapshot of Current US Legislation, Midem 2000

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Copyright Act, see below) rule of circumvention of copy protection, but is not equally specific.

Just recently the European Commission has proposed a new rule for intellectual property right enforcement that does not impose sanctions against individuals downloading music for non-commercial purposes. They only focus on copyright infringements for commercial purposes. P2P services would fall under the latter case because of advertisements in the clients.

1996 WIPO Treaty The first initiative that directly addressed digital information (in the US) was the National Information Infrastructure Task Force by the Clinton administration. Roughly explained it wanted to protect and control all information on the Internet on economic grounds, which sounded very good to the industry. It also addressed the issue of digital transmissions claiming to be performances. One much criticised rule was the new chapter that would prohibit any device that in any way, direct or indirect, would facilitate copying of any material. It was criticised because it would include anything ranging from encryption tech-nologies to sealed envelopes, and also all transitory storing such as the random access memory (RAM) and cache in computers. The US wanted to extend the later NII White Paper to an international treaty, which they brought forth in the 1996 WIPO Treaty. It ended up with a compromise - a quite unspecific formulation open for interpretation and free for the parties to implement: “…provide adequate legal protection and effective legal remedies against the circumvention of effective technological measures that are used by authors in connection with the exercise of their rights inter this Treaty or the Berne Convention and that restricts acts, in respect of the their works, which are not authorised by the authors concerned or permitted by law.”

1998 Digital Millennium Copyright Act However, the US went on making their own bill, the Digital Millennium Copyright Act that followed the previous White Paper more closely since the 1996 WIPO Treaty only provided minimum requirements. The problem here is that legislation only applies in the US. The DMCA has been strongly criticised, not least for the fair use issue (discussed later). The DMCA is now under revision.

Secure Digital Music Initiative When portable MP3 players were introduced, the RIAA set new rules that would apply to this group of players and the Secure Digital Music Initiative (SDMI) was born in 1999. The purpose was to develop specifications for secure digital distribution of music, and enable new legitimate business models in electronic music distribution. It also meant to improve dialogue between interested industries such as the music, IT and consumer electronics industry to name a few.10 The standards were going to be open, optional and interoperable between all partici-pants.

The SDMI has been working well so far. Very quickly they set up and implemented the so called Phase 1. Practically Phase 1 meant that all devices had a certain degree of copy protec-tion enabling reception of any file, including pirated, but not file transfers from the device. Phase 2 meant to fully use copy protection on new music with a copy protection flag, but it still allows illegal files. In practice, it has had a minor impact on the market. The Secure 10 MIDEM 2000, Infringement of Rights in Sound Recordings in the Online World and IFPI

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Digital format has for example had fairly successful penetration amongst consumers but is hardly any effective copy protection since most consumers are trading unprotected files.

Internet Radio Royalty Rates The main legislation for Internet radio has been done in the US (as most other Internet legis-lation). During spring 2002 the CARP and Library of Congress set new webcasting royalty rates, by recommendations from RIAA. The new rules were very unfortunate and would bankrupt most small Internet radio stations because of set rates. A lot of work has been done since, amongst them the Internet Radio Fairness Act, and just recently the Small Webcaster Settlement Act, that sets a royalty rate based on percentage of revenues that is fairer to small webcasters. So far the legislation for Internet radio seems to be going toward a more reason-able state.

6.2.2 Digital Rights Management on Music Files Digital Rights Management (DRM) is an overall name for technology systems for protecting digital material, such as books and music. All majors’ services are using some kind of DRM, and different companies develop different technologies, incompatible with each other. Examples of companies offering DRM-protected music are Microsoft, LiquidAudio and Real.

A DRM protected file is encrypted and registered in a database, and is independent of where it is used. Every usage of the file sends a license check through an online database query and if the use is authorised the file will work, otherwise it is useless. Encryptions have been hacked, but continuous updates of the licenses are supposed to counter hacking attempts. DRM also enables tracking of file source, owner, contents and more.

The DRM system limits the music files in several ways. Firstly there is a time limit on every piece of music. For example the license is only valid as long as there is a subscription. When the subscription has ended, the next time the license is updated the music will stop working. Secondly the files are limited in media (sound carriers). For example they mostly only work on the computer where the files are downloaded, although moving to other computers is possible. And they cannot be moved to other portable players or burned to CD unless an additional fee is paid. Read more about limitation of copyrighted material in chapter 6.1.1.

6.3 Economics of the Internet Chapter 6.3.1 through 6.3.4 all include theories for economics of the Internet described by Liebowitz11. He states that the principle of value creation on the Internet is merely a lowering of the cost of transmitting information. That is in fact all Internet does, not saying that it is not an immense advancement in scientific evolution. But Liebowitz also emphasizes that infor-mation transmission does not change the laws of economics and that the laws described below still are valid on the Internet.

11 LIEBOWITZ, S. Re-thinking the network economy: the true forces that drive the digital marketplace

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6.3.1 Network Effects “A network effect is present when a product becomes more useful to consumers in proportion to the number of people using it.”12 A telephone, for example, is useless unless there are other telephones to communicate with and thus telephones display network effects. There are other less obvious so-called virtual networks such as all the users of WordPerfect13. If the cost of a single copy of WordPerfect increases accordingly with the number of total users then Word-Perfect would be said to embody network effects.

Network effects definitely exist but their effect is often overestimated and the results of this overestimation can be quite fatal. There are plenty of examples of this during the early stages of Internet where companies raced and spent enormous amounts of money to be first with establishing a huge network of customers since the theory of network effects yields a higher profit for a bigger network. For this business model to succeed you must ensure a lock-in of the customers as described below. The burst of the IT bubble shows that this is in fact not the way markets have worked.

6.3.2 Economies of Scale The theory of economies of scale implies a decrease of average costs with an increase in number of sales and size of the company. Almost all manufacturing shows some economies of scale. But at some point there are other components of the production costs that replace the economies of scale and raise the average costs as output increases. Computer software is a very good example of a product that exhibits economies of scale. The cost of developing the software is high and fixed since it is independent of the number of copies sold. The duplica-tion and shipping costs are close to zero and will thus lower the average costs the more copies are sold. Economies of scale and network effects both have very similar impacts and profit a company with a large customer base, but economies of scale are frequently going to be more significant of the two, according to Liebowitz.

6.3.3 Winner-Take-All As mentioned above, the theories on network effects and economies of scale both benefit large companies in favour of small ones. In a scenario based only on these theories there would naturally evolve a single competitor taking hold of the market as a result of its economic advantages. This was referred to as increasing returns (of scale) and was usually thought to lead to winner-take-all results, especially since economic theories often tend to view products from different vendors as identical.

Increasing returns, however, was incompatible with the observation that most industries consist of far more than a single dominant company. It was also incompatible with one of the fundamental assumptions in economists’ basic model of competition pointing out the ideal of having many competitors in a market. Liebowitz means that a winner-take-all situation might be the outcome when large companies benefit from cost advantages that small companies do not, but it does not have to be the outcome. One important factor is the actual differences between products that appeal to different groups of customers. 12 LIEBOWITZ, S. Re-thinking the network economy: the true forces that drive the digital marketplace 13 A word processor application by Corel.

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Another factor that is thought to contribute to winner-take-all results is instant scalability, meaning the ability of a company to instantly change its products to meet market demand. This is the case when the production process involves non-specific inputs. Once again computer software serves as a good example because it requires machinery for duplicating CDs but these machines are the same independently of the software copied to the CD. The same machine that copies Microsoft Office can instantly switch to copy Microsoft Windows instead.

6.3.4 Lock-In In a market where the winner-take-all theory is applicable there is the possibility of a rapidly changing leadership whenever a better product enters the market, but lock-in implies that the winner not only takes hold of the market, but also keep doing so even though more attractive options are available for the customers. The reason for this is mainly due to network effects that help creating a winner-take-all situation and then support the winner by creating coordi-nation difficulties as described under strong lock-in below.

Compatibility is a key word when dealing with lock-in concepts. When consumers make their choice of what brand to buy they have already made several calculations (consciously or not) whether the new product is worth buying or switching to and in network markets they also have to consider the strength of the new network. An example is consumers choosing between BETA and VHS in the 1980s. For them it might be very important to choose a VCR with the most common format the video store keeps in stock to get a good selection of movies to choose from.

Lock-in costs can be separated in two types. First there are costs for familiarising and relearning old habits when switching product. This also includes being able to use your old work with the new product and could be said to be the cost of being compatible with one’s self according to Liebowitz. The other costs originate from an eventual loss of compatibility with others. If all your colleagues use Microsoft Word, for example, it is more difficult to exchange documents if you switch to WordPerfect.

The two factors, being compatible with others and being compatible with one’s self, are fundamental to Liebowitz distinction between strong and weak lock-in. Unlike the weak form of lock-in, the strong form supports the concept of first-mover-wins where the first company on the market will be able to stand ground against all competitors (even a better product) because of the consumers’ reluctance to switch.

Strong Lock-In Strong lock-in exists when a switch to a superior product is not adopted even though self-compatibility issues can be overcome by the superiority of the product. The reason for the consumer not switching in such a case is the fear of losing compatibility with others. What is most important if strong lock-in exists, as said by Liebowitz, is to get hold of a majority of the consumers first, even though the costs are very high, since the competitors will have difficul-ties in getting the consumers to switch to their product irrespective of its eventual superiority.

Except compatibility it is also a question about the consumer’s assumption of other peoples’ continued use of the product. It is actually the expectation of the network size that matters. The actual market shares are irrelevant if the consumers believe that the product will do well. Otherwise products such as the telephone never would have been if no one had believed that this was a product that people would buy.

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Weak Lock-In If a company produces a product that is superior to the incumbent but not superior enough to make up for the self-compatibility costs of switching to the new product you can say that the consumers are weakly locked-in to the incumbent. Unlike strong lock-in, the weak lock-in concept has nothing to do with network effects or economies of scale.

There are many different examples of weak lock-in, e.g. you do not want to buy a new computer a few months after buying your last one even though the new computer is slightly better. This example together with lots of others offers some protection for the incumbents.

Liebowitz mentions one final difference between the two forms of lock-in. It is economically efficient with weak lock-in because learning costs are real and weakly locked in consumers will switch product but not until the new product is sufficiently better to make it economically beneficial to do so. Strong lock-in on the other hand, will make the consumers stick to the old product unless all other consumers switch product as well. If that was the case all would be better of even after switching costs were included.

6.3.5 EMH – Electronic Market Hypothesis In his PhD14 Klimis refers to the Electronic Market Hypothesis (EMH), first introduced by Malone, Yates and Benjamin in 1987. It offers a theory that can be used as a base for predicting scope and evolution of electronic markets.

There are some important definitions to make to clarify the hypothesis. First there is the use of the terms production costs and coordination costs. Production costs include costs from all the physical or other primary processes necessary for creating and distributing the goods or services being produced, and coordination costs result from all the information processing necessary to coordinate the machines and people working with the primary processes.

Two other important terms are markets and hierarchies that are the two mechanisms of economic transaction coordination. Both represent two ends of a continuum of relationships that can evolve from a computer-mediated environment. The polarisation between these two coordination mechanisms can be observed in

Table 1. Hierarchical coordination means that a single authority such as a company manager controls the value chain activities, and thus product and service attributes are set by managerial decisions rather from open market selection. Hierarchical control supports long-term relationships in favour of quick and impulsive transactions. Markets, on the other hand, work on a transaction-to-transaction basis and the flow of goods and services through the value chain is coordinated by a decentralised price system. Assuming a situation with perfect market information, buyers make their purchases from the seller that offer the most attractive combination of price, quality and other attributes.

As seen in

Table 1, markets maximise the search costs since there are a multitude of products offered from different vendors to search through when looking for a product of choice. A hierarchy

14 KLIMIS, G.M. March. Disintermediation and Re-intermediation In the Music Business – the Effect of Multimedia Technologies and E-commerce

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gives the buyer only one choice of product and thus minimises the search costs but it is not necessarily the best or cheapest product available.

Coordination through markets Coordination through hierarchiesNo of vendors Maximum OneSearch costs Maximum MinimumBuyer's choice Wide Limited

Table 1. The Two Coordination Mechanisms

Malone et al.15 summarise relative costs for markets and hierarchies in Table 2 below. They mean that the production costs in the physical domain fall and coordination costs rise with an increasing number of competitors for a hierarchy.

Organisational form Production costs Coordination costsMarkets Low HighHierarchies High Low Table 2. Relative Costs for Markets and Hierarchies

From this table you can assume that lower coordination costs in a market would make the markets prevail as an economically efficient organisational form, or similarly that lower production costs for hierarchical organisation would make hierarchies prevail. The EMH predicts that since Information Technology and Internet lowers coordination costs by making information flows very fast and efficient this will result in an overall shift from use of hierarchies to markets as the basis of economic activity. Klimis also refers to Rayport and Sviokla16 who predict such a large effect of computer mediated transactions that eventually a disruption of many activities in the current value chain is due.

Three characteristics that Klimis distinguish as vital for a lowering of the transaction costs already apply to the electronic market and they are:

1. There are always alternative suppliers and buyers

2. Information is freely available

3. Opportunism due to bounded rationality is prevented

Two other factors that affect and encourage market transactions are low asset specificity and low complexity of product. By low asset specificity and low complexity Malone et al.17 means a product that is not specifically made to suit a certain target group or a product whose content is very easily understood, i.e. a wide range of people can use it. Music is a very good example of such a product.

15 MALONE, T. YATES, J. AND BENJAMIN, R. 1987. Electronic Markets and Electronic Hierarchies, Communications of the ACM 16 RAYPORT, J.F. and SVIOKLA, J.J. Exploiting the Virtual Value Chain 17 MALONE, T. YATES, J. AND BENJAMIN, R. 1987. Electronic Markets and Electronic Hierarchies, Communications of the ACM

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6.4 Value Chain Michael Porter first introduced the concept of a value chain18. It enables a visual separation of the company’s activities into the technologically and economically distinct parts it is com-prised of. Porter also introduced an embedding of the firm into a value system that include all the players that create value both upstream and downstream the value chain. The primary use of the value chain is to create a limited number of functional bins into which the firm activities could be categorised.

This native value chain has been criticised to be very linear and that it resembles a Fordian assembly line19 and that many of the dynamics of the firm is lost on this linear visualisation. The value chain has, since its introduction, been extended to better suit the actual market. An extension of great importance for this thesis is the treatment of information as value given that digital distribution of music is technically a transfer of information. This will be more thoroughly described under the virtual value chain section below

6.4.1 The Physical Value Chain A value chain that has been valid for record labels until the Internet made its impacts consists of roughly six steps as seen in Figure 3 below20. Some of these steps comprise of other intermediaries not listed below but a further investigation of that will be done in the findings section of the thesis.

1 - Development (Artist and Repertoire – A&R) The A&R department of the record labels seek up new promising bands and artists and sign them to long-term exclusive contracts. This part in the value chain is a very important part that the record labels play since it requires quite an expertise to spot the talent among the enormous amount of bands and artist looking for success. The labels spend considerable amounts of money on the development of the new artists.

2 - Production (Recording) The record label’s role in this stage has diminished since the price of digital recording equipment have fallen to a great extent and it is possible for bands to produce recordings in

18 PORTER, M. June. Competitive Advantage: Creating and Sustaining Superior Performance 19 KLIMIS, G.M. March. Disintermediation and Re-intermediation In the Music Business – the Effect of Multimedia Technologies and E-commerce 20 MARATHE, J. Impacts of Digital Distribution on the Music Industry. Durlacher Research, Ltd

Figure 3. A record company’s physical value chain

Development (Artist & Repertoire)

Production (Recording)

Sales & Marketing

(Publicity)

Distribution (Pick, Pack & ship)

Wholesale (Sales to retailers)

Retail (Sales to

consumers)

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home studios or at least record and produce their CDs much cheaper than before. The labels finance production and often provide an advance payment for signed bands at this stage.

3 - Sales and Marketing (Publicity) The labels have a well-established relation with music stores and media channels such as press, radio and TV stations. Through these relations they are able to work out profitable sales and promotion deals. The label decides the amount of promotional spent on a single or album according to its potential popularity and profitability.

4 - Distribution (Pick, Pack and Ship) This stage of the value chain is quite different for a major label compared to an independent label. The majors often have a global network of branch offices that can handle sales, distribution and marketing issues and sometimes they even own the distribution channels as well. Independent labels, in contrast, have to license local distributors.

5 - Wholesale Distribution companies most often work towards the big retail chains and to some of the smaller chains dealing with large quantities. Because of the quantities smaller shops can have difficulties with striking a profitable deal and thus they make their purchases from a whole-saler to avoid being forced to buy a minimum amount of CDs from the distributor.

6 - Retail Retailers place their orders at the wholesalers as and when the albums and singles are required. The music is then sold to the consumers.

6.4.2 The Virtual Value Chain

Rayport and Sviokla21 mean that almost every business today competes in the virtual world of information as well as the physical, and thus has to create value in both worlds accordingly. But the processes for value creation work are not the same for both worlds. Value creation in any stage in a Virtual Value Chain (VVC) involves a series of five activities: gathering, organising, selecting, synthesising and distributing information as seen in Figure 4 above.

They claim that every company observed have adopted value-adding information processes in three stages. In the first stage, visibility, companies use information to acquire ability to overview their Physical Value Chain (PVC) as an integrated system rather than a set of discrete but related activities. In practice this means that the company performs actions in the marketplace while it monitors and coordinates those actions in the marketspace.

21 RAYPORT, J.F. and SVIOKLA, J.J. Exploiting the Virtual Value Chain

Figure 4. The five steps for creating value of information

Gathering Organising Selecting Synthesising Distribution

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Physical value chain

Virtual value chain

Value matrix

New markets New markets New markets

Gather

Organise

Select

Synthesise

Distribute

Figure 5. The value matrix

In the second stage, mirroring capability, companies have established a necessary infrastruc-ture for visibility and move on by managing operations and even implement value-adding steps in the marketspace. The latter is often done by studying the PVC and transferring the value-adding activities to the new virtual environment. By moving from the marketplace to the marketspace the company starts the creation of a VVC that parallels and improves on the PVC. But ultimately companies must not just add value to the VVC, but extract value from it. This is done in the third and final stage, new customer relationships, where customer relationships are established through the marketspace. Collecting information about the customer that can be distributed through the company or sold to other businesses is a method often used but not totally accepted since it often is done without the customer’s knowledge. The reason, however, is to create more value for users by serving a broader set of their needs. This is done by personalised and hopefully attractive offers that can be given to the customer when he makes contact with the company. One must not forget that it is still important to specify what information will be collected so the customer feels secure when dealing with the company. Customer feelings of insecurity are still a major concern for online transactions22.

6.4.3 The Value Matrix New relationships with the customers that companies develop can be derived from a matrix of value opportunities.23 From each stage on the VVC (mirrored from the PVC) an extract of information can be tapped and this could form a new product or service. In order to perform this the company must use processes to gather the information, organise it in a proper way for the customer, extract the valuable information, package or synthesise it and finally distribute it according to the five value-adding steps above unique for the information world. These five steps in combination with the VVC form a value matrix that makes it easier to identify the customers’ desires more effectively and fulfil them more efficiently. The resulting matrix is shown in Figure 5.

This model is a logical choice in this thesis since the traditional linear music industry value chain has become insufficient in the new marketspace.

22 LIEBOWITZ, S. Re-thinking the network economy: the true forces that drive the digital marketplace 23 RAYPORT, J.F. and SVIOKLA, J.J. Exploiting the Virtual Value Chain

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7 Methods

7.1 Evaluation of Services An evaluation of the available services gives an overview of the current implementation level of digital distribution. One effective way to investigate what a consumer experiences is to act consumer and actually use the services. This method was chosen because of its effectiveness and low resource consumption. Minor case studies have been chosen instead of major to enable coverage of as many different sorts of services as possible. To extend the coverage maximally the different kinds of services have been categorised in classification matrices and additional criteria have been divided into so called selection models described below. The tests were performed during a four months period.

The goal of the evaluation is to find the most important factors that are stated in the problem definition.

7.1.1 Selection Models All services have different ways of storing and distributing their material, and they also have different sources of income. Below are the main groups of categories for the services. The purpose of this categorisation is to easier decide which business models seem to be most successful. As shown later, the focus and main comparisons will be between the major services (Pressplay, MusicNet and Rhapsody) and the P2P networks without any licenses. MP3.com will also play an important role as an independent platform. There are also minor comparisons with other business models such as Internet radio, small services and user communities

Distribution Models There are several distribution models in use today. Some are easier to use than others.

P2P: Almost all P2P services are without any license today, with only a few exceptions that try to be legal. Some services like Wippit, have ensured legality, but are not very popular. There are both centralised services where a central server keeps record of all nodes in the network, and decentralised services that are true Peer-to-Peer protocols.

Internet radio: Internet radio works like traditional radio, but using the Internet as distribution channel. As with radio it is used mainly as a marketing tool, and not as a source of income.

Central server: A central server enables full control over the material, but requires a large amount of resources to maintain. It is often accessed through a web interface and a proprietary client. This model ensures a good quality of service.

Income Sources Several pay models are used by the services today, all with their own advantages and disadvantages for the user.

Subscription: A sum is paid in advance each month, which enables the user to obtain a limited or unlimited amount of music. Often an unlimited amount of streamed music is offered, a limited amount of downloads and a limited amount of music which can be burned to a writable CD. In most cases the music is in fact rented, since it will cease to work when the subscription is cancelled.

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Pay-per-piece: A payment is made per downloaded song. This is a rarely used model.

Pay-per-listen: A payment is made every time a song is listened to.

Indirect: The above methods are all direct payment methods, while an indirect payment means that the music is financed by other means than directly buying music. All music can be seen as “free” for users. This model is commonly used in illegal file-sharing services, Internet radio and MP3.com. This is not in fact an income source by itself but by distributing free music this will eventually result either in a boost in CD sales, other revenues from the music in a later stage or even revenues for other parties than the service itself.

Networks Gnutella and Fasttrack are two networks open for different clients to use. Many of the P2P services choose to cooperate with such existing networks while other services create an own new network that can be used exclusively by its users. The advantage with the latter is that the user base is already there while a new network must attract a large amount of users before it becomes interesting in terms of network effects.

7.1.2 Classification Matrices The matrices outlined below were created to visually define a number of selection groups within each category below. The groups are defined by a number of parameters of importance for that particular category. Each axis represents one parameter and is based on a binary scale where each group is placed in the quadrant with the corresponding attributes.

Consumer Matrix The consumer matrix (Figure 6) is based on three parameters: Music Range (vertical axis), Interaction (horizontal axis), and Experience (depth).

Experience shows how IT-literate the user is, i.e. how much experience of computers and the Internet the user has. Low experience means the user have hardly any experience from computers, and an experienced user uses computers every day and has a lot of experience.

Music Range shows what kind of music the user wants. A wide music range means that the user listens to any kind of music, both different kinds of mainstream music and some niched music. A small music range means that the user only looks for one kind of music, and often niched music. Consumers only listening to mainstream music are considered to have a small music range. Even if the hit list includes different genres such as rock, pop, r’n’b and more, “hit list music” is considered a genre on its own.

Figure 6. Definition of consumer matrix

IT-illiterate, inactive searcher interested in wide

range of music.

IT-literate, inactive searcher interested

in wide range of music.

IT-illiterate, active searcher interested


IT-literate, active searcher interested


IT-illiterate, inactive searcher

interested in narrow range of music.

IT-illiterate, active searcher interested in narrow range of

music.

IT-literate, inactive searcher interested in narrow range of

music.

IT-literate, active searcher interested in narrow range of

music.

Music Range

Activ

ity

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Interaction shows how much time and work the user is ready to spend on finding the desired music.

All these parameters interact with each other. For example an IT-literate user is probably also ready to spend more time using the computer to find the desired music. To ease the definition of the groups extreme typical cases are studied.

Creator Matrix The creator matrix (Figure 7) consists of two parameters – Fame (vertical axis) and Influence (horizontal axis).

Fame displays the relative amount of people that are familiar with the particular artist. A high value on the fame axis means that the artist is well known among people from many different genres and not just well known among for example jazz musicians. Little fame is quite self-explanatory - a new entrant on the music scene that has not gained so much popularity yet.

Influence is the possibility for the creators to control their own music. A creator with high influence over the music gives him liberty to decide what marketing, payment and distribu-tion methods to use. A low influence is merely the opposite. Influence is strongly connected with ownership of music rights.

Service Matrix The service matrix (Figure 8) is also based on three parameters – Music range (vertical axis), Interaction (horizontal axis) and Income source (depth).

Income source defines how the service gains its revenues. The scale is divided in two different income sources – direct and indirect where the low value corresponds to an indirect income source, i.e. the user pays no fees or rates connected to the service. The indirect pay model is more thoroughly described under chapter 7.1.1 above. The direct pay model includes all of the three other pay models also described under chapter 7.1.1. They all imply a fee or rate for the consumer.

Selection shows how big selection of music the service offers. The difficulty with defining this scale is whether the scale is based on a big selection of songs from each of few genres or

Figure 7. Definition of creator matrix

Figure 8. Definition of service matrix

Pay service with a wide range of music and little

interaction.

Free service with a wide range of music and little

interaction.

Pay service with a wide range of music and much interaction.

Free service with a wide range of music and much interaction.

Pay service with a small range of music and little

interaction.

Free service with a small range of music and little

interaction.

Pay service with a small range of music and much interaction.

Free service with a small range of music and much interaction.

Music range

Inte

ractio

n

Fame

Established creators/artists with

much control over rights and selling channels for their

music

Not established creators/artists with

much control over rights and selling channels for their

music

Established creators/artists

without much control over rights and

selling channels for their music

Not established creators/artists

without much control over rights and

selling channels for their music

Influ

en

ce

25


a modest selection of songs from each of a great number of genres. In this case a large number of genres mean a large selection, whereas a large offering from only one genre is a small selection.

Interaction shows how much the industry is able to interact and reach out to the consumers. A high interaction means that the service can be used to market new releases or sell material that the user did not intend to buy firsthand. A low interaction on the other hand is mainly a service where the labels have no way to get in contact with the consumers. Pressplay with their own site has a very good platform for marketing while Kazaa has few ways to communi-cate with the users through advertisement or other channels.

7.1.3 Evaluation Methodology After selection services, the evaluations have been performed from a user-oriented view, first playing the part as ordinary users to create an overall impression of the service. All selected services have then been assessed according to a number of factors important for the consum-ers’ experience of value.

7.1.4 Evaluation Factors Prior to this thesis we performed a minor user oriented study of the music services available in spring 200224. This earlier work helped us discover many of the factors that have been examined in this thesis. During our current work we have been able to look into those factors and investigate their importance and correlations more thoroughly since their existence has been known from the start.

Since file sharing services and subscription services are quite different from one another different factors apply on each kind of service.

7.1.5 Music Bill of Rights The Music Bill of Rights, according to Bernoff25, consists of the below statements that are a couple of very basic, but not obvious principles that may be helpful to have in mind when reviewing the services. Bernoff claims that no music service is prone to succeed without paying attention to the Music Bill of Rights.

• The right to find music – There is no use subscribing to a service that does not have the music you want.

• The right to control your own music.

• The right to pay as you want.

24 LANDEGREN, J. LIU, P. Studie av digital musikdistribution – vilka värden har skapats. KTH, Stockholm, Sweden. 25 BERNOFF, J. Downloads Save the Music Business. August, Forrester, Wholeview, TechStrategy Research.

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7.2 Interviews The purpose of the interviews is to get a deeper insight into the music industry and to get information and opinions from the different actors in the business. Interviews have been conducted with the service providers of digital music distribution, music creators, interest organisations and collecting societies within the business.

7.2.1 Service Providers The interviews are based on questionnaires that have been sent to people representing each service of interest. The questions are not standardised and differ between the services since they all have different interests, technology and resources.

The reason for choosing this particular kind of interview method with a questionnaire was that most services are not situated in Sweden and thus a personal interview is made impossible from economic reasons. A method based on phone interview was also discarded on the basis that a recording of the interview is hard to make over the phone and then a full transcript of the interview would not be available.

7.2.2 Interest Organisations Record companies, artists and creators each have their own interest organisation and collect-ing societies – IFPI, STIM and SAMI. The interviews have been performed by phone and personal meetings with the legal advisors of each organisation to form an opinion of how current and future rules and tariffs for digital distribution work. The interviews have been to collect information on a specific topic and thus the amount of information was small enough so that a complete recording of the interviews was not necessary.

7.3 External Reports, Surveys and Statistics To get the users’ view on digital music distribution, one way is to use user surveys, statistics and reports to get a snapshot of users’ attitude toward music files at a given time. There is not enough time and resources to actually conduct a reliable user survey in the span of this work, so other surveys conducted by professionals are used. The findings from the studied surveys are displayed in chapter 8.3.

Since all figures are estimated and calculated by other companies and external sources, they have been reviewed with a critical eye. Statistics and numbers of this sort are known to be easily manipulated, thus the accuracy and reliability of the used reports are thoroughly reviewed and discussed. Furthermore, the reports are from established and well-known companies, ensuring better reliability. Since changes may occur rapidly and radically all surveys and figures are from recent reports (end of 2002 – beginning of 2003). See references for a list of the studied surveys.

7.3.1 Internet Connection and Digital Music Usage Statistics and Surveys Statistics on Internet usage among Swedish households were found in a report from Post- och TeleStyrelsen, Konkurrensverket and Konsumentverket26. Those organisations protect the

26 Alltid på! Bredbandsmarknaden ur ett konsumentperspektiv. 2002. Post- och telestyrelsen, Konsumentverket, Konkurrensverket. Sweden

27


consumers’ rights and ensure a rightful competition in several markets so the report is considered to be an impartial judgement of today’s Internet usage.

A Norwegian survey from MMI27 based on a survey to 2002 consumers is used in conjunction with the sales comparison to assume downloading behaviour for Swedish people.

7.3.2 Music Sales Figures Sales figures based on Quarterly reports from British Phonographic Institute28 (BPI) for the UK market were analysed to find any possible sales trends for CDs or singles since downloading became evident.

Figures from IFPI29 were used to compare sales figures from the Swedish and global market with ISPs revenues.

The McKinsey Quarterly report “Unchained melody”30 has given us some insight in how big shares of the CD price that comes from different steps in the value chain.

7.4 Keeping Up to Date with the MP3 News and Web Log All important news on the subject is gathered in a web log for easy access and tracking of recent events. Since the digital distribution business changes on a nearly daily basis it is necessary to keep this log to get an overview of all happenings in a chronological order. Many

of the events are mentioned in chapter 2.3. It has been of big help when tracking old news and events.

27 EILERTSEN, R.T. September 25, 2002. Kopiering av opphavsbeskyttet innhold – Innehav av egenbrente CD’er og DVD’er i Norge, Nedlastning og bruk av MP3-filer. MMI for Norwaco. Norway 28 BPI. 1998-2002. Quarterly Reports from 1998 to 2002 29 The Recording Industry in Numbers 2002 – the Definitive Source of Global Music Market Information. October 2002. IFPI. London, UK 30 MAY, B. and SINGER, M. McKinsey Quarterly, Number 1, 2001. Unchained Melody

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8 Findings

8.1 Evaluated Services Findings

8.1.1 Selected Services The basis of this selection has mainly been the Services Matrix. Each service of interest representing different distribution models, networks and income sources has been placed into this matrix and then the most innovative and interesting services from all extremes are evaluated. Only the selected services remain in Figure 9 below.

Musicnet (owned by BMG, EMI, Warner and Real) and Pressplay (owned by Sony and Universal) are two similar services owned by the majors, and they both offer about the same content and features. All five majors are represented in these two services and they put a lot of effort to break the ubiquitous illegal download trend on the Internet by offering a legal alternative. Rhapsody31 is another subscription service that is not owned by, but has licences from all five majors. Emusic is also a subscription service but the content is provided from independent labels and they have no license agreement with the majors.

OD2 and LiquidAudio have a very interesting business model where they acquire licenses from the labels and provide E-tailers, Internet portals and outlets with a full end-to-end solution for selling music on their sites. Royalty management, hosting of files on high bandwidth servers and E-commerce systems are all part of their solution.

MP3.com was from the beginning a free service where small independent bands could market and distribute their work on the site. The site is now owned by Universal and acts as a promotion platform for mostly unsigned bands and artists. A user community site similar to early MP3.com is Dmusic.com.

Vitaminic is a similar service to MP3.com with many independent or unsigned bands, but unlike MP3.com it requires a subscription fee to access the songs as well as for uploading your own work. It does provide a minor selection of music from larger independent labels and artists. Vitaminic is owned by the pioneers IUMA and Soundpeople.

31 Rhapsody is similar to Musicnet and Pressplay and is neither available in Europe, but it did have a limited offer for trying out the service for a few days even for European residents. This made it possible to evaluate the service and form an own opinion of the advantages and disadvantages with services like these.

Figure 9. Service matrix

P2P networks Internet Radio

Pressplay MusicNet Rhapsody

OD2

MP3.com

Vitaminic Emusic.com

Dmusic.com

Music range

Inte

ractio

n

29


Tom's Radio is a free customisable Internet radio service. Users can make their own playlists or choose between four different streams. A big player in Internet radio is Shoutcast, but it is more of a technology provided for anyone to use, and the website is just a collection of the sites that uses Shoutcast. Shoutcast allows no copyright control over the content, which can be streamed by anyone.

The selection of file-sharing programs has been the hardest to decide since there are numerous clients to choose from. We have chosen clients to represent each of the two networks Fasttrack and Gnutella. Some clients are focusing on music and some are general file-sharers and different search options and filters differentiate the focus. Kazaa is an obvious choice because it is the single largest P2P service available. It uses the FastTrack network, and it focuses on sharing music files. Morpheus 2.0 is the most popular client using the Gnutella network. Other investigated clients representing own networks are WinMX, Qtraxmax and DirectConnect (hub-based).

It is interesting to note that no services are in the quadrant that represents small range of music and little interaction and it is understandable that only few static sites offering niched music are successful and stay for very long under the current circumstances. There is also hardly any successful service that exclusively uses a pay-per-piece or pay-per-listen model, although the models are partly used in some of the evaluated services.

8.1.2 Briefly Investigated Services There were many services briefly investigated and discarded in this report because of their lack of usability or other factors, but they could be worth mentioning for reference:

• Numerous P2P-clients were examined and many of them were briefly tested such as: Shareaza, Imesh, Limewire, Bearshare and AudioGalaxy.

• A few legal music sites of interest: Philly Soul Classics, Liquid Audio, Liquid Audio BurnItFirst.com and RioPort.

• Internet radio stations: Live365, Shoutcast, Spraydio and icecast.

8.1.3 Overall Impressions of Pay Services Unfortunately because of the licensing restrictions the evaluation of Pressplay and Musicnet had to be made by Justin Maresh32 since the services are not available in Europe. Thus the impression of these services is not firsthand. These reviews can be found in Appendix XIII

and Appendix XIV.

Fortunately Rhapsody had a limited worldwide trial period of a few days when even non-US citizens could try the service with full functionality. That made it possible to form a firsthand impression of a subscription-based service with content from the majors.

The most apparent impression from most legal services is that they tend to have a very limited selection of music. Even though Rhapsody distinguished itself with a decent selection there were still many artists missing. Except in the case with Rhapsody, categorising and search functions on other services felt lengthy. Since the content on Emusic, Vitaminic and others

32 Independent musician and more important - US citizen

30


mainly consisted of bands unknown to most users browsing through the music can easily be very random. These services lacked a good and organised way to browse through the categories compared with for example Rhapsody’s user interface that felt much more intuitive and appropriate.

8.1.4 Overall Impressions of P2P and Non-Licensed Services Non-licensed services consist mainly of P2P networks, and most Internet radio station also lack licenses. Internet radio has so far not been considered a serious threat by the music industry, although actions against it have been taken (for example the Internet Radio Fairness Act).

What characterises P2P services are huge amounts and selection of music, and they are free to use. The availability is also very good, since music can be attained from virtually any computer with a client, and clients can be downloaded and installed easily. Depending on what network and client, the level of organisation and reliability of downloads varies. Most clients, such as Kazaa and Morpheus, are much unorganised. Reliability on the downloaded material and connection are also very low, often resulting in broken downloads or being extremely slow.

More closed services such as DirectConnect that are based on hubs requiring a certain amount of shared material and connection speed, are more organised and are far more reliable. It eliminates so-called ‘freeriders’ (user not sharing any material), thus forcing a higher amount of material available in the hubs, and the speed requirement guarantees a certain download speed. There is a strong connection between control and quality. The free nature decentralised P2P networks result in poorer quality, while a little more control like restricted hubs enhances quality. Centralised services offer most control and quality of service (see chapter 9.1.1).

Search tools and other functionality are quite similar for most clients. A few clients claim to have a superior search tool, interface, and better speed. The tests have shown that among the about 10 most popular clients, there is not a single competitor superior to the others, but a few clients are inferior to the others regarding the above criteria.

Spy-ware and ad-ware has been a problem in many clients, but today there are so called ‘clean’ alternatives for most clients, and new clients are often free from spy-ware and ad-ware.

Overall, the reliability of P2P services is low, and a great mass of users do not bother going through searches and broken downloads to attain music. There is definitely room for improvements and other alternatives.

8.1.5 Differences between Licensed Services and Non-Licensed Services The most notable differences are that non-licensed services are free to access, while licensed services charge users to access the offered content.

Non-licensed services are also mainly P2P networks, although there are websites that are not licensed but are seldom very popular or can even be called a service. Licensed services are only central sites, often with a proprietary client.

Licensed services with backup from a relatively generous budget for development usually are more user-friendly and easy to understand. They have focus on commercial services toward the common consumer, whether it is an IT-literate user or not. P2P clients tend to focus more

31


on the technical solutions, offering efficiency, aimed toward IT-literate users. For the user these clients often lack apparent commercial purposes and are believed to be free.

The range of music is superior in illegal services, because they do not have the hindrance of licensing and copyrights.

8.1.6 Interesting Observations during Evaluation of Services A very interesting observation is that all legal services offering digital downloads for burning onto a CD-ROM seems to have a price agreement since all downloads are priced at $0.99. It also seems that the common technology for all the services is almost the same. Every service provided by the majors offer subscription based services with optional burnable downloads for a pay-per-piece fee. The question is whether all the different players have developed this model separately and found it the most effective, all the players cooperated in the develop-ment or one major invented the model and was quickly followed by the others. The pricing level is also comparable with physical CDs.

8.2 Interview Findings

8.2.1 Interviewed Services We have only managed to interview three services – Morpheus, OD2 and Musicnet. The complete questionnaires can be found in the appendices. Several services such as Pressplay, Tom’s Radio and MP3.com were unwilling to answer our questions in spite of several attempts to contact them. Niklas Zennström gave his view on the Kazaa creation story, on the lawsuits regarding the service and more, but he did not have any really relevant information to share.

8.2.2 Interest Organisations The legal advisors from respective interest organisation have provided information of legislation, rules and future plans for each actor in the music industry. They were very helpful and had a lot of useful information of how the business works. The results can be read in Appendix II.

The interviews with the legal advisors have given us a better picture of how the current legislation works and what rules there are for distributing music on the Internet. Apparently there are rules and tariffs set for now, but it seems like few people are aware of these rules, and even less interested in finding out on their own. The rules are only temporary and still under development. The question is if the rules will ever catch up with technical development, since distribution technology is constantly evolving too. They are usable as they are and people will have to accept they are still in a developing stage.

The most interesting comment from STIM and SAMI is the one about the involved parties allowing their material to digital distribution services. They both have said that it is often the record companies that do not allow this, while performing artists and creators often do. One reason for this is that the artists and creators probably have more to gain than lose from this expansion to digital channels, while record companies want to keep the income generated from physical steps in the value chain (producing CDs). Creators have the most to gain from this because in the end it broadens the market. The main cause of industrial losses is illegal copying, that is a lot easier with music in a digital format.

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8.3 External Reports, Surveys and Statistics Findings Below are calculations and analyses from the gathered statistical reports.

8.3.1 Telecoms’ Revenues Compared to Record Companies’ Annual Profit The telecoms’ role in P2P downloading have been discussed occasionally but the maybe most important question have been left out of the discussions – How much money do consumers spend on downloading music? The term “free” downloading is definitely not valid as can be seen in Table 3 below.

Many of the figures above are approximations or generalisations since exact figures are impossible to estimate, but in order to create figures that have any reliability all assumptions have been made in the record companies’ favour. Thus the actual quote between the telecoms’ revenues and the record companies’ profit is actually much higher. Since the quote shows a considerable profit for the telecoms with these figures it is definitely worth to review the telecoms role in P2P downloading.

We have used an estimate of record company profits for this comparison, since the record industry’s rhetoric usually refers to P2P activities damaging their profits. The industry also regularly claims that, were consumers not able to download, they would go out and buy an equivalent number of physical CDs.

The Swedish figures are based on numbers from trustworthy sources (see chapter 7.3.1 for sources), and the accuracy should be considered good. The reason for choosing a Norwegian report as a basis for the user downloading behaviour is that any Swedish information source with the same scope and reliability not has been found.

The global figures in Table 4 are to a larger extent based on estimations and assumptions, but are still realistic figures.

The findings from this comparison is further discussed and analysed in chapter 9.1.4.

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Modem56K

TeliaADSL

0,5 Mbit

BostreamADSL

2,5 Mbit

BBBBroadband

10 MbitSize of song (kb) (1) 4 000 4 000 4 000 4 000Download speed (kb/s) (2) 7 62,5 312,5 1250Downloaded files per month (3) 64 64 64 64Time online per month (minutes) 610 68 14 3

Percentage of the population with Internet access in the household (4) 57%

Percentage of online users on different Internet access (4) 80% 7% 6% 7%Percentage using Internet connection for music downloading and webradio (4) 18% 42% 42% 42%Number of online users downloading music or listening to Webradio (5) 738 720 150 822 129 276 150 822Total amount of data downloaded by users each month (TeraByte) 189 39 33 39

Telecom's ratesMonthly rate (SEK) 0 375 449 320Minute rate (SEK) 0,115 0 0 0Monthly rate exlcuding VAT of 25% (SEK) 0 300 359,2 256Minute rate excluding VAT of 25% (SEK) 0,09 0 0 0Monthly rate excluding VAT of 25% (USD) (6) 0 33,3 39,9 28,4Minute rate excluding VAT of 25% (USD) 0,01 0 0 0

Total cost per month for user (SEK) 70 375 449 320Total cost per month for user (USD) 10 42 50 36Total cost per month for user spent on music (SEK) 70 150 180 128Total cost per month for user spent on music (USD) 10 17 20,0 14,2

P2P perspectiveTelecoms' traffic revenues per month (M SEK) (7) 39 17 17 14Telecoms' traffic revenues per month (M USD) (7) 4 2 2 2Telecoms' traffic revenues per year (M SEK) (7) 466 204 209 174Telecoms' traffic revenues per year (M USD) (7) 52 23 23 19

ComparisonRetail value of recorded music sales in Sweden 2001 (M SEK) (8) 2 960Retail value of recorded music sales in Sweden 2001 (M USD) (8) 329Profit from recorded music sales in Sweden 2001 (M SEK) (9) 740Profit from recorded music sales in Sweden 2001 (M USD) (9) 82

Telecoms' revenues from all Internet access per year (M SEK) (10) 1 052Telecoms' revenues from all Internet access per year (M USD) (10) 117Telecoms' revenues percentage of profit on recorded music sales 142%(1) Average track length of 4 min and file size of 1 Mb/minute of track (2) Theoretical download speed (3) Average number of files downloaded by users of P2P. Swedish downloading behaviour is assumed to be similar to Norwegian (Rune T. Eilertsen "MMI - rapport", 09-25-2002) (4) "Alltid på - Bredbandsmarknaden ur ett konsumentperspektiv" PTS, Konkurrensverket och Konsumentverket 2002 Estimates from official Swedish sources. (5) This number is calculated assuming a Swedish population of 9 million people (6) All figures in USD currency are calculated using an exchange rate of 9 SEK = 1 USD (7) For each type of Internet access, excluding Swedish VAT of 25% (8) (IFPI, Recording industry in numbers 2002) (9) Profit from recorded music sales is approximated to be ~25% of the retail price (McKinsey Quarterly, Unchained Melody...) This is a very conservative estimate - Major record companies' profits presently seem to be in the range of 4 - 8 % of wholesale. (10) A sum of telecoms’ revenues from all types of Internet access

Table 3. Telecoms’ revenues and record companies’ profit from recorded music sales in Sweden 2001

Many of the figures above are approximations or generalisations since exact figures are impossible to estimate, but in order to create figures that have any reliability all assumptions have been made conservatively, in the "favour" of the record companies. Thus the actual ratio between the telecoms’ revenues and the record companies’ profit is probably much higher. Since the ratio indicates a considerable profit for the telecoms, then these figures suggest it is

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definitely worthwhile reviewing the telecoms' role in P2P downloading (but not via legal actions, which has been traditional Record Industry strategy as the Internet has developed).

The Swedish figures are based on numbers from trustworthy sources, and the accuracy should be considered good. The global figures are to a larger extent based on estimates and assump-tions, but are still realistic figures.

Assumptions in the Swedish Comparison 1. The Statistics from the Swedish report “Alltid på- Bredbandsmarknaden ur ett kon-

sumentperspektiv”33 (the "Always -On Broadband market from a consumer's perspec-tive") show that 57% of the Swedish households have Internet access. Based on that fact we assume that 57% of the Swedish population have Internet access and we also assume the size of the Swedish population to 9 million people. The same statistics also show how many of those Internet users that use their connection for music downloads. There are also numbers on what kind of connections the population has. VAT has been taken into consideration for connection rates, since the retail value reported by the record industry's organisation IFPI34 excludes VAT of 25% in Sweden.

2. The track length is usually about three minutes but since many tracks can be much longer we approximate an average track length of 4 minutes.

3. 1 Mb/minute of track is based on an mp3-file with a bitrate of 128Kbps. This is by far the most common file format and bitrate for CD-quality music on the net even though mp3s with 192 Kbps bitrate are becoming more popular.

4. The calculations are based on theoretical download speeds, but actual download speeds vary and P2P users are also dependent on the connection at the other end i.e. the person with whom one is sharing the files. The actual download speed will be the lower of the two ends. Average download speed for a 56k modem user would be about 4 Kb/s and for a BBB 10 Mbit broadband user the download speed varies enormously between 1-1000Kb/s so an average is very hard to calculate and depends very much on what other users are online.

5. A Norwegian researcher, Rune T. Eilertsen has carried out an extensive survey of music file sharing over the net35. He estimated from an extensive user survey that 16% of the Norwegian population downloaded files and they downloaded an average of 64 files per month and person. We assume the amount of downloaded music per person is the same in Sweden. This would amount to about 4 full length CDs per month. A Forrester research survey (august 2002: Downloads save the music business) also found in the USA that regular users of file sharing services ripped CDs to their hard drives on average around 4 times per month.

33 Alltid på! Bredbandsmarknaden ur ett konsumentperspektiv. 2002. Post- och telestyrelsen, Konsumentverket, Konkurrensverket. Sweden 34 The Recording Industry in Numbers 2002 – the Definitive Source of Global Music Market Information. October 2002. IFPI. London, UK 35 EILERTSEN, R.T. September 25, 2002. Kopiering av opphavsbeskyttet innhold – Innehav av egenbrente CD’er og DVD’er i Norge, Nedlastning og bruk av MP3-filer. MMI for Norwaco. Norway

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6. The assumption that 57% of the population have Internet access is probably too low since most people have Internet access at their work. The record industry maintains that much downloading occurs at places of work/universities and is presently starting a campaign to persuade employers how illegal this activity is (inferring that even they could be sued).

7. The minute rate for modem users is that charged by Telia, Sweden’s largest ISP36. The figure of 0,115 SEK is the rate for weekday nights and weekends. On weekdays 8:00 - 18:00 Telia charge 0,23 SEK. There is also a connection fee of 0,45 SEK every time a customer connects - this has not been included in the calculations.

8. The start-up cost for acquiring a broadband connection has been excluded. Usually it varies between 500-2000 SEK. Even the costs for buying, servicing and replacing computers every 3 or 4 years as well as those for electricity have been excluded.

9. The VAT for Internet access is assumed to be 25%. A figure most domestic consumers cannot deduct. It has though been deducted from the telecoms’ revenues.

10. Broadband users are assumed to use about 40% of their connection for downloading music. The total cost for downloading music is calculated as 40% of the monthly rate to the ISP. This of course amounts to a small number of minutes for the transfer - but many more are devoted to searching for content, aborted downloads etc.

11. Record companies profits vary between -3% - 25% according to McKinsey Quarterly “Unchained Melody”37. The profits are calculated, very conservatively, using 25% profit, since record sales are still fairly steady in Sweden. The actual figure is currently nearer 4-8%. The IFPI claims illegal downloading and CD "ripping" is the reason.

12. There are more costs associated with downloading that are very hard to estimate. Ownership of a computer, as noted above, is required, but since computers are used for so many tasks it is impossible to estimate an average share of the computer price used for downloading and listening to downloaded music.

13. The broadband prices (BBB38, Bostream39 and Telia36) have been acquired from their respective websites.

36 www.telia.se 37 MAY, B. and SINGER, M. McKinsey Quarterly, Number 1, 2001. Unchained Melody. 38 www.bredband.com 39 www.bostream.com

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ISP with flat rateMaximum number of simultaneous users on Napster (2001) (1) 1 600 000Number of simultaneous P2P users today (june 2002) (9) 7 194 040Maximum total number of users on Napster (2001) (2) 60 000 000Total number of P2P users (june 2002) (3) 100 000 000

AOL monthly flat rate 2001 (USD) 21,95AOL monthly flat rate 2002 (USD) 23,90

ComparisonTotal sales of recorded music (M USD) (5) 38 680Profit from CD sales (M USD) (6) 3 868

Telco's revenues from P2P (june 2002)Telcos' traffic revenues per month (M USD) (7) 956Telcos' traffic revenues per year (M USD) 11 472

Telcos' revenues percentage of profit on CD sales (june 2002) 297%

Telco's revenues from Napster (2001)Telcos' traffic revenues per month (M USD) (7) 527Telcos' traffic revenues per year (M USD) 6 322

Telcos' revenues percentage of profit on CD sales (2001) 163% (1) (IFPI “the Recording Industry in Numbers 2002”) (2) (Alderman J. “Sonic Boom”) (3) A very approximate number (4) 1 USD ~ 9 SEK (5) Total global retail value of recorded music sales 1999 (IFPI, Recording industry in numbers 2002) (6) Revenues to the record company are approximated to be 10% of the retail price (see note 3 below) (7) Total users * monthly rate * 40% (Music downloads are assumed to constitute 40% of the connected

time) (8) A snapshot of all online users on different P2P networks (February 16th, 2003 14:00 EST)

Table 4. Global comparison between telecoms’ revenues and recorded music sales

Assumptions in the Global Comparison

(10 - 12 above also apply in the global comparison):

1. The total number of P2P users is estimated to be 100 million people. Napster was estimated to have about 60 million users at its peak and we know that there are many more users today. Kazaa alone has over 190 million downloads and the top 5 downloaded P2P services (Kazaa, Morpheus, iMesh, AudioGalaxy and Bearshare) from www.download.com have together about 400 million downloads. These numbers do not mean that there are 400 million unique users. Many users download applica-tions several times. There are also other services providing downloads from their own websites and they are they not included in these figures.

2. AOL40 is the largest ISP in the US and hence one of the largest in the world. Thereby a generalisation is made saying that all P2P users have AOL as ISP. In reality this is a very broad generalisation but it is impossible to estimate how the total number of users is divided between different countries at the scope of this thesis.

40 www.aol.com

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0

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Q2 199

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Sold singles

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trendline

Figure 10. Number of sales of singles and albums in UK over the years 1998-2002

3. Using the highest McKinsey estimate of record company profits in the range -3% to 25% of retail value41, is far less reasonable on a global scale. In Sweden CD sales have remained fairly steady around 24 million, despite CD burning and file sharing. In the US sales dropped 9% in 2002. The trade paper Music & Copyrights uses an estimate of 4 - 8% of trade value. We have opted for a 10% figure in the global figures, i.e. biased "in favour" of the record companies. Ironically, had one used the extreme figure of 25%, the conclusion would be that consumers’ telecom/ISP spend for P2P during the run up to Napster’s all time high would have been less than record company profits. The opposite is the case after Napster’s closure and Kazaa’s birth.

8.3.2 Trends for Single Sales versus Album sales Sales figures for CDs and singles on the UK market show a noticeable trend (Figure 10) that single sales have been constantly decreasing since 1998 compared to album sales that has been increasing. This implies that most of the losses in the British record industry origin from a loss of single sales. Album sales have steadily increased since 1998. One possible explana-tion to this is that the reason for buying a single very often is to preview an artist before buying the CD. This particular purpose of singles has now become obsolete when you can achieve the exact same result by downloading free songs from a file-sharing client. When it comes to album sales the satisfaction of owning a physical CD is still an attractive factor for consumers when buying an album and it is not substitutable in the same degree by file downloads.

These assumptions are confirmed by IFPI42 who claim that single sales increased 32 % between 1994 and 1997 but have since then fallen by 38% to 318 million units. The reason for a particularly difficult single market is thought to be a combination of growing file sharing and fewer single releases. IFPI also state: “As the Internet becomes a more significant channel for downloading of single tracks, the future of the physical CD is unknown”42.

An ironic aspect of this is that many record companies have shown an unwillingness to pay royalties on singles to artists. At the same time the recording industry has regularly and vociferously claimed that Internet downloading is the same as stealing money from the artists.

8.3.3 Other Sales Trends According to figures from the RIAA, CD sales have steadily gone downwards, and it is a known fact. What has not been made clear according to George Ziemann43, is 41 MAY, B. and SINGER, M. McKinsey Quarterly, Number 1, 2001. Unchained Melody. 42 IFPI. The recording industry in numbers 2002, p. 8 43 ZIEMANN, G. http://www.azoz.com/music/features/0008.html

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that the number of new releases have decreased as well. Whether the drop in sales corre-sponds to the decreased number of new album releases remains unclear, since different sources are reporting different results, as can be seen in the figures above.

Another known trend is that record companies venture increasingly more on superstars, and thus diminishing the diversity. The number of one-hit-wonders has increased, and artists now have a shorter lifespan and releasing fewer albums. One can only speculate how many of today’s artists that will still sell albums in 10 or 20 years.

8.4 Study of Important Factors for a Commercial Service After studying the chosen services, a number of factors that are considered important in evaluating digital music distribution services have been identified and listed below. There are certainly many other minor factors to take into consideration, but the ones listed are consid-ered the most important and decisive in a review of service value.

8.4.1 Music Selection Control For legal services it is important to maintain control of the music selection that passes through their service in order to be able to collect revenues and distribute money to the authors and license owners of the work. This control is most commonly achieved by keeping a central server that contain all files available and a database that stores information of all downloads and streams. File sharing services after Napster have chosen not to control the music selection or keep any records of the files downloaded and thus they have so far avoided being sued by the RIAA and the record labels. They claim that they are just providing a service and have passed the responsibility for the service’s content on to the users.

8.4.2 Selection Difficulties Satisfying customers’ all demands on selection is hardly possible. Today the most extensive selection of songs found online is on the Kazaa network. The pay services main advantage versus Kazaa is the ability to provide a guaranteed bandwidth or song quality since the number of songs on a free network of this size hardly can be exceeded. Still there are a critical least number of songs that must be available for customers’ experience of getting value for their money.

There are still many problems with getting licenses from the majors. They have certain restrictions on what songs will be available and where, and with what other artists they can be distributed. Before October 2002 the five majors were still very restrictive with licenses to services licensing music from some of the other majors, but they realised that they must provide their music digitally to have some chance of competing with file sharing clients and made deals with several pay services during that month.

8.4.3 Copy Protection, Digital Rights Management and Other Limitations Eventually digital files have to be protected in some way but the question is how restricted they should be. The copy protection methods implemented by the industry today are used to achieve a higher level of control over the material and prevent illegal copies to be made. The problem with copy protection is that it in many cases involves inconveniences for the user. Most copy protections work by making the CD unavailable in a CD-ROM to prevent digital copies to be made. The effect is that those users who use the computer for playing CDs cannot play the copy protected CDs and in some cases those CDs are known to cause lockups or

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computer crashes. Some CDs solve this by including their own player that can play separately provided audio files on the CD.

One other negative effect for the users is that they no longer are able to make personal compilations of songs from their own CDs and copies to MP3 players or other portable device.

These are very evident side effects of copy protection that are highly important for users. There have even been lawsuits where people have sued record companies for not being able to play their CDs.

8.4.4 Customer Groupings G. Klimis originally identified the main customer groups44, and they have been slightly modified to fit in the model used here in Figure 11. The groups are the following:

“The curious seeker” – a user that is willing to actively search for music and has an appetite for a wide range of genres.

“Follow the trends” – a user that is rather lazy and prefers being served the music that is “in”, preferably from MTV.

“Small range of what I like” – a user that is willing to actively search for one particular sort of music that she likes.

Each group also have different levels of IT-literacy, showing how much experience that a user has in using computers. Although a curious seeker is willing to go far in searching for music, the choice of what channel to use is decided by the level of IT-literacy. An experienced user is probably more willing to use a client with a difficult interface in exchange for a superior selection and functionality, and vice versa. The type of user is decisive for what type of service is most suitable (see chapter 9.3).

Note that there are no users that like a wide range of music and at the same time do not actively search for it. For example a user that likes classical, jazz, black metal and popular music at the same time would probably not be able to fill her needs without putting any effort in looking for it and just being served music on TV.

8.4.5 Value vs. Fee When looking at the value for the money paid, non-licensed services apparently have an advantage since they do not pay any royalty, or have any fees for users to get access to the 44 KLIMIS, G.M. March, 1999. Disintermediation and Re-intermediation In the Music Business – the Effect of Multimedia Technologies and E-commerce

Figure 11. Consumer matrix

Curious seeker

Curious seeker

Follow the trends, I want my TV back

Small range of what I like, Sinatra fans

Follow the trends, I want my TV back

Small range of what I like, Sinatra fans

Music Range

Activ

ity

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material. For the consumers this type of service gives most value for the money, disregarding that the services in general do not have licensed material.

Commercial services with licensed material are offering files to a price comparable with conventional CDs. Music files are generally more limited than CDs because of the licenses, but there are also some technical advantages with music files. How the pros and cons of files are valued is further discussed in chapter 9.1.3.

8.4.6 Extra Value The music industry still has some advantageous factors compared to the file-sharing clients, since they often have access to previously unreleased material, videos and concert rights. Some big stars like Madonna, and David Bowie have a huge fan base that is very interested in their back catalogue, i.e. their early work. This back catalogue is a very lucrative property for the record label since the marketing costs are close to zero for such famous artists. These advantages for the industry could be a major competitive force to be used in the battle versus P2P. The extra value of being able to watch a live concert, a music video, or listen to previ-ously unreleased songs could certainly be a factor that attracts consumers to a commercial service.

8.4.7 Offered Selection In the early stage of this thesis all the majors were still very restrictive with what music was distributed to the commercial services and there were strategic forces in play that prevented labels from offering their music to services run by another label. In October both Musicnet and Pressplay applied for licenses from all five majors to sell a certain amount of the majors’ songs. Early 2003 the services and the labels agreed on the licensing details and the services were permitted to distribute the labels’ music to a certain extent. The selection currently offered by Musicnet and Pressplay is (according to their own websites) exceeding 200,000 songs for Pressplay and 75,000 songs for Musicnet but they have still not expanded their subscription possibilities outside the US so these figures have not been verified.

8.4.8 Revenue Control Klimis45 model of revenue generation in the music business covers only traditional physical distribution and not digital distribution. Besides from pay services as the most obvious new revenue source there are many other sources to explore. Telecoms have probably earned huge amounts of money on illegal downloading (see chapter 8.3.1) and earn money from legal downloading. Below in Figure 12 is an updated version of Klimis model taking into consideration all the digital distribution channels available and it also shows where telecoms make money on music distribution.

45 KLIMIS, G.M. March, Disintermediation and Re-intermediation In the Music Business – the Effect of Multimedia Technologies and E-commerce

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Retailers

Recording

Tangibles “CD”

Intangibles “Files”

= Revenues to telecoms gained from net traffic

Recorded music used by licensees

or record clubs

Internet radio

P2P “Kazaa”

Sales of CDs

E-tailers

Radio, TV performance

Films, TV commercials

Digital music service

Subscriptions

Sales of files

“Th

e s

on

g”

Figure 12. Revenue generation in the music industry including digital distribution

Publishers Composers

The artist

Live concerts

= Entities where revenues are generated when consumers use music, physically or virtually

= Entities where legal services lead to revenue generation

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9 Discussion Below follow discussions and reflections on the acquired findings in the previous chapter.

9.1 Discussion of Important Factors For a Commercial Service

9.1.1 Music Selection Control The importance of control depends on the design of the company’s value chain. Until today the industry has been anxious to keep their control over the market and keep up their sales of CDs. Unfortunately for the industry it is not possible to maintain the same degree of control on the Internet and instead of desperately trying to regain control they should put their efforts in finding new possibilities in the new markets. One important reason for the industry’s earlier reluctance to incorporate digital distribution is that they own many parts of the value chain that would incur losses when removed from disintermediation.

In line with the above reasoning the need for music selection control relies on whether the industry is dependent on their physical sales or not. There is a relation between the degree of control and the number of potential listeners of a song illustrated in Figure 13. P2P services show that a low control over music selection is prone to reach a greater number of listeners and thus the marketing value is higher for such a service. On the other hand are the channels for marketing very restricted since there is no possibility for advertising or promotion on the service.

There is also a relation between the level of control and the ensured quality of a service. In order to ensure a certain level of reliability and music quality the services must also have a certain level of control over the content. P2P services are a very good example where Kazaa shows that a low control enables any user with any type of content to enter the network while Direct Connect provides a higher bandwidth for downloads and larger selection by restricting entrants with a low bandwidth and few files to enter the hubs.

Figure 13. Relation between control and potential listeners

Legal services with high control commonly achieve the degree of control by keeping a central server that contain all files available and a database that stores information of all downloads and streams. The files are often a copy-protected format that restricts the use of the file to the intended user.

File sharing services after Napster have chosen not to use a central server to control the music selection or keep any records of the files downloaded and thus they have so far been able to avoid being convicted in court. They claim that they are just providing a service and have passed the responsibility for the service’s content on to the users.

9.1.2 Value vs. Fee and Pay-Models The following discussion applies mainly to pay-services, and not P2P networks without license agreements.

High control Low control

Many listeners Low Quality of Service

Few listeners High Quality of Service

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There are many technical advantages of buying digital files compared to a CD, although an unprotected CD can easily be converted to files and vice versa. A protected CD is not as easily interchangeable with a digital file format. The most important advantages with files are distribution and storing. A digital file is easily portable and distributed between computers on different geographical locations, and also easily transferable between different media, such as portable MP3-players, burned to CD and more.

There are also a number of limitations that reduces the value of music files compared to physical CDs. The limitations are seldom technical, but caused by license deals and conven-tional copyright rules, that in turn are enforced by technology. The deals and legal limitations at the large pay-services severely cripple the possibilities that technological advantages brings, thus decreasing the relative value of copy-protected files.

There are a few important arguments for valuing the current copy protected files lower than the physical CD counterpart. Firstly the majority of consumers still value a physical product higher much because of better quality on CDs for now, and a digital music file should have a greatly reduced value compared to their physical counterparts. The price on files ought to be lower thanks to reduced distribution and production costs, but right now files only have a marginally reduced price. Secondly, DRM protected music files are much more limited than CDs, and decreases the value even more. The licenses limit the music geographically (where the music can be listened to, not DRM related), what media the music can be transferred to, and when the music can be used (as long as there is a valid subscription). The fact that a lot of services do not include permanent ownership of the downloaded music is the one of the most important factor. This condition is not clearly stated for the user in any of the tested services. Many services have recently changed the license agreements, and the conditions are better now, but still not optimal. It is clear that they have changed policy and are going in the direction of being more generous. Read more about the limitations in chapters 6.1.2 - 6.1.3 and 6.2.1.

One way to sell music to consumers through the current services is to use a deal similar to blanket licenses. Pressplay’s most recent deals are getting closer to an attractive alternative for consumers. There are a few alternatives ranging from $9.95 a month for unlimited download and streaming to $179.40 a year for an additional 120 “portable downloads”. A “portable download” means a permanent download that can be transferred to compatible portable devices and burned to CD-R, which means other downloads are not permanent. There is also an option to add more “portable download” packages46. A quick calculation reveals that the price is still on the same level as buying a CD: if assuming that an album usually has about twelve songs, it would sum up to $17.94 per album and additional traffic costs. The total sum actually exceeds a traditionally bought CD album. The lack of CD-cover and a printed disk is not accounted for, but it might be compensated by the unlimited stream-ing and download for a year. OD2 via MSN and MusicNet do not have deals nearly as attractive as Pressplay. OD2 offers a very limited amount of credits for £2.99 a month and MusicNet only offers a limited amount of downloads for $9.95 a month. The subscription 46 We have not been able to check whether the “portable download” is applicable to the entire repertoire. That has not been the case for any other service during the evaluation. For example OD2 only offered a very limited amount of music for burning, while all music can be streamed and downloaded. That is another condition never made clear to the consumer when subscribing.

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trend may follow the VHS trend when it first was very expensive, and over time became cheaper and has since been a huge success.

The question is what consumers find most attractive, considering the central pay-services are still competing with P2P networks. Everything offered by the pay-sites can still be attained practically for free on P2P networks. The price for downloading “free” music is traffic rates, which is also present on pay-sites, and lower overall quality on the connection and material. It does not necessarily have to be low quality, but nothing is guaranteed in a P2P service. It is essential to find out to what degree consumers will want to pay for better a quality of service to optimise the pricing.

Extra Value One can readily assume that all public material, e.g. music sold on CD, is easily transferred to a digital format and spread “for free” on P2P networks. One way for the majors’ services (Pressplay, MusicNet etc) to offer extra value is to offer exclusive material not available anywhere else, physically or digitally. Exclusives could consist of unreleased tracks, inter-views, articles, videos or other material created from the value matrix (see example in chapter 9.2.2). Another way to achieve exclusiveness is to offer physical exclusives, such as concert tickets and similar, attractive material. Current exclusive material is scarce, and at best of mediocre quality. It is uncertain what consumers really are ready to pay for, and what kind of exclusive material that entices and draws consumers.

Pay-Models The currently most common pay-model is subscription with additional fees for permanent downloads.

Assuming it is impossible to control P2P, which is a likely scenario even with DRM, then indirect appropriation47 might help. That is to have even higher prices on CDs in order to compensate for loss of income to pirated copies (implicit indirect appropriation). Although it seems unlikely consumers would accept a much higher price under these circumstances when people already complain about today’s prices. Also, indirect appropriation is based on an estimation of how much income is lost and how much is copied, which is impossible to do in P2P networks. Explicit indirect48 appropriation, i.e. putting a levy on recordable media, would be very difficult since files do not have any given storage medium and it would probably also be impossible to put a levy on hard disks (the most common storage medium for MP3s) since they are mostly used for other purposes.

In cases where consumers may not be willing to pay for the actual music files, there may be ways to generate revenue from related sources connected to the music and transport of music. The telecoms have for example had huge revenues thanks to traffic generated from the P2P networks. One idea of indirect payment that has come up is for ISPs to transfer shares of the added profit to the music industry49, since a significant part of it is thanks to music 47 LIEBOWITZ, S. Re-thinking the network economy: the true forces that drive the digital marketplace 48 LIEBOWITZ, S. Re-thinking the network economy: the true forces that drive the digital marketplace 49 Recent suggestion by Hilary Rosen, RIAA. 2003.

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downloads. It would require extensive deals between all telecoms and the record industry. But judging from the policy telecoms have had so far, i.e. denying all responsibility for the content on their networks, it is very unlikely they would come to an agreement. This scenario would strike at lawful users that already do pay for their music files, who would then pay again via their ISP. This is currently the situation for users in countries with a levy on recordable audio CDs, i.e. people that buy original CDs and make personal copies on recordable audio CDs pay twice for their music via the levy. But it involves such small sums that it is not a serious problem for users. It would probably require a governmental decision for introducing a levy on CD media in order to compensate for any form of music file copying and transfer the revenues directly to the music industry. Considering that the levy model works in the countries where it has been introduced leads us to conclude that it may be possible to introduce a revenue transfer. One must also consider that many files copied are not music, such as movies and software, and other actors would like to share the revenues too. It is a difficult problem, but this too has been solved with CD media, so it is not an impossible task.

Another idea that involves indirect payment for the consumer comes from the I-mode business model which has been successfully introduced for offering content over mobile phones in Japan. In I-mode the consumer only pays one bill to their ISP (NTT DoCoMo), and the ISP in turn divides the revenues between the content owners based on the usage of their respective contents. This model is very lucrative and works thanks to the restricted nature of I-mode. It is probably much harder to introduce it on the Internet, but not necessarily impossi-ble.

The third idea of indirect payment is already in use by a few P2P clients, and that is through spy-ware and ad-ware. This way the user is paying in form of giving out valuable information about herself or by being exposed to advertisement in one way or another. The current complication is that it is unclear what is defined as spy-ware, ad-ware or other bundled software.

What software is actually intrusive? On a side note, according to Alan Morris (Appendix VII) it is a general misconception that Kazaa Media Desktop installs spy-ware, and says that spy-ware is no longer included. Cydoor is an ad-engine and does not send personal information anywhere. It is stated to the user when installing what software is bundled. One can ask how many users actually read license agreements when installing software?

To transfer a rightful amount of money it would also require an estimation of how much traffic there is of copyrighted musical works and which works are involved. Such estimations are difficult to do, but certainly not impossible. There are already ways to estimate royalties from radio playlists for example. It could be related to sales from CDs or other major channels and services. This could also be combined with non-intrusive DRM systems which seek to monitor rather than control usage.

Either way, judging from the findings in chapter 8.3.1 and Table 3, a revenue transfer is clearly justified. The payment for music would be indirect for the consumer then, and music would be viewed in a completely different way, just as radio is considered free music when consumers in reality are paying for it through other channels.

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9.1.3 Copy Protection and Copyright on the Internet Copy Protection DRM is the most central component of copy protection. What DRM is about is enabling control over every individual file. Several issues arise here. Firstly whether it is an attractive payment method for consumers and secondly, it gives total control to the owners of intellectual property and any transfer or copy will have to be paid for, making fair use impossible. Is it attractive for consumers when all files are restricted in both time and space? DRM enables the owners to limit the file in time, i.e. it can cease to work after a month. It can also be limited in the number of copies and what kind of media it is allowed on. The technology can be implemented in all kinds of distribution models since it is based on each song, and licensing is done on each individual device.

Copy protection of this kind works only if all sources of music are protected. If there is any digital source that can be copied, it will be able to spread to all media allowing unprotected files. However, the unprotected songs that are out now will probably never be protected. There is always the option of digitising analogue copies, but there will be a significant degradation in quality. In November 2002 both EMI and BMG announced their plans on releasing only protected CDs. It remains to see whether or not these plans are realised, and if the protection is good enough. Today there is still no CD protection algorithm that has resisted cracking. And a few have even caused lawful consumers a lot of complications. The same question arises here if CD protection is successful: what will consumers think of the fair use aspect? Consumers take for granted that it is possible to make a few copies for private use, which is also legally stated. The goal of copy protection may not be to stop illegal copying all together, but to put some limitation to it.

Music creators have very strong opinions about their possibilities of protecting their work, but most of the established artists have let this matter over to the record companies. Will digital distribution make a difference for artists? If it does, how will it affect their income margins? There is a balance between how many copies a creator would want if he had full control and how much the consumers want. There has to be a point in which appropriation is optimal. One way of selling DRM protected work is through micro payments (pay-per-piece, pay-per-listen). If the micro payments were at a perfect price level for consumers and they had the ability to make their own copies, it would probably sell more. So even if each copy of a work costs less, it would generate more revenue to the creator because of higher number of sold units. In the end, it is about making profits and promoting creativity. DRM does not allow copying, but if so called perfect price discrimination can be achieved it might not be needed. Perfect price discrimination means that the price is optimal both for consumers and content owners. Perfect price discrimination is not possible in practice, but the question is how close to it DRM can get.

Some critics of DRM claim that it will reduce production of new work, because it will be impossible to derive new ideas from old work, which is the case for many works. That might seem far-fetched since DRM is just a copy protection, and not a new kind of copyright.

Historically the record companies have contracted and bought out artists’ rights for the recordings of their music. As new media have been developed, the contracts have been updated. For the Internet the record companies clearly do not have that kind of control yet, and it seems like artists might have a medium in which they have some power to control their own music. The Internet is hard to control both legally and technically. It is believed that the

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artists’ need and desire to have the power over their music depends strongly on whether they are established or not.50

One aspect that has been neglected in the DRM debate is differentiating between actual copy-protection and monitoring. The industry is not only after protecting their content to ensure appropriation, they also seem to implement a monitoring aspect in DRM. For example, besides from tracking a file, a DRM system might be able to monitor exactly what is done on one particular client, what music is played and how many times. It is then a question of a consumer’s integrity. That is a question that will not be discussed further in this report, but an aspect well worth having in mind. If a DRM system is perceived as being unfair or even intrusive by consumers, then it is almost certainly bound to fail.

MP3 copyright issues Many have drawn analogies between the audiotape, MP3s, Napster and many other new media. But there are significant differences between MP3 and the others. MP3s are intangi-bles with relatively small quality degradation compared to the reference file. Copying is extensive globally and not just private copying among friends. The likenesses with other media are that it is still fairly unorganised and no one directly profits from it although some one (telecoms) does profit indirectly.

It has been said by many that Napster and MP3 brings positive effects, such as more exposure for the music and sampling of music before buying. Opposite to what critics have claimed each download does definitely not mean a lost physical sale but the question is to what degree sales have been affected by P2P. Statistics on this subject shows completely different results. The core questions here are how to appropriate income from P2P activities, how to protect the content and what pay model that is attractive for consumers and can be used in practice.

There are a few examples related to copying, and all have been successful so far. Photocopying leads to a rapid growth for academic journals. The Betamax case ruled in favour of the cassette, with the argument that the function of the VCR was time shifting programs. The consumer could not watch VCR and TV at the same time, and the VCR could not record and play simultaneously. History has shown that pre-recorded tapes have been most popular to watch, and it has been a highly lucrative business. Audiotaping has shown to be a similarly successful business.

We think the situation with P2P networks and MP3 might devaluate copyright in its current form. As many have agreed on, it was a mistake by the record industry to shut down Napster instead of utilising its centralised network.51 Now the music downloaders have refuged to decentralised networks (such as Gnutella and Fasttrack) that are very difficult to control. Another way is monitoring by the ISPs.

50 ALDERMAN, J. Sonic boom – Napster, MP3, and the new pioneers of music. Perseus Publishing. USA. ISBN 0 7382 0405 6 51 LIEBOWITZ, S. Re-thinking the network economy: the true forces that drive the digital marketplace

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9.1.4 Revenue Control As can be seen in Figure 12 there are many different revenue sources to coordinate for the music industry, both physical and digital. The physical value chain is since long established and the rights and revenue sources are controlled by rules and enforcements that have been hammered out during the years, but the rules for streaming and downloading digital music from the Internet are currently under development. In a digital environment many coordina-tion difficulties arise from the immense amount of information at the same time as coordina-tion is facilitated by a fast and easy information transport.

There are three main problems described below with the music industry’s revenue control on the Internet described in the following three subchapters. The fourth subchapter about telecoms’ revenues is not really a problem but more of an observation that might lead to a possible solution for the P2P revenue control difficulties.

Direct Payment Revenues E-commerce in general have had problems with keeping a secure environment that makes the users feel secure when submitting their VISA card number or other sensitive information. This also applies for the music services and there are also problems with what pay-model to use for all parties to be satisfied. The currently most common model on the commercial services is a monthly subscription fee.

Rights and License Revenues A system for ensuring the composer a rightly payment has yet to be developed. Current rules compare the first reproduction of the file with a mechanical reproduction and thus a mechani-cal license must be paid. Every subsequent download or stream of the file equals an Internet performance and a performance royalty must be paid. This method is acceptable for the commercial services that have selection control and control over what songs people download or listen to. Napster also had the ability to log all traffic on the network through its central server but P2P services today have no possibility to log what songs are downloaded and thus a rightful distribution of the rightholders’ shares is very difficult to achieve.

The easiest technical solution would be for the ISPs to control the content in their networks but this raise a lot of moral questions about the consumers’ privacy and integrity. The suggestion has been made by the RIAA but both consumers and ISPs reacted very strongly against it. Another solution is to base this royalty distribution on statistics of CD sales.

Indirect Payment – Marketing Another solution to the control problem described above would simply be to count on P2P networking as a marketing channel and rely on revenues from increased CD sales instead. This has different effects depending on the type of artist involved. Superstars like Britney Spears do not need marketing to the same degree as an independent artist and do not have so much to gain from P2P.

Record companies claim that P2P damages CD sales and this contradicts the recording industry’s strategy to rely more and more on a few major names that all their assets are ventured on. The risk with venturing all money in a few artists is that the record companies are much more sensitive to a decline of sales of these artists. Statements from RIAA and the major labels accuse P2P downloading for being responsible of the loss in CD sales while many independent labels claim that P2P downloading is the best thing that has happened to them.

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Telecoms’ Revenues The figures in chapter 8.3.1 show a considerable amount of revenues to the telecoms from P2P downloading. Considering that telecoms’ revenues is at least 1½ times the annual profit of the record companies in Sweden Hilary Rosen’s proposed cooperation between ISPs and record companies (more described in the discussion on pay-models in chapter 9.1.2) by introducing a levy on internet connections seem quite reasonable. Even a small levy would make a considerable difference for the record companies’ profit.

Both the Swedish (Table 3) and global comparison (Table 4) show similar trends, where telecoms’ traffic revenues generated from music downloads are 142% and 163% of record companies profits respectively52. The exact numbers are not the most important fact here, but the relevance lies in that telecoms have made considerable revenue thanks to the music industry, and consumers are certainly not getting music completely for free. Telecoms might not be able to monitor and control all content, but there might be something they could do to compensate it.

9.2 Music Industry Interests

9.2.1 Current Issues Facing the Music Industry Last year’s news about the music business has been dominated about RIAA’s and record companies’ claims of losses in CD sales caused by illegal downloading. This thinking might not display the whole picture.

Two reasons mentioned by Forrester53 for the declining CD sales are firstly that a down economy has made people spend less money in general, and they compare this with the recession 1991 when CD sales slowed from 14% to 4% in the middle of the transition to CD as common media. Secondly there is at present a lot more competition from other media than before. DVD sales in North America increased 80% during the first half of 2002 and there was also a rise in sales of video games by 8% in 2001. Besides video games and DVDs there are many more radio stations, TV music channels and other media today competing for peoples’ spare time.

Another contributing factor for falling CD sales that RIAA have excluded in their calculations is the fact that the number of releases and money spent on new investments by record companies have been cut by 25%54 after 1999, and fewer CD releases logically lead to fewer CD sales.

52 We are aware of that there is a weakness in comparing telecom revenues to music profits, but it is very difficult to estimate profits made from music downloading. It is still an important comparison. 53 BERNOFF, J. Downloads Save the Music Business. August, Forrester, Wholeview, TechStrategy Research 54 ZIEMANN, G. http://www.azoz.com/music/features/0008.html

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Currently the industry is very dubious about what actions to take against illegal copying in the future. An online debate we attended55 showed that many of the highly placed persons in the music industry are very confused about the situation and their main track for the moment about what to do is to educate teenagers that P2P downloading is illegal. This in our opinion a very naive reasoning and we believe that teenagers already know that file downloading is not allowed. For teenagers we believe it is more of an economic reason since the price of one album equals about a quarter of a normal monthly allowance in Sweden.

The industry wants to keep its control over the music to better be able to control the different revenue flows and maximize profits. Irrespective of what degree of control future online business models will incorporate, the music industry must find different ways for different distribution channels to rightfully compensate the people involved in the production of the song. A business model that includes copy-protected files will need to overcome the current problems with users not being able to copy their own music for personal use in the car stereo or to a portable device. One possible solution to this problem is to develop some sort of household license that enable users within the household rights to use the file for all personal purposes, but restrict copying of the file to a person from another household.

Copy protection would also facilitate the control over selection in a service without a central server if the industry decides to adapt that business model. The control over selection is both essential for keeping unwanted music away from the network and to have knowledge of what files are downloaded so the rightful parties can be compensated.

Another important issue for the industry is the need for keeping a good selection of music. There is a difficulty between keeping a large enough selection for users to be satisfied and simultaneously restrict it so that searches for new music not are too encumbered by a redundancy of unwanted music for the user. This would require a lot more research of user interests and behaviour to suit the majority of users. Today the services’ content is based on what economic interests the labels have in the CD sales of the music. Emusic, for example, offered downloads of lots of independent music while Stevie Wonder was only available for streaming.

55 ”Internet Piracy: Victimless Crime or Outright Theft”; http://www.internetprnews.com/colloquix/1/documents/MSFreview14-02-03.pdf

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9.2.2 New Possibilities in a Digital Environment There are numerous new revenue sources to be created in a digital environment. The most evident, already existent source is if a deal with the telecoms could be made, as discussed in chapter 9.1.4. But when using the value matrix introduced in chapter 6.4.3 as a basis one can create new markets from information that flows in the traditional value chain. In the example in Figure 14 the record company uses studio material from the production of a certain song to create an overview of how the recording of this song was performed. This material can be of great interest to loyal fans of artists and even for other studio musicians wondering how a certain sound was made etc. The process of creating value of this information from the studio is carried out through the five steps described in chapter 6.4.2. First the material is gathered and organised into certain categories depending on what end-users it is directed at. Then the most attractive information is selected and synthesised into an appropriate format, mp3 or wav for sound files or PDF for text information etc. Then the synthesised material is distrib-uted through a service to the consumer. Similar scenarios can be created from other steps in the physical value chain by this value creation process.

9.2.3 Digital Distribution Effects on the Current Value Chain Disintermediation The most obvious effect of digital distribution is a disintermediation of many steps in the current value chain that are rendered obsolete. In an environment such as Internet where music can be transferred globally within seconds, physical manufacturing and distribution of CDs is made redundant. Presently two thirds of the CD retail price56 consists of activities not directly related to the recording and production of the master copy of the song. Digital

56 MAY, B. and SINGER, M. McKinsey Quarterly, Number 1, 2001. Unchained Melody.

Value Matrix

Figure 14. Example of new markets created by exploiting the value matrix of a record company

Physical value chain

Virtual value chain

Gather

Organise

Select

Synthesise

Distribute

Development Production Sales & Marketing

Distribution Wholesale Retail

Sales of recording

material “lost tapes”

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distribution has made it theoretically possible to distribute the song directly from this master copy to a consumer even though a method for the creator’s payment still has to be ensured.

Klimis57 mentions three possible patterns of disintermediation:

1. Labels sell content58 directly to the consumer

2. Artists sell content58 directly to the consumer

3. E-commerce between content58 owners and consumers is facilitated by intermediaries

There is only one of these patterns that have reached any level of success and that is the pattern where intermediaries are involved. Every service investigated uses this pattern where either the labels or the artists themselves provide their music to an intermediary that handles the relations with the consumers. Figure 15 illustrates the various creator groupings each with different opportunities for market entry.

There have been some attempts from the labels to provide file downloads from their own web sites but this have only been free samples for marketing purpose. There is no commercial service found where labels sell content directly to the consumer. Consumers are generally not interested in what label an artist belongs to, and the all artists a consumer likes seldom come from the same label.

Far from every artist has the possibility to sell content directly to consumers. An artist has to have a huge fan base to be able to ensure a certain number of sales given that the selection of music on the site is restricted to one artist. Hence only people looking for that particular artist are inclined to visit the site. David Bowie is the only found example of an artist that successfully have created an own website (or rather community) for his fans and is able to profit from it. For the membership fee the members get access to bonus material such as certain tracks only available digitally and concert tickets etc.

Publishers’ future role is uncertain and depends on whether the major record labels will maintain a monopolistic power over the market. In an open market the publisher’s role weakens and may be superfluous.

57 KLIMIS, G.M. Disintermediation and Re-intermediation In the Music Business – the Effect of Multimedia Technologies and E-commerce 58 Content is restricted to intangible content, such as music files.

Britney Spears

Mörk Gryning New comers (signed)

Niche artists

Bowie Ice-T

Real Group

Unsigned artists MP3.com artists

Influ

en

ce

Fame

Figure 15. Creator matrix

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Easier Market Entry Traditionally there have been a few big incumbents on the music market, mainly according to very high economic entry barriers to the market. Internet has lowered these barriers by lowering the cost of transmitting information and the competition has thus increased. This is also predicted by the Electronic Market Hypothesis (EMH), explained in chapter 6.3.5, that predict a transfer from hierarchic to market organisation for information based markets like music with a reduction of information coordination costs.

Reintermediation The disintermediation of the music value chain combined with easier market entry creates many opportunities for new business models to enter the value chain. MP3.com is a good example of creative ideas bypassing old value chains in the new environment. It acts as a kind of A&R department together with marketing and optional manufacturing but differently from a record company MP3.com have no interest in the publishing rights of the music and the creators get a larger share of the revenues. David Bowie has also developed a business model unique to the digital environment as explained above.

9.3 Bringing Together the Industry’s, Consumers’ and Creators’ Interests

It is interesting to envision what situations and complications arise when bringing together the interests of consumers, creators and the industry. This section will compare results from the two created reports in relation with each other to find situations possibly overlooked when focusing on just one player.

9.3.1 Conflicts The main conflict between consumers and the industry is the concern for how protected and limited music files should be (chapter 9.1.1, Figure 13). On one hand the users prefer not to have any restrictions, as it is with the unprotected files they have free access to. On the other hand the content owners want limitations to generate more money from their content. It is a grave dilemma that is intensely discussed by many experts in the area, and there is still no accepted working solution. Looking at the big picture, the industry either has to offer services that the consumers find attractive enough to pay for or stop all other alternatives that are more attractive, such as P2P networks. In this aspect the latter alternative is probably even harder to achieve than offering an attractive service.

There is also a conflict between music creators and the industry about copyrights and rightful compensation for entering artists. Digital distribution of music facilitates diversity, bringing more possibilities to individual artists and independent intermediates (publishers, record companies). This way, artists should be able to improve their conditions and independence from the majors. A global interest organisation for this cause may be needed for artist to actually make use of the current situation.

9.3.2 Common Interests and Possible Solutions Artists still need intermediates, but different ones than they have today. It is a matter of changing the music business and value chains within the industry, and digital distribution is only a tool and one step on the way. The industry should be able to provide the suitable intermediates in the form of new independent actors for smaller artists, and major companies should be accommodating for larger artists as partners.

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Assuming that consumers in general want to be honest, there is also a need for a pay-model that both content owners and consumers can accept. Direct payment in any form is still not attracting any consumers. Although they know it is wrong to download music from P2P networks, they cannot feel motivation enough to directly pay for something that they can get for free. Either the pay services have to provide some very attractive content and offer very good deals, or alternatively find a completely different model of payment. Consumers are likely to be more susceptible to indirect payment, where they do not actively pay for music and are closer to the feeling of getting free music. The implementation of indirect payment remains to be solved (see chapter 9.1.2).

9.3.3 Connecting the classification matrices As said in Liu’s report59, customers are clearly segmented in different groups. There will have to be different kinds of services to accommodate for different customers. The largest customer group, the mainstream customers by definition (“Follow the trends”, Figure 11), are a special case that will require huge services with all available music that could be classified main-stream. This group is best served by the major services (Pressplay etc, Figure 9). Otherwise diversity among services and selection is needed to fit the correct customer group. The “curious seeker” is actively seeking new material and would be interested in most services offering large assortments, no matter what sort of music. Community services like Dmusic.com and MP3.com (Figure 9) would serve this group especially well. The factor that matters here is usability and is dependent on what level of IT-literacy the user has. Customers that has great interested in individual bands and niched genres are best tended to by special-ised services. In this case even a direct contact between the creator and customer is possible (David Bowie, Figure 15).

Newly signed artists and unsigned creators (Figure 15) will find most interest in P2P networks for marketing, and other distribution from services like MP3.com and Dmusic.com (Figure 9). Unsigned artists are more inclined toward using P2P even for distribution just to get their name out, while small creators with an established fan base will prefer a mediator such as MP3.com. A rare superstar, like David Bowie, can distribute music on his own by relying on his huge fan base. A more general superstar like Britney Spears with a mainstream fan base would probably do well on the major services, although individual services selling directly to customers might be a possible solution too. The big difference between David Bowie and Britney Spears is that Bowie has very dedicated fans that stay no matter what, while most Spears fans are also mainstream listeners that easily change idols over short periods depending on trends.

There is also a future complication for the services when adapting to customers. One could imagine that the level of IT-literacy is much higher in 5, 10 or 20 years, and the potential for using more advanced services, such as P2P clients, would be higher. Technology advance-ment has historically been a scourge to the music industry many times, and it definitely has to be taken into consideration. The importance of the factors for consumers may very well change over time.

59 LIU, P. “Usability Factors in Digital Distribution Services for Music - A Study of Online Distribution Services Today, Identification of Important Factors for an Attractive Service, the Interests of Consumers and Music Creators”

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The new markets created from the value matrix consist partly of the consumer groups described in chapter 8.4.4 and different consumer groups are interested in different steps of the virtual value chain. The example in chapter 9.2.2 would for instance create a very interesting market for the small-range-of-what-I-like group since a dedicated fan of an artist would definitely be interested in learning about the creation process of the particular artist’s songs.

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10 Conclusions The research and discussion of digital music distribution has lead to a few interesting conclusions, partly answering the initial problem definition. It does not provide any concrete solutions, but that was not expected either in the span of this master thesis. The factors below correspond directly to chapter 9.1 where more thorough information about them can be found.

Important Factors for Digital Music Distribution Services Revenue control: The most important factor to consider for a commercial service is what revenue sources to rely on. There are many other channels than physical CD sales that can enhance revenues if efficiently utilized.

Music selection control: The selection of music provided by a service must be chosen from users’ demands and not by its current sales potential for CDs or other administrative reasons from the record companies.

Copyright and copy protection: The interpretation and enforcement has to be revised and the rules need to be more internationally coherent. Copy protection technologies do not really work in limiting the spreading of music since only very few sources are protected. Technical and legal limitations must not infringe on the freedom consumers are used to. At the same time it has to limit spreading to some extent, and be able to generate revenue to the content owners. How this can be done in practice is uncertain and more work definitely needs to be done.

Value vs. fee and pay-models: Considering consumers value physical products higher and music files can be attained fairly easy virtually for free, protected music files are deemed to a considerably lower price than their CD counterparts. Finding that not all consumers are willing to directly pay for files, indirect payments might be an alternative like radio that is generally seen as “free” music.

Economic Efficiency Maximisation Digital distribution has made several parts of the traditional value chain obsolete and a restructuring of the value chain could lead to a more efficient use of the remaining value chain steps. The most obvious redundant step is the physical distribution of CDs that instead could be manufactured locally from digitally transported music information.

Disintermediation of steps in the old value chain is also of importance for music creators, getting rid of redundant middlemen. But the situation is very different depending on how established the artist is. New artists will not be as dependent on third parties in a future scenario as they are today, and established artists have even more freedom and independence. All current successful models include intermediaries, so they can probably not be eliminated, but their roles should change.

By taking advantage of information from the physical value chain and create value from it through a value matrix services can gain new revenue sources. Other ways to create new revenue sources would be to make agreements with existing players such as telecoms or technology manufacturers and possibly insert levies on products related to them.

The strategy used by the majors today to put a large share of their ventures into marketing of a small number of major stars such as Britney Spears can be very hazardous in the future. This statement is based both on the Electronic Market Hypothesis that anticipates a transfer from

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hierarchic coordination to market coordination in an information-based environment such as the Internet and the fact that CD sales of major stars are the one most affected by P2P downloading according to the record companies.

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11 Recommended Continued Work The conclusions in this report are of a theoretical nature and an extensive mapping of digital music distribution today. There are many possibilities to continue this work, either by digging deeper into individual areas or evaluate more concrete solutions to some of the theories deducted from this work.

All services are being developed continuously, both P2P and commerical services, and a continued evaluation of services would give an even better overview over the available services and trends within this area. This in turn may be a good indication how further development of services should progress. This also affects the underlying strategies in the industry as a whole. Digital distribution services are still in their infancy, and there is a need for more choice and diversity among services. At the same time there is also a need for a more diverse music scene. An evaluation of how to work towards and strengthening diversity, both industrially and musically, is needed.

Concrete solutions are most interesting concerning disintermediation in the value chain, most importantly which steps that really are redundant and what potential new roles the old steps can have. It is also interesting to see what kind of pay-models that actually works60.

Lastly the question of limiting music, copy protection and DRM models is very interesting and need continued extensive research. It is a problem that involves many aspects: copyright legislation, technological possibilities, and the morals and opinions of the consumers.

60 The most accurate way would be an empirical experiment, but that is a costly method.

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12 References

12.1 Literature AHLGREN, B. 2000. Elektronisk handel med musik – övergång från materiell till immateriell vara. Examensarbete Affärsutveckling och medieteknik, KTH.

ALDERMAN, J. 2001. Sonic boom – Napster, MP3, and the New Pioneers of Music. Perseus Publishing. USA. ISBN 0 7382 0405 6

BERNOFF, J. 2002. Downloads Save the Music Business. August, Forrester, Wholeview, TechStrategy Research.

BPI. 1998-2002. Quarterly Reports from 1998 to 2002.

EILERTSEN, R.T. September 25, 2002. Kopiering av opphavsbeskyttet innhold – Innehav av egenbrente CD’er og DVD’er i Norge, Nedlastning og bruk av MP3-filer. MMI for Norwaco. Norway.

GRAHAM, G. et al. 2002. The Impact of the Internet on the Structure and Conduct of the Music Market Supply Chain. Manchester School of Management.

HARDY, P. Music & Copyright. No 221, January 30, 2002.

HUI, K.L. PNG, I.P.L. November 2001 (Revised July 2002). Piracy and the Legitimate Demand for Recorded Music. School of Computing, National University of Singapore.

IPSOS-REID (Contact KLEINSCHMIT, M). 2002. U.S. Music Downloaders Prefer a Pay-Per-Download Transaction over Current Subscription-based Offerings. www.ipsos-reid.com.

KLIMIS, G.M. March, 1999. Disintermediation and Re-intermediation in the Music Business – the Effect of Multimedia Technologies and E-commerce. A Doctoral Thesis. City University Business School.

LANDEGREN, J. LIU, P. 2002. Studie av digital musikdistribution – vilka värden har skapats. KTH, Stockholm, Sweden.

LESSIG, L. June, 2000. Code and Other Laws of Cyberspace. Basic Books. USA. ISBN 0465039138

LIEBOWITZ, S. 2002. Re-thinking the Network Economy: the True Forces that Drive the Digital Marketplace. AMACOM. New York/USA. ISBN 0 8144 0649 1

LIU, P. 2002. Usability Factors in Digital Distribution Services for Music - A Study of On-line Distribution Services Today, Identification of Important Factors for an Attractive Service, the Interests of Consumers and Music Creators. Master Thesis, Royal Institute of Technology, Sweden

MALONE, T. YATES, J. AND BENJAMIN, R. 1987. Communications of the ACM, vol 30, no 6. Electronic Markets and Electronic Hierarchies.

MALONE, T. YATES, J. AND BENJAMIN, R. 1989. Harvard Business Review, Vol. 67, Issue 3. The Logic of Electronic Markets.

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MARATHE, J. 2001. Impacts of Digital Distribution on the Music Industry. Durlacher Research, Ltd.

MAY, B. and SINGER, M. McKinsey Quarterly, Number 1, 2001. Unchained Melody.

MCNEALLY, P-J. GartnerG2 report, October, 2002. Digital Consumers: Are They ‘Fair Users’ or Copyright Pirates? www.gartnerg2.com

PARIKH, M. 1999. The Music Industry in a Digital World: Waves of Changes. Institute for Technology & Enterprise, Polytechnic University. New York.

PERSSON, C. 2001. Strategies for Enhancing Consumer Interaction in Electronic Retailing. Doctoral Dissertion, Royal Institute of Technology, Dept of Numerical Analysis and Computer Science, Media Technology and Graphic Arts. Stockholm, Sweden. ISBN 91 7283 194 4

PORTER, M. June, 1998. Competitive Advantage: Creating and Sustaining Superior Performance. Free Press. USA. ISBN 0684841460

POST- OCH TELESTYRELSEN, KONSUMENTVERKET, KONKURRENSVERKET. Alltid på! Bredbandsmarknaden ur ett konsumentperspektiv. 2002. Sweden.

RAYPORT, J.F. and SVIOKLA, J.J. Harvard Business Review, November - December 1995. Exploiting the Virtual Value Chain.

SHAPIRO, A. L. 1999. The Control Revolution: How the Internet is Putting Individuals in Charge and Changing the World We Know. PublicAffairs. USA. ISBN 1 891620 86 X

The International Journal on Media Management, Vol 4, No III, Autumn 2002. Focus Theme: The Future of Copyright. Media Communications Management Institute – University of St. Gallen, Switzerland.

The Recording Industry in Numbers 2002 – the Definitive Source of Global Music Market Information. October 2002. IFPI. London, UK.

TURTON, J. LAUVAUX, E. MIDEM 2000. Legal and Commercial Effects of Digitisation on the Music Industry. MAKLU Publisers. Apeldoorn/Netherlands – Aantwerp/Belgium. ISBN 90 6715 018 5

VELJANOSVKI, C. et al. March 1989. Freedom in Broadcasting. Institute of Economic Affairs. London, UK. ISBN 0 255 36218 8

WALLIS, R. et al. January 2000. Globalisation, Technology & the Music Industry – Current Trends and Implications for Creativity and (e) Business in the Digital Environment. Multimedia Research Group, City University Business School.

ÅBERG, J. 1999. Online licensiering. STIM.

12.2 Seminars Internet Piracy: Victimless Crime or Outright Theft. Online debate on www.makesparksfly.com. http://www.internetprnews.com/colloquix/1/documents/MSFreview14-02-03.pdf

WALLIS, R. March 2000. Total Confusion! (But Interesting Opportunities) The Music Industry and the Future. Dept. of Media Technology and Graphic Arts, KTH.

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WALLIS, R. WIKSTRÖM, O. 2002. Progress via Creative Destruction – Identifying value in the Tangible-Intangible complex. PRISM WP 9.2 Music Industry case. KTH.

12.3 Interviews Bowles, Trey. Vice President, Strategic Development, Streamcast Networks. 12-11-2002 (e-mail)

Eltell, Tobias. Legal advisor SAMI. 26-11-2002 (telephone)

Garrett, Ann. Information, Musicnet. 06-11-2002 (e-mail)

Grimsdale, Charles. Director, OD2. 03-11-2002 (e-mail)

Mårtensson, Magnus. Legal advisor IFPI Sverige. 20-09-2002, 26-11-2002 (telephone)

Wande, Maria. Legal advisor media, STIM/NCB. 29-11-2002 (meeting)

Zennström, Niklas (Founder of Kazaa and Altnet. Founder and CEO of Joltid). 11-02-2003 (e-mail)

12.4 Web References MP3 News Articles BRICKLIN, D. September 9, 2002. The Recording Industry is Trying to Kill the Goose That Lays the Golden Eggs. Dan Bricklin’s Website. http://www.bricklin.com/recordsales.htm

BROWN, J. April 9, 1999. Shoutcast and MP3 let a Thousand Web Radio Stations Bloom. There’s Only One Problem: the Law. http://www.salon.com/tech/feature/1999/04/09/shoutcast/

CHESTER, J. October 24, 2002. The Death of Internet – How Industry Intends to Kill the ‘Net as We Know It. TomPaine. http://www.tompaine.com/feature.cfm/ID/6600/view/print

CNET News MP3 Insider - http://electronics.cnet.com/electronics/0-3219397-7-2235385.html?tag=dir

BBC NEWS. Efforts to Stop Music Piracy ‘Pointless’. November 22, 2002. http://news.bbc.co.uk/1/hi/technology/2502399.stm

FORESIGHT. Foresight of the Consumer to Consumer Effect on E-commerce. February, 2001. www.foresight.co.uk

FOX, B. November, 2002. Copy Protection on CDs is ‘Worthless’. NewScientist.com. http://www.newscientist.com/news/news.jsp?id=ns99993020

GIBSON, O. October 7, 2002. Let the Music Download. The Guardian. http://media.guardian.co.uk/mediaguardian/story/0,7558,805750,00.html

HAAS, J. May, 2002. Siva Vaidhyanathan On Copyrights and Wrongs. Slashdot.org. http://interviews.slashdot.org/article.pl?sid=02/05/15/166220&mode=nested&tid=103

HARMON, A. August, 2002. Marketers Try to Turn Web Pirates Into Customers. New York Times. www.nytimes.com

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HARMON, A. October 7, 2002. Music Industry in Global Fight On Web Copies. New York Times. http://www.nytimes.com/

HU, J. July 18, 2002. Why We’re Better than Napster. Cnet News.com. http://news.com.com/2008-1082-944914.html

Janis Ian on Life in the Music Business. Chat transcript with Janis Ian . September 23, 2002. Slashdot.org http://interviews.slashdot.org/article.pl?sid=02/09/23/133228&mode=thread&tid=141

KING, B. October 18, 2002. Digital Radio: Small Guys’ Ruin? Wired News. http://www.wired.com/news/mp3/0,1285,55757,00.html

KING, B. September 12, 2002. Digital Rights Outlook: Squishy. Wired News. http://www.wired.com/news/mp3/0,1285,55006,00.html

LETTICE, J. October 4, 2002. Music Biz Strikes Back With Free, DRM ‘Padlocked’ Downloads. The Register. http://www.theregister.co.uk/content/6/27440.html

Mp3 File-Sharing Programs Showdown. Read September 18, 2002. MP3-2000. http://www.mp3-2000.com/exclusive/fileshare.php3

NEWTON, J. October 14, 2002. Can I Borrow Your Computer While You’re Asleep, Please? – Altnet. MP3Newswire.net. http://www.mp3newswire.net/stories/2002/altnet.html

O’REILLY, T. 2002. Piracy is Progressive Taxation, and Other Thoughts on the Evolution of Online Distribution. O’Reilly OpenP2P. http://www.openp2p.com/pub/a/p2p/2002/12/11/piracy.html

Raising Barriers to Entry into Music Business. October, 20, 2002. Slashdot.org. http://slashdot.org/article.pl?sid=02/10/20/156247&mode=thread&tid=141

Rosen Responds to Janies Ian: Misinformation and Mischaracterizations. October 23, 2002. RIAA. http://www.riaa.com/PR_story.cfm?id=579

SCHWARTZ, J. TEDESCHI, B. September 27, 2002. New Software Quietly Diverts Sales Commissions. New York Times. http://www.nytimes.com/

Shareaza Interview. December 20, 2002. Slyck.com. http://www.slyck.com/news/200212Dec/122002a.html

Streamcast Interview. September 12, 2002. Slyck.com. http://www.slyck.com/news/200209sep/091202b.html

VAN BUSKIRK, E. October 31, 2002. DVD To the Rescue. Cnet. http://electronics.cnet.com/electronics/0-3219397-8-20603898-1.html?tag=txt

ZIEMANN, G. December 11, 2002. RIAA’s Statistics don’t add Up to Piracy. Mac Wizard’s Music. http://www.azoz.com/music/features/0008.html

Services and Internet Radio AudioGalaxy – www.audiogalaxy.com

BearShare – www.bearshare.com

BurnItFirst (LiquidAudio Outlet) - http://www.burnitfirst.com

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DirectConnect – www.neo-modus.com

Dmusic – www.dmusic.com

Emusic – www.emusic.com

IceCast – www.icecast.org

Imesh – www.imesh.com

Kazaa and SharmanNetworks - www.kazaa.com

LimeWire – www.limewire.com

LiquidAudio - www.liquidaudio.com

Live365 – www.live365.com

Morpheus - www.morpheus.com

MP3.com – www.mp3.com

MSN Music Club (OD2 Outlet) - http://sib1.od2.com/common/home/index.asp

MusicNet - www.musicnet.com

OD2 - http://www.ondemanddistribution.com

PhillySoulClassics – www.phillysoulclassics.com

PressPlay - www.pressplay.com

QtraxMax – www.qtraxmax.com

Rhapsody - www.listen.com

RioPort – www.rioport.com

Shareaza – www.shareaza.com

ShoutCast – www.shoutcast.com

TomsRadio - www.tomsradio.com

Vitaminic – www.vitaminic.com

WinMX – www.winmx.com

Other Web References Antipiratbyrån – www.antipiratbyran.com

British Phonographic Institute – www.bpi.co.uk

Electronic Frontier Foundation – www.eff.org

MusicUnited – www.musicunited.org

Recording Industry Association of America - www.RIAA.com

Slashdot Music Topics - http://slashdot.org/search.pl?topic=141

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Slyck – www.slyck.com

ZDNet TechNews - http://news.zdnet.co.uk/0,,t287,00.html

ZeroPaid – www.zeropaid.com

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13 Appendices

13.1 Appendix I – Summary of Industry Interviews There is not much new information gained from the interviews with different services. Only three services cared to participate (Musicnet, OD2 and Morpheus) and their answers were very focused on promoting themselves and not leaking any unnecessary information. But one thing they had in common was the opinion that Napster played a significant role in teaching million of users downloading behavior from the Internet.

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13.2 Appendix II – Summary of Interest Organisation Interviews

Interview 01 – 20-09-2002 (Magnus Mårtensson IFPI) - Copyright issues keep Internet services from selling outside of the USA.

- Plans to offer added value to compete with “free” services.

- Digfi.com offeres pay-per-piece paying model.

- France has a law that requires a quota of domestic music – how does that work with Internet services?

- Vitaminic has gone bankrupt.

Comments: None

IFPI Sverige Magnus Mårtensson 26-11-2002 - IFPI has rules for webcasting (streaming).

- The record companies have not delegated any rights to IFPI, only specific assign-ments.

Future plans are secret. There are new plans going on, but nothing is going to happen for at least six months.

SAMI Artists and Creators Tobias Eltell 26-11-2002 - Two rules are applied to Internet broadcasting of music:

o Transfer from CD to digital format: mechanical transfer. Needs rights from SAMI (§45, the artist), producers of the recording (§46, often record compa-nies), STIM/NCB (§2, creator).

o Performance on the Internet. Needs rights from artist (§47, performance rights), STIM and the record company.

- Rights are often given from the artist and creator, not from record company.

- New tariffs are under testing.

Comments: It seems like the record companies are working out new solutions, but it will still take a while, and they are very secretive about everything.

STIM/NCB Internetgruppen Maria Wande 29-11-2002

General - STIM have had licenses since 1996.

- There are two music listening categories:

o Digital Phonogram Delivery (downloads of entire works + ring tones)

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o Replayable, streaming. Interaktivitet is split in three steps. The more interactiv-ity, the more it costs:

Customised playlists

Paus function

Internet radio, WebbTV

Policing - Policing is done in each region by the local interest organisation. This method works.

Examples of different organisations are STIM (Sweden) and PRS (UK).

- Mutual agreements internationally.

- Santiago Treaty: the responsible owner of the service is also responsible for payments. It is not dependent on where the server resides.

Copyrights - STIM are positive to the idea of music on the Internet

- STIM represents only creators and and rights of other involved parties. The creators give STIM the right to handle their works.

- The record companies does not have veto against music on the Internet, but the can charge high fees.

- ALL parts (record company, creator and artist) have to give their right for a work to be distributed on the Internet.

- The copyright laws are under revision. It might be done to next summer.

Tariffs - Current tariffs are temporary. Still under revision.

- Streaming have the following tariff criteria:

o Potential listener

o Amount of music made available

o Actual number of listeners

o STIMs costs for licensing

- The criteria are not easy to define.

- Pricing on downloads are based on prices:

o Entire works: 12 % of consumer price, minimum of 1.5 SEK per work

o Ring tones: 10 % of consumer price, minimum of 1 SEK per work

- Tariff differ internationally

- Royalty fairs stand for most of the income

P2P

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- P2P does not work. Several P2P-services have tried to get licenses, but no agreements have been reached, since there is no control over the networks whatsoever.

DRM - STIM is positive to DRM technology. Copyright laws weigh more than fair-use.

Miscellaneous - Tomsradio.com does not have an agreement!

- IFPI still closes down private Napster servers

- Lars Henriksson handled the Kazaa case with Niklas Zennström.

Comments: Once again it is confirmed that new rules are under revision. There are actually rules and tariffs now, although under development. It seems not many are aware of that. P2P networks are still a problem, and there is no apparent effort to use them commercially.

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13.3 Appendix III – Interview with Musicnet What’s your name?

MusicNet (name omitted)

What is the main purpose with this service? – Marketing / Distribution / Retail?

MusicNet is a leading digital music company. The most widely distributed digital music service for streaming, downloading and burning music online. As both a service and music content provider, MusicNet licenses to companies seeking to fully integrate digital music services into their online music offerings. MusicNet is a joint venture between RealNetworks, AOL Time Warner, Bertelsmann AG, EMI Recorded Music and Zomba.

What distribution technology does your service utilise today?

It is proprietary technology.

How does it work?

The MusicNet service allows for the legitimate use of digital music both through the Internet and portably.

Could it be improved in some way?

N/A

How does the payment system work?

That information is proprietary.

What types of payment alternatives do you offer? (Subscription / pay-per-piece etc.)

We currently offer a subscription service, but will evolve down the road to offer a-la-carte and other pricing options.

Are there any other income sources, for example advertisement?

Not currently

What is your target group?

Music fans that are interested in discovering their favourite artists and new music online,

What is your selection of music?

MusicNet offers music from thousands of artists including everyone from Goo Goo Dolls, FatBoy Slim, Red Hot Chili Peppers, Bruce Springsteen, Dixie Chicks, Jennifer Lopez and Neil Young, to Missy Elliott, Busta Rhymes, U2, Nelly, Eminem and Faith Hill. MusicNet also offers a variety of genres including Latin idols Carlos Vives and Thalia, classical artists Kiri Te Kanawa, Placido Domingo, Itzhak Perlman and Daniel Barenboim, as well as jazz icons Miles Davis, Louie Armstrong and Duke Ellington. For a more complete listing of artists available on MusicNet, please go to www.musicnet.com.

Will your selection include all music from the five major labels or a part of it?

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Yes.

Why did it take so long to get a license from all five major record labels?

Because with any new industry, things need to be put in place before partnerships can be made. This entire industry of digital music is new. There is no history to follow, therefore we have been working with our partners to put the systems in place to help advance this industry so that artists are compensated and consumers receive the music they love.

How do you control downloads?

(I’m not sure what you’re asking…)

Do you use copy protected file formats?

Yes.

Is your service created with the purpose to counter the file-sharing clients or as a natural evolution in the new digital market?

MusicNet’s goal is to offer consumers a legitimate way to consume music digitally, while making sure the rights holders are compensated for their work.

Do you think there could be a connection between the success of your service and Napster teaching 40 million people how to find music online?

Napster taught everyone a great lesson and that was there’s an appetite to consume music online. We believe that Napster’s role is significant because it put a stake in the ground for this industry to begin.

What is in your opinion the most important factor for reaching out to the customers and obtain a successful service?

Quality, convenience, ease-of-use and content.

You have just recently applied for a worldwide license except for Japan. Why not Japan?61

We are exploring all of international options, however we are focused domestically at the moment.

61 This question regarding Japan was originally written for Pressplay but incorrectly appeared in this interview.

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13.4 Appendix IV – Interview with OD2 What’s your name?

Charles Grimsdale (Director)

What is the main purpose with this service? – Marketing / Distribution / Retail?

Sales and marketing of music, which is delivered digitally.


We distribute mainly WMA, but some MP3. Protected with Windows Media DRM.

How does it work?

Rather a vague question. Please refer to the web site.

Could it be improved in some way?

Of course. Main concern is to provide more editorial information to consumers, and to provide effective recommendations, on music that users might like.

How does the payment system work?

Currently mainly Credit Card. But we do support cash cards, and working on integrated billing with ISP’s.

What types of payment alternatives do you offer? (Subscription / pay-per-piece etc.)

Both

What is your target group? (Record labels, internet portals etc..)

Internet portals (MSN, Freeserve, Wandoo, Tiscali, RTL, etc..), and bricks and clicks retailers (HMV, Tower, Fnac, MediaMarkt, etc..)

What is your selection of music? (e.g. genres, amount)

Wide.. but v. little classical (at the moment). So mainly focussed on POP, ROCK, URBAN, R&B, WORLD, ETC..

What majors do you have contracts with?

WARNER, EMI, BMG, UNIVERSAL

Does your selection include all music from the major labels or a part of it?

Much of it, but not yet exhaustive.

Do you know why it is so hard to get a license from all five major record labels?

This is very strategic for record labels. They are anxious not to set the wrong precedent on pricing.


N/A


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Yes. Windows Media V 7 DRM

Is your service created with the purpose to counter the file-sharing clients or as a natural evolution in the new digital market?

As an evolution. We do not expect P2P systems to go away.

Do you think there could be a connection between the success of your service and Napster teaching 40 million people how to find music online?

Yes … certainly Napster raised public awareness that downloading is possible.

What is in your opinion the most important factor for reaching out to the customers and obtain a successful service?

Price, ease of use and reach (i.e. getting users aware that legal services exist).

The digital download day was obviously a bigger success than you counted for since the servers couldn’t handle the pressure of people trying to download. Have you noticed any difference in the interest for your service since that day?

Significant…

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13.5 Appendix V – Interview with Morpheus What’s your name?

Trey Bowles

What is the main purpose with this service from your (Morpheus) point of view?

Morpheus is not a service rather it is a Peer-to-Peer product that was created to allow people to communicate directly with one another to share information.

In what ways can music creators gain from this service? – Marketing/Distribution/Retail

Once again Morpheus is a product not a service. One of other great technologies that we have created in the past year is our new CintoA technology. CintoA takes content and turns into an application. This allows us to place music onto the Morpheus Network and enable an artist to be paid. This only works for artists who submit there music to be wrapped in this technology. For all other content on the network because we are a decentralized network, StreamCast cannot control, monitor, track or record a users searches, downloads, or activities across the application. This new CintoA digital packaging solution can be used for marketing, distribu-tion and retail purposes. To find out more visit http://www.musiccity.com.


Answered above

How does it work?

Answered above

Is there something that could be improved?

There are always ways to improve any technology. We are continually working to find ways to improve our technology. We believe it is going to take the coming together of not only the technology companies, but also the record labels/movie studios, the artists, and the consumers to perfect an effective and successful business model for digital distribution.

What are your income sources?

Currently online advertising and strategic distribution relationships

Do you think you’ve earned or lost money with the introduction of illegal downloading? Once again, StreamCast and the Morpheus application do nothing other than allow people to directly connect and communicate directly with one another. We do not promote or condone the download or transfer of illegal or non-authorized information. We feel like there is an exciting and very profitable business model out there once all of the parties are willing to work together.

What is your target group?

All ages

What is your selection of music?

Morpheus has no concern or focus on music. For our musiccity.com portal we are open to all types, genres, and languages for music.

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Do you have any cooperation with any major record labels, and in that case who?

Not currently


We don’t control downloads


Cintoa, cta. This is simply a digital wrapper not a protected file format. We ensure the content creator gets paid now that their content is digital encrypted.

How come you are still online when Napster and now recently Songspy have been shut down by RIAA?

We have a completely different infrastructure. Napster was based on a centralized server system where as we are on a decentralized server system. Napster was able to track and monitor what people were trading whereas we are unable to do so. We are also extremely confident in our technology and the ability for people to be able to connect to one another and share information. We are the new breed of technology that is revolutionizing the way people will communicate in the future.

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13.6 Appendix VI – Interview with Niklas Zennström Niklas Zennström is the founder of Kazaa, Altnet and Joltid

Vi är intresserade av att höra hur det gick till när du var på STIM för samtal om detta, och framför allt vad din idé gick ut på. Som bekant gick det väl inte så bra. Vad var det som gick fel?

Historien med STIM var att efter att ha pratat med STIM, och och nagra syste organisationer blev det klart att vi i enlighet med Santiago avtalet skulle kontaka Buma/Stemra i Holland vilket vi gjorde. Vi var tvugna att pressa dem via intervjuer där jag sa att de inte var samarbetsvilliga för att få till ett möte. Vi hade en bra kontakt med Peter Koopmans och vi skrev ett LoI, darefter gick det valdigt långsamt från deras sida och i Oktober 2001 lämnade de amerikansa skivbolagen och filmbolagen in en stämningsansökan och två dagar senare fick vi ett brev från Buma Stemra där de avbröt förhandlingarna och hotade med rättsliga åtgärder om vi inte slutade med vårtan verksamhet. Detta resulterade i att vi stämde dem för missbruk av domineande ställning (de hade ju monopol på dessa licenser, eftersom vi inte fick skriva avtal med syster organisatiner i andra länder). De motstämde oss, och i November 2001 bestämde en Holländsk domare att vi skulle vidtaga sådana åtgärder så att Buma Stemras repetoar inte längre kunde laddas ner, han sa även att Buma Stemra skulle fortsätta förhand-lingen med oss. Vi var därmed tvugna att upphöra med att ha Kazaa programmet på våran hemsida, det var det enda vi kunde göra, samtidigt överklagade vi. I Mars 2002 bestämde appelationsdomstolen i Amsterdam att det är lagligt att distribuera Kazaa programmet eftersom det bara är en teknologi som kan användas för transferering av upphovsrättsskyddat material såväls som ej upphovsrättsskyddat material, samma argument som USAs högsta domsteol sa om Sony Betamax. Tyvärr kom detta för sent eftersom vi redan hade sålt Kazaa.

Efter Kazaa startade jag Joltid som utvecklar peer-to+peer teknologi för bland annat fil distribution, inte fil delning.

Vi håller på med ett examensarbete om just distribution av digital musik på Internet, främst ekonomiskt och legalt hållbara tjänster. Just nu dominerar helt klart användning av olagliga P2P-tjänster. Skivbolagen är ju igång med sina egna tjänster, men de går trögt, och de är föga framgångsrika. De nuvarande nätverken går ju knappast att ta bort, så dina idéer hur de kan utnyttjas på något vettigt sätt som är lagligt vore intressant att ta del av.

Du skriver att olagliga tjänster dominerar, det ar inkorrekt, mej veteligen finns det ingen olaglig tjnast som operrerar nu I storre utstrackning. Det finns en grundlaggande ratts princip som sagew att inget ar olagligt forren en dom har skett. Betraffande Kazaa som dominerar finns det bara ett domstolsutslag som sager att Kazaa ar lagligt.

Bra forslag pa distribution av musik via natet som ar sanktionerat av upphovsrattsinehavaren ar Altnet (www.altnet.com) som anvander P2P teknologi licensierad av (www.joltid.com) for att 1) marknadsfora inehall via respons pa sokord via bl a Kazaa 2) kostnadsfri distribution av filer genom anvandande av saker P2P fil distributions teknologi fran Joltid samt DRM teknologi fran Microsoft (varldens storsta anvandare av Microsoft DRM teknologi) samt mikrobetalningslosningar for att kunna ta betalt for inehallet.

Det vore också kul att få lite information om tillkomsten av Kazaa. Utgick ni från Napster eller Gnutella eller skapade ni ett eget P2P-nätverk från scratch.

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Napster ar inte P2P, de anvande P2P for filtransfer men natverket var client-server baserat. Gnutella kom ut medans vi utvecklade Kazaa. Det var fran grunden ett nytt koncept med sk SuprNodes, som senare har kopierats av manga andra.

Hade du något att göra med införandet av Altnet på Fasttrack, eller har det kommit efter att Sharman tog över? Tror du att Joltid skulle kunna fungera som en musikdistributions-kanal?

Jag var en av grundarna av Altnet. Joltid dar jag ar VD ager 49% av Altnet. Joltid har ingen ambition att bli en kanal, det ar en transport teknologi som kan anvandas av vilket bolag som helst som vill distribuera filer till en mycket lag kostnad. Musik bolag kan mycket val anvanda teknologin.

Vi undersöker ju hur en framtida digital muskidistributionstjänst skulle kunna se ut och kan kanske lära oss något av er modell...

En sadan tjanst maste kunna konkurera med gratis, lar er av vatten industrin, (Evian saljer packeterat vatten for flera kronor litern fast jag kan dricka gratis kranvatten).

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13.7 Appendix VII – Questions to Alan Morris (Sharman Networks)

We have some concerns about Kazaa and spyware. When you install Kazaa there are several spyware [Alan Morris] why do you call them spyware? programs installed at the same time even though there's very little information about this to the users.

[Alan Morris] See above - there is full disclosure and links to the sites

You said that Sharman Networks don't sell information to others, but I can't imagine all those spyware components are only for ads...(I think there were at least 50 components)

[Alan Morris] why not ?

Most components could be uninstalled without problem, but cydoor, which I suspect is the ad engine, couldn't...

[Alan Morris] precisely - Cydoor is the third party ad-server that works thro the app - it's a matter of widespread record that it's mandatory - it's the way the bills are paid. BTW it was erroneously labelled as spyware in the original 1998 article - Cydoor sent them the application and a week later they unreservedly declared it adware - but mud sticks :-(. Cydoor simply serves ads (pops frequency capped for instance to a lower daily level than the other major global sites) It's a client rather than server application and so doesn't send back any personal data - it doesn't need to. The only other bundle is WhenU - they are so protective of their privacy and disclosure - they are nearly more anal about this than we are!

It might be the case that Sharman do not sell information, [Alan Morris] totally we do not but still allows third party software to be installed together with Kazaa (that in turn might sell information)

[Alan Morris] see bundle acceptance and disclosures (Appendix VIII), without the users' knowledge or consent.

No matter if the software installed is spyware or not, the user does not know about it.

[Alan Morris] not so see disclosures`

I don't know if there are any differences in Kazaa v2 but here is an interesting link of v1.31:

http://www.gibboncore.demon.co.uk/kazaaspyware/

[Alan Morris] it wasn't true then and certainly isn't now - totally uninformed

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13.8 Appendix VIII – Kazaa Bundle Acceptance INFORMATION FOR BUNDLE PARTNERS This document provides information for vendors wishing to bundle applications with the KaZaA Media Desktop. It explains the KaZaA Acceptance Testing process and what we will require from you in order to effectively package and ship your product.

KAZAA BUNDLING POLICY All applications must pass KaZaA Acceptance Testing. This means that they abide by certain privacy criteria and technical specifications. We test a finalized installation package prior to release and once per month for the lifetime of the relationship.

Sharman Networks will strictly limit the number of applications that can be bundled with KaZaA Media Desktop to protect user experience and KaZaA brand value.

PRIVACY Sharman Networks requires bundle partners to address the following questions that will allow us to inform KMD users of any privacy issues with the bundled application and to allow us to effectively promote your application to our users.

This information will be used to present simple descriptions of how all bundles effect the KMD users’ privacy.

If your application collects information of any kind from the user (aggregated or otherwise) please describe this to us including:

Exact data that is collected (e.g. email address, nickname, gender)?

Frequency of reporting from the client to the server?

How the user opts in/out of your data collection? Is it clear what the user is opting in to? When are they asked?

Whether you sell the data and who to?

Can the user see and update or delete the information you hold on them?

Is data transmitted securely?

Is the data cross-referenced with any other database to create fuller profiles?

For acceptance testing we will also require a copy of the application’s Terms of Use and Privacy Statement. Please ensure that these only describe the applications that are to be bundled with KaZaA and not generic statements that include your other products or website.

Your application will be tested against these policies and your answers to the questions above.

TECHNICAL Your application must have an effective uninstall process that completely removes it upon user selection. It must be listed in the Windows uninstall applet.

It must also have an entry in the Windows Start menu. This must at least include shortcuts to a website or text file describing the application in clear terms and to the uninstall program.

WHAT A BUNDLE CAN’T DO

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It must not install any applications, services or processes without the users consent. This includes features that may be only ambiguously declared at opt-in.

It must not track any user behavior outside the users interaction with your application.

When the user says No (opts out) it must not ask them again…

It must not install undeclared (or ambiguously declared) apps that perform tasks other than the main app. For example click path tracking services.

It cannot prevent a user from doing something they are explicitly doing. E.g. they are browsing to Amazon.com and your application redirects them to Barnes and Noble.

It cannot effect any other installations that may be on the user’s PC.

Must not attempt to connect to the Internet when the user is not connected.

Must not automatically update itself. Any system updates must prompt for user’s permission and explain the nature of the update.

ADVERTISING If a bundle includes popup advertising, you will propose a frequency cap to be agreed by KaZaA. Ads cannot promote competitive products for KaZaA, existing KaZaA bundle partners, pornography or offensive material.

SOURCE CODE A copy of your application source code must be lodged with Sharman to audit that it fits with these acceptance criteria.

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13.9 Appendix IX – Interview with IFPI 11-09-2002, Magnus Mårtensson, legal advisor, IFPI Sweden

Varför finns de stora tjänsterna MusicNet och Pressplay inte i Sverige?

Deras upphovsrättsavtal gäller bara i USA.

Finns det några alternativ till dessa i Sverige?

Nej

Går det att få tillgång till Pressplay eller Musicnet från Sverige?

Det får man i så fall försöka genom att kontakta dem på egen hand.

Vad är planerna för Internettjänster i framtiden?

Man planerar att erbjuda ett mervärde i form av musikvideor och dylikt som man kan komma åt genom musiktjänsten. Som det ser ut nu så kan man inte konkurrera med tjänster som erbjuder samma utbud men gratis. Man måste helt enkelt erbjuda något extra.

Mårtensson nämnde också en tjänst som tillämpar Pay-per-piece som betalningsmetod – DIGFI.com. Dessutom påpekade han att Frankrike har en lagstiftning som säger att kommer-siella kanaler för distribution av media måste sända en viss andel inhemsk musik. Frågan är då hur detta fungerar med en eventuell mp3-tjänst?

En intressant sak som Mårtensson sade var att Vitaminic har gått i konkurs, men det är ingenting som märks på deras sajter. Än så länge i alla fall…

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13.10 Appendix X – Second Interview with IFPI Sweden Magnus Mårtensson 02-11-26 [email protected]

Regler nu?

Streamad, webcasting.

Skivbolagens rätt. Ger specifika uppdrag, inte rättigheter.

Regler sen?

Hemligt. Finns inte några detaljer… Mycket är på gång förstås, men inget kommer att hända inom närmaste halvåret i Sverige.

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13.11 Appendix XI – Interview with SAMI Tobias Eltell

Regler nu?

2 steg:

1. Ren överföring från CD => data. Mekanisk överföring.

Rätt från SAMI (45). från skivproducenterna (46), kompositör STIM/NCB (2:a)

2. Räknas som framförande (diskutabelt). Artister (47:e och framförande). STIM och skivbolaget.

Händer ofta att man får rätt artister och kompositörer, men nej från skivbolaget.

Regler sen?

Tariffsättning för smakprov är på gång. Resten är hemligt.

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13.12 Appendix XII – Interview with STIM/NCB Internet group Maria Wande, 021129

The interview has been transcribed by topic since no recording equipment was available for the interview.

General

- STIM have had licenses since 1996.

- There are two music listening categories:

o Digital Phonogram Delivery (downloads of entire works + ring tones)

o Replayable, streaming. Interaktivitet is split in three steps. The more interactivity, the more it costs:

Customised playlists

Pause function

Internet radio, WebbTV

Policing

- Policing is done in each region by the local interest organisation. This method works. Examples of different organisations are STIM (Sweden) and PRS (UK).

- Mutual agreements internationally.

- Santiago Treaty: the responsible owner of the service is also responsible for payments. It is not dependent on where the server resides.

Copyright

- STIM are positive to the idea of music on the Internet

- STIM represents only creators and and rights of other involved parties. The creators gives STIM the right to handle their works.

- The record companies does not have veto against music on the Internet, but the can charge high fees.

- ALL parts (record company, creator, artist) have to give their right for a work to be distributed on the Internet.

- The copyright laws are under revision. It might be done to next summer.

Tariffs

- Current tariffs are temporary. Still under revision.

- Streaming have the following tariff criteria:

o Potential listener

o Amount of music made available

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o Actual number of listeners

o STIMs costs for licensing

- The criteria are not easy to define.

- Pricing on downloads are based on prices:

o Entire works: 12 % of consumer price, minimum of 1.5 SEK per work

o Ring tones: 10 % of consumer price, minimum of 1 SEK per work

- Tariff differ internationally

- Royalty fairs stand for most of the income

P2P

- P2P does not work. Several P2P-services have tried to get licenses, but no agreements have been reached, since there is no control over the networks whatsoever.

DRM

- STIM is positive to DRM technology. Copyright laws weighs more than fair-use.

Miscellaneous

- Tomsradio.com does not have an agreement!

- IFPI still closes down private Napster servers

- Lars Henriksson handled the Kazaa case with Niklas Zennström.

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13.13 Appendix XIII – Evaluation of Musicnet General information Name of service:

RealOne Pass Gold

Type of service (client, web interface etc):

Custom FTP client62 integrated into a Web-oriented version of the latest-generation Real music player.

Owner:

Real.com, musicnet.com

Type of network (if applicable, for example Gnutella, FastTrack): FTP client62

How old is the service?

Fairly new, unknown

Copyright Prices / how much do you get to keep when cancelling the subscription etc:

I have been billed $19.95 a month. I was told that I would be charged $9.95/mo for the first three months when I signed up. The terms aren’t clear. It appears that I get to keep all downloads, but they stop working 30 days after I cancel, I learned this from a CNET.com article about the service based on a press release. It is signifigant to note that NONE of the details about the nature of the content is mentioned in the anywhere when signing-up! I went though the process twice to make sure I didn’t miss anything.

By what means does the site get income (ads, subscription fees, selling CDs etc)?:

I assume service receives income from subscriptions fees, no banner ads. They have links to buy CDs from a third party.

How do the artists featured on the site get paid (royalty, selling CDs etc)?

Downloads from this site appear to be equivalent music purchase. Therefore I assume that the artists receive royalties from some aggregate download statistics. This, like many aspects of this service, is unclear or it is unclear how to obtain this information.

Quality Type of music offered and amount of music (how many bands, number of songs, independent, major labels, how many genres, what kind of genres etc):

The selection is mixed. I tried to search for music from the most popular and influential independent (or formerly independent, yet still possessing indie credibility) artists of the last five years: stereolab, yo la tengo, magnetic fields, sunny day real estate, belle and sebastian, clinic, even bjork, radiohead, nick cave, smashing pumpkins, and the strokes (who have been

62 Author’s note: It is actually not a FTP-client, but a client integrated into the realOne player.

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topping the sales charts in the UK and US most of 2002). This site had none of these extremely profitable artists. For Internet downloading, I am interested in artists that are hard to find. I want to listen to their music before spend time searching for a store or pop $25+ for an import. I tried a few other artists, but gave up since they don’t even distribute the estab-lished artists listed above. For the artists they do have, it appears that they carry more of a back-catalog. For example, I thought I might try to download the new Tom Waits album “Alice,” that had all of his releases from the 70s - early 80s only. I tried Thelonious Monk, to test their Jazz selection. They had much of his early catalog on Blue Note, nothing from his seminal years on Prestige or Riveside records, or his veteran years 1967- on Columbia. Some genuinely good music was available, but a pretty limited selection, skipping his most important recordings. They had My Bloody Valentine’s two essential albums. And they had a surprisingly complete selection of Cocteau Twins, including rare, expensive singles and eps. They had an awful selection of Electronic/Dance music -- one of the most-downloaded genres on the net. I won’t even go into detail. The bottom-line is that the software doesn’t make it easy to simply search through bands of related genre, which is bad when there’s a limited selection. The software should make better suggestions based on bands I’ve searched. It should have Playlists programmed by some experts to give you a feel for what is offered. If these features ARE INDEED offered, I couldn’t find them.

Their radio station selection is no better/worse than what is available for free through any search engine.

I didn’t sample the Videos that I also have access to.

Speed (fast, slow service):

Service is fast, downloads are smooth.

Number of users / visitors:

N/A

Usability (client/web interfaces, accessibility from different computers etc):

Client is very nicely integrated and easy to use. My complaint is that it’s functionality is limited (see above).

Sound quality (bitrate, file format, streaming, download etc):

Sound quality is fair. The tracks I tested don’t sound as rich as the actual album tracks. Bitrate is unknown since a proprietary file format is used (.mnd), which I assume is a variant of RealAudio. It sounds much better than RealAudio. The music can only be played on the provided player, this player does not provide bitrate stats. Quite annoying. I am happy with my chosen music player, winamp. I don’t want another player on my computer that I have to use for special cases. Frustrating.

Categories (how is the music categorised):

Music is categorized by genre. But I was only able to locate the genre listing once. The search utililty needs some work.

Search engine (how does the search engine work, is it good etc):

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It permits search of their limited library only. It doesn’t even work that well. I searched one artist and a link to music by Yoko Ono appeared. I found some of her music. I clicked “where do we go from here” and it downloaded “when your eyes say it” by Britney Spears. I was charged for that mistake! Furthermore, when you search for Yoko Ono directly only one remix and a Barenaked Ladies sound with her name in the title come up. To summarize their search engine is full of bugs! You can’t even find music if they have it.

Extra value (bonuses, what else do you get besides just digital music):

The extra bonuses were games and demos. I could have found similar stuff for free. Furthermore, they charged me $19.95 for my pass when it said explicitly that the gold pass is $9.95 as a special offer. The gold pass gave me additional downloads, but I can’t even find enough music on this service to use-up this download credit! Furthermore, that charged a $6 “shipping” fee (what did they ship?). This fee was not stated explicitly when I signed up. I’ve tried to call to complain about the $19.95, but I can’t get through to an operator on any of the phone numbers provided, and they haven’t responded to my email.

Extra value?

This service is of no value. I feel robbed.

Other comments:

I would never have spent $26 on this “service” if I weren’t taking part in this survey. I got a few nice downloads, but it was not worth the cost, since they stop working when I cancel my subscription. For $26, I could have 150 channels of basic satellite TV, I could have supported a band directly by seeing them live, or I could have bought two CDs that I could keep forever. At these prices, this service fits into lives of people who have lots of money to spend on entertainment and like to get most of their entertainment through their computer. This is not me, nor did it describe anyone I know.

They need better selection and a better search engine desperately if this service expects to survive. Furthermore, they MUST offer a free trial period, especially because they don’t make it clear how the service works ahead of time (if they do they need to make this informa-tion easier to find). Real.com needs to license-out their format like Microsoft did with Secure .wma. Although the player is nice-looking and works satisfactorily, I would prefer if I could choose my player. Copyright-secured .wma files can play on most major players like Winamp, Siren, and of course Windows Media player.

Evaluation On a scale from 1-5, where 1 is expensive and 5 is cheap, how much is it worth paying for this service (take into account how much a CD costs, and that you can get mp3s for free illegally)?

1; Note, my ISP blocks illegal music downloads to reduce net traffic. Still I think this service is overpriced.

On a scale from 1-5, where 1 is dying and 5 is growing fast, how much is this site growing?

2

On a scale from 1-5, where 1 is narrow and 5 is broad, how many different genres is featured?

88


2

On a scale from 1-5, where 1 is only independent and 5 is only major label, what kind of bands and labels are featured?

5

On a scale from 1-5, where 1 is small and 5 is very large, what is the sheer amount of music featured?

2

On a scale from 1-5, where 1 is very bad and 5 is very good, how good is the usability?

3

On a scale from 1-5, where 1 is very bad and 5 is very good, how good is the search engine?

2, full of bugs

On a scale from 1-5, where 1 is very bad and 5 is very good, how good is the categorising?

2, e.g. they appear desperate to fill their “electronica/dance” category with names. A lot of tracks in that category should be elsewhere.

89


13.14 Appendix XIV – Evaluation of Pressplay General information Name of service:

Pressplay.com

Type of service (client, web interface etc):

Download client integrated into Windows Media Player

Owner:

www.pressplay.com

Type of network (if applicable, for example Gnutella, FastTrack):

FTP client?63

How old is the service?

Fairly new, unknown

Copyright Prices / how much do you get to keep when cancelling the subscription etc:

Downloads are only functional as long as I am active member. Limited number of streams and “burns” to CD are allowed. Service is $9.95/mo for first three months, $14.95/mo thereafter.

By what means does the site get income (ads, subscription fees, selling CDs etc)?:

I assume service receives income from subscriptions fees, no banner ads.

How does the artists featured on the site get paid (royalty, selling CDs etc)?

Downloads from this site appear to be equivalent music purchase. Therefore I assume that the artists receive royalties from some aggregate download statistics. This, like many aspects of this service, is unclear or it is unclear how to obtain this information.

Quality Type of music offered and amount of music (how many bands, number of songs, independent, major labels, how many genres, what kind of genres etc):

Like other services of this type (I have evaluated RealOne from musicnet.com and have tried Rhapsody from listen.com) the selection is mixed. They have a few good things and a lot that doesn’t appeal to me. This service has a lot of music that the other services don’t have. The only way a service of this nature can work, is all labels (major and independent) to operate through one service. Who is going to pay $60+ per month by subscribing to multiple services to have a decent selection?

63 Author’s note: It is actually not a FTP client but a client integrated with windows media player.

90


Speed (fast, slow service):

Service is fast, downloads are smooth when they work. 1 out of 3 downloads crashed with an error. They worked the second time.

Number of users / visitors:

N/A

Usability (client/web interfaces, accessibility from different computers etc):

Client interface is excellent, easy to use, well designed.

Sound quality (bitrate, file format, streaming, download etc):

Sound quality is fair. The bitrate is 128k/s. This sound is okay for electronic music but some subtle aspects of tone are lost in guitar-driven music. They should use higher bitrate.

Categories (how is the music categorised):

Music is categorized into 14 genres. More importantly, a frame on the right-hand side of the screen recommends music that other users who have searched this artist liked. This is helpful for ideas when the pickings are so slim.

Search engine (how does the search engine work, is it good etc):

It permits search of their limited library only. It works quite well. Uses an interface based on the successful Napster interface, very easy to use.

Extra value (bonuses, what else do you get besides just digital music):

Nothing I could see.

Other comments:

Why would anyone subscribe to several services at $15/mo and still have ridiculous limita-tions like “you may only burn 2 tracks from one artist per month” and “you do cannot use the music if you cancel your subscription.” What are you paying so much money for if you can’t keep anything? It’s a waste of money. In the end, it makes better sense to buy albums than subscribe to a collection of services that let you listen to music a few times on a limited number of computers! Perhaps this is what the record labels want in the end. This kind of service encourages people to collect “hit songs” instead of supporting individual artists. It feeds the big-label hit-making mentality. Why does Brintey Spears get the privlage of being marketed on all of the kinds of services, but Massive Attack appears just on pressplay? The programming decisions are too arbitrary. What makes “illegal” file-sharing networks so successful is that no one chooses the music for you. If this is the future of music marketing, how will independent artists get into these networks? As an independent musician, I believe that sales of my music have been helped by illegal file sharing. Small labels don’t have much marketing muscle. The internet allows for a whole new approach to marketing. There is great potential out there, but these types of services are not what is needed.

Evaluation On a scale from 1-5, where 1 is expensive and 5 is cheap, how much is it worth paying for this service (take into account how much a CD costs, and that you can get mp3s for free illegally)?

91


1; Note, my ISP blocks illegal music downloads to reduce net traffic. Still I think this service is overpriced.

On a scale from 1-5, where 1 is dying and 5 is growing fast, how much is this site growing?

2

On a scale from 1-5, where 1 is narrow and 5 is broad, how many different genres is featured?

3

On a scale from 1-5, where 1 is only independent and 5 is only major label, what kind of bands and labels are featured?

5

On a scale from 1-5, where 1 is small and 5 is very large, what is the sheer amount of music featured?

3

On a scale from 1-5, where 1 is very bad and 5 is very good, how good is the usability?

5

On a scale from 1-5, where 1 is very bad and 5 is very good, how good is the search engine?

5

On a scale from 1-5, where 1 is very bad and 5 is very good, how good is the categorising?

3

usability factors in digital music distribution services and their

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