The Market

Streaming music is the latest development to change the landscape of the music industry. The streaming revolution is proving to be more profound than the move to digital, as revenues nearly doubled over 2014, growing by 45.2 % [59]. Instead of buying an entire album, users can rent songs or stream music by subscribing to a service such as Spotify.

Record companies have adapted their business model from ownership of music to access to music, which is reflected in the growing share of subscription and streaming revenues as a percentage of global, digital revenues. The crucial fact is that global music revenue growth (3.2 %) was positive, after nearly twenty years of decline. Consumers have more choice in music offerings, and streaming is the high growth segment; subscription services grew by 58.9 % while pure ad-supported streaming services grew by 11.3 %. The industry derived 45 % of its global revenues from digital services exceeding revenues of 39 % from physical format sales, with 14 % from performance rights and 2 % from synchronization revenues in 2015 [60].1 Crucially, however, artists, and the music community, are concerned about the “value gap” where they are not being fairly compensated for their content as original rights holders. The Taylor Swift discussion in Chap. 4 illustrates exactly this issue.

Customized product differentiation further distinguishes the product offering: for instance, while in the past Spotify sorted music solely based on genre, it now offers music associated with an activity such as relaxation, meditation or exercise. This allows listeners to cross boundaries and rapidly discover new artists, adding to the song’s ranking since the music industry’s ranking index, the Billboard charts, now count plays on Spotify and YouTube in their calculation of the country’s top hits. There is a strong feedback effect here since programmers for radio stations use these charts to create their music rotation list. From the perspective of the content creator or artist, the choice offered by streaming music services increases competition so many of the new, undiscovered artists can become one-hit wonders.2

In addition to granularity, the intermediary or the producer is eliminated as in the new model recently espoused by the band Radiohead on BitTorrent.3 Prior to digitization, it was not financially viable for artists to release their own album. With the virality offered by the digital music model, promotion and distribution of music is essentially free. Internet radio and apps such as Spotify are examples of avenues that an artist could use to promote music. In some cases, the artist only has to incur the cost of recording and producing the music; most of the marketing has already been done by the record label. Radiohead is an established band, performing since 1992. The full album by Radiohead can be downloaded only after the consumer pays - BitTorrent keeps 10 % of the fee and the rest goes to the artist. In this business model, the creator ofinformation gets to keep most of the revenue. BitTorrent requires you to use the same computer and IP address to re-download the album at a future point. By creating innovative distribution deals with artists, the company is overcoming the free file sharing issue.

Music upload services, such as YouTube, are exempt from many licensing fees due to early music industry legislation that was intended to protect passive listener intermediaries from copyright liability. For example, user-generated content on YouTube might have a trending song playing at some public event. Is this copyright infringement? YouTube has automated software that evaluates the situation and requests the user to remove the material in the event of copyright violation. But there is no personalized monitoring, either by the artist or by the digital platforms.

The central issue in CIME industries is copyright protection. The standard argument is that weak copyright protection shrinks revenues for the producer of original content and, more importantly, reduces the incentive to invest in creative content since the owner may not be able to recover the high initial investment. Revenues for both the artist and producers stem from subscriptions, advertising, legal digital downloads, physical sales and live concerts.

Weak copyright protection can, paradoxically, increase revenues. In the music business, after Napster made large-scale file sharing (mp3) possible since 1999, there was an increase in the supply of concerts, as artists shifted to live performances, and also an increase in demand for live performances, since they are perceived as complementary to digital music. File sharing increases demand for albums due to the sampling effect as information about new music is now easily available. Traditional radio and Billboard top 200 lists used to be the sole source of information, but are now replaced by Internet radio and commercial uses of new songs or synchronization deals where songs are played in advertisements, films and television programs such as major sporting events. Sampling of individual songs creates more choice and enables the user to purchase a wider variety of music. Network effects, where users value music in proportion to its sales rank, will spread this popularity, leading to even more album sales. For small bands, concerts ticket sales and album sales both increase as digital technology increases awareness of these bands [62].

The unauthorized digitization of information goods and services, like music, can reduce the number and price of the original works supplied. But piracy in the music industry due to P2P file sharing via BitTorrent has an interesting feature. Downloading speed for music depends upon the number of initial seeds or legal sales of the music for the obvious reason that locating the music of a little known artist will be much more time consuming than that of a well-known artist. Once a song has been legally downloaded, the download speeds for subsequent users increases, which leads to more downloads and hence increases visibility of the artist. While there is an incentive, both for the artist and the producer, to incentivize more legal sales to start the seeding process, further downloads are enhanced by piracy, as direct network effects strengthen this process leading to possibly higher revenue overall. Consequently, extracting rent or higher price from initial, high value customers could offset the lost revenue for the producer from subsequent, late stage piracy. So the net effect of piracy may actually be increased revenue both for the artist and the label [62].

There are two aspects of copyright. First, there is the question of unintended use of copyrighted material. Second, there is free advertising for the artist. If there is to be compensation in the first case, then perhaps the publicity should also be accounted for. It was clear when Napster was taken down that companies that actively distribute music online were going to face issues of liability for hosting content. Artists and copyright holders would prefer licensing fees at every point along the value chain but monitoring the distribution of content in real time was challenging. The negotiated compromise was the “safe harbor” agreement, as part of the Digital Millennium Copyright Act (DMCA), which stipulated that hosting firms were not liable for copyright violations until they were notified.

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