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Home , Music industry, Retail

Media & Content : case study

Study for IPTS Seville, 26 October 2011 Andra Leurdijk & Ottilie Nieuwenhuis 2 October 26, 2011 Andra Leurdijk - a case study

Main questions

1. What are the main economic developments in the music industry?

2. How have digitisation and the affected the network in the music industry?

3. How have the digitisation and the internet affected the competitiveness of the European music industry?

3 October 26, 2011 Andra Leurdijk Music industry - a case study

Three main streams 4 October 26, 2011 Andra Leurdijk Music industry - a case study

Eurostat definition of sound recording and music

Sound recording Music publishing Related activities • Production of original • Acquiring and registering • Publishing of music and (sound) master recordings for musical sheet (tapes, CDs) compositions • Sound recording services • Promoting, authorizing and Not included: activities in a studio or using these compositions • Reproduction from master elsewhere in recordings, radio, copies of music or other • Production of taped (i.e. , motion pictures, sound recordings, see non-live) radio live performances, print 1820 programming, audio for and other media. • wholesale of recorded , television etc. • Distributing sound audio tapes and disks, see recordings to wholesalers, 4649 retailers or directly to the • Live performances public*

* Units engaged in these activities may own the or act as administrator of the music copyrights on behalf of the copyright owners.

5 October 26, 2011 Andra Leurdijk Music industry - a case study

Characteristics of music industry

9High up-front 9Uncertain demand, hit driven 9 Strategies of control: ƒ Stars, genres ƒ Control over value chain ƒ of copyrights 9 Highly concentrated , dominated by 4 vertically integrated majors, app. 70% of the international market 9Many SME’s

€4.449 billion €4.240 billion €2.186 billion €1,792 billion

Revenues in 2010 6 October 26, 2011 Andra Leurdijk Music industry - a case study

Number of firms, employees and labour productivity in EU 27 music industry, 1995-2007

1995 2007 Number of firms 4,982 11,833 Number of employees 15,407 21,023 Average number of employees 3,09 1,78 per firm Labour productivity 44,8 67,3

Source: Eurostat

Labour productivity is the amount of and services that a worker produces in a given amount of time. 7 October 26, 2011 Andra Leurdijk Music industry - a case study

The European music industry Share of EU members states in total value added of the music publishing industry in EU27 (2007) 8 October 26, 2011 Andra Leurdijk Music industry - a case study

Cost structure of the music industry

Costs for amount to 38%; for and promotion to 28%

Royalties for and artist are significantly smaller: 6 and 12%

Source: Aris & Bughin (2009) based on McKinsey analysis 9 October 26, 2011 Andra Leurdijk Music industry - a case study

Revenue streams in music industry

Source: IFPI RIN (2011) 10 October 26, 2011 Andra Leurdijk Music industry - a case study

Timeline: technological 1990s: CD – Replacement of 1940-1950: Television changed LP collections led radio format, increasing reliance to a new revenue on music and news. stream.

1900 1920 1940 1960 1980 2000

1920s: Commercial : Music Tapes Radio – Declining – Hometaping led to record . Mergers declining LP sales. with radio networks. 11 October 26, 2011 Andra Leurdijk Music industry - a case study

New value chain music industry

Production, Marketing, Creation Editing Promotion Consumption

Physical retailers Music labels Physical retailers MediaMedia E-retailers Artists E-retailers Artists (Radio,(Radio, A&R)

Music labels Device Manufacturers

New Labels Telco’s

Pure Web Players

Artists

Concert Promotion Companies

Consumers

Traditional Players New Players 12 October 26, 2011 Andra Leurdijk Music industry - a case study

Creation / production

9Recording, mixing, mastering, editing and producing is nog longer attached to time and space, easier to produce

9Artists can have more direct contact with audiences/fans and have access to alternative funding options, such as

9Less dependent on intermediaries?

Surroundings of the Nilento in October13 26, 2011 Andra Leurdijk Music industry - a case study

Development in global consumer sales for physical and digital recorded music (2005 – 2015*)

*Figures for 2011-2015 are expected sales for recorded music. Source: PWC and Wilkofsky Gruen Associates, 2010 14 October 26, 2011 Andra Leurdijk Music industry - a case study

Change in physical and digital sales

Change in US United Nether- Switzer- Million dollars Kingdom lands land

physical sales -684.6 -288.1 -484.9 -208.4 -205.6 -55.8 -83.3 -44.5

digital sales 245.7 104 70.5 18.5 11 12.4 18.3 3.5

difference -438.9 -184.1 -414.4 -189.9 -194.6 -43.4 -65 -41 15 October 26, 2011 Andra Leurdijk Music industry - a case study

Piracy or consumer dissatisfaction?

Consumer Piracy dissatisfaction?

OR

Protest against verdict of Pirate Bay in Sweden, 18 april 2009 16 October 26, 2011 Andra Leurdijk Music industry - a case study

Sharing vs. buying For every 5 files shared…

…1 is bought.

For every 15 to 20 downloads, one less is sold.

Downloaders also go to more and buy more Source: Rob and Waldfogel (2004) merchandise (TNO, 2009). 17 October 26, 2011 Andra Leurdijk Music industry - a case study

Music industry response to

9 Filing law suits against P2P services, closing down (2003) 9 Then licensing of music to online music providers (Apple iTunes store in 2003)

Source: Apple Inc/European Audiovisual Observatory 18 October 26, 2011 Andra Leurdijk Music industry - a case study

Business models Services Options for users

Users download and buy single Single song downloads at fixed price per song.

Users pay for limited download Membership quota per month or other fixed period.

Unlimited access to catalogue. Membership ‘all-you-can- Users get temporary to eat’ listen to music.

Music is streamed, users are Ad based unable to make own playlist (but do have ways to personalize by liking or disliking played songs.

Access to music catalogue in combination with other media products, such as mobile phones, Bundling or in combination with mobile subscriptions

Users can download music and Cloud Services store this in a personal box ‘in the cloud’ 19 October 26, 2011 Andra Leurdijk Music industry - a case study

Company case: (Sweden, 2006)

9 Streaming and online 9 Available in 8 EU countries & US, 300 employees 9 Freemium and subscription model

(Jun 2011: 3.13 million free user, 1.54 million paying subcribers) 9 Facebook account needed to sign up

Subscription model Price / Month Description Free 0 Online ad-supported desktop version Unlimited 4,99 Online ad-free desktop version 9,99 Premium service, mobile and offline

10 tracks 15 tracks 40 tracks 100 tracks Price €9.99 €12.99 €30.00 €60.00 Price per track €1.00 €0.87 €0.75 €0.60 20 October 26, 2011 Andra Leurdijk Music industry - a case study

Company case: Spotify

9 After the introduction of the Spotify-Facebook (September 2011), the number of users grew with one million new users a month

• from £11.32 million in 2009 to £63.17 million in 2010 (458% increase)

•More revenues from subscriptions than from advertisers

•The company is not yet profitable 21 October 26, 2011 Andra Leurdijk Music industry - a case study

Consumer surplus?

9Consumers can now listen anywhere and anytime to their favourite music, adjusted to a personal profile

9Consumers have a much more active role in sharing, uploading, commenting and remixing music.

9But also: lock-in effects? Less diversity? 22 October 26, 2011 Andra Leurdijk Music industry - a case study

SWOT 1

Value network Strengths Weaknesses Opportunities Threats

Production •Large variety of •Music industry •Talent scouting and •Uncertainty national artists leans towards talent development about level of and vibrant strong promotion remains a investments in of big stars professional skill music production needed by many in order to •Greater reliance succeed in the on hits and stars market •Lower costs for production tools, enable SMEs to enter and for artists to manage (more parts of) music production themselves •Production can be located anywhere, nearness to music centers in London, New York less necessary 23 October 26, 2011 Andra Leurdijk Music industry - a case study

SWOT 2

Value network Strengths Weaknesses Opportunities Threats

Aggregation & •One of the •Few national •Establishing links •Legacy distribution successful new artists are sold between online distribution online distributors outside their music service models through located in country of origin providers and record social networks, companies and increasingly operators and under pressure device manufacturers for •Continuing promotion and unauthorised distribution of downloading music •More options for •Music retail less well known shops closing artists to reach down (niche) audiences •stronger interaction and ties between artists, labels and audience 24 October 26, 2011 Andra Leurdijk Music industry - a case study

SWOT 3

Value network Strengths Weaknesses Opportunities Threats

Business models •A lot of •Music industry •Increasing •Decrease in experimentation slow to respond willingness to pay overall revenues with new to digital for digital music for music industry business models innovations and •Contextual the changes in services, offering •Lowering market business models extra features, barriers may be this requires are a USP for to the detriment music providers of Europe's •Development of competitiveness revenue sharing in a global market deals or license contracts which are beneficial for artists, record companies and online music providers alike •Involvement of users in (creation and) promotion and distribution of music •new talent scouting & financing models 25 7-11-2011 Titel van de presentatie

For Discussion

More comprehensive overview of revenu streams necessary to get full picture. How?

Market power of new players (in etc.) & relation with legacy music industry

Will investment in orgininal music production suffer?

Does European music industry have greater or lesser opportunities in digital music market? 26 October 26, 2011 Andra Leurdijk Music industry - a case study

Sales of performance rights

Digital performance rights in the US rose 60 percent in 2010 to $249 million (PWC, 2011). Source: IFPI RIN (2011) 27 October 26, 2011 Andra Leurdijk Music industry - a case study

Retailers

9The decline in physical sales has led to the closure of many specialized physical retail stores 28 October 26, 2011 Andra Leurdijk Music industry - a case study

Positive effects of filesharing

1. surplus, because access to large amount of music 2. Wider platform for artists

Leading to a raise of interest in live performances.

Source: OECD (2010), WAN (2010) 29 October 26, 2011 Andra Leurdijk Music industry - a case study

Impact of digitization

9Decline of physical music since the late nineties 9Music consumption shifted to online 9Traditional business models are disrupted 9Overall decline of revenues

But also: 9Cheaper and easier availability of digital music on different devices for consumers 9More possibilities for artists to produce and distribute their music, independent of intermediairies 30 October 26, 2011 Andra Leurdijk Music industry - a case study

Social

networks The musicindustry

Online /personal

Copyright Videoplatforms Collecting Societies Digital (e.g. iTunes) Online stores Music Content creators Physical (e.g. (musicians, publishers and

Amazon) Consumer record , studio Subscription companies engineers, services ) promotors Television/ movies

CD Radio manufacturers

Live Wholesale performances distributors Music stores

Retail Hardware provider