The Challenge of Monetizing Consumer Behaviour Via Advertisements in a Multi-Sided Music Business Environment

KES Transactions on Innovation in Music: Vol 1 No 1 Special Edition - Innovation in Music 2013 : pp.53-66 : Paper im13bk-005 The challenge of monetizing consumer behaviour via advertisements in a multi-sided music business environment Dr. Ainslie Harris [email protected] 1. Abstract Music is no longer a separate product in itself – songs and albums have become commoditized, and music is now considered by some as a means to an end. Today, it can be legitimately argued that it is consumer behaviour, delivery channels, and the experience of music rather than the tracks themselves that are monetized. This has led to the introduction of new business models, such as ad-supported music streaming and download services, in order to attempt to create value by taking advantage of the changing nature of music consumption. Today’s music industry is no longer represented by a linear value chain, but a complex, multi-sided network, with stakeholders that include artists, consumers, channel marketers, advertisers, and rights holders, among others. In this multi-sided, inter-dependent, networked environment, no single stakeholder has control over the monetization of music. Though consumers have substantial power and freedom in the network, they alone cannot singlehandedly influence its success or failure, because other participants such as rights holders form a crucial part of the network. With disruptive consumer behaviour transforming linear supply chains into complex networks, the task of monetization has become increasingly challenging. This paper specifically considers the plight of the ad-supported music download service as the central platform of a multi-sided network. It introduces the concept of a multi-sided network, gives an overview of the economic and consumer behavioural relationships in the network, and comments on the viability of a network based around an ad-supported model, based on the findings of a study by Harris [7]. 2. Introduction Large-scale illicit downloading has been taking place for nearly 15 years, and will never be completely eliminated. Such downloading has had a significant negative effect on music industry revenues in Copyright © 2014 Future Technology Press and the authors 53 The challenge of monetizing consumer behaviour via advertisements in a multi-sided music business environment Ainslie Harris Canada, the USA, and the UK (three of the world’s top English- speaking markets for recorded music), with billions in value stripped away in the span of a few years [7,9]. Since the introduction of Napster in 1999, which facilitated large-scale global file sharing, record labels and industry associations had been focusing their efforts on restoring revenues to pre-file sharing levels, perhaps not fully realizing or appreciating how evolutions in technology and consumer behaviour had changed how people were now relating to and interacting with the traditional value chain for music [8,9]. More recently, evolving consumer behaviour has made it ever more clear that restoring revenues to where they were before file sharing took hold is somewhat of a utopian ideal. We now live in an age where music is commoditized, and record labels are ‘competing with free’, as consumers find alternative ways to obtain music at no cost. Young people in particular are increasingly used to getting content for free online, with the youngest consumers even considering this as socially acceptable behaviour [6,7,14,19,21]. Industry tactics to dissuade illicit downloaders, including threats of, and on occasion actual litigation, have met with negligible success over the years [3,4]. In the United States, where stories of attempts to combat illicit downloading via litigation have frequently featured in the media over the last decade, the reality was that only a very few people were ever actually charged with copyright infringement. The average settlement reached in Recording Industry Association of America lawsuits was around US$3,500 [13]. Content innovation, including new formats, bonus content, and value- added features (e.g. legitimate digital downloads being made available to consumers, buy the physical media and get a digital copy, buy the album and get access to music videos or other featurettes, etc.), has increased unit sales of media; however, even with enormously successful new media formats, what consumers are buying and how they are buying or otherwise interacting with it means that recorded music revenues are still not where they were pre-file sharing (see Figure 1 and Figure 2). For example, when singles were legitimately made available as digital downloads (i.e. every song in an album made available for purchase as a standalone track via label sanctioned channels), unit sales for recorded music increased enormously; but because customers were buying 99 cent singles to get the songs they wanted, instead of ten dollar albums, revenues were not increasing in the way that industry would have hoped. Even amongst consumers who pay for downloads, the way they now purchase music (i.e. appetite for purchasing specific songs rather than albums) has affected how labels sign bands, develop bands, and release albums. Said a label executive in 2007 [9]: ‘[W]hat we have a 54 The challenge of monetizing consumer behaviour via advertisements in a multi-sided music business environment Ainslie Harris lot of now, is people who buy into a song. They’re not necessarily artist loyal the same way...people are more song-based now than artist loyal, and that has changed how record companies deal with what we used to term ‘artist development’ […] that kind of thing has really changed. It’s not quite to the point of signing them to three songs as an option, but it’s kind of going in that kind of direction’ (p. 194). 2,000,000,000 "Digital" formats included Napster Introduced 1,600,000,000 1,200,000,000 800,000,000 400,000,000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total Digital & Physical Retail Units Sold (album or song each = 1 unit) Year Figure 1: Total physical and digital unit sales in the USA, 1996-2010 [15,16,17] 16,000 14,000 12,000 10,000 8000 6000 4000 Net Retail Value (in $US millions) 2000 Napster introduced "Digital" format value included 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year Figure 2: Total retail value of physical media and digital format sales in the USA, 1996-2010 [15,16,17] 55 The challenge of monetizing consumer behaviour via advertisements in a multi-sided music business environment Ainslie Harris The music business is no longer a simple, closed value chain where music is recorded and then a physical piece of media is manufactured and shipped to a store where a customer can buy it – the music business is now a complex, multi-sided network, with myriad stakeholders and complex interactions that create two-way value between individual network participants (to be addressed later in this paper). It is thus important for industry to focus on securing revenues and preventing further revenue erosion, rather than striving for financial targets last reached 15 years ago in an environment that has completely transformed. Around 2007, revenue generation themes at music industry conferences moved from 360-degree deals (monetizing all aspects of an artists’ potential revenue streams, such as recordings, tours, endorsements, and merchandise) towards monetization of consumer behaviour and music distribution channels – specifically, unlocking perceived value in music and the music consumption experience via ad-supported business models. Since then, monetizing experiences and cross-promotional opportunities have increasingly been explored as revenue generation tools – most popularly via ad-supported streaming services (e.g. Spotify, Pandora). The premise of the ad- supported model is that if some people are going to take music for free anyway via illicit downloading (i.e. people who have no intention of ever paying for their music), then industry might as well make the music available for free, but monetize the acquisition/consumption behaviour. This has been explored via completely free services, and more commonly, ‘freemium’ models. In the case of freemium services, a paid upgrade option is available to users, which provides them with additional features and benefits, and generates additional revenue for the service provider. In this paper, the concept of an ad-supported download service is examined rather than a streaming service, because a free, legitimate streaming service is not considered to be the closest substitute to an illicit download service, given that a user gets to keep music that is downloaded for later use, but cannot keep music that is streamed. To date, there has been scant academic literature relating to the understanding of consumer attitudes towards not just ad-supported music services, but ad-supported media content services in general (both streaming and download). This is despite a number of ad- supported music download services having been launched (e.g. SpiralFrog, Ruckus, We7, QTrax, Guvera, Free All Music), only for many of them to be forced to change their business models, and/or end up defunct [7]. In a multi-billion dollar, multi-national industry where large incumbents have faced continually declining revenues and third party companies have the potential to generate significant value, it is important to have an understanding of what consumer 56 The challenge of monetizing consumer behaviour via advertisements in a multi-sided music business environment Ainslie Harris attitudes are towards such services, what characteristics they consider important enough to evaluate in their choice to try or continue using a service, and how these aspects contextually align with the concept of a multi-sided network. This paper specifically considers the plight of the ad-supported music download service, and the multi-sided economic and consumer behavioural relationships such a service is dependent upon.

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