ONLINE MUSIC DISTRIBUTION the Faculty of The
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ONLINE MUSIC DISTRIBUTION A THESIS Presented to The Faculty of the Department of Economics and Business The Colorado College In Partial Fulfillment of the Requirements for the Degree Bachelor of Arts By Jeffrey A. Moore May 2010 ONLINE MUSIC DISTRIBUTION Jeffrey Moore May, 2010 Economics Abstract The music industry has seen many new forms of technology that have helped shape it to become the multi-billon dollar industry it has become today. The Internet is currently changing how artists are distributing their music as well as how consumers are receiving it. The ease of which an artist can distribute their music across the country without the help of a record label has lead to a new question as to whether or not a record contract is still necessary for an artist to succeed in the industry. This study will look at groups from the Front Range of Colorado at different stages in their musical careers to see exactly how they are using the Internet to distribute their music and to find out if any have achieved any level of financial success doing so. KEYWORDS: Music Industry, Internet Distribution ON MY HONOR, I HAVE NEITHER GIVEN NOR RECEIVED UNAUTHORIZED AID ON THIS THESIS Signature TABLE OF CONTENTS ABSTRACT iii ACKNOWLEDGEMENTS iv 1 INTRODUCTION 1 2 LITERATURE REVIEW 6 2.1 Overview of the Music Industry 6 2.2 Pricing Strategies and Internet Distribution 8 2.3 The Music Industry Market Structure and Value Chain 10 2.4 Piracy and the Music Industry 14 3 RELEVANT THEORY 17 3.1 State of the Industry Pre-Internet 18 3.2 The Introduction of the Internet 21 3.3 The Rise of New Innovative Distribution Tactics 23 3.4 Hypothesis 28 4 Methodology 31 4.1 What Question is this Study Trying to Answer? 32 4.2 Variables 33 4.3 Problems and Research Obstacles 35 4.4 Methods 36 5 RESULTS AND DISCUSSION 40 5.1 Exact Methods for Surveys 40 5.2 Experience of the Groups Sampled 43 5.3 The Use of the Internet Distribution Sites 46 5.4 Ratings of Online Distribution Sites 48 6 CONCLUSIONS AND AREAS FOR FURTHER RESEARCH 53 6.1 Final Conclusions 53 6.2 Limitations of this Study 55 6.3 Areas for Further Research 56 7 WORKS CITED 58 LIST OF FIGURES 2.1 Music Industry Market Structure 10 2.2 Music Industry Value Chain 12 3.1 Description of Online Distribution Networks 27 4.1 Survey 38 5.1 Description of Artists Participating in Study 43 5.2 Chart of Survey Response to Question, "Have you used any of the following sites to distribute your music online? (check all that apply)" 49 5.3 Chart of Ratings of Distribution Networks 49 Chapter 1 INTRODUCTION The Internet has revolutionized the way we perceive and consume many different products. Anything that can be digitized can now be transferred from computer to computer in a matter of minutes. Newspapers are now posted online and books are downloaded for an instant read. Instead of sitting down with a pen and paper, people are more likely to type up an e-mail. The same could be said about paying bills; instead of writing out a check, some simply click a few buttons and hit "enter". The digitized age is upon us. Music is one such product that has seen a transformation due to the introduction of this digitized age. With the invention of the MP3 player, it is now more portable than ever. One can literally hold tens of thousands of songs in the palm of their hand. Not only is it more portable, but it is even more transferable than before, as it can now be transferred from one computer to another in a matter of seconds. With this ability to transfer information now available, it seems only natural that consumers and artists alike are turning to the Internet to share and distribute music. In October of 2007, the UK's rock band Radiohead released their album In Rainbows. Instead of the usual model of selling the album in stores, the band simply put the entirety of the album on their website for download. Not only did they do this, but they did not ask for a single penny from anyone who downloaded the album; they merely asked people to pay what they thought the album was worth. Although the band has yet to release any actual figures for sales of the album, several different estimations on how much the band actually made have been put forth. Although different agencies such as Billboard magazine or ComScore.com (an Internet research site) have varied estimates of number of albums sold and average price, it is widely accepted that the album was downloaded more than 500,000 times in the first three weeks of its release.' To add to this figure, the average price of a download was placed at $8. This means that Radiohead could have easily netted $4 million in the month of October alone. Even the smallest of these estimates placed the band's earnings at $1.36 million in the first month, which is enough to draw some attention, considering all this money went directly to the band. In a normal contract, the band would have been making royalties, which considering the band's status, could have been around 20%. Say they would have sold just as many albums at wholesale price (which varies widely, for this example we will use the figure of $10) as were downloaded. The money going to the band would have been two dollars per album sold, which is their royalty rate multiplied by the wholesale price. Under a normal contract, the band would have grossed $ 1 Million (# of albums sold X rate paid to the band per album sold). With the success of this distribution model, one might wonder whether or not this is the future of the industry. Could any band or artist copy Radiohead's methods to achieve a similar amount of success? Could they do it and succeed at all? One thing is 1 Hardesty, Larry. 2008. "The Tipping Jar." Technology Review (Cambridge, Mass.: 1998) 111, no. 1: 76- 77. General Science Abstracts, EQSCOhost (accessed March 1, 2010). 2 Passman, Donald S.. All You Need To Know About the Music Business. New York, New York: Free Press, 2006. p. 103 for certain: the music industry is changing, and the Internet is not going away anytime soon. The changing environment is posing new situations for both artists and the record labels that used to dominate the industry, as well as essentially control bands like Radiohead. Artist's record companies must adapt to the changing environment just as much as the artists themselves. The music industry is vast, especially considering the newly acquired ability to digitize songs and send them to the other side of the earth. According to a report by the International Federation of the Phonographic Industry (IFPI) the music industry worldwide is worth more than 130 Billion US Dollars. Furthermore, the report found that over twenty percent of music sales in the US are through digital vendors, which is about 1.4 Billion songs downloaded over the past year.3 There is a great opportunity for musicians and record labels to secure some of this market-share, especially with the rise of Internet distribution networks as a more feasible means of getting music to the masses. The creation of digitized music is not without its risks. Online piracy has been highly prevalent since the introduction of Napster and similar sites. In 2000, the metal band Metallica fought back, filing a lawsuit against the site for distributing copyrighted material. The court ruled in favor of the band and the site was shut down until it became a subscription site. Even with the demise of Napster, the downloading continues. It has been estimated that over 40 Billion songs are illegally downloaded each year, which would show that over 95% of all music downloads do not lead to any profits to record labels or 3 International Federation for the Phonographic Industry. Digital Music Report London (2009) Available online at: http://www.ifpi.org/content/library/DMR2010.pdfAccessed Oct. 2009 musicians.4 If musicians or record labels are going to keep their market share and be successful selling music, they must find ways to adapt to the changing demands of the consumer. Musicians, as in any other business, must sell a product or service in order to make a profit. Originally, the only hope an artist had a successfully distributing their music was to sign with a record label, who had connections to distribution networks such as radio stations, television networks and retailers. The record companies traditionally also provide artistic input as well as original investment on recording an album.5 The introduction of the Internet has created another option for musicians. Without the help of a record label, musicians can now distribute their music online. This new outlet of distribution and the changing of the industry have led to many studies. Scholars have looked at the impact of the changing technology from various fields of analysis. Economic scholars have focused mainly on the impact of piracy on both artist's and a record company's revenue. Other research has focused on how companies must change the way they do business in a new technological age. Although extensive research has been done in this field, very little has focused on the artists themselves. Record companies are adapting, but so are artists. The recent surge of artists that are using the Internet to gain financial stability or recognition from record companies requires a study from a different perspective.