School of Journalism and Mass Communications Faculty of Economic and Political Sciences

Digital Music Business Models

BY Esra Poryalı

A thesis submitted in partial fulfillment of the requirements for the degree of

MASTER OF DIGITAL MEDIA, COMMUNICATION AND JOURNALISM Specialization: Digital Media, Communication, Culture

Supervisor: Prof. George Tsourvakas Prof. George Kalliris Prof. Andreas Veglis May 2019

Abstract The Internet and modern-day technologies have changed the way people connect with the world around them. The music industry is one of the areas that is undoubtedly affected by the Internet. Music technologies have faced a drastic reorganization process due to the digital revolution that changed the way people consume, source, listen, purchase, discover, experience, produce, read and learn music. These technological advancements have induced great changes for artists, listeners, and producers. This study will attempt to investigate the business models of digital music that can be profitable in the future. As previous studies suggest (Arditi, 2017), with the introduction of the technological revolution the whole revenue mechanism has shifted. This study attempts to give insight into the changing revenue mechanism of how musicians, record labels, make money from digital music by analyzing the digital music business models from the perspective of the consumer, the record labels and the artists. The fundamental questions this study attempts to address are a) how technology has changed by presenting an overview of the music industry, b) what kind of digital music business models exist by analyzing their effects from the perspective of the listeners, artists and record labels, and c) what happens if the business model does not meet the demand of the users by explaining the ‘piracy’ phenomenon. The present research seeks to identify where digital music services in the contemporary era are heading, to investigate the effectiveness and operation of digital music services and to offer implications about what can be expected in the future. To answer the given research questions, the literature on related topics suggests that both a quantitative and a qualitative approach are considered as the necessary methods for the present study. In the first phase, drawing on relevant literature review qualitative analysis is used to present the theoretical background for the thesis. In the second phase quantitative analysis is utilized. The primary tool is the questionnaire, which contains three sections of questions. The first section focuses on the personal background of the participants, determining the type of the person under examination. The second section includes questions regarding music consumption habits. The last section analyzes listeners’ perception towards piracy phenomenon. As an artist, I will also myself make empirical analysis based on my observations and experiences during my work with Sony Music Turkey in 2015 in the conclusion. Keywords: Technology, Digital Music, Business Models, Digital Software

CONTENTS

ABSTRACT iii INTRODUCTION 1 RESEARCH QUESTIONS 3 CHAPTER ONE: THEORETICAL BACKGROUND 4

1.1 The Story of the Music Technology “From Vinyl to Streaming” 4 1.1.1 Historical Background and Development of Music Technology 4 1.1.2 Piracy 7 1.1.3 Intellectual Property Protection 9 1.1.4 Streaming 10 1.2 Business Model Development and Digital Distribution 15 1.2.1 The Business Model Definition 15 1.2.2 Business Model Canvas 17 1.2.3 The Impact of Digitalization on Business Models 21 1.3 Case Study: Spotify 29 1.3.1 Business Model Canvas of Spotify 30 1.3.1.1 Customer Segments 30 1.3.1.2 Key Partners 31 1.3.1.3 Value Proposition 36 1.3.1.4 Customer Relationships 38 1.3.1.5 Cost Structure 39 1.3.1.6 Revenue Streams 42 1.3.1.7 Key Resources 46 1.3.1.8 Key Activities 47 1.3.1.9 Channels 48 1.3.2 CRM Big Data 49 1.3.3 Spotify Recommender System 50

CHAPTER TWO: RESEARCH 55

2.1 Aim and Research Methodology 55 2.2 Results of the Questionnaire 55 2.2.1 Demographics 55 2.2.2 Music Consumption Habits 56 2.2.3 Perception of Piracy 69

CHAPTER THREE: CONCLUSION and IMPLICATIONS 73 BIBLIOGRAPHY 77 APPENDIX 84

Introduction “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” Charles Darwin The modern world is full of technological advancements. These technological developments have altered the entire mechanism people communicate and share knowledge and access to information. Likewise, companies have had to adapt to the new landscape and create new strategic business models to survive. Without a shade of doubt, technological innovation has had one of its most significant impacts on the music industry. Music companies have encountered challenges due to the decreasing demand for physical music media. Companies need to embrace and utilize emerging technologies by developing new strategies to maintain their influential position in the music industry. Based on this reasoning, the emphasis on this study is to investigate the historical background and development of music technology, the current status of the music industry and business models of digital music that can be profitable in the future. In addition to having an educational background in Economics and Management, I am a musician and songwriter. I professionally sing and write songs, which makes music an intrinsic part of my life. That is the main reason why I choose a dissertation topic that satisfies both my academic and artistic interests. Chapter one presents the theoretical background for the ensuing empirical part of the study. The first section of chapter one focuses on the story of the Music Technology from Vinyl to Streaming technology. The first part of my thesis clarifies how technology has changed the music industry. It consists of an overview of the music industry before and after the digital revolution by explaining the most significant technological advancements that have shaped the contemporary music industry and their effects on the players of the music industry. In addition to this, the dynamics that prevent artists from participating in this new environment and the things that will potentially happen if the business model does not meet the demands of the users will be investigated by examining the piracy phenomenon of people seeking alternatives, like illegal music downloading. The second section of chapter one focuses on the Business Model Development and Digital Distribution of the Music Industry. Firstly, the meaning of the business model will be defined. Afterwards, the Business Model Canvas presented by Osterwalder and Pigneur will be explained. The second section finishes by clarifying the impact of digitalization on Business Models. The effects of the income models from the perspective of the listeners, artists and record labels by studying the techno-economic functions of music streaming

1 services, strategies that are developed by streaming services to monetize imaginative content online and the value dynamic among record companies, artists, and streaming services will be analyzed. The third section of chapter one examines the leading digital music service provider, Spotify as a case study. Firstly, the business model canvas of the Spotify in the sense of the Osterwalder and Pigneur’s Business Models Canvas will be analyzed in 9 blocks. In this part, in addition to the business model, the tools and technologies of data warehousing, data mining, and other customer relationship management (CRM) techniques that provide new possibilities for businesses to operate on the notions of relationship marketing and the dynamic behind the Spotify Recommender system and its working mechanism will be clarified. Chapter 2 presents and analyzes the findings of the study. The research is conducted via a questionnaire. It involves views of 314 people related to the music industry. The results show whether the methods of digital music business models could be profitable in the future. Chapter 3 is the conclusion of this thesis. It will present the implications of the research. In this chapter, the consequences for the digital music industry will be identified and a number of recommendations for improvement regarding new media and digital technologies in the music sector will be done, including suggestions of possible solutions to the music industry for the future by describing where the digital sector could head to.

2 Research Questions My guiding research question is how business models of digital music can be profitable in the future. Specific objectives will follow this question: 1) To offer a comprehensive overview of the music industry after the digital revolution; 2) To investigate the digital music business models that currently exist; 3) To provide insight from the consumers regarding their digital music service preferences, their motivations and consumer behaviors in the music industry; 4) To investigate the changing circumstances on the artists’ side by enlightening the dynamics that prevent artists from participating in the new environment.

3 Chapter 1 Theoretical Background Chapter one presents the theoretical background for ensuing empirical part of the study. 1.1 The Story of the Music Technology “From Vinyl to Streaming” The first section of chapter one focuses on the story of the Music Technology from Vinyl to Streaming technology. 1.1.1 Historical Background and Development of Music Technology Before the technology, in the ancient era, the only way to see a live performance or listen to beautiful music was to go to a hall or an auditorium or buying the sheet music. The phonograph is the first method of recording and playing sound. Thomas Edison invented it in 1877. It was not possible to copy the recordings in this process. After that, Emile Berliner invented the gramophone. Neither of these two inventions made use of electricity. The main technical difference with the phonograph and gramophone was the induction of flat discs for recording. Through this innovation, information was compressed through the disc and copies of these discs were available for the first time (Abubakar, 2018). This innovation has eternally altered the concept of music from a vibrant, interactive and inherently social entertainment experience based on performance to a fixed, standard outcome. (Emery, 2013). Recorded music changed the previously public practice into a private manner that could be enjoyed in one’s own bedroom by oneself. Next, the induction of recorded music provided for space and time shifting. As Adorno, W. (1990, p.58) states, “the only thing that can characterize gramophone music is the inevitable brevity dictated by the size of the vinyl plate”. Since the technology allowed only for a three-minute recording, gramophone records were restricted about three minutes long. Hence, it was not possible to record longer musical pieces to be played on a gramophone. The influence of this limitation can still be seen by analyzing the duration of the pop songs, which still remain about three minutes (Arditi, 2017). At the beginning of 1920s, the radio began to appear in people’s lives. The radio was initially developed not for the music industry. It served for military functions during WWI. Then, it began to be utilized for night time entertainment by the families that gathered around their radios. In this era, listening to sports matches, musical performances and broadcast on the radio became a daily pastime for Americans (Tschmuck, 2006).

4 Afterwards, Long Plays started to appear. It was invented in 1948 and first released by Colombia Records. Long Plays are known as the album by many people. They have many various sizes 33 1/3”, 7”, 12” and 10” (Abubakar, 2018). In 1962, Phillip Company introduced one of the most famous and common forms of music media, audio-cassette. (Abubakar, 2018). Sony launched Cassette Tape Player (Walkman) on July 1, 1979. Portable cassette players have been a revolutionist in the music industry. It allowed people to listen to music when they are on the move. During the 1980s portable pocket recorders increased the demand for the cassettes. (Haire, 2009). Sony produced the first CD (Compact Disc) ever made on October 1, 1982. One year later, CDs were distributed in the USA. In a short while, CDs turned into the leader selling music media and overtook Long Plays. Sony released the first portable CD player in the year 1984. The time was ready for commercial CDs to make a venture into the market. The first CD pressed ever was ABBA’s ‘The Visitors' album. Although 52nd Street album was pressed later, it was the first music album CD that was sold in the market. In 1999, recordable CDs became available (“The history and evolution of the compact disc,” 2018). The digital technologies were at first advantageous. (Baym, 2010). The induction of CD served a significant modernization of music distribution. CD has presented many advantages, such as being cheap to produce, having a capacity of holding around 70 minutes of music and providing convenience to skip from song to song. CDs were seen the most fabulous way of distributing, selling and consuming music. These advantages led to a certain transition to the consumption of CD. There was an artificially strong peak in the revenue of the music industry under the favor of the many music listeners who re-purchased records on CD. In that era, listening to radio hits or watching music videos was the only way for consumers to have an idea on how the CD they were considering purchasing would sound like before they purchased it. Radio hits and music videos had a capacity of only advertising a few songs on each album; due to this limitation most of the artistic appeal of an album was a mystery to listeners before buying (Oberholzer‐Gee & Strumpf, 2007). The most notable development was the invention of the MP3 digital audio coding by the Motion Picture Experts Group (MPEG) in 1993. The MP3 format enabled producers to compress data to make them smaller and easily transferred. This technological innovation made the MP3 format the main disruptive factor in the music industry by changing the way the music is distributed and consumed. The necessity of obtaining the hard copies of music was over with the advancements in technology.

5 Digital mp3 removed the necessity to own CDs physically. This new changing mechanism brought about people to borrow their friend's CDs to copy the songs in them to their computer. This improvement was much more different than previous changes in the music technology history associated with the introduction of new formats (Baym, 2010). iPod has its origins in the first MP3 player which is formed by Diamond Multimedia Systems (Abubakar, 2018). In 1999, the new generation started to see music as digital files, namely MP3s, although the music industry still was evaluating music in physical terms. In June 1999, a software called Napster was introduced by Sean Parker, John Fanning, and Shawn Fanning. This little-known service drew great interest overnight. At the beginning, nobody had an idea about this new technology (Agrawal, 2017). The model was centered around illegal, unauthorized peer-to-peer (P2P) music file exchange via the Internet. It was the first high P2P file sharing network that enabled the share of song file between individuals and download of files directly from each other's computers, therefore making the "core scarce good of recorded music infinitely replicable" (Baym, 2010, p.177). Consumers were able to enjoy free music quickly with no barriers through this new technology. Internet organizations provide the necessary software to empower consumers to become unauthorized mass distributors of music for free. The phrase unauthorized refers to illegal, unlicensed music trade that takes place on the P2P networks. These music industries “P2P services often support themselves by serving up unwanted ads-annoying pop-ups, spam, and the like to users” (Taylor, 2003, p.34). Napster became the first renegade institute which gathered brand recognition and loyalty from its more than 60 million users worldwide (Greenfeld, 2000). To sum up, Napster was a signal that the young generation has started to see spending money on physical music as waste and there was a demand from the people to hold the music phenomenon in the digital form that they can even carry in their pocket. The first legal and successful digital music service was iTunes introduced by Apple in 2003. It was taking a stand against all the unauthorized or suspicious digital distributors and file-sharing services that had been existed since the massification of MP3. iTunes has evolved the distribution of music from the traditional model. It was the first format that practiced digital music to a model based on electronic exchanges. (Vaccaro & Cohn, 2004). The price of an MP3 was USD 0.99/song on the platform. It consisted of the most extensive library among all online music stores with more than 13 million songs available to download. This feature gave it a competitive edge over other online services. iTunes soon shifted the "Walmart" of online stores (Hamilton, 2007).

6 The iTunes store serves as a “celestial jukebox” that offers all music available for purchase on the Internet virtually (Burkart, 2014). For six years, music on iTunes was accessible only with DRM (Arditi, 2017). The DRM technology will be discussed in the following chapter. Consequently, it may be argued that sometimes high competition and demands of the consumers triggered the technological changes. The idea came from the necessity to make music more mobile. The gramophone was not suitable for mobility, but the Walkman was a tremendous accomplishment because its mobility was its best feature. Likewise, CDs victory was also due to mobility. The introduction of digital music is "the very pinnacle of the mobility paradigm" (Kusek & Leonhard, 2009). As Burkhart and McCourt (2006) claim, because the music industry’s groundwork and practices were based on the production, distribution, and promotion of hard goods like CD’s, the demand of music on digital downloads has forced the industry to adopt this shift and this situation has led the whole music industry to develop new business models in order to be profitable in the future. Before investigating these new business models, it needs to be understood what happens if the business model does not meet the demand of the users by explaining the ‘piracy’ phenomenon. 1.1.2 Piracy In economic terms, file sharing decreases music sales when the market prices of the songs are greater than its consumer utility (Waldfogel, 2010). In this sense, piracy is a sort of purchase substitution (Liebowitz, 2003), where music consumers substitute illegal downloads for legal purchases. Hui and Png (2003) directed one of the pioneer econometrics investigations into the association between piracy and demand for music. Their search of sales data over the 1994-1998 period pointed out that demand for CDs declined with piracy. The study provides insight into the mentality of the trade-off between positive demand-side externalities and the adverse effects of piracy. However, since it does not address digital piracy, it is only of limited use today. Illegal online P2P file trading, offline piracy (counterfeit CDs), economic conditions, the change in the demand for purchasers from music to DVDs and video games are the main reasons for the $2 billion decline in the global music sales in the period between 1999 and 2002 (Vaccaro & Cohn, 2004). According to Global Music Report 2004, as of June 2003, the calculated number of infringing music files at any given time on peer- to-peer services was at 1 billion, compared to 500 million in June 2002.

7 Nielsen SoundScan stated the drop of 19% in the CD sales in 2007. (The Economist) moreover, The Recording Industry Association of America’s reported a decline of 12.8 % in the number of units sold through retail outlets (RIAA). This decrease in recorded music sales caused a crisis in the industry since the recording companies and the artists kept demanding payment in this new landscape. According to Tschmuck, (2006) record labels always had challenges in adapting to new technologies in different eras in the past such as the launching of radio and appearance of rock music. With the crisis, the recording companies began to bypass their risks and they were forced to reduce their catalog and cut down their investment. This way, a significant number of artists ended receiving investments and therefore had to reconsider their strategies. Because of artists' high dependence to the record companies, they have always been the group who suffer record labels’ adaptation process at the most (Campos, 2012). Since record labels faced a significant difficulty with solving the piracy problem, consequently, whether physical or virtual, the piracy phenomenon became big trouble for record labels. (Campos, 2012). According to record labels, Napster was causing this loss. Ultimately, Napster was gone out of business by court order in 2001. However, this court order didn't prevent the entrance of the other unauthorized services to the market (Richtel, 2001; Strauss, 2001). Hence, it developed a fundamental idea of free online file distribution (El Gamal, 2012). The genie was out the bottle. The discovery of MP3 technology was the indicator that there was no returning. An anecdote published in The Economist shows this transformation. In 2006 EMI, the world’s fourth-biggest recorded-music company wanted to gain some insights about teenager’s music listening habits. For this, they invited some teenagers into its offices in London to talk to its head managers. At the end of the assembly, the EMI bosses thanked teens for their remarks and told them to help themselves to a big collection of CDs sitting on a table. However, despite the fact that the CDs were free, none of the teens took any of them. “That was the moment we realized the game was completely up,” states EMI bosses. In the meantime, some artists, such as Radiohead started to search for alternative business models and began to act to resolve problems directly related to artists. In 2007, Radiohead distributed their album "Rainbow" via their own websites, www.radiohead.com. They did not set a retail price for their album, merely they let consumers pay as much as they wanted and what they thought it was worth for the album. Consumers had even an option of not paying. The album ended up averaging USD 2.60 per download, which revealed the high industry prices of music.

8 The album also reached to a sales number of six times more than the former Radiohead album-which was sold on CD- in its first week (Bourreau & Hong, 2014). Customers determined on how much they appreciated music and indicated that value in their grants. By uploading free downloadable songs online almost every day Radiohead built an incredible bandwidth of audience and managed to release a bestselling album in turn (Thibeault, 2012). As can be seen from the data, consumers replied positively to songs being given away for free as promotion as it fosters “sympathy” for the artist which in turn was assumed to be one of the driving factors of consumer support. To sum up, revenues from the whole music industry have decreased substantially since the beginning of the twenty-first century. Darwin’s survival of the fittest indicates the power of new technologies to disturb existing business models to adjust or become obsolete. Technology and consumer dissatisfaction with the traditional business model have contributed to this imperative. Due to this fact, the new landscape forced the music industry players to make a choice; embracing and utilizing the right technology or perishing. 1.1.3 IPR protection As stated in the research, empirical evidence indicates that illegal file sharing reduces music industry revenue, which supports calls for more significant Intellectual Property Protection (IPR protection) (Hong, 2004; Rob and Waldfogel, 2004; Liebowitz, 2008; Michel, 2006; Zentner, 2006; IFPI, 2011). IPR protection takes two forms, either technological constraint on the user, e.g. Digital Rights Management [DRM] or the introduction of legislative instruments (Arditi, 2017). The first regulation method is technology (Arditi, 2017). The industry reacted to the increasing digital piracy by regulating the audiences' online activities. The widespread attempt at controlling digital content was the digital code called Digital Rights Management that limits the way consumers use digital music. This technology was designed to restrain media usage, and it alters the form we associate with cultural content (Burkhart & McCourt, 2006; Samtani, 2009). Maintaining some control over the diffusion of purchasing copies of digital music tracks among users was aimed by the major record companies and other actors in the value chain such as artists and producers (Burkhart & McCourt, 2006). Music restriction of the number of devices onto which a user could save their legally purchased song by the record label or digital distributor is the general example of DRM. Although this software provides control to intellectual property rights holders and content providers over the use of legally purchased content, it does not affect pirated content.

9 Since we may conclude the negative impact of CRM on consumers' pleasure of their legally purchased content, it is not a controversial technology today. DRM strengths the notion that music is licensed, not owned (Samtani, 2009). DRM technologies are not the only effort at controlling the digital copies of the content. The technique called watermarking is another method which is the process by which digital information such as the purchaser, location, date, etc is inserted into digital media in a way that is not visible to humans and this digital code is not affected by the format changes and nonlinear distribution paths. It is not possible for this digital information to be getting lost and it has slight or no influence on the files' integrity or fidelity. Since watermarking does not inevitably require priori constraints on the use or interoperability of content, we may conclude that watermarking has a more positive impact on consumer utility of digital content compared to DRM. In this aspect, it is possible to say that this in itself is a significant business advantage (Samtani, 2009). The second method is regulation through the policy by changing the law. Copyright law implemented by the government has been the first policy that is used to restrict the means that people can use music (Arditi, 2017). Moreover, the importance of education as a regulation method should be noted. Education by teaching legal and accurate ways of utilizing music is another important regulation method. For instance, at colleges and universities across the United States, students are instructed that downloading free music is a kind of theft in which people steal from artists (Arditi, 2017). 1.1.4 Streaming This section attempts to investigate the streaming technology. Many people don’t remember the last time they got to the record store and pick out a physical music CD to buy. The method listeners reach music has changed conspicuously. Digital products lessen the shopping time. In the modern world, people use their phone to open an app or search the name of the song they want to play on Google for free. In definition, streaming media is “compressed form of the video or audio content over the Internet and played directly, rather than being saved to the hard drive” ("What is streaming media? - Definition from WhatIs.com", 2018). The benefaction of the technology presented us with various digital music streaming services and music apps which have transformed the music industry. Most common and important companies are YouTube, iTunes, Vimeo, Deezer, Soundcloud, Pandora, Spotify, I Heart Radio, iTunes Radio, Milk Music, Online Radios, Apple Music.

10 These online streaming services boomed since the widespread use of smartphones and tablets (“How Streaming is Changing the Music Industry,” 2016). The foundation of the origin of the music streaming services began at the end of 2001 with the formation of the service called MusicNet by the two major labels Universal and Sony clumping together and the other three labels Warner, BMG and EMI pooling their catalogs into an opposing service called Pressplay. These services were an industry response to Napster (Hill, 2003). The major record labels eventually abandoned these music service providers for various reasons. “Universal and Sony had each poured 30 million USD into Pressplay and had attracted fewer than 50,000 subscribers for their trouble” (Burkhart & McCourt, 2006, pg.92) which shows that the record companies did not have an adequate amount of expertise to generate a thriving technological platform for music distribution. Streaming services are bringing new developments to the music industry, and they symbolize an essential step towards dematerialization of music consumption. Hype Machine and SoundCloud are the first examples of streaming services; however, Spotify's' launch in 2008 considerably increased the popularity and demand for music streaming (Eiriz & Leite, 2017). Streaming services have many advantages for the listeners. Firstly, through streaming services, listeners have more control over the songs they listen to. This advantage arises from streaming technologies ability to ensure listening music on any electronic device with an internet connection but not certainly online. Secondly, people can access abundant music. This situation is the result of access to any music more quickly and convenient than with previous download-based models. In other words, the transfer and reproduction of the music got easy with a valid electronic format without losing quality. (Eiriz & Leite, 2017). Consumers' demand was not accommodated by the first music industry initially though. As mentioned in the previous chapter, Napster allowed users to pursue their interests and obtain free music. The distinction between Napster and the new services that developed in the music industry is that “Napster connected users to each other while the new services connect users to a central inventory of licensed music” (Hill, 2003, pg.53). With more than 900 million users of ad-supported streaming services globally, streaming music became the option to physical music in 2013 (IFPI, 2014). Streaming music is solely one manifestation of cloud computing, which Patrick Burkart describes as “the delivery of meted-out services using virtual servers available over the Internet".

11 To store a large amount of music on one's computer/device is not needed with the induction of the cloud providing the virtual distribution of music (Arditi, 2017). Music distribution occurs over networks instead of at record stores: music listeners can reach almost all music instantaneously via iTunes, Spotify, YouTube. Figure 1 shows the irrepressible rise of Music Streaming. This chart displays the number of songs that have been streamed on-demand in the United States since 2013. According to Nielsen's 2018 Year-End Music Report, Americans streamed more than 900 billion songs during the past 12 months. The growing popularity of the subscription-based services among the American music listeners such as Spotify and Apple Music is the reason for the 49 percent growth on the number of on-demand audio streams which is at 611 billion. As the following chart depicts, the number of songs streamed over the Internet rose more than eightfold between 2013 and 2018. Streaming is the number one way of music consumption, both ad-supported and subscription- based, now constitutes 65 percent of U.S. music returns and has long replaced CDs and downloads. The chart below also demonstrates that people who utilize paid audio streaming services are more than the people who use free video streaming services such as YouTube since 2015. Figure 1: Number of on-demand music streams (audio and video) in the United States

Source: Nielsen Looking from the record labels perspective, presently, the streaming services and record companies have mutual advantages, meaning that record companies are needed for the streaming services for licensing the content process; in that vein, streaming services are required for the record companies as these services have been able to improve the revenue of the music industry through their added values. (Krueger, Swatman, & Van Der Beek, 2012). Krueger, Swatman and Van Der Beek (2012, pg.5) verify this statement by indicating that it is necessary for record companies to “form

12 joint ventures with companies such as telcos, ISPs, or providers of other types of technology”. Streaming services are included in these companies. The standard system of evaluating performance and payments of the musicians have been reconfigured with the induction of the streaming model. In the early days, the sales of an album were the indicator of the payments to musicians; nowadays the number of times each song is downloaded or streamed are used to measure the performance of the musician. These changing mechanism in the methods and objects used for the performance evaluation of musicians depicts the business models are changing. (Eiriz & Leite, 2017). Shifts in consumer behavior, growth of consumer empowerment, reform in technology and the progress of the Internet (precisely, Web 2.0) and alterations in business and industry practices open a road for the emergence of streaming services which are seen the future of the music industry. These new mechanisms cause a structural change in the industry. It must be known that the market structure and value chain are being influenced by variables like relationships between the players of the industry, cost of the production, and shifts in the distribution networks through digital channels. As a consequence, product (a song, an album), price, promotion, and especially the place of distribution of music which constitute the essential marketing variables cause new challenges for all the players taking part in the music industry (Eiriz & Leite, 2017). Thanks to the streaming technology, the territories where previously there were obstacles to generating revenues through licensed music have been opened and expanded. Countries, where there used to be significant differences between population size and consumer waste on music are ultimately beginning to recognize their potential. Streaming, however, is not merely the answer itself. Instead, it is a technology utilized by the record companies and their partners aiming to benefit artists and consumers through bespoke offerings and approaches in different regions. This technology was not aimed to build markets; however, the advantage of streaming to drive the process, working with local services and global platforms alike to build and strengthen markets at an unprecedented rate was used (Majewska-Wierzbicka & Czeczot, 2018).

13 Figure: 2 Digital and physical recorded music sales

Source: PWC Global Entertainment and Media Outlook Figure 2 displays the digital (left bars) and physical (right bars) recorded music sales per country in 2017. Data are revenues in € per capita. It reveals that in most countries, digitally recorded music has outgrown physical carriers. France, Germany, and Japan are the exception countries. Sweden has gone nearly completely digital; on the other hand, Japan is resisting on to physical carriers. Over the past three years, digital music has grown considerably, while earnings from physical carriers have reduced across the board. Figure 2 concentrates on the digital revenues from recorded music. Revenues per capita from downloading (left bars) and streaming services (right bars) in 2017 are compared in the figure. According to data, it can be concluded that streaming generates higher revenues than downloads in all countries. It is shown that on average, earnings from streaming services are more than three times greater than those from downloads in these 13 countries. Looking at the countries, not surprisingly, it can be seen that Sweden, the home of Spotify, is the country where the streaming most popular is. Netherlands and the United Kingdom follow it. In addition, it can easily be seen that Streaming Service Revenues are not high in Poland, Spain and outside Europe. The relative demand for downloads seems related to this situation in Canada and Japan; next in 10 countries such as Poland, Brazil, Indonesia and Thailand, relatively low purchasing power explains this situation. To sum up, music streaming has developed steeply over the past three years in almost every country, while this market seems to

14 have matured in Sweden and music downloading has shortened considerably in nearly all states (Majewska-Wierzbicka & Czeczot, 2018). According to Kusek & Leonhard (2009), in the future music is expected to be like water. This is an interesting metaphor since they claim that music will be ubiquitous and free-flowing, like water from a tap. Longhurst (2007) stretches this assertion and states that if music becomes similar to water from a tap, music will also be able to be turned on and off like a tap. Streaming services serve as the hand that turns the "music" tap on and off. 1.2 Business Model Development and Digital Distribution The second section of chapter one focuses on the Business Model Development and Digital Distribution of the Music Industry. 1.2.1 The Business Model Definition In general, it can be argued that every company has a business model. Although the term has existed in the literature for a long time, it has begun to attract greater notice just over a decade ago due to several reasons such as the evolution of the knowledge economy, burst of the Internet bubble and online commerce, outsource activities that were earlier carried out within the company, and the reform of many firms and industries that require altered methods to management and strategy (Teece, 2010). In the case of music, the delimitation of the business model concept is much more difficult since their primary object of the action is art rather than business. According to Obermann (2018), business developer of the Warner Music, all the players in the music industry must interiorize that even though music is art; at the same time, it harbors a significant business aspect which requires discovering, nurturing, creating, refining, marketing, and promotion stages. Hence, since the artists have to handle and manage their careers concerning music production, distribution, communication, advertising, financial assessments, it is essential to clarify the concept of the business model for the music industry (Eiriz & Leite, 2017). Although the concept of business models has won growing attention in recent years, it is still not a mature matter in literature, and the business model literature involves various ways and approaches of using the term. There is not even consensus on the components of the business model in the broader sense; whether it is a description, a conceptual model, or some other object (Teece, 2010; Zott, Amit, & Massa, 2011). Hence many different definitions do exist.

15 Traditionally a business model can be defined as: The method of an entity to build and use its resources aiming to present greater value to its customers than its competitors and earn money Afuah & Tucci, 2003). Considering the business model as a description that explains the firm's ways of making money and sustaining its profit is the simplest definition (Stewart & Zhao, 2000). Another simple definition is presented by Tankhiwale (2009), who defines a business model as a company's way of earning money. Mitchell and Coles (2004) define a business model which answers the questions "who," "what," "when," "where," "why," and "how much" in the context of providing products or services. According to Teece (2010), the term Business Model expresses how a firm creates an absolute value and delivers it to customers. This definition indicates the description of costs and gains associated in that process of creation and delivery, and how these gains are converted to profit. Teece (2010) introduces five points: (i) technologies and product features or services offered by the company; (ii) effect of the advantage to the customer when utilizing the product or service; (iii) targeting the accurate customer segments; (iv) he revenue streams; and (v) the mechanisms to obtain value. Amit and Zott (2012) describe a business model as a system of interdependent activities, which defines the manner of how a company does business with its customers, co-workers, and suppliers aiming to produce and gain value. According to another notion, although a business model is related to the strategy, these two terms should not be confused with each other. According to Casadesus (2010), a business model “refers to the logic of the firm, the way it operates and how it creates value for its stakeholders”, while strategy “refers to the choice of business model through which the firm will compete in the marketplace” (Casadesus-Masanell & Ricart, 2010, p.196). According to Chesbrough (2002), there are three different areas between the business model and strategy. Firstly, the business model begins at value creation for the customer, whereas strategy puts the major emphasis on value capture and sustainability. Secondly, financing is more prominent in strategy than in the business model. Third, the business model implies that knowledge is cognitively not unlimited and biased by a firm's prior success, whereas strategy implies precise analytics based in substantial and accessible information with short notice of cognitive constraints. Magretta (2002), addresses the following questions to define a good business model: (i) Who is the consumer; (ii) What does the consumer value? (iii) How does the business

16 generate income? Moreover (iv) What is the economic reasoning that reveals how value can be uttered to clients at a suitable cost? According to Shafer (2005), business model symbolizes an entity's underlying core reasoning and strategic decisions aiming to build and capture value within the value chain. The comprehensive yet straightforward skeleton to structure business models is needed to meet the purpose of this study. Therefore, the business model canvas presented by Osterwalder and Pigneur (2010) will be applied in this research. Osterwalder and Pigneurs’ Business Model Canvas will be clarified in the following chapter. 1.2.2 The Business Model Canvas The Business Model Canvas presented by Osterwalder and Pigneur, consists of 9 blocks. i) Customer Segments: Group of people or businesses a company aims to reach and serve to define customer segments block. Since companies cannot survive without profitable customers, customers constitute the core of any business model. Customers with common needs, behaviors, or other characteristics have to be categorized into different segments by the organization. An organization may serve one or several large or small customer segments. An organization must determine its audience and its most valuable customers to target the correct type of the customer segment. A company may target the following different types of Customer Segments: mass markets, niche markets, segmented markets, diversified markets or even have a multi-sided platform that produces distinct value propositions to different customer segments (Osterwalder & Pigneur, 2010). ii) Value Proposition: The bundle of product and services that generate quantitative (e.g., price, the speed of service) or qualitative (e.g., design, customer experience) value for a particular Customer Segment describes this block. The demand for the specific customer segment is covered with the chosen bunch of products and/or services. The company must determine the motivation factors of the customers in the purchasing process. These motivations may be related to Newness, Performance, Customization, "Getting the job done," design, Brand/Status, Price, Cost Reduction, Risk Reduction, Accessibility, Convenience/Usability. Following questions must be asked to understand the company's Value Proposition: "What value do we give to the client? Which one of our customer's difficulties are we helping to answer? What bundles of products and services are we proposing to each customer segment? Moreover, which customer's demand are we meeting?" (Osterwalder & Pigneur, 2010).

17 iii) Channels: The way a firm communicates with and reaches its Customer Segments to deliver Value Proposition defines the Channel Building Block. The communication, distribution and sales channels consist of the company's interface with its customer segments. Value propositions are offered to customers through these channels. A company must describe how blended the channels are, which channels serve properly, and which are most co-efficient, how the channels are being blended with customers' cycles, through which channels do the Customer Segments need to be reached and how does it reach them now (Osterwalder & Pigneur, 2010). Channels which are the customer's perception points play a crucial role in the customer experience. Channels increase awareness between customers about a firm's products and services, assist customers to evaluate an organiation's Value Proposition, permit customers to purchase particular products and services, deliver a Value Proposition to consumers and give post-purchase customer support (Osterwalder & Pigneur, 2010). Finding the right mix of Channels among direct, indirect, owned and partner to answer the way customers want to be reached is vital in bringing a Value Propositions to market (Osterwalder & Pigneur, 2010). iv) Customer Relationships: The relationship types of a company that a company builds with specific Customer Segments define Customer Relationships block. Personal assistance, Dedicated Personal Assistance, Self-Service, Automated Services, Communities, and Co-creation constitute the types of customer relationships. Customer relationships are driven by the motivation of customer acquisition, customer retention and boosting sales. The company must clarify the following questions: “What type of relationship does each of our Customer Segments await us to build and manage with them? Which ones have we built? How costly are they? How are they blended with the rest of our business model?” (Osterwalder & Pigneur, 2010). v) Revenue Streams: The money a firm earns from each Customer Segments defines the Revenue Streams block. (costs must be deducted from revenues to create earnings). Since the heart of the business models is customer, we may define revenue Streams as its arteries. Value Propositions successfully conveyed to customers yield Revenue Streams. The way of generating money and different streams of the firms associated with various value propositions and diverse customer segments are explained in this block. A company must ask itself the following questions to generate one or more Revenue Streams from each Customer Segment: “For what value are our customers reliable to

18 pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues?” (Osterwalder & Pigneur, 2010). A business model can comprise two distinct types of Revenue Streams. One-time customer payments called Transaction revenues and continuing fees called Recurring revenues form the two distinct types of Revenue Streams that a business may have. Selling an asset, taking a usage fee, subscription or brokerage fees, lending/renting/leasing, licensing, and advertising are the ways to generate Revenue Streams. Each Revenue Stream might have different pricing mechanisms. Choosing the correct pricing mechanism affects the revenues generated. Fixed and dynamic pricing are the two main types of the pricing mechanism. Fixed Menu Pricing are predefined prices based on static variables (e.g.: List Price), and Dynamic Pricing consists of changing prices based on market conditions (e.g., Negotiation) (Osterwalder & Pigneur, 2010). vi) Key Resources: Physical, intellectual, human and financial resources required to make a business model product by offering Value Propositions, reaching markets via Distribution Channels, maintaining Customer Relationship with Customer Segments and earning revenue via operating Revenue Streams define the Key Resources Block. Every business model needs key resources (Osterwalder & Pigneur, 2010). A business may need different Key Resources depending on the type of its model. The business can own the Key Resources or lease by the company or acquire from the key partners. Physical Resources that contain physical assets and Intellectual Resources that include intellectual resources are the two types of key resources and vital elements of a successful business model. Human resources are demanded by every enterprise; however, in some specific business models, like in knowledge-intensive and creative industries, people are notably more prominent. With its army of trained scientists and prominent and proficient sales force, a pharmaceutical company Novartis is an example of the firms who rely heavily on human resources. In contrast to that, in some business financial resources such as lines of credit, cash, or a stock option pool are vital (Osterwalder & Pigneur, 2010). vii)Key Activities: The Key Activities Building Block describes those important activities, processes, and tasks a company must do required to execute the value proposition properly to make its business model work. Same as the Key Resources, Key Activities may also define the activities required to create and offer Value Proposition, reach markets via Distribution Channels, maintaining Customer

19 Relationships, and earn revenues (Osterwalder & Pigneur, 2010). According to Osterwalder and Pigneur (2009), these activities may be classified as Production, Problem Solving, and Platform/Network. Moreover, like Key Resources, Key Activities differ depending on the business model type. A company must ask itself the following questions: “What Key Activities do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue streams? Key Activities can be classified as follows: “Production, Problem-solving, Platform/network” (Osterwalder & Pigneur, 2010). viii) Key Partnerships: The Key Partnerships Building Block describes the network of suppliers and key partners of the company that helps create value for the customer and makes the business model work. Companies form partnerships for many reasons, and they are becoming a touchstone of many business models. Performing key activities and providing key resources that the company cannot do alone are the main issues that these partner and suppliers are dealing with. Firms create partnerships to use the advantage of economies of scale, reduce the risk and uncertainty and gain appropriate resources and activities. The company outsources some activities, and some resources are obtained outside the enterprise. It is a must for the organization to determine its key partners, key suppliers, which Key Resources they do acquire from their partners and which key activities do their partners perform (Osterwalder & Pigneur, 2010). We can divide between four different types of partnerships. These are: Strategic alliances between non-competitors, Coopetition which is a strategic partnership between competitors, Joint ventures aiming to develop new businesses and Buyer- supplier relationships to ensure a reliable supply (Osterwalder & Pigneur, 2010). ix) Cost Structure: The Cost Structure describes the key costs of the model and approach that strengthens the company's choice concerning costs incurred to operate a business model. Key Resources, Key Activities, and Key Partnerships have to be defined to easily calculate the costs such as Creating and delivering value, maintaining Customer Relationships, and Generating Revenue. The company must ask itself the following questions: “What are the most significant costs inherent in our business model? Which Key Resources and Which Key Activities are most expensive?” (Osterwalder & Pigneur, 2010). Minimizing the cost is a must for every business model. However, in some business models, low-cost Structures are more significant. Therefore; the distinction between the two broad classes of business model Cost Structures is needed. Two broad categories of business model cost structure: I) Cost-driven: In this business models, like in No frills

20 airlines, the concentration is on minimizing the costs wherever possible aiming to create and maintain the leanest possible cost structure, use low price Value Propositions, maximum automation, and extensive outsourcing. II) Value-driven: In this business model, like in luxury hotels with their full facilities and exclusive services, the concentration is on creating value instead of minimizing costs. Premium Value Propositions and a high level of personalized service ordinarily discriminate value-driven business models. Cost Structures may have the following properties: Fixed costs, variable costs, Economies of scale, economies of scope (Osterwalder & Pigneur, 2010). 1.2.3 The Impact of Digitalization on Business. In order to analyze the influence of the digital distribution of music on business models, we need a better comprehension of the relationship between technological innovation and business models. A better understanding of this relationship ensures to analyze the impact of digital distribution. The most precise way to build this relationship is to assert that technological advancement can facilitate new business models (Eiriz & Leite, 2017). A physical world where resources can be seen; and a virtual world made up of information are two distinct worlds distinguished by the literature aiming to study the impact of digitalization in business. This distinction was the first attempt to analyze the digitalization impact on business. The distinction between offline channels (stores) and online channels (web stores) can be depicted via defining electronic businesses or electronic commerce. Businesses that operate on the Internet through electronic activities are usually called electronic businesses or electronic commerce (Rayport & Sviokla, 1995). Electronic businesses open up new markets and possibilities through the advantages of the electronic business. In this new landscape, the way firms operate, and commercial transactions happen is changed significantly through the economic costs of the information process. These unique circumstances may appear from different mixtures of information, physical goods, and services, as well as from the reconfiguration and synthesis of resources, skills, roles, and relations between the players in the industry (Amit & Zott, 2001). Since 1999, the Internet has drastically changed the production, distribution, and consumption of music. The digital path to music production, distribution, and consumption has significantly altered the industry.

21 Before the digital era, the traditional business model of the music industry has four major types of firms: Firstly, artists or musicians, who are the songwriters and performers. Nextly, there are record labels, which hire artists, run their promotion and do the recording, production, and sales of music. Then, Service providers and other suppliers, including suppliers of musical instruments and facilities, and factories that produce physical formats (predominantly CD, but also vinyl and cassette) last, Distributors, including both physical and online retailers, who sell music to final buyers (Eiriz & Leite, 2017). Earlier, a firm’s competitive advantage was profoundly dependent on high-street shops. Since shops have limited stock space, firms were competing on managerial skills in balancing consumer demand and balancing stock (Coltman, Devinney, Latukefu, & Midgley, 2001). To sum up, the traditional business model includes mass production and distribution of physical goods. In this model record labels produces the product (e.g., mainly CDs) and distributes it via bricks-and- mortar stores, same as artists selling their CDs at their concerts. When looked from the artists perspective, traditionally, artists were making a royalty-based contact with a record label. Their payment was based mainly on the sales of their music albums (Mortimer, Nosko, & Sorensen, 2012). Previously, record labels were responsible for producing and selling albums to distributors who then make them available in stores (Wagner, Benlian, & Hess, 2014). In brief, the foundation basis of the industry was formulated for a market established on physical copies of albums (Eiriz & Leite, 2017). As mentioned in the previous chapter, music became digitalized in the early 1980s, with the invention of the CD. Different than the technologies of the vinyl and magnetic types, music on a CD stored through a sequence of zeros and ones. This technology enabled to play music on any personal computer (Alexander, 2002). However, the immediate cause of music to lose its dependence on a physical medium was the Mp3 format (Bakker, 2005). Mp3 technology expedited the evolution of online offerings. Utilizing this feature, it expanded the availability and choice for consumers. In this sense, it can be discussed that Mp3 technology is the turning point in the music market (Graham, Burnes, Lewis, & Langer, 2004). The total sales decline in the industry that is the result of the Mp3 technology implies that a new business model is needed in order to stimulate consumer demand in the industry. In response to this, Universal Music Group reduced the prices of the CD for purchasers by nearly a quarter in September 2003. In the meantime, a number of discount stores such as Best Buy or Wal-Mart also reduced their prices even more. This move was made in order to support the traditional value against the first decline in the sales of the

22 physical CD (Dubosson-Torbay, Pigneur, & Usunier, 2012). Since there a growing digital marketplace has existed already, the reduction of the price of the physical CD was not a solution to survive in this new landscape. The common use of the Internet and digitalization induced some necessary changes in the structure of the recording industry (Galuszka, 2015). Hence, this situation would result in crucial changes in media business models that media managers “were forced to look to the Internet to distribute content and generate new revenue due to the impressive numbers of consumers that were migrating from traditional media outlets to new media outlets online” (Hendricks, 2011, pg.14). The industry turned out that, traditional ways of revenue generation lost its success and effectiveness, resulting in media companies to shift into the digital market realm. As opposed to physical products, digital products are suitable as items for sale because they typically hold substantial fixed manufacturing costs, however after fixed costs are covered the cost for producing additional units are least or nonexistent. As production, recording and packaging charges are the chief expenses of record companies and selling in the digital market eliminates retail costs and allows single-track songs. Hence, it can be stated the music itself is also a suitable digital product to sell in the digital marketplace (Gallaway & Kinnear, 2001). When we look at the supply side of digital music, we may conclude that much of the supply side challenge is removed through digital music. It offered operating efficiencies across the supply chain (Coltman et al., 2001), most importantly developed a business model which unite customer and supplier in a relationship (Sommer, 2003). To sum up, producing music, which is a type of information, is an expensive process, but its reproduction is affordable. The digital and the physical marketplace are entirely different from each other. The distinction of the physical world and virtual world go far beyond the creation of value, affecting content, context, and the business infrastructure (Jeffrey & Sviokla, 1995). Since demand, competition, and technology are continually changing in the digital realm, the environment of the online market has high-velocity (W. Wirtz, Mathieu, & Schilke, 2007). The mechanisms for obtaining value through the delivery of information are a key element in the design of a business model to compete in digital markets (Teece, 2010). Therefore, to understand how business models create value for customers better, firms have started to put more emphasis on analyzing customers' behavior and adapting new approaches to please consumers (Parry, Bustinza, & Vendrell-Herrero, 2012).

23 Papathanassopoulos (2011, p.152) writes about the four converging trends in digital users’ discourse that sharpen the skill of marketers to create commodity-signs: The four trends that then potentially add symbolic “magic” to the commodity are the Internet as a multimediated channel for commodity-sign construction; the emphasis on interactivity, data mining, and target marketing; the ever-evolving power of digital production techniques; and the blurring of the commercial into other mediated texts. The Internet plays an essential role in creating possibilities for value construction. Since it provides for notable interactivity between a business and other businesses, businesses and consumers and consumers and other consumers, digital technology ensures tracking individual tastes and collecting relevant data about the individual consumer. With this feature, it enables more precise and relevant target marketing. Selling this consumer data is another way of generating revenue for the companies. In the meantime, consumers start to take part in the creative process behind the music industry since the process of digital production is also becoming easier for consumers. Next, the Internet also brings about the convergence of media sectors. For example; with the Internet, it is possible for the music industry to license its content to be in other media, such as advertisement and television (Papathanassopoulos, 2011). The different notion of the exchange of music content between different players of the value chain, mainly records companies and consumers, is the subject of the ongoing discussion in the new landscape with the evolution of music into the digital era. People who listen to music are often referred to music consumers by critics, politicians, and academics. Since they are speaking of the recording industry, in one sense this sounds reasonable. When talking about the industry, it is assumed that the music is commodified. There is nothing different from considering music as a commodity. However, it is a huge loss to claim that all music, when listened to, situates the listener in a consumer/commodity relationship. The discussion is based on the distinction between the use value and exchange value of the commodity. According to Marx (1867), use value is inextricably tied to "the physical properties of the commodity", the usefulness of the thing. Exchange value is the value that one commodity has in relation to another. If we adopt this theory on the music phenomenon, we may conclude that listening to music has a use value for a listener but does not necessarily have an exchange value. For instance, suppose Ed Sheeran's latest album is played to a room of friends. All the audience would hear it and remain a commodity. Notwithstanding, it does not mean that the audience would consume the music; they would be the music listener. Therefore, listening is a sharply distinct relationship to music from consuming

24 it. Hence, music collectors are the people who act as consumers of music. The commodified music record has been accessible in several physical media that have enabled people to collect it. These physical media appear in the form of vinyl, tapes, or compact discs and are the main cultural artifacts that we fetishize as the musical piece. Because music exists as a recording and is not a tangible asset, it exists originally as an idea. In this sense, ideas are not easy to consume because the notion of consumption is related to either exchange or the thought that the "good is used up". Since one person's listening to a song does not prevent anyone else from listening to the same song, it can be argued that consumption of music does not use up the commodity. Therefore; the consumption of music is referred to its exchange value (Arditi, 2017). However, there is not a fundamental connection between listening to music and exchanging it. By being more specific about the means people associate with the cultural concept of music, one may concentrate on changes in the way people associate with it over time. To that end, people are able to listen to, perform, consume, use, collect, stream, subscribe to, and appreciate music. As Burkhart and McCourt (2006, p.129) state, “in the network-based economy, value is not an inherent character of the product; it is the manner in which it reaches the consumer, and that, unlike a tangible product, can be easily sold to the same consumer repeatedly”. The network-based economy influenced the evolution of the music industry by transiting the industry from a product-based to service-based. Therefore, “the commodification of the popular music product depends in large part on building… relationships between the music fan and the music service” (Burkhart and McCourt, 2006, p.129). Regarding content, it can be stated that the digitalization of music and dematerialization inclines information to become the transacted element, rather than a product. As a product, music is exchanged merely within the value chain, starting with record companies and finally reaching the consumers at the end. As a service, however, music becomes a product that switches hands which is much more than a product. In this sense, it becomes an experience. In this experience, the powerful one-to-one relationship is essential because it adds value to the music. McCourt (2006) emphasizes “the transition from a world of cultural goods to a world of cultural services”. In this new digital realm, since hard goods are disappearing, people have become music users rather than music listeners, and the ability to listen to music becomes a service. As Negus identifies (2018) “a recording is no longer physical, numerically finite, collectible object`. He emphasizes the disappearance of hard goods, in the form of

25 physical recordings. Arditi (2007) and Styven (2007) explains the transition of the music products from product-based to service-based like as they move from the marketplace to the market space. Styven supports an innovative marketing method by referring to music listeners as "an endless source of revenue for the consumption of intangible goods". As the recording industry implements these advances, music is converting a service manner in which licensing is needed, instead of retail (McCourt, 2005). A services-oriented pattern might imply a shift to a subscription model for online content, in which users pay a recurring fee, and they do not have ownership on the content but have to access it on demand together with value-added service industry (Priest, 2008). Over the past century, many people had music collections by collecting physical media. These musical artifacts enable collectors to possess library-like collections that in turn allow them to fetishize the commodity. As McCourt explains (2005), having a record collection has visual and tactile aspects at the same time. This specialty makes the record collection activity “emotionally gratifying”. In the early days, people used to go to the music store and buy musical artifacts like CD or cassette or copy a friends' relative collection to themselves. The substance is that people possessed musical artifact. Therefore, this possession makes them able to listen to music for as long as the recording will continue to play and give music to whomever they want. This means that there were only a few restrictions on what people can do with the music they hold. However, digital technology changes the idea of being a music collector, as music distribution system changes from one that is limited in the possessions of the individual to one that provides access to almost all music as long as the individual pay its subscription. This new technology converts people to music users. In brief, as Negus recognizes (2018), a recording is no longer a prized physical, numerically finite, the collectible object. This situation is one of the negative aspects of subscription streaming services that if an individual buys a CD, he/she possesses it forever; however, if he/she pays for a subscription, he/she no longer has access to music if he/she stops the subscription (Arditi, 2017). The papers explaining the dire straits of the recording industry can be divided into two categories. The first group declares the death of the music industry by underlying the diminishing power of the record labels. The second group explores the possible changes in the formation of the recording industry without underestimating the power of the major players.

26 The first one, described by Fox (2004) and McLeod (2005), sees new communication technologies like the power to a music market designated by an equal distribution of power. McLeod wrote that “technological changes do threaten to help break the music monopoly that has existed for a century” (2005, pp. 530–531). By the “music monopoly,” McLeod indicated the control and power of the major record companies, which apparently would be defeated by the independent labels and artists using Internet distribution to develop more direct relationships with listeners. He calls this process as the disintermediation, and he thinks this cutting out the intermediary situation would result in a rise in artists' earnings. In a recent Google Panel conference that took place in Detroit, music industry insiders discussed the ‘Movement of Music’. The panel uttered about how branding, music, and advertising go hand-in-hand with the fast-increasing adoption of technology and how digital marketing is “revising” the laws of the music industry for artists to win. In the new landscape since music technology is replacing the record labels, a major record label is not required to promote new music artists hereafter. This shift is the new direction of today's music industry. Modern-day artists don't need industry higher-up’s approval to start their music career and reach the rest of the world. Branding and networking tools are crucial in this process. The unending technology offers many opportunities for recording artists to pair up with branding authorities, distribution firms, and agencies for marketing plans, all while without losing their independence. In brief, record labels don't play a role in the achievement of new music artists (Powell, 2018). This type of reporting, in most cases, takes any sign of crisis in the traditional business model of the recording industry as evidence of the argument that direct relationships between artists and fans can completely replace record labels. According to this argument, when looked from the artists’ perspective, technology has altered the formation of strategic networks and internal power relations among artists and other actors. Artists are not as dependent on record companies as they used to be. There is a lower barrier to enter the music industry for artists whose chance used to be taken away by record labels and now they have got their chances back. Since nearly everything is digital in the new landscape, music artists can produce music on their own without bothering about the charge of producing physical records and sell their music through online stores and streaming services. They don't need the support of the traditional large record companies in the creation and promotion part of the process like in the old days. (Eiriz & Leite, 2017). Foremost, it is a must for the musicians to learn how to

27 promote themselves by learning, business skills and know-how of the record labels to be able to use this advantage (Galuszka, 2015). In this new landscape less well-known artists who know the rules of the business can reach audiences and fans, they could not have imagined achieving past (Lee, 2015). A similar line of argumentation was implemented by Fox (2004), who, apart from highlighting the positive impact of disintermediation on competition in the recording market, remarked that the decreasing costs of distribution would occur in greater royalties paid by record labels to artists. To sum up, according to this stance, the power structures in the music industry is changing, and this circumstance provides convenience for the musicians. It is easier for them to reach their listeners compared to 1990s. In contrast to these scholars’ views that will be discussed later in this thesis, this does not imply that there are no or even fewer intermediaries found in the new digital music business models. The second line of reasoning-represented, for example, by Bockstedt, Kauffman, and Riggins (2006) and Frost (2007) focuses on how record labels can be substituted or what they must to do to withstand the turbulence. Bockstedt (2006) rightly predicted that the position for the record labels and traditional retailers in the value chain might be weakened with the induction of technological development, yet they seem to have been too positive about the possibilities of direct contacts between artists and digital retailers. Frost (2007) reasonably remarked that disintermediation would not happen by itself, because there is a necessity for an infrastructure to replace the services of the record labels. Consequently, instead of disintermediation, the appearance of new types of intermediaries will be discussed later in this thesis. Legitimate online digital music services are the main focus of the new business models in today’s music industry. This focus indicates that legitimate music services are a component of digital products and digital delivery, which often have strategic partnerships with access providers (Bambury, 2006). None of the first legitimate online music services were very successful until Apple introduced its iTunes service in April 2003. It has been the first major successful new business model (“iTunes tops 100m downloads mark,” 2004). This pay-per-download model offers users with the opportunity to purchase individual tracks, usually for about 1 USD or 1 Euro each. Record labels get a portion of the price paid by buyers (Galuszka, 2015). In its first six months, digital music users purchased 14 million songs for download. In July 2004,

28 iTunes reached its 100 millionth download (“iTunes tops 100m downloads mark,” 2004). Arditi (2014) asserts the small market share of the independent record labels in the United States compared to 1990s, which implies that it is not the majors, but the indies which are the sufferers of the changes. He adds that the iTunes business model profits major record labels by preventing individual musicians from directly uploading their music. Young and Collins (2010), basing their observations on conversations with Australian musicians, reach similar results concluding that intermediary role that iTunes have would have resulted in difficulty for independent artists to access (Arditi, 2014; Young & Collins, 2010). This leads Young and Collins to conclude that “the rise of iTunes represented re-intermediation rather than disintermediation” (p. 350). To sum up, digital distribution has affected each actor in the music industry uniquely. Internet is a disruptive technology that overturns a long-standing business model in the current market by establishing relationships between industry and stakeholders and endangers to superannuate or replace markets under their control (Burkhart & McCourt, 2006). 1.3 Case Study: Spotify Spotify was established in Stockholm in 2006 by Daniel Ek, former CTO of Stardoll, and Martin Lorentzon, co-founder of TradeDouble (Parsons, 2018). Spotify Limited was incorporated on 23 November 2007 with the registered office settled in London, Greater London. The company's head office exists in London; however considerably of its research and development remains in Stockholm (Parsons, 2018). The organization is listed as the active status. There are currently 3 active directors according to the latest confirmation statement presented on September 21, 2018 (“Spotify Limited,” n.d.). Spotify changed music listening permanently with the introduction of the streaming service launched on October 7, 2008. Earlier, sign-up for free services were limited by making it invite-only (“Company Info,” 2018). According to the company's house description: "Spotify is a digital music, podcast, and video streaming service that gives you access to millions of songs and other content from artists all over the world" (“What is Spotify?,” 2018). It provides people a legal and accessible way to utilize music anytime they want. The Spotify team views itself as the "operating system (OS) of music" rather than just a streaming service or an application. The executive team's vision is to give music to people wherever, and whenever they want to utilize it. What is more to the point is, Spotify's vision is to transform the music industry (Hagel & Brown, 2013). According to company's house

29 description the company's mission is “to unlock the potential of human creativity—by allowing a million creative to live off their art and billions of fans the opportunity to enjoy and be inspired by it" (“What is Spotify?,” 2018). As of June 30, 2018, Spotify is the world’s most popular music streaming service with a community of 207 million users, including 96 million paid subscribers across 79 markets. There is more than 3 billion number of playlists created by the users and there are more than 40 million songs. As of October 2018, it has paid 10 billion in revenue to rights holders since its establishment (“Company Info,” 2019). It is the most significant driver of revenue to the music business today. 1.3.1 Business Model Canvas of Spotify In this chapter, the business model canvas of the Spotify will be analyzed. 1.3.1.1 Customer Segments In this section, we will be answering the question of what type of audience Spotify targets. The Internet has unquestionably provided to the change in the marketing focus. The accessible and abundant information has resulted in consumers of being more informed and sophisticated. Customers are aware of nearly everything that is being suggested to them and they require the best. In this new landscape, firms' work has become even more difficult. Businesses have to differentiate their products or/and services in a method that bypasses the undesired result of becoming weak and insignificant commodities to struggle with this condition. Systems that can interact precisely and consistently with customers are effective ways to differentiate themselves. Precision targeting is possible with collecting customer demographics and behavior data. This kind of targeting supports making an efficient promotion plan aiming to meet fierce competition or recognizing considered customers with the induction of the new products (Guo & Qin, 2017). The audience of the streaming services is, on average, younger and have an enhanced relationship with technology. According to experts, this difference will diminish over time. Since it is straightforward and effortless to access much music without paying additional costs, streaming services also obtain new consumers who may have reached music illegally before. According to experts, these new captured customers have an impact on the decline of music piracy. The most significant difference between the audience of the download shop and streaming services is, customers who buy music in download shops decisions are more conscious aiming to purchase a particular song or album, the users of the streaming services mostly use the service as a traditional radio,

30 where music has more of a background actor (Trefzger, Rose, Baccarella, & Voigt, 2015). Looking at the customer segmentation of Spotify, it can be claimed that the company uses a multi-side platform model. This model consists of two customer segments; the first one is the society of young people seeking for affordable ways to reach music, are the lovers of all kinds of music, interested in outdoor activities, love to socialize with friends. Considering the listeners of Spotify geographically, it can be seen that 36% of Spotify’s audience belong to Europe, 30% to North America, 22% to Latin America and 12% to the rest of the world. For subscribers, the percentages are 40% from Europe, 30% from North America, 20% from Latin America and 10% from the rest of the world. The second one is the advertisers seeking for ways to reach this society with their advertising (Spotify, 2018; “Spotify Business Model | How Does Spotify Make Monel | Strategy and Insights,” 2018; “Spotify Solvay Case,” n.d.). Two-sided markets consist of two distinct groups of customers. In this structure, there exists a "chicken and egg" problem that needs to be analyzed. The challenge results from the value gained by one kind of customer rise with the number of the other type of customer and a mediator are required for internalizing the externalities generated by one group for the other group. Two-sided markets are ubiquitous in media markets. In media markets, the mediators which include digital streaming services, meet a group of buyers with a group of sellers. In this case, the sellers are the advertisers seeking a platform on which to market their products, and the buyers are the consumers, the one who will be observing or listening to these pitches. In this sense, as an intermediary role, streaming services are simply attempting to build a vast audience to which they can make hear their advertisers' words (Evans, 2003). Hence, these two groups of customers are in need of each other. The businesses service such markets by serving as "matchmakers." To do so, they have to get both of their customers on board to have a product to sell. 1.3.1.2 Key Partners: “Partners that help Spotify” In this section, we will be answering the question of who the key partners and suppliers of the Spotify are. An opening of a digital music store involves three elements: “Designing a user interface (store’s website), signing the required deals with credit card operators, obtaining the repertoire that can be offered to customers” (Galuszka, 2015 p.260). Each of these elements requires Spotify to establish partnerships with the mentioned respondents above. In addition to these partners, Spotify already established many

31 different partnerships aiming to build great relationships with users, providing easy access to music and improving engagement. From a business point of view, the first two elements are relatively not complicated. The first two factors are relatively uncomplicated from the view of the business. A team of website developers is responsible for the first element and signing contracts with two, or several business co- workers by taking into consideration the country and payment opportunities a digital music store aims to offer its customers solve the third element. Since in the world of digital music, copyright is not embedded in a tangible medium, obtaining the repertoire is a much more complex issue. This difficulty gives rise to starting and running a digital music a much more complicated process than starting and operating a traditional record store (Galuszka, 2015). In the old model, there is no necessity to sign business dealings with suppliers of records and deal with the owners of related rights. Whereas, in selling digital music online it is obliged to sign business deals with record labels and/or individual artists (the owners of the copyrights to the sound recordings), performers (whose rights may be managed by record labels), and music publishers and/or collecting societies (which license songwriters’ rights) (Galuszka, 2015).To sum up, suppliers and record companies/labels, as well as music publishers and/or and collecting societies constitute the most significant suppliers. Other relevant partners are network providers, credit card operators, and partners who are responsible for developing and operating platforms (Trefzger et al., 2015). Record label or a music distributor delivers the content to Spotify. Since major digital music stores are willing to cooperate directly only with the largest players, all others – small and medium sized record labels, individual artists- must reach these stores via intermediaries. In this way, digital music stores do not have to conduct costly negotiations with small and medium-sized record labels (Galuszka, 2015). An artist's record label takes care of getting their music to Spotify. Independent artists are needed to manage distribution by themselves via working with a music aggregator or register the upload beta Spotify for Artists. In this juncture, information about the aggregators—an intermediary that aggregates “the demand of many customers or the products of many suppliers” (Bailey & Bakos, 1997, p.9) needs to be given in order to understand the working mechanism behind the obtaining the repertoire deeply. Aggregators run on the business-to-business market, where one group of contractors is record labels or individual artists and the other group is digital music stores. Finally, it needs to be remembered that aggregators do not deal with songwriters’ rights, which must be negotiated with collecting societies and/or music publishers. The existence of

32 intermediaries stands for two reasons. The first reason is the transaction costs of selling products directly to consumers being lower than the transaction costs of selling them via an intermediary. In this situation, producers would obviously prefer direct contact (Hess & von Walter, 2006). Secondly, if there is a bargaining asymmetry and only one side of the transaction holds the bargaining power between producers and buyers, then intermediaries are needed. In that case, the stronger side may seize part of its supplier’s margin by threatening to switch to another supplier. In that situation, hiring an intermediary who serves several producers (and hence becomes a more charming trading partner) may be the most profitable way. Reducing the bargaining asymmetry that exists between sizeable digital music stores and small independent music labels or independent artists is one of the most critical tasks of the music aggregators. This situation is what exactly occurs when the vulnerable small labels are bargaining with Spotify and the like (Galuszka, 2015). Even if we expect that agreements between these two parties are not hindered by high transaction costs (i.e., the digital music store would agree to contract directly with a small label or individual artist) then the more significant player—a digital music store—would be in a higher status to force its own contract terms. Take-it-or-leave-it contracts are offered to small labels and individual artists by the digital music store. These contacts mostly support the interests of the digital music store. The size of the catalogs of the aggregators ensures digital music stores to work with aggregators. More clearly, the size of the bundle of digital rights gathered by the aggregators makes aggregators an engaging and winning partner for digital music stores. Hence, seeking the right owners whose catalogs are not yet sold online is a great motivation for the aggregators. Therefore, making contracts with new partners not only allows aggregators to gain profits but makes them a more engaging partner for digital music stores. Owners of more extensive and more commercially charming catalogs would be in a favorable position to barter contract terms. Only those are perceived as requisites by a digital music store (major record labels) to secure acceptable terms. Under favor of the size of a catalog that an aggregator delivers to a digital music store, equal basis negotiations can be made between the aggregator and the digital music store in the name of all the rights owners that it represents. This solution is imperfect because there is a risk of aggregator itself to discriminate against rights owners, proposing better terms to owners of more prominent and more commercially attractive catalogs. This risk is, however, moderately relieved by the competition among aggregators— small labels and individual artists can search for an aggregator that grants them the best terms (Galuszka, 2015).

33 To sum up, aggregators as an intermediary are needed in order to reduce transaction costs and bargaining asymmetry. Although aggregators exist in many industries, in the digital music industry their role is mostly overlooked. This part of the thesis will analyze the aggregators that exist in the music industry in order to come through this disregard (Galuszka, 2015). The key activities of the music aggregators are bundling digital rights and delivering them to digital music stores, reducing bargaining asymmetry, controlling the status of the rights, adopting digital formats to the demands of the online retailer, presenting the digitalization service, and producing marketing materials to digital music stores. These activities will be analyzed in detail on the line (Galuszka, 2015). The first duty of the aggregators’ is to control the status of rights. Record labels make several types of record deal contracts with the artists. In these contracts record labels hold control over a master recording just for a limited number of years. Because selling digital files without the permission of a current copyright owner may have serious legal results, it is required to keep track of the current copyright status of a recording. Aggregators are responsible for controlling who currently has the rights to the record and when the rights expire. Adapting digital formats to the demands of the online retailer is another task of the aggregators. Theoretically, record labels are able to adapt digital formats to the needs of online retailers on their own, but in the case of multiple formats and large music catalogs, this task could become very much time- consuming. Since aggregators provide these services to several record labels, they utilize economies of scale, which executes the whole process less costly than if each label adapted formats on its own. Digitalization is another service offered by a music aggregator to record labels that have an extensive catalog of old records in analog formats such as master tapes or vinyl that were never sold in digital formats before. Next, delivering marketing materials to digital music stores is another service offered by the music aggregators. Aggregators provide marketing content to some of the digital music stores. It is preferred in this manner by some of the digital music stores, because it may be more economical than investing in the development of the retailer’s own marketing department. In this case, an aggregator serves as an intermediary between record labels and digital music stores, which, aside from bundling music catalogs, delivers marketing spots and messages (e.g., brief info about an artist’s new album and materials) produced by record labels to online retailers. Such marketing content can, if paid for, be inserted in the digital music store’s main website, where it can reach customers. Large digital music stores are not willing to outsource the technological and legal issues to aggregators. On the contrary, they prefer to compose all the components

34 of their services. Smaller players (e.g., stores that operate in one country only) may be willing to outsource for the stages that require necessary know-how. From an economic point of view, such a division of labor can be viewed effectively (Galuszka, 2015). Picture 1: Music Aggregators and Intermediation of the Digital Music Market

Source: (Galuszka, 2015) Spotify operates with music aggregator companies who are responsible for the licensing and distribution of the music and payment of the royalties for the independent artists who currently do not work with a distributor. Fuga and the Orchard are the label distributors, and CD Baby and EmuBands are the artist distributors who support individual or unsigned artists. These two types of distributors constitute the content distributors that Spotify works (“Spotify for Artists Guide,” 2018). Also, it is possible for external companies to become partners with Spotify. Internet service providers and mobile operators are the platforms which the Spotify aims to reach out in order to encourage them to offer Spotify and its services to their clients (Emery, 2013). Besides, Spotify also reaches out to consumer electronics industry actors such as media streamer producers, mobile phones, connected television, set-top boxes, and gaming consoles. Delivery platforms like FUGA are also Spotify's integration partners (Emery, 2013). The key partners are diverse in each country, but each of these key partnerships is used for co-branding and selling boundless aiming to promote both Spotify and a particular product. For example, in England Spotify is a partner with Vodafone and with specific tariff from the phone company they can experience the premium account benefits of Spotify. There are many other partnerships and co-branding, from which the most notable would be with Facebook, which has the highest turnover rate of new customers

35 (“Spotify Solvay Case,” n.d.). Several notable partnerships are announced in third quarter 2018 by Spotify. According to this announcement, Spotify will be globally integrated into the setup experience on new phones by Samsung and Spotify will be the chosen music partner for Samsung’s multi-device ecosystem, in the UK, and Ireland Spotify will be directly added to users' cable bill by Sky, Europe's largest pay-tv service. Also, in Japan, Spotify will be the partner with DAZN, a fast-growing subscription streaming services on marketing operations to support Spotify. 1.3.1.3 Value Proposition In this section, we will be answering the question of what kind of value proposition Spotify offers to its customers. Streaming services are frequently adding more tools that add value to their services. These tools and values added to its service by Spotify are answered below. i) Practically free music anywhere anytime: Newness, accessibility, and convenience for the end user to stream online music for a short set of time are the value propositions that Spotify offers. There are two options to access to music, one is being able to stream music for free in exchange for listening to an advertisement. The second way is to register for a premium account which is charged between 5-10$ for a monthly subscription in order to be able to stream the songs without listening to any advertisement (“Spotify Solvay Case,” n.d.). Users can either download the Spotify app or listen in a web player directly through Spotify's website to stream songs (“What is Spotify?,” 2018). Spotify enables users to reach the right music for every second in every device. Aiming to make use of its services more convenient, Spotify has adapted its service to enable use across a range of devices including mobile phones, computers, tablets, speakers, TVs and more (“What is Spotify?,” 2018). The value proposition in Spotify’s case is that customers have admittance to the full database. However, there is also a trade-off in that the customer does not own any of the songs, they solely obtain rights to stream from the database for one month (“Spotify Solvay Case,” n.d.). It is possible for premium users to download music for offline use in Spotify (“What is Spotify?,” 2018). ii) Massive storage of songs: Millions of tracks exist on the music library of Spotify and it gives unrestricted access to this comprehensive platform. On Spotify, you can find all the types of music that suit your mood (“About Us,” 2018). iii) A personal touch to the experience: Spotify gives recommendations from its personalized features, such as Discover Weekly, Release Radar and Daily Mix to its

36 users to deepen their listening experience (“What is Spotify?,” 2018). We will examine the working principles of these personalized recommendation tools in the following chapter. iv) Playlists and selected choices of liked music: Spotify enables users to search or browse the music collections of friends, artists, and even celebrities to make them see what they listen to or create a radio station. Building collections of music by the creation of users' own playlists or adding other users' playlists to the users' personal collection is also possible on the service (“What is Spotify?,” 2018). v) “First truly social digital music experience”: Blogs, wikis, and social networks are the platforms that have social aspects which are brought by Web 2.0. These interactions have resulted in consumers to be able to interact with each other, which eases the discovery of new music. Considering the website of Spotify, it is obvious that Spotify constantly refers to "you". Social media platforms play a vital role in this issue. Spotify does not own Facebook, but Spotify depends considerably on Facebook in order to improve its social features. The interface comprises a direct link to Facebook, and this word underlines the services' social character enabling the integration of the Spotify service into users’ social lives through the connection via Facebook. With regard to its positioning, Spotify views itself as the “first truly social digital music experience”. The recommendation systems that exist on the platform are intimately linked to social media services which have a benefit on customers as it serves to access individually favored music. Spotify enhances the idea of recommendation systems by allowing users to interact effortlessly with other friends. Spotify, straight through its interface, supports sharing on Facebook, Facebook Messenger, Twitter, Telegram, Skype and Tumblr. These sites are external platforms that are intended to intensify the value of Spotify. Follow and share, which according to Spotify itself, are also elements what make Spotify “so social” (“Spotify: Fast Facts,” n.d.; “What is Spotify?” 2018). Interactivity is an essential piece of online media content. Hendricks (2011) asserts that interactivity occurs when the audience is included in the creation of media content, within direct modification, feedback or even the production of original material. Spotify's this "operating system" or music platform, deliver interactive music experience through third-party applications to its consumers. On disseminating this vision and straight charming and harmonizing key ecosystem members, it can be claimed that the intensity and complexity of the listening experience have been increased by the Spotify (Hagel & Brown, 2013). Social recommendations are critical factors in building engagement with new and established artists alike. Spotify's launch

37 in the United States followed this strategy, as the service was firmly integrated with Facebook Connect from the start. The user’s playlists are highlighted to Facebook friends in real time; this tool makes users be able to "send" songs to each other aiming to recommend a new artist (Hagel & Brown, 2013). As Ek (2014) observed in an interview at the Grammy Awards The sales cycle of [a] record is anywhere from four to twelve weeks in most typical cases. With Spotify, the effect can be seen [extending] up to twenty-five, thirty-five [weeks], or even a year (Van Buskirik, 2014). 1.3.1.4 Customer Relationships In this section, we will be answering the question of what Spotify does to maintain relationships with its customers. The customer relationship is an automated service and online relationship without direct contact with the company itself. It is a more advanced form of the self-service. The usage and purchase of the online software and customizing process depended on people’s specific needs that take place in the customer relationship continuum (“Spotify Solvay Case,” n.d.). Spotify has shown commitment to developing convenience for its customers. It provides users with four different methods of obtaining answers to their questions, as stated in Spotify website’s customer service and the support section (“Customer Service and Support,” 2018). i) Help site. In this section, users can find an answer to their questions and learn the way of getting their music on Spotify. There is a list of frequently asked questions about Listen Everywhere, Account and Payment subjects. In addition to this, a search engine is also available. Users can write the keywords of their questions to the Spotify search engine. ii)Community. In this section, users are able to get quick support from proficient Spotify users by posting their question on the community page in case there is not already an answer to users' question in help site. In addition to this, the exciting part of The Community page is users can create or vote on new ideas for Spotify for feature requests or discuss music with other fans and can ask them for advice. iii) Contact us. In this section, customers can directly contact Spotify customer support team if they cannot find a solution on the help site or community page. iv) @SpotifyCares. Also, tweeting the team using the SpotifyCares mention address is the social way to ask for help.

38 Advertisers who are the large buyers and an important part of the freemium business model have a direct connection (For example; phone contact) and have more personal contact methods to answer their problems with Spotify since it is a more dedicated form of personal assistance in their customer relationship with Spotify (“Spotify Solvay Case,” n.d.). 1.3.1.5 Cost Structures In this section, we will be answering the question of what kind of costs that Spotify are incurring. According to Duedil which gives essential information about companies, Spotify is a private limited company with share capital. For a private limited company with share capital, it is not possible to share offers to the public, but it is possible to sell shares privately. Limited means, the only possibility for investors to lose shares is Spotify to gone bankrupt. According to Duedil, 112 million USD has to be paid by Spotify to other actors, currently. This amount constitutes Spotify's liability. This financial information shows us that Spotify's upfront costs, which include research and development, are shared between actors. However, Spotify's marginal costs, which include royalty payments, are concentrated with Spotify itself. Same with all digital music stores, Spotify’s significant costs are licensing fees for the music/content. Spotify is obliged to pay the licensing fees to music labels and recording companies and royalty fees for the streamed content which Spotify has access. According to Spotify reports, as of October 2018 since its launch, it has paid over 10 billion Euro to rights holders (“Company Info,” 2018). The company asserts that it pays out about 70% of all its revenue to intellectual right holders which involve artists, labels, publishers, and performing rights societies like ASCAP and BMI. Since the company makes agreements with all these actors, it can be claimed that it does not technically share revenue with them. As Spotify pays royalties depending on the artists' demand on service, each actor is paid a different amount in the platform. Moreover, according to the agreement set with the four major label companies, Spotify pays 200 million dollars each year, 70 % of all its revenue. The remaining 30% of revenue is required to be used to cover for the operation costs of the company like salaries of key personnel/technicians aiming to keep the platform operational at all times, expenses related to maintenance of the platform, and costs related to the technical requirements of the platform like servers, programs, updates (“Spotify’s public listing shows its ambition – but won’t help struggling musicians,” 2018; “Spotify Business Model | How Does Spotify Make Monel | Strategy and Insights,” 2018).

39 Founders of a digital music store must determine the size of the musical repertoire that will be offered to customers and the number of the countries that the store will be available before contacting the right owners. In order to have a decision in the first matter, it is a useful method to make a comparison with the traditional record store (i.e., trading in compact discs or vinyl). In the old model, there exists a warehousing problem that the stores' capacity was limiting the size of the offer of a traditional record store. The records that are less demanded were being kept in stock and were perceived as a misuse of shelf space that could be used to sell the more demanded product. In contrast, in the digital record store, such a warehousing problem does not exist. However, obtaining the stock is a much more complicated issue. Traditional record store gets products from record distributors whereas in the digital record store, contracts with the copyright owners of sound recordings (in most cases record labels) is required in order to be able to obtain musical repertoire and sell the product on an online platform. In theory, there is a positive correlation between the size of the catalog that a digital music service aims to present to its customers and the cost. Because when a digital music store wants to offer a larger catalog to its customers, that requires more negotiation with the more copyright owners by the store (Vogel, 2010). The second important point for digital music stores is to determine the geographical reach of the store. Even though the Internet does not have any borders, one should be aware that international laws may and probably will vary. Intellectual property laws and appropriate institutional arrangements are different in different countries. Permission also has to be obtained from songwriters or organizations to represent them as the digital music store in addition to the permission that will be got from the owners of the copyright in sound recordings. In the matter of tangible records, this process was not as complicated. A record label used to pay mechanical royalties which constituted about 10% of the price of a music album in a store for each copy of a record that was produced to organizations that were representing songwriters (Vogel, 2010). Even if the records were sold abroad, the owner of the retail store didn't have to deal with getting a license from any respondent. This situation is not the same in the case of digital music since the digital music stores rather than the label has to pay the mechanical royalties. Paying the mechanical royalties process is difficult in the United States compared to the European Union. In the European Union, 28 collecting societies (each member state has its own collecting society) manage songwriters' rights. Hence, negotiations with collecting society in each of the member states to secure songwriters' rights are required for a digital music store to operate across the European Union. Therefore, based on a

40 cost-benefit analysis, it is more profitable for digital music stores to concentrate on the most fruitful markets, dropping plans to enter, for example, the Iceland (about 329,100 citizens) or Estonia (about 1.3 million citizens) markets, where it would have to assign separate deals with collecting societies to cover the local catalog in its proposal. Alternatively, such a digital music store may reconsider entering a market in a small country without obtaining the rights to the local catalog, which means is not able to sell music that especially interests to listeners living in that country (Galuszka, 2015). As a result, selling globally an extensive catalog of digital music is a very costly task and no digital music store offers every record ever released in every country. Adopting a more pragmatic strategy for entering the most lucrative markets first and then progressively extending their offer, with some important exceptions based on business strategy is applied by the most prominent actors in the industry (Galuszka, 2015). As mentioned in the previous chapters, economic mechanisms and music aggregators play an essential role in the development of the digital music market by reducing transaction costs. These expenses are the essential expenses required to be covered for the company to give convenient and sufficient service to the customers. It can be seen that the high percentage of the revenue is paid to the music industry. This situation has resulted in having difficulty covering all arising expenses of the company. This challenge is the reason why Spotify has not been profitable since 2008 and the reason for the rise in its costs. Spotify is not unusual in this aspect. This issue is the common problem of all online startups containing Tango and Pandora. They both developed their revenue in recent years, but their losses also increased in this period. The business model of these companies is not the reason for this problem. The problem roots from the point that they are all startups and since the music industry has the tremendous bargaining power it is the core power. This issue affects the profitability of the companies and puts many limits in the operation of the companies in this industry (“Spotify Solvay Case,” n.d.). 2018 has been a very notable year for Spotify. According to its latest quarterly financial results, covering the final quarter of 2018, 13 years and 96 million paid subscribers later, Spotify is ultimately profitable. Since Spotify is leading the whole industry, this news is an essential milestone for the music streaming business. The revenue items will be analyzed in detail in the following chapter.

41 1.3.1.6 Revenue Streams Since Spotify has various sources of revenue, it can be claimed that Spotify's revenue model involves both direct and indirect aspects. Consumers compose the source of the direct revenue, while sources other than consumers comprise the source of the indirect revenue (Baloon, 2009). Regarding revenue derived from consumers, Spotify’s revenue model arises from two different price tiers. These price tiers are the following: (“Get 3 months of Premium for $0.99.,” 2018) Table 1: Spotify Price Tiers

*Including trials, Premium for Family, Premium for Students, bundles, and Premium plans with other companies. Image Source: (“Get 3 months of Premium for $0.99.,” 2018)) The optimal pricing structure is the key aspect of most industries business model. There is a challenge in the division of revenues between the two sides of the market. (Evans, 2003). In addition to the pressure felt from the necessity to find an optimal pricing structure, music streaming services encounter many other pressures like striving to balance the need and demands of their stakeholders, while their main competitors are unlicensed and illegal peer-to-peer file sharing networks. Due to this fact, the services are obliged to find various methods to add value to their products to attract customers from peer-to-peer file sharing networks to listening to legally licensed music. These added values will be discussed in the value proposition section. The company uses fixed menu pricing for its products where there exists a list price for accounts offered, which are the following: 1. Free account 2. Premium account

42 The features bought by the customers determine the price and it goes up with the amount. Users can use the freemium model of Spotify in which the service offers the basic function of online streaming. With the rapid evolution of today's technology world, the cost of getting information out is getting cheaper and cheaper day by day; this situation leads to free information. The notion that online media will inevitably be free takes its roots from the theory that the price of any good should fall to its marginal cost. In brief, the cost of digital distribution getting lower every year brings about the marginal cost of online media to approach zero. (Levine 2011). Including the free tier in the subscription model, Spotify lowered the cost of their service below a level where it could draw a critical mass. When reviewing the pricing structure, it becomes apparent that the free tier in the subscription model works as a customer conversion tool. Offering the service for free, the freemium model ultimately aims to persuade enough number of customers to subscribe to the premium version of the tool (McGrath, 2010). Once users are exhibited to the inclusive, steadily developing environment of Spotify, Spotify expects that these users will prefer to change to a paid subscription. Currently, there exists a 30-day free trial for the premium mobile version of Spotify. With the ultimate goal of increasing its revenue, Spotify runs various campaigns during the year, aiming to increase the number of customers who are the subscribers who use the premium version of the tool. One of the very successful campaigns is the traditional promotion which gives three months of Spotify for only one dollar to users. The company reported that "Over the course of 6 weeks, approximately 7 million new subscribers were added during this campaign, including a single day record of nearly 500,000”. In addition to this, the achievement of the pre-Christmas promotion with the collaboration of Spotify and Google Home Speakers is reported by Spotify. The campaign boosted the premium subscriptions. It showed the importance of the home voice speakers in growth, especially for music and audio content. 2018 finished with 207 million monthly active users for Spotify. Among these active users, 96 million was premium subscribers. It is possible to claim that there is a positive development in the matter. Moreover, according to Spotify's 2019 forecasts show between 245 million and 265 million monthly active users, including 117-127 million premium subscribers by the end of the year. The conversion rate– the percentage of its listeners who have premium subscriptions – of Spotify is now 46.4%, up from 44.7% at the end of 2017, and 39% at the end of 2016. Revenues of just under €1.5bn for the fourth quarter of 2018, up 30% year-on-year are reported by Spotify. That covered a 30% increase for its subscription revenues to €1.32bn and a 34% increase for its ad-

43 supported revenues to €175m. Spotify records an operating profit in Q4 2018 of €94m compared to a loss of €87m in Q4 2017. Meantime, the company announced a quarterly net profit of €442m, compared to a loss of €596m in that year-ago quarter (Spotify, 2018). Spotify also highlights the notable increase in listening hours of content by users on the platform during the four quarter. They emphasize that this engagement grew over both the ad-supported and premium tiers. With €4.89 average revenue per user (ARPU), Spotify’s ARPU declined 7 % year-on-year in the final quarter of 2018. The company attributes this decline to the increase in family and student plans. Levine (2011, pg.77) quotes a significant label administrator who concentrates on digital services and states that streaming services must “restrict free so that it is basically a customer acquisition vehicle and not a service alternative”. If the quality of the free service is high, then a free subscriber has no incentive to convert to paying subscriber. At the same time, if the quality of the service is not high, then it will cause the customer to leave the service to search for a better and high-quality alternative. This alternative could even include the use of illegal peer-to-peer file sharing networks. According to Levine (2011) aggressive price cuts and free media offer have to be the two ways of legal music services to battle with unauthorized websites. Spotify uses this strategy. Unfortunately, this strategy may hinder the growth of companies with the potential to generate revenue. Levine (2011, pg.78) calls this the “new media catch”: “a business must give away content for free to attract an audience that eventually turns out to be worthless that they previously conceived, simply because that audience is invited and attracted to free content”. From a different viewpoint, free music models could be charming to digital music providers, but it might also drive to devaluation of music due to music blended with the advertisement (Pulverer, 2010). It results in artists rejecting such an approach as they desire their music to be valued. Nevertheless, Spotify's freemium model was attacked by the music industry. Taylor Swift’s op-ed is claiming that Spotify damages artists to Neil Portnow’s claim at the 2015 Grammy Awards that freemium services will eventually hinder people from writing and performing music (“57th Annual Grammy Awards”). The subscription of premium accounts unlocks certain features they would not get otherwise to users. Spotify premium costs $9.99 per month. Spotify offers premium quality sound in the premium tier in the subscription model. The best Spotify experience can be got with the subscription of the premium version of the software.

44 Premium users can use the service on any device without any advertisements, as well as being able to download single tracks and listen to them offline. Spotify strengthens its premium product above others by also enabling users to get their music over geographical borders and improving the sound quality of the streams. Spotify Family is when an entire family receives the premium service as a package. They are permitted to have their own distinct playlists in individual accounts. Such premium hallmarks attract many people to opt for it once they have tried it (“Get 3 months of Premium for $0.99.,” 2018). Arditi (2017), describes the subscription services as “the unending consumption of music.” Unending consumption refers to subscription-based consumption which turns an individual’s consumption to the constant and consistent manner. In the subscription-based consumption, subscribers possess the commodity until the expiration date of their subscription. This circumstance reconstructs users’ consumptive experience from a one-time event to a continual process that requires continued subscription through further consumption with an intangible collection on the cloud. In addition to revenues generating from the users, the company receives revenues on advertising fees from the firms advertising on the platform for free users in case of the free account. For the premium version; the revenue comes from the subscription fees from customers for the usage of the service in exchange for not listening to any advertisement (“Spotify Solvay Case,” n.d.). These subscription fees allow Spotify to offer free price tier. The revenues come from these sources generate the total revenue from as we have mentioned in the cost section, which 70% belongs to licensing fees for the songs and the remaining 30% of revenue stays by the company (“Spotify Solvay Case,” n.d.). Spotify asks information to its users to gain specific, crucial data about them in the registration step before they can access to service careless of price tier. This data enables a consumer targeting platform for its advertisers (Emery, 2013). Spotify e-cards are another way of Spotify to generate revenue directly from users. These cards have options for one month, three months, six months and a year duration of access to Spotify's premium service. They can be bought as presents for users (“Get a Spotify Gift card.,” 2018). Spotify offers different kinds of advertising for the third-party companies. These different kinds of advertising include audio, video, display and sponsorship. i)Audio: Audio Everywhere Package enables brands to reach their target audience on any device, in any environment, during any moment of the day. In order to guarantee that the brand reaches 100% SOV, audio ads are inserted between songs during active

45 sessions.you In addition to the audio spot, ownership of a clickable companion display unit is given to brands for the ones who want to extend their campaign and drive traffic to an URL destination. ii)Video: Spotify video views have foremost viewability scores compared to industry benchmarks. There are two kinds of video advertising: Sponsored Session and Video Takeover. With the Sponsored Sessions, brands connect with their audience with an uninterrupted session of listening to music by providing the audience the opportunity to unlock 30 minutes of ad-free listening in exchange for watching the brands' video. In this sense, the brand displays a gateway to an upgraded streaming experience. With Video Takeovers, all ads are delivered with the premium app experience to logged-in users when they are engaged, and the app is in view. The brands' video message is shown to listeners between songs during commercial ad breaks and involves a clickable companion display unit for campaign extension. They are created for the brands who aim at telling their story confidently in a rich, immersive canvas. iii) Display: There are three kinds of Display Advertising: Overlay, Homepage Takeovers and Leaderboard. The overlay is built for the brands who want to reach their audience with ads created for viewability. In order to ensure maximum brand impact, this kind of advertising is delivered at the user rotates to the Spotify app. The clickable immersive display unit drives traffic to brands' URL destination. Homepage Takeovers are clickable, and rich media supported interactive ads which are created to showcase the message of brands aiming to achieve a great impact experience that exists on the front of Spotify's Browse page for 24 hours as a surface in the background. The leaderboard is developed for the brands who want to enlarge their campaign reach in a brand safe environment by displaying their message for 30 seconds. Clickable Leaderboard display units are only presented when Spotify is the top app on the screen. iv)Sponsorship: Sponsored playlists which empower maximum brand awareness are created for the brands who want to sponsor a Spotify's top real estate, our owned & operated playlist for a week. These playlists enable brands to connect with their listeners on listeners favorite playlists. Spotify assists brands to choose the most appropriate playlist for the brands' target audience, whether they’re tastemakers tuning into New Music Friday, gym addicted listening to Power Workout, students studying for exams with Brain Food, and more. Since the playlists that exist on Spotify already have a strong, loyal fan base, it is ensured that the brand will be amplified and heard in this kind of advertising. To conclude, there are several methods of Spotify to offer to its customers for the advertising of different brands. In this sense, it is possible to say that

46 Spotify has done amazingly great in this regard by giving so many opportunities to brands (“Tell your brand’s story on Spotify,” 2018). Ultimately, as mentioned before in the previous chapter, by the fourth quarter of 2018 for the first time in company history, Spotify has reported that the firm turned a profit. It was the first time in the company’s history that Operating Income, Net Income, and Free Cash Flow were all positive according to the financial release. Precisely, the company obtained an operating profit of about $107 million. On the other hand, since the company is anticipating a loss of €50 to €100 million (about $57 to $113 million) next quarter and €200 to €360 million (about $227 to $409 million) over the full year, it seems like the profit may not last long (Spotify, 2018). 1.3.1.7 Key Resources In this section, the question of what makes Spotify successful will be explained. The key human resources of Spotify are the software and network engineers making sure the operation, development, and evolution of the software goes successfully. Spotify has over 1600 employees. Technical experts of the company are the crucial human resources for an online company, just like in the case of Spotify. Technical experts constitute the essential human resources of the online company, just like in the example of Spotify. The platform and the software compose the key physical resources of the firm. These resources are fundamental to operate the service effectively and offer excellent music service quality to their customers. The key resources of the company are the vast music collection it has which are obtained with the licensing agreements with the big music labels. In addition to these elements, Spotify has the following resources: The latest innovative updates it keeps executing, the growing culture in the company, the numerous contracts it holds, the features it offers to the users, the 100 million monthly active users and the 50 million paying subscribers, the Open Music Model it adopts, the right protection system it suggests and the customized content it presents its users. All of these key resources give Spotify a mighty brand name which is also a key resource indeed itself (Sydeek, 2018). 1.3.1.8 Key Activities The activities done by Spotify are: Managing the site, developing the app on several platforms, the roadmap for products, maintaining the vast library it has, marketing its products and what it suggests, growing its user base, negotiating for new contracts, content acquisitions (“Spotify Business Model | How Does Spotify Make Monel | Strategy and Insights,” 2018)

47 1.3.1.9 Channels In this section, we will answer the question of how Spotify reaches out to its customers. The service is usable on several various platforms from the computer, mobile devices to even TV and available on almost all operating systems. The services are connectible from one system to the other and it is compatible with external equipment like speakers, smart watches and tabs. The main channels are the corporate website Spotify.com, the computer application and the mobile application. Customers have direct contact with the company or its products on all the surfaces (“Spotify Business Model | How Does Spotify Make Monel | Strategy and Insights,” 2018). Spotify reaches its customers in the following 5 steps: Awareness, Evaluation, Purchase, Delivery, and After Sales. i) Awareness: For the promotion, Spotify utilizes its distinct platforms and interfaces and makes use of co-branding with other firms like Facebook and large telecom companies proposing their products for a set of time with some charges. Vodafone in the UK makes use of co-branding with Spotify. ii) Evaluation: The Evaluation occurs chiefly on the corporate website of Spotify and other platforms like the Spotify Blog, YouTube channels, and Facebook account. These sites are visited by the customers aiming to obtain more knowledge about the company, answer the question if it is worth for them to buy Spotify's products. iii) Purchase: As for users, the products of Spotify exist on the corporate website of the company, or in the Google or Apple app stores. Since advertisers involve in another kind of business, they can use direct communication with Spotify through emails. iv) Delivery: The delivery results through the permitting of the music streaming application for music users, which depends on the account type, can occur on various devices. v) After sales: The after sales support is very restricted to self-service, which can arise from 4 sources largely from the corporate website of Spotify (“Spotify Solvay Case,” n.d.). 1.3.2 CRM Big Data Analysis of customer lifecycle plays a vital role in increasing customer value in today's business models. The tools and technologies of data warehousing, data mining, and other customer relationship management (CRM) techniques provide new possibilities for businesses to operate on the notions of relationship marketing (Guo & Qin, 2017). As described by Burkhart and McCourt (2006), consumers receive personalized content via CRM technologies based on their user characteristics and behavior. Besides, CRM

48 technologies assemble promoting dossiers that can be applied in-house to automate marketing campaigns or can be sold to external concerns. Developing a broad range of auto-recommendation, personalization and rights-management platforms for online marketing and e-commerce through CRM technologies by the technology companies are required in order to answer business needs (Burkhart & McCourt, 2006). Since the foundational component of CRM technologies is the personalization, businesses attempt to develop brand loyalty through customization (Burkhart & McCourt, 2006). According to Gue and Quin (2017), since businesses aim at building a long-term relationship with each customer, the purpose of dealing with customers for businesses is not solely to make transactions in this new landscape. This situation results in firms to shift their purchasing process into service experience. Four elements of a simple framework define customer Relationship Management: Know, Target, Sell, Service. CRM requires the firm to identify and analyze its markets and customers. This process entails comprehensive customer intelligence aiming to choose the most profitable customers and indicate those no longer worth targeting. CRM also involves the advancement of the offer by indicating which products to sell to which customers and by which channel. Customer relationship management is a compound of several parts. Before the beginning of the process, the firm first needs to possess customer information. At this stage, the basics of building customer focus are mastered, which means a shift from product orientation to customer orientation and settling market strategy from outside-in and not from inside-out. The focus has to be on customer demands rather than product characteristics. Utilizing the internal customer data and/or purchasing data from external sources are the ways of learning information about their customers for the companies. Summary tables that define customers (e.g., billing record), customer surveys of a subset of customers which involve detailed answers about behavioral data included in transactions systems (credit card records, weblogs, etc.) consist of the internal data. In the second stage, companies are going away the basics; they do not trust on their laurels but drive their evolution of customer orientation by blending CRM over the whole customer experience chain, leveraging technology through examining the data using statistical tools, OLAP, and data mining. Campaign execution and tracking involve the last stage of the CRM system. These processes and systems enable the user to generate and deliver targeted information in a test-and-learn environment (Guo & Qin, 2017).

49 The collected databases of consumer attribute information and behaviors via CRM technologies can generate another revenue stream and help to improve profits for the companies via selling this consumers' data to outside interests (Burkhart & McCourt, 2006). Spotify began forming methods of collecting data about its consumers aiming to build relationships with their customers by utilizing the technology. This approach has resulted in the widespread use of registration policies that obtains transactional data (Burkhart & McCourt, 2006). Transactional data relates to “data collected when a transaction takes place, such as product name, quantity, location and time of purchase. These data are obtained from registration forms, order forms, computer cookies, log files, surveys, and contests” (Guo & Qin, 2017). Today, producing the highest value to customers via high-grade communication, quicker delivery, and personalized products and services have to be the focal point of any organization. CRM is one of the ways, in which the music industry and digital music streaming services need to present value to consumers. 1.3.3 Spotify Recommender System Previously; Radio, print magazines and music videos on TV were the only way of discovering music (van Hooijdonk, 2015). With the rapid evolution of the Internet, the information overload problem has become severe in the e-service industry. More and more information and data have become accessible by e-services and users have issues to handle such large amounts of data. From the music industry perspective, the number of songs available from the music websites is continuously increasing, which is a “double-edged sword”. For the customers, there are more opportunities to choose from; however, they challenge the information overload problem (Din & Liu, 2014; Lü et al., 2012). The music recommender system is the promising approach that can resolve the individual information overload problem as it is based on the user’s necessities and preferences etc. and generate a more pleasant user experience (Ding & Liu, 2014). A recommender system gathers data and information of users’ behavior and preferences to predict users’ possible likes and interests and then implements recommendations for users (Lü et al., 2012). Artificial intelligence and machine learning algorithms are the two significant developments introduced by the new technology. The significance comes from the point that these algorithms revolutionized the method of discovering and experiencing the music phenomenon by analyzing peoples purchasing histories, social media behavior and listening practices across various devices. Through these analyses, music

50 services become capable of making new music recommendations intelligently. In that point, big data arises. Custom playlists are recommended utilizing big data via complex algorithms. Ultimately a unique taste in music developed through the changing mechanism of the way people experience and discover music. Big data gives power and sophisticated manner to the music industry players by giving pave the way to understand their customers' tastes better and collect information about their listening habits (van Hooijdonk, 2015). According to ZhenZhu and Jing-Yan Wang (2007), a sound recommender system has to build strong relationships between the recommender system and its users. This strong relationship makes users trust the recommendation service in the long term. The primary recommendation service in Spotify involves the Discover, the Related Artists, and the Radio lists. Spotify is also integrated with Last.FM. Discover: The “Browse” part includes many functions; one of them is “Discover”. Plenty of musical tracks recommended to users exist on the discovery page. These recommendations are based on users’ listening histories, favorite music that they have chosen by pressing “Like” or “Starred” or “Saved”, new releases of the artists they follow. Moreover, the music shared by friends make the discover page more personalized. The discovery function blends the Spotify technology and the content from Picthfork, Tunigo and Songkick and some others (“Spotify improves discovery function.,” 2012). Related artists: The “Related artists” function serves as follows: When the user listens to the song of one artist very frequently, then a list of artists who are similar to that artist will be displayed. The word "similar" refers to similar genres, the similar level of reputation of the artists, similar language of the songs, etc. For instance: When listening to the Buena Vista Social Club, the related artists will be Cesaria Evora, Omara Portuando, Bebo Valdes. Radio: Radio offers users the experience to listen to a random list of music that is particularly picked. In this sense, this function is the most personalized function in Spotify. This collection of music is based on one track or artist or playlist (Spotify Support, 2014). There are “Thumbs up” and “Thumbs down” buttons next to the name of the songs, which are used for the feedback to the music recommended. These feedbacks support the system to make more exact matches with users' music tastes (“Spotify radio-learn more,” 2018).

51 How the recommendation service in Spotify works? In order to produce its single uniquely influential discovery engine, Spotify blends some of the best strategies used by other services rather than using a solely single revolutionary recommendation model (Ciocca, 2017). 1) Collaborating Filtering: According to Dieleman (2014), who has made interning at Spotify on content-based music recommendation, the music recommendation service on Spotify is mostly based on the collaborating filtering method. The working principle of collaborative filtering is as such: There are two users, X and Y. If it is determined that these two users listen to mainly similar sets of music then the recommender system assumes that these two users’ tastes are possibly similar, the same thinking method can be also applied to songs. If the same group users listen to a different kind of music, the recommender system assumes that these different kinds of sets of music are similar to each other. This working mechanism is used in making recommendations (Dieleman, 2014). The historical usage data that arises from the users’ preferences are used in determining the tastes of the users. The mentioned data is the implicit feedback which is particularly the stream numbers of the tracks and additional streaming data, such as whether a user saved the record to their own playlist or visited the artist’s page after listening to a song (Ciocca, 2017). Since the collaborative filtering approach only works with the analysis of past usage data, recommending new and unpopular songs in collaborative filtering is the biggest problem of this approach. This situation is called the so-called cold-start problem. In order to be able to recommend new songs when they are released and to recommend unpopular but remarkable artists to listeners that they have never heard of, a distinct approach is required. In addition to this, the weakness of taking into consideration the characteristics of the music such as tone, genre, lyrics etc. when drawing up recommendations is another problem in this approach (Dieleman, 2014). 2) Content-based Filtering: Content-based filtering is another recommending approach that is being used by Spotify to improve its recommender system as an alternative to collaborative filtering. In this model, there is a focus on the text. The historical usage data of the listener is not taken into consideration by drawing up recommendations (Ding & Liu, 2014). Spotify has acquired the Echo Nest, a music intelligence and data platform company, on March 6, 2014, aiming to use techniques for content analysis like data mining and digital signal processing techniques, to strengthen its recommender system (Etherington, 2014).

52 There are several different kinds of information linked with music that could serve recommendation: tags, artist and album information, lyrics, text mined from the web (reviews, interviews, etc.) and the audio signal itself. Among these, the audio signal is the most interesting one and plays a huge and significant role in determining the listener preferences. Hence, analyzing the audio signal of the music by examining the attributes of the music like the genre, tone, theme of the lyrics, artists, album etc. is required in order to use content-based filtering (Dieleman, 2014). Convolutional neural networks which are the same technology that is applied in facial recognition software analyze the raw audio data. In Spotify’s case, they have been adjusted for the use on audio data instead of pixels. Eventually, Spotify understands the primary similarities between songs and hence which listeners might enjoy them, based on their own listening history via this reading of the song's key features (Ciocca, 2017). The analyzed data of the music will be obtained as track-related information, which then works as the base for making recommendations (Ding & Liu, 2014). The radio tool in Spotify utilizes content-based filtering to make recommendations. Various songs that share some similar attributes with the song that is chosen will be recommended to listeners (Ding & Liu, 2014). To give a personal experience on the matter, I released my own single three years ago. The digital version of the song was found in digital platforms including Spotify. Since I am a no-name singer and known by too few people, there are rarely other listeners to filter it against collaboratively. Since my song was not specified anywhere on the Internet yet, because of the same reasons, NLP models would not be able to pick up. At this moment, this model was the only model that does not distinguish between new tracks and popular tracks and helped my song very much to end up in a Discover Weekly playlist alongside the favorite songs. 3) Natural Language Processing (NLP) Natural Language Processing (NLP), which is the ability of a computer to interpret human speech as it is spoken, is another recommendation model that Spotify uses to improve its recommender system. It is a broad field in itself, often provided through sentiment analysis APIs. Technically, API stands for Application Programming Interface. As can be understood from its name, the words, track metadata, news articles, blogs, and other text around the Internet, consist of the source data of this model. The precise mechanisms behind NLP are not the subjects for this article. However, it can be explained how Spotify utilizes this method basically as such: Spotify searches the web constantly looking for texts written about music to figure out what people are

53 saying about specific artists and songs — which adjectives, what particular language and what kind of emotion tone, whether anger, disgust, fear, joy, sadness and social tone whether openness, conscientiousness, extraversion, agreeableness- are often used in reference to those artists and songs, and which other artists and songs are also being discussed alongside them. Echo Nest buckets Spotify's data up into what they call "cultural vectors" or "top terms". The mentioned adjectives, a particular language, emotion, and social tone associated with the artists and songs held an associated weight, which correlated to its relative importance — roughly, the possibility that someone will express the music or artist with that term. Table 2: “Cultural vectors” or “top terms,” as used by the Echo Nest.

Image source: How music recommendation works — and doesn’t work, by Brian Whitman, co-founder of The Echo Nest. Then, much like in collaborative filtering, these terms and weights are used by the NLP model in order to generate a vector representation of the song that can be adapted to decide if two pieces of music are similar. (Ciocca, 2017). To conclude, since I am a musician myself, I must be aware of the new musicians, new songs and new trends of the music industry at any time. These technologies help musicians much in this matter. From my perspective, this technique is brilliant in that I am often amazed by the system’s capability of recommending the perfect songs and playlists for me. It is a very useful and time- saving method for me to discover and add new songs to my repertoire. Eventually, I can simplify that such data is the answer to excellent user experience.

54 Chapter Two Research Chapter 2 presents and analyzes the findings of the study. 2.1 Aim and Research Methodology A quantitative analysis is used for the research. The primary tool for the research is the questionnaire which involves three different sections of questions. It involves the views of 314 music-related people. For this purpose, I went to Marmara University, Department of Economics to gather results for my inquiry. One hundred twenty students from the Department of Economics participated in the survey. The rest of the results are collected via online questionnaire. The results show whether the methods of digital music business models could be profitable in the future. The first part of the survey focuses on the personal background of the participants, determining the type of the person under examination. For this purpose, the questionnaire included three demographic questions. The second part of the survey examines the responders' music consumption preferences with regard to important attributes of online music services and music listening habits. It has a target to provide insights from music consumers. For this purpose, the questionnaire asked ten questions regarding consumers’ digital music service preferences, their motivations and consumer behaviors in this matter. The third part of the questionnaire examines the responders’ attitude towards piracy. It has a target to enlighten the piracy phenomenon by analyzing people’s attitude towards piracy in the music industry. For this purpose, the questionnaire directed four questions to participants regarding their stance towards piracy. 2.2 Results of the Questionnaire 2.2.1 Demographics The total number of participants in this questionnaire was 314. Out of 314 respondents; 57,32% were males (180 males) whereas 42,68% were females (134 females). Age categories of 18-24 and 45-54 years old were the substantial majority of respondents in this survey with 32% and 29% respectively. The third most common age category was the category of 25-34 years with a rate of 18% followed by the category of 35-44 years old with 13%. There is also a small representation from ages 55-64 who were 7% and 65+ who were 1%. The minority of respondents are still students (31%) while the majority is already employed (67%). Engineering, Sales & Marketing,

55 Education & Training, and Arts Industry are the top industries with the highest number of responders with the following percentages respectively; 12%, 10%, 10%, and 8 %. 2.2.2 Music Consumption Figure 1– Hours of Listening to Music per Week

Out of the 314 respondents 34,71% of them (Figure 1) stated that they listen to less than 5 hours of music per week, 28,34 % reported that they listen to 5-10 hours of music per week, 26,43% indicated that they listen to more than 15 hours of music per week, and 10,51 % stated that they listen to 10-15 hours of music per week. Figure 2 – Hours of Listening to Music per Week-Age Groups

41% of the 25-34 age group (Figure 2) listen to more than 15 hours of music per week. This percentage is the highest listening music per week rate compared to other age groups. The second age group that has the highest rate of hours of listening music rate per week is the 18-24 age group. We can conclude that younger respondents listen to more music than older age groups. 29% of the 18-24 age group listen to more than 15

56 hours of music per week and 28% of the 35-44 age group listen to more than 15 hours of music per week. Only 12% of the 45-54 group listen to more than 15 hours of music per week. In the same trend, 53% of the 45-54 age group listen to less than 5 hours of music per week. This percentage is the lowest listening music per week rate compared to other age groups. Figure 3 – The Rate of Digital Music Service Subscription

Out of 314 respondents, 68.15% (Figure 3) use and 31.85% don’t use any Digital Music Subscription Service currently. Figure 4 – Digital Music Services Utilized

When asked the participants which digital music services they use, 69.16% of respondents (Figure 4) stated that they solemnly utilize the Streaming Platform Spotify. Fizy is the second most popular streaming Platform after Spotify. 6,07% of the respondents solely use the Digital Music Streaming Platform Fizy. Fizy is a digital music service based in Turkey. The service is conducted by Turkey’s leading mobile phone operator Turkcell. Due to this fact, the operator offers advantages on the

57 subscription conditions of the music service to the users who are already users of the mobile operator Turkcell. This cooperation has a positive effect on the rate of the people who use Fizy as their preferred Digital Music Service. Apple Music is the third most popular Digital Music Streaming Service with 5,61%. 5,61% of the respondents merely use Apple Music to utilize digital Music. 10,28% combined Spotify with other different digital music platforms like Apple Music, Deezer, Fizy and Soundcloud to utilize digital music service. Figure 5 – Music Consumption Mediums Utilized

With 45.86% (Figure 5), YouTube is the respondents’ favorite music consumption medium and with the 34,71% rate Digital Music Services are the respondent’s favorite music consumption medium after YouTube. These results indicate us the further growth of the streaming power. This situation is due to embraced change and technology by the industry. The music industry has not just embraced the evolution of streaming, it has been proactively driven by it. Streaming’s power is focused on maximizing the possibilities granted by advancements in technology and has formed alliances with the greatest and most forward-thinking firms in the tech industry. These results display us the rise of the digital realm of the music industry. According to the Global Digital Music Report 2019, in 2018, global recorded music revenues calculated $19.1 billion with a growth rate of 9.7. The 9.7 growth rate is one of the most accelerated growths rates the industry has observed since IFPI began tracing industry sales in 1997. According to the same report, digital revenues rose by 21.1% to $11.2bn and crossing the US$10 billion mark for the first time ever and now accounting for 58.9% of total recorded music revenues. In the same direction, total streaming revenues shifted the sole most significant revenue source with a 34.0%

58 growth rate to $8.9bn and with paid streaming revenues up by 32.9%. According to the same report, by the end of 2018, there existed 255 million users of paid subscription accounts globally with new 79 million users having been joined during the year and 46.4.9% of total global revenue arises from streaming. The revenue comes from the digital downloads follows a 21.2 % drop. In 38 markets, more than half the recorded music market revenue is constituted by digital revenue and physical revenue follows a 10.1 % drop. Facing the backdrop of a global market that had lasted 15 years of the notable revenue drop, record companies are operating to feed the recent return to growth, and secure music creators obtain fair value. Record companies' continuing investments' and digital shift that is enhancing fans' experiences are the reasons for the growth in developing music markets. Results show that record companies have made a great effort to form music’s transformation for the good of fans and music creators the same. Eventually, followed with continuous technological innovation and supported by the efforts of record companies and their partners’, the realm of the music and reach of the fans enlarge year after year. However; it must be known that the industry is still very much in recovery remains. According to Glen Barros (2018), COO of Concord Music, it is a must to embrace and adopt all of the new business opportunities to be better off as an industry and having an open-minded perception is crucial in this process. Parallel with Barros, Julie Swidler (2018), EVP Business Affairs and General Counsel, Sony Music, points out the advantage of digital technology for the industry players. According to her, technology enables a better understanding of the insights of the listeners, and this valuable information gives power to artists and managers (Majewska-Wierzbicka & Czeczot, 2018).

59 Figure 6 – Music Consumption Mediums Utilized-Age Groups

When the age groups of the respondents whose favorite music consumption mediums are YouTube and Digital Music Services are examined, it can be concluded that 18-24 age group constitutes the highest percentile whose favorite music consumption medium is YouTube with %58,19 (Figure 6). 25-34 age group represents the lowest percentage whose favorite music consumption medium is YouTube with 31,03% whereas, the 25- 34 age group includes the highest number of people whose favorite music consumption

60 medium is Digital Music Services. 45-54 (22,22 %) and 55+ (20%) age group consisting of the lower number of people whose favorite music consumption medium are Digital Music Services. In this aspect; it can be claimed that Digital Music Services and YouTube are substitute goods based on these results. In consumer theory, substitute goods or substitutes are products that are perceived as alike and comparable by the consumers that possessing more of one product makes them demand less of the other product (Wikipedia, n.d.). Figure 7 – Rate of Free/Paid Subscription Streaming

Asking the participants if they use digital music services in free or paid basis, 61.93% of respondents (Figure 7) who use digital music services stated that they use these services on a paid basis and 38,07% of respondents reported that they use these services for free.

61 Figure 8 – The rate of the reasons for not using paid versions of music services so far

Among the participants, who use the digital music services on a free basis, 45.24% of them (Figure 8) solely claim that they have not used the paid basis of the digital music services because they believe “Music has to be free”. The second most common reason for not using the paid versions of digital music services among participants is that they think it is not worth using it. Meaning that, according to users, YouTube can be used as a substitute for Digital Music Services. This view supports the statement of Spotify and YouTube of being substitute goods. 11.9% of the respondents claim that they have not used the paid basis of the digital music services because of the financial reasons and 3,57% of the respondents claim that they have not used the paid basis of the digital music services because they do not want to give their credit card information due to negative experiences that they had gone through in their past regarding credit card fraud. Since the increase in the absolute number of the paid subscribers is fueling the revenue component of the digital music services' business models, creative methods are needed to be transitioning to a paid subscription. One needs to be aware of that all the different channels to manage and the need of the market by market approach since the consumer behavior varies dramatically. One-size-fits-all view has to be abandoned for the streaming transition. It can be concluded that music services are vital to developing robust consumer segmentation and providing differentiated products that are more likely to reach either people who are not converting to paid subscription or are ready to spend more for richer offers.

62 With 13,06% (Figure 6), radio is ranked number three in favorite music consumption medium by the respondents. According to the source, 32% of radio listeners were aged 55 and older. Figure 9- The rate of the people who bought a CD in the past 12 months

Figure 10 – The rate of the reasons for buying a CD in the past 12 months

For people who use the free versions of the streaming services, it is not possible to use the service in the offline version. In the present case, a stable Internet connection is required to listen to music whenever and wherever they want. The requirement of streaming services to have a stable Internet connection is a considerably sharp disadvantage for the utilization on for example smartphones while traveling and hence greatly favors the use of traditional radio, downloaded music files and also CDs. Even a tiny percentage of the respondents’ favorite music consumption is hard copy. 21,66% of the respondents (Figure 9) stated that they bought a CD in the past 12 months. Not surprisingly the reason for 25% of respondents’ (Figure 10) buying a CD in the past 12

63 months is to listen to music in their cars. The downturn of the hard copy music industry finds its display as well with only 0.32% of respondents (Figure 5) stating they would utilize hard copies. According to the Global Music Report 2018, there is a 5.4% decline in revenues from physical formats. This decline is a slightly higher rate than the rate of the prior year, 4.4%. It is crucial to point out that the declining rate of the consumption of physical forms in the majority of markets; however, the revenue coming from the physical products still accounted for 30% of the global market and a larger percentage of market shares in countries such as Japan (72%) and Germany (43%). Figure 11 – The rate of the reasons for buying vinyl in the past 12 months

Nostalgic Feeling

Because of its sound quality (analogue recording etc.), Nostalgic Feeling

Because of its sound quality (analogue recording etc.)

0 20 40 60 80 100 Interestingly, even though only 0.32% of respondents utilize hard copies, 4.46% of respondents’ (Figure 6) favorite music consumption medium is vinyl. According to the Global Music Report 2018, globally, revenues from vinyl sales rose by 22.3% and made up 3.7% of the total recorded music market in 2017. This data shows us the increasing popularity of vinyl. Asking the participants if they bought vinyl in the past 12 months, 17,83% the participants stated yes. The reason for participants to buy vinyl in the past 12 months is shown in the figure. 40,35% of the respondents indicated that they purchased vinyl because of its nostalgic feeling and another 31.58% of the respondents stated that they bought vinyl because of its sound quality (analog recording etc.). 28,07% of the respondents stated that they purchased vinyl because of both of the reasons: Nostalgic feeling and sound quality.

64 Figure 12 – The rate of the motivations for Willing to Pay for Digital Music

The hedonic value of a given music item differs from consumer to consumer. Respondents’ greatest motivation for willing to pay for digital music is “Discovering New Music” with 19,53% (Figure 12). Being able to create playlists, quickly find the music that people already know they will like, higher quality files and supporting the artist are the top-rated motivations after the convenience of discovery of new music motivation for consumers being willing to pay for digital music with the following rates respectively: 15,92, 11,68, 11,68, 11,47. These rates demonstrate the prominence of the Digital Music Services’ Business Model Canvas’ value proposition component by indicating respondents’ increased demand for the tools of Streaming Services which is provided by the Streaming Services in order to add value to their service in the first place. Discovering new music is the respondents’ biggest motivation. The players must be aware that the new technology completely changed the ways listeners discover music. Digital Music Services make a personal touch to the music listening experience. Spotify gives recommendations from its personalized features, such as Discover Weekly, Release Radar and Daily Mix to its users to deepen their users listening experience. Results show how recommending systems of digital music services outstand in listeners’ music listening experience. It is a must for a Digital Music Service to concentrate on and enhance the user’s music listening experience by

65 perfecting the process of gathering data and information of users’ behavior and preferences to predict users’ possible likes and interests. Furthermore, the study has found out that artificial intelligence and machine learning algorithms alter the way people discover and experience new music in the previous chapter. In order for the music services to be capable of recommending new music to listeners intelligently it is an obligation for them to keep up with and embrace all the outcomes that the new technology introduces to the industry and be aware of each user’s unique taste in music. With 15,92%, “Being able to Create Playlists” is ranked number two in motivations for willing to pay for Digital Music. According to the company info of Spotify, there is more than 3 billion number of playlists created by the users. Before the Internet, people used to build collections of cassettes and CDs of their favorite songs. These results show us that people still continue this tradition in the new digital environment. With %11,68 “Being able to quickly find the music that people already know they will like” and “higher quality files” are ranked number three in motivations for willing to pay for Digital Music by the digital music users. Spotify’s one of the tools that add value to its services is making available practically free music anywhere anytime. Newness, accessibility and convenience are the value propositions that are musts for the digital music services to offer to its customers. Additionally, the music library of the digital music services in the sense of the number of tracks and the wealth of the types of music is crucial for the users to be able to find any music they want to listen to. Higher quality files enhance the music listening experience of music listeners. People who get used to the improved sound quality of the streams would easily differentiate the difference between the higher quality music files and lower quality music files. If the quality of the service is not high, then it will cause the customer to leave the service to search for a better and high-quality alternative. This alternative could even include the use of illegal peer-to-peer file sharing networks. Thus, high-quality audio plays a notable role in streaming services that the services must dwell upon. 11,47% of the respondents specify that their motivations for willing to pay for digital music are “supporting the artist.” To the contrary of the value propositions, this motivation is related to the fandom phenomenon. Fans are the most apparent and identifiable audiences. People who wear their favorite teams' colors, people who know every small detail about a pop star's life, people who sit in line for hours for front row ticket to music concerts are the examples of the fandom phenomenon.

66 According to Fiske (1992) Fandom is a common feature of popular culture in industrial societies. It selects from the repertoire of mass-produced and mass-distributed entertainment certain performers, narratives or genres and takes them into the culture of a self-selected fraction of the people. Fans create a fan culture with its own systems of production and distribution that forms what I shall call a ‘shadow cultural economy (p 30). In contrast to the high percentage of the motivation of “supporting to an artist” only 2,12% of the respondents specify that their motivations for willing to pay for digital music are “supporting to the label”. This situation reveals the losing power of the record labels. Music technology is on the brink of substituting the record labels. The direct relationship between artists and fans may effectively replace record labels. This situation brings about a crisis in the traditional business model of the recording industry. 8,07% of digital music users’ motivation for willing to pay for digital music is because they do not find digital music expensive. This means that the budget spent by 8,07% of the participants on digital music does not take up much of their total budget and this financial condition leads to motivation for 8,07% of the digital music users for willing to pay for digital music. 7,22% of the respondents’ motivation for willing to pay for digital music is because Digital Music Services are user-friendly. This motivation is also related to the value proposition component that Streaming Services has in its Business Model Component. As mentioned before, convenience plays a significant role for the end user to stream online music. Ethical reasons and Risk of Getting Caught with 5,92% and 0,21% respectively have the lowest percentage of motivations for willing to pay for digital music. These two motivations are related to people’s attitude towards piracy. We will be discussing the results of the respondents’ attitude towards piracy phenomenon in the following chapter.

67 2.2.3 Perception of Piracy In this section, whether and to what extent people act legally will be analyzed. Figure 13 – The rate of illegal music acquisition

When the participants were asked if they ever acquired music illegally, 53,5% of them (Figure 13) stated that they had not acquired music illegally ever and 46,5% of respondents reported that they had obtained music illegally. This shows a clear underlining of the insufficient intellectual property protection and growth of online opportunities to acquire files illegally. Figure 14 – The rates of the ways of acquiring illegal music

68 When respondents were asked about their method of acquiring music illegally, 39,91% of them (Figure 14) stated that they download from the streaming sites (e.g., YouTube), 25,34% said that they download illegal content from file sharing sites, 23,0% reported that they copy a friends’ or relative’s collection and 11,74% indicated that they buy an illegal CD. It can be concluded that, in the era where the legal digital music streaming services did not exist or were not widespread, because the substantial business model was not meeting the demands of the users, people were seeking alternatives like illegal music downloading, copying a friend’s or a relative’s collection or buying an illegal CD. According to a survey conducted by YouGov, global data opinion and data company, music piracy has fallen dramatically over the last five years under the favor of streaming services (Jones, 2018). According to YouGov Associate Director Marshall (2018) the advantages of the streaming as low costs and ease of use cause a behavior change in the consumer in the sense of illegal download. It doesn't mean that streaming entirely banishes digital piracy; however, this altering depicts us that there are encouraging signs for the music industry, and these signs help us to see the light at the end of the tunnel. Figure 15 – The rates of the respondents who think/don’t think piracy is a kind of theft

Even 46,5% of the respondents (Figure 13) stated that they had acquired music illegally, 71,02% of the respondents (Figure 15) said that they think piracy is a kind of theft. It shows us despite the fact substantially of the people do not find acquiring illegal music ethical, they still continue to acquire illegal music.

69 In order to fight effectively with piracy, it needs to be analyzed what makes it so gratifying. “Illegal downloading allows consumers to engage in a crude ‘do-it-yourself’ form of price discrimination” (Rob & Waldfogel, 2004, p.31). 30% of the respondents stated that they do not think piracy is a kind of theft. The first reason of respondents for seeing piracy not a kind of theft is because they argue culture needs to be universal and free. In today's technology and Internet world, anything goes on the Internet is open, to be used again and again and becomes a public commodity somehow. They think all the cultural activities must be reachable for not only the rich but also for the poor. People who have financial problems also have to be able to reach the cultural, musical, products since music is universal. As Liebowits (2003) argues piracy occurs when music consumers prefer to acquire music in an illegal way instead of legal purchases. In this aspect, piracy is a type of purchase substitution. Hence, financial difficulties lead people to download and stream from illegal sources. Especially the piracy rate is so much correlated with the countries’ economic condition. Anti-piracy technology developer company Muso indicates that piracy sites are demanded mostly by the users who live in lower income countries. Respondents who live in the states that are not in an economically good condition may have a little willingness to pay. According to this view, artists have alternative sources of earning money such as concerts, advertisements. Due to this fact, they should give their music for free. In that point, we come across with the third-party programs. This point of view says music should be available to everyone and with this purpose third-party programs allow people who cannot afford to purchase music to download music for free. In my personal opinion, lower-priced digital music files would also help restrain illegal file sharing and reinforce the number of people purchasing music legally from online services.

70 Figure 16 – The rates of the respondents who feel like/do not feel like downloading music from streaming websites through third-party programs should be officially illegal and prosecuted.

The streaming services have regenerated the music industry. However, at the same time, they presented a new way of listening to music illegally. According to IFPI, so-called stream ripping (illegally saving music while streaming it) is now the most widespread form of music piracy. This new form of music piracy substitutes illegally music downloading from Torrent websites or other forms of online exchanges. Since today plenty of music is available on YouTube or on similar platforms, under the favor of a small tool it is possible to rip and save the song a person is searching for. It may seem less dark than hunting through the malware-infected back roads of the Internet, but it is also illegal in the end. While looking at streaming as the future of the business, we have to be aware that they also create an environment for illegal acquisition of music with the third-party downloading programs. Hence, the opinion of respondents is examined whether the third-party downloading programs should be officially made prosecutable and unlawful to reduce the abusiveness of streaming and to analyze if they become a significant threat for the music industry. 41,4% of respondents (Figure 16) strongly disagree with the thought of making third-party downloading programs illegal and prosecutable. Another 10,83% disagree while 18,47% took a neutral stance. On the contrary, 30% are pointing out that acquiring music this way is an “illegal act” and should, therefore, be prosecuted. Consequently, the conflict with third-party downloading programs

71 becoming illegal leaves the door opens to scan for new business models to possibly counter illegal downloading or abuse it to an advantage. The further inducement of respondents for seeing piracy not a kind of theft is because they support that piracy widens the target audience of the music. Since the artist can reach to so many people even with its pirated products, this circumstance even has a contribution to the artist. To the contrary of the wrong image of piracy, according to this view, piracy has a positive effect on the marketing process of cultural goods. It works like a word of mouth marketing mechanism. People can still support their favorite artists’ music even with pirated products. Although illegal downloads are not resulting in record sales which is to the detriment of the artist, at the same time illegal downloads certainly brings about to more “publicity and popularity”. This status leads to an increase in concert attendance and therefore it positively links to causing a “buying decision. While for example Spotify or Apple Music generates income, YouTube or Soundcloud can preferably be employed to obtain publicity, even though they are risky regarding property protection. In parallel with the first view, it is suggested that record sales are not the case of the art anymore and the main revenue administrator would be concert or gig participation.

72 Chapter Three Conclusion and Implications The music landscape is altered by digital technologies dramatically and lastingly. As pointed out early on, album sales and the global music industry have been declining steadily since 2004. The significant driving factor of the decline is the online market and its opportunities. Thus, for the music industry, initially digital was perceived as a threat and it indeed devastated the business. After all, these digital technologies obliged to alter the practices of the music industry in the sense of engagement, the business, and the laws of ownership. At present, new consumption means are taking over the business and illegal downloading is simpler than ever before. Intellectual property protection is, therefore, harder to implement leaving some business models behind in competitiveness, such as the traditional business model (Vaccaro & Cohn, 2004). On this new landscape, it is required for all the players of the industry to learn and internalize the modern practices of the music world in order to be able to remove their obstacles and survive. The players must leave the traditional marketing strategies like putting posters up to advertise new bands and new music, instead utilize the latest marketing strategies that Web 2.0 has made it possible to be successful. Otherwise, they may be damaged by these innovations. The empirical data showed that the leading medium between the respondents was the streaming platform with 45% of the respondents whose favorite music consumption medium is YouTube and 35% of the respondents’ whose favorite music consumption medium is Digital Music Services. Combining this data and from looking at the literature, we can conclude that, streaming as a medium is the most significant factor currently and, in the future, when it comes to business models in the music industry and should be the main focus. When looking at generating income, as well as streaming growth rates, we can assume that streaming indeed will be the primary distribution medium in the future. Furthermore, 40% of respondents asserted they were using third-party programs to download music illegally from the streaming websites. Also, 42% strongly disagreed with the idea of making third-party downloading software illegal and prosecutable. Combining these insights, we might assume that streaming is not solely the future on the income site but also on the overall exposure and spread site. As preventing these illegal downloads instantly is nearly not possible, the online music market requires labels and artists to shift their focus from protecting their intellectual property online to instead applying these downloading techniques for promotional goals. For artists and labels to stay competing, they need to interiorize these factors and introduce a new business model, namely a mixture of the integrated and the promotional business model to generate a maximum of income.

73 Consequently, players must embrace and utilize powerful technology. It is out of the question for an individual to survive who don't adapt to this shift. Streaming platforms, therefore, take the fundamental role in distribution channels. As streaming revenues are still lacking and album sales are declining, income has to be generated in different fields, such as concert ticket and merchandise sales. In the future, it has to be concluded whether these statements and propositions hold. Further research with more comprehensive empirical studies could further amplify this topic. Ultimately, the actors of the industry who have managed to adjust to the turbulent music landscape by shaping the music world with its knowledge, skills, and experience are capable of adapting to the digital landscape and survive. Today, the business still has not wholly recovered. The perfect signs of growth show the success of this struggle for stability. What can be agreed on is, there is no turning back. It should be not forgotten that in the new music economy the only way to achieve and succeed is to go forward. The goals of entertainment, music organizations are same as the media organizations but are different from other types of structure. It is not identical to manage Mercedes with managing BBC so on and so forth. The process is more complex. Most importantly, it is difficult to evaluate the performance of a music product. We cannot consider the music products as usual products such as oil or car. There are too many diverse tastes and preferences. For me, first of all, we have to answer these questions: “What is the quality?” and “What is success?” Is there any positive correlation between the view number of a song on YouTube and its quality? Can we count all the high budget music projects as qualified? Therefore, I believe that we cannot evaluate the performance of a music product from only one aspect. We have to examine it in two dimensions: Quantitative and Qualitative. Quantitative data include economic and other types of social statistics measuring the success in advertising cost equivalent, rating, number of people who attend the live event, YouTube viewing rate, number of ticket sale and more. My criticism comes at this point; in today's music industry, record label owners only evaluate the performance of a music product based on the quantitative data. YouTube view number is the most important indicator for the record companies to make a deal with the no-name artists and to decide if one music product is successful or not. Owners see music products as these numbers and take these numbers as a guarantee of the financial success. However, they skip a crucial point, which is the qualitative analysis. In my opinion, a musical piece has to have a positive impact on individuals. It has to involve cultural aspects, aesthetic concerns and intellectual capital. It has to raise awareness and wake emotions. “Are people talking about your song, if so, what are they saying about your song, how unique, artistic, sensitive are

74 your melodies and lyrics?” These are the most critical questions to answer. As I mentioned at the beginning of the paper, in 2015 my way crossed to Sony Music Turkey as an artist. Depending on my observations, Sony Music Turkey adapted very much to this new digital landscape. The company was very successful at catching the latest trends. However, its evaluation mechanism was only quantitative which caused me to separate my way with the company. They were not respecting my artistic skills. Despite the fact that I had more than 30 songs they pushed me to sing certain songs that do not have artistic properties. The reason was not surprisingly, to have more financial revenue potential with the songs. This is also due to the new digital landscape; because in this era record labels have a big fear of losing money. This situation results in record companies to tighten their budget and only grant funding to artists that are expected to thrive commercially and profitably. As I have indicated in my study, in this new landscape, artists are not as dependent on record companies as they used to be, under the favor of innovative technology. However, this changing mechanism forces musicians to learn how to promote themselves by learning business skills and know-how of the record labels to use this advantage. In my opinion, the contradiction starts at that point. Because artists' perspectives on the world, the habit of mind, skills, knowledge, focal points are different from other people in society. From my point of view, it is not logical to expect artists to promote their own work with the right marketing techniques. Because artists are the people, who perform art. Performing art and marketing are very different things from each other. Hence, as for me, the division of labor is a must. Since in this new landscape, the digital world gives rise to abundant of music available; in some aspect, artists have more difficulty in attracting notice. It is very hard for the artists who don't have business skills and know-how of the record labels to reach so many people and be successful although they are very talented. This mechanism hinders some gifted musicians from entering the music industry. Hence, in my opinion, record labels who are able to evaluate the art product both qualitatively and quantitatively are still needed for promoting the artist. Lastly, as it is mentioned before in the previous chapters, with the induction of digital music services, people become able to reach practically free massive storage of songs anywhere anytime. In the past, people had to go to the music store, search for the music album they are looking for in there and if they can't find it there, they had to search for another record store. People used to touch these music albums physically. Whereas, now listeners have the ability to reach their favorite albums by just pressing one button. This situation led to a decrease in the audience's respect for music. This is why the popularity of today's songs lasts for only a short period. Although people can reach the music so easily and quickly, they should be

75 aware that there exists a huge amount of labor in the music product they listen to.

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83 APPENDIX SURVEY Masters Dissertation Questionnaire Research: Digital Music Business Models

My name is Esra Poryalı and I am currently studying for a master’s in digital media, Communication and Culture at Aristotle University, Thessaloniki. I am conducting research into consumers behaviors in the sense of music consumption and piracy attitude. The questionnaire consists of 30 questions and will take no longer than 15 minutes to complete. All responses will be kept anonymous, and no one will be identifiable in the research.

Digital Music Business Models - Questionnaire

Part 1- Demographics

Age:

Gender:

Occupation:

E-mail address:

Part 2- Music Consumption

1. How much time do you spend listening to music in a week on average? <5 hours 5-10 hours 10-15 hours >15 hours

2. Do you use any music subscription service (Spotify, Apple Music, Fizy, Deezer etc.) currently? Yes No

3. If yes which one?

84

4. If yes, do you use these services on a free or paid basis? Free Paid

5. If free, why have you not used paid versions of music subscription services so far? (Multiple answers possible. Tick all that apply)

It is expensive

I don’t think it’s worth using it I think music has to be free

Other (Please specify).

6. Did you sign up for the three-month free trial for any digital music service?

Yes No

7. If no, why did you not sign up for any digital music service trial? Please select the option that was most significant, even if several apply. I wasn't aware of it

I already use another streaming music service

I prefer to listen to music in other ways

I don't listen to much music

I don't have a device on which I can use it

Other (please specify).

8. Did you cancel your subscription after your three-month free trial is over?

Yes No

85 9. If yes, why did you cancel your subscription rather than becoming a paying subscriber? (Multiple answers possible. Tick all that apply) Financial reasons

I prefer other services I've used and went back to those

I didn't like the way the app worked (e.g., it was confusing, not user friendly)

Too hard to start again with a new service (e.g., I have playlists on other services that I couldn't import) There were missing features (please specify which)

I was fine with just the free features

Other (please specify).

10.What is your current status of digital music service trial?

Still in trial Now paying Canceled

11. Have you ever purchased music (Physical or digital) legally?

Yes No

12. If yes what is your preferred way of purchasing music?

Hard Copy Digital Download

13. Have you bought a physical CD in the past 12 months?

Yes No

14. If yes why, please specify

86 15. Have you bought vinyl in the past 12 months?

Yes No

16. If yes, why, please specify.

Because of its sound quality (analogue recording etc.) Nostalgic feeling

Other (please specify)

17. Have you bought any digital music files in the past 12 months?

Yes No

18. Which of the following mediums do you utilize to listen to music? Please rank the selections.

YouTube Digital Music Services (Spotify, Apple Music etc.)

Purchasing Digital Music

Radio TV

CD

Cassette Vinyl

Torrents etc.

Other (please specify)

87 19. How often do you purchase digital music after listening to it on the music streaming website? Never

Sometimes

Often Always

20. What is your motivation for you willing to pay for digital music? Rank the importance of various features when it comes to streaming music services (Please mark all that apply).

Discovering new music Quickly finding the music I already know I am like

It is not expensive

Being able to create playlists Its social aspect

Being easy to use (User friendly)

Supporting the artist Supporting the label

Higher quality files

Easier to acquire

Risk of getting caught

Ethical reasons

Other (please specify)

88 21. Do you support the music industry in other ways? If yes, how? (Multiple answers possible. Tick all that apply) Going to concerts, festivals Buying Merchandise other (please specify)

Part 3- Piracy Attitude / Justifications for illegal downloading

1. Have you ever acquired music illegally? Yes No

2. If yes how did you acquire it?

File-sharing sites Streaming site download (e.g.: YouTube)

Copying a friend’s relative collection

3. Do you think piracy is a kind of theft, stealing?

Yes No

4. If yes, why/ why not? If no, why/why not) (Please specify)

5. How much do you think piracy hurt the music industry? Not at all hurting 1 2 3 4 5 extremely hurting

6. Do you think artists should give away their music for free? Never 1 2 3 4 5 Always

89 7. Do you feel like downloading music from streaming websites through third-party programs should be made officially illegal and prosecuted? (For example, downloading from YouTube using mp3converters)

Not at all 1 2 3 4 5 Extremely

8. Do you have any idea/ideas of how to improve the current situation in the music industry regarding piracy?

9. Do you feel like there should be a change in business models regarding the electronic music industry? If yes, what changes and why?

Thank you for taking part in my research.

90