Media & Content Industry: Music case study Study for IPTS Seville, 26 October 2011 Andra Leurdijk & Ottilie Nieuwenhuis 2 October 26, 2011 Andra LeurdijkMusic industry - a case study Main questions 1. What are the main economic developments in the music industry? 2. How have digitisation and the internet affected the value network in the music industry? 3. How have the digitisation and the internet affected the competitiveness of the European music industry? 3 October 26, 2011 Andra LeurdijkMusic industry - a case study Three main revenue streams 4 October 26, 2011 Andra LeurdijkMusic industry - a case study Eurostat definition of sound recording and music publishing Sound recording Music publishing Related activities • Production of original • Acquiring and registering • Publishing of music and (sound) master recordings copyrights for musical sheet books (tapes, CDs) compositions • Sound recording services • Promoting, authorizing and Not included: activities in a studio or using these compositions • Reproduction from master elsewhere in recordings, radio, copies of music or other • Production of taped (i.e. television, motion pictures, sound recordings, see non-live) radio live performances, print 1820 programming, audio for and other media. • wholesale of recorded film, television etc. • Distributing sound audio tapes and disks, see recordings to wholesalers, 4649 retailers or directly to the • Live performances public* * Units engaged in these activities may own the copyright or act as administrator of the music copyrights on behalf of the copyright owners. 5 October 26, 2011 Andra LeurdijkMusic industry - a case study Characteristics of music industry 9High up-front costs 9Uncertain demand, hit driven 9 Strategies of control: Stars, genres Control over value chain Management of copyrights 9 Highly concentrated market, dominated by 4 vertically integrated majors, app. 70% of the international market 9Many SME’s €4.449 billion €4.240 billion €2.186 billion €1,792 billion Revenues in 2010 6 October 26, 2011 Andra LeurdijkMusic industry - a case study Number of firms, employees and labour productivity in EU 27 music industry, 1995-2007 1995 2007 Number of firms 4,982 11,833 Number of employees 15,407 21,023 Average number of employees 3,09 1,78 per firm Labour productivity 44,8 67,3 Source: Eurostat Labour productivity is the amount of goods and services that a worker produces in a given amount of time. 7 October 26, 2011 Andra LeurdijkMusic industry - a case study The European music industry Share of EU members states in total value added of the music publishing industry in EU27 (2007) 8 October 26, 2011 Andra LeurdijkMusic industry - a case study Cost structure of the music industry Costs for supply chain amount to 38%; for marketing and promotion to 28% Royalties for composer and artist are significantly smaller: 6 and 12% Source: Aris & Bughin (2009) based on McKinsey analysis 9 October 26, 2011 Andra LeurdijkMusic industry - a case study Revenue streams in music industry Source: IFPI RIN (2011) 10 October 26, 2011 Andra LeurdijkMusic industry - a case study Timeline: technological innovations 1990s: CD – Replacement of 1940-1950: Television changed LP collections led radio format, increasing reliance to a new revenue on music and news. stream. 1900 1920 1940 1960 1980 2000 1920s: Commercial 1980s: Music Tapes Radio – Declining – Hometaping led to record sales. Mergers declining LP sales. with radio networks. 11 October 26, 2011 Andra LeurdijkMusic industry - a case study New value chain music industry Production, Marketing, Creation Editing Promotion Distribution Consumption Physical retailers Music labels Physical retailers Consumer MediaMedia E-retailers Artists E-retailers Artists (Radio,(Radio, A&R) Music labels Device Manufacturers New Labels Telco’s Pure Web Players Artists Concert Promotion Companies Consumers Traditional Players New Players 12 October 26, 2011 Andra LeurdijkMusic industry - a case study Creation / production 9Recording, mixing, mastering, editing and producing is nog longer attached to time and space, easier to produce 9Artists can have more direct contact with audiences/fans and have access to alternative funding options, such as crowdfunding 9Less dependent on intermediaries? Surroundings of the Nilento recording studio in Sweden October13 26, 2011 Andra LeurdijkMusic industry - a case study Development in global consumer sales for physical and digital recorded music (2005 – 2015*) *Figures for 2011-2015 are expected sales for recorded music. Source: PWC and Wilkofsky Gruen Associates, 2010 14 October 26, 2011 Andra LeurdijkMusic industry - a case study Change in physical and digital sales Change in US United Nether- Switzer- Germany France Spain Italy Belgium Million dollars Kingdom lands land physical sales -684.6 -288.1 -484.9 -208.4 -205.6 -55.8 -83.3 -44.5 digital sales 245.7 104 70.5 18.5 11 12.4 18.3 3.5 difference -438.9 -184.1 -414.4 -189.9 -194.6 -43.4 -65 -41 15 October 26, 2011 Andra LeurdijkMusic industry - a case study Piracy or consumer dissatisfaction? Consumer Piracy dissatisfaction? OR Protest against verdict of Pirate Bay in Sweden, 18 april 2009 16 October 26, 2011 Andra LeurdijkMusic industry - a case study Sharing vs. buying For every 5 files shared… …1 song is bought. For every 15 to 20 downloads, one track less is sold. Downloaders also go to more concerts and buy more Source: Rob and Waldfogel (2004) merchandise (TNO, 2009). 17 October 26, 2011 Andra LeurdijkMusic industry - a case study Music industry response to file sharing 9 Filing law suits against P2P services, closing down Napster (2003) 9 Then licensing of music to online music providers (Apple iTunes store in 2003) Source: Apple Inc/European Audiovisual Observatory 18 October 26, 2011 Andra LeurdijkMusic industry - a case study Business models Services Options for users Users download and buy single Single song downloads songs at fixed price per song. Users pay for limited download Membership quota per month or other fixed period. Unlimited access to catalogue. Membership ‘all-you-can- Users get temporary license to eat’ listen to music. Music is streamed, users are Ad based model unable to make own playlist (but do have ways to personalize by liking or disliking played songs. Access to music catalogue in combination with other media products, such as mobile phones, Bundling iPods or in combination with mobile subscriptions Users can download music and Cloud Services store this in a personal box ‘in the cloud’ 19 October 26, 2011 Andra LeurdijkMusic industry - a case study Company case: Spotify (Sweden, 2006) 9 Streaming service and online music store 9 Available in 8 EU countries & US, 300 employees 9 Freemium and subscription model (Jun 2011: 3.13 million free user, 1.54 million paying subcribers) 9 Facebook account needed to sign up Subscription model Price / Month Description Free 0 Online ad-supported desktop version Unlimited 4,99 Online ad-free desktop version Premium 9,99 Premium service, mobile and offline 10 tracks 15 tracks 40 tracks 100 tracks Price €9.99 €12.99 €30.00 €60.00 Price per track €1.00 €0.87 €0.75 €0.60 20 October 26, 2011 Andra LeurdijkMusic industry - a case study Company case: Spotify 9 After the introduction of the Spotify-Facebook partnership (September 2011), the number of users grew with one million new users a month •Revenues from £11.32 million in 2009 to £63.17 million in 2010 (458% increase) •More revenues from subscriptions than from advertisers •The company is not yet profitable 21 October 26, 2011 Andra LeurdijkMusic industry - a case study Consumer surplus? 9Consumers can now listen anywhere and anytime to their favourite music, adjusted to a personal profile 9Consumers have a much more active role in sharing, uploading, commenting and remixing music. 9But also: lock-in effects? Less diversity? 22 October 26, 2011 Andra LeurdijkMusic industry - a case study SWOT 1 Value network Strengths Weaknesses Opportunities Threats Production •Large variety of •Music industry •Talent scouting and •Uncertainty national artists leans towards talent development about level of and vibrant strong promotion remains a investments in popular music of big stars professional skill music production cultures needed by many musicians in order to •Greater reliance succeed in the on hits and stars market •Lower costs for production tools, enable SMEs to enter the market and for artists to manage (more parts of) music production themselves •Production can be located anywhere, nearness to music centers in London, New York less necessary 23 October 26, 2011 Andra LeurdijkMusic industry - a case study SWOT 2 Value network Strengths Weaknesses Opportunities Threats Aggregation & •One of the •Few national •Establishing links •Legacy distribution successful new artists are sold between online distribution online distributors outside their music service models through located in Europe country of origin providers and record social networks, companies and mobile phone retail increasingly operators and under pressure device manufacturers for •Continuing promotion and unauthorised distribution of downloading music •More options for •Music retail less well known shops closing artists to reach down (niche) audiences •stronger interaction and ties between artists, labels and audience 24 October 26, 2011 Andra LeurdijkMusic industry - a case study SWOT 3 Value network Strengths Weaknesses Opportunities Threats Business models •A lot of •Music industry •Increasing •Decrease in experimentation slow to respond