The Music Industry and Digital Music Disruptive Technology and the Value Network Effects on Industry Incumbents A thesis written by Jens Peter Larsen Cand. Merc., Master of Science, Management of Innovation & Business Development Copenhagen Business School Supervisor: Finn Valentin, Institut for innovation og organisationsøkonomi Word Count: 170.245 digits – 75 standard pages The Music Industry and Digital Music – Jens Peter Larsen, Cand. Merc. MIB Thesis Table of Content 1. Resume .................................................................................. 4 2. Introduction ............................................................................ 5 3. Research Design ....................................................................... 6 3.1 Research Question .......................................................................................................... 6 3.2 Elaboration on Research Design ................................................................................... 6 3.2.1 Technological Development ..................................................................................... 6 3.2.2 Definitions................................................................................................................. 7 4. Methodology ............................................................................ 8 4.1 Project Outlook .............................................................................................................. 9 4.2 Delimitation ................................................................................................................... 10 4.3 Methodology Critique .................................................................................................. 11 4.4 Validity Assessment ...................................................................................................... 12 5. Theory and Empirical Data ....................................................... 12 5.1 Clayton Christensen’s Value Network Approach ..................................................... 12 5.2 Quality Function Deployment ..................................................................................... 13 5.3 Platform Theory ........................................................................................................... 13 5.4 Empirical Data .............................................................................................................. 13 6. Introduction to the Music Industry ............................................. 14 7. Quality Function Deployment Analysis ........................................ 20 7.1 The QFD Framework ................................................................................................... 21 7.1.1 General Considerations on Data Assembly............................................................. 22 7.2 Respondents’ General Attributes ............................................................................... 22 7.2.1 General Tertiary Needs: Music Listening ............................................................... 23 7.2.2 Unhelped memory: Tertiary Needs......................................................................... 23 7.3 Digital music: Most Important Needs ........................................................................ 24 7.3.1 IPSOS TEMPO ....................................................................................................... 25 7.3.2 INDICARE.............................................................................................................. 25 7.3.3 Jöckel et al. - DRM Analysis .................................................................................. 26 7.3.4 Survey by Author .................................................................................................... 26 7.4 General Considerations on Convenience ................................................................... 30 7.5 General Considerations on Quality ............................................................................ 31 7.6 General Considerations on Pricing ............................................................................. 31 7.7 General Considerations on Social Connectivity ........................................................ 32 7.8 Summing up .................................................................................................................. 33 8. Quality Function Deployment – Platform Assessment ..................... 34 8.1 Types of Product Platforms ......................................................................................... 34 8.1.1 Internet Streaming Services .................................................................................... 35 8.1.2 Online Radio Services............................................................................................. 35 8.1.3 Download Subscription Services ............................................................................ 35 8.1.4 Online Music Stores................................................................................................ 35 8.1.5 Illegal Download Sites ............................................................................................ 36 8.1.6 CD-shops Offline and Online.................................................................................. 36 8.2 Platforms vs. Customer Attributes ............................................................................. 37 8.2.1 Internet Streaming Services .................................................................................... 37 2 The Music Industry and Digital Music – Jens Peter Larsen, Cand. Merc. MIB Thesis 8.2.2 Online Radio Services............................................................................................. 38 8.2.3 Download Subscription Services ............................................................................ 39 8.2.4 Online Music Stores................................................................................................ 40 8.2.5 Illegal Download Sites ............................................................................................ 41 8.2.6 CD-shops Offline and Online.................................................................................. 43 8.3 Re-introducing the House of Quality Matrix ............................................................. 43 8.4 Identifying Important Trends Using the House ........................................................ 45 8.4.1 Convenience............................................................................................................ 45 8.4.2 Quality..................................................................................................................... 46 8.4.3 Pricing ..................................................................................................................... 47 8.4.4 Social Connectivity ................................................................................................. 47 8.5 Summing up .................................................................................................................. 47 9. Platform Leadership & Value Network Analysis ............................ 50 9.1 Introduction to Platform Leadership Theory ............................................................ 50 9.2 Value Chain Analysis ................................................................................................... 50 9.2.1 The Traditional Value Chain................................................................................... 50 9.2.2 The Future Value Chain .......................................................................................... 51 9.3 Value Chain and Platform Leadership ...................................................................... 52 9.4 The Break-down of the Old Value Network .............................................................. 53 9.5 A New Value Network .................................................................................................. 54 9.6 Disruptive Technology become Dominating Technology ......................................... 56 9.7 New Platform Leaders in a New Value Network ...................................................... 58 9.8 Incumbents and the New Value Network .................................................................. 59 9.9 Incumbents’ Reactions ................................................................................................. 60 9.10 A Transforming Appropriability Regime ................................................................ 61 9.11 Weakening the Appropriability Regime .................................................................. 63 9.12 A New Approach to Innovation ................................................................................ 64 9.13 Summing up ................................................................................................................ 66 10. Discussion ............................................................................ 67 11. Conclusion ........................................................................... 69 12. Bibliography ........................................................................ 71 Appendix: 1. Survey Design and Results 2. Additional tertiary needs from survey results 3 The Music Industry and Digital Music – Jens Peter Larsen, Cand. Merc. MIB Thesis 1. Resume This thesis carries out a value network analysis, which identifies characteristics of technology development in the recorded music industry,