MASTERARBEIT Titel der Masterarbeit „Business Model Experimentation in the Recorded Music Industry“ Verfasser Kai Kirkkopelto, BSc angestrebter akademischer Grad Master of Science (MSc) Wien, 2013 Studienkennzahl lt. Studienblatt: A 066 914 Studienrichtung lt. Studienblatt: Masterstudium Internationale Betriebswirtschaft Betreuer: O.Univ.-Prof. Dr. Kurt Heidenberger Eidesstattliche Erklärung Ich versichere, dass ich diese Masterarbeit selbständig verfasst und nur die angeführten Quellen und Hilfsmittel verwendet habe. Die Masterarbeit wurde von mir an keiner anderen Universität weder im In- noch im Ausland in irgendeiner Form als Prüfungsarbeit vorgelegt. Wien, Februar 2013 _________________________________ (Kai Kirkkopelto) II There is no happiness except in the realisation that we have accomplished something. (Henry Ford) First, and foremost, I would like to thank my parents for their endless support throughout my studies. I would also like to thank my sister and my girlfriend for being there for me. Furthermore, I am very grateful for the invaluable help that I received from MMag. Waldner and O.Univ.-Prof. Dr. Heidenberger during the writing process. Last but not least, I would like to thank Mr. Niemi, Mr. Pereira and Mr. Pöyhönen for participating in the research and sharing their insights. IVI II Abstract This research examined business model experimentation in recorded music industry. The purpose of the study was not only to describe the phenomenon but also to provide a multidimensional analysis of the complex subject by demonstrating: what caused the necessity for business model experimentation in the recorded music industry; who are the early adopters in terms of experimentation; and how one can successfully implement a business model experiment in the recorded music industry. The research was conducted using the methods of qualitative research. The theoretical foundation used in this research provided the basis for examining the topic. The theoretical background consisted, most importantly, of literature concerning the business model, the disruption of the business model and business model experimentation. The empirical evidence was based on vast information acquired through case studies and in-depth interviews. The results suggest that digital delivery of music – which is considered as the confluence of MP3 compression technology and Internet – disrupted the traditional business model in the recorded music industry and eradicated its profit potentiality. The disruptive innovation, instead of being a technological challenge, was most importantly a business model challenge to those committed to the conventional model. The disruption started an era of ferment and forced the industry to look for new business models to compensate for the falling revenues. Independent record companies and independent artists were seen as the early adopters of business model experimentation in the recorded music industry. While the major record companies are being held captive by their traditional business models, new opportunities have arisen for independent parties to cope with the disruption and commit themselves in business model experimentation that requires a profound understanding of niche markets and positioning of recorded music as a secondary product. The research suggests that successful business model experiments are based on offering recorded music as a promotional product – either for free or a very low cost – and bundling it with more lucrative value-added elements that provide personalised and unique value beyond the music. In the value-added model, the universal access to music is taken for granted, but as such, will neither create significant value nor contribute a considerable stream of revenue – therefore the value-added products are necessary to create new kind of value, and close the monetisation gap left by the falling sales of recorded music. IV V Table of contents 1 Introduction ........................................................................................................................... 1 1.1 Background .................................................................................................................................. 1 1.2 Research objective ....................................................................................................................... 3 1.3 Structure of the thesis .................................................................................................................. 6 1.4 Key terminology ........................................................................................................................... 7 1.5 Methodology ................................................................................................................................. 8 1.5.1 Qualitative research ................................................................................................................ 9 1.5.2 Sources, gathering and analysis of empirical evidence ........................................................ 10 2.1 Business model ........................................................................................................................... 13 2.1.1 Ambiguity of a business model concept ............................................................................... 14 2.1.2 Osterwalder and Pigneur’s business model framework ....................................................... 18 2.2 Disruption of a business model ................................................................................................. 22 2.2.1 Theory of disruption ............................................................................................................. 23 2.2.2 Disruptive innovation as business model challenge ............................................................. 26 2.3 Business model experimentation .............................................................................................. 30 2.3.1 Business model mapping ...................................................................................................... 30 2.3.2 Implementing business model experiments .......................................................................... 32 2.3.3 Barriers to business model experimentation ......................................................................... 34 2.4 Summary of the literature review and its link to the recorded music industry ................... 36 3 Recorded Music Industry ................................................................................................... 38 3.1 Scope of the study ....................................................................................................................... 38 3.1.1 Defining the ecosystem ........................................................................................................ 38 3.1.2 Defining the recorded music industry .................................................................................. 39 3.1.3 The history of the recorded music industry .......................................................................... 44 3.2 Traditional business model in the recorded music industry .................................................. 46 3.3 Disruption of the traditional business model in the recorded music industry ..................... 49 3.3.1 Digital delivery of music as disruptive innovation ............................................................... 50 3.3.2 Digital delivery of music as business model challenge for major record companies ........... 51 4 Business model experimentation in the recorded music industry ................................... 57 4.1 From ownership via access towards value-added model ........................................................ 57 4.2 Independent record companies and ”entrepreneurial artists” as the early adopters of business model experimentation ..................................................................................................... 62 4.3 Case studies: artist-driven business model experiments ........................................................ 64 4.3.1 Radiohead: In Rainbows ....................................................................................................... 65 VI V 4.3.2 Trent Reznor: Ghosts I-IV .................................................................................................... 69 4.3.3 Amanda Palmer: Theatre is Evil ........................................................................................... 73 4.3.4 Findings of case studies ........................................................................................................ 78 4.4 In-depth interviews .................................................................................................................... 82 4.4.1 Why change something that works? ..................................................................................... 83 4.4.2 Searching for the dominant design ....................................................................................... 85 4.4.3 From selling downloads via selling access to selling experiences ....................................... 86 4.4.4 Rising opportunities of independent record companies and artists ...................................... 88 4.4.5 When offering recorded music is not enough ....................................................................... 92 5 Results and discussion ........................................................................................................