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.