The Monkey Lab
  Music Industry: Big Market, Big Questions Music Industry: Big Market, Big Questions Despite complaints and panic-induced lawsuits against file sharing services such as Napster by major music labels in the United States, the U.S. and global music markets are flourishing. The global market has grown by 3.4% annually since 1991 and the U.S. music market is the largest in the world, having grown 71% in value since 1991 to U.S. US$13.2 billion in 1998 [4]. More importantly, Napster use appears to be boosting music sales both online and offline. One study, commissioned by Napster and prepared by Peter S. Fader, associate professor of marketing at the Wharton School of the University of Pennsylvania, found that "over 91% of Napster users buy as much or more music than before they used Napster, with 28% purchasing more" [5]. Even so, the major music labels and their mouthpiece the Recording Industry Association of America (RIAA) appear to be frantically searching for a strategy to maintain control and revenues. The industry is being challenged not only by technology innovators such as Napster, Gnutella, and, but also by alliances of music artists and supporters such as the Future of Music Coalition. Internet research firm Jupiter Communications suggests that if the music industry were to let players like Napster stand it would drive incremental sales, but if the industry partnered with networked music-sharing technology companies through licensing schemes, the benefit would be exponentially greater. Jupiter also proposes that "a subscription service to an online music community with high-quality digital music, virus protection, and a wide variety of content could eventually be a more successful driver of revenues for recorded music than individual downloads sold through an online store." Of the five biggest music labels, at least Universal and Bertelsmann seem to be paying attention. Bertelsmann announced at the end of October 2000 a legal settlement with Napster in which Bertelsmann's e-commerce group will partner with Napster to create a membership system to allow paid users to download high-quality songs from Bertelsmann Music Group's entire catalogue. Napster CEO Hank Berry suggested membership fees of US$4.95 per month, but neither party has released information regarding a start of service date. Universal may have swung an even sweeter deal with After watching Bertelsmann, Sony Music Entertainment, Time Warner's Music Group and EMI settle in court with for approximately US$20 million each, Universal waited and eventually settled out of court with for US$53.4 million. As part of the deal Universal also reportedly bought warrants for up to three million shares. The big question still remains: Will partnerships such as those engineered by Napster and Bertelsmann or and Universal actually generate revenues? A July 2000 essay in the Economist argues that if the music labels can put their songs online in a format that is more organized and more appealing than their illegal competitors can, fans will be willing to pay something for that privilege [6]. Although online sales - both CD and digital downloads - represented only 2.4% of total music sales for 1999, according to one survey 50% of online U.S. youths ages 16-22 report that they will purchase music online in the near future. Online Internet economy publication The Standard reports Jupiter's prediction of download sales in particular to increase through 2004, reaching 25% of total music sales in 2005 [7]. Media Metrix forecasts that in 2005 76 million users will purchase US$5.4 billion of music online, and another US$1 billion will be spent on online music subscriptions. In October 2000 - before their dances with and Napster - both Universal Music and BMG announced new online initiatives to capture some of this projected revenue, with BMG charging users per download. Singles are priced from US$1.98 to US$3.49, and albums are going for between US$9.98 and US$14.98. Universal is experimenting with a subscription model offering users unlimited access to more than 20,000 songs. The Universal plan is not offering actual downloads of music, however. Instead, users can listen to streaming song files, which are extremely difficult to record and share at high audio quality. The online music file access strategies as currently conceived by the major labels, including the two joint initiatives with Napster and, are likely to fail for three main reasons. First, few music consumers purchase music of only one particular label, so until the major labels create some form of low-priced, comprehensive access from one Web site to all of the songs in their combined catalogs, any consumer response will be tepid at best. Separate subscriptions or memberships to each of the four big labels will not be an attractive option. More importantly, BMG's current per song or per "CD" download model is priced at levels similar to CD costs in a physical store, giving consumers little incentive to move from existing no-cost file sharing services. Second, streaming of music as planned by Universal will not replace the appeal of downloading song files because the ability of consumers to share music appears to be a major motivation behind current use of Napster, and similar services. Finally, current industry initiatives appear to make no concessions to music artists' increasing dissatisfaction with recording contract restrictions enforced by major labels and what many artists and supporters consider to be unreasonable percentage takes of sales revenue. Although it is not clear given the popularity of free file sharing services that music consumers feel compelled to pay artists for their music, if paid subscription access becomes the dominant model in the future there may be increased interest among consumers in seeing that artists get a better deal from the labels than in the past. Put differently, if consumers are forced to pay for digitally downloaded music, many probably will demand that artists get a fair deal. In fact, some well-known artists have declared a kind of unilateral divorce from the labels and have pledged to support innovative schemes by entrepreneurs that give artists more control and compensation for their art, and give consumers the flexibility and convenience of digital downloading. To compound RIAA's headaches, researchers at Xerox PARC, Princeton, and Rice University recently claimed to have cracked four digital watermark technologies created by RIAA's Digital Music Initiative (SDMI) encryption scheme. Following this claim, the five major music labels driving the SDMI announced the results of a challenge posed by SDMI in which two of its five copyright protection technologies were apparently thwarted. Critics on all sides are attacking SDMI as a waste of time and resources, and many analysts believe that the effort will die on the vine. In the next section I describe some possibilities for music experience innovation using mobile Internet business models and technologies. 
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