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The music industry is composed of basically 3 structures that shape the dynamics of
this industry. Composers and songwriters create songs, lyrics and perform live on
stage. This is recorded and distributed to customers or licensed for some other use.
This structure has divided the music industry in 3 parts: the recorded music industry
focused on recording and distribution of music to consumers; the music licensing
industryprimarily licensing compositions and arrangements to businesses; and
live musicfocused on producing and promoting live entertainment, such as
concerts, tours, etc.
Music Artists earlier required the support of a record label to produce, promote and
distribute music. However the pricing mechanism was more based on historical
prices rather than competition. Artists signed exclusive contracts with record labels,
which enabled the record labels to charge retail price levels consistent with how
much a customer is willing to pay rather than the quality of the music, resulting in
consistent pricing strategies.
In the 1960s, the distribution of music in the form of albums gained ground. Record
labels created music bundles that increased its fan-following. This gave the record
labels an opportunity to raise prices for additional content. However, the pricing
mechanism for full-length albums stayed relatively consistent across albums and
artists regardless of its quality or popularity. A highly popular music album had the
same cost structure as an unpopular one. Many releases were not able to recover
their upfront production costs. Consistent pricing strategies made matters worse.
Record labels had to rely on the success of a few albums to make up the losses
incurred by a majority of unpopular releases.
The growth of digital Music
The music industry has experienced significant changes in the past decade with the
growth of internet and digital distribution. It all started with the launch of a file
sharing service called Napster by Shawn Fanning that allowed users to download
and share music without compensating the recognized rights holder. However, it
was eventually forced to shut down by music industry. This service ushered in a new
era of music digitization.
The first company that was able to create a successful online service for legal sales
and distribution of music was Apple, through its service itunes Music store. Apple
was able to convince the major labels that music consumers would buy music
legally if they were offered an extremely simple service that allowed them to buy
and download music for less than a dollar per track. The retail sales of recorded
music in United States dropped from US$13 billion in 1999 to US$10.6 billion in
2003[1]. During the same time, Apple iTunes customers expanded from 861,000 in
July 2003 to 4.9 million in March 2004 [2], signaling the popularity of digital music.
The music industrys digital revenue grew by 4.3% in 2013 to US$5.9 billion.
Globally, digital now accounts for 39 percent of total industry global revenues and in
three of the worlds top 10 markets.
music technological milestone on the magnitude of the Walkman, the Compact Disc,
and Apple iTunes.
Spotify model was an ad-supported music service that would be free for music
listeners but the ads would generate revenues for licenses to copyright holders.
Over the years Spotify has moved from being a service solely funded by
advertisements to a more advanced version, which is funded by subscription fees
also.
Spotifys model with two or more different service versions where the most basic
version is free and the more advanced versions are offered on a subscription basis
is usually called freemiuma play on the words free and premium. Often, the profit
margin for the free version is very low, or even negative, and it is expected that it is
the subscription fees that will generate enough revenues to make the service
profitable. The logic behind a freemium service model is that users shall be willing
to use the service for free and that they while using the service gradually will make
behavioral and emotional investments in the service that will increase the costs and
efforts to switch to another service. The goal is to make as many of the users of the
free version to convert to the subscription version. In order to achieve that goal, the
free version has to have a number of increasingly annoying features (such as
advertising) or lack a few key features (such as the ability to use the service on
certain devices) that are removed/ available on the premium versions of the service.
In Spotifys case it has achieved a conversion rate of approximately 20 percent,
which means that 20 percent of the total user base is using the premium version
and pay a monthly subscription fee. Spotify has reported that 70 percent of their
revenues from ads and subscriptions has been paid in royalties to rights holders. At
the end of 2013, the company has generated more than a billion dollars for rights
holders around the world, which according to Spotify is proof that their model does
work.
Online music and videos
Another recent phenomenon in music digital distribution has been the advent of
internet radio and online streaming platforms. The surge in smartphone markets has
given a boost to this segment as well. Applications such as Pandora, Google music,
Youtube etc. operate in this segment. These services play videos and music online
based on the user selection. The pricing mechanisms involve a free subscription
supported by advertisements and a fee based subscription without ads. Youtube for
example embeds advertisements to its free videos and these advertisements are
the major source of its revenues.
Online audio distribution has further evolved, enabling its users not just to listen
shared songs but also upload, record, promote and share originally-created sounds.
Sound cloud which has over 40 million registered users and 200 million listeners is
one its kind. These applications also work on a freemium basis, providing a limited
sharing space for free and charging premium if the sharing space has to be
increased. In this way it provides opportunity to aspirating artists and musicians to
bring their sound to the world.
generated by official videos. You tube, until now had an exclusive advertising
supported service, is planning to enter subscription based pricing for its content.
Internet Radio has also incorporated effective pricing mechanisms to generate
revenues from stores. For example, itunes radio service has the feature of a buy
button which directs listeners to itunes store. Artists in countries with high rates of
streaming have recognized the benefits of streaming based revenue model giving
their songs a longer life. There has now been a major focus to create music based
applications on mobile further expanding the sources of revenues
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