Digital Economy in Music Industry

Mohd Aziz Shah Bin Mohd Basir (M031010030)

Faculty of Information and Communication Technology University Technical of Melaka (UTeM) Melaka, Malaysia ftmk.utem.edu.my shahbandar72@hotmail.com Abstract This paper outlines the digital economy in music industry and how distributed computing assist in solving the problems occurred in the recent music industry. Digital music history started from the introduction of CDs, which was developed to replace gramophone records. As technology evolves to embark on computer networks and the Internet, consumers began to use computer as the means to store, record and play music. These technological changes mark the shift from physical product to online music. To cater to the declining sales of recorded music, industry players need to find a way to survive. As consumers are driving the evolution of music industry, industry players embark on reinventing the business and creating new business models by applying distributed computing. Index TermsDigital computing, music industry. economy, distributed 1980s, digital media had gained a larger market share, and the vinyl record left the mainstream in 1991. COMPACT DISC AS CATALYST OF MUSIC INDUSTRY Digital audio has emerged because of its usefulness in the recording, manipulation, mass-production, and distribution of sound. Helped along by the introduction of popular digital multi track recorders from Sony and Mitsubishi in the early 1980s, digital recording was soon embraced by the major record companies. With the introduction of the Compact Disc by Sony and Philips in 1982, digital audio was embraced by consumers as well. Compact disc, which is also known as CD, is an optical disc used to store digital data. Originally, the CD was planned to be the successor of the gramophone record for playing music by storing and playing back sound recordings. Audio CDs and audio CD players have been commercially available since October 1982. Later, its function extended to encompass data storage, write-once audio and data storage, rewritable media, Video Compact Discs (VCD), Super Video Compact Discs (SVCD), PhotoCD, PictureCD, CD-i, and Enhanced CD. The advancement of digital media did not hit Malaysia right away. In the 1990s, music is still widely sold in cassettes. In mid 1990s, recording companies started to sell their music in CDs. While digitization is supposed to reduce the cost of products, CD albums are priced higher than cassettes, in relation to the value of its ability to store more data than typical C46 cassettes tapes do and can be played back in various digital devices. DIGITAL ECONOMY IN MUSIC INDUSTRY The value system in music industry may be modeled as transformation of sound into a reproducible signal (encoding), multiplication of this signal as a recording device, distribution of these recording devices to the end consumer, administration and management of intellectual property rights, and marketing (Schmid, 2001). 1

INTRODUCTION Digital economy is an economy that is based on the digitization of information and the respective information and communication infrastructure (Zimmerman, 2000), in which computers and the Internet are producing rapid changes in how goods and services are produced, the nature of goods and services being offered and the means by which goods and services are brought to the market (Brynjolfsson & Kahin, 2002). The digitization of information, too, had swept the music industry locally and globally. Commercial music history traced back to the introduction of phonograph cylinders in 1888, and then the competing disc-shaped gramophone record system triumphed in the market place to become the dominant commercial audio medium in the 1910s. Gramophone records were the primary medium used for music reproduction for most of the 20th century. By the late

While the product may have been changed from gramophone records to CDs, the value chain primarily remain the same. Music is created by musicians, produced by a record company and then distributed by a distribution company to retailers which then passed the product to a consumer. Not to mention that since it is physical product, inventory cost need to be considered as well. As such, the cost incurred in producing a CD is still relatively high. At the same time, record companies in Malaysia insisted on putting a high price for CDs in comparison to cassettes tape. The 74-minute playing time of a CD, which was longer than the 23 minutes per side of a typical C46 cassettes tape, was often used to the CDs advantage during the early years. CDs would often be released with one or more bonus tracks, enticing consumers to buy the CD for the extra material. Other than that, cassettes tapes have lower fidelity. In the first decade of the 21st century, consumers began to use computers and computer networks as the primary means to record, distribute, store and play music. This technological shift caused widespread economic changes and fundamentally changed the relationships between artists, record companies, promoters, retail music stores, the technology industry and the consumer. The rise of digital music consumption options contributed to a few fundamental changes in consumption. The sales of recorded music started to decline. Back in 1996, estimated sales of recorded music in Malaysia is RM315 million, and declined to RM289 million the next year. As years went by, the sales of recorded music kept on declining. In 2004, it plummeted to a mere RM111 million. Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Estimated recorded music sales (RM) 315 M 289 M 225 M 200 M 200 M 158 M 108 M 113 M 111M

new devices and changing the way they access entertainment. In response, record companies have reinvented the way they do business, innovating with business models and licensing a wide range of services. DISTRIBUTED COMPUTING THE WAY OUT Distributed computing is originally used to refer to a system, technique or programming that uses more than one computer to complete a task. The terms are nowadays used in a much wider sense, even referring to autonomous processes that run on the same physical computer and interact with each other by message passing (Andrews, 2000). In response to the revolution of music industry driven by the consumers, artist and record companies need to find a way to halt further decline of recorded music. This calls for distributed computing to work alongside distribution of physical recorded music for the music industry to survive. The initial stage of the digital music revolution was the emergence of peer-to-peer (P2P) networks that allowed the free exchange of music files, such as Kazaa and Napster. By 2001, the cost of hard drive space had dropped to a level that allowed pocket-sized computers to store large libraries of music. The iPod and iTunes system for music storage and playback became immensely popular, and many consumers began to transfer their physical recording media, such as CDs, onto computer hard drives. The iTunes music store offered legal downloads beginning in 2003, and competitors soon followed, offering a variety of online music services, such as internet radio. Digital music distribution was aided by the widespread acceptance of broadband in the middle of the decade. At the same time, recording software began to be used almost exclusively to make records, rendering expensive multitrack tape machines almost obsolete. With the explosion of formats and the creation of legitimate digital content, is it observed that three main business models have risen to dominance, that are a-la-carte, subscription service, and advertisement-based. A-la-carte is a service that sells individual songs, known to consumers as MP3 Stores. The leading provider is iTunes Store (Apple Inc.), who surpassed Wal-Mart to become the USs largest music retailer in April 2008. Sector leaders include iTunes Store and Amazon.com. Bill Carr, vice president of digital media for Amazon.com mentioned that, One of the great benefits of the digital business versus the CD business is that we can experiment with price 2

Table 1: Estimated recorded music sales 1996 2004 based on the numbers provided by participating Recording Industry Association of Malaysia members

The consumer is driving the digital music revolution. Consumers worldwide are embracing digital media, using

changes for an hour, a day or however long we like, with no impact on inventory. A subscription service offers the consumer unlimited downloads for a monthly fee. This approach is theorized to maximize revenues in the long run. The sector leader is Napster which offers 6 million downloads. Sector leaders include Napster and Rhapsody. Advertisement-based services offer music free of charge to the consumer, while funding is derived from advertisement. The model is widespread as seen by the success of AOL Music, Yahoo! Music and YouTube (multimedia provider). Many of these services are internet radio stations, as they offer continuous streaming music, while others are not continuously streaming. Many of these services offer multimedia or additional services. For example, MySpace offers social-networking as its flagship service. Digital channels now account for 29 percent of global music industry revenues, up from 25 percent in 2009. Growth in 2010 was particularly strong in Europe (up nearly 20 per cent), while sales of digital albums rose strongly in major markets (up 29 percent in the UK, 43 percent in France and 13 percent in the US). Subscription services enjoyed success in 2010, with Spotify reporting more than 750,000 paying subscribers and Vodafone Music more than 600,000 customers across eight markets in Europe. Deezer has achieved significant reach in France where it is used by 13 per cent of active internet users. Record companies have struck a range of subscription deals with ISPs and mobile operators including Eircom (Ireland), Far EasTone Communications (Taiwan), FASTWEB (Italy), SK Telecom (South Korea), TDC (Denmark), Telenor (Norway), Telia (Sweden) and Vodafone (Europe). Consumers today can access more than 13 million tracks from more than 400 legal music services worldwide. New partnerships with ISPs and mobile operators are vital to the music industry's digital strategy. A report by Ovum in 2010 estimated that ISPs could achieve more than 100 million in additional annual revenue by 2013 by running music services. Informa Telecoms and Media estimated that large mobile operators in Europe could realise up to 80 million each in the first year of a partnership with established music streaming services. Music video services such as VEVO and MTV are commanding significant audiences and monetising them by selling targeted advertising. YouTube remains the most popular platform for viewing music videos online, 3

accounting for around 40 per cent of online videos watched in major markets. Justin Bieber's Baby is the most watched music video online with more than 430 million views on YouTube. Cloud music ventures such as Sony's Music Unlimited are bringing in a new generation of licensed services giving access to music across many platforms and devices. More such deals are expected in 2011, enabling fans to access music stored on remote servers (clouds) for use on a range of internet-connected devices including smartphones, games consoles, TVs and Blu-ray players. Yet despite these developments, digital music remains a sector with enormous growth potential. Just 16.5 per cent of online users in the US purchase music online and 14 per cent in the UK. Digital music has also support the existence of independent musicians who did not wish to attach themselves with any recording label. The internet provides the platform for them to establish themselves, reach the audience to promote their music, and sell their music straight to the consumer without the interference of conventional distribution channel. In Malaysian scenario, digital music in terms of mobile ring tones and internet downloading brought in additional revenue of RM5 million for the year 2005, and increased to an enormous RM15.5 million the next year. The sales keep on increasing steadily for the next two years, while 2009 and 2010 shows sales of RM32.2 million and RM42.3 million respectively. However, while paid digital downloads grew rapidly, but it did not begin to make up for the loss of revenue from CDs. The overall sales of recorded music in physical product and digital form in Malaysia reduced to RM102 million in 2005 in comparison to RM111 million the previous year, and decreasing annually. 2008 recorded the lowest sales in history with RM76 million, and the market boomed back in 2009 with RM101.8 million, but fall back to RM99.9 million. The decline of Malaysia music industry may be contributed by excessive piracy and illegal downloading.

Year

2005 2006 2007 2008 2009 2010

Estimated recorded music sales (RM) Physical Digital Total (Cassetes, CD, (Mobile, VCD, DVD) Internet) 97 M 5M 102 M 87 15.5 M 102.5 M 69 M 16.2 M 85.2 M 56 M 20 M 76 M 71.6 M 32.2 M 101.8 M 57.6 M 42.3 M 99.9 M

Industry action is helping develop this legitimate business. Limewire, the biggest source of infringing downloads in the US, has been declared illegal and Mininova, a major BitTorrent site, shut down its illegal activities. The Pirate Bay was blocked by a court in Italy and its operators' criminal convictions were upheld by the Court of Appeal in Sweden. Recording Industry Association of Malaysia is hopeful for the Government to approve and implement Digital Act amendment of Copyright Act 1997 as it is needed to protect the rights of musicians and local artists. RIM president commented that if the Act is approved and implemented, it can handle the issue of illegal downloading of music via Internet, in which the existence of Digital Act is expected to provide guarantee and protection on the copyright of local music from being stolen or easily downloaded in order to assure the wellbeing of songwriters, lyricist, composers, singers as well as the recording company. Consumer education too plays an important role in the music industry's digital strategy. IFPI and its national affiliates are involved in dozens of public education program worldwide. Amongst international consumer education program are Young People, Music and the Internet, which provides guide for parents and teachers, Music Matters, which aims to remind people of the value of music and highlights licensed services, Pro-music that is an international information campaign about online music supported by major and independent record companies, music publishers, artists and retailers, and Pop4Schools that is a new program run by an independent company that enables primary school children to gain a better understanding of how music is produced. CONCLUSION While key industry players cited piracy and illegal downloading as the factors contributing to the decline of music industry, they have to succumb to the fact that the industry is in evolutionary phase which is driven by the consumer. Industry players need to change the way they do the business, create a new business model, and innovate products and services by applying distributed computing in order to survive in the evolution. Government should play a role to ensure the legislation to protect the rights of industry players is in placed and implemented. Other than that, consumer education too play an important role.

Table 2: Estimated recorded music sales 2005 2010 based on the numbers given by participating Recording Industry Association of Malaysia member

This is global scenario. International Federation of the Phonographic Industry reported 31% decline in the value of global recorded music industry during the period of 2004 and 2010, 77% estimated fall in debut album unit sales in the global top 50 during the period of 2003 and 2010, 12% fall in the revenues of the global top 50 tours in 2010, 17% fall in the number of people employed as musicians in the US during the period of 1999 and 2009, 1.2 million jobs projected to be lost in the European creative industries due to piracy by 2015, 240 billion estimated cumulative lost retail revenues to the European creative industries from piracy for the period of 2008 and 2015, zero local debut artists in the annual Spanish Top 50 in 2010, and 45% fall in the number of domestic releases in Mexico 200510. Consumers benefited enormously from the ease with which music can be shared from computer to computer, whether over the internet or by the exchange of physical CDs. This has given consumers unparalleled choice in music consumption and has opened up performers to niche markets to which they previously had little access (Kusek & Leonhard, 2005). COMBATING PIRACY Action to stop digital music piracy is gaining momentum worldwide, with implementation by ISPs of warnings and deterrent sanctions taking effect in three countries in 2010 and governments in other countries expected to implement measures in 2011. ISP cooperation measures are now in place aimed at substantially reducing illegal file-sharing in France, South Korea and Ireland. Governments in several other countries, including the UK, New Zealand and Malaysia, are expected to implement new laws in 2011 and the European Union is reviewing its intellectual property enforcement legislation. 4

REFERENCES [1] Zimmerman, Hans-Dieter, "Understanding the Digital Economy: Challengers for New Business Models" (2000). AMCIS 2000 Proceedings. Paper 402.

[2] Brynjolfsson, Erik & Kahin, Brian, Understanding the Digital Economy: data, tools and research (2002), MIT Press 2002. [3] F. Schmid, Beat, What is New about The Digital Economy? (2001), Electronic Markets. [4] Andrews, Gregory R., Foundations of Multithreaded, Parallel, and Distributed Programming, (2000) AddisonWesley. [5] Rolling Stone, Issue #1071, February 2, 2009, "Digital Albums Prices Slashed" p.13 [6] http://www.hmetro.com.my/articles/Laksanasegera AktaDigital/Article/artikelMA [7] IFPI Digital Music Report 2001 [8] www.rim.org.my