The Recorded Music Industry
1.) Description of the Industry
The recorded music industry creates, manufactures, and distributes music. The products that this industry primarily creates and distributes are CDs, digital music (MP3s), and Vinyl LPs.
Throughout the past 10 years, the recorded music industry has changed drastically. Illegal downloading has run rampant, physical sales have declined, legal digital distribution outlets were created, music became more portable, cellular phones became media outlets, and alternative revenue streams for artists and labels have been developed.
Increased usage of mobile phones in the U.S. and consumers’ desires to get their favorite music on their phones has caused ringtones and ringback tones to become an extremely profitable part of the music business in recent years. Decreases in the sale of music have caused artist and labels to look for alternative sources of income to generate revenue. Artists have started to focus on making the majority of their money on merchandise, endorsements, and touring. After record labels recognized that these revenue streams could generate profit for them as well, they started requiring artists to sign 360 deals (or risk not having a deal at all).
The industry has also recently seen a shift in power from the labels (controlling the creation, duplication, and distribution of albums) to do it yourself/independent musicians. The accessibility of ProTools and other home recording programs and equipment has enabled artists to create their music at home recording studios. Companies like Disk Makers, have enabled artists to replicate and duplicate physical versions of their product and digital distribution services (like iTunes) have enabled those artists to get their products out to music consumers.
The advent of the iPod has also transformed this industry by altering consumer listening habits (in the past 10 years). The iPod removed restrictions on where consumers could listen to music. No longer is a consumer confined to listening to music in places that have a radio or a CD player. The iPod created music portability which, in turn, enabled consumers to create portable soundtracks to their lives.
In early 2009, CD sales continued to decline and digital sales started to plateau. This industry is currently considered to be in the mature stage of its life cycle and is on its way into the decline phase of its life cycle. The total revenue the recorded music industry has declined from $18B in 2000 to $8.4B in 2009.[i]
2.) Market Structure
The market structure of this industry is an oligopoly. “This market is dominated by a small number of firms (major record labels), which own more than 40% of the industry’s market share.”[ii] These firms will be noted below. Since the market is an oligopoly, the major record labels set prices, cause the barriers to enter the industry to be high, and the products that they sell (even though they appeal to different target markets and are different—based on the type of music released) are essentially the same (recorded music). Due to recent troubles (with the sale of recorded music declining) each of the 4 major companies have been struggling. They have been downsizing, reducing the amount of releases they put out each year, have started to tap into new and alternate revenue streams, and have started cutting costs all around.
3.) Major Players in the Industry
There are 4 major players in the recorded music industry: EMI, Warner Music Group, Universal Music Group (Vivendi), and Sony. These companies account for over 70% of the industry’s market share. Below is a brief description of each market player.
Vivendi (Universal Music Group)
This company currently captures 31% of the industry’s market share and is the largest music company in the world. The company owns approximately 14 major record labels and in 2008 generated $7.51B in revenues.[iii]
Warner Music Group
This company currently captures 27% of the industry’s market share and is the second largest music company in the United States.
Sony Music Entertainment
This company currently captures 14% of the industry’s market share. Sony Music Entertainment, in 2004, entered into a joint venture with Bertelsmann and merged to form Sony/BMG Entertainment. In 2008, due to the turmoil in the music industry, BMG decided to end the joint venture by offering Sony the opportunity to buy back their 50% stake in the company. Sony capitalized on that opportunity and now operates as a subsidiary of The Sony Corporation of America.
This company, based out of the UK, currently has the smallest market share out of the major four record labels (5%).
Although four major record labels dominate the industry, there are a few large, independent, companies that also account for the majority of music sales and should be mentioned. These companies are Koch (now E1 entertainment), EDC (Entertainment Distribution Company), Bad Boy Entertainment, Edel Music, and Zomba.
4.) Is the Market Growing or Shrinking?
The recorded music industry is shrinking and has been for the past 10 years. Although the recorded music industry is shrinking, based solely on sales, music consumption is higher than ever before (due to new business models and technological advances). Each major record label has consistently reported losses throughout the past 10 years and it is not likely that (unless something radical is done) this trend will stop. CD sales have declined approximately to half of what they once were (in 2000) and sales of digital music have not yet been able to make up for that decline. “In 2009, revenue is expected to fall by 6.2%, as expanding adoption of digital sales, falling CD sales, and piracy are exacerbated by poor economic conditions and consumer sentiment.”[iv]
5.) How Technological Change is Affecting the Market
Technology has been severely affecting the market since the late 1990’s and early 2000’s. With the advent of MP3s and illegal file sharing services, technology has negatively affected revenue and is widely regarded as the cause of the industry’s decline. Although technology is regarded as starting the industry’s decline, it is also now being embraced, in order to hasten the decline of the market.
New services, previously unavailable to consumers (due to technological limitations), have developed into viable (but not dominant) revenue streams. The new services and products created for music consumers are as follows: digital downloads, subscription services, streaming services, and mobile services. Each service and its effect on the industry is briefly described below.
Throughout the 1st nine months of 2009, digital downloads accounted for approximately 48% of total sales and represent over 60% of the total digital business.[v] iTunes is currently the dominant player in the digital download market, accounting for approximately 70% of the worldwide digital distribution sales.[vi]
Subscription services offer consumers an “all you can eat” option for purchasing music. Consumers pay a fee to the service provider in exchange for being able to listen to and download as many tracks as they want. The issue with this model, though, is that even though consumers pay for the music, once their subscription expires they don’t own any of the content they had previously paid for (because this is a DRM product). A couple of the major players in this market are Napster/Real Networks and Rhapsody.
There are currently four different types of streaming services (all relying on an ad based business model): internet radio, streaming on demand services, video streaming, and on demand services. Internet radio has become widely popular amongst music consumers and has started to become a substitute for terrestrial radio in recent years. Major service providers in this market segment are Pandora Radio and Last.FM. Streaming on demand services, enable music consumers to listen to whatever track they choose to listen to, whenever they want to listen to it. Major service providers in this market segment are: MySpace, Imeem, and Spotify. Video streaming services provide consumers with access to music videos. Major service providers in this market segment are Vevo, YouTube, MySpace, AOL, and Yahoo. On demand services are those services offered to consumers who want to access a specific kind of music when they have the desire to. The major provider that services this market segment is Music Choice.
Mobile services come in four different forms: ringtones, ringback tones, video tones, and single track and video purchases. Of these four forms of mobile services, ringtones generate the most revenue. Ringtones consist of thirty second clips of popular tracks, that a music consumer can put on their mobile device. Once the track is on their mobile device they can hear the track (instead of a typical phone ring sound) when receiving a call. Ringback tones, on the other hand, are purchased by individuals who want the people who call them to hear a song (rather than hear a typical phone ringing sound). Video tones are videos downloaded to a consumers phone, so that when they receive a call they see the video play. Single track and video purchases (on mobile phones) account for roughly 8% of the mobile services market. These purchases occur when a mobile phone user downloads a track or video to their phone (through their wireless provider).
Although technology seems to have initially hurt the industry, it is currently developing in a way that will potentially poise the industry for future success. The issue with technology in this industry, however, is that the major companies who are in charge of creating, manufacturing, and distributing music are behind the times when it comes to technological trends. These companies are music companies and are not technology companies therefore, they don’t know how to control it (or its open source nature), they misunderstand how it can be used to benefit them, and they originally spent a long time trying to fight the changes that new technologies produced. These companies don’t truly grasp how to utilize new technology in the most efficient manner (which, if they understood it, would help hasten the decline of the industry and will generate substantial returns for them). They are currently in the process of taking stabs in the dark when it comes down to trying to figure out what will and won’t work in the digital space.
6.) Are the Major Firms in the Market Merging/Consolidating?
The major firms in the market are currently not merging or consolidating. The majority of consolidation between firms took place during the 1980’s and 1990’s. The decline of the industry and each major label’s struggle to stay solvent has caused many of their partners (like BMG) to exit the music market and has prevented consolidation and mergers.
7.) How the Market Interacts with Other Markets (within & outside of the Entertainment & Media Market)
The recorded music market interacts with a variety of other markets within and outside of the entertainment industry. There are many industries that have a direct effect on and rely on the recorded music industry’s products. The recordable media manufacturing industry relies on the recorded music industry to provide them with master copies of albums, to mass manufacture CDs and other physical products (like Vinyl) that the recorded music industry produces. Record, big box retail, online retail stores, and department stores rely on the recorded music industry to produce and supply finished and packaged products for sale (in their respective stores) to consumers. Audio production studios rely on the recorded music industry to generate revenues. The recorded music industry, after finding artists and prior to having a finished product that is ready for mass manufacturing, relies on audio production studios to record, mix, and master artists’ tracks for inclusion on albums. These industries have a significant impact on the recorded music industry and without their inter-linkage, the recorded music industry would not be able to operate effectively.
[i]Ellner, David. “Class Lecture.” The Business of Music & Film. New York University, New York, NY. 5 Oct. 2009.
[ii] Market Structure. 29 Nov. 2009. Wikipedia. 12 Dec. 2009. <http://en.wikipedia.org/wiki/Market_structure>.
[iii] Major Label Music Production In the U.S. 19 Nov. 2009. IBIS World. 12 Dec. 2009. <http://ezproxy.library.nyu.edu:24809/industry/default.aspx?indid=1252>.
[iv] Major Label Music Production In the U.S. 19 Nov. 2009. IBIS World. 12 Dec. 2009. <http://ezproxy.library.nyu.edu:24809/industry/default.aspx?indid=1252>.
[v] Ellner, David. “Class Lecture.” The Business of Music & Film. New York University, New York, NY. 30 Nov. 2009.
[vi] iTunes Store. 13 Dec. 2009. Wikipedia. 13 Dec. 2009. <http://en.wikipedia.org/wiki/ITunes_Store>.