a paper 450 words

Module 6: Technological Capability - Case Study "Music Industry"

COLLAPSE

In the last two to three decades, the music industry has changed dramatically. The distributors, and distributing channels, have transformed from their traditional in-store structure, in the 1990s, to streaming services nowadays. This transformation is directly related to companies trying to capture value to maintain, or create, their strategic advantage. Companies like Tower Records and Virgin Megastore were replaced by Pandora and Spotify. However, during this transformation, the industry itself kept flourishing. Here is an analysis of how music intermediaries captured value; and competed-cooperated with their complementors to shape the music industry.

Suppliers and Buyers

Historically, the dynamics between music producers and distributers was of a correlation. Both sides needed each other to capture value and profit from the industry. Producers needed to market their products, and distributors needed creative contents to sell. However, it is more difficult for intermediaries to substitute suppliers (producers). Moreover, the artistic content of music, makes producers, and their clients, offer products that are unique and differentiated. Both above factors, contributes to the bargaining power of suppliers in the music industry.

On the other hand, customers had no real power before the online shift of the music industry. Their only place to buy music was the traditional in-store outlets, like Virgin Megastores. The only other source for customers to buy music was illegal copying, until Napster introduced its P2P model. Customer gained power, and they had unlimited content available for free. However, with the shut-down of Napster, intermediaries re-positioned themselves in the market through online stores and streaming services (iTunes and Spotify for instance). Customers have alternatives now, but they are still in need of music because they are emotionally related to art. What Napster did was “not kill the music industry, they caused producers to think of new ways of profiting” (1). This resulted that intermediaries in the music industry became able to capture more value (from selling music and advertisement).

New entrants and Substitutes

The two sub-factors that affect the entry of new entrants to the music industry are the ease of building supply and ease of building demand (2).

In the online world, and for intermediaries, new entrants require a strong platform and a big investment to be able to build supply. Providing service to a huge online demand, a big music library and efficient online technology is required. Both requirements necessitate big capital resources. Moreover, to build demand, new entrants require enormous marketing capabilities, to attract online traffic, especially for millennials.

Because customer develop emotional connection to music, it is difficult to substitute this demand. However, the substitutes could be in-between different types of intermediaries. As an example, music streaming is taking over the industry, replacing online purchasing of music. More and more customers are depending on free streaming services to listen to music, instead of buying and downloading music from online stores (iTunes). This customer behavior determines the shift of value capture among intermediaries.

Competing firms

The competition among intermediary firms in the music industry, led to a phase where online streaming service providers offer music for free. Their income is mainly from subscriptions (Amazon), or advertisement (YouTube and Pandora).

The music industry is a clear example on the positive-sum approach. The Napster incident pushed intermediaries, producers, customers, partners, and complementors to collaborate, and create value for each one of them. Instead of rivaling in the industry, they compete and cooperate; i.e. they created innovative solutions (technology) and exchange linkages (marketing cooperation). VEVO, for example, hit the 55 billion views on YouTube (3). This represents value for producers, customers, partners, complementors and VEVO themselves. The strategic partnership between producers, VEVO, YouTube, and online viewers shaped the music market.

Note: This Module is so interesting and rich, in a way that it is very difficult to analyze in only 500-600 words, and within three days of time.

References

Sascha Segan, “Napster’s Effect on the Industry”, ABC News, Feb. 2013

Chapter 5: “Macro-foundations of Strategic Advantage: Industry Analysis”

Digital Entertainment World - Video, “The state of the music industry”, YouTube, June 26,2014