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«Kate Totaro An honors thesis submitted in partial fulfillment of the requirements for the degree of Bachelor of Science Undergraduate College Leonard ...»

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Differentiating on age alone—not even factoring in important determinants such as socioeconomic class or geographic location—it is easy to see that digital music is only relevant to a certain demographic of music purchasers. For instance, older consumers who did not grow up in the digital age (age 45+) may not have access to or adequate knowledge about digital downloading. On the other side, younger consumers (18 and under) may not have the funds or the ability to pay (lack of credit card access) for digital music. (This younger generation also may not have access to P2P networks because of parental blocks.) As becomes apparent, the digital market for music is only widely prevalent with a small population. (This is why I concentrated my consumer study on college aged students.) And, even among that population, tangible music is still valued. As the International Federation of Phonographic Industries’ 2006 report on digital music indicates, 34% of file-sharers and 37% or about one in three online music purchasers value CDs more than digital music (IFPI, 2006, p.15).

Not only will consumers demand tangible music, but the industry will also encourage the market’s stability. From the point of view of the industry, digital music cannot and will not completely replace tangible music in the near future most simply because revenues from the digital market will not be large enough to support artists and their entourage; with digital music alone, there simply would not be enough revenue to go around. Because the majority of digital music is purchased in the single song format, the labels are only bringing in negligible revenues from each purchase. However, in the tangible market, labels accrue revenues from, effectively “ten singles” at every purchase. Even if a consumer would not have paid $1 each for all of an album’s songs, they are forced to shell out $10 for each album, no matter if they ever listen to all ten songs. The industry locks customers into purchasing more than they may actually be interested in. This system allows the industry to bring in much greater revenue in the tangible market than in the digital market even if they are earning equitable amounts per song. For example, to offset revenue lost from falling CD sales alone, downloads would have to maintain a 150% annual growth rate! (And that is just to offset losses, not to completely replace the tangible market!) Even with digital sales at a record high 420 million tracks in 2005 (not including the mobile market) the digital market still only accounts for about 5% of major-label revenue (IFPI, 2006, p.3; Bruno, “Digital Track Sales…”, 2005, p.1).

Additionally, despite some negative predictions, the market for CD sales is rebounding slowly. As Figure 12 indicates, U.S. CD sales reached a peak in 2000, but as prices continued to rise and as P2P technology began to proliferate, the industry was struck hard by drastic declines in sales in the following years. In fact, it was not until 2004 that sales began to rebound (5.3% above 2003 sales) as prices dropped and illegal downloading began to face stringent pushback from the industry. This rebound in sales is encouraging for the future of tangible music and it is predicted that sales will settle around this current mark of about 700 million albums per year in the near future.

–  –  –

It is in both the customers’ and labels’ best interest to continue to focus strong efforts in the tangible music market. For the reasons mentioned above, tangible music will continue to be a prevalent medium in the music market.

5.2 THE FUTURE OF RETAIL SALES

While the future of the tangible market remains encouraging, there is one player in the game who will not fare as well. The traditional music store (independents and chains alike), like its label brethren, will have to “innovate or die” in order to survive in a market of heavily increased competition. Traditional music stores are facing tremendous pressure in the tangible music market from big box retailers as well as online merchants, and their future looks to be filled with many challenges. (Even Starbucks sells music!) The introduction of music distribution to big box retailers such as Best Buy, Target, Costco, and Wal-Mart began in the 1990s as labels scrambled to find revenues from new places.

The ultimate impact, however, was a drastic drop in CD prices. The discount retailers were using CDs as “loss leaders”—often pricing products below their actual wholesale costs—in order to attract people to their stores. The result is a loss in profits for traditional music retailers, and a pricing structure that is unsustainable for competitors. As Kusek points out about discount

retailers:

These giants have come to gain the largest share of the U.S. market today. Wal-Mart alone accounts for approximately 20 percent of all music sold in the U.S. This is an astonishing figure, given that the music selection at most Wal-Mart stores is usually less than 750 titles deep. Neither the individual music store nor dedicated music chains such as Tower and Virgin can compete with this kind of pricing power (Kusek, 2005, p.87).

As Kusek’s pessimistic view illuminates, not only are big retailers successfully driving out traditional music stores, but they are also dictating and limiting consumer choice in music variety (the retail counterpart to Clear Channel!). The results of my survey concur with the rise in discount retailer prevalence in the market; in fact, the majority of respondents who had purchased a CD in the last month, purchased from a discount retailer as opposed to an alternative source such as mail order, internet, or independent retailer.





In addition to this strong pressure from discount retailers, traditional music stores are also facing strong competition from internet retailers such as Amazon.com, Barnes & Noble, and even eBay. With minimal overhead costs, unlimited shelf space, and unparalleled convenience, internet retailers offer an experience that cannot be paralleled in a traditional brick-and-mortar store. They can offer a wider selection of products (including digital downloads) at relatively lower costs without sacrificing their own profits.

Despite the tough competition, traditional music retailers cannot be eliminated from the picture yet. In fact there are many ways that these retailers can innovate in order to remain relevant. First, as has become popular, many traditional music stores such as Virgin have transformed themselves into entertainment lifestyle stores, selling DVDs, MP3 players, books, headphones, posters, clothing and other products to supplement CD sales. Second, many traditional stores have merged the in-store experience with the digital realm, allowing customers ultimate flexibility and convenience. For instance, Trans World Entertainment, which owns fye.com and its brick-and-mortar counterpart, FYE, has put kiosks in all there stores that allow customers to shop for out of stock items and either burn a CD, download the MP3s, or ship the product to their home. This type of innovation allows physical stores to remain relevant and convenient in the consumers’ eyes, offering the best of both physical and internet retailing (Bruno, “Digital Track Sales…”, 2005, p.1).

While traditional retailers will have to continue to innovate to stay relevant, they do offer something that none of their competition can, something that many devout CD purchasers crave.

They offer a unique environment in which to browse, listen, discuss, and experience music with likeminded people, all elements that cannot be replicated adequately in either a discount retailer or an internet retailer. With these types of innovation and this nonreplicable aspect, traditional music retailers may be able to survive in this ever increasingly competitive market.

5.3 CONCLUSION Based on industry opinions and the primary research results, it can be concluded that the market for tangible music among the student demographic will remain important in the future.

While digital alternatives will certainly pull some consumers away from tangible music, the nonreplicable attributes of tangible music will allow for the existence of two music markets, one digital, one tangible.

Additionally, the industry will fine-tune their understanding and use of technology by fully utilizing the potential of digital music consumption. By supplementing tangible products with differentiated, unique, and consumer friendly digital alternatives, the industry will effectively open a new world of economic and cultural opportunities. The industry’s optimal strategy for digital music will encompass many of the proposed strategies explained earlier such as increased prevalence in the mobile phone market, unique bundled downloads. The industry will not be limited to one digital strategy, but instead will utilize many techniques to reach the customer ubiquitously while still protecting their licenses. I predict that the bulk of the digital market revenue will remain in the singles and mobile businesses; however, labels will also see new revenues from novel label/artist contracts.

While digital music is a critical market for the music industry to embrace, tangible music will remain the main revenue stream for labels and will continue to be an important market for student consumption.

6. ACKNOWLEDGMENTS I would like to thank Professor Craig for all of his guidance and support along the way, Professor Subrahmanyam for the truly unique opportunity to explore, in depth, an area of passion, Jeff Bronikowski and Catherine Moore for their time and insight, and my peers for honest and willing participation in my guinea pig experiments.

7. APPENDIX A: SURVEY REPLICA

The internet based survey has been replicated below as accurately as possible. Because of some differences in formatting, the survey is not identical to the Surveymonkey.com version. The arrows () used below indicate skip logic that was utilized on the original survey. Survey responses are indicated in red.

–  –  –

Music Preferences What are your three favorite music genres? (Label your first favorite with a “1”, second favorite with a “2”, and third favorite with a “3”.) This question was a warm-up, introduction question.

Because it was not integral to my research, I have chosen not to include the responses.

Approximately how many hours of music do you listen to per day? _ 3.3 hrs (mean)__

–  –  –

Purchasing Intent/Behavior “Purchasing”: Does not include downloading music but instead constitutes purchase of a physical CD from a store, the internet, or mail order service.

Approximately how many compact discs (CDs) do you currently own? __150 (mean)__ Approximately how many CDs do you purchase a month? _1.35 (mean)___

–  –  –

Is this where you typically purchase CDs? Y 144 N 34  If no, where else do you typically purchase music? (Circle all that apply.) Internet 22 Large Retailer 26 Independent Music Store 11 Mail Order 5 Other 4 Was your last purchased CD by an artist you were already familiar with? Y 155 N 22

–  –  –

Please specify what, if anything, would encourage you to purchase more CDs or pay for downloads.

OPEN ENDED

Alternate Entertainment If you were given $100 per month to spend on personal entertainment (not including social entertainment such as going out to a movie, restaurant, club, etc.) how would you allocate your budget across the following categories? You can spend anywhere from $0-$100 on a category. Remember, your total must add up to $100.

$37.89 (mean) DVDs $30.36 (mean) CDs $20.98 (mean) For-Purchase Downloaded Music (not including ringtones) $2.63 (mean) Ringtones $7.73 (mean) For-Purchase Downloaded Video (including TV shows, music videos, and films) $12.69 (mean) Video Games $28.01 (mean) Books (excluding required readings) $ 100  If $0 for CDs and/or For-Purchase Music: Why did you spend $0 on music purchases?

I’m not interested in music. 2 I download all of my music for free. 49 Other:

__27____ In-depth of CD Purchasers (People who buy more than 2 CDs a month.)

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Would you purchase a CD of your favorite artist even if you were unsure of the content or quality of the music? Y 60 N 18 Have you ever purchased a CD because of its extra features (i.e. video clips, interviews, ect.)? Y 12 N 66 What other value do you find in owning CDs as opposed to downloading music?

OPEN ENDED

Demographics

–  –  –

Monthly Income (Student Income or Student Allowance from other source):

$100_32__ $100-$500_82__ $500-$1,000_37__ $1,000-$1,500_18__ $1,500-$2,000_4__ $2,000_4__

–  –  –

8. WORKS CITED Bricklin, Dan. "The Recording Industry is Trying to Kill the Goose That Lays the Golden Egg."

Dan Bricklin's Web Site. 9 Sept. 2002. 11 Oct. 2005 http://www.bricklin.com/recordsales.htm.

Bronikowski, Jeff. Personal interview. 29 Jan. 2006.

Brown, Barry A., Erik Geelhoed, and Abigail J. Sellen. The Use of Conventional and New Music Media: Implications of Future Technologies. HP Laboratories Bristol. Hewlett

–  –  –

Bruno, Anthony. "Digital Entertainment: The Future of Music: Industry Transformation is Just Getting Started." Billboard 3 Dec 2005.

Bruno, Anthony. “Digital Track Sales Stall.” Billboard. 3 December 2005.

Bruno, Anthony. “Retailers Work Toward Digital Future.” Billboard. 3 December 2005.

Burgess, Richard James. The Art of Music Production. 3rd ed. New York: Omnibus Press, 2005.

"Cost of a C.D." RIAA.com. Recording Industry Association of America. 3 Mar. 2006 http://www.riaa.com/news/marketingdata/cost.asp.

Frith, Simon. Performing Rights: On the Value of Popular Music. Cambridge, MA: Harvard

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IFPI: 06 Digital Music Report. International Federation of the Phonographic Industry. 2006. 3 Mar. 2006 http://www.ifpi.org/site-content/press/20060119.html.

Jenkins, Mark. "Hit Charade: the Music Industry’s Self-Inflicted Wounds." MSN.com 20 Aug.

2002. 3 Mar. 2006 http://slate.msn.com/?id=2069732.

Katz, Mark. Capturing Sound: How Technology has Changed Music. Berkeley, CA: University

–  –  –

Kusek, David; Gerd Leonhard. The Future of Music: Manifesto for the Digital Revolution.

Boston, MA: Berklee Press 2005.

Leeds, Jeff. "Labels Halt Downloads to Increase CD Sales." New York Times 9 Mar. 2006. 9

–  –  –

http://www.nytimes.com/2006/03/09/arts/music/09sing.html?ex=1142571600&en=f354 64cad1e14682&ei=5070&emc=eta1.

Leeds, Jeff. "When All the ‘Greatest Hits’ are Too Many to Download." New York Times 2 Feb.

–  –  –

http://select.nytimes.com/gst/abstract.html?res=F50816FB345B0C718CDDAB0894DE 404482.

Macklin, Ben. Online Music: Downloads, Streaming, Radio, Mobile. eMarketer. August 2005.

Moe, Wendy W., and Peter S. Fader. "Modeling Hedonic Portfolio Products: a Joint Segment Analysis of Music Compact Disc Sales." Journal of Marketing Research XXXVIII (2001): 376-385.

Moore, Catherine. Personal interview. 21 Mar. 2006.

Nicoli, Eric. Interview. Podcast From EMI Chairman, Eric Nicoli. 3 Mar. 2006 http://special.the-raft.com/podcasting/ericnicoli.mp3.

Oestreicher-Singer, Gal, and Arun Sundararajan. "Digital Rights and Wrongs." STERNbusiness

–  –  –

Peitz, Martin, and Patrick Waelbroeck. "An Economist’s Guide to Digital Music." CESifo Economic Studies Vol. 51 (2005): 359-428.

Premkumar, G. Prem. Alternate Distribution Strategies for Digital Music. Communications of

–  –  –

"Robbie Signs ₤80m Deal." BBC News 2 Oct. 2002. 3 Mar. 2006 http://news.bbc.co.uk/2/hi/entertainment/music/2291605.stm.

"The Digital Music Revolution." BBC News 13 Apr. 2004. 3 Mar. 2006 http://www.bbc.co.uk/liverpool/music/2004/05/digitalrevolution/.



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