Advanced Search

Research Project

The Music Industry: Facing New Challenges?

The aim of this project is to guide you through using the Biz/ed site and the Internet to help you in your studies, whilst at the same time researching a topic that will enable you to apply a variety of concepts you either have, or will, come across in economics and business studies.

All exam boards have questions that expect you to draw on stimulus material or evidence of various kinds. The evidence in this case is related to the issues associated with the recorded music industry.

Your Task

Produce a report on the current state of the music industry; analyse the changes in the market and how the industry as a whole is facing up to that challenge. Your report should be around 1500 words in length.

The Scenario:
The music industry as a whole is facing a massive challenge. The nature of the industry has changed in that some of the most popular artists have only a short product life cycle. The market changes quickly - people's tastes change as they grow up (can you admit to having been a fan of Jason Donovan or the Spice Girls?), but the fan base for some acts that do survive in the longer term may not be big enough to justify the sort of expenditure that is needed to maintain them as high market growth acts.

Then along comes the Internet; technology allows consumers to acquire music at high quality for little or no cost through file sharing or swapping. The popularity of this method of acquiring music has been at the heart of the decline in sales and profits of recorded music, according to record companies and their representatives. Supporters of file sharing lay part of the blame on the corporate greed of the record companies and point to the relatively high prices of CDs and recorded music as the primary cause of consumers seeking such alternatives.

What is clear is that the technology is here and will become even more sophisticated in the coming years. Many artists have difficulties in getting their music heard because of the dominance of the 'quick buck' mega marketing of the current crop of top acts. For them, the Internet may provide a useful means of distributing their music to fans around the world. Whatever the arguments, the music industry faces the challenge of meeting a changed market place and how they respond to such changes is going to be crucial in their success and the continued development of the music industry as a whole.

The research you will undertake should follow these steps:

• Research the music industry market - ensure you understand what the industry consists of and how it is made up
• Identify the problems - this will need to be from the music industry angle and the file swappers side
• Quantify the problem - some facts and figures to support the two sides - sales of CDs, profit levels, market shares, etc.
• Identify possible ways in which the changing market situation can be addressed
• Seek to quantify these market solutions
• In the light of the quantifiable evidence, arrive at informed conclusions
• Summarise the judgements that you have arrived at

The Music Industry Market

Let us begin by looking in a bit more detail at the music industry itself. To appreciate all the arguments, it is important to have some understanding of how the music industry operates. The music industry consists of retailers, artists, producers, distributors, manufacturers, engineers, record labels, record studios, publishers, marketing agencies and song writers. It is a massive industry. In essence, an artist, who may be the song writer, is signed under contract by a record company to produce a certain number of singles and albums. The record company may pay for the album to be produced, manufactured and marketed throughout the world. The revenue received from the sales of the album or single go to cover the cost of producing the CD.

Music engineers work with recording artists to produce singles and albums. © Photolibrary Group

Some record companies also own the rights to an artist's back catalogue. That means that they are in a position to decide how to use that catalogue. Maybe another artist wishes to record the song; maybe an advertising agency wants to use a song for its campaign; it may have to decide whether to re-issue the material - possibly in some reformatted version with bonus tracks or re-mastered and so on. In many cases, the demand for some types of music is insufficient to spend large sums of money on it and, as a result, losses may be made on that artist. The record company is likely to view all their artists as their product portfolio and in many cases, very successful artists effectively subsidise lesser known ones.

The company are therefore basing their business on providing a range of music to satisfy the diverse range of tastes of the consumer.This product portfolio has to be managed very carefully to ensure that the cash flowing into the business is sufficient to maintain all its liabilities. A glance at any site of the main record companies will highlight the fact that each company actually owns dozens of other companies that it may have bought or set up. For example, the Universal Music Group owns the jazz recording company, Verve, the classical recording company, Deutsche Grammophon, as well as labels that distribute mainstream pop and rock material. The market is therefore dominated by 5 major corporations who account for 75% of the total sales of recorded music in the world but within those five corporations are dozens of other labels and companies that are well known in their own right and may have been acquired or set up by their larger parents over the years.

The Concepts

Below is a diagram highlighting the range of concepts that are relevant to this investigation:

The Background

1. What type of market structure is the music industry? (A look at http://www.oligopolywatch.com/2003/06/28.html will be useful here).
2. Assess the type of cost structure that is likely to exist in the music industry.
3. Describe the production of a CD from commission by a record company to eventual release and subsequent sales.
4. Explain the likely product life cycles of the following five aspects of the music industry:
   • The Beatles
   • Kylie Minogue
   • Classical Music
   • Jazz
   • Rap music

Market Share of the Music Industry 2002. Source IFPI; http://www.ifpi.org/site-content/press/20030909.html

5. Explain what type of market structure that the music industry appears to be and what sort of behaviour you might expect from firms within such an industry given that market structure.
6. Look at the following Web sites - note the range of activities that the major companies are involved with and the way in which the companies are structured.
   
   http://www.bmg.com/ - Bertelsmann Music Group site
   http://new.umusic.com/overview.aspx - Universal Music Group
   http://www.emigroup.com/About/Overview/Default.htm - EMI music
   http://www.timewarner.com/corp/index.html - corporate information from the Warner Group

The Problem

The problem centres on several issues:

1. The record labels have experienced falling sales and attribute this to the increase in 'piracy'.
2. Artists receive royalties from the sale of their music - if the sales are not official they do not get paid.
3. The sophistication of technology means that major piracy operations can be responsible for the considerable quantity of 'fake' CDs on the market.
4. Some musicians who are not signed to major labels because their music may not be considered part of the 'mainstream' see the Internet as a potential source of getting their music to a wider audience.
5. Retailers of all sizes are feeling the effects of falling CD sales on their business. Smaller retailers complain that the disadvantages they face in competition with the larger stores is being exacerbated by the availability of downloaded music.
6. Some people dispute the effects of music piracy - they claim that it encourages further sales and that the record industry is seeking to protect its monopoly powers and maintain artificially high prices, effectively 'ripping off' customers.
7. Some of these critics believe that the reason for the fall in sales is partly due to the actions of the record companies themselves and doubt that piracy is the major cause of the problems the industry faces.

You will need to think about each of these concepts to a greater or lesser extent as you go through the project. Having got some background information about the music industry and the various issues the industry faces, it is time to look into these in more detail. Below is a list of links and some hints about what to look for in them. Try to work through these and it will help you to build a useful store of information that you will later have to decide how to utilise in presenting your report.

http://news.bbc.co.uk/1/hi/business/3264083.stm - BBC News article covering the problems.
http://www.ifpi.org/site-content/press/20030909.html - an overview of the music industry from 2002 - 2003. A detailed version is available via subscription only.
http://www.riaa.com/news/marketingdata/default.asp - the Web site of the Recording Industry Association of America. The link leads to the Research and Data page which, in turn has a number of other useful links to facts and figures relating to the music industry.
http://www.boycott-riaa.com/article/9385 - a different view on the RIAA's stance but with some interesting statistics on the reaction of the music industry to the problems they face.
http://www.screendigest.com/reports/mi2104/readmore/view.html - abstract of a report on the global music industry

1. From these sites, build up a picture of the pattern of sales of music CDs over the past 3 years (the number of years here is not crucial but should be enough to enable you to identify the key trends along with the changing nature of the types of music being sold and the consumers who make up the market).
2. Suggest possible reasons for the trends you have identified.

Other Problems

The changing market for music has had an impact on other aspects of the music industry. The way that music is purchased is also undergoing rapid changes coupled with the development of new forms of media entertainment such as video, and now DVDs. Businesses that are involved in selling music have also had to come to terms with changes in the market. HMV, Virgin and Tower Records, the three major retailers, have had to face renewed competition particularly from on-line retailers such as Amazon. The latter has had a particular impact given its global access, speedy delivery times and extensive range of stock.

The way we buy the music we listen to has changed a great deal over the years. © Sara Medved, Stock.Xchng

Task

Use the links below to identify the extent of the impact of changes in the industry on other areas of the music industry.

http://www.hmvgroup.com/investors/index.jsp - the HMV investor relations site - plenty of links to the company's accounts and sales data.

http://www.centredaily.com/mld/centredaily/news/opinion/6165755.htm - the impact on small music retailers.

Balancing the Argument

The information viewed so far should have given you a picture of how the music industry is structured and what has been happening to music sales in recent years. The information has come primarily from the music industry itself. Whenever you are producing any type of argument, it is essential to be able to offer a balanced account of events - in other words, presenting both sides of the argument.

The music industry have laid much of the blame for the fall in sales of CDs at the hands of music piracy - illegal downloading of music and in particular what is called 'peer to peer' (P2P) networks. These allow those with music files to swap them through facilitating a connection between computers to swap the music. There is a range of P2P sites available - Kazaa (http://www.kazaa.com/us/index.htm), Grokster (http://www.grokster.com/), Gnutella (http://www.gnutella.com/) and a relative newcomer that is proving very popular based in the heart of the Jenin Palestinian refugee camp, Earthstation 5 (http://www.earthstation5.com/).

Note: The links provided are designed to assist you in your research. Biz/ed does not condone or support any form of illegal filesharing.

The question therefore has to be asked as to how far such sites can accept the blame for the apparent downturn in the music industry? Look at some of these sites to get an idea of the number of people using them and then look at, what is now a famous rebuttal of the record industry view, http://www.azoz.com/riaa/news/logic.html by George Zieman, himself a musician. Other links are provided by http://www.theregister.co.uk/content/6/28588.html. Ensure you access the updated information provided by Zieman. (http://www.azoz.com/news/2002piracy.html See also http://news.com.com/2100-1023-898813.html - a technology news site.

1. What are the reasons put forward for the trends that you have identified according to Zieman and others?
2. Use business and economic theory related to market structures to explain how their views may have some validity. (Hint - your earlier investigation into the nature of the music industry might help here!)
3. What evidence is there that the availability of new technology has helped to increase sales of CDs?

The following links may also be useful:

http://www.earthstation5.com/resistance.html - comment from the P2P site on the anomalies in the copyright laws.
http://www.theregister.co.uk/content/archive/26710.html - more from 'The Register' on reports by researchers of the benefits of file sharing.

The Solutions

By now you should have gathered enough information to be able to have a clear understanding of the arguments surrounding the issues facing the music industry as a whole. We now have to consider some solutions. Below is a map showing the possible solutions.

The map above gives you some hints about the possible way forward for the music industry. The links below give more detail about these solutions and the views of those involved. You need to consider the likely effectiveness of the solutions being put forward. Napster, one of the first file sharing sites, was challenged in the courts and effectively forced to close down as it was unable to operate as a viable entity following the ruling. However, it clearly had a name and it had the technology in place to be exploited. As a result it was bought by Roxio, who ironically supply software to facilitate CD burning, and turned into a legal business selling tracks for download. Once Napster was closed down however, there was already plenty of other sites where 'free' music could be acquired. With the all pervasive Internet is it really possible to prevent 'illegal' activities of this sort? Are the copyright and Intellectual Property Laws out of date? (Remember that few 'artists' actually own the rights to the songs they themselves have written!). Will the move to consolidate the industry merely mean that the corporate giants will have more opportunity to be able to restrict access to the industry and increase their control as some would claim? Weigh up the evidence and give a considered judgement!

http://www.eff.org/share/compensation.php - campaign group for legal P2P - links to suggested solutions.
http://www.pro-music.org/viewpoints/speech290703.htm - speech by Larry Kenswill of Universal Music.
http://www.economist.com/displaystory.cfm?story_id=2177244 - Economist article on some of the developments in the industry.
http://www.economist.com/background/displaystory.cfm?story_id=2216946- on mergers in the industry.
http://www.ondemanddistribution.com/eng/home/home.asp - the OD2 Web site - pioneered by Peter Gabriel.
http://www.usatoday.com/tech/news/2003-12-03-riaa_x.htm - news on legal action against file swappers in the US.
http://www.andante.com/article/article.cfm?id=22731 - New York Times/International Herald Tribune article on new trends in the music industry.
http://www.dw-world.de/english/0,3367,1447_A_829741,00.html - News of the reaction of the German record industry's response to the issue.

The Conclusion

To draw a conclusion to the report you will need to reflect on all that you have covered and try to make some overall judgement of it. Refer back to the title at this point - 'The music industry - facing new challenges?' You will need to consider whether, given what you have covered, the music industry is facing significant adjustments to the way it has to operate in order to survive long term or whether the problems are temporary. Refer back to your investigation and draw on the issues covered in your conclusion. You are expected to come to some form of judgement about the issue, so be bold and ensure that whatever conclusion you come it is supported by relevant facts, figures and so on.

What have you learned?

At the end of this activity you should have learned the following:

• To be selective in the use of a wide range of information sources
• An understanding of key concepts related to business studies and economics
• To structure an extended piece of writing
• To produce a coherent and balanced argument on a topical issue
• To understand different perspectives of a controversial issue and be able to attach some weight to such perspectives
• To arrive at an informed judgement by weighing up the points raised in the issue