Music in the Cloud

2MUS77H Music Business Management Final Project

University of Westminster

School of Media, Arts and Design

Ozge Ergen
12569782

9 June 2010

This paper is under a Creative Commons License. You can share it, redistribute it and blog it.

MusicintheCloud

Executive Summary
The music consumption has been evolving along with the technology offering
better playback formats for the consumers and the improved production tools for the
producers. Digitalisation initiated in 1970s had turned to a massive success with the CD
format bringing in considerable amount of sales and revenue to the labels. While copying
and sharing of music on blank CDs had grew as a trend among young music fans during
the first half of 1990s, the compressed digital music format, mp3, and the Internet created
a free market for the recorded music which resulted in new market dynamics. Today
music in digital codes is independent of the physical objects such as CD, tape or record
and unlimited copies can be made and spread on the networks easily.
The Cloud which has been used as a metaphor to denote the Internet since the
late 1960s is preparing to determine the next era when the music consumption will take
place on virtual networks utilising streaming technologies. Evenmillions of files stored at
the hard drives of the computers are already offered to be replaced by the virtual content
which is served for free online. Furthermore, interoperability which has been the major
problem that made it cumbersome for the consumers to transfer the digital music libraries
to any other device since the first days of digitalisation is to be solved by the cloud based
services providing a listening experience independent of file formats and hardware
functionality.
Consumers of the digital age who are looking for a new experience rather than a
new content are turning to accessing music online via subscribing to services offering

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always on connectivity with mobile devices. Moreover online streaming portals, digital
music lockers, social networks enabling sharing of digital content seem to be forming the
basis of the transformation to the virtual consumption of music.Whether through feels
like free -service or device- bundle offerings or advertising funded models, those music
services will be organising and extending personal libraries in the cloud while integrating
music more into our lives in the future.

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Table of Contents
1.0. Introduction

2.0. Music Consumption Behaviour: The Evolution

2.1. A brief history of the music formats

2.2. Analogue to Digital

2.2.1. Napster and iTunes: Pioneers of the digital revolution

2.3. Digital to Virtual

10
14

2.3.1. Cloud as an Internet metaphor

14

2.3.2. Music in the Cloud: Streaming Services

15

2.3.3. Storage in the Cloud: online lockers

19

2.3.4. Online video portals: Video as the rising music format

24

3.0 Digital Music Services and Business Models:

Consumer Adoption vs. Sustainability

28

4.0. New Trends Affecting Music Consumption in the digital age

37

4.1. Mobile Convergence: The world of smart phones

37

4.2. Social networks: Crowd in the Cloud

39

4.3. iTunes: Upgrading libraries to the cloud

40

4.4. Broadband Speed and Penetration: Internet as water

43

5.0. Monetisation of music in the digital age

47

5.1. Easy to police & easy to monetise in the cloud

47

5.2. Collaborations in the technology and the music world

52

6.0. Conclusion

54

7.0. Bibliography

56

8.0. Appendix

67

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Table of Figures
Figure 1: Effectiveness of marketing channels

27

Figure 2: Recorded Music Sales in Top Markets in 2009

29

Figure 3: Recorded Music Sales 2008-2009 % Change by Region

29

Figure 4: Performance Rights Revenues of PRS, ASCAP and IFPI in 2008 & 2009

35

Figure 5: Change in media use 2004-2009

36

Figure 6: Information & Communication Technology growth (1998-2009)

37

Figure 7: Global Broadband Speed

44

Figure 8: Markets with the highest broadband penetration of households, 2007-2012 47

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1.0. Introduction
The music industry has been transforming into the digital world since the 1970s,
when digital technologies were introduced in the areas of music production and recording.
Music distribution was one of the first to experience the change; analogue music storage
products were replaced by digital compact disks in the 1980s. It was followed by the MP3
format to initiate free online distribution in 1990s which resulted in the new music market
dynamics.
The Internet which made it possible to share the music online on digital mp3 files is
now shifting music consumption towards another medium. Cloud-based services that are
offering millions of tracks are promising to profoundly impact consumer behaviour which
is today in the favour of downloading tracks online.
The Cloud which has been used as a metaphor to denote the Internet since the
late 1960s and early 1970s (Wikstrm, 2009) is expected to form the basis of the music
consumption experience in the virtual world of Web. Likewise, accessing music in the
cloud will be replacing ownership of mp3 files on hard drives. While the amount of
content and quality of networks stay as the influential factors on the transformation, new
music platforms will mainly be utilising the mobility and interactivity to support the
momentum among the online users.
This paper aims to discuss the digital music consumption behaviour in the future
while analysing the new trends on the digital music environment which puts the emphasis
on the networks rather than computers at the nodes of the networks. Web 2.0
technologies -which enable people to socialize with friends, store and edit photos, listen

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to and remix music online- streaming portals, online lockers, smart phone technologies
and subscription models will be examined with the iTunes traditional download service
that has been dominating the digital music market since 2003.
2.0. Music Consumption Behaviour: The Evolution
2.1. A brief history of the pre-digital music formats
The history of music and the recording industry is strongly linked to the
technological improvements which took place on the production, distribution and the
playback of the music. From the first publishing companies in the New York which
represent the entire music industry (Wikstrm, 2009) to the conglomerates of today, the
new sound recording technologies have always shaped the popular music. The design
and the format of the music carrier were dictated by the technology, whereas the format
sometimes dictated the musical form (Coleman, 2003). For instance, the compact form of
the popular song with three-four minute duration is the result of physical formats which
were introduced by the playback machine manufacturers.
With every new format initiated the music industry established itself -from a live
performance business to become the recorded music business of today. A music
enthusiast who used to buy sheet music at the stationery store and play it on the piano in
his living room (Wikstrm, 2009), now creates a web site and makes songs available to
millions of the people all around world.
Thomas Edisons groundbreaking invention of the phonograph in 1877, followed by
Emil Berliner getting the patent for his first playback-only gramophone in 1887, initiated
the improvements for the new sound-recording technology. Those former music formats

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primarily intended to serve as a tool for office dictation morphed into the Victrola in 1906,
which was the first successful mass-market record player (Coleman, 2003). While
recording technology was struggling with format (disc versus cylinders) and functions
(music versus dictation), the 33 1/2 rpm long-playing record (LP) and the 45 rpm single
emerged to spread a new style of music to a new generation of listeners (Coleman,
2003). 45 rpm disc singles and cheap transistor radios gave birth to rock n roll (Barfe,
2007).
In 1979, there came the cassette tapes aiming to beat 8-track tapes which were
accounting for 25% of all music sales by 1975. Although they lack on sound quality
compared to vinyl LP and had limited ability on manual cue, the support of the automobile
industry the Ford Motor Company installed Motorola 8-track players in its cars as a
luxury option- provided success to the format during the late 1960s and the start of 1970s
(Coleman, 2003).
Meanwhile the alternatives to the turntable as a music player were multiplying with
better price offerings. Record players which were fuelling the public consumption of
music with the help of DJs of the Sixties and Seventies started to evolve in another
direction after Sonys release of Walkman II in 1981. Almost overnight, portability turned
into a crucial issue for audio consumers. As a result of the trend on the private
consumption of music cassette sales overtook that of LPs by 1986 (Coleman, 2003).
While the sales of pre-recorded tapes and discs were growing blank tapes were
introduced which made it possible for the consumers to create their own albums rather
than being limited to the number of LP collections. The music industry reacted quickly

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with declaring the home taping as a greater threat than any competing technology for
their profits. While mix-tapes became a phenomenon Recording Industry Association of
America (RIAA) described the act of copying music on blank tapes as piracy and the
music industry lobbies succeeded to initiate a tax on tape recorders and blank tapes
(Coleman, 2003).
Conversely, the sales of 45 rpm record and LPs started to decline until when they
are left to be consumed only by DJs and jukebox operators. Then the first commercial
compact discs were offered for sale in 1982 making the introduction of the digital
technology to the recording music industry (Barfe, 2007).
2.2. Analogue to Digital
Digital communication which was born in telephone labs (Samuel Morses
telegraph as a basic approximation of binary code) (Coleman, 2003) opened a new
chapter for the music industry. Starting with the production technologies, digital editors
altered the binary code replacing analogue tapes with more durable CDs. Besides its
portability, the recording capacity of a CD which is almost twice as long as a forty-minute
LP also supported the adoption of the format by the industry. Almost overnight, CDs
replaced LPs and the transition started when the CD outsold vinyl for the first time in 1988
(Coleman, 2003). During the Nineties the record labels enjoyed the profits coming from
consumers with eager to purchase the reissues of their LP collections in the CD format.
Although there were attempts to supplement the CD with a new format; such as CD
quality tape called digital audio tape (DAT) and MiniDisc, none of them managed to
become mainstream. In fact hardware for the playback has always been critical for the

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adoption of the music formats. During nineties price tags of the hardware -players of the
mentioned new formats- prevented Sony and Philips to create a rival for the CD
(Alderman, 2001).
By the end of 1996, CD sales growth had stalled. While the quantity of pop records
produced were questioned for being a reason music stores were especially mourning
about the lack of teen pop idols-, also there were concerns on the music industrys focus
which has been on the format rather than the music itself (Coleman, 2003). The music
industry -in the search of a new format to replace CDs- seemed to fail to see the digital
revolution which was about to take off and the advent of the Internet which enabled the
free distribution of digital files online while changing the rules completely.
The recording industry had found itself in an environment in which their chief
commodity was not just easily converted into digital code but also unlimited copies could
be made and spread on the networks swiftly. Songs created with digital tools in digital
codes initiated a new era where the music consumption is independent of the physical
objects such as CD, tape, or record (Coleman, 2003).
2.2.1. Napster & iTunes: Pioneers of the digital revolution
Mp3 format (mpeg-1 layer 3 compression) was developed in the early 1990s by the
Fraunhofer Institude in Germany (Barfe, 2007) and formed the basis of the mentioned
evolution by introducing a music format of a small size -the music at 128kbps mp3 file
was acceptable in sound quality considering it is a compressed file which is eleven times
smaller than the original file (Barfe, 2007). However; the bandwidth (the speed of the
Internet) in its first years was not supporting the easy distribution of the digital files. Rob

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Glaser, who did not want to wait for a better connection to arrive, developed RealAudio
the first online streaming format- in 1995 (Alderman, 2001). Radio stations, retailers and
web sites embraced the format quickly. Conversely, winamp, a freely distributed decoder
and player, came as an innovation to help mp3 format reach to the mass audience.
Although it became possible to download music files from the Internet via websites like
mp3.com- the catalogue available was not satisfying for the young internet communities.
Napster, which was developed by a teenage computer student, introduced that killer app
for the free distribution of mp3 online in 1998 (Barfe, 2007). Peer-to-peer sharing of
digital content between the Internet users utilising the Napster software quickly adopted
by the teenagers and grew tremendously worldwide in a year.
RIAA which accused home taping of killing the music sued Napster for copyright
infringement in December 1999. While legislations against web sites offering mp3
downloads was favoured by the majors and some artists such as Lars Ulrich of
Metallica- Bertelsmann took another path and acquired a stake in Napster in October
2000. However, its legal subscription-based download service had to wait until November
2003 as a result of ruling of the court against Napster in July 2001(Barfe, 2007).
Peer-to-peer sharing phenomenon initiated by Napster spread across the web with
the new services blossoming in early years of the new millennium. Gnutella and Kazaa
offered non-centralized file sharing platforms which made it hard for the industry to take
action against service providers (Coleman, 2003). Although the music industrys goal of
replacing CD with another format seemed to fail they were convinced to build an
alternative legal market for the digital music. MusicNet and Press Play were first legal
digital music services launched as joint ventures of major labels and online media

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companies- offering streaming and download of limited number of songs for monthly
subscription fees in 2001. Both of them were restricting downloads to a single computer
as well as preventing transfer to portable players and burning onto CDs. Therefore, they
fell short to attract the music consumers who have been busy filling up their 6 gig byte
iPods with illegally downloaded digital music. Coincided with the federal courts ruling
that file-sharing services Grokster and Morpheus were legal technological tools, protected
by law in much the same way as videocassette recorders or copy machines (Borland,
2003), Apple launched the iTunes music store in 2003 first in the US with a promise to
convince customers to pay for the digital music. Steve Jobs vision in 2002 of an online
music store hosted by Apple that would be easy to use, complete in selection and reliable
in performance (Chen, 2010) had to take on a long negotiations period to persuade labels
on an a-la-carte sales model which they believed could be death of the traditional album
format. Also Jobs had to restrict the first version of the iTunes to Mac computer users,
which were making up the only 3% of the total market in 2003 so could not ruin the
record business. However, after 1 million downloads were acquired by iTunes in the first
week (Coleman, 2003) the music industry decided to approve opening up the platform to
Windows users and following that Apple introduced its pay-per-download music service in
Europe in 2004 (Kahney, 2008).
Today Apple has 69% of the market share in the total digital music market as of
the first half of 2009 (Dalrymple, 2009) and representing 25% of the total recorded music
sales (NPD Music Watch, 2010) with its iTunes music store. Whereas a number of
subscription music offers from online and mobile service providers emerged within the
last six years, according to International Federation of the Phonographic Industry (IFPI)

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those services could only made up of 6% of the digital income of the labels in 2008
(2009).
Since the 1990s, the digital revolution has created a massive catalogue of digital
files which can be owned as single track or digital album downloads, as well as, the
temporarily owned (tethered) downloads within online memberships. While accessibility,
availability and price determine the popularity of those services, free consumption still
seems to be the most favoured by the consumers. Research conducted by Capgemine
underlines the fact that legal digital platforms accounts for only 35% of the revenues in
the US, UK, France and Germany where 70% of the music consumption generates on
digital channels (2010). So the real competition that the widespread of digitalisation has
brought in is between legitimate and pirate channels.
Digital technologies, which according to Frith were shaped by analogue practices,
introduced new forms of ownership of music (2001). While new platforms are allowing
people to reach millions of tracks easily, they represent a challenge for the creators and
the owner of the music. Easy access is resulting in increased possibility of theft; whether
in terms of sampling or piracy (Frith, 2001). Therefore the music industry, which
recognised the insecure nature of digital files, has been trying to protect free distribution
of their copyright by investing on digital rights management (DRM) solutions. As a result
of that the first decade of the millennium saw the futile attempts of the record labels with
the discussions on the fair use against the new business models including different
versions of DRM applications.

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Liberated world of web caused confusion on the consumer while creating a sea of
free information online. Furthermore music as a form of information and content has
encouraged the usage and the adoption of the Internet since its first days. Now the
industry is aiming to implement new solutions according to the improvements at the online
environment to monetise the free access of music. Conversely, it is likely that the online
world will embrace the music once again as the heart of new cloud services.
2.3. Digital to Virtual
2.3.1. Cloud as an Internet metaphor
The Cloud has been used as a metaphor to denote the Internet since the late
1960s and the early 1970s after the invention of the technologies behind the network of
networks (Wikstrm, 2009). When Web 2.0 technologies promoted some offline and
online activities to advanced web platforms which are capable of offering software and
storage applications of the computers, the cloud has started to fit into the digital age.
Sun Microsystems slogan of Network is the Computer which was introduced in 1990s
(Carr, 2008) earns a meaning with the improved broadband infrastructures and wide
spread of mobile devices providing online access on the move.
The term cloud, which was used in the past to represent the telephone network,
has recently been more linked to the cloud computing solutions (Carr, 2008). Especially
those business applications that are aiming to increase the capacity and add capabilities
on the fly without investing in new infrastructure or licensing software are widely preferred
by IT departments (Knorr, Gruman, 2009). Conversely, virtual services available over the
Internet are also providing an easy access to entertainment and office software online.

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Regardless of the functionality of the computer or the mobile device, today these
solutions are offering platforms to edit and to save different types of documents and files
on web browsers or through the desktop clients.
Rifkin suggests a new era where markets will give way to networks and ownership
will be replaced by access (2000). As the online commerce reduces the transaction costs
towards zero, while enabling consumers to reach more products online, experience in the
form of services grows in importance. So the ownership of things gives way to
experiences. In the light of that, cloud-based services are proposing to promote all the
media consumption at the digital channels to the virtual world. Peer-to-peer revolution
enabled by compressed audio and video formats in 1990s is finding new grounds in the
cloud of networks. Millions of files stored at the hard drives of the computers are offered
to be replaced by the virtual content which is served for free online. Furthermore, productbase transactions are losing over the lure of subscriptions (Griffin, 2001), with which
access to the cloud is monetised.
2.3.2. Music in the Cloud: Streaming Services
Streaming as a technique for distributing audio or visual media across the Internet
(Wikstrm, 2009), has been one of the ways of music consumption since the late 1990s.
Online broadcasting which first enabled by RealAudio format in 1995 has followed by
other formats and software to create an alternative method to the online downloading
services during the first half of the last decade. Todays music consumer can listen to
online radio broadcasts on any device with Wi-Fi connection. Also new on-demand
streaming services are offering customised stations and search-and-listen options to

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create a better listening experience online. As it is easy as browsing the web pages,
streaming platforms are investing on functionality more than any other online music
services to retain their customers.
Pandora with almost fifty million users in the US (Miller, 2010) and Spotify with
seven million users in six European countries (Watson, 2010) have been representing the
substantial proportion of online music consumption today. Discovery and
recommendation being the key features for both services, they mostly benefit from their
extensive catalogues to grab attention and usage among the Internet users. Also they
are offering a real alternative to pirate web sites according to Gfk six out of twelve users
of Spotify in Sweden had stopped or cut down on their file-sharing activity since using the
service (2009).
Conversely, its nature of providing music enjoyment without having to download
and save the file to the computer is supporting the access principal. Daniel Ek, CEO and
founder of Spotify, says the average user on their platform has 15,000 tracks in his/her
collection, which he claims to be higher than the number of average tracks on hard drive
of a PC user (2010). Therefore, people are using streaming services, with playlist
functions, as their online music libraries. Especially, with the advent of smart phones with
applications providing easy access to online platforms on the move, more people are
adopting streaming services as a way of music consumption. As an example, Pandoras
iPhone application (app) is said to attract twenty thousand new users to the service each
day that represent 75% of the all app activations (Van Buskirk, Snyder, 2009). Even
portable mp3 players manufacturers are now including tools to enable web access on the
players to attract the consumer with online music service subscriptions.

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Interoperability is another reason behind the quick adoption of streaming music

services. Since the first days of the digital revolution, music formats have been evolving
providing better sound quality and secure usage online. However, each new format has
made it more cumbersome for the consumer to transfer the digital music libraries to any
other devices. Streaming portals, coming with extensive music catalogues (even
including special edition material) which are playable on any device with an online
access, are providing a listening experience independent of file formats and hardware
functionality.
While the economics of mentioned services are still unsatisfactory (McCandles,
2010) compared to the physical sales and pay-per-download digital sales PRS for
Music collects 0.00085 for each stream whereas it is 0.04 for each track downloaded
(PRS, 2010)-, creative remuneration solutions have been introduced by new
entrepreneurs with each new service offering. Today ad-funded free services and
premium subscription services are most common types of pricing of online streaming.
Content owners and record labels are considering licensing rates of those services
according to users freedom to choice songs to play. Online radio stations (so called
internet radios) are treated as traditional broadcast media and subject to blank licensing
schemes of collecting societies, whereas streaming platforms such as last.fm, Spotify,
We7, MySpace, which are offering on-demand (interactive) services have to negotiate
with publishers and labels on royalty payment models ranging from pay-per-stream model
to advertising revenue sharing (King, 2001).
Although free streaming of music for the song previews or for listening to the
albums are appealing to music consumers from different demographics, the concept of

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licensing access of music still seems unattractive for the music industry. As a result of
that they are signing temporary contracts and preferring to renegotiate the terms after a
certain period to be able to assess the performance of the start-up businesses build
around streaming of music. Ian Henderson, Vice President, Digital Business
Development, Europe & Africa in Sony Music, says that the key metric of performance is
revenue generated per active user. So if free streaming services are not able to upsell
their free users to premium subscriptions or digital music sales their revenue per active
user will fall below the renewal threshold, which may lead to a decision of ending the
partnership (Henderson, 2010). Conversely, there are labels and artists rejecting the
inclusion of their catalogues for ad-funded streaming services. As a recent example;
Warner Music announced that it will stop licensing free music streaming services with a
belief that it is not positive for the industry (Youngs, 2010). Given that 95 per cent of
digital music downloads are illegal (IFPI, 2009) -generating no income to artists,
producers or labels- the music industry should be considering the whole digital music
market, including pirate channels, before reaching to a conclusion on the effect of free
online streaming services. However, as demonstrated by the mentioned approach of
Sony Music and Warner Music, financial terms (i.e. revenue share, minimum royalty per
stream) are more influential on evaluation of music streaming businesses. Consequently,
load of royalty payments occasionally results in diminishing of the service providers and a
rise in the number of social platforms providing links to other online music services (i.e.
Last.fm).
Social communities are becoming larger with each new technology enabling
interconnection within the online networks. While the catalogues of unlicensed music are

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spreading, increasing the size of free music available online, musician members of those
communities offering streams of their content are turning out to be popular without a need
to follow the old rules of the music industry. Besides altering access to popular major
label repertoires those social music portals are also providing exploitation and discovery
of new music, which results in more music consumed online.
The Internet has enabled interactivity between sellers and buyers; today creators
exploit their products and connect with fans directly. MySpace as one of the first
examples has been introducing new talents of the digital age just by hosting personal
user pages and making the uploaded content available and accessible on the web.
Unlike purchasing of the physical products (such as CDs and vinyl) for which there are
limited previewing options available at some retail shops, online streaming platforms are
facilitating users with free discovery online. While the ownership results in private
collections stored in computers and home basements, consuming music on social
streaming portals of today means accessing libraries of the millions with same tastes.
Likewise, it is storing and sharing personal libraries online.
2.3.3. Storage in the Cloud: online lockers
In the digital age, where people constantly share, download, accumulate bites of
information and content, storage and easy access have become focus of technology
creators quickly. With the advent of cloud computing technologies, companies such as
Google, Amazon and Microsoft introduced platforms serving individual users and
enterprises that are in need of extra remote databases in the cloud. Saving data to an

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online storage system which is maintained by a service provider is called the cloud
storage today (Strickland, 2010).
Inspired by this trend a young entrepreneur launched the first cloud-based music
storage service in 2000 called MY.MP3.com. The idea was to give an online access to
the customers for the music they own. Users could easily register their personal CDs (by
downloading the software and placing a CD in the disk drive to prove the ownership) and
then stream the music on the Web. Michael Robertson, the founder of mp3.com, then
bought 80,000 CDs for his database and continued to add one thousand and 1,500 CDs
a day to the service (King, 2000). Although the service itself was attractive for the
Internet users and should be admired by the labels because it encourage the purchase of
CDs, the industry chose the litigation against mp3.com and New York Federal Court
rejected Robertsons fair use arguments imposing US$53 million in statutory damages
(Sheffner, 2010). Today, he has two lawsuits with EMI Music and he is still improving his
online music locker business with mp3tunes.com (Gomes, 2010).
Whereas the streaming catalogues of the online services grow especially with
the belief and the support of the independent artists and labels - service providers are
embracing locker technology and propositions to personalise their cloud music offers.
Imeem, which was bought by MySpace in 2009 (Arrington, 2009) and Lala as Apples last
acquisition (Sandoval, 2009) are popular platforms offering a space for user libraries
online. While the users are converting physically and digitally owned collections to an
online medium they are also creating virtual identities through music tastes. The more
digital music files are uploaded and shared on user profiles the more contagious these
services become.

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PSonar is one of the online services using the cloud as a storage space. For a cost
of monthly premium subscription users can access their libraries through unlimited
number of devices or can choose to sign up for a free service allowing limited access and
storage space. While involving similar recommendation and discovery functionalities of
streaming services which have been embracing the access principal, the service
appears to support the ownership-based proposition. Following that the platform is
offering users an option of exploring the other users collections with an ability to preview
and to buy the music they like on CD or download from Amazon. Matthew Bailey, the VP
of business development in PSonar, says that they believe that most people want to
collect and own music and be confident that theyll always have access to that music
(Forde, 2010). Also the company which has not signed any licensing agreement with
music labels for its online locker service could be trying to avoid possible royalty
payments by positioning itself as a channel for legal digital downloads. It is known that
major labels are not approving the services providing access to the songs acquired from
illegal channels without any remuneration (pls. see Appendix). However, there are
opportunities for the music industry to monetise the pirate copies of the music on those
online storage utilities.
For instance, Lala is offering an unlimited storage space in its servers; consumers
can transfer their libraries easily through installing the Lala Helper app, which scan their
computer for music files, and sign into Lala to find their entire music library in the cloud
(Kincaid, 2009). Once the music on the hard drive of the computer is matched with the
metadata of the service digital music is promoted to a legal consumption channel (Rosoff,
2008). Lala users can then listen to the music in their virtual libraries for free, purchase

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web-only versions for 10 cent per song or download songs for 89 cents each (Van
Buskirk, 2008). Whichever way the music is consumed copyright owners are rewarded.
Alternatively, such locker services can sign their users to a monthly subscription which is
offering limited storage of their digital libraries and streaming of the available music
catalogues during the subscription period and where the music owner are remunerated
according to listening trends of their own catalogues.
While new players such as TuneBag, Bluetunes.net have introduced similar
technology platforms, legal aspects of storing music online are likely to stay as a question
until the court makes an injunction for the case between EMI Music and mp3tunes in
2007 (Kravetz, 2007). Furthermore, Apple has been rumoured to be in discussions with
major labels (Sandoval, 2010) on the licenses for offering music in the cloud for free.
Although it is likely that the industry will be treating Apple much better compared to other
small start-ups-, any approval on the free upgrade of digital libraries to a virtual platform
will constitute an important step for the future of cloud-based services. Whether through
storing one copy of each track on the server to match with user libraries (like the former
mp3.com model) or encouraging consumers to upload their own copies to keep separate
files (like the Cablevision model) in the cloud (Sheffner, 2010), Apple will have to find a
legal grounds to exercise fair use doctrine at its cloud base offering. Otherwise, its cloud
service will be limited to purchases from iTunes store, which seems to be the only
possible legal method of upgrading digital libraries to the cloud for free, considering the
major labels current perspective of sharing the subscription fees earned by the service
provider.

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The level of freedom on those digital lockers or the streaming services offering
storage for user libraries is another important aspect affecting the consumer adoption
(Buskirk, 2009). Robertson underlines the fact that the music uploaded to services like
imeem and Lala cannot be downloaded again, meaning users are completely converting
their digital libraries to a virtual world (Michaels Minute, 2009), once they sync their files
on the hard drive. So, arguably the mistake of the former online music services of
locking the purchased tracks to certain devices with DRM applications- seems to be
repeated by those cloud services which will probably cause dissatisfaction among the
users. Server DRM as Robertson calls it- or network DRM as named on the patent
owned by Lala, is restricting downloading and sharing of uploaded files. They are
delivering the product directly from the network by which only authorized users and
devices can access the media (Robertson, 2009).
Conversely, watermarking of digital files with personal information on download
and streaming services are becoming common practice for legal music platforms.
Arrington suggests that Apple, Lala and Walmart are using watermarking whereas
Amazon and Napster still resist label pressure to do so (2010). Moreover, applying that
type of DRM on cloud based services is expected to be included on licensing contracts of
Apple, Google and Amazon for their future cloud offering by the major labels. As a result
of that the users will not be able to play the music they ripped from a CD and upload to
their online library if they change their usernames on those platforms (Arrington, 2010),
restricting users ability to share personal files with the others. However, peer-to-peer
sharing of digital files still manages to find grounds on locker technology with the help of

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open application programming interfaces (API) which are embraced by most of the web
platforms today.
SoundCloud is one of the first services to bring the cloud to the digital music
environment for sharing of music files. It allows content owners to share high-quality
audio with others by simply uploading and sending the link to any Internet user. Unlike
the former P2P services SoundCloud provides benefits for the music industry to position
itself as a legal music platform. Taking the advantage of controlling the recipient of the
delivery and the ability to monitor the activity online, it has quickly been adopted by record
labels for sending promotional material to the media members. Also label A&R (artist &
repertoire) departments are using its dropbox service to accept demo recordings from the
artists (Forde, 2010). It is not hard to see that SoundCloud has been one of the biggest
rivals of MySpace in terms of providing a platform for the musicians to exploit their work
online. Moreover, its partnership with Hype Machine popular music blog search engineto serve tracks to bloggers, while providing rich data on play trends for the content owners
(Bell, 2010), has been an important step to support its Business-to-Business (B2B) usage
in the future.
2.3.4. Online video portals: Video as the rising music format
One of the most important results of unlimited storage and easy access of content
on the Web has been creating a visual culture that relies on images and videos to share
their daily experiences online. Today twenty four hours of video is uploaded to YouTube
every minute (Walk, 2010) and almost four hundred and fifty million people visit YouTube
every month (Caraeff, 2010). Online video portals have been gradually replacing the

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traditional media while visual quality and the storage capacities of the portals such as
Hulu and YouTube are improving each year. As a result of that consumption of long-form,
premium content is increasing (comScore, 2010) with more time spent on online video
portals.
Conversely, amateur production is revealing itself in user-generated videos. Music
fans of the digital age are not only listening to the music on video portals but also crafting
their own versions which can achieve million views while reaching and binding other fans
around the world.
Unlike the analogue technologies which were only benefiting those who have
access to expensive facilities, online video platforms are providing free digital tools to
create and share content easily. Considering that, those networks are utilising cloud
computing technologies to provide access to millions of licensed and user-generated
content via internet connected devices. So since the first video web site ifilm.com, which
was bought and converted to Spike.com in 2005 (Mahalo)- the Internet user who is
consuming online media regularly has been shifting to the cloud, unconsciously .
According to Jupiter Research sites such as YouTube dominates digital music
activity in Europe with nearly one third of all the Internet users watching music online
(IFPI,2010). In addition, CEO of Vevo, music channel on YouTube developed by
Universal Music and Sony Music in December 2009, points out the fact that 60% of the
visitors of the site consume some form of music programming (2010). Therefore the
recording industry, which was previously accusing such platforms for copyright

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infringement (Sandoval, 2009) (i.e. Universal Music vs. Veoh case), are now investing on
the solutions to control and to improve the monetisation through advertising.
While the music video is rising to become the contemporary form of music
consumption among teenagers, new online media has been blurring the distinction
between promotion and distribution outlets of music (Wikstrm, 2009). Whereas the
traditional radio is losing its attraction for the marketers (pls. see Figure 1) online
presence achieved with creative video contents is turning out to be a major part of
marketing campaigns -total advertising spending on online video channels is expected to
double by 2014 in the US (Forrester, 2009). Furthermore, Patrick Walker from YouTube
revealed in MidemNet 2010 that the Company is monetising over a billion videos per
week with 75 of the top 100 advertisers are currently running campaigns on YouTube
(2010). Given that its music video channel, Vevo, attracted 43.6 million viewers alone in
April 2010, which is representing a quarter of the U.S. online video audience (comScore,
2010), the online visual media are becoming the next generation of MTV.

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Figure 1: Effectiveness of marketing channels (Forrester, 2009)

The video format which created the pop stars of the Eighties is once again
promoting the music; (this time) through visualisation of original ideas in the form of online
video contents, websites and games. Content introduced by the artist is creating viral
effect on connected online networks where the buzz around the content is feeding back
the demand for the artist or the products. Therefore, availability of free video content for
preview or full streaming purposes is accepted to bring in support and indirect revenue to
its creator. Most of the online video portals which are designed to give access to free
content on ad-supported basis are supplying links for the consumers to buy digital
downloads or concert tickets from sponsored retails or artist websites and they are
creating new markets for the musician to capitalise on.

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Moreover todays artists and labels are embracing online media to an extent that
they have their own channels and analytic tools to monitor the activity around their
content. Since the number of professional content is growing with the number of
channels controlled by their owners, monetisation schemes are improving as well. As an
example, YouTube launched The Partnership Program in 2009, which allows users with
popular videos to share advertising revenue with Google and it is planning to offer its
users the ability to charge rental fees for their uploaded videos (Axon, 2010).
It is to see whether those new trends will help to transform the online commerce
from markets to networks in coming years. However, in the unpredictable world of the
Internet, one thing is clear that the visual consumption of music on internet connected
devices, including TV and game consoles, will be promoting the cloud-based offers on
online video portals.
3.0. Digital Music Services and Business Models: Consumer Adoption vs.
Sustainability
Digitalisation has been introducing a variety of channels and services for the music
consumption. While the traditional a-la-carte (pay per track) model which was pioneered
by Apples iTunes Music Store remains to represent the largest part of digital revenues of
the recording industry, ad-funded offers and subscription services have been showing
remarkable growth in number and in revenue in the recent years (IFPI, 2010). According
to NPD Group, 18% of the Internet users (aged 13 and over) in the US are buying music
from digital retailers today (2010). Although the adoption of legal digital music channels
lag that of the US in top five markets of Europe where according to Forrester Research

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8% of the Internet users buy music digitally- countries such as Sweden and UK has been
celebrating the return to growth in total recorded music revenues by 2009, caused by the
increase in digital incomes (IFPI, 2010).

Rank

Country

Trade Value
US$ (millions)

%
Change

Physical

Digital

Performance
Rights

USA

4,632.4

-10.7%

55%

43%

2%

Japan

4,049.6

-10.8%

74%

24%

2%

UK

1,573.8

1.9%

73%

19%

8%

Germany

1,533.3

-3.0%

85%

10%

5%

France

947.7

-2.7%

77%

14%

9%

Australia

381.6

4.3%

78%

18%

4%

10

Spain

245.9

-14.3%

72%

13%

15%

15

South Korea

144.8

10.4%

45%

55%

0%

16

Sweden

138.0

11.9%

76%

15%

9%

31%

19%

128.4
2.0%
50%
17
India
Figure 2: Recorded Music Sales in Top Markets in 2009 (IFPI, 2010)

Region

Physical

Digital

Performance
Rights

Total

North America

-17.9%

1.1%

20.3%

-10.4%

Europe

-8.9%

29.7%

4.1%

-4.1%

Asia

-15.4%

10.4%

11.9%

-9.2%

Australia/New Zealand

-2.4%

41.4%

8.6%

3.5%

Latin America & Caribbean

-4.7%

17.6%

23.2%

-0.7%

Global
-12.7%
9.2%
7.6%
-7.2%
Figure 3: Recorded Music Sales 2008-2009 % Change by Region (IFPI, 2010)

While peer-to-peer (P2P) sharing of music is pronounced to account for more than
20% of the Internet traffic globally (Sandvine, 2009), free online streaming services are
appealing to more users every year and helping to curb the online piracy (Walker, 2010).
Music Consumption Around the World Survey conducted by Music Matters and
Synovate in December 2009 highlights streaming music as a growing trend in music
consumption behaviour with 21% of the respondents saying that they stream music from

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a service such as Spotify and MySpace. Furthermore, the economics of offering free
music access to online consumers are improving; the BPI announced an increase of
247% in ad-supported service revenue in the UK in 2009. Even though those revenues
still represent less than 1% of the annual total revenues (BPI, 2010), this positive trend is
raising the hope for the sustainability of such services which are utilising cloud
technologies. More to the point, We7 proclaimed that it had its first month where money
owed to rights holders was paid by display and audio commercials -to its three million
users- in March 2010 (Paine, 2010).
Consumers from different territories are exhibiting different tastes on different
services built on converged technologies. South Korea and China are leading on mobile
purchases (Synovate, 2010) while the music consumption in Europe grows more on
online channels; total online revenue in the UK grew 51.7% in 2009 where there was a
13.3% of decline in mobile incomes of record labels (BPI, 2010).
According to IFPI online digital music libraries now include more than twelve million
tracks and there are four hundred legal music services worldwide (2010). The music
consumers problem is not to access the content anymore (Wikstrm, 2009). The need for
convenient ways to organise the content is increasing with proliferation of mobile devices
particularly smart phones and laptops (Fogg, 2010). Therefore, cloud based services
are proposing to replace the digital ownership with the online access on all available
Internet connected devices.
Music Experience and Behaviour in Young People Research conducted by the
University of Hertfordshire in August 2009 underlines the rising adoption of computers

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among the 14-24 year old teenagers for listening to music. Conversely, in the same
research the Internet outscored mobile phones and books/magazines as an
entertainment tool which young people value the most. Moreover, the growing
investments on technologies which are bringing in mobility to computing are supporting
the trend towards the Internet based consumption of music. Today most of the online and
mobile music services have their own mobile applications and mobile web platforms to
make it possible for their users to access their services on devices with the Internet
connection. One million iPad sold in twenty eight days drove ebook sales to reach 1.5
million and mobile application downloads to over 12 million during the same period (Jobs,
2010). As Will Straw underlines in his article called Music, Consumption and
Technology-, devices which bring music into our lives shape the consumption (2001).
Consumer of the digital age is looking for a new experience rather than a new
content. Services offering interactivity on their online platforms are giving the act of
listening to the music a third dimension where other related activities (such as, sharing
ideas, editing, remixing products) also become possible. As a result of that, buying a CD
album, which turned out to be purchasing single downloads with iTunes, is now being
replaced by subscribing to a service. According to the BPI, incomes from subscriptions
showed 37.2% growth in 2009 in the UK (2010), where the digitally dominated (98%)
single sales rose 32.7% to a record value of 152 million sales (Cardew, 2010). While the
consumers have been enjoying the ability of picking up songs they like to buy from an
album, high conversion rate to digital within the single download market points out to a
coming state of saturation, when the transformation to subscription services is expected
to accelerate within the digital music environment.

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Leonhard argues that feels like free access to music is the key for the owners to
capitalise on their music content (2008). Following that in the last three years music
services offered as bundles to other products or services have been embraced by mobile
and hardware companies and internet service providers (ISP) to reduce the churn rate
and to attract young consumers with an interest to download free music. Nokia as an
example launched Comes with Music service in 2008 on different music handsets, which
was providing free unlimited (all-you-can-eat) music downloads with a year contract. HP
recently announced to be including Omnifones MusicStation service on its sixteen
computers offering fourteen days of free trial and unlimited WMA downloads with rights to
keep ten tracks every month for 8.99 (Music Ally, 2010). Besides big budget advertising
campaigns run around the launch of those services consumer adoption of bundled music
still remains unsatisfactory for the providers, due to the low level of subscribers and the
high level of advances paid to record labels. As a result of that major players in the
hardware market are persuaded to expand their focus towards emerging markets.
Mulligan suggests that Nokia is embarking on a first or early mover strategy across key
emerging markets such as India, Russia and Mexico (2010) and slowly turning their allyou-can-eat music offer into a DRM-free music download services with its Ovi brand
starting from China and India (Sharma, 2010).
Conversely, research conducted by The Leading Questions and Music Ally in the
UK, US and France has shown that 46% of music fans choose ISPs as their top music
service provider where only 3% preferred to get their music from handset manufacturers
(2009). Therefore, bundling music services that feels free or very cheap looks like a
good add-value for ISPs considering the current competitive environment (Walker, 2009).

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For instance, TDC launched a free unlimited music streaming service to its broadband,
mobile and cable customers in Denmark and achieved to reduce the customer churn by
50% for those who used TDC Play (IFPI, 2010). Furthermore, bundled music offers may
be resolving the problem of consumers unwillingness to pay monthly bills, which
Forrester Research analysts Sonal Gandhi believes is the main reason affecting the
subscription revenue growth (2010). She underlines the fact that the average spending of
a US music buyer which is US$ 80 a year - is not enough to make those new music
services appealing. Even though in the UK annual music spend average goes a bit
higher to 65 (TNS, 2009), still yearly budget of a subscription service with around 9
monthly fee may sound unaffordable to the majority.
While the music industry seems to be supporting the idea of licensing ISPs and
mobile operators for subscription music offers as long as the initial payments are fulfilling
(Henderson, 2010), having as many people as possible to sign up stays as the biggest
challenge for the subscription services. If only hard-core music fans subscribe because it
lets them reduce their spending the music industry may end up cannibalizing its other
sales (Nakashima, 2010). According to the BPI, 56% of the population in the UK do not
buy music (2010). So the extent of engaging those people who have no financial
contribution to the music market should stand as the starting point to evaluate services
targeting high volume of subscribers with the low average revenue per user.
Rob Wells, SVP Digital Universal Music Group, states that Spotify was Universal
Music Group Internationals fourth largest digital partner in 2009 in terms of amounts of
revenue it generated for the company (2010). The service which has 320,000 premium
subscribers as of March 2010 (Watson, 2010), is paying per user royalties in the UK and

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Spain where in other territories the revenue generated by subscriptions and advertising is
shared with record labels (Barnett, 2010). Also Daniel Ek, co-founder of Spotify, says that
the service is one of the biggest affiliates to music downloads adding despite of the fact
that 80% of the users are not aware that they can purchase music (2009) - arguably due
to loosely coupled nature of digital music services .
While Spotify has been tight lipped about its financial sources, according to
Robertson, the service has raised millions from its wealthy founders and tens of millions
from venture capitalists (2009). Besides that the major labels own part of Spotify
(Lindvall, 2009), similar to imeem, Myspace Music and Lala (Robertson, 2009).
Conversely, Pandora which offers a non-interactive radio is known to be struggling to find
investors and battling record labels over royalties for the last ten years. However, due to
the successful implementation of its strategy to make the online radio as ubiquitous as
AM/FM radio, Pandora reported its first profitable quarter and US$ 50 million in annual
revenue at the end of 2009 (Miller, 2010). Today the service has 48 million users tune in
an average of 11.6 hours a month and Tim Westergren founder of the company- says he
hopes to integrate the service more to the peoples lives through making deals with
makers of cars, televisions and stereos (Miller, 2010).
The last decade has seen many music start-ups fail to survive (i.e. Spiral Frog) or
being acquired by media companies in order to survive (i.e. imeem,) and there are new
initiatives introducing solutions each year to serve the tech-savvy consumer while
rewarding the content owners. While the sustainability seems to be the key driver for long
term success of any digital music business today, the music industrys support will likely
to define the next music format.

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The new generation, born to the world of free distribution of digital goods on the
Internet, is hard to convince on the meaning and the value of legal music consumption.
Different business models trying to convert illegal file sharing to legitimate digital channels
are fighting against the lure of free. Be it for saving money or to experiment and try
before buying, consumers are challenging any new music initiative more than the
competition in the market. Conversely, according to Music Experience and Behaviour in
Young People research there is interest in paying for digital music with 85% of the illegal
downloaders saying they would be paying for an unlimited download service where they
can keep their music forever for a reasonable amount of subscription fee (2009).
Therefore, the music industry should be enabling those feels like free services such as
Spotify, Rhapsody, to create ubiquity which will result in increase in the revenues from
legitimate digital platforms. According to IFPI digital channels represents 25.3% of all
trade revenues to record labels today (2010) where PRS announced 72.7% increase in its
online revenues reaching to 623 million in 2009 (Music Ally, 2010). Furthermore,
performance right incomes, whose importance grew with the new music access models,
rose by 5 %, 2.6% and 7.6% in 2009 for ASCAP, PRS and IFPI, respectively (PRS,
ASCAP, IFPI, 2010).

Collecting Society

2008

2009

% Change

PRS

878

901

2.6%

ASCAP

820

863

5.0%

729
785
7.6%
IFPI
Figure4:PerformanceRightsRevenuesofPRS,ASCAPandIFPIin2008and2009(US$millions)(PRS,ASCAP,IFPI,
2010)

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This encouraging growth of legal digital market more than ten times since 2004
(IFPI, 2010)- is expected to continue with broader strategies adopted by record labels and
service providers. Rob Lewis, the CEO of Omnifone, defines the key to success as
delivering services that have a quality user experience that addresses a mass market,
meaning that the connectivity on cloud-based services has potential to accelerate the
growth in digital music market. He also underlines the result of the survey -the company
conducted in 2009- showing that 80% of the consumers have not downloaded or played a
digital music track in their lives (2010). Considering the gradual increase in music
consumption especially among teenagers (pls. see the figure 5) due to the rampant
free online channels available, there is a bigger room for the growth than before. The
next chapter will be discussing the new trends affecting music consumption; including
technology convergence, social networks, iTunes dominance and broadband speed and
penetration.

Figure 5: Change in media use 2004-2009 (Kaiser Family Foundation, 2010)

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4.0. New Trends Affecting Music Consumption in the digital age

4.1. Technological Convergence: The world of smart phones
Technological convergence which is the process of telecommunications,
information technology and the media sectors growing together (Papadakis, 2007), has
been forming the basis of the innovations since the start of the new millennium. Mobile
phones, which surpassed any other medium or device introduced before (Qualmann,
2009) in terms of adoption rate are defining the media consumption of today. According to
the International Telecommunication Union there will be over 5 billion mobile subscribers
in the world by the end of 2010.

Figure6:Information&CommunicationTechnologygrowth(19982009)(InternationalTelecommunicationsUnion,
2009)

While the pool of content expands with participatory culture getting more involved
in the creation, smart phones with computer capabilities are challenging the relevance of

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the traditional delivery platforms. At the technological side all the devices we own are
getting easily connected, whereas at the functional side a single mobile device is
executing multiple tasks -including entertainment, voice and computational - independent
of the location.
According to Gartner, 172 million smartphones were sold making up 14% of the
total mobile phone sales in 2009 (2010). Furthermore, Strategy Analytics revealed that
the global smartphone shipments surged 50% in the first quarter of 2010 from a year
earlier and 54 million units were sold in three months (2010). In terms of adoption rate,
Italy and Spain have the largest percentage of smartphone owners with 32%, 28.3%,
respectively, where the US is ranking third on the list -not setting the pace in adoption,
despite its reputation of being mobile friendly (comScore, 2010).
Conversely, the growing trend towards quality devices and mobile web usage is
expected to increase the spending on mobile applications which enable access to web
based platforms and services. Worldwide mobile application stores download revenue
which exceeded $4.2 billion in 2009 is estimated to grow to $29.5 billion revenue by the
end of 2013 (Gartner, 2010). With a huge increase in popularity, mobile applications will
become more personal and practical similar to websites - as their numbers grow
(Symbian Foundation, 2010). Therefore, convergence of media and mobile is likely to
build a new environment for the current Internet users, where easy access to online music
platforms will be altering todays computer oriented download behaviour. Furthermore,
affordable tools which connect us to the world of web will be supporting the virtualisation
of the consumption in the future.

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4.2. Social networks: Crowd in the Cloud

Consumption has become a collective process. The world of free information has
been fed by individuals, collectively consuming and creating the data on the social
networks. Facebook has more than 400 million active users, who have been spending
average of 55 minutes on the website every day (digitalbuzz, 2010) whereas 50 million
tweets are sent per day on Twitter by its 105 million registered users (Ha, 2010).
Collective intelligence has created an alternative source of media (Jenkins, 2006) where
new content and services find us on social networks.
Regards to digital music experience, social functionality introduced by streaming
music services has added discovery element to music enjoyment. Today networks built
on those platforms not only encourage sharing of music tastes but also help to exploit the
content online. Crowd sourcing, which created the Wikipedia phenomenon (Catone,
2007), supplies data for online music recommendation engines powering the music
discovery on services like Last.fm, Spotify and iTunes Genius. Furthermore, social
networks are enabling publishing of web site links and audio/visual content through user
profile updates. According to Qualmann, more than 1.5 million pieces of content are
shared on Facebook every day (2009), meaning it has to be counted as a file-sharing
platform. In addition, with its new Open Graph feature, Facebook is expected to
integrate its service more into the online music experience by adding a social layer to
popular digital music services. Open Graph will make it possible for services such as;
Rhapsody, Napster and even iTunes to know each users musical preferences and
enable automatically cue up of the playlists, recommendations the minute they login to
their web sites without going through todays teaching process. For the reason that Open

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Graph is designed to track tastes on every web platform Site A learns from the activity on
Site B (Bruno, 2010). For example, Pandora and Spotify as the first adopters of the
Open Graph functionality are now making it possible for their subscribers to interact with
their Facebook profiles on their service interfaces. With Like buttons that Facebook and
other web sites embed, any Internet user is able to feed information to Facebook Graph,
which music services like Pandora can then tap in to present stations or
recommendations on what the user signed as a favourite on Facebook or around the Web
(Buskirk, 2010). Also users of those services can share song recommendations and
playlists with their Facebook friends while listening to others favourite artists and albums,
meaning integrating accounts leads to wider listening and discovery options.
It is not hard to notice the potential Open Graph will create among the connected
world of the cloud. Seamless flow of content and constant interaction with friends on
multiple devices and multiple platforms may speed up the transformation to social
streaming portals, altering the peer-to-peer sharing at the same time.
4.3. iTunes: Upgrading libraries to the cloud
Since 2001, when the first iPod with 6 GB memory of storage was launched, the
digital music environment encountered a lot of change with the new players and the
technologies entering to the market every year. While the portable mp3 player started to
be referred as iPod, Apple stayed dominant in legal digital music market with its iTunes
store; more than ten billion digital tracks were downloaded via 125 million iTunes
accounts in eight years (Schroeder, 2010).

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Apple which introduced the purchasing of media without a physical copy and
enabled reaching the online media through mobile applications on touch screen
interacted smartphones is now turning to the virtual world to upgrade its users digital
libraries to the cloud. The companys recent acquisition of Lala has supplied the biggest
clue on its plans to launch an online music service which will allow customers to listen to
tracks streamed over the Internet (Ahmed, Foster, 2010). While the conversation with
labels on licenses has already been initiated by Apple (Sandoval, 2010), according to
Kafka it seems to require a new set of negotiations, as the labels argued that streaming a
single purchase to multiple devices constitutes multiple uses (2010). Presumably record
labels are after remuneration for the performance of the pirate digital copies of their
catalogues, through sharing the subscription fees collected by service providers for multi
platform access. Although the company could simply implement Lalas locker service
without any further licenses and argue that users have right to do whatever they want with
their content, its relationship with the music industry and the legality of iTunes cloud
service which needs additional remuneration to the copyright owners (Sheffner, 2010)
seemed to force it to postpone the second quarter launch of the service in 2010
(Sandoval, 2010).
Lalas digital locker technology which enables the uploading and accessing music
files through the web browser underpins Apples new music and most probably videostrategy. Therefore, it is expected to offer the users an ability to back up their already
purchased music and access the songs from any Internet-connected device and possibly
from anywhere (Sandoval, 2010). Considering 225 million iPod (Schroeder, 2010) and 43
million iPhone sold (Schonfeld, Apple, 2010) so far, Apple has the power to accelerate the

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adoption of cloud-based services via adding an upload button on iTunes with an update
on the software over the night. However, it is likely that the territory restricted nature of
the copyright could prevent an easy approval for the online streaming of iTunes libraries.
Sheffner suggests two options of: Apple storing one copy of each track on its servers or a
separate one for each of the millions who will want their copy stored in the cloud. Also he
gives an example of Cartoon Network v. Cablevision Systems Corporation (CSC)
Holdings case in 2008, for which the court decided that a remote-storage DVR run by
CSC did not infringe copyright owners right as it was the customer who actually presses
the button to make the recording (2010). Following that, Apple could be allocating
separate storage for each user. The companys investment of US$1 billion on creating a
huge server farm that includes supercomputers required to run big internet services
which has not been addressed to any of its services- supports its possible action of
storing user music files separately to avoid legal problems.
Conversely, it is rumoured that Apple will turn to a subscription/renting service
such as Rhapsody and Spotify, in the case that it cannot settle on licensing agreements
with the record labels (Kafka, 2010). iTunes has been offering a movie rental service
since 2008 (Cohen, 2008) and the ability of watching a movie on multiple devices for a
lower price than purchasing a copy is appealing users preferring legal ways of
consumption. Although the service is said to lag behind Netflixs popularity, Tim Cook,
COO of Apple, noted in an earnings call in 2009 that iTunes movie rentals were a strong
part of the store and were helping drive Apple TV sales (Siegler, 2010). With an
experience the company earned from its movie rental service, it can introduce a
streaming business model with a potential of generating recurring income for the industry

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from its digital-friendly consumer base. Moreover, such a service will be powering iPad
which treasures the portability and ease of use for the consumption of the online media.
Although the music industry has been complaining about its dominance in the
digital music market Apple should be appreciated for its iTunes platform which seems to
be the most potent monetisation channel to make the legal digital music ubiquitous in the
future.
4.4. Broadband Speed and Penetration: Internet as water
The broadband Internet access which is known as broadband forms networks
which are bringing the high-bit rate Internet connection to households and all the other
living areas. Commencing with primitive dial-up networks, the improvements in the
Internet technologies has enhanced the speed and the quality of online experience
through introducing new standards. Today high-speed broadband networks can carry
over fifty mega bits of data, voice, TV and video over long distances in most parts of the
Europe. According to the Organisation for Economic Co-operation and Development
(OECD), nearly one in ten subscribers within its member countries currently access the
Internet over fibre networks which are even surpassing the speed of broadband (2009).
Asia, which has the highest number of the Internet users worldwide (Internet World Stats,
2010), leads on the network speed with a capacity of carrying 1 gigabits of data per
second, whereas Sweden, France, Denmark, Norway and the UK are the territories
improving their network capacities (Futuresource Consulting, 2009).

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Figure7:GlobalBroadbandSpeed(FuturesourceConsulting,2009)

Although North America has the highest Internet penetration rate of 76.2%(Internet World Stats, 2010) the US still lags behind several developed countries in
broadband penetration (OECD, 2009). According to the data collected by OECD between
June 2008 and June 2009 the US ranks fifteenth in the world in broadband penetration
with 26.7 subscribers per hundred inhabitants. Also the data shows that The Netherlands
and Denmark have the highest broadband penetration in the world (OECD, 2009).
Conversely, UK, where the government announced that they are aiming to make the
super-fast broadband available to 90% of the country by the end of 2017, ranks 13th on
the penetration and 21st on the speed out of thirty OECD member countries (BBC, 2009).
However; Federal Communications Commissions (FCC) National Broadband Plan in the
US and Digital Britain in the UK, are promising to change the current picture in the
coming years.

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While the governments are announcing new investments and funding schemes to
build better broadband networks, the service providers and the Internet users are raising
their concerns about plans ambition. Masnick argues that FCCs National Broadband
Plan is not controversial enough to deliver tangible results and suggests building out a
single super-high end fibre infrastructure offering 100 megabit per second speed to 90%
of all homes and letting service providers compete on top of it. He also underlines
governments involvement can create a broadband network like national highway system
coming with the massive economical benefits (2010).
The high-speed Internet networks are also crucial for supporting the efforts of
virtualisation of the media and music consumption. Therefore, service providers with
cloud computing solutions are investing on solutions to speed up broadband connections
for improving the experience of their web service offerings. As a recent example Google,
the search engine giant, announced its plans to build a fibre-optic network to provide
speeds up to 1 gigabit per second to up to five hundred thousand homes in the US. The
company says the trail is about promoting killer apps that will take advantage of fast
speeds (BBC, 2010). It is not hard to see benefits of such a network to Googles
YouTube service. Furthermore, its trial of building an own network at a time when
leading telecom groups in Europe started to pronounce the load of carrying bandwidthhungry content for streaming services over their networks and suggesting that Google
should be paying or sharing the advertising revenue with them for its YouTube
service(Parker, Waters, 2010), does not seem to be a coincidence. After the consumers
complaints on the service providers slowing down internet connections in the case of
heavy P2P file sharing activity, the regulators in the US proposed to supervise the

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operators traffic management practices under the policy of net neutrality in October
2009. The European Commission is also considering similar net neutrality policies for
which Google is said be supportive in political level (Parker, Waters, Taylor, 2010).
While the debates about the need for faster broadband and the cost of supplying it
continues, an ambitious plan to increase the fibre coverage to 93% of all homes is
revealed in Australia (Masnick, 2010). Considering the growth of digital incomes in the
country which offset the decline in the physical revenues by 2009 (IFPI, 2010), it can be
one of the first territories to experience a move to online consumption of the music.
Conversely, South Korea where broadband penetration is expected to grow to 97% by
2012 (Gartner, 2008) is one of the strongest countries to be able to switch to the virtual
world sooner. Today digital revenues represent more than half of the music industry
incomes in South Korea and recently legitimised music platforms have started to convert
their users to paying subscribers of all-you-can-eat music services with a growing rate
(IFPI, 2010).

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Country

2007

2012

South Korea

93

97

Netherlands

74

82

Hong Kong

76

81

Canada

65

79

United States

54

77

Japan

54

77

Switzerland

69

76

Singapore

57

75

United Kingdom

58

74

Taiwan

59

74

France

58

73

Australia

52

72

Sweden

58

69

Spain

54

68

Germany

49

68

Belgium

55

66

New Zealand

43

64

Figure 8: Markets with the highest broadband penetration of households, 2007 to 2012 (percentages)
(Gartner, 2008)

Whether provided by the government or by the service providers, the Internet will
definitely be one of the utilities such as water and electricity, resulting in ubiquitous
connectivity so the better online music experience. Before goals of 90% penetration are
achieved, the cloud-based services are likely to benefit from workarounds like offline
mode of Spotify which allows playing the number of playlists even when there is no
internet connection available- to overcome problems caused by the shortage of the
Internet connection on computers and mobile devices.
5.0. Monetisation of music in the digital age
5.1. Easy to police & easy to monetise in the cloud
Early adapters of the Internet have created a platform which is based on
unlimited access to products and free sharing of the content and information online.

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Therefore the scarcity principle of the economics does not often apply to todays online
commerce; instead the Internet adopts connectivity and ubiquity.
Conversely, every activity occurring on the Internet is traceable. Technologies
built on the Internet platforms have introduced online services which are making it
possible to collect and use the consumer data that are constantly been generated on free
consumption channels.
In the virtual world of today, service providers easily can get hold of an in dept
data including the territory, the number of transactions and digital identifiers of the
consumed contents. Although the quality of the input data is said to need improvements,
database services, such as Gracenote, are providing solutions for the content owners to
drive better usage reports. Moreover a centralised copyright system has started to be
discussed as a way of building a universal online music database for monitoring the
activity in the cloud (Casey, 2010).
Therefore the music industry, who is taking part in those plans, has been arguably
investing on re-gaining the control over their copyright utilising the new Internet
technologies. At this point streaming of content, which is generally platform and Internet
dependent, stands as an ultimate solution for the industry to control the flow of content
and to monetise on the music access. The collaborations with ISPs and licensing deals
with mobile operators for bundled offers are not only showing the increasing importance
given to online networks but also providing signs on the future form of music
consumption. It is likely that the liberated world of the Internet will get more

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commercialised in the coming years with rising security concerns due to online trade and
innovation becoming more relied on the consumer data.
Conversely, Consumer Relations Management (CRM) should be expected to
overtake the DRM applications on digital platforms aiming to keep the customers on
signed networks with more personalised offers. A decade, which has seen various
copyright protection methods and reactions against those, seems to have turned into a
new era -with the widespread use of cloud solutions- where consumer behaviour became
the main focus. According to the Nielsen Company, global consumers spent more than
five and half hours on social networks (2010), while leaving remarkable data on their daily
activities and favourites. The music industry which had never had a chance to know the
customer of their goods on traditional physical retails are given an opportunity to build a
global and local customer strategy through collaborations with online music services.
Moreover, as the interaction on cloud networks dominates the online activity, the quality
of the user data will improve, leading to more customised networks offering better
experience. The decision makers behind DRM applications have seen that there will not
be any continuous revenue without the consumer satisfaction, therefore eCRM
technologies solving the mystery of online consumption behaviour are to form the basis of
marketing on online digital music platforms associated with enhanced DRM applications
(such as network DRM). While the litigations against individuals are replaced by
graduated response schemes executed by ISPs, filtering technologies have started to be
adopted at some territories to clean the Internet by blocking unauthorised files. If the
efficiency problem of this approach can be solved with more consumers upgrading their
digital libraries to the cloud via digital locker services, the long-standing desire of

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copyright owners to create a controlled environment with a leak-proof delivery systemcan be achieved. At this case monetisation can be through bundling such services to
broadband deals or asking consumers to subscribe to monthly offers tailored according to
the size of the storage they use or the catalogue they want to access.
Besides the amount of CRM opportunities that the online portals provide, it is also
making it possible for the copyright owners to exploit their works easily with negligible
costs- to millions on multi-national platforms and increase the source of income through
better licensing schemes. Today international catalogues can be sold on digital platforms
at the territories where the physical presence was not possible due to economical and
geographical reasons. In fact those developing countries show better responses to the
different business models based on monetisation of music access, which is convincing
more partnerships to occur at the region within the technology and music industries (i.e.
Nokias Comes With Music in India and China and Googles free music download service
in China)
As the scale of economics for the musical products improve, content owners are
likely to get better compensation on connected platforms -where the most of the
consumption will take place- in the future. The hardware used to access computing, the
Internet, visual media, the automobiles, game consoles, cable networks and radio and TV
receivers, all will be supply channels reaching people from different regions and
demographics. Following that the music will move from an ownership model to an access
model, while the converged media devices become integrated to life styles providing
always-on connectivity.

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Therefore, social networks will gain more importance to bridge the online content
platforms to build a railway system on the Web. Furthermore, the seamless flow of the
content and customisation of subscription offers (enabled by user data collected by
service providers) will result in less ownership of digital products. Given that the
streaming of the content on the cloud-based platform are often remunerated per activity
(stream) basis, the more content shared on such platforms will generate more revenue for
the owners in contrast with the digital downloads which are purchased once and copied
or shared unlimited times. Moreover, similar to buying CD copies of your favourite LP
albums which is accepted to cause the increase in the value of the music industry in
1990s- experience economy created by cloud services will result in re-consuming the
already purchased music on streaming portals. Once the ubiquity of music will be
achieved the music industry will be counting increasing revenues from digital platforms.
Anderson suggests in his book called The Long Tail that the wide availability will
help to generate more income from the products of less popularity (2006). If it is put on
the context of digital music service providing the long tail of services and offers will bring
in more revenues for the music industry. Whichever way the royalty is to be collected, it
is likely that more choice with the easy subscription and payment mechanisms will result
in more people signing up for legal music services. Mobile applications (apps) as a
recent example have created a market with a value of US$ 4.2 billion in 2009 (Gartner,
2009), with different pricing strategies and offerings. Although one fold of downloads from
the apps store are paid-for apps, according to Flurry the average price paid was US$ 0.91
in December 2009 (2010). Considering the additional advertising revenue generated by

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free apps which target app stores sixty million users it is not hard to see the effect of long
tail offers on the prosperity of mobile apps market.
5.2. Collaborations in the technology and the music world
As discussed in chapter 2, technology has always been motivation for the new
music formats to arrive. Also the improvements on the consumer high-technology
devices are acknowledged to have helped the economies at the time of recession
(Burkart, McCourt, 2004). Smart phones and Apples iPad device as recent examples
have been growing their sales each year despite of the global financial crisis taking place
since 2008. Consumers who value technology and the ownership seem restlessly
investing on gadgets to improve their life styles and communication skills. Therefore,
hardware and software markets are providing opportunities for the creative industries in
general and music industry in particular to spread the legal platforms.
According to the research by the Kaiser Family Foundation, young Americans age
eight to eighteen are spending more than seven and half hours of the day using
smartphones, computer or other electronic devices, consuming eleven hours of media
(2010). While the music ranks at the second place at the list of popular media among
those young Americans, Music Experience and Behaviour in Young People research
underlines the importance of music by defining it as the most valuable form of
entertainment among 14-24 year-olds in the UK (2009). Live events increasing its share
in the budget spent on music, the survey conducted by UK Music shows that mobile
phones are the second most valuable item for the young people in the UK (2009).
Therefore, social and technological aspects of music consumption hold the key for the

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monetisation in the digital age and the technology companies especially Internet and
mobile service providers- such as Google, Apple, and Microsoft should be expected to
define the next generation of music formats reaching to millions of people with the
devices they produce.
Google as an example announced at I/O conference in May 2010 that it is
activating 100,000 Android phones a day (Music Ally, 2010), which makes 36 million a
year. Conversely, Research In Motion (RIM) and iPhone are selling 42 million and 35
million smartphones respectively, in a year (Ahonen, 2010). Adding 306 million
computers (Gartner, 2010) and 54 million iPods sold in 2009 (Apple, 2010) the number of
sales of the hardware with a digital music playing capability can be estimated to be over
500 million per year. With an assumption that US$ 1 music levy is taken on the purchase
of those devices the additional revenue earned for the music industry would be US$ 500
million. Given that the industry has been losing around US$ 1 billion a year this new
revenue stream would substantially help to overturn the decline in the value, while
promoting the legal music consumption among technology savvy consumers.

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6.0. Conclusion
The music formats have been evolving along with the technology which strongly
affects the production, distribution and the playback of the music. Since the analogue
storage products have been replaced by CDs, digital world has been liberating the
distribution of music while challenging the producers and copyright owners.
Today millions of audio and visual files are shared on P2P and social networks.
Besides the music industrys never ending investments on DRM applications, digital
music has been proved to be insecure and free of any protection on distribution.
The Internet created a virtual world where commerce got a new meaning with
scarcity principle changed to ubiquity of products. Furthermore, always on connectivity
has been reforming the media consumption and creation. Cloud-based services are
offering access to extensive catalogues of music and promising to replace ownership of
digital files on hard drives or on CDs. Whether it is through streaming of audio or video
files online, new social music portals are providing music enjoyment independent of file
formats and hardware functionality. Therefore interoperability combined with mobility and
interactivity is set to promote digital libraries to the cloud for convenience and better
experience. While the amount of freedom and the quality of networks stay as the
influential factors on the transformation, it seems like new digital platforms will be
benefiting from workarounds until the fast broadband connection becomes a facility such
as electricity and water.
Although the economics of streaming music is still unsatisfactory compared to the
physical sales and pay-per-download digital sales, improving social and technological

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aspects of music consumption holds the key for the better monetisation schemes in the
digital age. Especially bundle offers and collaborations with ISPs are expected to
integrate music more into our lives, aiming to increase the digital music incomes of the
music industry through licensing the music access on connected devices. Conversely
convergence technology will be one of the major drivers of the virtualisation of music
consumption in the future while the long tail of services is creating more customised
offers according to social graph of the consumers.

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7.0. Bibliography
BOOKS
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Fourth Estate
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Burkart, P. and McCourt T. (2006) Digital Music Wars: Ownership and Control of the
Celestial Jukebox. Maryland: Rowman & Littlefield Publishers, Inc.

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JOURNALS AND ARTICLES

AFP (2010) 24 hours of video uploaded to YouTube every minute, AFP. 17 March 2010.
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BBC (2010) UK trails on super-fast broadband say OECD figures, BBC News. 11
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Catone, J. (2007) Crowdsourcing: A Million Heads is Better than One, ReadWriteWeb. 22

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Business Development, Europe & Africa, Sony Music International. 10 June 2010.

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8.0. Appendix
Interview with Ian Henderson (Vice President, Digital Business Development, Europe &
Africa, Sony Music International)
1.How do you evaluate streaming music services before licensing your catalogue
(according to the amount of down payment, advertising revenue potential..etc.)?
I.H.: Any of the following could convince us to do a license with a new streaming service:
(1) the beta product/user experience is really good (2) the management team is very
impressive (3) the company is very confident of its ability to generate revenue for us and
is willing to committ to a large revenue guarantee. However, we would only sign the deal
if we could negotiate acceptable terms (i.e. Revenue share, min royalty per stream, etc.).
2.For instance, is there a criterion to get the approval for the start-ups?
I.H.: The same criterion as above applies to start-ups.
3. Is there an assessment during the contract period which may lead to a decision to end
the partnership afterwards?
I.H.: Yes. The key success metric is revenue/active user. This is especially true with
services with a free, ad-supported streaming tier. If these services are not able to upsell
people to premium subscriptions or MP3 sales, their revenue/active user will fall below
the renewal threshold.
4. Whats your legal point of view on the online music lockers?

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I.H.: We will license online locker services. We will also sue companies who are making
money providing access to our content without a license.
5. Have you signed any deal with such a service provider?
I.H.: We have been I advance negotiations recently.
6. Do you believe that streaming a single purchase to multiple devices constitutes multiple
uses?
I.H.: I dont understand, but I believe that if a service can verify that a user has purchased
a song (i.e. The service is Apple and they know the track was purchased through iTunes),
then they should allow that song to be used on multiple devices. If a service can not verify
that a song was purchased, a consumer should be charged a monthly fee, shared with
labels, for multi-platform access.

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