Idea Project: Phase 1

ENTR 3310-01 Professor Miller 10/14/13 Team: Dylan Elkin Brandon Horth Derek Kim Matt Steelman

The Industry
During the twentieth century the music industry was dominated by a surge of corporate mergers and the expansion of music based outlets. In 1994, 90 percent of worldwide gross music sales accrued to six multinational corporations. The century ended much as it had begun, even as the industry giants grappled with the copyright repercussions of the digital revolution (encyclopedia.com). Today three record labels, Sony Music Entertainment, Universal Music Group, and Warner Music Group are monopolizing the current music industry. The music industry consists of many different facets. The overall music industry is made up of record label companies that sign and employ individuals that make music that is in accordance with a companys model. The music industrys ultimate goal is to produce music that the masses positively receive in order to make money through the creation and selling of music. Under the hierarchy of the record labels, there are many individuals that work to organize and create the finished product. The industry employees musicians (who preform and write music), producers (create and execute the instrumental track), recording studios (record and master songs or music tracks), sound engineers (mix and master finished product), booking agents (find and schedule shows for artists), promoters (buildup publicity for artists), talent managers (manage day-to-day operations), business managers (manage finances), entertainment lawyers (execute and manage legalities), and the distribution of music in a variety of different forms (CD, streaming, mp3).

Above is a flow chart from the Northern Music Company based in the United Kingdom. The flow chart illustrates the nature of the music industry, which incorporates numerous different entities and employees per faction of the industry. The industry has drastically evolved from its previous position of hardcopy sales. Today, people get the vast majority of their music from streaming, and online/cloud sales. 2

Most generated artist revenue comes from live performances and memorabilia, not the actual music produced. The music industry today is more focused on artist singles rather than the entirety of an album. CDs have become virtually obsolete; whereas one hit wonders have progressively become the norm. In the past bands such as The Rolling Stones, The Beatles, and Bob Dylan have created a cult following that still runs strong today. The industry has changed its model with the times to fit the needs and trends of the general public. The younger generations are extremely tech oriented and savvy, leading the music industry to put a major emphasis in online and cloud based music stores, and streaming music through such mediums as Pandora and Spotify.

The Problems
1) One of the most evident issues in the music industry is pirated music. While downloading one song may not feel that serious of a crime, the accumulative impact of millions of songs downloaded illegally and without any compensation to all the people who helped to create that song and bring it to fans is devastating. One credible study, by the Institute for Policy Innovation, pegs the annual harm at $12.5 billion dollars in losses to the U.S. economy as well as more than 70,000 lost jobs and $2 billion in lost wages to American workers (www.RIAA.com). Consider these facts1 Since peer-to-peer (p2p) file-sharing site Napster emerged in 1999, music sales in the U.S. have dropped 53 percent, from $14.6 billion to $7.0 billion in 2011. From 2004 through 2009 alone, approximately 30 billion songs were illegally downloaded on file-sharing networks. NPD reports that only 37 percent of music acquired by U.S. consumers in 2009 was paid for. According to the Information Technology & Innovation Foundation, the digital theft of music, movies and copyrighted content takes up huge amounts of Internet bandwidth 24 percent globally, and 17.5 percent in the U.S. Digital storage locker downloads constitute 7 percent of all Internet traffic, while 91 percent of the links found on them were for copyrighted material, and 10 percent of those links were to music specifically, according to a 2011 Envisional study 2) Another problem in the music industry is the concentration of power amongst only three major record labels: Warner Music Group, Universal Music Group, and Sony Music Entertainment. These three major labels run a monopoly over the entire music industry. They control what plays on the radio, when it plays, and how its played. This leads to the radio continually playing the same songs over and over again as opposed to getting a wider variety of good music playing out there for the consumer. Also because the industry is so highly concentrated in these three corporations it makes it very difficult for the music industry to expand and grow its market. Therefore leaving the music industry in a stand still where its making far less that it used to before Napster was created in 1999. 3) The third problem in the music industry is the fact that about 80 percent of commercially played music is unreported or misreported (Informaes E Mercado). This means that when an artist creates a song, 80% of the time that its used by someone else whether its on a TV show, or commercial, or radio that someone is not reporting it or its being misreported and therefore the artist is missing out on some very crucial royalties. Tunesat is a service that could solve this problem by turning manual user reports into programs that will eliminate human error, but the ASCAP and BMI refuse to us it. Because neither ASCAP nor BMI will use TuneSat data and apparently still rely on user reports created manually to keep track of such music usage, artists owed money must pay both for TuneSat's services and then go the extra mile to get appropriate fees

www.RIAA.com, Scope of the Problem 4

(UneSat Helps Musicians Get Paid). Artists need these royalties in order to make enough money to continue to make music and support the economy. 4) Problem number four is the fact that Apple ITunes holds a monopoly on the digital distribution of music. Another problem, related to the pricing issue, is the emergence of digital monopolies such as the one Apple has in the digital music business. This threatens the music industry more than piracy, Miramaxs CEO suggested. Miramax CEO Mike Lang and Netflix chief content officer Ted Sarandos gave a keynote talk at the MIPCOM conference. The two discussed the challenges they face in the constantly changing digital world. Both agreed that piracy is not much of an issue as long as you give consumers what they want. Digital monopolies, such as Apples dominance in the music industry, are a far bigger threat (Ernesto). Essentially when digital distribution started Apple jumped on the idea and created iTunes and didnt have any competition. They tremendously reaped the benefits of being the first mover in a new industry. But still to this day there isnt enough competition against iTunes. As a result, Apple has maintained a ridiculously large amount of market share when it comes to digital distribution. This makes it difficult for the industry to adapt, change, and expand its digital distribution aspect because of the fact that only one company owns pretty much the entire market share. 5) The fifth and last problem is the complicated aspect of ITunes payments in foreign countries. In countries where the iTunes Store only sells apps, the accepted payment methods are Visa, MasterCard, and American Express. Other payment types such as gift cards, store credit, monthly allowances, ClickandBuy, and PayPal are not accepted. Depending on your App Store country, prices may be listed in your local currency, US Dollars, or Euros. And, You cannot use American Express with the iTunes Store in India. If you have an Apple ID in India and American Express was your designated payment method, you will be prompted to change it when you make a purchase or sign in to your account (www.support.apple.com). The fact that this is such a complicated process lessons the amount of digital song downloads. There were reports of people trying to buy a song from a UK artist and was not allowed to unless they had a UK ITunes account. So they would make one and then ITunes UK would not accept American money. Its difficulties like these that force people to pirate music instead of buying it. The Internet is full of people who are currently having difficulties downloading music on ITunes from other countries. This is also a problem because ITunes has too much market share in the industry.

The Solution
1) A problem is that consumers are able to illegally pirate music, allowing the user to download music without actually purchasing the song. This makes it hard for artists and the music industry in general to make money off songs that would normally be sold through businesses such as iTunes. A proposed solution to this problem would be to create a system that would track users IPs giving them a one-way ticket to download music. This would be IP tagging which means the IP address of the user will get tagged when they buy the right to download the song/album. This will give the user a one-way ticket that would transfer them through the firewall, allowing them to download the song/album. Afterwards, they would not be able to download anything more unless they paid for more rights or another ticket into the database. Furthermore, these files would be encrypted so that it would not be able to be shared with others that did not pay for it. Creating this system will help solve this problem of piracy and allow for a company to compete in this market place with others such as iTunes. If this idea sticks iTunes will decrease the price per a song because of the competition and it will overall be more beneficial to society itself. This would ultimately promote legal downloading of music and eventually end the problem of piracy in the music industry. 2) Another problem is that in the music industry, 4 major record labels dominate 75% of the entire industry. These record labels include: Sony, Universal Music Group, EMI, Warner Music Group. This also includes the multitudes of subsidiary labels that are also owned by the 4 major record labels. A proposed solution to this problem would be to use a social media database with high traffic such as Facebook to market music artists and almost act as a label in itself. They would create an actual platform that had list of all the artists that wanted to enter the network and would show details such as the amount of views and traffic the page gets. Facebook would be able to mine the data that would determine if the artists is trending and be able to determine how popular he/she is in the social network community. Furthermore, it will allow artists to feature and showcase their music through this platform giving them exposure and if it is found that people support it the data would show it. This would make it easier for artists to compete in the industry and not have to rely on the major record labels as the only shot for a chance of breakthrough. 3) The third problem is that in the music industry, 80% of commercially played music is unreported or misreported. There is a solution to this problem and it would be to utilize a database that monitors TV channels and millions of websites around the world. There is currently a company called Tunesat, which utilizes a unique audio fingerprint technology to accomplish this. TuneSat lets you know exactly when and where your audio content is being performed on hundreds of TV channels and millions of websites around the globe (Rosenbush). The next step would be to deliver the voluminous pages of Tunesat usage data to ASCAP to receive complete and accurate performance royalties for your musical work. However, ASCAP would have to form a negotiation that would divert wealth from one group to another, which they do not want to do. Thus, they have turned a blind eye to solutions such as Tunesat (Holden). Thus, in order to solve this problem society need

international intervention for the existence of solutions such as Tunesat that would be able to monitor and fix this problem. 4) The fourth problem revolves around iTunes monopoly as a music distributor. The lack of competition between music distributors that has resulted from iTunes monopoly has made it difficult for the industry to change its methods of digital distribution and become more efficient and profitable. A direct approach to decreasing iTunes market share on the web involves a cooperative relationship between the Internet Service Providers (ISPs) and the infringed record labels of the music industry. Digital piracy has cost the music and film industries in the United States an estimated $16 billion annually, while ISPs continue to profit off providing the infringers with internet access (Hofmeister). Today, ninety-five percent of music downloads are illegally downloaded (Zhu). However, if the internet providers were to work with the music industry in halting copyright infringement on the web, perhaps they could both profit and gain lost revenue. Internet providers and the music industry are naturally co-dependent and could both benefit off how successful their industries perform; especially with the rise of streamed music .The music industry provides digital music, and the internet providers bring the music to the listeners. If the Recording Industry Association of America (RIAA) along with the music companies were to team up with the internet providers, they could bundle together digital music downloads or streams along with other products or services. This method could prove to be effective in taking market share from iTunes and other digital music stores. Internet users are already paying the internet providers monthly costs for home web access. If internet companies offered a bundle package that provided users with unlimited downloads from a catalogue of licensed songs for an extra monthly fee, this would make paying for songs more feasible and attractive to consumers. Rather than going through the hassle of setting up new payment plans for premium Spotify accounts, iTunes accounts, or other music streaming services, web users could opt to pay a little extra on their internet bills so they could legally stream or download songs direct from the internet companies. This could result in a lucrative and profitable market for internet providers and subsequently decrease iTunes market share and monopoly over the music distribution industry in America. 5) The last problem relates to the difficulties that can occur when purchasing iTunes songs in different countries. Although iTunes has had a significant role in stagnating the evolution of digital music distribution, one solution that they could implement to help improve payment methods for Apple products is to create their own currency and establish a monthly payment system that provided customers with a certain amount of credits in exchange for monthly subscription charges billed to their payment method of choice. For example, iTunes could charge $10 a month (currency dependent on the country) in exchange for X amount of Apple dollars (credits). Each download would cost a certain amount of credits. The credits would then be converted to money and distributed to the artists/record labels depending on where they reside. By allowing consumers to download multiple songs at a fixed price, this would lower the marginal cost per song and could promote legal downloading. Everyones music tastes are different which makes it difficult to value what a song should be worth to the average customer. By charging $10 per month to download 50 songs, iTunes will most likely gain more revenue and regular paying customers will

appreciate the decreased marginal cost per song ($1.29 for individually downloaded songs vs. $0.20 per song by charging monthly payments). Furthermore, establishing an Apple dollar that runs on credits will help address issues relating to currency exchanges.

Recommendation
For our recommendation we decided to propose the two solutions to the problems that commercially played music is either misreported or unreported 80 percent of the time and to the problem that ITunes has too much market share in the digital distribution of music. Our solutions were that you could use a company like TuneSat that uses, audio fingerprint technology (that) monitors hundreds of TV channels and millions of websites around the world, helping rights holders collect millions of dollars that would otherwise have been lost. (http://www.tunesat.com/) We could also develop or have developed our own software that does the same thing this way eliminating human error. This is a good solution for further analysis because this solution is VERY feasible since it has already somewhat been put into use and because the music industry is a large industry and this would be a great money maker if we decided to pursue it in the new venture course. Our second solution to ITunes having too much market share would be to create more digital distribution channels that allow easier use and more focus on the consumer. This way people have some options to choose from when it comes to buying music on their computer. This is a perfect solution for further analysis because it too is very feasible, creating an online distribution service is not very hard now-a-days and the most difficult part would be legalities and obtaining rights to sell the music. And this would also be an incredibly HUGE moneymaker and the idea has so much potential that we see no reason why it shouldnt possibly be pursued in our new venture creation course.

WORKS CITED
Digital image. About Northern Music Co. NMC, n.d. Web. 11 Oct. 2013. <http://www.northernmusic.co.uk/about>. Ernesto. "Digital Monopolies A Bigger Threat Than Piracy, Says Miramax CEO." TorrentFreak. N.p., 4 Oct. 2011. Web. 12 Oct. 2013. <http://torrentfreak.com/digital-monopolies-a-bigger-threat-than-piracy-saysmiramax-ceo-111004/>. Holden, Mark. "Tunesat: A Revolution in Music Performance Tracking." Film Music Magazine. N.p., 11 May 2009. Web. 12 Oct. 2013. <http://www.filmmusicmag.com/?p=3052>. Hofmeister, Matthew. "The RIAA and Online Piracy: Why Bundling Access to Digital Music with Other Products and Services Would Give the Industry Greater Control Over Downloading." Denver University, 4 Jan. 2010. Web. ITunes Store: Accepted Forms of Payment." Apple Support. N.p., n.d. Web. 11 Oct. 2013. <http://support.apple.com/kb/HT5552>. Miller, Karl. "Music Industry." Encyclopedia.com. Dictionary of American History, 2003. Web. 10 Oct. 2013. <http://www.encyclopedia.com/doc/1G23401802800.html>. Paul. "Informaes E Mercado." 80% of Music Played Commercially Is Unreported or Misreported... N.p., n.d. Web. 12 Oct. 2013. <http://psmith2301.blogspot.com/2012/11/80-of-music-played-commerciallyis.html>. Rosenbush, Steve. "How Big Data Will Disrupt the $9 Billion Music Publishing Rights Business." The Wall Street Journal. N.p., 15 May 2012. Web. 12 Oct. 2013. <http://blogs.wsj.com/cio/2012/05/15/how-big-data-will-disrupt-the-9-billionmusic-publishing-rights-business/>. "Scope Of The Problem." Http://www.riaa.com. N.p., n.d. Web. 12 Oct. 2013. <http://www.riaa.com/physicalpiracy.php?content_selector=piracy-online-scopeof-the-problem>. "UneSat Helps Musicians Get Paid For Unreported & Unlicensed Use Of Their Music On TV." Hypebot. N.p., 30 Oct. 2012. Web. 12 Oct. 2013. <http://www.hypebot.com/hypebot/2012/10/tunesat-helps-musicians-get-paid-forunreported-unlicensed-use-of-their-music-on-tv.html>.

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"Who Music Theft Hurts." Http://www.riaa.com. N.p., n.d. Web. 12 Oct. 2013. <http://www.riaa.com/physicalpiracy.php?content_selector=piracy_details_online > Zhu, Kevin, and Bryon MacQuarrie. "The Economics of Digital Bundling: The Impact of Digitization and Bundling on the Music Industry." UCSD, 2003. Web.

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