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Downloadable Music Industry

Ryan HerringJinghua LuoKevin Mack

Shahram Rezaei

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Standards

Downloadable music files are generally available in three formats: MP3 (MPEG-1 Audio Layer 3) AAC (Advanced Audio Coding) WMA (Windows Media Audio)

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MP3 Became ISO standard in 1993 Supported by a large variety of

software and hardware Popular in peer-to-peer file sharing,

but not in commercial downloads Thomson Consumer Electronics, which

controls MP3 patents, decided to charge licensing fees for MP3 encoders and decoders in 1998 Potential lock-in led to proprietary

alternatives

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AAC Designed as an open-source successor to MP3

and became an ISO standard since 1997 Less widely supported than MP3

Apple: iPod and iTunes Sony: PlayStation Cell phones from Nokia, Motorola and Sony Ericsson

Apple’s market share: iPod: 74% iTunes: 85%

Dominant standard in commercial music downloads

Apple has developed proprietary extension to the AAC format, leading to interoperability problems

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WMA

Proprietary format developed by Microsoft to avoid the licensing issues associated with MP3 patents

Widely supported by a large variety of portable players and online music stores

Direct competitor against Apple’s AAC but is still the minority

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Prospects Standards war between Apple’s AAC and

Microsoft’s WMA

MP3 continues to dominate peer-to-peer file sharing until a winner from the standards war emerges

  Apple Microsoft

Control over an installed base of customers X  

Intellectual property rights X X

Ability to innovate X X

First-mover advantage X  

Manufacturing abilities X  

Strength in complements X X

Reputation and brand names X X

Key Assets:

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Pricing Downloading a song costs $0.99,

almost everywhere legal on the web. Cheaper for album

Wholesale music price is ~65c/song. Originally set artificially low in a bid to

stimulate demand. Apple sells 84% of all songs sold

online. Plus 75% of all music players

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Subscription Apple competitors trying

subscription base music downloading

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Switching Cost In order to increase switching cost,

providers ask for annual subscription.

In addition, users require installing music engines. The music engine: 5 MB, 11 MB and 32

MB for Yahoo!, Napster, and iTunes, respectively.

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Apple, One Year after iPOD Apple’s revenue was $2 billion at end of

2003. The company's net income grew to $63

million, compared with a net loss of $8 million last year.

iPod and iTunes represent roughly 9 percent of revenue, they are expected to eventually account for more than 50 percent of Apple's revenue.

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Apple, Present (Source: CNN, October 12, 2005)

In the last fiscal quarter, about 6.5 million iPods were sold. Accounting for nearly a third of Apple's

revenue. 75 percent revenue gains on its iPod and

record profits The company's net income rose to $320

million, up from US$61 million in the year-ago quarter.

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Why just iTunes & iPOD? Success of iTunes Music Store (iTMS) is

due primarily to: Great digital rights management (DRM) The 99¢ per track song price.

iPOD’s success because of: Great Physical Design Software & Syncing Music Store One source for all kind of supports

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Download Price Going Up?

CNN, February 28, 2005: The major record labels (Sony Music, MEI Group, Warner Music,

Universal Music, Bertelsmann) are in talks to raise the price they charge online retailers. Similar increase rumored last spring

Apple disagrees!

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Network Effects and Lock-In iPod's large market share means

recording industry forced to sell through iTunes.

Access to most songs means consumers attracted to the iPod over other players.

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Apple's Competitors Subscription based music downloading

RealNetworks (Rhapsody) Napster Yahoo!

Generic MP3 players Creative Samsung Others...

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Complements Large, cheap supply of content

available through iTunes means increased sales of iPods

Large, cheap supply of generic portable players means more potential customers for other content providers (Napster, etc.)

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Microsoft, RealNetworks Partnership

Microsoft increases number of Windows Media Player users Microsoft can more easily control

piracy RealNetworks obtains access to

MSN customers Can increase subscription orders

Good example of “Co-opetition”

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“All-in-one” Devices

Cell phone, PDA, music, video, email, internet all in one device

Industry consolidation Apple now providing video on iPod,

iTunes on cell phones Microsoft, Palm create the Treo 650 Companies can't be one dimensional

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Intellectual Property Copyright is the primary protection for

musical works Protects original works of authorship fixed in

a tangible medium Copyright owner has the exclusive right to

reproduce the copyrighted work Copyright protection extends to two

elements in a sound recording: (1) the contribution of the performer(s) whose performance is captured and (2) the contribution of the person or persons responsible for capturing and processing the sounds to make the final recording.

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Online Piracy When a user downloads copyrighted

music without permission, the user is violating the exclusive right of the recording company and the artist to reproduce the copyrighted work.

The Recording Industry Association of America (RIAA) estimates that each year the music industry loses $4.2 billion to piracy worldwide.

Availability of low-cost downloadable music and threat of lawsuits are primary means of combating online piracy.

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The No Electronic Theft (NET) Act of 1997 Sound recording infringements (including by

digital means) can be criminally prosecuted even where no monetary profit or commercial gain is derived from the infringing activity.

Punishment in such instances includes up to 3 years in prison and up to $250,000 fines.

The RIAA is planning to use the Act to prosecute illegal music downloaders in the near future.

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Digital rights management (DRM) DRM, often referred to as copy protection, limits what

functions a user may perform with digital media. Apple, for example, reserves the right to change at any

time what you can do with the music you purchase at the iTunes Music Store. For instance, in April 2004, Apple decided to modify the DRM so people could burn the same playlist only 7 times, down from 10.

Microsoft, similarly, utilizes Microsoft's Windows Media Audio (WMA) DRM.

The future: Sony has announced that it plans on shipping CDs with DRM built-in.

DRM has become and will continue to be an essential element to control access of downloadable music.

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Conclusion

Apple Microsoft Online music stores Music labels Consumers Generic MP3 players