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TRANSCRIPT
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Downloadable MusicIndustry
Ryan HerringJinghua Luo
Kevin MackShahram 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 tocharge licensing fees for MP3 encodersand 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
Apples market share: iPod: 74% iTunes: 85%
Dominant standard in commercial musicdownloads
Apple has developed proprietary extension
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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 Apples
AAC but is still the minority
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Prospects Standards war between Apples AAC and
Microsofts WMA
MP3 continues to dominate peer-to-peer filesharing until a winner from the standards war
emerges
XXReputation and brand names
XXStrength in complements
XManufacturing abilities
XFirst-mover advantage
XXAbility to innovate
XXIntellectual property rights
XControl over an installed base of customers
MicrosoftApple
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.
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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 Apples revenue was $2 billion at end of
2003.
The company's net income grew to $63million, compared with a net loss of $8million last year.
iPod and iTunes represent roughly 9percent of revenue, they are expected toeventually account for more than 50percent 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 theyear-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.
iPODs success because of: Great Physical Design
Software & Syncing
Music Store
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Download Price Going Up?
CNN, February 28, 2005: The majorrecord labels (Sony Music, MEI Group, Warner
Music, Universal Music, Bertelsmann) are in talksto raise the price they chargeonline 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 othercontent providers (Napster, etc.)
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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 formusical 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) whoseperformance is captured and (2) thecontribution of the person or personsresponsible for capturing and processing thesounds to make the final recording.
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Online Piracy
When a user downloads copyrightedmusic without permission, the user isviolating the exclusive right of the
recording company and the artist toreproduce the copyrighted work.
The Recording Industry Association ofAmerica (RIAA) estimates that each
year the music industry loses $4.2billion to piracy worldwide. Availability of low-cost downloadable
music and threat of lawsuits are primarymeans 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 nomonetary profit or commercial gain isderived 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
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Digital rights management(DRM)
DRM, often referred to as copy protection, limits whatfunctions a user may perform with digital media.
Apple, for example, reserves the right to change at anytime 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 burnthe same playlist only 7 times, down from 10.
Microsoft, similarly, utilizes Microsoft's Windows MediaAudio (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