DIGC102 – Assessment 2

James Hallihan – Wollongong University – 24/09/09

Research Area - Music Industry: Physical and Online Music Retail

Question - What effects are the new wave of digital music formats and retailers having
on physical retail products, retailers, and sales?

In the last decade, physical music sales have been plummeting in Australia (ARIA 2008), with
the blame going largely to the presence of digital music and file sharing. The convenience of
the ‘instant product’ has increasingly become a priority for consumers. Now, in 2009, the lines
are blurring more and more between the physical and the digital product. Music retail industry
leader Apple have just introduced the ‘iTunes LP’, which is being marketed as the digital
version of a vinyl LP, with all of the liner notes, lyrics, photos etc. In addition to ‘LP content’,
there are also bonus videos. Apple CEO Steve Jobs (2009), at the recent ‘Apple Event’
admitted that “most of that stuff (the content) left us when we went to CDs, and even more so
to digital music.” This new format of the digital music ‘package’ is designed to make the digital
product more personal, even tangible, as it is much closer to the increasing amount of
physical products with ‘bonus material’ that record companies have been trying to produce, to
compete with the digital music arena.
In an attempt to entice customers, record companies have been releasing albums
with bonus content such as a DVD disc, video clips, live tracks, rare/unreleased material, and
so on. The iTunes LP has now potentially made the majority of this bonus material available
to online customers, and in the process, superseding the physical product in a number of
cases. While iTunes LP is only weeks old, and is limited to only a select number of albums, it
will continue to grow as new albums are released, such as ‘The Resistance’, the new album
by UK band Muse.

As an experiment I bought and downloaded the Muse album ‘The Resistance’ via iTunes to
compare what features of the iTunes LP are offered, versus the physical versions.

iTunes LP:
- 543MB download, consisting of 11 audio tracks, and iTunes LP content (3 short
videos, song lyrics, pictures of the band, song list, written commentary on each song,
album credits)

Physical Retail Album:

JB Hi Fi has four versions of the album available (as listed on their ‘JB Hi Fi Online’ website,
which is the online mail order arm of the company):

- Standard Jewel Case – 11 audio tracks, liner notes, lyrics – Price: AU$18.99

- Limited Edition Version (1 disc, Digipak cover) - 11 audio tracks, liner notes, lyrics,
cardboard digipak cover – Price: AU$18.99

- CD + DVD Version (2 discs, Digipak cover) – 11 audio tracks, liner notes, lyrics,
“Making of The Resistance” DVD – Price: AU$19.99

- Limited Imported CD + DVD + 2LP + USB Box Set – Contents of the “CD + DVD”
version (with exclusive 5.1 surround sound audio DVD content), plus 2LP vinyl,
‘Muse’ rubber USB stick with 3 file versions of the 11 album audio tracks, and ‘limited
edition’ print, all within the box packaging – Price: AU$109.99

(JB Hi Fi Online 2009a,b,c,d)

The comparisons are obvious, with the choice of styles and content contained in the physical
product out numbering the contents of the iTunes LP format. Though the digital product’s file
size is over ‘half a gigabyte’, this could be considered comparable to the physical space the
packaging of the physical product would take up. A major difference presented here is the
price, with the iTunes LP being more affordable, and getting near to, if not more content than
that of the ‘CD + DVD’ version. Whilst there are more physical products to choose from, the
digital version has the added advantage of price, and convenience. Though a ‘die hard’ fan
may want to spend $109.99 on a box set, being a commercial band, there would be a vast
majority of consumers who would want a copy of the album to listen to straight away. This is
where the physical music retailer loses out.

Retailers such as JB Hi Fi are limited to profiting from sales of the physical product, as more
consumers turn to digital music, and stores are forced to limit stock purchases, or even
discontinue the stocking of items such as vinyl and singles (Adams 2009). While fans will buy
the physical album from a physical retailer, they will most likely buy just one version, and only
retailers with the largest customer base will order the Box Set version, as mainstream fans
will not have a need for all of the ‘trimmings’ within. And whilst JB Hi Fi have the bulk buying
advantage of cost negotiation with the record companies, a majority of smaller independent
retailers will not be able to afford to ‘stock up’ to achieve a competitive price point.
Unfortunately for the small retailers, there is not much that they can do, as government
regulators, the ACCC, do not see this sort of ‘muscling in’ as anti-competitive (though, JB Hi
Fi have been investigated before over accusations of ‘restrictive practices’ (Richards 2008)).

One small, and rarely mentioned advantage that the physical product has over the digital
product is ‘resale value’. A glimmer of retail hope lies in the collector and the ‘boffin’… those
who have been around long enough to retain some pride in their wall of vinyl or CDs. In the
blog post, suitably title “You can’t put your arms around an MP3”, Nick Spence (2009) writes:
“I've never been able to get to grips with something that exists only on your hard
drive, has no resale value, can't be given away or dropped off at your local charity shop, and
until fairly recently was crippled with digital rights management restrictions and low quality
encoding.”
There have been a number of recorded vain attempts to re-sell digital music files, via eBay, or
contained within a Digital Music Player being re-sold… with both cases being refused sale,
and attracting legal action (Kaufman 2006). This, then, brings into light the price value of a
digital track, and whether it is really worth what the consumer pays (Harrel 2006). It could be
said that the issue of value is being, if not rectified, then improved with the introduction of
further content in a format such as the iTunes LP.

Meanwhile, back at the Record Company…

It would appear that Warner are not too concerned about ‘where the money comes from’, as
long as someone buys the album in some form (or several). The first link to Muse on the
Warner Music Australia website links to iTunes via a “You can grab a copy of ‘The
Resistance’ here” link, and further information on the artist provides further links to Bigpond
Music, and JB Hi Fi Online (to the CD + DVD version) (WMA 2009). There appears to be little
concern for the competition between physical and digital retailers… the wider the distribution
of the product, the better. Reaching more consumers, beyond geographical constraints, to a
wide socioeconomic demographic, resulting in at least one of the 5 official versions of the
album being in the homes of ‘die hard’ and new fans alike. Where production costs of the
physical products may be high, profits from digital sales would no doubt be sufficient to
compensate.

In addition to the iTunes LP, Apple have introduced a new feature to the iTunes player,
known as ‘Home Sharing’, where 5 ‘authorised’ computers in one ‘home’ can share iTunes
purchased songs for “personal use” only. This allows more people to hear or “discover”
(Sandoval 2009) downloaded digital music files within their own home, between family
members/friends, therefore creating new ‘fans’ out of existing customers, and there is little
doubt that both Warner Music and Apple would agree with analyst Mike McGuire:
“Helping customers find what they want "is one of the oldest and most persistent
problems in retail," said Mike McGuire, an analyst with research firm Gartner. "The barriers to
entry are pretty low and people's allegiances can switch quickly. Digital music is maturing so
now it's less about getting people to the site and more about getting old customers to
continue using the product.” (Sandoval 2009)
While record companies have traditionally been scared of the concept of ‘file sharing’, Apple
have started to pave the way in utilising this popular online activity. Apple, in this case, could
be considered coming out on top in the music retail industry. Especially with the newly added
features of the iTunes Store and program.

Consumers tend to prefer convenience, lower prices, and technology that will allow a wider
distribution of ‘their music’. If the physical retail store is to survive, they will need to continue
to evolve just as the digital retailer has evolved. For the time being, digital retailers will
continue to have a high stake in shaping the future of the physical retail store. While there is
still value in the ‘package’ (as demonstrated by the iTunes LP), what physical shape or form
that package takes will certainly be more than just the plastic case and ‘shiny disc’.

Bibliography

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