QUESTION 1

Draw the “bricks and mortar” value chain by which records, tapes and CDs are created, distributed, and sold in retail stores.
Use formats similar to Exhibits 2.1 to 2.5, and write a one-page description of how this value chain works and how each player 
makes money.

Traditional Music Distribution Value Chain (Bricks and Mortar)

Content Creation: Artists / Producers / Composers / Ghostwriters
-> Production / Publishers (Recording)
-> Manufacturers
-> Sales & Marketing (Publicity)
-> Distribution (Pack & ship)
-> Wholesale (Sales to Retailers)
-> Retailers (Sales to customers)
-> Customers (End Users)

The process begins with the talent pool which includes artists, producers, composers, ghostwriters and among others. These artists are
then contracted to a international record label to produce music recordings such as Sony BMG, Universal, Warner and EMI are examples
of large music companies that own smaller record labels. The rest of the record label industry is made up of independent labels such as
Sub-Pop, Epitaph, and Muse Music. Record labels add to the artist’s product by augmenting it with marketing campaigns, promotions,
concerts, and most importantly, access to and bargaining power with distributors. Artists often find it beneficially to leverage the resources
of a record label in order to reserve shelf-space amongst retailers. Best Buy and Wal-Mart are the two largest brick and mortar (versus
digital) music retailers. The big four own their own distribution channels while smaller independent record labels rely on separate systems
of distribution. Finally, the music is finally delivered to the end-user or the consumer. Though there are many separate steps in the value
chain, many record labels and music groups, including the “Big Four” participate in several of these stages. For instance, Sony BMG may
enter into a contract with an artist, then publish, manufacture, and distribute that artist’s work. Please refer the diagram for more details.

QUESTION 2
Develop an alternative value chain structure for this industry, and justify your recommendations.
recommendations. Use formats similar to Exhibits
2.1 to 2.5, abd write a one-page description of how this value chain works and how everyone makes money.

Digital (Online) Distribution Value Chain

Artists and record industry
Content Creation: Artists / Producers /
-> Composers / Ghostwriters
->Production Sales & Marketing
(Publicity)
Digital Content Creation
Online Music Store Network and Device Provider 
Rights clearance and royalties
Hosting in server /proprietary & digitised format Delivery over networks
Digital record encoding -> Device: Handphone / iPod / Portable Device etc
Jukebox sotware / iTunes / RealPlayer etc.
Billing / Fee Digital Networks/Devices
Digital Asset Management
Digital technologies in the music market will drive changes in the underlying market structure and value chain. The adoption and diffusion
of digital music, reduction in “distance” between artists and consumers, wide distribution networks through the online channel, reduced
costs of replication and production and copyright protection and piracy issues will affect the music market structure.

For digital music, the creation and recording of music and the signing and promotion of artists represent the gathering and organizing
steps. Selection and synthesis occur when the artists and/or record labels produce digital recordings. Distribution of information occurs
over the Internet when consumers purchase digital music files from a distributor and download or stream content.

Intermediaries are economic agents that facilitate transactions between suppliers and buyers. They set market-clearing prices, make
purchase and sales decisions, manage inventories, supply information and coordinate transactions. Their role in the music market is
changing as a result of the digital music format. Physical retailers are being replaced by digital music retailers. Manufactures and
distributors are becoming obsolete as record labels, producers and artists can go directly to digital music retailers without producing a
physical product, reducing the “distance” between the music supplier and the consumer.

The added value to the music product from manufacturing and distribution is decreasing, but digital music retailers add new value. With
Internet distribution and music piracy, they can now add value through marketing, promotions, copyrighting and licensing. There is also
value added through enforcement of IP rights and piracy prevention. As a result, the channel power dynamics change. Plus, there will be
new incentives as the roles of the players in the value chain shift. The changed value chain is likely to be affected by issues that relate to
IP rights. Though digital music also has advantages over physical formats, the product is incomplete. Digital music does not include some
of the important attributes of the physical CD. These include artwork, lyrics, liner notes, and additional content found in enhanced CDs
(video games, desktop wallpaper, video clips). But these can be made available in a digital form for value chain distribution of digital
music and the price digital music offer much cheaper compared to analogue music and easy excess to the consumers. Under the income
derive from digital music which is the two main pricing strategies for digital music: pay per song download and subscription services,
these also should include monthly subscription and pre-payment credit. There are many opportunities to explore consumers’ willingness
to pay in the context of illegal file sharing and piracy in the digital music value chain.

QUESTION 3
Explain and compare the role of operations in the two value chain structures you developed in question 1 and 2.

There are two main value chains structures:

Brick and Mortar Value Chain f or Traditional Music Industry
**Artists / Producers / Composers / Ghostwriters
-> Publishers
-> Manufacturers
-> Distributors
-> Retailers
-> Customers
Brick and Mortar Value Chain f or Digital Music Industry
**Artists / Producers / Composers / Ghostwriters
-> Publishers
-> Retailers
-> Customers

The principal physical distribution channel of the recording music industry value chain has been standardized with a final physical media
as CD's among other products. Unfortunately with the Internet and digital technology the recording music industry has been one of the
most affected by companies like KAZZA, Morpheus, Grokster, Gnutella, and the like, which are all based in peer to peer networks or just
selling music without taking care of the copyrights. When a person buys a CD, that person is acquiring a product that represents all
contributions of a chain that are part of the music industry. The price that is paid for a CD compensates all the contributors involved in the
production of the CD. The value chain for the music recording industry consists in basically a few components:

Artists or Singers
Publisher / Recording: Studios such as Universal Music, Sony Music, Warner Music, BMG or EMI
Manufacturing: CD Manufacturers
Marketing: Advertisement, catalogues, tours, concerts, Interviews, etc
Distribution: Transportation, Packaging from manufacturing to distributors.
Indirect distribution through traditional channels: chain music stores and chain bookstores.
Indirect distribution through nontraditional channels such as gift stores, independent business entity.
Retailing: Carried by major label and internet superstores until products become popular with particular segments. It is important to know
that there are other types of distribution channels like radio stations which use music to make profits. These companies are known as
professional users of music and in order to use any kind of music they have to pay fees for doing so. In this way some of the factors that
make part of the recording music industry value chain are facing decreases in their sales and revenues.
According to the forecast of iResearch, the global digital music market will remain on the fast track, and the market value by 2010 is
expected to hit a record high of USD12 billion. The current bullish global digital music market is attracting a flock of industry heavyweights.
Backed by the success of its iPod music player and iTunes music store, Apple’s performance in the marketplace has been nothing short
of spectacular, making it the envy of all its rivals. The software giant, Microsoft, has likewise thrown its hat into the competitive digital
music arena by recently launching its MSN Music online music service. It further plans to establish an industry chain alliance, which will
be centered on “Plays for Sure”. As a conventional retailer, Wal-Mart has also taken a hand in digital distribution. Apart from these
household names, a wide array of professional service providers, have also emerged in recent months to join the ever growing digital
music competitive arena.

Thus, one might say, that the digital music market is abuzz with various kinds of players. With the development of value-added telecom
services, carriers are also beginning to tap into the digital music gold mine (market), and have quickly found their feet in this highly
lucrative market with the introduction of their knockout product – the Ringtone. According to the report, the revenue for mobile music
alone, by 2009, is expected to reach USD 9.3 billion. So, indubitably, digital music will become a virtual gold mine for telecom carriers and
the music industry. When compared with conventional music, as well as allowing people to listen to music on a trial basis and buy
downloads anytime and anywhere, digital music also features greater pricing flexibility, a new sales model based on the sale of a single
track, as well as a wide variety of value-added services. Hence, with the continuous development of the 3G & 4G network, the potential of 
the digital music market will certainly continue to be further explored and exploited.

Herewith the summary of comparison the value chain for music industry:
Elements Production Marketing Distribution Consumption
Function Invention Understanding what the market wants, tuning Delivery of music Playback,
Writing content style and content, presenting music to to consumers management
Performance the market through appropriate channels, driving
Recording Editing demand
Programming
Member of the The artists themselves: The artists themselves: at the center of what Retailers: shelf  CE: CD players,
Value Chain Central to production, May the fans want, and live performance is a key space, customer  home stereo, etc.
be involved in any or all of  method of marketing support, instore
the functions Producers: Live venues: same marketing, PC/IT: software
enhance the quality of the Radio: a business unto itself, but also a key transactions (for  players
created work through enabler for promoting music to the mass market. now lets not worry
understanding of the Merchandisers: again, business into itself but about the credit Automotive: as
creative process and tshirts and posters play a big role in marketing card processing integrated into the
bringing together the right Print media: business also provides reviews and companies, POS car and other 
people to make it work. advertisements that drive consumer adoption software, etc) transportation
Value added providers: and information
make the content better  Retail channels: in-store marketing can be very Distributors: move
Songwriters: as important important content to retailers
as the artists in many Grassroots / street teams: increasingly
cases Set musicians important Duplication
Sound / studio engineers The labels: provide funding, and:
The labels: provide A&R – refine product to meet market demand Wholesalers
funding to bring the right Marketing – present message through
elements together  appropriate channels Labels: fund a
Advertisement, catalogues, tours, concerts, large part of this
Interviews, etc process
Output A musical work of varying Targeted product, increased demand, informed A CD on the shelf, Consumption in
degrees of quality market transactions to multiple locations
consumers including traditional
and digital
Digital Software enables P2P: can enable nearly costless presentation of  Can enable Increased storage
Music Marketing production at lower costs content to marketplace costless copying and portability –
and higher rate. Portals and filters: similar to print media in the and distribution of  virtually all the
analog world – but can have broader reach at content to all music you could
More people can have much lower costs consumers ever want can be
access to more powerful Filters and matching techniques (Amazon carried in the palm
tools – increase quality of  effect) – can radicalize segment by dramatically of your hand.
offering at a much lower  increasing the quality of match between
final cost consumers and product and can be virtually Leverage
costless at scale (see Launch.com) commodity IT
Streaming radio – to the extent that equipment for 
programming is done by humans this is virtually storage media
identical to existing broadcast radio
Convergence
makes everything
into an audio
device (cell phone,
digital camera,
coffee maker, etc.)
Effect on Analog Costs of production Value of analog value chain segments can be Everything except Devices no longer 
Model reduced completely eliminated in a strong DM scenario. for retail tied to media or 
undermined content
 piracy cases
Traditional Retailer Distribution to customer  None Loss of customers/sales
Advertising
Digital Music Retailer None Distribution to customer Advertising • Growth of digital music
Services (recommendations, market
search, etc.) • Potential increase in
profits
• Increased competition
Consumer Purchase music in physical Choice: purchase physical format New supply channel
format or digital format or pirate digital More product choices More power 
format over prices