Music Industry

01 Mode of Consumption

• Personal consumption – Castes, CDs, DVDs, MP3

• Mass Consumption:
Physical Retail Store Sale Digital Retail Sale
 Radio stations broadcast
 Televised music videos (MTV) 13,048 12,705
12,165 12,389
 Public venues such as shopping malls, pubs, 11,549 11,423
10,786 11,053
restaurants 10,478

02 Industry Size

• Half of all Americans purchased recorded music

at least once a year
• Yearly sales at retail store shrank from $13B to
$10B
• Piracy cost to recording industry was estimated 504
183
yearly $4B
1997 1998 1999 2000 2001 2002 2003 2004 2005

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 Music Industry
As % of Retail Assuming $1.5
03 Value Chain Analysis Party
Price
retail price per
song
 
Song Writers 0.3% 0.0045
• Four major record labels: SONY BMG,
Song Publishers 0.3% 0.0045
Warner Music Group, Universal Music
Group and EMI Mechanical Rights
Agency 3.5% 0.0525 $ 0.984
• Developed, produced and distributed
85% of all recorded music Recording Artist 4.0% 0.06
• Fast growing independent recording Less Costs 12.5% 0.1875
labels Recording Labels 45.0% 0.675
• Mass merchandisers Wal-Mart and Distributors 10.0% 0.15  
Target had 65% of music retail store Retailers 25.0% 0.375  

Song Song Mechanic Recording Recording Distributo Consumer

Retailers
Writers Publishers al Rights Artist Label rs s

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 Music Industry
04 Portable Music
• Walkman in the late 1970s
• Until 1998 digital music files can
only be played on computers
• Diamond Multimedia’s Rio 300
MP3 player – 16 songs
05 Current Issues
• Recording Studios perspective:
 Songs could be easily ripped from CDs, converted,
and emailed
 Pirated CDs could sell for <10% of the retail cost of
the real thing
 Further, consumers were more interested in
downloading music for free than paying for any CDs,
authentic or pirated
• Consumers perspective:
 They had limited “fair use” rights to make copies of
music they purchased for their own multi-purpose
use
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 Industry Analysis
POLITICAL ECONOMIC
 Copyright infringement policy  Huge market for digital music
 RIAA, Recording Industry Association of
America, sued websites such as MP3.com
for not paying royalties
P E  35% of potential retail value in the existing
value chain available o be captured

 SDMI, the Secure Digital Music Initiative

was founded to develop secure methods
of distributing digital music
 Technological challenges in
implementation of policies

TECHNOLOGY SOCIAL
 Growing no. of internet users
 Advances in digital music such as MP3
T S  More technological awareness
 Rapid adoption of digital music especially
 Increased disk space by young and college goers who constituted
a key demographic
 Consumers willingness to “own” the music
they purchase
 Napster – Disruption in digital media
Late
1999
1999s
Napster Launched
Growth
 Free download software
 User base grew between
 Acted as central hub
5%-25% daily
program with P2P
 Within few months, 4
network
million songs were in
 Allowed computers to link
circulation and in less
over internet and trade
than a year, more than 20
(music) files
million people
downloaded the program
2000 2001 2003
Copyright infringement Music alliances
 Two major alliances –
 US court orders to stop MusicNet & Pressplay took
distribution as it was Downfall of Napster
place
not protected for fair  Other programmers
use  Decrease in cash reserve
developed own version of
 Failed to police its and stoppage of music decentralized servers
system exchange led to shut down
 Inflicted substantial of Napster
harm to recording  Name and assets sold to
companies Roxio
 Why iPod? - ANSOFF Matrix
Apple Inc.
• In 2001, it roughly had 3% of PC platform, compared to

New market
market leader Microsoft’s 87%
• Industry had CAGR growth in double digits, but Apple’s
hardware sales declined every year
• Difficulty to grow loyal user base in highly competitive
Market Diversification
market Development
• Focused on diversification and product development

Existing market
Differentiated market Targeted towards Market Product
segmentation people who have
characterized by age, enthusiasm for Penetration Development
gender and desire for technology & hobby
image (particularly in music)

Existing product New product

 Life Cycle of iPods
• Mainly triggered by the launch of iTunes • Introduce new features with every
in 2003 new generation of iPods
• Launch of iPod variants – iPod mini, iPod • Touch sensitive click wheel replacing
nano, iPod shuffle mechanical scroll wheel
• Released iPods by HP & Dell with the • Seamless integration with other Apple
difference in logo positioning products as an ecosystem

• Introduced in Oct’2001 • Sales declined to

• Could carry 1000s of songs mere 26 million by
in pocket; 21x times more 2013 due to success
capacity than leading MP3 of iPhones
player
• Launch of iPod Lounge &
iTunes software
 Bundles iTunes with iPods

It allowed songs to be played, converting digital

formats into Apple’s chosen format using company’s
proprietary Fairplay – DRM

Encrypted each audio file, and it prevented songs

from being traded on illegal P2P networks

iTunes introduced features like playlists and auto

filling of iPods from users’ personal digital libraries

DRM was not infallible. Several times programmers

stripped DRM restrictions from iTunes

Within a week’s time, Apple came up with new

versions and also used legal help to dissuade
websites from making Playfair available to public
 Launch of iTunes Music
store
Quick link that will take you through each version of iTunes:
• Steve Jobs saw Napster, MP3 and the internet in a different way https://www.youtube.com/watch?v=Iv5pAGb4qtI
• Apple introduced iTunes Music Store in 2003
• Demonstrated elegance and simplicity of the iTunes Music Store
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• First started with 200,000 songs
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• Each song at $ 0.99
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• Analysts estimated barely breaking even at given cost
hen an unknown printer took a galley of type and
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• By Feb 2006, more than one billion songs has
been downloaded
• First digital store to be in top 5 music sellers in US

Its catalog of download was broadened from music

to television shows, podcasts, video podcasts and
games
 Innovative Business Model
Solution for Legality of Copyright
• Offered an easy and legal way of
Convenient Distribution Channel downloading music online
Digital Rights Management
• Consumers can find virtually any music
they want in iTunes Music Store • Proprietary Digital Rights Management (DRM)
• Consumers can purchase their particular prevented songs from being traded on illegal
hits – unbundled the music albums P2P sites
• Personal digital libraries • Standard digital formats such as MP3 could not
be played on iPod

Bundled Offerings Pricing Strategy

• By “bundling” iTunes and iPod, it provided • Apple enjoyed 64% margin over retail
seamless experience for the music fans to price of iPod
find, purchase, manage and enjoy music at • iTunes subscription and songs
anywhere download was offered to consumers
virtually at break-even price $0.99

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10
 Value Chain of iTunes
Value Creation Value Purchase Value Use Value Renewal

• iPod provides the • iTunes provides chance for trial
consumers with Make It
Personal service for laser
carving specially
• For iTunes
• iTunes enables the consumers
listening and enables the Software, no
to arrange melody
consumers to determine whether expense must
management mode
buy or not after tasting the be paid.
according to their
goods. It also provides rich preferences. Music can be Additionally, it
music knowledge to assist the shared with limitation without can be
consumers to comprehend. need to pay copyright updated to up
Various sound products are expense. Perfect integration to date
available, such as music, sound with iPod hardware player version.
book etc. enables music to be carried
for hearing.
C mpetitors
Innovative Raxio launched “Napster-To-Go”. Charging $12.50 a
pricing month for unlimited access to songs
structure
from Subscriber can transfer unlimited number of tracks to a
competitors compatible portable player(not iPods)
Motorola announced plans for a mobile cellular phone
that offered iTunes types software
Microsoft's Zune market website offered subscribers
access to more than 2 million songs for $14.95 per
months

Market Share
• Price Sensitivity
$0.99 Song download Rhapsody
17%
• Switching Barriers iTunes
Napster 44%
Digital Right management 19%

Yahoo
21% iTunes
Yahoo
Napster
Rhapsody
 Circle Mind Map
Buyers Power : Low
Barriers to Entry : High
• First mover advantage
• Strong brand with quality
• Technology and Innovation
Supplier Power : Low
iTunes secured partnership with
agreements with recording companies
that met their privacy concern
Threat of Substitute : Low
iTunes can only be used
within Apple’s ecosystem • A simple-to-use seamless integration of
iTunes with: iPod
• Marketing iPod as one of the closed
ecosystem of products built round Apple
technology
Rivalry : Low
Porter’s Apple retained its competitive
Five advantage by continuous
Forces introduction of new features
and adjusting prices
Analysis
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 Road Ahead for Apple Inc.
June 29, 2007: “An iPod, a phone, an internet mobile communicator... these are NOT three separate devices! And we are
calling it iPhone! Today Apple is going to reinvent the phone.”
THANK
YOU

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