The presentation is dedicated to changes in music industry caused by digitisation

1. Reorganization of
Music Industry
GUSEINOVA Tamam
MSc in Strategic Management
Media Strategy Class

2. Agenda
! The impact of digitization on music industry. Overview
! Changing value chain
! Decline in the industry
! Piracy
! Market trends caused by digitization
! Overview
! Record Labels’ strategies in Digital Age
! New pricing and business models
! New meaning of digitization for the industry
! New trends in the industry
! BigData: Moneyball for Music
! Crowdfunding: empowering independent artists
3

3. The impact of digitization on
music industry. Overview
! Changing value chain
! Decline in the industry
! Piracy
4

4. Music industry used to be led by large corporations, but is
being disrupted by digital
5
! Corporations lead marketing, production and sales
! Compositions created and owned by songwriters,
usually licensed to production companies.
! Artists with the help of production companies create
recordings. Companies usually own the recordings.
! Consumers own physical media, such as compact
disks and MP3s. Retailers distribute these from
producers to consumers
Cooperation between artists and
business people
Financing led by production companies
! Record labels cover touring, marketing, engineering,
studio
! Artists earn a portion of album proceeds
! Companies are integrated in groups with minimal
outsourcing
! Exception: live performances booked by promotion
companies
Content creation
Artist & Repertoire
Production
(Recording) Publishing
Sales&Marketing
(Publicity)
Distribution (Pack
+Ship)
WholesaleRetailConsumers
10%
$1.6
60%
$9.6
30%
$4.8
Artist Label Retail
$15.99
CD Artist iTunes Label
$9.99
Album
14%
$1.40
30%
$3.00
56%
$5.59
Music industry value chain before and after iTunes
Changing value chain

5. Popular music formats have changed significantly in the last
40 years
6
00%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1973
1983
1993
LP/EP
8-­‐track
Vinyl
Single
CasseAe
CasseAe
Single
Music
Video
CD
Other
00%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003
2008
2012
CD
Music
Video
CasseAe
CD
Single
SubscripKon
&
Streaming
SoundExchange
Mobile
Download
single
Download
album
SynchronisaKon
! 1973
! LP/EP – the format of choice, representing over 60% of
sales.
! Cassette tape – an emerging format, representing 3.8% of
sales.
! 1983
! Sales of cassettes overtook LP/EPs contributing to nearly
½ of the industry's revenues
! 1993
! CD had grown phenomenally from 0.5% of sales in 1983
to nearly ⅔ of sales
! Music videos were a format that had begun to produce
revenues, representing 2.1% of sales
! 2003
! CDs overwhelmingly the format of choice, representing
94.8% of revenues.
! Music Video – next most valuable format was,
representing 3.4% of revenues
! 2008
! The industry had become more varied
! CDs still the format of choice (representing 62.3% of
revenues), though the following formats were becoming
more popular
! CD singles and Cassettes became virtually obsolete (0%)
! 2012
! Formats diversified further
! Revenues from CD sales and Mobile shrank
! Other formats grew considerably , esp. download singles
and albums
Market has shifted from physical to digital
forms
Changing value chain

6. Distribution Channels previously restricted to physical forms
have expanded into digital to the advantage of online forms
7
Role
• Bridge the gap between
consumers and
production companies
• Purchase the recordings
from the producers and
selling to consumers
Forms
• Digital Role Players
• Online Radio
• Physical Distributors
Evolution
• The distribution of
recorded music CDs
has shifted from
specialty shops to
mass-market, online
retailers and more
recently to online digital
media retailers and
other digital music
services.
Physical Distributors experience crisis
! Decreasing market
! Higher shelving costs
! 39,000 songs on CD’s in average store
! Small consumer surplus
! Can only sell hit albums
Online distribution can produce a higher
profit margin than traditional retailing
! Labels
! Save the cost of packaging,
! Don’t have to worry about losing sales
because a title is sold out,
! Do not have to absorb the costs of unsold
overstock.
Changing value chain

7. Causing changes in the value chain digitization of music
resulted in ever declining revenues
8
! Revenues reach all time music industry high of
19.5 billion dollars by 1999.
! 1999 was the ‘peak’ for the industry, with revenues
dropping since.
! Reason: digital music piracy enabled by MP3
format and Internet
! Peer-to-peer file sharing network
! Mass distribution of music files
! Competition for classic record
companies and retailers
! Other sites follow similar model
Sales
Decline in the industry

8. Declining Music revenues are the result of multiple trends
created by digitization of the industry
Pirating
! Illegal downloading directly and indirectly
caused the music industry to go into decline.
Consumer Behavior Changes
! Since 2005, consumers have turned to individual
track purchases instead of bundled albums,
causing revenue to fall and margins on new sales
to narrow.
Devaluation of music
! Access to free music makes consumers less
inclined to pay high prices
! Cheap digital songs devalue physical bundled
albums
Big Time Artist Going Independent
! Madonna's, Michael Jacksons, Justin Timberlake's,
etc bring in big amounts of money for labels.
! The cases of Radiohead and Beyoncé show the
new trend
.
Radiohead’s In Rainbows
paradigm, 2007
! In Rainbows: Radiohead’s 1st to be
released after a 4 year gap without
the support of a major label
! Clever use of internet technology to
reach an existing fan base &
encourage a new one Marketing
campaign with the banner of ‘pay
what you want’ to download the
new album
! CD release later in the year
! The release achieved worldwide
media interest
! 2.3 million downloads between
October 10th and No- vember 3rd
2007
! The internet as a marketing tool
was also instrumental in the band’s
next album, The King of Limbs
! Coldplay followed the example for
their singles Violet Hill and Viva La
Vida
Challenge to create growth in digital and other non-traditional revenue streams that
are strong enough to offset the decline in physical album sales 9
Decline in the industry

9. The Business Model of Piracy: an easy and free way to get
music
10
Piracy

10. Industry players are taking vigorous measures to
eradicate piracy
11
The effect of these efforts appears to be positive, with growth in legal downloading
now exceeding illegal file sharing
95% of music downloaded worldwide is
done illegally
! Attacking the pirating systems
! Napster, LimeWire, FrostWire,
Kazaa, etc.
! Updating digital file protective
encryptions. Digital Rights
Management (DRM)
! software that can detect, monitor,
and block the use of copyrighted
material
! limits or prevents the sharing of
downloaded music
! opened the door for new ways of
legally distributing digital content
! different versions of DRM allow
different access to files
Illegal piracy of music costs the broader US
economy as much as $12.5 billion in
losses and 71,060 jobs annually
Between 2003 through 2008, the industry
sued over 35,000 individuals
Actions taken
Piracy

11. Market trends caused by
digitization
! Overview
! Record Labels in Digital Age
! New pricing and business models
! New meaning of digitization for the industry
12

12. Digitization has created new trends affecting all the areas
related to the industry
13
① Profit margins decrease
! Down from over 15% in mid 1990’s to 2.3%
in 2010
② Shift to Tech Based Business
Models
! In 2010, the big four shift budgets from
physical distribution models to investing in
new technologies for digital distribution.
! ITunes
! Advertising based models
③ Long Tail Marketing
! Digital Music allows for greater variety
amongst music groups and makes it easier
for consumers to find lesser known artists of
their liking up and coming artists to find a
target market
④ Digital sales increase, growth
slows
! Value is in the artist's brand, not record label
! social networks
! Move from full-length album to singles
! Promotion in spurts around album release or
constant promotion with constant releases?
! Kanye’s Good Friday
! Revenues coming from sponsorships, licensing,
and live performances
Industry Trends
! Artist needs to be a true entertainer and performer, not
just on record
! Music more prevalent than ever before
! easily transferable and transportable
! easier to find niche market content
! Recording costs near zero
! Distribution costs near zero
! Marketing & promotion costs go up ⇓ Need to break
through the noise
Content Trends
Costs in Digital Era
Overview

13. The Major Record Labels used to be Global Goliaths in
the industry with increasing concentration…
14
! Collect around 80 percent of recording industry revenues each
year.
! Until the 1980s, part of a major label’s business was to develop
new talent.
! Today, artists who don’t sell fast are dropped or not given
adequate promotion.
! In the 90s, majors signed multi-million dollar deals with superstars
including Michael Jackson, Mariah Carey, Motley Crue and Prince.
! Most of these projects were artistic and financial disappointments
and drained support from developing acts.
1988–1999
Big Six
1999–2004
Big Five
2004–2008
Big Four
2008–2012
Big Four
Since 2012
Big Three
! Warner Music
Group
! EMI
! Sony
! BMG
! Universal
Music Group
! PolyGram
! Warner Music
Group
! EMI
! Sony
! BMG
! Universal
Music Group
! Warner Music
Group
! EMI
! Sony BMG
! Universal
Music Group
! Warner Music
Group
! EMI
! Sony Music
Entertainment
! Universal
Music Group
! Warner Music
Group
! Sony Music
Entertainment
! Universal
Music Group
Record Labels gradually became stiff and risk-averse
incumbents
! Finding music talent
! Manufacture of recordings
! P r o d u c t i o n o f m a s t e r
recordings
! Purchase of reproduction and
distribution rights to master
recordings
! Release, promotion, and
d i s t r i b u t i o n o f s o u n d
recordings
Job of Music Label
Record Labels in Digital Age

14. The Business Model of Record companies worked for a
lot of years…
15
Record Labels in Digital Age

15. …but now Record Labels have to adapt to the Digital Age
pursuing new strategies
16
! The label will reduce the average wholesale price of albums from $10.35 to $7.50. This
is equivalent to a Large Meal at McDonald’s
! UMG is actively working with cell phone manufacturers, including Apple and Google, to
improve mobile digital music technology.
! Sales for streaming services as well as full track and album purchases.
! UMG is also the principal participant in VEVO, an online streaming music video service.
! Short advertisements before the music videos provide income for the labels and allow
fans to access the service free of charge.
Adaptive pricing
strategies for their most
profitable sectors
Consolidation and
innovation
! SME joined in a partnership with UMG for VEVO launch in December 2009
! Reconstructing cost have been the bulk of their losses to date
! Sony has incurred restructuring charges of $14.2, $8.69 and $67.73 million in 2007-2009
! Abandoning the Physical CD despite the fact that SME experienced market share
increases in physical sales of new releases and catalogue albums as a result of strong
demand for Sony artist Michael Jackson and Susan Boyle.
! Sony benefits from its advances in digital distribution including licensing deals with
Apple, Nokia, Vodafone, MySpace and Amazon.
Aggressive new cost
management strategy
to prepare for digital
age
! Unique Distribution:
! WMG has partnerships that enable distribution of the label's music online and through
mobile services including partnerships with News Corp's MySpace Music and Nokia.
! 360 Deals:
! Like its major competitors Warner Music Group has also expanded into artist image and
brand management, which includes merchandising, sponsorship, touring and artist
management.
! By utilizing in-house resources and some acquisitions the label has been successful in
embarking in these expanded-rights deals with a number of represented artists.
Record Labels in Digital Age

16. The market faced digitization of the industry with new
pricing and business models
17
Versioning
Creating different forms of the same product to sell
! Digital Full-Length Albums
! Digital Singles
! Product Placement
Movies, TV, Events, Video
Games
! Live Concerts
! Physical CDs
! Mobile Music Downloads
! Music Videos
! Vinyl LPs
A La Carte
Downloading
Unbundling CD’s to maximize consumer surplus
! Since 2005, consumers increasingly have turned to individual track
purchases instead of bundled albums
! Dominance of single-track downloads over album sales " Margins on new
sales to narrow & Revenue to fall
Subscription
Certain online distributors require their customers pay monthly fees
to access unlimited downloads
Major Labels are establishing partnerships to create subscription based
streaming models that
! provide users with more access than free services
! increase revenue from distribution rights for labels
New pricing and business models

17. The market faced digitization of the industry with new
pricing and business models (continued)
18
Tying
iPods and MP3 players are need to play the music for the customer
Mixed Bundling
Buying multiple artists from the same record label for a concert
or
Internet companies’ offer of different types of products or services
combined into one package
E.g. partnership between Deezer and mobile phone provider Orange
Streaming
Opportunity to listen to (stream) music, through sites such as
Myspace, Bebo, YouTube and Facebook
! In 2012 audio steaming services such as Spotify, Deezer, Rdio, Rara,
Napster and We7 delivered at least 3.7 billion streams, a rise of 40% on
2011
! Revenues: subscription fees and/or advertisement
! Pandora practices freemium model: Up to 40 hours of free radio, $0.99 for
over 40 hours = one download
New pricing and business models

18. The market faced digitization of the industry with new pricing
and business models (continued). Business Model of iTunes
19
New pricing and business models

19. The market faced digitization of the industry with new pricing
and business models (continued).Business Model of Spotify
20
New pricing and business models

20. As a result, global music industry experienced 0.3% growth in
2012 driven by increasing popularity of legal digital music
21
0
1
2
3
4
5
6
2008 2009 2010 2011 2012 2013
Global digital
revenues, US$ bn
The industry’s digital revenues grew by 4.3% in 2013 to US$5.9 billion
39% - the proportion of the industry’s
revenues from digital channels
51.3%
Increase in subscription
streaming revenues
28M
Paying users of
subscription services
1%
8%
19%
5%
67%
2013
Other
Ad-­‐supported
streams
SubscripKon
Mobile
Downloads
1%
3%
6%
26%
64%
2008
Subscription & ad-supported streaming have grown
from 9% to 27% of digital revenues in the last 5 years
! In 2011, the largest companies providing digital services,
including iTunes and Spotify, operated in just over 23
countries
! At the beginning of 2013, this had jumped to more than
100 countries
! Markets where digital sales now outstrip physical
formats: the US, Sweden, India, and Norway
! Worldwide, there are over 500 licensed digital music
services in operation.
“Digital channels mean we can monetize markets
worldwide much more effectively “
New meaning of digitization for the industry

21. New trends in the industry
! BigData: Moneyball for Music
! Crowdfunding: empowering independent artists
22

22. 23
Moneyball For Music: BigData will help to enhance
consumer understanding and talent discovery
What’s Moneyballing?
! 2013 Forbes article Moneyball For Music: The
Rise of Next Big Sound # 2003 nonfiction
book by Michael Lewis, Moneyball: The Art of
Winning an Unfair Game
! Application of statistical analysis and focus on non-
traditional objective indicators over traditional subjective
measures of performance (Ackman, 2003) to acquire the
right players at low cost turned Oakland Athletics into
“one of the most successful franchises in Major League
Baseball”
! Sets of data can be used and analysed
correctly to spot the right talent in music as
well as understand the consumer
“Music is experiential and fundamentally social –
it is socially constructed, socially embedded and
its nature and value are inherently social”
Need for newer systems for Processing big data
for music that may not be supported by the
existing infrastructure of the company
External and specialized help requires additional
revenues
Need for Large capital investments
Major labels have advantage over
independents
Consumer Understanding
Talent Discovery
✚
BigData: Moneyball for Music

23. Increasing impact of digital revenues on overall industry
performance necessitates BigData analysis
24
! Сomposition of music consumption to be considered,
whereby sales figures alone may no longer be an
accurate representation of artist or song popularity.
! The impact of streaming revenue on the business not
to be ignored "
! A good argument for the industry to also look at other
non-sale metrics for music popularity, such as
Shazam.
! The music industry is being ever urged to employ
more pull-marketing tactics alongside existing push-
marketing tactics
Why venture into Big Data?
Sales data
Streaming Data
Social media statistics
Cookie information
Relevant application usage figures
Various forms of segmentation
! 90 million monthly active users are voluntarily tagging 17 million songs, TV shows and ads every day
to identify the tracks they like, causing Shazam-driven music sales of more than 500,000 a day
! Shazam weekly charts of the top 200 most tagged tracks and most tagged new releases by key
territories are spontaneous, free and independent, presenting purely consumer music preference data;
and it is inherently digitised
! Despite the lack of access to Shazam’s granular data, it may yet be hypothetically possible to utilise
what is currently available in order to bring out further insight
Shazam: A case in favour of a largely untapped resource
The new range of data sources
BigData: Moneyball for Music

24. Partnerships
25
Company Tools Comments
UMG
Creating their own internal
analytics tools that pull
social media data together
Audience analysis using not only
demographics, but it also indicates the type of
products the audience might have an affinity
toward
External social analytics
companies such as Topsy
Deciphering how often a term is tweeted, find
an influential person on a specific subject, or
measure the exposure of an event or
campaign
Billboard
Partnership with Twitter
Creating further charts that “will reflect the top
tracks being discussed at the moment and
over an extended period of time on Twitter, as
well as surface the most talked about and
shared songs by new and upcoming acts”
EMI Music
Music Data Science
Hackathon held in
partnership with Data
Science London
A global event where “more than 1,300
formulas and ideas were submitted in answer
to the question: ‘Can you predict if a listener
will love a new song?’”
BigData: Moneyball for Music

25. Advanced Moneyballing: Sentiments,
Streaming, Algorithms
26
Segmentation type Tools Comments
Online behavioral
patterns
The Echo Nest’s
Music Audience
Understanding
Creates dynamic, music segments to understand
music tastes across entire audiences through the
segmentation of audiences by over 710 genres
and styles of music, affinity to artists and several
unique behavioural segments
Mood & Activity
Stereomood A music streaming service that allows the creation
of playlists based on mood and activity
8tracks An online streaming radio service also centred on
user-curated playlists;
works better than Stereomood in understanding
consumers’ desires to choose certain types of
music, as it allows not only a three-step filtering
process, but it provides genre suggestions, both
broad and niche
Predictive profiling can potentially provide marketers with a wealth of information to
! understand consumer music tastes,
! give insights into their online personalities and behaviours, plus how and what kind of
culture these consumers are choosing to interact with,
! relate numerically human emotions and music they listen to.
BigData: Moneyball for Music

26. Moneyballing Talent Discovery: wise usage of Big Data can
increase efficiency of Record Label’s A&R
27
! Spotting and developing musical talent that is able to bring in commercial gains has been a game
governed by the gut instinct and experience of A&R individuals, backed by trusted sources of
recommendation
! But A&R departments already go beyond trusted recommendations and gut instinct and back this up
with social media statistics such as Facebook Likes, Twitter followers, YouTube views and
SoundCloud plays to filter out artists.
The way data is used has evolved towards spotting trends rather than creating hits
Analysis of patterns in songs
Methods embracing the idea of cumulative
advantage
! Using data to look for a formula for a hit
song that can be used to manufacture
success, rather than using data to spot
talent and musical product that is readily
and organically emerging.
! E.g. Music Xray: statistical analysis to
predict the chance of a song being a hit
prior to release
Data should give the A&R scout a map to know where and when to spot it not what to
spot
! ‘Cumulative advantage’: “if one object
happens to be slightly more popular than
another at just the right point, it will tend to
become more popular still” (Watts, 2007)
! Helping A&R departments get a closer look at
crowd reactions to music more directly,
without having to rely on data, tastemakers
and recommendations
! E.g.: Shazam, Next Big Sound, Musicmetric
BigData: Moneyball for Music

27. Independent artists can leverage crowdfunding opportunities
to rich wider audiences and get signed
28
! The result of the ability via the internet of
bridging closer ties between artist and fan
base.
! Kickstarter and PledgeMusic are two
successful crowdfunding services
! Clear example of using internet promotions as
a business tool for the artist that achieves
financial goals
Crowdfunding is a platform from which an artist
requests money for a specific project
Slicethepie – get recommended to a record
company or radio station
! Slicethepie was established in 2007 in order to
! support unsigned musicians in reaching a market
and
! ultimately for the music lover to explore new bands
and new music
! Music is reviewed by interested music lovers
who are paid
! The better the review, the greater the chance
that Slicethepie will recommend that artist
Ditto Music – a model of independent artist engagement
! Digital distribution service that provides help
for new, unsigned bands.
! Album packages include such services as the
artist keeping 100% of their royalties or getting
their tracks onto digital stores such as iTunes
and Spotify
! Work on a fee basis and are in effect a
facilitator to unknown musicians
! Success is shown in 11 UK top 40 singles
starting in 2007 with the first unsigned artist to
reach Top 40
! Has a partnership with online music video
distributor Vevo, which increases the visibility
of their artists
Crowdfunding: empowering independent artists

28. Digitization has had an immense impact on the overall music
industry & on its main actors
29
Consumers
• Greater levels of control,
creativity and participation
• Need it now and everywhere at
once;
• Can discover more appealing
choices if they can sift through
the offerings
• More access to artists and their
lives
• Need to decide how they will
listen to and pay for music
• New business models alleviate
consumers’ inclination to piracy
Artists
• A wide range of tools and
applications to create music
independently for little cost
• A myriad of low-cost media to
reach the consumer
• Established signed artists can
act independently leveraging
on their immense fan base
through digital means
• New and little-known artists
have to break through the
‘noise’ created by highly
i n c r e a s e d v o l u m e s o f
accessible music
Gatekeepers &
Record Labels
• Reduction of power and
influence to dictate which
tracks are heard by and
pushed onto the consumer
along with heavy advertising;
• Necessity to incorporate Big
Data & new tools to seize,
understand and surf new
consumer trends + customize
the offering
• Record Labels are still the main
investors in talents. Their
activities have changed, but not
their role in the industry
Impact on the industry
! Erosion in power of “industrial, professional and institutional cultural production [and giving way to a]
more democratic and vigorous system”
! The music industry is being ever urged to employ more pull-marketing tactics (i.e. encouraging and
attracting the consumer to actively seek out the product) alongside existing push-marketing tactics
Conclusions

29. Appendices
30

30. Artist
• Record on the track (Who you hear)
• No Intellectual Property rights to the
song (unless they wrote some of it)
Writer
• Writes the words to the music (The
words you hear)
• Split Intellectual property rights with
Producer
Producer
• Creates the musical soundtrack (Make
the beats)
• Split Intellectual Property Rights with
Writer
Engineer
• Mix the track (make sure everything
flows)
Mastering Center
• Make the audio "Commercial-
Ready" (Adjust Hi-Lows to for Radio
Play)
31
Appendix 1. Creative Talent in music industry

31. Appendix 2. Evolution of music industry, 1998-2010
32
1998
1999
2000
2001
2002
2003
…

32. Appendix 2. Evolution of music industry, 1998-2010
(continued)
33
2004
2005
2006
2007
2008
2009
2010

33. Appendix 3. The Long Tail Marketing Trend
34