In 1999 the global recorded music industry had experienced a period of growth that had lasted for almost a quarter of a century. Approximately one billion records were sold worldwide in 1974, and by the end of the century, the number of records sold was more than three times as high.
At the end of the nineties, spirits among record label executives were high and few music industry executives at this time expected that a team of teenage Internet hackers, led by Shawn Fanning (at the time a student at Northeastern University in Boston) would ignite the turbulent process that eventually would undermine the foundations of the industry.
Shawn Fanning created and launched a file sharing service called Napster that allowed users to download and share music without compensating the recognized rights holders. Napster was fairly quickly sued by the music industry establishment and was eventually forced to shut down the service.
However, a string of other, increasingly sophisticated services immediately followed suit. Even though the traditional music industry used very aggressive methods, both legal and technical, to stop the explosion of online-piracy services such as Napster, Kazaa, Limewire, Grokster, DC++, and The Pirate Bay, it was to no avail.
As soon as one file sharing service was brought to justice and required to cease its operations, new services emerged and took its place. By the end of 2013, the sales of physically distributed recorded music (e.g., cassettes, CD, vinyl) measured in unit sales, were back at the same relatively low levels of the early 1970s.
During the 15 years that has passed since Napster was launched, the music industry has been completely transformed and the model that ruled the industry during most of the past century has been largely abandoned.
This rapid transformation of the music industry is a classic example of how an innovation is able to disrupt an entire industry and make existing industry competencies obsolete. The power and influence of the pre-Internet music industry was largely based on the ability to control physical distribution.
Internet makes physical music distribution increasingly irrelevant and the incumbent major music companies have been required to redefine themselves in order to survive. This chapter will examine the impact of the Internet on the music industry and present the state of the music industry in an age of digital distribution.
In order to understand the dynamics of the music industry, it is first of all necessary to recognize that the music industry is not one, but a number of different industries that are all closely related but which at the same time are based on different logics and structures.
The overall music industry is based on the creation and exploitation of music-based intellectual properties. Composers and songwriters create songs, lyrics, and arrangements that are performed live on stage; recorded and distributed to consumers; or licensed for some other kind of use, for instance sheet music or as background music for other media (advertising, television, etc.).
This basic structure has given rise to three core music industries: the recorded music industry—focused on recording and distribution of music to consumers; the music licensing industry—primarily licensing compositions and arrangements to businesses; and live music—focused on producing and promoting live entertainment, such as concerts, tours, etc.
There are other companies that sometimes are recognized as members of the music industrial family, such as makers of music instruments, software, stage equipment, music merchandise, etc. However, while these are important industry sectors they are traditionally not considered to be integral parts of the industry’s core.
In the pre-Internet music industry, recorded music was the biggest of the three and the one that generated the most revenues. Most aspiring artists and bands in the traditional music industry dreamed about being able to sign a contract with a record label.
A contract meant that the record label bankrolled a professional studio recording and allowed the artist entry into the record labels’ international distribution system, something which otherwise was beyond reach of most unsigned bands. The second music industry sector—music licensing—was much smaller and more mundane than the recorded music industry sector.
Music publishers, who were operating in this business, were largely a business-to-business industry without any direct interaction with the audience. Their main responsibility was to ensure that license fees were collected when a song was used in whatever context and that these fees subsequently were fairly distributed among the composers and lyricists.
The third music industry sector—live music—generated its revenues from sales of concert tickets. Although live music has a long and proud history, it came to play second fiddle to the recording industry during the twentieth century.
Record sales was undoubtedly the most important revenue stream and record labels generally considered concert tours as a way to promote a studio album, and were not really concerned whether the tour was profitable or not. Sometimes the record label even paid tour support, which would enable bands to go on tour and promote the album even though the actual tour was running with a loss.
This music industry structure, including the relationships between the three industries, was developed during the mid-twentieth century and was deeply cemented when the Internet emerged to challenge the entire system. The short-term impact of the Internet on the music industries primarily concerned the distribution of recorded music to consumers.
This means that while the recorded music industry was severely affected by the loss of distribution control and rampant online piracy, the other two music industry sectors were initially left more or less unaffected.
As a matter of fact, while the recorded music industry has suffered during the past 15 years, the other two industries have gained in strength and prominence. There are several reasons why this shift in balance has happened.
One of the primarily reasons is simply that as one revenue stream is diminishing, the music industry is required to reevaluate its other businesses and try to compensate for the lost revenues from recorded music by increasing revenues from music licensing and live music.
For instance, revenues from music licensing have more than doubled during the past 15 years due to new and more active licensing practices, but also due to the fact that the media industries have changed in a similar way as the music industry.
There are now considerably more television channels, radio channels, videogames, Internet websites, and other outlets than only two decades ago, and most of these outlets need music as their primary or secondary content. Music publishers have also in general been more nimble than the record labels to address the demand from new media outlets.
A clear example of how music publishers changed their business practices is how they strive to establish themselves as a one-stop shop for musical intellectual properties, where media outlets can clear all their music licenses with a single contract. That may sound like an obvious service, but in the traditional music industry it was not always the case.
Rather, there was one legal entity holding the rights to the composition and another legal entity controlling the rights of the recording of the musical work (the master). Music publishers in the age of digital distribution increasingly control both the master and the composition, which makes the licensing process more efficient.
The music licensing industry has during the past 15 years evolved into the most profitable music industry sector and is often also considered as the most innovative and agile sector of the three.
While music licensing is the most profitable music industry sector, live music has developed into the largest music sector. There is a fairly straightforward explanation why live music has experienced a surge during the past 15 years. Live music is simply easier to control than recorded music.
A musical band that is in demand can grow their revenues from live music by increasing the number of concerts and raising the ticket prices. Even though the financial crisis of 2007–08 put a dent in the growth of the live music industry, it has nevertheless surpassed the recorded music industry in size.
During most of the second half of the previous century, the largest music company was a record company, but after the Internet transformation of the music industry the world’s largest music company is Live Nation, a U.S.-based live music company spun off from Clear Channel in 2005.
This is a further marker of the changing power relationships in the music industry. It should be noted, though, that the boundaries between the three industries are not as clear as they were during the pre-Internet era.
Music companies, including Live Nation, serve as a general business partner to artists and composers and support their activities regardless of whether they concern live concerts, merchandise, licensing, or distribution and promotion of recorded music to consumers.
This means that it is no longer entirely easy to categorize a music company into one of the three industries, but, nevertheless, in the case of Live Nation its revenues are still mainly generated via live concerts, which still makes it relevant to refer to them as primarily a live music company.
This section has presented how the three main music industry sectors have been affected by the introduction of the Internet and how the size, strength, routines, and relationships between the industry sectors have been transformed.
The next section will turn its attention specifically to recorded music and examine how new business models for music distribution may be able to lead the recorded music industry on a path toward recovery.
The music industry went to great lengths at the beginning of the century to put a stop to online piracy; however, they were not equally ambitious and innovative in developing new models for legal online distribution.
Certainly, there were a few feeble attempts from the major record labels at the time, but the most important criterion in the development of these services seemed to be that they should not in any way threaten the existing revenue streams but should only add additional revenue to the companies.
The majors did succeed with one of their goals, which is that the new services should not compete with the existing physical sales. However, unfortunately the services could not compete with anything, especially not with online piracy.
The first company that was able to create a successful online service for legal sales and distribution of music was not a music industry player at all—it was Apple Computer (as it was called at the time). In 2003,
Apple was able to convince the major labels that music consumers would buy music legally if they were offered an extremely simple service that allowed them to buy and download music for less than a dollar per track. The service was called iTunes Music Store. In one sense,
iTunes was a radical change for the music industry. It was the first online retailer that was able to offer the music catalogs from all the major music companies, it used an entirely novel pricing model, and it allowed consumers to de-bundle the music album and only buy the tracks that they actually liked.
On the other hand, iTunes can also be considered as a very careful and incremental innovation, as the major labels’ positions and power structures remained largely unscathed.
The rights holders still controlled their properties and the structures that guided the royalties paid per every track that was sold was predictable and transparent. Apple were correct in their prediction of consumer behavior and the iTunes Music Store can not be considered as anything but an enormous success. In 2013,
iTunes Music Store is the world’s largest music retailer (offline and online) and it has sold more than 25 billion songs since its launch in 2003. The service has evolved substantially during its decade-long existence, and a number of competitors using more or less the same business model have entered the digital download music market.
Even though the competition has increased, iTunes remains on top with a market share of more than 50 percent of the global digital music market.
Figure 1 indicates how the global recorded music market has evolved since 1973, and shows that while the digital music market has been able to partially compensate for the decline of physical sales, the total recorded music market still has lost more than 50 percent of its sales since the peak in 1999.