NAPSTER and MP3: REDEFINING THE MUSIC INDUSTRY

GROUP 1

BACKGROUND

Music IndustrySDMI (founded 1998): forum for music industry to

develop open framework for digital music.

Participants included IT companies, Consumer Electronic, telecommunication, Internet Companies, security providers, etc.

RIAA: main body for intellectual property rights in American record music industry. It’s members included Record Companies.

Technological developments CDs

Mp3

format

Mp3

Devices

New Audio compressio

n technologi

es

• SDMI strategy

NAPSTER

• Napster was created in 1999 by Shawn Fanning

• It was designed as a peer to peer file sharing site.

• Had approximately 60 million users by 2001.

• Napster is nothing but a “Giant Online Pirate Bazaar.” (Recording Industry Association of America (RIAA))

• Acquired by Roxio and eventually has become part of Rhapsody in Dec,2011.

Phase I Phase II

PEST ANALYSISMUSIC INDUSTRY

Music Industry

POLITICALCopyright infringement policy

Permitted copying of musical works for personal use

Gaps in policyFile sharing law “unclear”No proper law for online distribution of musicCourt was forced to take decision.

Technological challenge in implementation

ECONOMICHuge market for digital music products

Low cost due to competition

SOCIALMore technological awareness and

willingness to adopt

Rapid adoption of digital music specially by college goers who constituted a key demographic

Youth culture was free exchange of ideas over internet: “No fee”

TECHNOLOGICAL High Growth in

number of internet users.

New technological advancements New formats such as .mp3 Digital recording Emergence of new products to enrich online experience online distribution network

`

Artist

Record CompanyMass

Production

Distributors

Traditional Retailer

Online Retailer

(Amazon.com)

Online Source

(MP3.com)

Retailer

Distributor

Manufacturer

Consumer

SDMI

RIAA

DISTRIBUTION CHAIN

New EntrantsNot an easy entry for Record Companies:

High cost for signing, recording and promoting a potential star.

Easy entry for Internet Companies who can sell and distribute digital music achieving product differentiation

New business model to gain a competitive advantage as low switching cost to buyers.

Need initial capital for technical infrastructure.

New Entrants cont...Ease with digital format and easy

distribution, thus a cost advantage

No need of a retail presence.

No proper laws for entry into this segment.

Open possibility for new modes of operation

New SubstitutesSubstitute for CDs is the new MP3 Format:

Small compressed file with good quality, can be uploaded on internet and shared.

Conversion of music files also possible.Disruptive technology. May make Music

industry undergo a rapid change. Buyers can buy single songs. No need to

buy whole album. Thus low price and switching cost to buyers.

New Substitutes cont...Peer to peer sharing of files can severely

affect the copyright holders.All this due to a rapid penetration of internet

and its new products.Also, development of new formats like

ATRAC and new MP3 players

Buyer PowerBuyer Power increased as now they have multiple

sources to get music from.No need to buy CDs. Can get digital music files

from internet. Thus saves time, effort and money.Switching cost low. Buyer can easily switch to a

different source.Price sensitivity:

No Impact on quality. Buyer Profit No need to buy whole album.

If Phase 2 is implemented, buyer power will be limited. Also exemption clause will become narrow in scope.

Industrial RivalryNew rivalry high due to entry of new

business models

Market Concentration has increased.

Diversity of competitors in the present market.

Absence of Proper Laws results in Copyright lawsuits and thus increase in rivalry

NO existing laws for such companies. NO clarity over the legality of file-swapping

facilitators.

Earlier supplier power higher: RIAABut now, product differentiation has lowered

the supplier power.Artists can upload his album and sell it online,

bypassing the traditional hierarchy of distribution.

Reduced dependence on record companies and availability of supplier substitutes.

At present, the power will depend on the outcome of the case. Implementation of 2 phase strategy may give back the power to RIAA.

Supplier Power

`

Artist

Record CompanyMass

Production

Distributors

Traditional Retailer

Online Retailer

(Amazon.com)

Online Source

(MP3.com)

Retailer

Distributor

Manufacturer

Consumer

SDMI

RIAA

NEW DISTRIBUTION CHAIN

SWOT ANALYSIS: NapsterStrengths :Huge customer baseAdvantage on the legal front as it identified

itself as a facilitator.Cost involved was minimal.Supply of the content was easy.Weakness: could not capitalise on the idea

SWOT ANALYSIS CONTD. Opportunities:Huge untapped marketCan generate revenue in collaboration with

the recording companies.Can form alliances with social networking

websites.Threats:Vulnerable to legal attacksUploading of malicious content

FUTURE TRENDS OF MUSIC INDUSTRYThe market for CD’s has reached saturation

point and with acceptance of MP3 technology trends are changing.

People are becoming internet savvy due to ease of access and MP3 is now widely accepted.

Industry must reach a consensus on how to keep a check on piracy and simultaneously achieve profitability.

THANK YOU