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Popular Music Where audiences meet musicians other pages in this Pop Music web industry portrait | competitors | indies suppliers | buyers | substitutes and new entrants royalties | music software | WNY music | Kazaa | The Bigger Picture links Lessig's Means of Control Economics / Markets || Technological / Architecture Political / Laws || Social Culture / Norms maybe history, PEST and pressures? this page Porter's Five Forces | How the Internet Changes the Five Forces   learn more

Overview

Change is not fun, but clinging to 19 is worse
by Leonard Pitts
Miami Herald, January 26, 2004

Music is a way of framing the world, a brand of truth. The connection is deeper than the fact that a song has a good beat and you can dance to it. You get this sense that you have found something here that expresses you. And you want to stay in that moment of discovery forever.

The popular music industry capitalizes on an enduring, resilient, and adaptable human activity -- music, making it and listening to it. This industry is undergoing deep change that is putting the relationship between musicians and their listeners at the center and driving out fear with sharing.

The Internet. It is the enabling technology putting pressures on almost every business model, especially information services. Music, movies, books, and magazines will thrive in the Information Age. I also expect them to work differently than they do today.

To understand how the popular culture industries will adapt, we can look at an important process: how to make money in a world where music is freely shared. Compressed digital files are now shared over broadband peer-to-peer networks. The artificial scarcity carefully nurtured by corporations in the name of profit is an artifact of the past. What's next?

The pressures that the Internet, the driving force, puts on the current business models mostly affect the production and distribution of the music.

The pressures that the incumbents are returning, the restraining forces, are strong. This early in the process, we can call it a backlash to peer-to-peer sharing. It's "stealing", and the courts sometimes agree. If no one company can compete with the the concentrated powers in the industry, maybe a volunteer army can.

Amidst the struggle is the Internet. How important is it that the Internet be re-engineered to take sides in this struggle? How important is the concept of Net neutrality?

Parts of the Industry

Here is Michael Porter's commonly used model of the parts of an industry.

We can use this model like a lens to move it over an economy and focus on any industry. Then we can shift it slightly, that is, move the competitive rivalry in the center to hover over the suppliers, which makes theirs the new competitive rivalry and makes buyers out of the previous competitors.

Even though it was not Porter's intention, his general model will in this way let us generate three versions. The versions will differ depending on what we put in the center, which group we hover the center of the model over. As you can see on the table below, we can put the musicians or the music labels in the center easily because Porter's model was designed for economic systems. The third version has the audience at its center, that is, the people who listen to music. Strictly speaking, this third column is not an economic system in the sense of money being a currency for the exchange of goods and services. However, adding the audience column creates some interesting parallels.

Andy Grove, then President and CEO of Intel Corporation, in 1996 proposed a sixth force to add to Porter's five: The possibility that what your business is doing can be done in a different way. It is sort of a super-substitute, a revolutionary business model.

Using each stakeholder as a point of view, you can identify and assess the external drivers of change, roughly grouped into politics, economics, society, and technology, the PEST of every smart organization's ongoing environmental scan. They correspond to the timeless constraints of laws, markets, norms, and architecture. Added together, all the stakeholders' views will give you a rich three-dimensional portrait of the environment.

How the Internet changes the Five Forces model

Porter tells us that in an industry with a favorable structure, companies gain competitive advantage through operational efficiency and unique positioning. But what happens when the structure isn't favorable? More to the point, is the early 21st century a time when the pop music industry can continue benefiting from the favorable structure of the last half of the 20th century?

In Porter's terms, how much value is still being created by the pop music industry?

The economics of bits (aka the economics of information goods) are not the same as the economics of atoms. Perfect lossless duplication is trivial. Worldwide distribution is instantaneous. The interconnected peer-to-peer network provides its own exponential effect because it blurs the distinction between consumer and distributor.

Updating his five forces in Spring 2001 in Harvard Business Review after the Internet "bubble" burst, Porter told the dinosaurs what they want to hear:

The experiences companies have had with the Internet thus far must be largely discounted and … many of the lessons learned must be forgotten. ...

When seen with fresh eyes, it becomes clear that the Internet is not necessarily a blessing. It tends to alter industry structures in ways that dampen overall profitability, and it has a leveling effect on business practices, reducing the ability of any company to establish an operational advantage that can be sustained.

It would seem that the pop music industry, based on information (music) as bits, has a structure that has been altered by the Internet. Porter is no fool, however. He goes on to say:

The greatest threat to an established company lies in either failing to deploy the Internet or failing to deploy it strategically.

In other words, if the idea is to protect existing value, the Internet is not a blessing. But what about creating new value? Not just grabbing market share from the Big Five but using the Internet to create value that didn't exist before? In Porter's words:

Use Internet technology to make traditional activities better … and implement new combinations of virtual and physical activities that were not previously possible.

The Labels in the center

The more detailed model on the left expands the areas of New Entrants and Industry competitors

Who are they? Industry portrait Industry competitors: oligopoly of five companies

What do they do? Vertically integrated, they acquire, produce, manufacture/reproduce, license, distribute, and market popular music.

What are the barriers to entry? For independent start-ups, the barriers are very low except for copyright laws.

How do the companies compete?

Cost leadership. They don't compete on price; they collude. Oligopoly and cartel are words often used to describe them in the economics literature.

Kick Music Execs While They're Down
Betsy Schiffman
Forbes, October 1, 2002

Theoretically, a price-fixing scheme is a surefire way to maintain revenue -- even if it is an efficient way to land in jail. But for such a blazingly simple plan, those clever music executives proved that if anyone can screw it up, they can.

After a two-year battle waged against the major record companies and music retailers -- Bertelsmann, EMI , AOL Time Warner's Warner-Elektra-Atlantic, Sony Music Entertainment, Vivendi Universal's Universal Music, Trans World Entertainment, Tower Records and Musicland Stores -- New York state and Florida attorneys general announced a $143.1 million settlement.

The companies did not admit guilt in the alleged price-fixing scheme, but they will pay $67.4 million in cash to consumers who got ripped off buying overpriced CDs between 1995 and 2000. They will also distribute $75.5 million worth of CDs to nonprofit organizations and schools. (The teachers undoubtedly will be grateful for free copies of Eminem's latest album.)

differentiation - In the sense that it's a standard plastic disk, a CD is a CD. However, one musician is highly differentiated from another; brand loyalty is to the musician, not the label. The freely available digital copy is a perfect substitute for the $20 CD.

focus - The major music labels think they're in the CD distribution business; instead, they're in the sound business and the life experiences business.

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