New music formats create dilemmas

Researchers at the Carlson School of Management have been studying current phenomena in the music industry. Their results suggest that we'll never hear or think about music in the same way again.

Fifteen years ago, consumers bought much of their music on audio cassettes, fearing that CDs would make them obsolete. Today, consumers buy most of their music on CD and worry that MP3s will soon replace the disks as the format of choice. But, in addition to the classic risk of a recording's format becoming out-of-date, today's music customers also wrestle with complicated legal issues and face a strange world of copyright law that has put record companies in the unsavory position of suing their own customers.

Between 1999 and 2003, annual sales of recorded music in the United States dropped by $2.4 billion - nearly 20 percent over only four years, according to new research by Carlson School Professors Rob Kauffman and Fred Riggins and doctoral candidate Jesse Bockstedt. Despite this, sales of online music have swelled. Apple iTunes' customer base blossomed from 861,000 in July 2003 to 4.9 million in March 2004. Meanwhile, Apple iPod sales have gone through the roof, firmly entrenching the iPod as the industry-leading MP3 player.

The growing popularity of online music downloads does not guarantee that everyone will be buying their music on the Internet in five years, Bockstedt says. In order to thrive, the record industry will have to adapt better to the complex needs of today's consumers. "Digital music is still in its early-adopter phase," he says. "iPod and iTunes are selling to a niche market." Only eight to 10 percent of the music sold in the U.S. comes from online downloads. According to Bockstedt, the vast majority of music being purchased in this country is being purchased on CD.

There are many possible reasons why people aren't jumping on the MP3 bandwagon faster. The most likely reason, suggests Bockstedt, is the relative complexity of obtaining the songs. "You need a computer and a basic dial-up Internet connection to download music, but to really get the most value out of digital music you need a computer, an MP3 player, and a high-speed connection," he says. Acquiring all these tools to create the technological infrastructure needed to access digital music on the Internet is too daunting a task for many users.

Their research scrutinizes all the steps in the music industry's value chain; that is, all the business and production steps needed to create music and deliver it to the consumer. Not surprisingly, their research shows a shakeup in the traditional music distribution channels. Manufacturing, distributing, and brick-and-mortar stores stand to lose from the digital music revolution. Meanwhile, those who are enforcing copyright protections, developing piracy protection tools, and managing the distribution and sales of the music online have much to gain.

Music artists also stand to gain much from the trend toward digital downloads. "With the advent of digital music, artists have been able to take a do-it-yourself approach to selling their music," says Bockstedt. "In some cases, it has allowed them to bypass the record producers altogether." Online downloads have allowed groups like the Boston-based band Freezepop to develop their own fan base, promote their tour, and broker download-only deals with online music stores. These kinds of artist experiences have led to changes in the way record labels do business. "It's going to be interesting to see how the labels are drafting their contracts with the artists in the future," says Bockstedt.

None of this means that record labels are going out of business anytime soon. But the research suggests that, to capitalize on the popularity of digital music formats, record companies are going to have to change. In two scenarios the researchers consider, record labels will invest heavily in distribution services alliances in order to maintain more control over how music reaches the consumer. And they'll support their bottom lines through heavier copyright protections and larger investments in promotions. In a sign that these types of changes are already afoot, Warner Music Group has announced that it will launch an Internet-only music label; instead of producing full-length CDs, the label will sign artists who will release a few singles at a time every few months. The music will be distributed only online.

In addition to traditional music artists, Riggins notes, "Users are beginning to make use of remixing tools to allow them to create and make available a variety of creative 'mash-up' compilations. The line between music artist and music consumer is blurring as the Internet allows many users to create and serve artistic content."

The researchers also predict changes for brick-and-mortar music retailers. To recapture the interest of consumers who have transitioned to online music downloads, and to advance consumers who prefer to purchase their music on CDs, brick-and-mortar retailers have begun to find ways to combine the best of both media. St. Paul-based Mix & Burn offers retailers a "music tablet" for in-store use. Customers browse samples of their favorite songs, select a playlist, and purchase a CD that they have compiled themselves. Mix & Burn technology was available in five cities in April 2005. And, according to a recent Wall Street Journal article, Starbucks is launching a coffee shop/music store fusion called Hear Music Coffeehouse. Customers will be able to shop for traditional CDs or burn their own using a 200,000-song music library owned by Starbucks.

Another change that might be seen in the brick-and-mortar stores is related to the market segmentation that can be caused by the digital divide, another topic Riggins has examined. "Since downloading music off the Internet is closely tied to the number of users that have relatively expensive high-speed connections, we should expect to see users with those connections getting their music off the Internet while those without broadband access continuing to buy their music in traditional physical stores," Riggins says. "This may cause the brick-and-mortar stores to configure their stores and promote music that caters to consumers with less disposable income, while legitimate online music stores focus on consumers with more income and corresponding music tastes.

These projections about the future of the music industry hinge on the developments on what has been a controversial frontier: illegal downloading of music. The recording industry has struggled vigorously to protect its copyrighted music, but illegal downloading is still widespread. This has been an important concern for Carlson School Professor Norman Bowie, who holds the Elmer L. Andersen Chair in Corporate Responsibility.

For Bowie, the popularity of illegal downloads splits along generational lines. Today's younger music listeners, who are also tapped into the technology that gives them access to the illegal music files, aren't as concerned about the ethical issues wrapped up in copyright law. "The fundamental moral principles of society-don't lie, cheat, or steal-are being eroded. That's what we need to be thinking about," says Bowie.

This isn't to suggest that illegal downloads are the sign that young people are morally bankrupt. "I was going to college in the 1960's," Bowie said. "We were at the forefront of the civil rights movement and the anti-war movement. But we came late to the environmental movement; whereas today's students are very concerned about the environment." Today's youth are not morally adrift but their ethical priorities should be scrutinized with a critical eye, says Bowie, whose article arguing for a greater moral sensitivity to the issues surrounding illegal downloading appeared in the April issue of Business and Society Review.

Recently, Bowie was confronted by a student who wanted to know why he was so concerned about illegal music downloads in the face of global moral problems like starvation and terrorism. "He was asking a fair question," says Bowie. "My answer is that what I'm really worried about isn't illegal downloads. It's the desensitization of conscience and guilt and thinking that it's okay to lie, cheat, and steal."

Many music listeners have tried justifying their illegal downloads by saying record labels are finally getting their due for many years of overcharging consumers. But, from Bowie's point of view, even if it's true that the record industry has been ripping people off, it doesn't mean that it's okay to violate copyright laws.

"There's a price we pay for going from the belief that the music industry is ripping us off to thinking it's okay to download music illegally," he says. "That quick move by the younger generation is ethically disturbing."

The record industry has not been very good at persuading people to download their music legally. "One of the things the record companies and music industry have to do is look at what's changed. Why is it the sale of albums didn't create the kind of problems that the sale of CDs does? Is it because we don't have as many singles available?" Bowie wonders. "I don't think the industry has thought through the issues well."

Bowie believes the solution lays partly in greater interactions between record labels and their customers. "We don't hear much about a dialogue, just about crackdowns," he says. "I'm not aware that the music industry has sat down with a lot of focus groups comprised of teenagers and asked the right questions. Where are you coming from? Where are we coming from? What are the possibilities? Where can we find a win-win situation?"

Source: http://www.carlsonschool.umn.edu/page4422.aspx