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In the music industry prior to the introduction of internet marketing there were different roles being played by different actors of the market. The usual way a product is prepared for market is to contract the artists. The artists who were the content providers record materials which are either their own or provided to them by other writers. This is clearly depicted in the figure below. Traditional Value Chain in the Music Industry Source: John B. Meisel and Timothy S. Sullivan
The recordings will be done on the basis of the contracts entered into with the recording companies. Hence the power and control over the supply of the product remained with the record company. The recording company thus would be regarded as the holder of the major item of value in the supply chain being the exclusive rights over the recorded artists’ content. (Hardaker and Graham, 2001) Most of the part of the distribution is in the hands of the record companies and they also retain the rights to select the suppliers.
The distribution and supplier selection is based on the record companies’ perception about the quality of the recording and the music, past reputation of the suppliers and the contract price for the recording. In return for the content in the form of recording, the artist is compensated by the provision of promotions for the recording and its merchandising in connection with the sales there of and the distribution of the content as a saleable commodity – CD for example. It was usual in the traditional music industry that the major record companies have their own distribution channels and businesses.
Hence it would become necessary for a retailer to source his music products from different sources. Sometimes the retailer may have to place orders with major record companies and up to 20 other firms from the independent sector. The new releases of music albums or other sales of the record companies are usually handled by the wholesalers. If the retailer would like to follow the wholesaler route then he might have to order through only one wholesaler. The main wholesalers also offer another service called ‘rack jobbing’ which is a different method of supply being adopted by them.
The function of a rack jobber includes the supply of complete package that contains records and other promotional and display materials. It is also the duty of the wholesaler to keep a regular stock usually on a sale or exchange basis. Just as the advancement in the telecommunication had its effect on all the other sectors from airline reservations to banking and related financial services the music recording industry has also been severely impacted both positively and negatively observes Eric de Fontenay. In fact the impact of internet on the music industry is much more profound than on any other industries.
Despite the fact that the entertainment related products and services have taken their own time to develop and take advantage of the improvements in digital technology over the decades, during the intervening period the overall structure of the industry has remained dormant. The reasons for the industry to remain without major changes can be traced to the following reasons: 1. The cost of creation of content has always remained higher and this prohibited any new entrants in to the industry. 2. The structure of content ownership and rights of licensing system remained unaltered thereby keeping the structure of the industry in tact.
3. There has been a continuous necessity for the presence of a distribution network almost everywhere in the world irrespective of the geographical barriers. This has restricted the existing firms to make any changes in the structure. There was no possibility of new firms entering the market in view of the high capital intensive nature. 4. Similarly there had always been a constant scarcity for the distribution networks which also prevented any new forms of distribution or change in the structure of the distribution networks. (Eric de Fontenay) The internet has affected the music industry in so many ways.
It has made the industry incur additional costs in completely restructuring itself. Further the internet has reduced the entry barriers. This was possible by a considerable increase in the number of downstream outlets having varied nature. At the same time the internet has provided the actors in the upstream end to enjoy greater control over the aspects of content ownership, production and distribution. This has created a distinct fear in the record labels that they cannot eliminate the possibility of getting bypassed by both the markets in the downstream and upstream.
This impact has created the following reaction on the part of the traditional industry actors. They tried to impose the existing rules and procedures to the new medium so that they could exercise the same leverage and control over the market. The process by which they attempted to do it involves a twin aspects strategic approach. At one end they used legal channels to restrict the availability and use of the new technology in the Industry. On the other end they adopted new technologies to tackle the potential legal threats that would affect the control derived by them from the traditional systems.
This strategy backfired and left them high and dry in the market while new information technology players like AOL, Microsoft, E Music and MP3 took advantage of the stalemate. They reacted aggressively by building their infrastructure and systems for the online marketing and distribution of music. They also involved themselves in the retailing of music over internet. The distribution of revenues in the music industry involves the portion of the performer. As per the contract terms the performer is to be paid a portion of the revenue each time there is a sale of the record.
Before the money is paid to the performer the revenue is to be apportioned towards the expenses incurred by the company for marketing and distribution. This gives an opportunity for the artists to earn considerable amounts from the sale of products. For gaining maximum revenue the artists should control the publishing rights to their songs or they have the capacity to negotiate contracts with terms that are favourable to the artists. In the case of revenue distribution Internet has its impact on the industry in the following respects.
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