Innovation in the Online Music Industry: Past, Present & Future

TM6006Student ID: U1338360

(Online Music Library, 2014)

The music industry’s entry into the digital realm may

be traced back to 1991, when the first compressed

audio file was perfected. (Knopper, 2009) It would

become commonly known as the MP3 file in 1995.

(Fraunhofer, 2016) Both the Erlangen Nuremberg

University and the Fraunhofer Institute for Integrated

Circuits worked on the research project which was

funded by the European Union. (Fraunhofer, 2016)

An MP3 reduces the size of the original file by 90%,

thus an MP3 requires much less storage space and

allows for fast transfer via the Internet. (Fraunhofer,

2016) Mainstream connectivity to the Internet was

very much on the horizon when the MP3 was

developed and a new era for the music industry was

set to begin. (Silver, 2013)

(Fraunhofer, 2016)The team responsible for developing the MP3 are pictured. (Fraunhofer, 2016)

The development of the MP3 proved to be a ‘disruptive

technology’ to the sale and distribution of music in physical

formats and shared common common traits with other

disruptive technologies in that it was: “cheaper, simpler,

smaller, and frequently, more convenient to use”

(Christensen, 1997: 19).

Meanwhile, from the mid 90s onward, dial-up access to the

Internet became increasingly popular. It seems music

executives were given ample opportunities to ‘tap in’ to the

rapidly developing online environment, but were either

reluctant to be involved with or in utter denial about the

eminence of the disruptive technologies. (Christensen,

1997 and Knopper, 2009).

(AZ Digital Transfers, 2014)

(Wikipedia, 2015)

(Early Internet Memories, 2015)

BEEP! BEEP!

BEEP!! DER

NERRRR NER BEEP!

BEEP!

In 1990, for every 100 people in the world, 2.5 owned personal computers. By 2001, there were nearly 9 computers for every 100 people in the world. (Chinn & Fairlie, 2006) At the beginning of the 90s close to 0% of the entire population were connected to the Internet; by 2001, however, 8.1% of the world’s population were capable of connecting to the Internet. (Chinn & Fairlie, 2006)

(International Telecommunications Union, 2001 cited by Chinn and Fairlie, 2006)

Throughout the 1990s, there are numerous reports of meetings

taking place between different online music entrepreneurs, who

were each keen to demonstrate their concepts for legitimate

consumption of music through the Internet; however, executives

within the music industry were apparently reluctant to disturb

what had become a lucrative and established business model by

venturing into the emerging digital market. After all, CDs were

still being ‘snapped’ up by the mass market at premium prices.

(Silver, 2013 and Knopper, 2009) By the end of the 1990s,

however, the MP3 format was reaching critical mass and was

well on its way to becoming the dominant format for music.

(Silver, 2013 and Knopper, 2009) (Wikipedia Commons, 2015)

For music enthusiasts with Internet connectivity, there was

a notable absence of legal access to online music service

and consequently, illegal peer-to-peer file sharing services

became increasingly popular. (Knopper, 2009)

Without doubt, Napster was the most notorious of the

illegal online music sharing services in the late 90s and early

2000s. (Knopper, 2009) Despite Napster’s blatant disregard

for copyright infringement laws, Shawn Fanning and co-

founder Shawn Parker attracted a number of major

investors and at the peak of Napster’s popularity, it had

attracted around 57 million users. (Knopper, 2009 and

Lamont, 2013)

(History-Computer, 2016)

(God is a Geek, 2015)

Instead of recognizing the potential revenue that could

likely be gleaned from licensing Napster in order to

profit from a legal version of its service, numerous

music corporations along with the Recording Industry

Association of America (RIAA) initiated litigation against

Napster. (Silver, 2013 and Knopper, 2009)

Notwithstanding numerous attempts to save the

company, Napster ceased to offer its service in 2001

and filed for bankruptcy in 2002. (Knopper, 2009)

(sdcitybeat.com, 2012)

(Cracked, 2011)

(via Newser, 2010)

(P2P Filesharing History, 2010)

With Napster no longer a concern, the ‘majors’ sought to conquer

the digital music environment with two completely separate

alternatives, Pressplay and MusicNet. (Silver, 2013) Each platform

offered users a limited number of legal downloads, some ‘CD burns’

and low quality streams in exchange for a monthly subscription.

(Tynan, 2006) Some artists and catalogues were available on one

service but not the other due to the services’ corporate rivalry.

(Tynan, 2006) The overall restrictive and confusing nature of both

platforms resulted in their complete failure to compete with the

unrestricted excesses that were available for free elsewhere, online.

(Tynan, 2006)

$15 p/month with limitations and restrictions

“Stealing music became more convenient, and the Napster audience was fragmented all over the internet” (Knopper, 2009: 143).

(bbcnews.co.uk, 2001 and Tynan, 2006)

$10 p/month with limitations and restrictions

While illegal music downloads and copyright

infringement ran rampant, Apple Computer’s Steve

Jobs was apparently acutely aware of the music

industry’s failing attempts at capturing the masses

and monetising a suitable digital music retailer.

(Knopper, 2009) Under Jobs’ direction, Apple

Computers developed an MP3 player that could

easily synchronise with a legal, online ‘one-stop-

shop’. (Knopper, 2009)

Apple’s iPod hardware effortlessly integrates to

iTunes software and securely links to debit or credit

card to facilitate impulse purchases. (Knopper, 2009)

(Steve Jobs, 2016)

(UK Business Insider, 2013)

The convenience of Apple’s iPod hardware and iTunes

software seemed to force the hands of the ‘majors’ to

license their catalogues and accept Apple’s retail price

point of 99 cents per track download. (Knopper, 2009)

Apple’s original, slick and aspirational marketing

campaign turned the iPod and its unconventional white

ear buds into an entire generations’ ‘must have’

functional fashion accessory. (Knopper, 2009)

When iTunes launched in 2003, its global success stood

as proof that consumers were willing to pay for music

online. (Knopper, 2009) Statistical data has shown that

iTunes increased demand for individual tracks, but in

turn, purchases of entire albums declined. (Elberse, 2009

cited by Tschmuck, 2012)

(D&AD- Silhouettes Research, 2014)

“…the industry hitched its wagon so completely to Apple and its iTunes online store as to make it the default digital sales outlet for music in the Western world for a very long period until around 2006 when the first streaming services started to offer another means of accessing music” (Silver, 2013:9).

(Zilio, 2014) (Anon, 2016) (freelargeimages, 2016)

Social media exploded into popular culture around 2005.

(Tschmuck, 2012) Through MySpace and YouTube, Artists were

able to directly engage with their audiences in ways that were

never possible before. (Tschmuck, 2012) Through YouTube,

viewers are access millions of recordings for free in exchange for

watching a short advertisment before the commencement of

their selected video; meanwhile, YouTube’s earns its revenue

through advertising. (Tun, 2015) (MTV, 2007)

(YouTube Logo, 2016)

(Msfitm

ag.com, 2016)

Digitalisation has also impacted upon the way in which some Artists gain

funding for projects. (Silver, 2013) In recent years, some Artists have been

able to secure investment for projects through non-traditional means.

Instead of making deals with record labels to finance their albums,

projects, etc., thanks to the Internet, Artists now have the option of

asking their fans to provide them with capital. (Freedman and Nutting,

2015) Usually based around a tiered reward system, crowdfunding

involves the collection of many small contributions in order to finance a

project or product. (Freedman and Nutting, 2015) Kickstarter reports that

54.1% of music pitches launched through its platform are reportedly

successful in reaching set targets. (Ronen, Sanderse and Rusman, 2012)

Of course, it is likely that in many of the cases where Artists have been

particularly successful with their campaigns, they had previously been

signed to a record label that had at one time significantly invested in the

Artist and their brand. (Silver, 2013)

(CrowdFund Beat, 2014)

As music distribution models continue to adapt in order to meet customer needs

that are based upon access to music instead of ownership of music, a series of

tiered premium and ‘freemium’ subscription based streaming platforms have

emerged in the last decade, including the leading tiered streaming subscription

service provider, Spotify. (Stutz, 2015)

Other services have since entered the streaming market including Amazon Prime

Music, Tidal and Apple Music. Apple’s launch of its streaming service in 2015 saw

the platform amass more than 10 million paying subscribers within a period of 6

months; the same milestone which took Spotify six years to achieve. (Garrahan,

2016) The instantaneous popularity could be attributed to Apple’s clever

marketing or a general heightened consumer awareness of streaming in general.

While music downloads are in a state of steady decline, streaming may be

categorised as a definite growth area for the music industry, with demand for

streaming increasing by 50% in 2014. (Nielsen 2014, cited by Financial Times,

2016)

(Amazon Prime Music Logo, 2016)

(Rotunda Media, 2015)

(Stutz, 2015)

(iPhone No Sound, 2015)

Spotify marked 2015 with the introduction of its personalised,

suggested listening playlist ‘Discover Weekly’ which is compiled using

recent listening activities of each user. Spotify’s recent innovation has

reportedly changed users’ listening habits and within the first 10

weeks of its introduction, users had streamed over 1bn recordings

from the personalised playlists. (Ogle, 2016 and Hu, 2015) Also in

2015, Spotify implemented its ‘Fresh Finds’ playlist, which has

allowed new artists to grow their Spotify listener base, exponentially

after their record has been featured. (Ogle, 2016) (Spotify, 2016)

(Ogle, 2016)(Ogle, 2016)

Spotify’s annual ‘Year in Music’ feature demonstrates a clear move away

from marketing music as a highly personal, individual experience and

instead, veers towards the notion that music is more so enjoyed as a

shared experience, not unlike the medium of terrestrial radio. Not only

does the ‘Year in Music’ tool track personal streaming habits, it also

records macro trends within music listening, consequently mapping

historical events. (Hu, 2015) Within hours of David Bowie’s death in early

2016, Spotify had published a 49 song playlist, accurately predicting that

millions would seek to listen to and celebrate the influential artist’s vast

body of work. Over the past 10 years, the instant access to entire

catalogues of popular artists’ recordings on streaming platforms such as

Spotify and Apple Music have apparently driven sales and chart-positions,

posthumously. (Willens, 2016)

(Hu, 2015)

(Spotify, 2016)

YouTube should be recognised as the behemoth of music

streaming, with over 1 billion users visiting the site each day,

many of which are allegedly visiting to watch music videos.

(Graham et al., 2015) YouTube has been accused of exploiting

safe harbor laws that were designed to protect Internet

service providers from suffering any liability from their

customers’ infringement of copyright laws. (Cooke, 2015)

YouTube’s parent company, Google, credits YouTube’s success

as a a key factor in the corporation’s ability to achieve

impressive growth, year-on year. With the launch of ad-free

app’s, YouTube Music and YouTube Red, Google seems

determined to continue in its focus to dominate and profit

from the digital music industry. (Graham et al., 2015)

(Google.co.uk, 2016)

(YouTube logo, 2016)

YouTube has been referred to as the ‘elephant in

the room’ during debates about fair royalty

payments to music rights holders. (Cooke, 2015) In

2016, the IFPI quantified the ad-funded streaming

service’s average revenue per user (ARPU) for 2015

at just $0.70 for each of its 900 million users,

generating a total of just $634 million in revenues

for the record industry per annum. This is a

miniscule (ARPU) when compared with the $29.41

(ARPU) from each of the 68 million paid subscribers

to streaming services which generated a total of $2

billion for record companies in 2015. (Graham et

al., 2015)

(YouTube Logo, 2016 and Adapt Learning Framework, 2016)

Major record labels may be looking towards closing

the ‘value gap’ which results from ad-funded

YouTube streaming, soon. All three of the major

labels’ licensing agreements with YouTube have

either expired or in Universal Music’s case, the two

corporations are currently operating on a ‘rolling

contractual basis’. The remaining two labels’

agreements are also due to expire shortly;

therefore, renegotiation of higher rates for ad-

funded streaming of the majors’ catalogues has

been predicted by some music industry insiders.

(Ingham, 2016)

(Cross, 2016)

The development of music recognition algorithms have resulted in

the launch of one of the most popular smart-phone applications

available, Shazam. After ‘listening’ to a 20 second audio clip,

Shazam consults its database and reverts back with the name of

the recording and the relevant recording artist. (Jovanovic, 2015)

Shazam has become one of the most popular smart phone app’s,

boasting over 100 million monthly users. (Apple App Store, 2016) It

seems that entrepreneurial opportunities may exist within the

context of music identification tools, with Apple apparently

investigating ways to integrate the software with their OSX

operating system. (Dignan, 2014)

(Apple App Store, 2016)

Music is an integral part of most of the major video games produced over the last

10 years and clever marketing campaigns from the largest game developers often

include compilation albums that are released to coincide with the game’s launch.

Activities such as these make a positive contribution to the music industry, with

one of the growth of 2014 being revenues from synchronisation deals, which rose

by 8.4% in 2014. (Ifpi.org, 2016) Digital technologies and the Internet have

created a vast number of new mediums that are likely boosting the demand for

synchronisation licensing.

(EASports, 2016)

(Rockstar Games, 2016)

(Invision Community, 2012)

Designed as a video streaming platform for gamers, Twitch is also used by recording artists who are able to deliver live streamed shows to their fans. (Tom's Guide, 2016) Twitch is owned by Amazon Inc., and the service allows viewers to donate or commit to tiered monthly subscription options in order to receive premium access to content and downloads from favorite artists, a medium that likely could not have been conceived of 20 years ago. (Tom's Guide, 2016) While Twitch allows artists to connect with fans live and online, Bands In Town helps fans to find all the necessary information they need in order to attend live performances by their favourite touring artists and offers yet another example of an innovative online tool for artists, fans, venues and promoters. (Herstand, 2015)

(Twitter, 2016)

(Bands In Town Logo, 2016)

Although there is no doubt digital technologies and the Internet have irrevocably changed the way in which the industry operates, the Internet and associated digital technologies have also produced new mediums which have provided opportunities for new businesses to emerge and operate within the new environment.The Internet allows artists and music businesses to engage with fans in ways never before thought possible, whether it be through video streaming platforms such as YouTube and Twitch, crowd-funding campaigns or social networking sites such as Facebook, Twitter and so on. All of these platforms have produced potential revenue earning opportunities which have only become possible as a result of the online economy that has developed over the past two decades. There have been some ‘casualties’ along the way, however the new music economy has produced some very clear winners, with companies such as Apple, Google and Spotify leading the way for effecting innovation and ongoing transformation within the context of the digital music industry and beyond.

(Support.apple.com, 2016)

(Google.co.uk, 2016)

(YouTube logo, 2016)

(Commons.wikimedia.org, 2013)

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