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Downloadable MusicIndustry

Ryan HerringJinghua Luo

Kevin MackShahram Rezaei

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Standards Downloadable music files are

generally available in three

formats: MP3 (MPEG-1 Audio Layer 3)

AAC (Advanced Audio Coding)

WMA (Windows Media Audio)

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MP3 Became ISO standard in 1993 Supported by a large variety of

software and hardware Popular in peer-to-peer file sharing,

but not in commercial downloads Thomson Consumer Electronics, which

controls MP3 patents, decided tocharge licensing fees for MP3 encodersand decoders in 1998 Potential lock-in led to proprietary

alternatives

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AAC Designed as an open-source successor to

MP3 and became an ISO standard since 1997 Less widely supported than MP3

Apple: iPod and iTunes Sony: PlayStation Cell phones from Nokia, Motorola and Sony

Ericsson

Apples market share: iPod: 74% iTunes: 85%

Dominant standard in commercial musicdownloads

Apple has developed proprietary extension

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WMA Proprietary format developed by

Microsoft to avoid the licensing

issues associated with MP3 patents Widely supported by a large

variety of portable players and

online music stores Direct competitor against Apples

AAC but is still the minority

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Prospects Standards war between Apples AAC and

Microsofts WMA

MP3 continues to dominate peer-to-peer filesharing until a winner from the standards war

emerges

XXReputation and brand names

XXStrength in complements

XManufacturing abilities

XFirst-mover advantage

XXAbility to innovate

XXIntellectual property rights

XControl over an installed base of customers

MicrosoftApple

Key Assets:

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Pricing Downloading a song costs $0.99,

almost everywhere legal on the

web. Cheaper for album

Wholesale music price is~65c/song. Originally set artificially low in a bid to

stimulate demand.

Apple sells 84% of all songs sold

online.

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Subscription Apple competitors trying

subscription base music

downloading

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Switching Cost In order to increase switching cost,

providers ask for annual

subscription. In addition, users require installing

music engines.The music engine: 5 MB, 11 MB and 32

MB for Yahoo!, Napster, and iTunes,respectively.

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Apple, One Year after iPOD Apples revenue was $2 billion at end of

2003.

The company's net income grew to $63million, compared with a net loss of $8million last year.

iPod and iTunes represent roughly 9percent of revenue, they are expected toeventually account for more than 50percent of Apple's revenue.

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Apple, Present(Source: CNN, October 12, 2005)

In the last fiscal quarter, about 6.5

million iPods were sold. Accounting for nearly a third of Apple's

revenue.

75 percent revenue gains on its iPod and

record profits The company's net income rose to $320

million, up from US$61 million in theyear-ago quarter.

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Why just iTunes & iPOD? Success of iTunes Music Store

(iTMS) is due primarily to: Great digital rights management

(DRM)

The 99 per track song price.

iPODs success because of: Great Physical Design

Software & Syncing

Music Store

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Download Price Going Up?

CNN, February 28, 2005: The majorrecord labels (Sony Music, MEI Group, Warner

Music, Universal Music, Bertelsmann) are in talksto raise the price they chargeonline retailers. Similar increase

rumored last spring

Apple disagrees!

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Network Effects and Lock-

In iPod's large market share means

recording industry forced to sell

through iTunes. Access to most songs means

consumers attracted to the iPod

over other players.

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Apple's Competitors Subscription based music

downloading RealNetworks (Rhapsody) Napster

Yahoo!

Generic MP3 players Creative

Samsung

Others...

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Complements Large, cheap supply of content

available through iTunes means

increased sales of iPods Large, cheap supply of generic

portable players means more

potential customers for othercontent providers (Napster, etc.)

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All-in-one Devices

Cell phone, PDA, music, video,email, internet all in one device

Industry consolidation Apple now providing video on iPod,

iTunes on cell phones

Microsoft, Palm create the Treo 650 Companies can't be one dimensional

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Intellectual Property

Copyright is the primary protection formusical works Protects original works of authorship fixed in

a tangible medium Copyright owner has the exclusive right to

reproduce the copyrighted work Copyright protection extends to two

elements in a sound recording: (1) the

contribution of the performer(s) whoseperformance is captured and (2) thecontribution of the person or personsresponsible for capturing and processing thesounds to make the final recording.

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Online Piracy

When a user downloads copyrightedmusic without permission, the user isviolating the exclusive right of the

recording company and the artist toreproduce the copyrighted work.

The Recording Industry Association ofAmerica (RIAA) estimates that each

year the music industry loses $4.2billion to piracy worldwide. Availability of low-cost downloadable

music and threat of lawsuits are primarymeans of combating online piracy.

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The No Electronic Theft(NET) Act of 1997

Sound recording infringements(including by digital means) can be

criminally prosecuted even where nomonetary profit or commercial gain isderived from the infringing activity.

Punishment in such instances includes

up to 3 years in prison and up to$250,000 fines.

The RIAA is planning to use the Act to

prosecute illegal music downloaders in

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Digital rights management(DRM)

DRM, often referred to as copy protection, limits whatfunctions a user may perform with digital media.

Apple, for example, reserves the right to change at anytime what you can do with the music you purchase at

the iTunes Music Store. For instance, in April 2004,Apple decided to modify the DRM so people could burnthe same playlist only 7 times, down from 10.

Microsoft, similarly, utilizes Microsoft's Windows MediaAudio (WMA) DRM.

The future: Sony has announced that it plans on

shipping CDs with DRM built-in. DRM has become and will continue to be an essential

element to control access of downloadable music.

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Conclusion

Apple

Microsoft

Online music stores

Music labels

Consumers Generic MP3 players