Transcript Downloadable Music Industry

Downloadable Music Industry
Ryan Herring
Jinghua Luo
Kevin Mack
Shahram Rezaei
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Standards
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Downloadable music files are generally
available in three formats:
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MP3 (MPEG-1 Audio Layer 3)
AAC (Advanced Audio Coding)
WMA (Windows Media Audio)
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MP3
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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 to charge
licensing fees for MP3 encoders and
decoders in 1998
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Potential lock-in led to proprietary alternatives
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AAC
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Designed as an open-source successor to MP3 and
became an ISO standard since 1997
Less widely supported than MP3
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Apple’s market share:
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Apple: iPod and iTunes
Sony: PlayStation
Cell phones from Nokia, Motorola and Sony Ericsson
iPod: 74%
iTunes: 85%
Dominant standard in commercial music downloads
Apple has developed proprietary extension to the
AAC format, leading to interoperability problems
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WMA
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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 Apple’s AAC
but is still the minority
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Prospects
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Standards war between Apple’s AAC and Microsoft’s
WMA
Key Assets:
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Apple
Microsoft
Control over an installed base of customers
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Intellectual property rights
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Ability to innovate
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First-mover advantage
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Manufacturing abilities
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Strength in complements
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Reputation and brand names
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MP3 continues to dominate peer-to-peer file sharing
until a winner from the standards war emerges
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Pricing
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Downloading a song costs $0.99, almost
everywhere legal on the web.
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Wholesale music price is ~65c/song.
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Cheaper for album
Originally set artificially low in a bid to
stimulate demand.
Apple sells 84% of all songs sold online.
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Plus 75% of all music players
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Subscription
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Apple competitors trying subscription
base music downloading
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Switching Cost
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In order to increase switching cost,
providers ask for annual subscription.
In addition, users require installing music
engines.
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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
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Apple’s revenue was $2 billion at end of 2003.
The company's net income grew to $63
million, compared with a net loss of $8 million
last year.
iPod and iTunes represent roughly 9 percent of
revenue, they are expected to eventually
account for more than 50 percent of
Apple's revenue.
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Apple, Present
(Source: CNN, October 12, 2005)
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In the last fiscal quarter, about 6.5 million
iPods were sold.
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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 the year-ago
quarter.
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Why just iTunes & iPOD?
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Success of iTunes Music Store (iTMS) is
due primarily to:
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Great digital rights management (DRM)
The 99¢ per track song price.
iPOD’s success because of:
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Great Physical Design
Software & Syncing
Music Store
One source for all kind of supports
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Download Price Going Up?
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CNN, February 28, 2005:
labels
The major record
(Sony Music, MEI Group, Warner Music, Universal
are in talks to raise the
price they charge online retailers.
Music, Bertelsmann)
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Similar increase
rumored last spring
Apple disagrees!
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Network Effects and Lock-In
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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
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Subscription based music downloading
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RealNetworks (Rhapsody)
Napster
Yahoo!
Generic MP3 players
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Creative
Samsung
Others...
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Complements
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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 other content providers (Napster,
etc.)
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Microsoft, RealNetworks
Partnership
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Microsoft increases number of Windows
Media Player users
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RealNetworks obtains access to MSN
customers
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Microsoft can more easily control piracy
Can increase subscription orders
Good example of “Co-opetition”
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“All-in-one” Devices
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Cell phone, PDA, music, video, email,
internet all in one device
Industry consolidation
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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
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Copyright is the primary protection for
musical works
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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) whose performance is captured and
(2) the contribution of the person or persons
responsible for capturing and processing the
sounds to make the final recording.
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Online Piracy
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When a user downloads copyrighted music
without permission, the user is violating the
exclusive right of the recording company and
the artist to reproduce the copyrighted work.
The Recording Industry Association of
America (RIAA) estimates that each year the
music industry loses $4.2 billion to piracy
worldwide.
Availability of low-cost downloadable music
and threat of lawsuits are primary means of
combating online piracy.
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The No Electronic Theft (NET)
Act of 1997
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Sound recording infringements (including by
digital means) can be criminally prosecuted
even where no monetary profit or commercial
gain is derived 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 the
near future.
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Digital rights management
(DRM)
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DRM, often referred to as copy protection, limits what functions
a user may perform with digital media.
Apple, for example, reserves the right to change at any time
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 burn the same playlist only 7 times,
down from 10.
Microsoft, similarly, utilizes Microsoft's Windows Media Audio
(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
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Apple
Microsoft
Online music stores
Music labels
Consumers
Generic MP3 players
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