Analysis of the Current Market Situation in the Global Recorded Music Industry - Research Paper Example

Running Head: AN ANALYSIS OF THE RECORDED MUSIC INDUSTRY An Analysis of the Recorded Music Industry in APA Style by University 1.0. Introduction The strategic direction that a business organisation takes is usually in response to the various significant factors in its immediate environment. In crafting its strategic moves, companies often conduct environmental scanning which enables them to identify the important trends and developments that can present viable opportunities and threats. Strategic management tools are widely utilised in order in conducting extensive industry analyses. This report will analyse the global recorded music industry. Specifically, this paper aims to identify and evaluate the different factors in the sector's environment in order to fully identify the present threats and opportunities. In so doing, it will make use of two strategic widely accepted strategic management techniques, namely PESTLE analyses and Porter's Five Forces Model. This report will end with the presentation of the identified industry's identified opportunities and threats. 2.0. PESTLE Analysis PESTLE Analysis stands for Political, Economic, Social, Technological, Legal, and Environmental which represents the important aspects affecting the operation and strategic direction of a business organisation and the whole industry. This strategic management tool gains wide acceptance among managers and industry analyst because it offers an extensive identification of the environmental factors that affects an industry. 2.1. Political The past years have witnessed the rapid integration of economies into a global village due to the various political agreements. It should be noted that both geographical and political boundaries are disappearing with the creation of trade agreements, free trade zones, regional blocs, and economic zones. This rapid globalisation facilitates the influx of goods and services within geographic borders at lower tariffs, duties, and other trade boundaries. This is coupled with the free flow of capital especially in developing countries where foreign direct investments are warmly welcomed with financial and non-financial incentives. These policies which are instituted to promote globalisation have crucial implications for the global music industry. These enabled large music labels to penetrate profitable markets in other countries and allow the free flow of music formats such as CDs and MP3s from one location to another (Dolfsman 2000). 2.2. Economic One of the most significant developments in the global music industry is the rise of the former developing economies like China, India, and other Latin American countries. It should be noted that the rapid growth in these nations are strongly indicated by the rise in gross domestic product and per capita income. Currently, China is the fastest growing economy in the world, posting a GDP growth rate of 10.7% during 2006 (GDP Growth 2007). With this rapid growth, the Chinese economy is eyed by various business organisations as a profitable business venue. Economic growth also signals higher disposable income for customers which can further trigger and enhance spending in the consumer sector. 2.3. Social The internet technology has been warmly embraced by customers around the world. According to the latest data from InternetWorldStats.com, worldwide internet penetration is at 16% as of January 11, 2007. Asia accounts for the largest portion of this population with the large share increase from China. Usage growth has been escalating, posting a growth rate of 202.9% during the eight year period 2000-2007 (Internet Usage Statistics 2007). Similarly, the number of global mobile phone users is also in an uptrend. It is reported that the number of mobile phone subscribers have increased by 25% during 2004, 2005, and 2005. However, experts forecast that this trend in increments will slowly decelerate in 2007. According to iSuppli, mobile phone users will be growing at slower rates of 12.8% and 9.6% in 2007 and 2008, respectively (Moskalyuk 2007). 2.4. Technological The main driver of change in the music industry is technological advancement. It can be noted that the past decade has ushered various technological innovations in the music recorded industry, notably MP3, P2P, streaming technologies and the internet which in turn gave way for new and innovative trends. Digital Technology and Music The digitisation of music began with the launching of the CD format in the market (Zhu and MacQuarrie 2003). Further technological innovations brought more advanced products in the market one of which is MP3. The advent of MP3 has significantly affected the method of obtaining music. Through the use of MP3 technology, digital music takes up only one-twelfth of the original space for a track, making it very viable for internet download. Since the size of the file is lessened, downloading is more efficient as time required is also reduced. It is expected that MP3 format will become the most dominant music format in the years to come. Peer to Peer Architecture Peer-to-Peer (P2P) is a network that "relies on the computing power and bandwidth of the participants in the network rather than concentrating it in a relatively few servers (P2P 2007)." This technology is widely used for sharing content files which contains audio, video, data or anything in digital format. It is also used to transmit real time data such as telephony traffic. This type of network architecture has triggered the introduction of music file sharing which is becoming very popular and prevalent. Music File Sharing Perhaps the most noteworthy revolution in the music technology is the conception of online music services which allows music file sharing among customers through the use of peer to peer network architecture. This technology allowed music lovers to easily swap MP3 music files with each other for free which eventually lead to industry players' accusations of massive copyright violations. The clamor of record labels lead to the shutdown of the whole Napster network in 2001. However, Napster has begun its operation using a new business which allocates subscription fee for its service users (Napster 2007). Streaming Technologies The rapid advancement of technology has also facilitated the creation of streaming technologies which enables the user to view or hear digitized content in the same time that it is being downloaded from an Extranet or Internet. This technology allows information to be readily accessed in real time as the file is being transferred from another location. This technology saves tremendous amounts of both time and disk space adding to total efficiency of a consumer (Sosinsky 2000). Streaming technology has allowed consumers to download music from the internet without being constrained by the track's size. This technology is much more advanced than MP3 as it does not merely economize on disk space but eradicated the disk space requirement altogether. 2.5. Legal Record labels are currently pushing lawsuits to the sectors involved in commercial piracy and illegal file sharing (Gaither 2003). An example of these is the lawsuit filed against Napster in 1999 to prohibit the sharing of copyrighted material online which resulted to the shut down of the network and its eventual operation as a commercial online music provider. They are currently intensifying their thrusts in the protection of the copyright of music materials. File sharing which allows consumers to download music for free is considered as a violation of the copyright law, which has protected the record labels from unauthorised copying, usage, and distribution of albums. File sharing is considered a form of piracy and theft where the rightful owner of the track is not paid for consumption. To stop the steady trend of illegal usage of recordings, the Recording Industry Association of America (RIAA) together with numerous intellectual property and commerce organisations such as the World Intellectual Property Organization (WIPO), United States Council for International Business (USCIB) and the International Chamber of Commerce (ICC) have become active in promoting the establishment of regulatory structure which will further boost the copyright protection of the holders. This led to the formulation of various legislations like the Digital Millennium Copyright Act (Sosinsky 2000). 2.6. Environmental Currently, the global recorded music industry is not tackling any environmental issue. 3.0. Porter's Five Forces Model 3.1. Barriers to Entry/Exit: LOW Traditionally, the recorded music industry has very high barriers to entry and exit. Potential entrants are barred from the sector through the high level of start-up costs. It should be noted that only established major record labels has the financial muscle to support the different value chain activities like acquisition of content, provision of director and engineer, distribution of the albums, and marketing activities. However, the advancement of technology has facilitated the production, distribution, and marketing of recorded music by the artists themselves. Software offered by different companies can now be utilised in order to record songs in any format. The products can now be readily marketed and distributed through the establishment of virtual stores (Sosinsky 2000). 3.2. Intensity of Rivalry: MODERATE TO HIGH The internet technology has no doubt intensified the competition among industry players, specifically for those involved in the marketing and distribution channels. As consumers can now readily access information about the music products sold online, they can easily compare prices charged by different retailers and take advantage of price differences. Due to this, retailers are forced to bring down their prices or add other features which will attract the consumers. Value adding has been a trend to compensate the consumers for higher prices. Consumers, in turn gained the power to choose among different alternatives which will maximise their utility by choosing the least priced products offered by distributors. 3.3. Threats of Substitutes: HIGH Within the global recorded music industry alone, there is competition within different music labels. Since the music of an artist can be considered as a homogenous good in the sense that it is the same wherever it is sourced, the music industry competes with pirated albums and music files shared. This is aggravated by the continued prevalence of these illegal activities. Customers do not usually mind where the music products came from because it does not depreciate the enjoyment derived from it. 3.4. Buyer Power: HIGH The intense competition in the music industry together with the availability and accessibility of the substitutes, gives the buyer a high purchasing leverage. This is coupled with the availability of information about the different music products online. Through file sharing, buyers can now stream music without paying for them in websites like youtube.com. 3.5. Supplier Power: LOW With the intensity of competition, suppliers of the global recorded music industry have low leverage compared to the producers and consumers. It should be noted that globalisation has facilitated the suppliers entry to geographic boundaries and offer their products and services at relatively lower costs. In the case of record labels, suppliers have high dependence on the producers. 4.0. Opportunities and Threats Based on the analysis of the external environment of the sector, the following are the identified threats and opportunities for the global record music industry: 4.1. Opportunities Mobile Music With the rapid increase in the mobile usage and music downloads from cell phones, the music industry can take advantage of this sector by focusing on the creation of music formats which can be readily transferred to mobile phones. Even though the growth of mobile phone usage will decelerate in the future, it is irrefutable that the customers are getting fond of this type of music especially now that they can now surf the web through their phones. E-Commerce The high global internet penetration presents opportunities to established companies and potential entrants to distribute and market their products online. E-commerce which facilitates the virtual distribution of music allows companies to cut cost in storing physical inventory, producing physical format, and distribution outlets. Through the use of internet technology, companies can now easily set up their own website and offer music products and services directly to customers without intermediaries. 4.2. Threats Piracy The rapid decline in the sales of music in physical format is largely attributed to the widespread global piracy. Even though experts cannot fully quantify the amount of revenue lost because of piracy, it is irrefutable that this illegal activity continues to threaten the global recorded music sector. It should be noted that pirated music products are cheaply and abundantly manufactured in China and other countries. If this continues, music companies will be suffering from poor margins and potential losses. Illegal File Sharing Illegal file sharing is also an important issue currently faced by the music sector. As music can now be directly streamed and downloaded from the internet, customers find it irrational to buy them from distributors who charge fees. Illegal file sharing like piracy, shaves the margin enjoyed by industry players. References Dolfsman, W. (2000) "How Will the Music Industry Weather the Globalization Storm." Retrieved 02 March 2007, from http://www.firstmonday.org/ issues/issue5_5/dolfsma/index.html Gaither, C. (2003) "Group sues 261 over Music Sharing." Globe Newspaper Company. Retrieved 02 March 2007, from http://www.boston.com/news/globe/ "Internet Usage Statistics." (2007). Retrieved 02 March 2007, from http://www.internetworldstats.com/stats.htm "Napster." (2007) Wikipedia--The Free Encyclopedia. Retrieved 02 March 2007, from http://en.wikipedia.org/wiki/Napster Moskalyuk, A. (2007). ZDnet.com. Retrieved 02 March 2007, from http://blogs.zdnet.com/ITFacts/index.phpcat=4 "Music's Brighter Future." (2004) The Economist. Retrieved 02 March 2007, from http://www.economist.com/business/displayStory.cfmstory_id=3329169 "Peer-to-Peer." (2007) Wikipedia--The Free Encyclopia. Retrieved 02 March 2007, from http://en.wikipedia.org/wiki/P2p Sosinsky, A. (2000) "Are Streaming Technologies a Threat of the Music Industry." New York University. Retrieved 02 March 2007, from http://pages.stern.nyu.edu /sjournal/articles_00/streaming_technologies.pdf> Zhu, K. & MacQuarrie, B. (2003) "The Economics of Digital Bundling: The Impacts of Digitization and Bundling on the Music Industry." Retrieved 02 March 2007, from http://web.gsm.uci.edu/kzhu/PDFfiles/Papers_Abstract/ CACM_DigitalBundling_p264zhu_published.pdf Read More