Assignment 1

SURVIVAL OF THE MUSIC INDUSTRY IN DIGITAL ERA

MBA/11/2742 P.S.S. Harshadewa Ariyasinghe

Course Instructor Term

: MBA 509: Business Law : Dr. Wickrema Weerasooria : October December 2011

Postgraduate Institute of Management

University of Sri Jayewardenepura

1.0 INTRODUCTION This report critically evaluates the global and local music industry which has become dangerously fragile in the recent times due to several reasons that are discussed here in detail. Following a brief description of the industrys background using Five Ws method, the report then discusses about the present major problems of the industry and drills down into each problem area to identify the root causes. Finally this report proposes recommendations and improvements as remedies for the music industry to come out from the problems and triumph as a highly successful industry. 2.0 BACKGROUND OF THE INDUSTRY A lot of people understand music but not the industry behind it. Reasons for that are obvious since its irrelevant for general public to have an understanding of music as an industry due to it being in the entertainment category and also due to it being very different industry compared with other non-entertaining industries. 2.1 What is the music industry? Historically, in the late 19th and early 20th centuries, the music industry was dominated by the publishers of sheet music such as Tin Pan Alley a group of New York City-based publishers and composers. Later on in the late 20th century with the increased use of computers, more interest was put on representing sheet music in a computer-readable format and introduction of MIDI (Musical Instrument Digital Interface). In fact the music industry is about selling compositions, recordings and performances of music. There are people with different skills sets involved in the industry. In brief, they are; Musicians who compose and perform the music Companies and professionals who create and sell recorded music (e.g., music publishers, producers, studios, engineers, record labels, retail, performance rights organizations and online music stores) 1

People who present live music performances (e.g., booking agents, promoters, music venues)

Professionals who assist musicians with their music careers (e.g., talent managers, business managers, entertainment lawyers)

Those who broadcast music (e.g., TV, radio, satellite and etc) Journalists Educators Musical instrument manufacturers

2.2 Why there is an industry? As explained in above section, there are dynamic differently skilled people who are involved when it comes to making a song or doing a live concert. The reason why an industry exists is because making music involves practically an enormous set of activities that should be dealt by skilled people at different activities. The music industry feeds the people who are involved in the industry given in the previous section. 2.3 Who are the big players? Currently three record companies (The big three) out of four that were once known as the Big Four dominate the market. The fourth company was EMI Group Ltd. which was acquired by Universal Music Group in 2011 November. 1. Universal Music Group (based in USA) - is an American music group, the largest of the "big three" record companies by its commanding market share and its multitude of global operations. Universal Music Group is a wholly owned subsidiary of French media conglomerate Vivendi. 2. Sony Music Entertainment (based in USA) - is the second-largest global recorded music company of the "big three" record companies and is controlled by Sony Corporation of America, the United States subsidiary of Japan's Sony Corporation. 3. Warner Music Group (based in USA) - is the third largest business group and family of record labels in the recording industry, making it one of the big three record companies. For three decades the conglomerate was known as WEA,

which stood for Warner Bros.-Elektra-Atlantic Records; three major record companies that signed and developed musical acts and, in turn, distributed product for subsidiaries and other record labels. However in Sri Lanka, there is no such large company to recognize as a music record label company except for the M-Entertainment (Pvt) Ltd that has a little presence in the local market compared to the huge number of much smaller companies and individual labels. 2.4 How big is the industry? In 2009 the total revenue of the music industry was approximately $8 billion from which around 40% is coming from digital sales. The digital sales are expected to go beyond the physical sales such as CDs. However, the total revenue of the industry is falling rapidly due to the decrease in CD sales and increase in digital distribution methods that result in much lower profits. 2.5 Where does industry lie today? Figure 1.0: USA recorded music industry turnover (1979-2009) Source: RIAA

The industry is virtually becoming a very dull place for record companies and to investors. If one looks at what has happened to the industrys revenues over the years (1973 - 2010), the below facts can be found. 3

The music industry is down 64% from its peak (1998 - 2000). 10 years ago the average American spent almost 3 times as much on recorded music products as they do today. 26 years ago they spent almost twice as much as they do today. Turns out that, somewhat unsurprisingly, the recording industry makes almost all their money from full-length albums (generally 12-16 songs). i.e. Selling singles (one single song at a time) does not give returns as much as selling full albums.

3.0 PROBLEM ANALYSIS GLOBALLY AND LOCALLY There are numerous problems in and around the music industries standstill today. Below each problem is described and then the problems are looked in Political, Economical, Social, Technological, Environmental and Legal (PESTEL) aspects.

3.1 Problem analysis Global Five years ago, a person who spent around $100 a month buying CDs and digital downloads to fill his iPod. Now, he spends less than $10 each month on tunes. The reason is that he gets almost all of his music from services like Imeem and Last.fm where he can listen to pretty much anything over the Web for free or at minimal cost. Figure 2.0: PESTEL Analysis (Global)

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5 4 3 2 1

Environmental
Political Social Legal Technological Economical

As shown in the above figure (Figure 2.0), the technological aspects are the root cause on which other aspects are piled upon. Due to the introduction of new technology the economics of the total industry has affected. The next most important aspects are Legal issues in fighting with Piracy. All these aspects lead to changes in Social aspects which results in Political and Environmental aspects. 3.1.1 Economical aspects The big three rules The Big Three record companies Universal Music Group, Sony Music Entertainment and Warner Music Group are dominating the market (oligopoly market) and they dictate the terms most of the times. Many artists are having no option but to sign with them if they want to sell their albums globally. Regardless of the artists country of origin, these companies have presence in almost all the developed countries and many bigger nations in the eastern world such as India. Affordability With the global financial recession, it has become increasingly hard for the music producers to sell music and earn profits since there are budget cuts for many areas including entertainment materials as individuals and as companies. On one hand, people are looking for cheaper options for entertainment and on the other hand producers and distributor costs and increasing. Royalty payments The artists share for their work (royalties) is not paid accurately and the companies who do pay, pay very little share.

Figure 3: iTunes revenue sharing model (Source: Rolling Stone)

Discovery of other revenue streams Over the years the technological advancements has driven discovery of new revenue models. From Vinyl to Cassettes, from Cassettes to CDs, from CDs to the Web and form Web to Mobile devices the revenue streams have being changing ever since.

3.1.2 Technological aspects The Internet/ streaming problem A decade ago, the major record labels began to worry about online piracy, in which people illegally swapped music over peer-to-peer networks like Napster and later LimeWire. Partly in response to the piracy threat and partly due to sliding CD sales, music companies began to experiment with licensing their records to new online services. The idea was that services like Imeem, Last.fm, and Pandora would let people listen to music on PCs, mobile devices, and home stereos, while collecting small fees and 6

advertising revenue that the services would share with labels and artists. Music fans would be discouraged from stealing tunes, and the major labels Sony Music, Universal Music, Warner Music Group might even get a sales boost as listeners discovered new kinds of music. But it hasn't worked out that way. Researchers and industry consultants say online music sites are being used by a growing number of listeners as a substitute for purchasing music, rather than serving as a catalyst for more purchases. The new world of music looks very different from the old. With the new Web, services' listeners don't put CDs into a stereo or download tunes to their iPod. Instead, their music sits on a server somewhere else, waiting to be played from a computer or any other Netconnected device. Consumers ability to convert CDs to MP3s Its also possible that consumers' ability to convert CD to digital versus having to re-buy vinyl albums on CD accounts for some of the disparity as well.

3.1.3 Legal aspects The business and creative sides of the music business are linked. No matter how creative is an artist; it is important to think and operate like a business in order to remain successful. Music-related careers are affected by legal matters on a regular basis. From artist contracts, recording and music publishing agreements to copyright law, name protection and business organization. The copyright law In the USA copyright laws for music production and performance are very comprehensive and up to date with the latest technological changes. For the musician, copyrights can protect both songs (which usually consist of a melody and include lyrics if the song has words) and recordings (CDs, mp3s, LPs, cassettes, DAT, and any other recording). The fixed requirement means that there is no protection for a song that is only in your head. A song may be "fixed" by writing it down, recording it (even on a handheld recorder), or saving it to a hard drive on a computer. Playing a 7

song live does not meet the fixed requirement. But, if you record the live performance, you have now "fixed" the song. Once an original work is fixed in a tangible medium, the creator has copyright protection automatically. Though registering the work with the Copyright Office may be desirable, it is not required to obtain copyright protection. In the developed countries laws exists not only for songs but for other related areas such as; Music Sampling - Sampling occurs when a portion of a prior recording is incorporated into a new recording. Music Publishing - Music publishing is simply the business of exploiting a song Publishing Company Public Performance Royalties Mechanical Royalties Synchronization License Fees Record labels and recording agreements Internal band agreements Artist representation in the industry o Personal Managers o Agents o Business Managers Piracy Even though there are strong copyright laws intact in the system, piracy has increased with the help of technology. Any person can download the mp3 of any new song or old from file sharing sites, forums and sophisticated web searches. There are even websites that provide free download of music albums in compressed formats that allows users to download whole albums free of charge illegally. Also with the ever increasing network bandwidth, it is now possible for a person to see even music videos online without having to download them like they play a file in their

computer. However, this has made possible for some people to download these videos illegally to their computers and sometimes sell them after writing them to DVDs.

3.1.4 Social aspects The social culture of the western countries is somewhat helpful to retain the industry from piracy and copyright infringements than it is in developing countries. People are reluctant to buy counterfeit products and always go for legitimate copy because they value honestly and devalue theft and fraud. However with the technological advancements people are more likely to change and go for digital goods such as iTunes and online streaming rather than not-so-environmentalfriendly and hard to use physical CDs. The pull from former is not enough to face the push from latter making record companies life hard day by day. 3.1.5 Environmental aspects The global GREEN movement has impacted well with most people in the western countries. They are now focusing on reducing the Carbon Footprint and trying to find more and more environmental friendlier, non-paper, non-plastic, low carbon emitting materials and processes. In this phenomenon, people are less likely to buy CDs and more likely to buy MP3s online since that does not pollute the environment. 3.1.6 Political aspects Politically most developed countries are stable and the governments provide good support to take down illegal activities related to music industry and make it hard for people who do illegal selling. In the developing countries in most of the parts in South Asia, Africa and South America, illegal sale of music is legally prohibited by the laws are not in control 100%. Political instability has made the businessmen who make living from illegal selling easy to do their

activities without legal intervention. It seems politicians have much bigger problems to deal with.

3.2 Problem analysis Local 10 years ago in Sri Lanka, it was literally effortless to sell more than 15,000 audio CDs when an artists album was released. Today, it is very hard to even sell 5,000 CDs with a lot of effort and expenditure for marketing. 5,000 CDs is merely negligible when compared to the population of Sri Lanka and also not profitable in terms of a record company. As shown in the below figure (Figure 4.0), in the Sri Lankan context, the political aspects are the root causes on which other aspects are piled upon. Figure 4.0: PESTEL Analysis (Local)

Social
Lack of knowledge Lack of different revenue streams Ignorance

Technological Economical Legal Political

No Interest/ No Support

Due to literally zero support from the political organization, and ignorance of the law related to copyrights in the music industry the total industry has affected. The next most important aspects are Economical, Technological and Social issues in fighting with Piracy.

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4.1 Political aspects Sri Lanka has been politically unstable for years due to several reasons including fighting a war with a guerilla group and facing hard economic downfalls due to different political and economic policies that change whenever a new party rules the country which happened to be happening quite frequently. However with the end of the war, there has been a better political stability in the country which should in turn help to revive the fallen music industry of Sri Lanka. No concert after 11 pm When the war was on, there were security issues in the south where the government ruled that no live musical concert should continue after 11pm. This law affected a whole set of skilled individuals who made a living from these concerts. However this law has been changed now that allows going beyond that point with the approval of the Police.

4.2 Economical aspects Affordability Most people in Sri Lanka are not earning well enough to afford higher prices of legitimate physical CDs that are in the stores priced well above Rs. 300 - 500. However it is not possible to sells CDs below Rs. 300, due to the cost of production and the number of CD sales. This has made CD market more of a niche market and people are having real passion for a personal collection of CDs of their favorite artists are buying the albums. Others would simply download the MP3s and share with friends using digital devices. 4.3 Social aspects Due to the lack of affordability on entertainment spending, it has become socially acceptable to illegally sell and distribute CDs and MP3s out at large. Since no one sees it

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as breaking of rules and regulations, the music industry is getting hit in multiple directions. 4.4 Technological aspects Sri Lankas internet penetration has been shooting higher ever since it was introduced and its linking the distant villages upgraded with latest information and resources before the government do it. With this boom in technology and internet penetration, it has become easier for illegal song downloads and related content that are subjected to copyright laws. Below figure (Figure 5) shows the internet users growth over a period of 2 decades. Figure 5.0: Internet user growth from 1990 - 2009 (Source: World Bank, World Development Indicators)

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4.5 Legal aspects The older copyright laws were amended to match with the international law of copyrights but there are still areas where the technicalities of every aspect of music industry are not being covered. However, legislations have been passed to help the personnel in the industry on payment of Royalties since it has not been done in the past. However a very little no. of companies in the market is obeying these legislations. Currently the intellectual property law of Sri Lanka includes most of the laws in the international intellectual property law. Also the know-how of copyright laws about music is not known to many people in this country and that has lead to confusions and arguments such as who owns a song?

4.0 RECOMMENDATIONS FOR FUTURE IMPROVEMENTS To overcome the global and local issues those were identified in the above sections, below recommendations can be suggested. 4.1 Operational (short term actions) By implementing below actions, the industry will gain benefits in short term and will be able to survive without a problem. However strategic decisions should be made to see an improvement from the current problem those are discussed in the next section. Improving awareness Awareness campaigns should be done both locally and globally showing the results piracy and copyright infringements. The people should know how many professionals are making living out of the industry and how illegal copying and purchasing make someones life hard and sometimes destroy. Cutting costs The costs associated with the music production should be decreased significantly to improve the quality aspect and lower the excess and/or unwanted costs.

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 Regulation The rules should be executed to 100% without exception. Nobody should be treated differently for political or any other reason. Today it is easy for anyone to put up and small store and sell illegal CDs/ DVDs for very low price and make high profits. This should be demoted by enforcing law to the fullest extent.

4.2 Strategic (long term actions) The below strategic decisions should be taken to see a growth in the industry that is affected by multiple challenges in the ever changing digital era. New technology More time, effort should be put on research on technology which will help to stop illegal downloads and copyright infringements. This will put more pressure on people who are illegally copying and distributing content that are protected by copyrights. Legislation More restricted legislations should be passed and enforced that are practically possible to achieve. The existing problems and holes in the law should be patched to catch people who evade the rule of law. Consolidation Both hands are always better than one hand. Currently the industry is divided in to different private entities. The record companies that are working individually can merge and then work as one unit to face the problems of the industry and they will then have better control and more power to improve together. However there can be implications of Monopoly in that case, but there are pros and cons of consolidations

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 New product development New products can be developed with new business models. The best example is the Nokia mobile phones that come with unlimited music with monthly subscription. People would not like to buy whole albums when they like only 1 song of it. Also people would not like to buy songs one by one as they would listen to thousands of songs which will cost thousands of dollars. Therefore monthly subscription for music is a good way of making money. Research has shown that such business models prevail more in the future.

5.0 CONCLUSION It is obvious that the music industry is on a big downfall and still there are no predictions for a positive change in the revenues. This has made almost everybody in the industry worried and most of the investors would rather invest in other industries than investing in an industry that is falling apart. When every other industry has gained and become successful with the technological advancements, music industry has been coming down ever since. As described in this report, it is due to the ease of copying and distributing music content over the web without restrictions. Though many companies have invented different systems such as DRM (Digital rights management) to fight piracy, it has not been very effective. However a newer act is about to be passed in the USA called SOPA (Stop Online Piracy Act) which is giving rights to the government to terminate the whole website/service even if a user distributes even a single content that is copy protected. However tech giants including Google do not support this claiming that this kind of Act would eventually help government control freedom of the internet. However the Big Three discussed in the report is for the act. Eventually what needs to be done is to safeguard the industry and its professionals because even though it is entertainment people are living from it and its their profession. If the industry is down, the profession and also its professionals will go down in misery.

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6.0 LIST OF REFERENCES SOPA: Who's in and Who's Out? Engadget. Retrieved 09 Jan. 2012. From engadget.com :http://www.engadget.com/2011/12/31/sopa-whos-in-and-whos-out. The REAL Death Of The Music Industry - Business Insider. Retrieved 09 Jan. 2012 From The Business Insider. http://articles.businessinsider.com/2011-0218/tech/30052663_1_riaa-music-industry-cd-era. The Music Industry: From Major to Minor The Economist. Retrieved 09 Jan. 2012. from economist.com: http://www.economist.com/node/10498664?story_id=10498664. The New Economics of the Music Industry Retrieved Web. 09 Jan. 2012. From Rolling Stone : http://www.rollingstone.com/music/news/the-new-economics-of-the-musicindustry-20111025. Stealing Ideas Is Making Sri Lankan Society Poorer. Retrieved on 09 Jan. 2012. Times Online : http://sundaytimes.lk/070325/FinancialTimes/ft317.html>.

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I am fully aware of the content under plagiarism stated in Chapter VII of the PIM Students Handbook and I hereby declare and affirm that I have strictly observed the law relating to intellectual property, copyright and plagiarism in this exercise.

06/01/2012 P. S. S. Harshadewa Ariyasinghe Date

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