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Read Case Study 1 and respond to question 3.Can you map the different kinds

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response should be at least one page long and conform to APA Version 6

Exploring Innovation in Action:
The Changing Nature of the Music Industry

April 2006. Apart from being a traditional day for playing practical jokes,
this was the day on which another landmark in the rapidly changing world of
music was reached. ‘Crazy’ – a track by Gnarls Barkley – made pop history as
the UK’s first song to top the charts based on download sales alone. Commenting
on the fact that the song had been downloaded more than 31,000 times but was
only released for sale in the shops on 3rd April, Gennaro Castaldo, spokesman
for retailer HMV, said: ‘This not only represents a watershed in how the charts
are compiled, but shows that legal downloads have come of age … if physical
copies fly off the shelves at the same rate it could vie for a place as the
year’s biggest seller’.

One of the less visible but highly challenging aspects of the
Internet is the impact it has had – and is having – on the entertainment
business. This is particularly the case with music. At one level its impacts
could be assumed to be confined to providing new ‘e-tailing’ channels through
which you can obtain the latest CD of your preference – for example, or
CD-Now or 100 other websites. These innovations increase the choice and
tailoring of the music purchasing service and demonstrate some of the
‘richness/reach’ economic shifts of the new Internet game.

beneath this updating of essentially the same transaction lies a more
fundamental shift – in the ways in which music is created and distributed and
in the business model on which the whole music industry is currently
predicated. In essence the old model involved a complex network in which
songwriters and artists depended on A&R (artists and repertoire) to select
a few acts, production staff who would record in complex and expensive studios,
other production staff who would oversee the manufacture of physical discs,
tapes and CDs and marketing and distribution staff who would ensure the product
was publicised and disseminated to an increasingly global market.

Several key changes have undermined this structure and brought
with it significant disruption to the industry. Old competencies may no longer
be relevant whilst acquiring new ones becomes a matter of urgency. Even
well-established names like Sony find it difficult to stay ahead whilst new
entrants are able to exploit the economics of the Internet. At the heart of the
change is the potential for creating, 4647storing and
distributing music in digital format – a problem which many researchers have
worked on for some time. One solution, developed by one of the Fraunhofer
Institutes in Germany, is a standard based on the Motion Picture Experts Group
(MPEG) level 3 protocol – MP3. MP3 offers a powerful algorithm for managing one
of the big problems in transmitting music files – that of compression. Normal
audio files cover a wide range of frequencies and are thus very large and not
suitable for fast transfer across the Internet – especially with a population
who may only be using relatively slow modems. With MP3 effective compression is
achieved by cutting out those frequencies which the human ear cannot detect –
with the result that the files to be transferred are much smaller.

a result MP3 files can be moved across the Internet quickly and shared widely.
Various programs exist for transferring normal audio files and inputs – such as
CDs – into MP3 and back again.

does this mean for the music business? In the first instance aspiring musicians
no longer need to depend on being picked up by A&R staff from major
companies who can bear the costs of recording and production of a physical CD.
Instead they can use home recording software and either produce a CD themselves
or else go straight to MP3 – and then distribute the product globally via
newsgroups, chatrooms, etc. In the process they effectively create a parallel
and much more direct music industry which leaves existing players and artists
on the sidelines.

changes are not necessarily threatening. For many people the lowering of entry
barriers has opened up the possibility of participating in the music business –
for example, by making and sharing music without the complexities and costs of
a formal recording contract and the resources of a major record company. There is
also scope for innovation around the periphery – for example in the music
publishing sector where sheet music and lyrics are also susceptible to lowering
of barriers through the application of digital technology. Journalism and
related activities become increasingly open – now music reviews and other forms
of commentary become possible via specialist user groups and channels on the
Web whereas before they were the province of a few magazine titles. Compiling
popularity charts – and the related advertising – is also opened up as the
medium switches from physical CDs and tapes distributed and sold via
established channels to new media such as MP3 distributed via the Internet.

As if this were not enough the industry is also challenged from
another source – the sharing of music between different people connected via
the Internet. Although technically illegal this practice of sharing between
people’s record collections has always taken place – but not on the scale which
the Internet threatens to facilitate. Much of the established music industry is
concerned with legal issues – how to protect copyright and how to ensure that
royalties are paid in the right proportions to 4748those who
participate in production and distribution. But when people can share music in
MP3 format and distribute it globally the potential for policing the system and
collecting royalties becomes extremely difficult to sustain.

has been made much more so by another technological development – that of
person-to-person or P2P networking. Sean Fanning, an 18-year-old student with
the nickname ‘the Napster’, was intrigued by the challenge of being able to
enable his friends to ‘see’ and share between their own personal record
collections. He argued that if they held these in MP3 format then it should be
possible to set up some kind of central exchange program which facilitated
their sharing.

The result – the site
– offered sophisticated software which enabled P2P transactions. The Napster
server did not actually hold any music on its files – but every day millions of
swaps were made by people around the world exchanging their music collections.
Needless to say this posed a huge threat to the established music business
since it involved no payment of royalties. A number of high-profile lawsuits
followed but whilst Napster’s activities have been curbed the problem did not
go away. There are now many other sites emulating and extending what Napster
started – sites such as Gnutella, Kazaa, Limewire took the P2P idea further and
enabled exchange of many different file formats – text, video, etc. In
Napster’s own case the phenomenally successful site concluded a deal with
entertainment giant Bertelsman which paved the way for subscription-based
services which provide some revenue stream to deal with the royalty issue.

Expectations that legal protection would limit the impact of this
revolution have been dampened by a US Court of Appeal ruling which rejected
claims that P2P violated copyright law. Their judgement said, ‘History has
shown that time and market forces often provide equilibrium in balancing
interests, whether the new technology be a player piano, a copier, a tape
recorder, a video recorder, a PC, a karaoke machine or an MP3 player’ (Personal Computer World, November 2004, p. 32).

Significantly the new opportunities opened up by this were seized
not by music industry firms but by computer companies, especially Apple. In
parallel with the launch of their successful iPod personal MP3 player they
opened a site called iTunes which offered users a choice of thousands of tracks
for download at 99c each. In its first weeks of operation it recorded 1 million
hits and in February 2006 the billionth song, ‘Speed of Sound’, was purchased
as part of Coldplay’s X&Y album by
Alex Ostrovsky from West Bloomfield, Michigan. ‘I hope that every customer,
artist, and music company executive takes a moment today to reflect on what
we’ve achieved together during the past three years,’ said Steve Jobs, Apple’s
CEO. ‘Over 1 billion songs have now been legally purchased and downloaded
around the globe, representing a major force against music piracy and the
future of music distribution as we move from CDs to the Internet.’


has been a dramatic shift, reaching the point where more singles were bought as
downloads in 2005 than as CDs, and where the overall shift to a majority of
purchases being by download was expected to take place during 2006. New players
are coming to dominate the game – for example, Tesco and Microsoft. And the
changes don’t stop there. In February 2006 the Arctic Monkeys topped the UK
album charts and walked off with a fistful of awards from the music business –
yet their rise to prominence had been entirely via ‘viral marketing’ across the
Internet rather than by conventional advertising and promotion. Playing gigs
around the northern English town of Sheffield, the band simply gave away CDs of
their early songs to their fans, who then obligingly spread them around on the
Internet. ‘They came to the attention of the public via the Internet, and you
had chatrooms, everyone talking about them,’ said a slightly worried Gennaro
Castaldo of HMV Records. David Sinclair, a rock journalist suggested that ‘It’s
a big wakeup call to all the record companies, the establishment, if you like
…. This lot caught them all napping … We are living in a completely different
era, which the Arctic Monkeys have done an awful lot to bring about.’

writing may be on the wall for the music industry in the same way as the low-cost
airline business has transformed the travel business. And behind the music
business the next target may be the movie and entertainment industry where
there are already worrying similarities; or the growing computer games sector,
with shifts towards more small-scale developers emulating the Arctic Monkeys
and using viral marketing to build a sales base.

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