Introduction 2
Overview 2
Aims 2
Recorded music as a technological innovation 2
Recording sound 2
Radio and cassette tape 3
Compact disc 3
MP3 4
Apple and the iPod 4
The traditional recorded music industry value chain 5
Disintermediation 6
Re-intermediation 7
Summary 10
Glossary 10
Answers to self-assessment activities 11
2.1
E-business technologies:
foundations and practice
Block 1 Part 8: The effect of the
Internet on an industry
Introduction
Overview
Now that you have an understanding of what a value chain is and an idea of some of
the benefits and challenges that e-business can offer, I am going to look at the case
study of an industry that appears to have been rocked to its very foundations by
developments on the Internet and Web.
I have been looking at business process redesign or re-engineering as something
challenging, but within an organisation's control. However, imagine a product that
could be turned into pure information and so moved electronically through the value
chain; clearly, this would involve a radical move away from the traditional, physical
business model. I am going to look at one such 'pure information' product, one that
you should be familiar with as a consumer: music.
You've probably heard a lot about the effect that the Internet has had on the music
industry. In this part of Block 1 I am going to focus on the music industry value chain,
starting with a brief history of the recorded music industry and moving on to look at the
new opportunities and challenges to this business that the Internet presents. The
central case-study resource will be a video programme consisting of a series of
interviews with representatives of each stage in the traditional music industry value
chain. I shall direct you to this at an appropriate point in the text.
In the film and in this block I shall be looking out towards the competitive environment
and seeing what opportunities and challenges are presented to organisations in one
particular industry. As you will see, one organisation's challenge is another's
opportunity.
Aims
The aim of this text is to introduce you to an important case study on the opportunities
and challenges of e-business, that of the recorded music industry.
When you have finished this part of Block 1 you should be able to:
• Explain what is meant by the terms disintermediation and re-intermediation.
• Apply heuristic models as part of an industry analysis.
• Understand the concept of a value chain ecosystem.
Recorded music as a technological
innovation
When we talk about the music business or the music industry, what we often more
specifically mean is the recorded music industry; that is, the industry that has grown
up around the recording of music, its distribution and its sale.
I am going to start by taking a very brief look at the history of the recorded music
industry, in order to provide you with some context for current developments
concerning the Internet and the Web.
Recording sound
The ability to record sound has existed since the late 1800s. Thomas Edison, the
prolific US inventor, was a key figure in the development of the phonograph, a device
that could record and play back sound. It was an innovation that was later superseded
by Emile Berliner's gramophone, which used flat discs (records) rather than the
cylinders used by Edison's machine. Neither Edison nor Berliner envisaged their
inventions as becoming devices for entertainment: they saw them as primarily
Block 1 Part 8 | 2
business dictation machines. It was the business innovators and early adopters that
shaped the use of the gramophone for recorded music.
Prior to these inventions it had been possible to store music only in our (human)
memory or in written form. A large music publishing industry had previously grown up
around the publishing of sheet music: music in its written form.
Radio and cassette tape
By the 1900s, the recorded music industry was burgeoning. The British company HMV
opened its first retail outlet in 1921 in Oxford Street, London. About the same time
other innovations, such as radio, began to pose a big threat to the established
recorded music industry model. It was widely thought at the time that radio would
supplant records as the distribution medium for music. However, things eventually
settled down and the two technologies co-existed. Radio became primarily a means to
market, rather than distribute, recorded music.
The third Schumpeterian wave of technological revolution, which brought the
widespread diffusion of electricity in the first half of the twentieth century, also
facilitated the replacement of mechanical recording devices with electric counterparts.
This improved the quality of the recording and playback of music, and led to the term
hi-fi (high fidelity) to describe this new generation of consumer devices.
Improvements in the quality and playback of recorded music continued with another
innovation: the invention of stereo by Electrical and Musical Industries (EMI). EMI was
formed in Britain in the 1930s after a merger involving HMV. Stereo saw widespread
adoption by the early and late majority, replacing mono as the de facto standard used
for records towards the end of the 1960s. It was only the laggards who stuck with their
mono equipment in the 1970s.
The 1960s saw the fourth Schumpeterian wave of technological revolution.
Transistors replaced valves and this meant musical devices could be smaller. The
transistor radio made music truly portable for the first time. But it was the advent of
Philips' compact cassette tape, a popular re-recordable alternative to the record, that
posed the next significant threat to the traditional recorded music industry model.
By the 1980s, the threat of the re-recordable compact cassette seemed so great that
the BPI launched a campaign that proclaimed 'home taping is killing music'. However,
the industry survived and in a few years 12" and 7" records had been replaced by the
compact disc as the de facto format for recorded music.
Compact disc
The compact disc (CD), another Philips innovation, was born in the 1970s and came
to market in the early 1980s. After initial scepticism about the new format, a pivotal
year for the record labels came in 1985 when Dire Straits' Brothers in Arms became
the first CD to sell more than one million copies.
Brothers in Arms was the first commercially successful, fully digital piece of recorded
music. Shortly afterwards, the rise of the current digital revolution (the fifth
Schumpeterian wave) posed the latest and perhaps strongest challenge to traditional
music industry structures.
Prior to the commercialisation period of the Internet (1995 onwards), music existed in
a digital form on CD. Those with computer hardware and software that could rip and
burn CDs were able to do the digital equivalent of home taping using CDs, distribute
copies to friends, etc. However, it was the prevalence of digital networking in homes
that came with this commercialisation period that saw the distribution network grow as
it moved from the physical to the virtual.
Block 1 Part 8 | 3
MP3
It was another Philips-led invention, the MP3 compression format, that meant a typical
track from a CD could be compressed down from about 50 MB to 5 MB. Even before
home broadband had crossed the chasm and seen widespread adoption, it was
possible to move an MP3 file about on the Internet in minutes.
Although the MP3 standard (ratified by ISO as ISO 11172) is not a totally open
standard because a licence is required for its incorporation in hardware and software
products, it is much more open than closed. The open leanings of the standard and
the absence of any DRM restrictions meant that it became the de facto standard for a
digital music format. The widespread availability of software such as Winamp in 1997
gave the majority, not just the innovators and early adopters, the ability to play back
MP3s on their home computers. The arrival of file-sharing networks such as Napster
soon afterwards meant that the transaction costs associated with searching for and
acquiring music were greatly reduced.
Apple and the iPod
Music in this digital form can be seen to be pure information. Once Apple popularised
the MP3 player with the launch of its iPod in 2001, it had made pure music information
portable. Apple did for the 2000s what Sony had done with the Walkman in the 1980s
and the Discman in the 1990s. There was one big difference, however, that was a key
part of Apple's marketing strategy. The first iPod, which had a 5 GB hard drive, was
able to hold 1000 songs. Or as Steve Jobs, Apple CEO, succinctly put it (2001), 'you
[could] now carry your entire music library in your pocket'.
Apple did not endorse peer-to-peer sharing of music. In fact, each iPod came wrapped
with a warning, 'don't steal music'. But the iPod could play a variety of digital music
formats, including the DRM-free MP3.
In 2003 Apple further enhanced its position in the digital music market by signing
deals with the 'big four' record labels (EMI, Universal, Warner Bros and Sony BMG),
which account for some 80% of all recorded music output. The deal allowed Apple to
retail music owned by these labels through its iTunes store. Apple was now an
innovative retailer in a music industry value chain containing new B2C and B2B
relationships that were to have serious ramifications for those businesses that had
grown up with the traditional recorded music industry.
Activity 1 (Self-assessment)
The previous discussion has been a very quick look at music as a series of
technological innovations. I've taken a technological and business perspective, and
touched upon a number of the models that I introduced you to earlier in the block.
I now want you to go back through my account and identify which models I've used.
Look back at these models and see how I've used them. Compile a list of the order in
which they are used in my account.
Comment
My list can be found in the 'Answers to self-assessment activities' section. In my
account above, I could (and should) have included pictorial representations of the
models in order to clarify my points; I didn't do this because I wanted you to identify
the models yourself. When you do your assignment, the inclusion of pictures of any
models you may draw upon (with modifications to highlight the key points in your
argument) is crucial for good marks.
Note also that I applied the models to help me make sense of the evolution of
recorded music. Some of them could just as easily be applied to make sense of a
current situation.
Block 1 Part 8 | 4
The traditional recorded music industry
value chain
In my account of recorded music as an innovation I made reference to the traditional
recorded music industry value chain; it was one of the models I employed so that I
could position Apple as a digital music retailer with B2C and B2B relationships. I shall
now have a look at this value chain and use it to illustrate the effect that the Internet
and e-business may have had on traditional industry structures.
Figure 1 is a representation of a simple value chain for the music industry. This could
have been presented in other ways, with a greater or lesser amount of detail, but the
level of detail I've chosen to show is just right for the amount of analysis I am going to
perform here.
creation
composition and arrangement
artist
distribution
marketing/shipping/selling
record company/wholesalers/retailers
selection and certification
signing of artists
record company
production
recording/mixing/cutting/manufacture/packaging
record company
consumption
listening
consumers
Figure 1 Traditional music industry value chain
Source: adapted from Clemons and Lang (2003)
Each box in the model represents a value-adding stage in the traditional music
industry value chain. The stages are labelled creation, selection and certification,
production, distribution and consumption. I've also listed who has traditionally been
responsible for each activity at the bottom of each box. In the middle of each box are
some of the sub-activities involved in that stage: the sort of activities that I might have
broken down into separate stages if I were looking at a lower level.
Very shortly I want you to watch the video programme associated with this case study,
which will raise and answer some issues to do with the stages and the relationships in
this traditional value chain. You may already be thinking about how the Internet and
e-business have affected this established way of doing business. For now, I'm going
to introduce two ideas that will get you thinking even more and provide labels for some
of your thoughts: disintermediation and re-intermediation.
Block 1 Part 8 | 5
Disintermediation
I have talked previously about the ability of the Internet and the Web to increase
geographic reach and market size, and to reduce transaction costs. It's quite possible,
given the low transaction costs and use of the Internet as a distribution medium, for an
artist at the beginning of the value chain to bypass the other stages in the traditional
process and reach the consumers directly. The bypassing of intermediaries in the
value chain is known as disintermediation.
Artists could have done this before the Internet. The punk phenomenon of the late
seventies had a strong DIY ethic that championed this kind of behaviour, but in
practice artists could not easily record and distribute their music without relying on the
traditional stages (albeit fulfilled by non-traditional businesses) of the value chain.
Without these intermediaries, artists were limited to a small market that came within a
limited geographical reach. The cost related to the availability of and access to
technologies for reproducing the music was also prohibitively high.
But now that the Internet is ubiquitous and sound-recording equipment comes with
most computers, it's perhaps not immediately clear why artists haven't cut out the
intermediaries and sold direct to the consumer. Why haven't the record labels and
retailers been disintermediated? After all, we often hear about how much music costs
to buy compared to how little the artist receives from the sale of the final product.
Table 1 shows a breakdown of the typical revenue share from the sale of a CD
through the traditional recorded music industry value chain.
Table 1 Breakdown of revenue share on a typical CD sale
Person or organisation Revenue share
Composer and publisher 5.1%
Artist 10% (+1.1% to The Musicians' Union)
Record company 28.8% (of which 10.6% is profit)
Manufacturer 5%
Promotion and advertising 15%
Distributor 5.6%
Retailer 29.3% (of which 5% is profit)
Source: Rolling Stone, 2004
A solo artist who also composes and publishes his or her own music can possibly
earn a share of approximately 15% of the sale price of a typical piece of recorded
music under traditional recorded music industry arrangements. However, the Internet
and a B2C e-commerce operation direct from the artist's web site should enable the
artist to take a much larger share, owing to the disintermediation of the record
company, the manufacturer, the distributor and the retailer roles. So why isn't
everyone doing it?
The idea that this form of disintermediation was the main (legal) threat posed by the
Internet to traditional industry structures was a popular one. It hasn't materialised.
Record labels add a lot of value that can't be expressed purely in monetary terms.
They invest money in new artists and develop them. They have very powerful
marketing operations that ensure consumers get to hear about new artists. They have
B2B relationships with physical and virtual retailers that mean the product is widely
available through different distribution channels. They also have important B2B
relationships with television and radio stations that play an important role in the
discovery of new music for many people.
But, you may say, what about those artists who have made a name for themselves by
distributing their music and building up a large fan base on social networking sites
Block 1 Part 8 | 6
such as MySpace? There has been quite a lot of publicity around artists (such as
Gnarls Barkley, The Arctic Monkeys and Lily Allen) who have had successful
recording careers after they self-promoted themselves and built up a loyal following on
MySpace. There was even an edition of the BBC Money Programme in 2006 called
'The Online Music Revolution', which covered the 'artists are now able to do it for
themselves' story (Messenger, 2006).
However, the reality is far more complex than it would first seem. Firstly, the
disintermediation in these high-profile cases is temporary. Artists have used it in order
to make a name for themselves and attract attention from record companies. In the
main, they still see the long-term value in record companies and the traditional value
chain. The video programme you'll be watching soon highlights the case of a band
called KOOPA, who employed a similar strategy in order to attract some much-
needed publicity.
Secondly, the story of some of these artists going it alone is not all it seems. It
appears that record labels big and small were behind some of the artists, although as
part of a sophisticated marketing strategy they may have made it appear as if they
weren't. This piece from the Guardian is worth a quick look (it's available from the
'Library resources' section of the course web site):
Webb, A. (2006) 'Making a song and dance', The Guardian, 25 May, Technology
Pages p. 1.
So although e-business has made disintermediation possible, it's not always
desirable. It would seem that the only artists who can wield enough power within the
value chain to disintermediate those that lie between themselves and the consumer
are those artists who are already well established and have made a name for
themselves.
I hope you have some thoughts now as to why the Internet and Web have not simply
driven the disintermediation of the steps in the value chain and ended up with all
artists selling direct to consumers. It's all about the perception of value.
Re-intermediation
I've said that the Internet has offered opportunities for disintermediation (removing the
middlemen) in traditional value chains. However, disintermediation also has an
opposite, re-intermediation, which is the introduction of middlemen into the value
chain.
I've mentioned MySpace already. You may be familiar with this social networking site
or you may not; but whatever your opinion of it, its e-business importance is hard to
deny. Rupert Murdoch's News Corp certainly thought it was important when it
purchased the company for $580 million in 2005. At this time it was the fifth most
visited site in the United States. News Corp possibly had its eye on the potential
advertising revenue from such a frequently visited site.
If I were a music consumer at the bottom of a disintermediated value chain, one of the
problems I might face would be how to find new music that I liked. I said before that
the radio has long fulfilled a marketing role for new music. The combined richness and
reach of the Internet has allowed social networking sites such as MySpace to step into
the space between the artists and the consumers and provide a service that adds
value for the 'long tail'. MySpace users can discover new music based on what their
friends are listening to. Rather than searching the whole of the Web for music,
MySpace users have a smaller network to search; and, importantly, that network is
one of friends whose judgement they trust.
Still, even MySpace can be too big an area to comfortably search. After all, we are
used to the radio and TV pushing information at us, rather than us pulling information
from other providers. This is where further re-intermediation can take place, as
podcasts such as the iCast MySpace top 20 show. iCast aims to add value by
Block 1 Part 8 | 7
selecting and certifying MySpace content for consumers. It adds value, enabling
consumers to keep up to date with new music beyond the circle of their online friends
without the enormous transaction costs associated with searching the whole of the
Internet or MySpace on a weekly basis.
MySpace and iCast are intermediaries that fill spaces between the content creator and
the content consumer at either end of the value chain. Ditto Music, which is mentioned
in the video programme you are about to watch, is another intermediary. It fulfils a
very important role in the reconstructed value chain for the e-business music industry.
Figure 2 is my interpretation of this new reconstructed value chain with KOOPA, the
artist featured in the video programme, at the top; Ditto's re-intermediated position in
the middle; and the consumer at the bottom. Familiarise yourself with this value chain
and compare it to the previous one. This will be a useful reference point for you before
you watch the video programme.
creation
composition/arrangement/recording/mixing
distribution
relationship management/marketing
Ditto Music
retail
selling
consumption
listening
consumers
KOOPA
HMV Online/iTunes Music Store/7Digital
Figure 2 Ditto Music's place in a reconstructed music industry value chain
The value chain shown in the figure bypasses the traditional record labels yet still
gives KOOPA access to retailers such as HMV, iTunes and 7Digital. Without Ditto
Music, who provided the services of a traditional record label but in the lean fashion of
an e-business from the ground up, KOOPA would not have enjoyed the success they
did.
I've listed the activities of Ditto Music as relationship management and marketing.
Relationship management was the best term I could think of that encompasses just
what it is that Ditto did for KOOPA. As you will see from the video programme, Ditto
connected KOOPA to the retailers by managing the B2B relationships in the chain,
and so it is a key intermediary here. I'm treating the artist, KOOPA, as a business for
these purposes; it's the one they are closest to in our three-stakeholder
transaction/relationship model, since they certainly aren't a consumer or the
government.
Activity 2 (Video, self-assessment)
Watch the video programme entitled 'The music industry', available on DVD 1. There's
a lot contained in just under twenty minutes. The film works on several layers and
you'll probably have to watch it a few times in order to gain a deep understanding. It's
well worth spending time over this.
Block 1 Part 8 | 8
Before you start watching for the first time, I'd like you to think about the relationship
that exists between technology and the music industry. Make some notes about how
you think the Internet has affected your consumption of music.
After you've finished watching, make some more notes about the effect of the Internet
on those interviewed in the film. Are they passive 'victims' of technological progress,
or are they shaping the future of the industry? Which model from earlier in the block
would be most useful in order to categorise some of the organisations represented in
the film into idealised types, based on the interviewees' responses?
Why do you think music as a product has been so affected by the Internet and the
Web? What is special at this present moment about the nature of music? What other
industries do you think have been, or soon will be, affected in this way?
Comment
I've included some of my thoughts in the 'Answers to self-assessment activities'
section.
Activity 3 (Video, in-text)
Now watch the video programme through again. This time I want you to use the
industry value chain and the e-business relationships model (B2C, C2C, C2B, B2B) as
a way of analysing the interviewees' responses.
Comment
In Figure 2, I provided you with my interpretation of a constructed value chain, with
KOOPA (the artist) at the beginning and Ditto Music as an intermediary between
the artist and retailers such as HMV. However, this is not the only value chain we
can draw from the information contained in the video programme; there are at least
two others.
The first is the traditional recorded music industry value chain, in which KOOPA
and its manager see long-term value. This is the value chain I outlined in Figure 1.
The second is one in which Last.fm plays a key intermediary role. Last.fm has
reconstructed a value chain around its 'intelligent recommendation system'. It takes
Amazon's recommendation system to the next level by recommending new music
based upon what a Last.fm user has listened to rather than purchased. As the
Last.fm representative puts it in the video programme, this is 'music discovery for
lazy people'. Users can discover new music in a 'lean back' rather than 'lean
forward' fashion. This means that once the software has been installed on their
computer, they need do no more than carry on listening to music in order for
Last.fm to 'scrobble' (store details of) the tracks and provide added value via its
intelligent recommendation system.
Rather than presenting exclusive choices, I'd like to suggest that these value chains
offer complementary alternative distribution strategies for digital music. Of course
those businesses that have grown up with the traditional recorded music industry
value chain as their business model are going to feel threatened by the emergence
of new value chains. After all, some of them face disintermediation unless they are
willing and able to adapt.
However, innovative organisations both new (e.g. Last.fm) and old (e.g. Apple) will
re-intermediate themselves and construct new industry value chains. They can only
do this by forging new B2B, C2C, B2C, C2B relationships that are perceived to add
real value for business and consumers alike.
Block 1 Part 8 | 9
Summary
In this part of Block 1 you have seen how the Internet offers opportunities for
disintermediation and re-intermediation in the value chain. I looked at the example of
the recorded music industry as my case study, but these opportunities apply to other
industries too.
New industry value chains made possible by these disintermediation and
re-intermediation opportunities are viable only if they can be seen to add value to
e-business relationships. Just because these disintermediation and re-intermediation
opportunities are technically possible, it does not mean they can or should be realised
from a business perspective.
Existing ways of doing business have not been completely swept away by the new
recorded music industry value chains facilitated by the Internet. Instead, there has
been an incorporation of elements of established structures (albeit provided by new
intermediaries in some cases) into new industry value chains. These elements are
those that add value, such as selection and certification, marketing, and selling.
Complete disintermediation (the artist selling direct to the consumer), whilst technically
possible, has not proven viable from a business perspective.
Glossary
BPI Originally an abbreviation for the British Phonographic Industry, an organisation
that was established in 1973 in the UK to fight music piracy. It now prefers to be
known as just BPI and its purpose is to represent, promote and protect the UK
recorded music industry.
disintermediation The bypassing of intermediaries in a supply chain or industry
value chain. Contrast with re-intermediation.
DRM (digital rights management) The technologies and techniques designed to limit
the use of copyrighted digital content such as music, films or software to authorised
devices.
MP3 A standard format for encoding digital audio that creates files approximately
one tenth of the size of the corresponding track on an audio CD.
podcast (iPod broadcast) An audio broadcast in a file format suitable for playback
on a computer or digital music player. Podcasts are often made available to
subscribers via RSS feeds.
re-intermediation The reinstatement or creation of intermediaries in a supply chain
or industry value chain. Contrast with disintermediation.
rip and burn The processes of using a software program to convert digital content
from an optical medium such as a CD, often into a compressed format for storage on
a computer or portable media device (ripping); and writing digital content from a
computer or other device to an optical medium such as a CD using software and/or
hardware (burning).
social networking The use of a web site that provides a virtual community to
connect people who share similar interests.
Block 1 Part 8 | 10
Answers to self-assessment activities
Activity 1
Here's the list of models in the approximate order that they occurred in my brief history
of recorded music:
• technology adoption lifecycle model (innovators, early adopters, early majority, late
majority, laggards)
• Schumpeterian waves of technological revolution
• open/closed, sponsored/unsponsored, de facto/de jure standards
• three phases in the development of the Internet: innovation, institutionalisation,
commercialisation
• industry value chain

• e-business relationships (B2C and B2B).

Remember that I did not include pictorial representations of the models in my account

because I wanted you to identify them for this activity. You should always use figures
where appropriate in order to clarify or emphasise points you make in your writing.
Also note that I didn't introduce the models in my account because of its brevity, and
because I knew that I'd introduced them in previous parts of the block. In a stand-
alone piece of writing it would be necessary to introduce and explain the models
before you started using them.
Activity 2
Recall that technological determinism postulates that technology shapes society
rather than society shaping technology, and that technology follows a path driven by
some inner autonomous logic. It would be difficult not to see the allure in this stance
when we look at Internet technologies and the music industry. We must remember
that business is a social enterprise.
I suggest using the technology adoption lifecycle model to categorise those
represented in the film into idealised types, ranging from innovator to laggard.
The BPI spokesperson provides some technological reasons for the recorded music
industry being currently most affected by the Internet. He mentions 'the size of the
files' and 'bandwidth issues'. As I mentioned previously, music tracks can be
conveniently compressed into files of about 5 MB in size, small enough to be fairly
quickly downloaded. With the advent of faster broadband connections other 'creative
industries' whose outputs are readily digitised, such as television and film, are also
now beginning to experience similar effects to those felt by the recorded music
industry.