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A Survival Plan for the Music Industry - Napster and the Consequences

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1 A Survival Plan for the Music Industry - Napster and the Consequences
Wanted: A Survival Plan for the Music Industry - Napster and the Consequences Andreas Becker Managing Consultant, “Media, Publishing & Entertainment” Management & IT Consultancy Diebold, Germany O’Reilly p2p Conference San Francisco 15th February 2001

2 About Diebold Diebold fingerprint.
Establishment of the Diebold Group: 1954 Revenues 1999: Million DM 2000: 110 Million DM 340 employees Offices in Germany Frankfurt-Eschborn (Headquarters), Berlin, Munich, Stuttgart, Saarbrücken Offices worldwide Amsterdam, Budapest, Zurich, Vienna, Madrid, Singapore

3 About the Business Unit “Media, Publishing & Entertainment”
The following industries are at the center of the Business Unit “Media, Publishing & Entertainment“. Publishing Publishers: newspapers, periodicals, books Corporate Publishers News agencies Publishing suppliers MPE Media Film producers Broadcasters Internet (media) start-ups Media suppliers Entertainment Portals Games producers Music labels Entertainment suppliers

4 As an introduction... "The great cultural war has broken out at last. Long awaited by some and a nasty surprise to others, the conflict between the industrial age and the virtual age is now being fought in earnest, thanks to that modestly conceived but paradigm-shifting thing called Napster.” John Perry Barlow, Musician & Journalist, October 2000

5 1. The current Internet strategies of the “Big Five” 2. The p2p pioneers 3. The Internet challenge for the music industry 4. Refocusing strategy and business models 5. Examples of new business models 6. Does a p2p business model for the media industry exist?

6 1. The current Internet strategies of the “Big Five”

7 1. The current Internet strategies of the “Big Five” (1)
The world music market has been fairly constant for the last five years. Five countries account for about 75% of all revenues. The “Big Five” control about 70% of the total market. $ 38.5 $ 38.6 $ 40.0 $ 41.5 Total Market size (billion $) USA J F D GB Rest of World Sales (billion $) 71% 74% 69% 72% Share of the five largest na- tions (total %) Source: Phonographische Wirtschaft, Year book 2000

8 WWW 1. The current Internet strategies of the “Big Five” (2)
By the end of 2000, all five major labels want to be represented on the Internet with download offerings. WWW Sale of downloads since # 5 11/2000 # 2 07/2000 # 1 05/2000 # 3 08/2000 # 4 10 / 2000 Business model Sale of online music through dealers Sale of online music Sale of online music / subscription Offering Start with 100 songs; expand to 1,000 singles / albums 200 singles / 100 albums 175 songs 60 songs Start with 100 songs; expand to 300 songs Price per title no information $ 2.49 0.29 DM (1x) 2.99 – 4.99 (unrestricted)

9 1. The current Internet strategies of the “Big Five” (3)
“An industry that goes to war with its customers is not an industry that will ultimately prevail.” David Boies, Napster Chief Legal Counsel, October 2000

10 2. The p2p pioneers

11 2. The p2p pioneers (1) An overview of some key dates for the most important online competitors. WWW A The Freenet Project Online launch # 1 11/1997 # 3 03/2000 # 4 04/2000 # 2 08/1999 # 5 08/2000 Business Model Platform with free and chargeable offerings None apparent and not intended Trying for subscription fees Strategy / Principle Products and services relating to music in general Platform for end cust-omers, artists and retailers Remote search on chain letter principle Not really open to attack Remote P2P file-sharing for all kinds of information Not open to attack Central server, on which songs are registered Remote downloads Plugin for the AOL Instant Messenger File-sharing among buddies, who decide who has or has not access

12 2. The p2p pioneers (2) A recently published survey by Spin magazine shows that, in practice, many Napster users are downloading whole albums. Despite this, many users also claimed that using Napster prompts them to buy new CDs. Spin.com, 6 September 2000, online survey among 480 Napster users How many individual songs do you download from Napster onto your computer each week? 28.2 How many complete albums do you download from Napster onto your computer each week? 1.7 How many CDs have you bought because you heard the music on Napster? 7.2

13 2. The p2p pioneers (3) Are services such as Napster really stealing profits? So far, it has been impossible to give a clear answer to this question, but it does appear that the formula ‘download song = lost sales’ is erroneous, as the following research suggests. Yankelovich Partners, March 2000, online survey with just under Internet users (Profile: aged between 13 and 39; 10 hours or more per week spent listening to music via traditional and online media; expenditure on music in the last six months > 25$) “Has online listening to a song persuaded you to buy the song or album in a shop?” yes: 59% no: 41% “Do you believe that as a result of downloading music you would buy more, the same amount, or less on CDs in shops?” more: 31% the same: 57% less: 12%

14 3. The Internet challenge for the music industry

15 &  3. The Internet challenges for the music industry (1)
In order to charge for online music, the hi-fi industry will need to set itself four challenges. Each will in turn have consequences which need to be taken into account when planning Internet strategies and allocating relevant resources. Create a sense of injustice Intensify existing marketing activity 1 Challenge Consequence Eliminate illegal offerings Have ready supply of dedicated resources & 2 Obtain online copyright Negotiations can be difficult and protracted 3 Create a cross-label offering Increased demands on co-ordination and agreement 4

16 3. The Internet challenges for the music industry (2)
The following theses are used to develop a worst-case-scenario, if the music industry fails to meet the challenges outlined above. Low income target groups (e.g. teenagers) will not be prepared to pay for downloads charged for by record labels on the Internet. 1 2 Even the high income target groups are only prepared to pay for music over the Internet if it is enhanced by significant benefits. 3 The time-to-market of large record labels will, in the medium term, be substantially longer than that of pure Internet enterprises, whose focus is on online activity alone. 4 In terms of music product enhancement through information and services, record labels and artists are clearly left behind by online providers. 5 The number of known artists circumventing record labels in favor of direct selling will significantly increase in the next years.

17 4. Refocusing strategy and business models

18 Traditional media business models Internet business models
4. Refocusing strategy and business models (1) The Internet will have a lasting effect on the existing business models in the media industry. The music industry in particular will be affected by this. As a result it will need to rethink its current internet strategies and the SOPs (service offering portfolio) tied up with these. Traditional media business models Internet business models TV, radio Adver- tizing Media convergence Content Adver- tizing Products Services (*) Distribution share purely for example Newspapers, magazines Adver- tizing Content Books, music Content

19 Money resources specifically
4. Refocusing strategy and business models (2) Successful business models for online music sales will need to be guided by the needs and attitudes of their target groups. With use of the following three criteria, two clearly distinguishable segments begin to emerge. Qualitative NOT quantitative representation Attitudes to illegal copying or downloads ‘I don’t care’/ ‘I think it’s good’ ‘I’m against it’ Convenience expectation low - medium high Money resources specifically for music expenditure low – medium high

20 4. Refocusing strategy and business models (3)
The previously derived target groups will need to be targeted with different business models. The consequence will be sharply divergent strategies and SOPs. Target group’s characteristics Examples Business model Accepts ‘illegal music’ Low ‘music budget’ Low service expectation ‘Kids’ Teenagers Classes C2, D, E Charges for music not enforceable Primary refinancing possible with advertising Against ‘illegal music’ High ‘music budget’ Highly developed service expectation ‘Freaks’ Classics enthusiasts Collectors Charges for music + service may be enforceable Advertising hardly accepted, if at all

21 4. Refocusing strategy and business models (4)
Will the breakdown be as follows? Provisional working hypothesis: The number of ‘non-payers’ will be substantially larger than the group of users prepared to pay for online music. Music for free Advertizing as source of revenue Target group A Target group B Music and services for fees Advertizing unnecessary

22 5. Examples of new business models

23 5. Examples of new business models (1)
Users will be prepared to ‘pay’ for free music with their profiles, which in turn will be bought by commercial enterprises and used as ‘enablers’ in targeted advertising. Users A B C Marketing platform MyMusicShop.com Rock Pop Jazz Classics Indie Folk R&B Soul Blues My Profile Profiles Business Partners 1 BUY IT ! Advertizing 4 Music 2 Money 3

24 Exponential growth of free song offering
5. Examples of new business models (2) The number of songs to be obtained free is dependent on the number of questions answered by the user. Modular questionnaire My Profile What I buy... What films I go to... Where I go on holiday... Which TV programs I watch... What clothes I wear... Exponential growth of free song offering Number of free songs Questions answered 100 50 20 10

25 Other external content
5. Examples of new business models (3) ‘My Music Account’ allows users to listen to their music any time and on a number of devices. My personal music box My own music My collector‘s corner My bonus points Freely configurable individ. music archive with various ‘play options‘ Tools for the creation and manipulation of own music Storage and management of music-related information and ‘items‘ Bonus account with special exclusive offers My Music Account Desktop PC Mobile devices MP3 player Notebook Stereo Own-label music content Other-label music content Other external content Songs Albums Merchandising Samples Videos Concert clips Articles Books Peer information other Devotional objects

26 6. Does a p2p business model for the media industry exist?

27 6. Does a p2p business model for the media industry exist? (1)
In the area of conflict between artists, online players and music listeners on the Internet, the hi-fi industry is in danger of losing its central mediator role and being bypassed in the future. Co-operations Artists Online players Mistrust Record labels Competition Direct selling Acceptance Non- acceptance Music listeners

28 6. Does a p2p business model for the media industry exist? (2)
The music industry is the first “victim” of p2p - others will follow. “It’s not just pop music. Every industry that trades in intellectual property - from publishing to needlework patterns - could get Napsterized.” Adam Cohen, Journalist, Time, , p. 66

29 6. Does a p2p business model for the media industry exist? (3)
But will these models really work? Will users finally be ready to pay for contents or will they happily embrace p2p networks, enabling them to receive access to all kind of copyright-free materials? Will the current Bertelsmann / Napster deal determine tomorrow’s destiny of today’s media giants? “As soon as Bertelsmann is trying to charge Napster users, we are going to copy the bloody thing - and call it ‘Obstler’ (= German for booze).” Doc Summer, Computer Hacker, Handelsblatt, , p. 62 Will Napster users be willing to pay? Is a monthly fee of $15 way too high given the fact that the average German spends $30 a year on music? How can a centralized business-model work with a decentralized p2p community? Will the other music labels co-operate with Bertelsmann? How will musicians profit from the revenue generated? Will the music industry fight other online players like they fought Napster?

30 ...available on one consumer “This is the end, my only friend,
6. Does a p2p business model for the media industry exist? (4) IT specialists predict that within 10-years-time - due to progress in compression technologies - all of mankind’s recorded music could fit onto a convenient consumer storage device. Jazz Rock Classical Alternative All of mankind’s recorded music... ...available on one consumer storage device: All the world’s music Available at Hong Kong’s Night Markets: US$ 10 “This is the end, my only friend, the end” (Jim Morrison) p2p-networks could play a key role in aggregating the necessary contents. Jazz Rock Classical Alternative P

31 6. Does a p2p business model for the media industry exist? (5)
The consequences of Napster & Co. will have a lasting impact on the other media genres on the Internet. This Forrester Research overview still seems to show cautious optimism about the prospects. Demand-side threat elements - long-term reusability - good, connected non-PC devices available - users want to manage library - collectibility - appeal to Net demographic - users already have free access Supply-side threat elements - lots of independent artists - solo production easy - content bundled in clumsy packages - Internet-friendly file size Threat of collapse of control Music 5 3 Books 1 3 5 Games 5 3 1 Movies 3 1

32 As a closing... “At the heart of the controversy is a clash that goes far beyond the music industry. What we're witnessing is the beginning of an epic struggle between two great economic systems. On one side lies the old market-based economy, made up of sellers and buyers. On the other side lies the new network-based economy, made up of servers and clients. In markets, the parties exchange property. In networks, the parties share access to services and experiences. (...)Today, Napster is an oddity. In the future, it will be the norm.” Jeremy Rifkin, Los Angeles Times,

33 Recent Diebold Publications
This presentation is based on the current Diebold Study “Wanted: A Survival Plan for the Music Industry - Napster and the Consequences”. Watch out for the first world wide p2p-study which will be published by Diebold in May 2001. 2000 Wanted: A Survival Model for the Music Industry - Napster and the Consequences The p2p Phenomenon: The Next Internet Revolution for the TIME Industries 2001 P-t-P Das Peer-to-Peer-Phänomen: Die nächste Internet-Revolution für die TIME-Industrien Dummy

34 Thank you very much for your attention. Which questions do you have?
Andreas Becker Managing Consultant, “Media, Publishing & Entertainment” Management & IT Consultancy Diebold, Germany O’Reilly p2p Conference San Francisco 15th February 2001

35 About Andreas Becker Andreas Becker
Managing Consultant Business Unit Media, Publishing & Entertainment Diebold Deutschland GmbH Dessauer Strasse 6 D Munich Germany Tel.: +49 (0) Cellular: +49 (0) Fax: +49 (0) Andreas Becker studied Business Management in London (UK) and Reutlingen (Germany), and then worked for two years as financial controller at the leading German educational publishers in Stuttgart (Germany). Since subsequently completing an MBA course in Edinburgh (UK) he has worked as a consultant for publishers and media firms. The emphasis in his consulting activities has been on topics such as eBusiness, Strategy Development, Business Planning, Controlling and Organization.


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