Digital Music Industry

Andy Soergel

Research Question:  What are the economic consequences of the digital music industry?  How have firms adjusted to digital downloads, and what have these adjustments meant for business?

The music industry has had to adapt to a point where consumers no longer drive out to a record store to make a purchase.  Instead, digital downloading and cloud networks are making music sharing easy, affordable, and, as some would argue, not profitable.  Although music piracy is still a major problem for artists and record labels, it is important to note that piracy weeds out individuals who have low threshold prices for music.  The consumers left in the industry have a high threshold price for albums, meaning companies can slightly increase album prices to make up for a portion of sales lost to piracy because their smaller market will be more willing to pay.

Record labels as a whole are also adapting to compensate for a digital age in which artists no longer rely on major record moguls to get their name out there.  Artists frequently take to YouTube and other online media outlets to spread their image, and record companies are facing an era in which they could become outdated middle-men.  Artist Macklemore recently topped iTunes charts.  He is currently unsigned to any major record label, so the “big five” are facing potential loss in revenues from independent artists.  However, they still have a substantial hold on the industry, and more relaxed contracts with artists have made them more appealing within the past five years.

I also talk about the speculation that CDs will be driven out of the industry as early as 2015 if their marginal profits continue to decline at current rate.  A steady rise in popularity and revenues of “apps” and music-innovative technology like cloud networks could create an age in which CD’s are no longer profitable to produce.  I argue that, if the CD dies, it will not be for several more years, as recent trends indicate a temporary break in the CD-industry free fall.

I’m open to comments and critiques.  This post highlights some of my more involved subjects, but I’m working with a lot of data.  Refining my topic will shorten the paper up pretty significantly.

Sources:

Hervey, S 2002, Future of Online Music: Labels and Artists, http://www.weintraub.com/FutureofOnlineMusic.pdf

Laudon, K C and Laudon J P 2006, Management Information Systems, ‘Managing the Digital Firm’, ninth edition, Prentice Hall of India Private Limited, New Delhi

Legit music downloads taking off, say Industry, ABC News Online, 2006 http://www.abc.net.au

Power, Dominic and Johan Jansson. “The emergence of a post-industrial music economy? Music and ICT synergies in Stockholm, Sweden.” Geoforum, Volume 35, Issue 4, July 2004, Pages 425–439.

Rey, Patrick and David Salant.  “Abuse of dominance and licensing of intellectual property.” International Journal of Industrial Organization, Volume 30, Issue 6, November 2012, Pages 518–527.

van Wijk, Jeroen. “Dealing with Piracy:: Intellectual Asset Management in Music and Software.”  European Management Journal, Volume 20, Issue 6, December 2002, Pages 689–698.

Warr, Richard and Mark M.H. GoodeIs. “The music industry stuck between rock and a hard place? The role of the Internet and three possible scenarios.”  Journal of Retailing and Consumer Services, Volume 18, Issue 2, March 2011, Pages 126–131.

2 thoughts on “Digital Music Industry

  1. This is an interesting topic. It definitely appears CDs are becoming obsolete very fast, and it seems the trend will continue with so many avenues available to listen and play music, such as YouTube and Pandora, etc. It will be interesting to see how artists respond to the freedom of information available out there to listen to and share music. Being a music artist now seems to involve the effective use of social media more and more for popularity, but this doesn’t directly lead to revenue. Consumers, on the other hand, seem to have benefitted immensely from the change from CDs to digital.

  2. I agree that companies take advantage of price discrimination by charging much more for albums because those consumers clearly are willing to pay more. I think the ability of producers to do this will decrease as competition increases from more artists entering the market. My research on price discrimination for my paper showed that competition usually has a negative effect on price dispersion because it pushes firms toward perfect competition where they are price takers, not prices setters as price discrimination implies. It appears as if the airline industry is an exception to this and I wonder if the music industry could be too, or if its profits will continue to decline.

Leave a Comment!