Re-inventing Music Distribution

The music industry is in the throes of a revolution, due to the proliferation of new compression technologies and the widespread availability of both original and pirated content on the Internet. This article describes the current developments affecting this industry and posits that major players in this domain need to reinvent their business models in order to embrace and extend this revolution. By moving toward a commonly available audio file formats such as MP3, and supporting technological solutions for copy protection and digital watermarking, record labels need to capture the distribution efficiencies and customer value that can be realized by moving to the online model. The Digital Distribution Revolution In early 1999, several threats looked significant enough to undermine the very foundations of the industry, and the way business was done. Firstly, consumers increasingly purchased their music online, through online retailers like Amazon.com, CDnow, etc., and this had led to increased price competition and increased customer acquisition costs for the traditional retailers. Many traditional retailers had to rethink their revenue model either due to the advent of pure online retailers or their own migration to the hybrid physical-online model (Rao, 1998). Secondly, in addition to the gradual drift towards online retailing, the Internet had also brought a more immediate and equally serious threat: the online (and in a majority of cases, illegal) distribution of music through various compressed audio formats, had clearly sent panic signals across the industry. Streaming audio and compression technologies had made spectacular progress since their inception in late 1995 and early 1996. The earliest signs that near CD-quality music could be transmitted on the Internet came with the release of Real Network's RealAudio 5.0, by which files could be stored and streamed relatively efficiently over a 28.8K modem. But this was just a hint of the developments to follow. In a few months, another spectacularly successful format had emerged, the MP3 format. Under this format, files were compressed in compliance with the standards established by the Moving Picture Experts Group. Established in January 1998 by the International Organization for Standardization (ISO), MPEG had grown to include some 350 experts, hailing from academia and 200 companies and organizations around the world. The MP3 format allowed for an almost tenfold reduction in file size from previous methods of compression, without a discernible loss in quality. The acceptance of MP3, and the proliferation of ripper-programs that enabled audiophiles to copy tracks from CD-ROMs and post them online, had turned the online digital music trickle into a flood. In late 1998, the MP3 phenomenon had gone "mainstream" on the Internet, when the Internet portal Lycos.com began to offer a unique MP3 search engine. The bulk of traffic in MP3's was clearly illegal and violated copyright. However, MP3 had proliferated virus-like in a networked environment, where legislation and policing of any kind were neither forthcoming nor made sense and was almost impossible to implement. MP3 also gained widespread attention when Michael Robertson, a pioneer and evangelist of the format, established a web-site dedicated to resources for MP3 buffs. Around 500,000 music files available for free download on the Internet by February 1998. The online medium was beginning to alter the way musical content was created, promoted and eventually distributed. A number of bands had gravitated toward the MP3 format, creating and promoting new singles online, due to cost and reach considerations. Some bands like Widespread Panic complemented this type of promotion with online marketing efforts, often aided by a loyal group of fans (WSJ, 1999). It was likely that small to medium sized bands could easily migrate to the online distribution format, in order to attract and gain an initial audience, and ultimately build their identity. The arrival of a secure standard for distribution would be vital to legitimizing their efforts and enabling them to earn both recognition and financial rewards for their creative efforts. Insofar as final distribution was concerned, the trend was towards the ubiquitous availability of music. Rio, a portable MP3 player that retailed for $199, would enable users to download their own compilations as and when they required. The "empeg-car" player was geared toward the car user. A future version promised the ready availability of 500 albums (or over 7000 singles) for the road at CD quality.