Brave New World: How Can Record Companies Adapt to the New Digital Reality?

In late 2010 I joined ICCE to complete an MA focusing on media, comms, creative industries, business modelling and digital music.  I wrote this essay as part of my final portfolio (the rest of it was a business plan that since reached the Santander Entrepreneurship Award final, so it’s on ice from public viewing).  I thought it might be nice to share the essay though, rather than keep it on a disk in a drawer. It was written in the summer of 2011 and I’ve learnt a lot since so please bear than in mind.  There’s a nice bibliography worth checking out too. 

Dissertation Portfolio Final Essay

Brave New World: How Can Record Companies Adapt to the New Digital Reality?

Introduction

 The decline of the recording industry since the dawn of the digital age has been spectacular.   After enjoying almost two decades of huge profits brought about by the introduction of ‘the most exciting innovation’ (Knopper, 2009) of the 1980s, the CD, a seismic shift occurred in music consuming habits as millions started to download free music from the internet.  The sharp and long fall from glorious profits for the major labels (or record companies) was undoubtedly heightened by poor fiscal practices – such as failing to effectively conserve profits – and decadent spending habits, which saw unprecedented deals being made – Barbara Streisand’s Sony album and move deal for $40 million, or Madonna’s $60 million deal with Warner, for example.  But ultimately the shift in consumer behaviour to digital formats has brought this to an end and brought forward apocalyptic assessments of the future of music:

“The eruption of file sharing and online music had remove the ground from beneath my feet… not only was the future of the record as a ‘thing’ in question, but so was the future of music as a profession and an art”. (Italics for emphasis, Eisenburg, 2005: vii).

These assertions are unhelpful in understanding how consumption of music has changed and how the industry ought to adapt.  As with every technological revolution change is difficult and casualties are incurred, however this need not mark the end of the major record company, who despite falling profits continue to dominate charts and radio playlists.  A chief complaint is that file sharing – downloads and piracy – are to blame for the decline, shifting consumer attention away from the profitable CD format.  This may have appeared the case in the mid 1990s but in 2011, the damage to the record business is being caused by the record companies themselves, by failing to adequately accept and adapt to the new reality of the internet and online culture: file sharing has not only long since arrived, but is also the future of the music industry[1].

This essay aims to cast an eye over the actions of record labels that have ruptured relationships with the new online consumer – the Net Generation or Net Geners (Tapscott, 2009).  The ensuing discussion hopes to highlight some useful truths about the mechanics and culture of the online world; a new reality which functions differently to the offline “bricks and mortar” (Jarvis, 2009) world in fundamental ways, and from this, outline practices that could benefit the future of the record label.  It must be accepted however, that these companies will not be able to return to the fat and happy revenues they enjoyed throughout the CD boom, not just yet.

At this point, as we delve into a new understanding of business principles presented by the online world, it is worth pointing out that the essential needs and wants of the consumer have not changed; they have instead found new outlets to be indulged.  The sense of community that music fans enjoy at the record shop still exists, but is found at live music concerts and on music forums[2].  The record store staff expertise and radio DJ choice cuts are still important, but recommendations are increasingly being sourced from unpaid bloggers and taste tracking technologies and services such as Last FM.  The badge of ownership of the vinyl or CD thoughtfully arranged on shelves still exists, but are worn on Facebook ‘like’ pages, and personal music blogs.  Intrigued fans still read the NME for reviews and interviews, but many more visit their website for content instead of buying the magazine. The limited deluxe edition on vinyl with additional artwork is still a prize that was tough to rival digitally – until Bjork commissioned web and game developers to help build her iPad App Album Biophilia in 2011 (Burton, 2011).  The Net Generation consumer still wants the same essential experience, but the digital world opens up multiple possibilities in how to consume, and what we are virtually consuming.  What was once intangible as a product – the MP3 file, has now become a norm to younger generations, the ‘bits’ that make up the online world are being increasingly thingified.

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 Out of Touch Record Companies and the Net Generation 

When the digital file sharing service Napster came onto the scene, it was apparent that the record companies, however large, did not house any technologists – instead they had many lawyers.  This was the basis that launched a string of reactions to the digital world that would ultimately damage the reputation of the record labels with it’s consumers.  Not knowing how to deal with Napster[3] and fearing what they did not understand the Recording Industry Association of America (RIAA) – a lobbying group who represent 13 labels, including Sony, Warner and BMG – felt record companies were under threat from the file sharing trend, and launched offensives to quash the practice with a series of copyright infringement claims. As file sharing practices exploded, so did the ferocity of the labels punitive action and lawsuits against copyright infringement (Knopper, 2009).  Moving beyond Napster their firing line grew longer and increasing indiscriminate. Thousand of claims were filed against students and other individual consumers.  Tens of thousands of infringement notices to Internet service providers[4] and university campuses, and millions of person hours have been wasted on trying to tackle file sharing and downloading with litigation, with little impact.   Ultimately, the biggest impact they had was on their own reputation among digital consumers.  Punishments appeared to far out weigh the crime, and the cack handed approach to dealing with file sharing produced a number of PR nightmares for the companies; famously the RIAA sued a 12 year old girl who had harboured an MP3 file of her favourite TV programme on her computer.  Her working class parents, living in the projects, were forced to pay $2000 as part of a settlement in 2003; in 2005, the RIAA struck again, attempting to sue an 83year deceased lady for copyright violation of 700 songs (Orlowski, 2005).

The copyright lawsuits are not the only activities of the record companies damaging their consumer relationships.  Years ripping off consumers with high priced CDs (Knopper, 2009); poor revenue and royalty deals for artists; poor relationships with independent record stores – the eyes and ears of the music community (Jones, 2009); finally the record companies consistent rhetoric being almost exclusively about money – what they have lost, and what they are owed[5], and less publicly demonstrated concern for what impact illegal downloading could have on the artist and the future of good music.  It soon becomes apparent why major labels seem to have so few friends and supporters on the ground, and why file sharing continues with new and improved technologies being launched for free on a regular basis – it is a Net Generation back lash.

 Who are the Net Generation?

The term Net Generation and Net Geners was coined by Tapscott in his book Grown Up Digital.  With the rapid development and introduction of digital and online technologies, a new generation ‘bathed in bits’ was emerging tapping into a world of knowledge from far flung places, from a smart phone, sending emails, photos, locating their GPS coordinates and surfing the net (Tapscott, 2009: 2).

Literature is rife with sceptics and critics of the Net Generation. Arguing that their emersion in technology has meant they are dumber than previous generations at their age, easily distracted and relying too much on the internet for information; that they are net addicts, losing social skills attained from regular hobbies such as sport; they have no shame, giving out all sorts of information online, posting provocative pictures; they are adrift, living at home because their parents have coddled them; they bully friends online in social networking sites; they’re violent because of the violence that appears in video games; they have no work ethic and are bad employees with unrealistic demands on employers in regards to new technologies and approaches to management; they are narcissists fuelled by social networking sites and video posting sites; they have no values, and are only interested in their friends and celebrities; and finally, they steal, violating intellectual copyright laws of music and film (Tapscott, 2009: 3,4,5).

What is striking about these critiques is the hostility they represent, and doom and gloom they project about the future.  It was from this hostile backdrop that Tapscott drew up his research, trying to uncover some level of empirical truth about the attitudes of Net Geners.  The story that emerges from this research is a positive one, identifying that as the first truly global generation ‘Net Geners are smarter, quicker, and more tolerant of diversity than their predecessors.  They care strongly about justice and the problems faced by their society and are typically engaged in some kind of civic activity at school, at work, or in their communities.’  He argues that with reflexes ‘tuned to speed and freedom’ Net Geners have become empowered to transform the institutions of modern life.  ‘They are replacing a culture of control with a culture of enablement’ (Tapscott, 2009 6). This is arguably what the large record labels have been experiencing.

If Net Geners are typical of future consumers, it is important for businesses to align their practices with their attitudes.  In this capacity, Tapscott outlines 8 key characteristics, or norms, of the Net Generation. These are as follows:

1) Freedom

Net Geners want freedom in everything they do and to them ‘choice is like oxygen’.  Where as previous generations may have felt overwhelmed by the number of channels, brands, path and product types on offer, endless choice has become normalised for the Net Gener.  In this context, they use technology to cut through clutter and find what fits their needs.  This is not only applied to the products they consumer, but also to lifestyle.  They expect to be able to choose when and where they work, using technology to integrate their working and social lives; to have the freedom to change jobs, follow their own path and express themselves.

2) Customisation

Net Geners love to personalise their media and create their own content.  This is the result of the convergence of choice and the technology to manage choice.

3) Scrutinisers

Transparency seems natural to the Net Gener, research and information is expected to be made available.  This helps them to evaluate the choices they have, whilst protecting themselves from undesirable outcomes.  They naturally compare information, and use it to scrutinise products, offers and processes of companies and organisations.

4) Corporate Integrity

They look for corporate integrity when deciding what and where to buy a product.  The internet has provided instant connections between company and Net Generation consumers, as well as amongst Net Geners themselves who share values and trust one another’s opinions.

5) They want to be entertained

The variety of interactive experiences online have resulted in a playful mentality to work and an understanding that there is more than one way to achieve a goal – this is ‘outside-the-box thinking’ attributed to playing video games.

6) Collaboration

This generation communicate and collaborate constantly – sharing information for work or just for fun.  They trust one another’s recommendations when choosing to purchase a product, influencing each other when discuss brands, companies, products and services.

7) Speed

Rapid communication has become a norm amongst Net Geners and they expect the same speed of communication from others.

8) Are Innovators

The pace of innovation is on ‘hyper drive’. Net Geners quickly take up new technologies presented to them because the technologies can do so much more than before.  Therefore Net Geners are constantly looking for new ways to improve, be efficient, collaborate, entertain, learn and work.

These are the typical attitudes of future generations in the new reality, and the first wave have come of age.  The Net Generation are ‘flooding into the workplace, market place, and every niche of society’, they are globally connected, and bring with them demographic muscle (Tapscott, 2009: 4).  Record companies lack transparency, which has led to questions about integrity – in how they regard their artists, record stores and customers.  Their attempts to bottle neck file sharing and blocking of Private Copyright legislation is seen as an infringement on consumer freedoms to use their music files as they please, customise their music consumption, inhibiting them from playfully using technologies. The record companies slow response to aligning their values to that of the Net Generation consumer, to avoid exploring new ways of collaborating, is frustrating.   To the Net Gener, the behaviour of record companies since the 1980s is one of cold and controlling corporate labels who have exploited the consumer and greedily pursued those who cannot defend themselves with law suits where the compensation appears to far outweigh the crime.  In addition, the time spent in chasing this line of defence has meant that downloading has become increasingly normal.  These circumstances have contributed to the Net Generation’s rationalisation of file sharing and piracy; fostering what Anderson calls ‘The Pirate Brain’ (Anderson, 2009, 71).

‘Piracy is a special form of theft, one that is often considered by pirates and consumers of pirated goods alike to be a relatively victimless crime. …The argument is that a pirated good rarely substitutes for the authentic original. Instead, it allows the product to reach populations that can’t afford the original or otherwise wouldn’t have bought it. …the cost to the rightful owner are intangible. If you make a music album that is then pirated, the pirates haven’t taken something you own, they have reproduced something you own.” (Anderson, 2009: 71)

Without wanting to enter the discussion of whether the file sharing is right or wrong, this unpacking of the psychology of the pirate brain raises an interesting distinction: that file sharing is not a case of labels suffering a loss, but instead, a lesser gain.   Pirates are calculating the risk, the intangibility of the cost to the owner (and who the owner is) and the effort it takes to file share illegally.  As Steve Jobs has pointed out, there are many problems with downloading music on peer to peer sites – missing album information, the chance it’s the wrong song, problematic formats or a bad quality version.  The time taken to sort through these problems means that in order to avoid paying for music “you’re working for under minimum wage”. Pirates  are Net Geners who are time rich, but money poor. The record company ends up harshly penalising those who can least afford to pay. The magnitude of the penalties compared to the crime, means they rupture the possibility of relationships to consumers who understand the online world most comprehensively. And as Anderson notes, these are usually young people who, as they grown older, migrate to a paying customer as the 79p charge here and there seems less of a big deal (Anderson, 2009: 68)[6].

In 2011, record companies are still failing to align their values with the new Net Generation consumer with outmoded practices and ineffective arguments.  Recently, record label trade body BPI, the British equivalent of the RIAA, have been lobbying for web-blocking sites and internet server providers argued that

“Blatantly illegal foreign sites flout our laws, rip off customers and musicians, and wreak huge damage on our creative sector… failing [to block infringing sites] will see some of this county’s world-leading industries irreparably damaged on this Governments watch” (CMU, 2011).

To the Net Gener, CDs and copyright laws rip off the consumer and expensive licenses prohibit new business models and revenue streams for musicians. The recent fallout between independent record stores and Universal records over distribution agreements also illustrates either an inability or a reluctance to adapt to the new reality.  Record stores have a history of raw deals at the hands of the major labels. Previously, majors cut deals with large retailers such as Wal-Mart, who would sell the records on as a lost leader product, pricing them so cheap that the independent stores, that had supported the industry for decades, could not compete (Jones, 2009). The labels however, maintained their high profit margins.  In 2011, Universal/Def Jam cut a deal where the new collaborative Jay-Z and Kanye West album Watch the Throne was released four days early exclusively to iTunes and then gave large retailer Best Buy exclusive rights to sell a deluxe CD version for the first 10 days of release – cutting out the independent retailers altogether and cornering the albums market.  The deal, the first of it’s kind, has left independent stores angry.  The stores bandied together under the Record Store Day moniker and wrote a letter to Jay-Z and West stating that their arrangement “will be doing great damage to over 1700 independent record stores” who have supported them over the years. Jay-Z responded to complaints in an interview saying that the deal was a measure taken to limit the possibility of the records being leaked early onto the internet and was not intended to hurt small retailers[7] (CMU, 2011a).  So, although dressed up differently, the same old bottlenecking arrangements motivated to protect profits, despite negative impact on the wider industry, are still at the centre of the major record companies plan to tackle the digital conundrum.  And what was the Net Generations response? The record was leaked early online publicly by influential music website Pitchfork: Watch the Throne.

In order to survive in the new reality of Net Geners, virtual products and the web, record companies need to change their attitudes to handling the digital dilemma. As Wyndham Wallace of The Quietus put it:

“Whether the industry likes it or not, music is now like water: it streams into homes, it pours forth in cafes, it trickles past in the street as it leaks from shops and restaurants. Unlike water, music isn’t a basic human right, but the public is now accustomed to its almost universal presence and accessibility” (The Quietus, May 24th 2011).

This fluid property to music consumption afforded to us by the internet is not about to go away. Already clouded by the perceived complexity of renegotiating artist contracts that do not cover digital music and dealing with the potential losses of revenue for publishers that could make the lives of record companies uncomfortable, has meant they have failed to recognise the potential of digital services and new revenue streams[8].  Whilst labels have spent over a decade focussing on litigation against file sharing and building a potentially disastrous reputation with the Net Generation, other companies have swooped in and taken the reigns of the industry. Most notably Apple’s iTunes as a downloading service, and online instant streaming service Spotify. The popularity of these services is based on their understanding of the free flowing nature of online, and the inevitable role it will play in the future of music consumption. These services are not without problems however.  For example, iTunes is critiqued for it’s limited search capacity, being unable to search via record label for example.  Spotify, continues to run on investment and is yet to make a profit. Meanwhile, independent labels are choosing to remove their catalogues from the service because the meagre royalties they receive do not out weigh the negative impact the service has on physical sales. Without more paying users, it will be difficult to increase the royalty pay. What is more, it suffers competition from other services such as Groove Shark, where users can both make playlists and are offered recommendations.

Understanding some of the trends in the online world and economy may help to outline some paths towards a more compatible business model for record companies to survive in the new reality.

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Understanding the New Online and Digital World

What Apple and Spotify recognised when developing their services is that Net Geners want the freedom to play whatever music they like, on a selection of choice devices. Both supply users with software to listen and organise music on their personal computers.  Apple’s iPod allows users to carry their whole music libraries around with them. Spotify allows users to stream whatever music they like through their smart phones.  These companies also allow Net Geners to connect to others with similar musical choices; Apple allows users to create playlists and burn them to disc.  Spotify allows users to create playlists that can be shared with friends online. Both have functions to share user libraries.  However there are more principles of the internet available that can be invoked in new business models and approaches for record companies.

A first step is to understand the ‘long tail’ shape of the online economy.  Cheap tools for content creation, and near zero costs for showcasing products, information and services has made it easy for individuals to affordably ‘set up shop’ on the internet.  Consequently, the web presents ‘a billion choice’ world of infinitive possibilities, in which individuals can find out about any niche interest they wish.  Offline, in the brick and mortar shops and libraries, there is a finite amount of space for showcasing goods.  To shelve every possible interest or product of desire would be simply too expensive, even in the biggest of supermarkets. Therefore offline there is a higher chance of having a hit product, a product that has mass appeal in a choice limited realm.  By contrast the online economy is made up of a large number of niche markets, each with small profits but that collectively reap a large distributed profit.  The collection of niche low-profit markets is what Anderson terms The Long Tail.  Online, there are still hits, but they are lesser hits than in the offline world because the consumer attention is spread across the Long Tail (Anderson, 2009a; cf Jarvis, 2009).  Record companies need to accept that big hits are less likely to surface in the digital age, and that when they do, they will not be as profitable as they once were.  Future success will need to leverage the power of the long tail.

Next is to understand the value of links and networks in the digital world. Links and search mechanisms mean that everything can be found, and the more links leading to a site, the more valuable that site is considered to be[9]. In this network information is collected and passed on, and unlike previous media is two way and collaborative.  For businesses this means they can connect with customers, listen to what they think, and then enter a conversation with those who are unhappy and respond to improve or rectify issues with their product and service, for next to no cost. The ability of online networks to build relationships has enabled business to enrich the user experience in return for customer loyalty.  Successful examples of this include Dell, who suffered a barrage of online criticism regarding the handling of complaints, and who responded by admitting this was a problem and asking for users to help put forward suggestions on a platform called IdeaStorm.  The customers got involved with generating ideas for improvements to services and even products; they remained loyal to the business, and spread positive word about the company (Jarvis, 2009).  Connectivity opens up doors to establishing new and valuable relationships with customers, bringing new ideas to the company and instilling customer loyalty whilst helping to mitigate the impact of negative press.  Record companies need to build better relationships with consumers, who might be able to provide new ideas for improving business.  A network could bring forward new artists and music markets through tastemakers, and tap into the fervent loyalty that music fans are famed for (Hills, 2002).

Third, it may be counter intuitive to record companies as they operate in 2011 in the offline world, but online ‘free’ is a business model.  Offering free products and services opens the gates to forming a relationship with consumers who will return the favour in loyalty and by telling their friends how good the business it[10].  Cost gets in the way of businesses having a relationship with consumers, especially on the large scale that is made possible by the internet.  Often, ‘free’ is the best part of service and charging for a product is not necessarily the more sensible route to profit, instead the customer relationship can leverage a profit elsewhere.  Charging advertisers to be placed in front of your user can make a profit and remove the cost for your product or service away from the consumer; the advertisers, although not necessarily service or product users, become your customers instead. Google have created lucrative ways of making money through  targeted advertising and analytics, whilst providing multiple platform software to users free of charge, for example Google maps. Once the relationships are formed, information about consumers’ tastes and behaviours can be leveraged in other profitable markets. In short, if the old model for revenue streams are no longer lucrative; free them up in order to create a new environment with new possibilities for revenue (Anderson, 2009).

Record companies may wince at the thought of giving away free music but case studies suggest that free can make money.  In 2007, Radiohead’s name-your-own-price experiment with album In Rainbows has shown encouraging results advocating the value of free.  Side stepping a physical release to begin with, the album was released online and requested that fans pay as much or as little as they wanted. Some paid nothing, others paid £20 and the average price was around £6. Yet In Rainbows is Radiohead’s most commercially successful album, as the sale statistics show (Anderson, 2009: 154).

  • 3 million copies sold worldwide across all formats
  • 100, 000 copies of the deluxe edition sold at $80 each
  • The band made more money from the digital downloads before releasing the CD version, than the total take across all formats of their previous album.
  • When the CD was released, two months after the pay-what-you-will experiment, the album still entered number one in both the US and UK charts, and the paid digital iTunes download also entered number 1 selling 30 000 copies in the first week
  • The following live tour was Radiohead’s biggest ever, selling 1.2 million tickets.

Prince is another recording artist who has embraced to power of free to reach new audiences.  In 2007 he released the album Planet Earth for free in London’s Daily Mail. Licensing it to the paper for less than a fifth of its potential licensing revenue, the loss was made up for in ticket sales, selling out a record 21 shows in London’s O2 Arena (Anderson, 2009: 155).  Free can be a promotional tool, in fact it’s what makes Spotify and iTunes popular – the free try before you buy factor.

Although demonstrating how free can be profitable, through the side door, Radiohead and Prince are established and well respected artists to begin with and already command consumer attention.  Many lesser known musicians give away music, and it is difficult to calculate what impact this may have had on their revenue streams.  These cases are also unusual, and unprecedented.  If all artists gave away albums for free, either online or in the paper, the impact might be less impressive, and unlikely to yield the same hit sales targets.  Furthermore, the record companies don’t necessarily benefit from increased ticket sales on artist tours, unless they have entered into an agreement to redistribute that revenue, or have signed a 360 deal and take on a number of new responsibilities. It is therefore perhaps unsustainable and unfair to expect all music to be free in the near future. If this is the case, then record companies could benefit by reducing the cost of buying a digital song to a price approaching free. A low price would certainly factor into the decision making equation that leads to people illegally downloading songs for free – free becomes, at the very the least, less attractive. And as long tail economics shows, many small profits can mean larger rewards.

Thinking about ‘free’ or approaching free combined with long tail economics, might also be the key to finding new business models, in a time when the future shape of the music industry remains uncertain.

If record companies were to introduce a cheaper, affordable copyright blanket licence for digital start up companies, in exchange for information or shares in a company they could speed up the route to uncovering a sustainable and innovative business model and continue to be profitable.  The sharing of assets – in this case the record label catalogue – and knowledge between cooperative yet competitive companies is a new phenomenon termed co-opetition (Levy, Loebbecke & Powell, 2001).

The potential success of the blanket licence involves mixing the idea of the long tail with the value of free.  If many more start ups could afford a licence, the increased number of small profits being paid to the record companies could add up to a large profit over all.  If small start ups could afford a licence, they may be able to develop free services for users, who pay for music through a side door either by advertising, buying many individual tracks, perhaps a subscription fee or ideas that are yet to be developed.  If more start ups could afford to launch, then it becomes more likely that a successful business model will be established sooner, rather than later – and record companies could have a lucrative stake in the business model.

The business practices involved are those of open innovation and collaboration.  According to Chesbrough, practicing open innovation involves sharing ideas and knowledge with others in order to increase the probability of finding a solution to a problem or new innovation (Chesbrough, 2003); this may be key to finding a sustainable future for the music industry.  Co-opetition, as discussed earlier, thrives on this principle of sharing, but between competition companies.  The notion of Wikinomics takes the idea one step further.  The global reach of the web means that collaboration can occur between the best in the field around the world, and at little cost to the individual. Knowledge, power and productive capability, afforded by groups of connected individuals and experts is a world where value creation is ‘fast, fluid and persistently disruptive’, constantly updating and adapting shared knowledge to create value (Tapscott and Williams, 2009: 12). Arguably, this is what made Dell’s IdeaStorm a success.  By embracing the digital commons of open source goods and services, peer production can be induced.

An example of this, is the collaboratively created encyclopaedia Wikipedia has been authored by tens of thousands of enthusiasts, is ten times bigger than the Encyclopaedia Britannica and roughly the same in accuracy.  Despite constant battles with saboteurs, Wikipedia continues to grow in scope and quality, as well as traffic.  This style of mass collaboration is also having an impact on industry.  Businesses that rely on research and development have harnessed the power of the collective capabilities to help solve problems, gage industry direction and cut research time in the race toward innovation and markets; out performing their competitors.  The principle is that instead of struggling with the limited capacities bound by the company, open them up for talented outsiders to contribute to the effort. This is demonstrated in the case for mining company GoldCorp, who were in decline and struggling to locate where to mine on their property.  By making the data about the terrain in their property public and offering a reward for identifying successful mining locations, they opened the doors to a wealth of knowledgeable individuals internationally, who began to crunch through the data. The exercise received submissions from all over the world from geologists, physicist, mathematicians and many other experts hoping for a piece of the action.  Collectively, the contestants identified 110 locations to mine, 50% of which had not been identified by GoldCorp’s in house team. Over 80% of these locations yielded significant amounts of gold and the company estimates that the exercise shaved two to three years off their research time (Tapscott & Williams, 2009: 9).  By sharing intellectual property[11] the company went from entering decline with a valuation of $100 million, into a company worth $9 billion. Such is the power of opening up, casting the net and encouraging collaboration.  The principles of Wikinomics include openness, peering, sharing and acting globally (Tapscott & Williams, 2009: 30).  Wikinomics is born from the convergence of earlier online world principles that have been discussed. What it highlights is that the web presents an opportunity for record companies to learn about and from communities, talent and technologies that exist outside their company boundaries.  Such a process could help the industry develop and build upon new innovations such as Bjorks recent iPad album, Biophilia, a computer software based, interactive musical experience, without needing to be computer scientists themselves. Where record companies are able to provide access to talent, collaborators can provide ideas, skills and technologies.

Finally, one of the key business principles on the internet is to do what your business does best, and link to everything else (Jarvis, 2009: 26).  Record companies generally consider themselves good at making records, and profiting accordingly.  With this at threat we see them dabble in ideas about 360 contracts, widening the skill set of employees whilst diluting the talent.  Record companies ought to reconsider what it is they are best at.  It is perhaps a mistake to think the companies make the records. In fact as Radiohead have shown since their departure from EMI, it is the musicians who make the records, not the labels.  What the record companies do have to offer over and above other companies is a combination of budget and networks with some investments in technology.  They have valuable and unrivalled networks that reach far around the offline world, successfully distributing records and promotions to new markets.  These capabilities are perhaps the reason online music sensations such as Lily Allen and Justin Beiber choose to sign to major labels – because the online networks are more valuable with the offline reach of the record companies. It should be noted though, that the CD boom resulted in large profits to the label because they gained from the CD technology.    A logical step would be for labels to invest in music playing services and platforms, and foster strong online networks with consumers who can link to these services, collaborate on their development and become loyal users.

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Conclusion

The music industry is facing a rapidly changing market and consumer. This has been particularly difficult for record companies who are blinded by the success of the CD boom they enjoyed only a decade ago. The web, file sharing and new technologies have built a new reality in the way consumers behave and what they expect from businesses and organisations. As this new reality increasingly impacts commerce, record companies have jammed their heels into the ground with hostile protectionist activities that have been ineffective in halting, or even slowing the pace of change.  In order for these major labels to survive in the future, they will need to understand and learn the new trends and principles of the online world. To not do this, risks making themselves obsolete across the far-reaching online market, and eventually, offline too.  By employing the principles of long tail economics, the value of free and power of collaboration through links, it is possible for record companies to reposition themselves into a sustainable business model for the future.  Technologies already on the market are popular, but not pervasive.  iTunes, is critiqued for its limited search capacity, whilst Spotify continues to run on investment and is struggling to gain a profitably paying user base. There is still room for record companies to develop and influence the future of music distribution, should they wish to take on the challenge.

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Bibliography

Anderson, C., 2009a, The Longer Long Tail: How Endless Choice is Creating Unlimited Demand, London: Random House Business Books

 Anderson, C., 2009, Free: The Future of Radical Pricing, London: Random House Business Books

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Jenkins, H., 2006, Fans, Bloggers and Gamers: Exploring Participatory Culture, London: New YorkUniversity Press

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Articles

Burton, C., 2011 ‘Music. Nature. Science: Bjorks Most Ambitious Project to Date Fuses Music with iPad Apps’, in Wired: UK Edition, p87-95, Issue 08/11

CMU, 2011. ‘Vince Cable Talks Copyright’, at www.cmuwebsite.com, August 3rd

CMU, 2011a, ‘Jay-Z Defends Best Buy Deal, It’s About the Leakers’, at www.cmuwebsite.com, August 3rd

Emarketer, 2011, UK Digital Music Revenues 2005 – 2010, available at The British Library, London.

Gran, A. B. & Molde, A., 2009, ‘Downloading Music and CD Purchase’, research by the Bi Norwegian School of Management, available at http://www.bi.no

Hargreaves, I., 2011, Hargreaves Report: ‘Digital Opportunities: A Review of Intellectual Property & Growth’, available at www.ipo.gov.uk

Kusek, D., 2011, Future of Music, various articles at http://www.futureofmusicbook.com

Levy, M., Loebbecke, C. & Powell, P., 2001, ‘SEMs, Co-Opetition and Knowledge Sharing: The IS Role’, Global Co-Operation in the New Millennium, presented at The 9th European Conference on Information Systems, June 29-29

Orlowski, A., 2005, ‘RIAA Sues the Dead’ available at http://www.theregister.co.uk

Presnikoff, 2011, ‘Limewire Settles Out-of-Court for $105 million…’ at www.digitalmusicnews.com, May 12th

Wallace, W., 2011, ‘Music Industry is Killing Music and Blaming the Fans’, http://www.thequietus.com, May 24th

References

[1] Emarketer data shows digital music revenues have increased 5 fold in the UK, from £56.9 million in 2005, to £259.7 million in 2010.

[2] Leeds Music Forum.co.uk is particularly colourful, as is Drowned in Sound.

[3] The RIAA did attempt to negotiate with the site, but Napster executives were struggling to come to an agreement on a central business plan, in the strain hostilities surfaced and communications with record companies broke down (Knopper, 2009).

[4] Business Secretary Vince Cable and OfCom recently agreed that blocking ISPs was both unworkable and unnecessary.  Legislators move increasingly toward loosening the copyright grip on digital media.  Cable recently endorsed the idea of a private copyright law, as recommended from the Hargreaves Review fro Copyright. The law would allow people to make private backup copies of the CDs they own and make without compensating the labels and artists, as well as parody songs online without permission from the original song owner (CMU Daily, 3rd August 2011; Hargreaves, 2011).

[5] In a recent court battle against file sharing service Limewire, the RIAA posited that the site had cost the music industry $75 trillion. This was considered ludicrous considering world GDP stands at $65 trillion, and was, rightly, laughed at by the courts (Presnikoff on Digital Music News, May 2011; The Wallace on The Quietus, May 2011).

[6] In fact a study undertaken by the respected BI Norwegian School of Management in 2009 found that those who download music illegally are ten times more likely to pay for songs than those who don’t. The survey did not take into account the use of streaming services (Gran & Molde, 2009).

[7] Although his comment is tantamount to accusing the employees of independent record stores for any leaks.

[8] The failure to take on Napster in the late 1990s lost record companies direct access to 22 million users (Knopper, 2009).

[9] A principle mechanism in Googles search algorithm (Jarvis, 2009).

[10] Illustrated through common place free sample marketing, or 50% free campaigns we see in retailers

[11] They by no means shared all their intellectual property, safe guarding certain company fundamentals continues to be good practice (Tapscott & Williams, 2009).