MAXIMIZING in a Decline in Revenue Due to

MAXIMIZING in a Decline in Revenue Due to

MAXIMIZING PROFITABILITY IN THE MUSIC INDUSTRY INTRODUCTION The Canadian music industry encourages development in technology as an aid to improving revenues. This has resulted in the current challenge which the music industry faces: loss in overall profits due to technological advances, and potential for product obsoleteness. Going forward, profits will be affected even more as technology advances further, and digital music becomes more popular. Therefore, the CRIA has asked industry experts to assess the current and future business environments and propose measure the music industry must take in order to adapt and survive. The purpose of this report is to assess the music industry, evaluate the key decision criteria affecting the industry, and recommend a response to the changes in the marketplace. This report outlines several methods to improve long-term profitability, but the exact long-term profits are difficult to determine.

Estimates for future profits were made based on the current path of the industry. For this report, the industry expert analyzed internal reports on the effects of piracy on the music industry. This information was compared with external statistics to determine opportunities for growth and profitability in the future.

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Consumer behaviour was also analyzed in order to choose the most profitable opportunity for the music industry to invest in This report reviews the current and future market, outlines key decision criteria around which the report’s recommendations are based, and suggests modifications to the industry’s current business model to increase annual revenue. THE DECLINE IN PROFITABILITY IN THE MUSIC INDUSTRY In 2006, the music industry achieved a profit of 14 percent, illustrating the industry’s ability to turn a profit; however, annual revenues have decreased.From 1999 to 2010, the music industry faced a 57. 5 percent decrease in global revenue. This has led to the industry’s inability to pay its debts, and reinvest its money into new materials and Canadian musicians.

The long-term profitability of the music industry is in jeopardy. Refer to Exhibit A and Exhibit B regarding the assessment of the current state of the industry. Advances in Technology have resulted in a Decline in Revenue Due to technological advances, new entrants easily enter the market, preventing growth, and stealing market share from existing record labels.Two major entrants into the industry due to technology are •Digital music distribution which includes illegal peer-to-peer file sharing as well as legal downloading software such as iTunes •Internet sites that allow new and existing artists to utilize internet sites promote themselves and their music without being signed by a record label In a market where there is relatively ease for product substitutability, the introduction of digital music has resulted in a decrease in revenues for the music industry (see Figure 1)Digital Music and CD Sales Revenue Decreased from 2007 to 2008 In the current recession consumers are unwilling to spend on ‘entertainment’ items such as CDs.

Figure 2 shows the breakdown of CD and digital music sales in Canada from 2007 to 2008. Year To Date Units and dollars expressed in thousands20082007Percent Change Units Shipped – Physical Product DVD29683152-6% CD3325338763-14% Other Formats108121-11% Total Units3632942036-14% Net Value of Shipments – Physical Product DVD4154845519-9% CD322956384622-16% Other Formats567850-33% Total Value$365,071$430,991-15%Net Value of Shipments – Digital Product Internet Downloads454382756465% Digital Mobile Content21632205925% Subscription Model4599314446% Other (Including Streaming)2829552413% Total$74,498$51,85244% Grand Total $439,569482843-9% The CRIA measured and compared the net value of shipments in physical and digital products. Findings were determined that CD formats suffer a 14 percent from 2007 to 2008, while digital products experienced significant percentage increases, with an overall loss in the value of products. This demonstrates the consumers’ shift in value from physical product to accessibility.The Government Does Not Prosecute Illegal Downloaders The World Intellectual Property Organization (WIPO) Copyright Treaty created in 1996 was made in order to compensate the music industry due to advances in technology which were not previously available.

Currently, the government of Canada is reforming its copyright laws; therefore, while downloading from peer-to-peer networks is illegal, courts are not enforcing the laws, and allowing this downloading to continue. The Industry Five Years Later A more digitally focused industry will be focused on the improvement of global laws and treaties regarding anti-piracy.This includes prosecuting individuals who infringe on copyright laws.

The main area of turbulence that will continue to impact the industry’s business approach is technology. Due to its promotion of digital music distribution and illegal downloading technology will continue to have a detrimental effect on profits. Technological advances will continue to threaten brick and mortar locations. Refer to Exhibit C and Exhibit D regarding a more thorough analysis of the industry five years into the future. KEY AREAS IMPACTING STRATEGIC ACTIONSThere are many factors which affect the music industry. The industry expert has outlined five key decision criteria around which a response to the industry’s current challenges should be formulated.

1)Focus on long-term sustainability and profitability. The most important factor affecting decisions in any industry is ensuring the long-term sustainability and profitability of said industry. If growth potential is non-existent, investing in the industry, or any improvements, is futile. The music industry has focused on short-term profitability rather than the development of their artists.New artists are continually signed to labels, and subsequently lose their contract after the release of one album. Evidenced in the decline in the music market, these short-term endeavours cannot sustain the industry.

In response to the current challenge, there should be a focus on developing long-term tactics to ensure that the industry will thrive in the future, while continuing to create short-term profits. 2)Costs and benefits. While it is necessary to take risks involving the improvement of an industry, these risks must produce positive results.

If the benefits of a plan are insufficient when compared to costs, the industry’s current challenges have not been overcome. When contemplating the response to the music industry’s current challenge, it is important to consider its financial ability. While the music industry continues to turn a profit, there has been a $23 billion decline in the global recorded music revenue since 1999.

The purpose of the response to the music industry’s current challenge is to find a method to increase revenues in the long run. If the music industry’s response does not do this, then it is ineffective, and the plan should not be implemented. )Ease of transition. Consumers must be able to easily adapt to the response made by the music industry. One of the key factors driving consumers to buy products is ease of access. This is seen in the decline in profits for bricks and mortar locations, and the increase in profits for downloading software. If consumers do not find the changes made in the industry ‘easy’, profits may increase at first due to promotion, but there will be a severe decrease due to customer dissatisfaction.

A focus must be placed on making the transition easily adaptable for consumers. 4)Industry flexibility.The importance of improving market flexibility is evident in preventing history from repeating itself.

The music industry faced an enormous revenue loss due to not assessing the industry and its markets for potential threats. This was detrimental as advances in technology overwhelmed the music industry which had no response to the changes in the marketplace. To guarantee the future success of the industry, the market must constantly be assessed, in order to ensure that the industry has the means to develop alongside any market changes. 5)Maintenance and improvement of customer and suppliers relations.Customers are less connected to the industry due to downloading software and the ease of access through the internet.

Moreover, customers are not repurchasing albums and there is a decrease in the market for music. Customers drive profits; in order to overcome the music industry’s current challenge, there should be a focus on customer acquisition and loyalty in order to ensure long-term success. The main focus of the music industry is to promote and sell its products. The music industry is significantly dependent on artists for critical aspects of the music industry’s product offering.With the advancement of technology, artists no longer have a need for record labels.

Therefore, the music industry must devise a plan which focuses on maintaining and generating artist relationships. METHODS FOR EXPANDING MARKETS AND INCREASING REVENUES After assessing the current market and the market in five years, the industry expert identified three opportunities based on the key decision criteria that should enable the music industry to increase revenues and ensure long-term profitability. Three Ways to Improve the Music Industry 1)Integrate into New MediumsThe music industry should work alongside the entertainment industry to create more music-focused television shows and movies. A group of people should be appointed to assess the market and determine the genre of shows and movies which would generate discussions about music. This type of promotion causes sales in particular songs to increase overnight; for example, the day popular television show Glee performed Madonna’s “Like a Prayer” 87 000 downloads of that song occurred. Additional music awareness can be achieved by utilizing the capabilities of smartphones.The industry should work with the smartphone industry to create applications which would capitalize on the distribution of digital music via cell phones.

While Apple offers iTunes to iPhone users, there is a much larger existing and growing market in other smartphone users; for example, Android cell phone users. Furthermore, the internet should be utilized as a method of globally distributing and promoting music at a lower cost. The internet will allow the music industry to expand its market into emerging marketplaces; for example, Brazil, Russia, India and China.As the industry moves into new markets, it is imperative that money is invested in market research in the metropolitan areas of these countries. In order to drive profitability, the music industry must determine the best way to market existing artists to these countries and determine cultural musical preferences so as to acquire new, profitable artists from these countries. 2)Decrease Investment in CD Production. It is evident that while CD sales continue to produce the highest revenues for the music industry, sales are decreasing.

Over a twenty year period, the music industry should remove investment in CD production and reinvest that money in new endeavours as well as in the expansion of digital music. With the stricter enforcement of copyright laws comes the development of the digital music distribution sector of the music industry. The CRIA should invest in creating and promoting its own digital distribution channel. Additionally, one of the music industry’s key strengths is its ability to utilize promotional strategies to generate audiences for new and existing artists.These promotional strategies are focused on the internet along with live concerts.

Going into the future, the CRIA should focus on promoting its use of the internet and live concerts as a strategy to keep new and existing artists interested in labels. After assessing the current legal state of the market, it is evident that new reforms on copyright laws will be made and enforced globally. In expanding into new markets, it is important for Canada to support the global creation of groups which collect royalties.In emerging economies there is little encouragement for countries to pay royalties, by supporting the establishment of royalty collecting groups the industry will receive revenue from these countries in the long-term. 3)Constantly Assess the Industry The music industry’s current challenge was caused because the industry was not constantly assessed for potential threats to its products. After the advances in technology, the industry faced decreases in revenue and the customer market, and the potential that their product may be rendered obsolete.

In order to prevent this situation from reoccurring, the CRIA should hire a team of people to produce an annual report regarding the music industry. To ensure industry flexibility regarding any changes found in the marketplace, the CRIA should invest money into recruiting workers who have the skill set to deal with new technology. Also, existing workers should be trained in new technologies. An annual investment should be made to create and maintain a program to ensure the continual skill of workers. EXHIBITS Exhibit A: Porter’s Five Forces – Current Market Exhibit B: PEST Analysis – Current MarketExhibit C: Porter’s Five Forces – Industry Five Years Later Exhibit D: PEST Analysis – Industry Five Years Later BIBLIOGRAPHY CIMA: The Canadian Music Industry in a Digital World – CIMA Submission to National Digital Policy Consultations . (2010, July). Retrieved November 4, 2010, from The Canadian Independent Music Association: http://www.

cimamusic. ca/ Canadian Recording Industry Association (CRIA). (2008, December 31). Canadian Recording Industry Association (CRIA) Statistics. Retrieved November 7, 2010, from The Canadian Recording Industry Association: http://www.

ria. ca/ Geist, M. (2010, January 25). Michael Geist – The ACTA Guide, Part One: The Talks To-Date.

Retrieved November 4, 2010, from Michael Geist: http://www. michaelgeist. ca/ Goldman, D. (2010, February 2).

Music’s lost decade: Sales cut in half in 2000s – Feb. 2, 2010. Retrieved November 6, 2010, from CNNMoney. com: http://money.

cnn. com/ Government of Canada. (2010, October 19). Anti-Counterfeiting Trade Agreement (ACTA). Retrieved November 8, 2010, from Foreign Affairs and Internation Trade Canada: http://www. nternational. gc.

ca/ Hunter-Tilney, L. (2010, September 10). FT. com/Reportage – The music industry`s new business model.

Retrieved November 7, 2010, from FT. com: http://www. ft.

com/ International Federation of the Phonographic Industry. (2010). Statistics. Retrieved October 28, 2010, from IFPI: http://www. ifpi. org/ Knowledge@Wharton.

(2006, July 2006). From Confrontation to Experimentation: The Music Industry Is Playing a New Tune. Retrieved November 6, 2010, from Knowledge@Wharton: http://knowledge. wharton. upenn.


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