E-commerce Business Models for the Music Industry

Abstract

In 2000, global sales of CDs, cassettes, and vinyl records amounted toapproximately US$37 billion (International Federation of the PhonographIndustry, “Recording”). The United States—the primary focus of this essay—is theworld’s largest music market, with at least $12 billion in annual sales of record-ings (Recording Industry Association of America, “Recording Industry Releases”).However, there are indications that recording sales have reached market satura-tion and may even be declining for some formats. Diebold, a leading Germanconsulting group, has observed that global music sales fell from $41.5 billion in1995 to $38.5 billion in 1999 (Diebold Group, “Wanted: A Survival Plan for theMusic Industry—Chapter One” 1). Music sales in the United States dropped2.6 percent in 2000, and sales of CD singles slumped by 36 percent (RecordingIndustry Association of America, “Recording Industry Releases”). According to theRecording Industry Association of America (RIAA), music product shipmentsbetween mid-2000 and mid-2001 decreased from $6.2 billion to $5.9 billion, adecline of 4.4 percent (RIAA, “The Cost of a CD” ).Industry observers have attributed the decline in music sales to several factors,including a lack of “blockbuster” releases, competition from other media such ascomputer games for younger consumers, and the availability of free music on theInternet. By 2001, an estimated 30 million American adults—29 percent of alladults—had downloaded music files over the Internet (Graziano and Rainie 2).Younger Americans are even more likely to download music, with 53 percent ofthose between 12 and 17 years old (more than 7 million consumers) claiming tohave downloaded music (Graziano and Rainie 2). Moreover, at least 79 percent ofdownloaders do not pay for the music they have retrieved from the Internet(Lenhart and Fox 2). The downloading of free music by young consumers is a par-ticular concern for the music industry. Evidence indicates that these consumers arepurchasing less music: Between 1991 and 2000, the overall market share declinedfrom 18.1 percent to 12.9 percent for 15–19-year-olds, and from 17.9 percent to12.9 percent for 20–24-year-olds (RIAA, “Recording Industry Association”).Understandably, these findings raise concerns about the future of music as a prod-uct, particularly with regard to young consumers, whose future music-purchasinghabits are being influenced by the availability of free music over the Internet.Offsetting these concerns are predictions that delivery of music over the Internet(i.e., music as a service) will expand significantly through 2005 (see Tables 1 and2). Jupiter Media Metrix, an Internet market research firm, estimates that, in2005, 76 million consumers will purchase $5.4 billion of music online, thereby