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Digitalization of Music

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Digitalization of Music
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Lassiter, Nathan
Blair, Roger ( Mentor )
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Gainesville, Fla.
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University of Florida
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Digitalization of Music

Nathan Lassiter


ABSTRACT


To fully grasp the effect the Internet and other emerging technologies have had and will continue to have on

the music industry, we must analyze the various business models in this new environment, the new channels

that have emerged, and the businesses operating within these channels. The new business models consist of

slight variations of the traditional model, as well as radical reconstructions of the relationships among

consumers, intermediaries, and content creators. These business models can be broken down into four groups:

digital music services, p2p stores, collective blanket licensing, and ancillary products and services. In addition to

the formation of new business models, the internet and other emerging technologies have created new media

for creators to promote and sell their content to consumers. The main media in the digital music market consist

of digital music services, peer to peer (p2p) networks, satellite and Internet radio, and mobile phone networks.

Each of these media offers unique opportunities for content creators, businesses, and consumers.



INTRODUCTION


The Internet and other emerging technologies are changing life for both consumers and businesses.

From transforming the way various industries function, to changing consumer behavior, digital technologies

exert more impact now than ever before. Businesses have new media to market products and services to

consumers, while consumers have new ways to purchase and find information on these products and services.

These transformations are especially prevalent in the music industry, which is going through a radical change

directly resulting from the Internet and other emerging technologies. As a result, there are opportunities to

exploit and new obstacles to overcome. Record labels, for example, have the opportunity to promote and sell

their music through new channels, such as digital music services, but also face the challenge of integrating these

new channels into their business models efficiently and effectively. The best known channels to promote and

sell music in this digital era are digital music services, peer to peer (p2p) networks, satellite and Internet radio,

and mobile phone networks. To fully grasp the effect the Internet and other emerging technologies have had and

will continue to have on the music industry, we must analyze the various business models in this new

environment, the new channels that have emerged, and the businesses operating within these channels.


BUSINESS MODELS





The Internet, in conjunction with various digital technologies, is threatening the traditional business model to

which the music industry is accustomed. Those who understand these digital technologies have created new

business models that range from slight variations of the traditional model, to radical reconstructions of

the relationships among consumers, intermediaries, and creators. These new business models can be broken

down into four groups: digital music services, p2p stores, collective blanket licensing, and ancillary products

and services (Digital Media Project). These business models differ in the degree to which they depart from

the traditional business model and the degree of control they exert on consumer behavior and content.



Digital Music Services (DMS)


DMS is the business model that most closely resembles the traditional brick and mortar retail model for selling

music. Also, this model exerts the most control on consumer behavior and content. Rights holders, such as artists

or record labels, license their content to various DMS providers, who then sell the content to consumers

through websites or software applications. DMS providers can sell music on a pay-per-download basis, a

subscription basis, or a combination of the two, such as allowing a certain number of downloads per month

(Digital Media Project). Digital rights management (DRM) can be used to limit the use of content after a

certain amount of time, thus allowing rental models (Digital Media Project).



Since the variable cost of distributing digital content is essentially zero, this model has a much cheaper cost

structure than the traditional model. Also, since digital storage is relatively inexpensive, DMS providers can

offer consumers an extensive catalogue of content, unlike a brick and mortar store, which is limited in the amount

of content it can offer consumers (Digital Media Project).

DMS are currently the music industry's main source of revenue from the Internet (Digital Media Project).

DMS compete against each other on such factors as price of content, exclusivity of content, and the flexibility of

the content (Digital Media Project).



P2P Stores


The p2p store business model is closely related to that of the DMS. One key difference is that this model

uses consumers as second-hand distributors. The p2p stores' main purpose is to pay rights holders and

collect payment from consumers (Digital Media Project). Secondary purposes are distribution and content

hosting. P2p stores negotiate licenses with right holders on an individual basis.



The p2p store model consists of two variations: "superdistribution" and "closed networks." In

"superdistribution," consumers can distribute and host content through all available p2p networks (Digital

Media Project). Consumers download content from other consumers. Depending on the set up of the

network, consumers could receive a piece of the revenue or some type of reward when content is downloaded

from them. This encourages the distribution of licensed content (Digital Media Project). In "closed

networks," consumers connect to a specific p2p network. This p2p network would only allow authorized files to

be shared among users. In both models, consumers have the option of various payment plans, such as a pay-






per-download or a subscription plan (Digital Media Project).


The p2p store business model allows content creators to supply their work directly to consumers, even more so

than the DMS business model. By giving consumers incentives to distribute content and therefore turning them

into viral marketers, less financial investment is needed for content creators to obtain sales (Digital Media

Project). This reduces the content creators' need for large intermediaries, such as record labels.



With the ease and incentives of distribution in combination with the ability of content creators to more easily obtain

a financial return, consumers are exposed to a larger assortment of artistic work (Digital Media Project). For

the music industry, the p2p business model provides cheap distribution and content hosting, and allows consumers

to actively participate in the marketing process. For consumers, the p2p store allows participation in an

interactive community where they can discover new content from individuals who share similar interests and

tastes. P2p stores such as Wippit, a closed network model, and Weedshare, a superdistribution model, have

licensed content from various independent artists. However, it is still uncertain to what extent the music industry as

a whole will embrace the p2p store.



Collective Blanket Licensing (CBL)


The CBL business model allows consumers to download unlimited content from various decentralized p2p

networks, and at the same time compensates rights holders for their work (Digital Media Project). In order for

this model to work, a CBL would have to be formed. Rights holders would register their content with the

organization, thus allowing consumers to distribute and copy it online without restrictions. The CBL organization

could sell licenses directly to consumers at a fixed rate, or to p2p software distributors or Internet Service

Providers (ISPs), who would pay a fixed rate for each of its users.



The CBL organization would distribute royalties to rights holders based on the number of times their content

was downloaded. Some type of government involvement would be necessary to set the price users will pay, set

the amount of money received by rights holders, and to set up the CBL organization. However,

government involvement in regulating and valuing various forms of art is extremely unpopular, posing a

potentially serious problem for this model. Additionally, intermediaries such as record labels would likely reject

the model because it reduces their importance in the industry.



CBL has worked well for performance rights organizations such as BMI and ASCAP. But relying on this model for

its primary revenue source would significantly affect the music industry's structure and revenue distribution. As

a result, the industry will most likely resist implementing the CBL model.



This business model could benefit consumers because they do not have to worry about companies putting any type

of restrictions on their content, such as digital rights management, and they would have unlimited access to

an enormous amount of content.








Ancillary Products and Services (APS)


In the APS business model, the role of digital content switches from being a revenue source, to being a

marketing tool for other revenue sources. These other revenue streams consist of sales of ancillary products

and services. Examples of some ancillary products and services with revenue potential are merchandise sales,

concert performances, endorsements and other forms of advertising, and fan club services (Digital Media Project).

In order to promote these ancillary products and services, distribution of digital content would be encouraged

by rights holders and content creators (Digital Media Project). Content creators and rights holders could

distribute digital content through websites, p2p networks, e-mail, or mobile phone networks.



Since the cost of distributing digital content is very low, this model is much more feasible than in the past.

Content creators would not only have to market their content, but also market whatever ancillary products

and services they intended as revenue sources. The role of record labels in the APS business model would

change significantly. They would no longer receive revenue from selling content, their main source of income,

but rather from selling ancillary products and services.



It is unlikely this model would be able to support the industry as a whole. It could benefit those content creators

who take advantage of the cheap distribution costs brought about by p2p networks, because they can cheaply

market their content and rely on ancillary products and services for profits. This model would not benefit the

major labels, which spend large sums of money marketing programs for certain artists, anticipating they will

recoup their costs from music sales; they tend not to focus on ancillary products and services.



MUSIC INDUSTRY SALES ANALYSIS



Since 2000, the music industry has seen a decline in music sales. Many believe the illegal sharing of

copyrighted material on p2p networks is the main cause of declining CD sales. According to Nielsen

SoundScan, which tracks point of purchase sales of CDs, however, 2004 was a rebound year. CD sales were up

2.3 percent compared to 2003 (Daly, A01). This is the first increase in CD sales since 2000. According to

the International Federation of the Phonographic Industry (IFPI), worldwide sales of recorded music declined

7.6 percent in 2003 (Wardell). A market analysis by Alec Hanley Bemis of LA Weekly contrasts album sales in 1999

to album sales in 2004. The difference is that multi-platinum albums are not as common in today's market. In

1999, N Sync's N Sync sold about 10 million; Britney Spear's Baby One More Time sold approximately 12 million;

the Dixie Chicks' Wide Open Spaces sold approximately 10 million; Shania Twain's Come on Over sold

approximately 17 million; and The Backstreet Boys' debut album sold approximately 13 million (Resnikoff, "A

Closer Look"). In 2004, the top seller was Usher's Confession, which sold approximately 9 million copies

(Resnikoff, "A Closer Look").



2004 was also the year online music sales finally began to take off. According to the IFPI, online digital sales






were approximately $330 million, a growing but small proportion of overall industry revenue (Koranteng). There

are now more than 230 online music retailers across the globe; 150 of these online retailers are in Europe. This is

a large increase from the 50 online music stores in 2003 (Koranteng). In the US and Europe, the number of

songs legally downloaded increased 10-fold in 2004 to more than 200 million. In the U.S., consumers purchased

over 200 million downloads in 2004, up from 20 million in 2003 (Daly). According to research firm Jupiter

Media, digital music sales will represent up to 25 percent of total global music sales in five years (Koranteng).



Since online music sales are beginning to gain traction, the Recording Industry Association of America (RIAA)

has begun giving out awards. Artists who sell 100,000 digital downloads will receive a gold award, and artists

who sell 200,000 digital downloads will receive a platinum award (Resnikoff, "RIAA"). Also, Billboard magazine

will include downloads when it calculates the nation's top hits (Bauder).



MAJOR PLAYERS IN THE DIGITAL MUSIC SPACE



Apple's iTunes


Of all the players in the digital music realm, Apple's iTunes is getting the most attention. iTunes sells

consumers music through the Internet on a per track, or per album basis. Of the 200 plus million downloads sold

in 2004, Apple's iTunes accounted for 90 - 95 percent of the market (Smith). iTunes has been established in

14 countries outside of the U.S since its launch in April 2003. The countries include the United Kingdom,

France, Germany, Ireland, Austria, Belgium, Finland, Greece, Italy, Luxembourg, the Netherlands, Portugal,

Spain, and Canada (Koranteng). With much of the European Union covered, iTunes next rollout will likely be in

Asia and in Australia. Australia seems to be a good choice because the current digital music services,

Telstra's BigPond, Ninemsn, and Destra, are failing to draw a substantial number of consumers to their

sites (Resnikoff, "Australia").



Apple's iTunes has a few key competitive edges in the online music market. First, and probably most important,

is Apple's introduction of the iPod. This portable mp3 player is extremely popular among consumers as not only

an mp3 player, but also a fashion accessory. This gives iTunes a competitive edge because consumers can

only transfer content from iTunes to the iPod. This content can be downloaded from iTunes, or it can be loaded

into the program at the user's discretion. Also, the Apple brand name is highly recognized and identified by

the majority of consumers. Apple has created some strategic alliances that have helped their position in the

market. Most recently, Apple has again paired with Pepsi to give away 200 million free downloads and 2,000

silver iPods. Specially marked Pepsi caps will reveal to consumers whether they have won (Resnikoff, "Apple").

Apple has also allied with Hewlett Packard, and HP will co-brand the iPod (Heine). This alliance helps the

distribution and promotion efforts of the iPod, which in turn brings more consumers to the iTunes store. Apple has

set up an iTunes affiliate program that allows websites to make commissions from consumers clicking on links

to iTunes singles or album downloads. Affiliates get 5% commission on sales resulting from links on their

websites (Banerjee).








RealNetworks


RealNetworks offers consumers a couple of choices to enjoy music. These include RealRhapsody, RealPlayer

Music Store, and RadioPass. RealRhapsody is a subscription service and consumers pay $9.95 a month to

have access to over 800,000 songs and 80 plus advertising-free Internet radio stations. Subscribers are streamed

the 800,000 plus tracks, and therefore can listen to them as many times as they like, but only on their

computers. Customers pay 79 cents to burn a song to a CD.



The RealPlayer Music Store sells music to consumers on a per track or per album basis, just like iTunes.

The RealPlayer Music Store's catalogue has more than 700,000 songs, with individual downloads ranging from

49 cents to 99 cents. Using the Harmony Technology, consumers can transfer music to numerous portable devices.



The RadioPass costs consumers $4.95 a month or $49.95 a year and gives them access to over 70 ad-free

online radio stations and 3,200 broadcast stations worldwide. Customers can only listen to RadioPass on

their computers.



RadioPass and RealRhapsody now have a combined subscriber base of over 700,000. This is a large increase from

the 350,000 subscribers a year ago. Music accounted for $21.6 million of RealNetworks revenue in the fourth

quarter of 2004, approximately 30% of total revenue (Resnikoff, "RealNetworks Gains").



RealNetworks has made several strategic alliances that have helped them advance in the online music

market. Recently, RealNetworks partnered with Monster.com to offer people who revise or upload a resume

by January 31st a month of RealRhapsody for free and a chance to win $50,000. This partnership will help to

increase RealNetworks' visibility since Monster.com will be heavily promoting the giveaway (Resnikoff,

"RealNetworks Monster"). This partnership follows a promotion with Comcast in which subscribers of Comcast's

high speed Internet service receive a free month of RadioPass, a $4.95 value (Resnikoff, "RealNetworks

Monster"). The promotion will give broadband users a taste of the digital music space in hopes they will

eventually upgrade to the RealRhapsody service. RealNetworks has teamed up with various broadband

Internet service providers in the past, including Verizon, Time Warner's RoadRunner, Cablevision, and Sprint. But

the Comcast deal is the largest agreement RealNetworks has made with any broadband Internet provider

(Bruno). Also recently, RealNetworks has partnered with Sonos. Sonos will integrate RealRhapsody into its

digital music system. Sonos provides consumers with a digital home stereo solution that allows you to listen to

music in any room of the house. The partnership comes after agreements with other networked stereo

providers, such as NetGear, D-Link, Linksys, Pinnacle Systems, Rockford Fosgate, Prismiq, GoVideo, and

SMC Networks (Resnikoff, "RealNetworks Continues").


Napster





After being shut down for copyright infringement, Napster has reemerged as a legal solution to enjoy music.

Napster can be found in the U.S., Canada, and the United Kingdom, with Germany and France soon to

follow (Brandle). Napster offers consumers two types of subscription services, as well as the option to buy

individual tracks and albums. For $9.95 per month, consumers can access over 1,000,000 tracks and over

50 commercial-free radio stations on their computer. Like other subscription models, consumers do not own

the music; they rent it and have access to it as long as they pay the monthly fee. Consumers cannot move the

music off the computer and must have an Internet connection for the service. If they want to burn certain tracks to

a CD, they must buy the individual tracks. For $14.95 per month, consumers can get Napster To Go.

This subscription service gives consumers access to the same content as the previous subscription service, but

on multiple devices. For example, consumers can now transfer music to certain mp3 players, which they can hook

up to car stereos through an audio cassette adapter. Consumers can also access the service from Windows

mobile based smart phones. Napster To Go is based on Microsoft's Janus digital rights management

technology (Garrity). Consumers also have the option of buying individual tracks or albums from Napster Light

at prices comparable to other digital music services.



In the last quarter of 2004, Napster experienced a 50 percent increase in subscribers, bringing the total

to approximately 270,000. Fifteen percent, or 44,000, of these subscribers were from universities

(Resnikoff, "Napster Shows"). Napster will continue to heavily promote its Napster To Go service in 2005 with a

$30 million promotional budget.



Napster is now counting on the digital music space as its only source of revenue, after Roxio, Napster's

parent company, sold its software division to Sonic Solutions (Resnikoff, "Roxio Sale"). Napster received over

$130 million in cash and stock from the sale, thus helping it finance its future endeavors in the digital music

space (Resnikoff, "Napster Makes").



Napster faces competition from Apple, MSN Music, Yahoo Launch, and RealNetworks, who rely on download

and streaming services to assist in other objectives, such as device sales, format dominance, and/or increased

traffic to websites (Resnikoff, "Roxio Sale").



Napster has made key strategic alliances that have strengthened its position in the digital music market. Napster

has a multi year agreement with Best Buy in order to promote its subscription service through Best Buy stores.

Best Buy will promote the subscription service nationally to customers using interactive kiosks located in its

stores and offer customers the Napster subscription service through Bestbuy.com (Garrity). Napster has made a

deal with the U.S. Army and Air Force in which over 11.5 million reserve, retired, and active military personnel

will get discounts on Napster's subscription service (Banerjee). Also, Napster has an agreement with Britain's

Post Office, which has agreed to sell pre paid Napster subscription services and downloads in its 16,000

locations nationwide (Brandle). With the aim of taking advantage of universities' large student population,

Napster has made deals with Penn State and Rochester in which all students have access to the

Napster's subscription service when they are using the school network (Vance).








Microsoft's MSN


The MSN music store is very similar to its rival iTunes. Both allow consumers to purchase music on an individual

track or per album basis, both give consumers access to numerous Internet radio stations, and both have

catalogues of over one million tracks. Consumers, however, can access MSN's music store through Internet

Explorer or Windows media player, while iTunes consumers must download software in order to access the

music store. Microsoft plans to gain an advantage on the market-leading iTunes by offering consumers

more flexibility in content portability and device compatibility (Jardin). Microsoft will also take advantage of the

350 million consumers who visit the MSN franchise every month (Garrity). Recently, Microsoft revamped its

MSN search engine, allowing users to perform a more specific search. When users do a music-specific search,

they are brought to the MSN music store (Resnikoff, "MSN").



Yahoo


Yahoo offers consumers a wide variety of services related to music. From streaming music videos, to

customized Internet radio, to artist information, Yahoo gives consumers many options. In 2004, Yahoo purchased

the digital music service MusicMatch for $160 million in cash (Resnikoff, "Yahoo"). MusicMatch has a partnership

with Dell through which Dell's PCs come equipped with the MusicMatch digital music service, thus introducing

the software to millions of PC users (Smith). Yahoo encountered a hurdle with its music services when

Universal Music Group (UMG) recently started to charge for Internet video streams. UMG is clearly trying to get

a piece of the eight billion videos streamed over the Internet in 2004 (Resnikoff, "Streaming"). Other major labels

are likely to follow. Yahoo's music services help its overall goal of attracting more consumers to its sites and

profiting from the resulting advertising revenue.



AOL


AOL offers consumers, not just AOL users, music services comparable to Yahoo. Consumers can watch music

videos, listen to Internet radio, and find artist information. AOL currently is using Winamp technology to develop

a stand alone AOL media player called AMP (Resnikoff, "AOL Stand-Alone"). As with its other music services, AMP

will help to draw non AOL subscribers to its site, thus helping to attract advertising revenue. AOL has a

distribution deal with iTunes, with AOL directing users to iTunes when they want to download a track or album

from the Internet.



AOL and Yahoo are becoming extremely important promotional tools for musicians in the digital age. For

example, AOL set up a promotional campaign for rap artist The Game, in which he was positioned as a

"Breaker Artist" on the front page of AOL music in September. Since then, approximately 4.1 million visitors

have been exposed to The Game. Also, AOL set up a listening party for various tracks on his debut album resulting

in 637,730 streams (Resnikoff, "AOL Music"). The Game now has a chart topping debut album.






eMusic


While Napster, Rhapsody, and iTunes are all fighting for digital dominance, eMusic is pursuing a niche

strategy. eMusic is an independent digital music store that offers consumers more than 500,000 tracks from

over 3,500 labels. About 40 percent of this content is exclusive. eMusic has over 70,000 subscribers who

downloaded more than 4.75 tracks in the fourth quarter of 2004 (Resnikoff, "eMusic"). Consumers have the option

of paying $10 per month for 40 downloads, $15 for 65 downloads, or $20 per month for 90 downloads. All tracks

are offered in high quality mp3 format with no digital rights management (DRM) protection. This allows users to

burn as many CDs as they wish, and transport their tracks to any mp3 player. When users search for content

on eMusic, they are continuously given suggestions from other users and from "the sickest team of music

creators ever developed," according to eMusic COO David Pakman (Resnikoff, "eMusic"). This viral aspect of

eMusic allows users to form a tight community devoted to supporting indie music. eMusic also offers consumers

live concert performance through eMusicLive. Subscribers can access this content within 36 hours of the

gig (Resnikoff, "eMusic").



Loudeye


Loudeye provides digital music backed services for various businesses in the digital music market. These

services include encoding/encryption, hosting, royalty management, and secure delivery of promotional and paid-

for downloads. In June of 2004, Loudeye acquired European backed provider OD2, giving Loudeye a global

presence in the digital music market (Resnikoff, "Loudeye/OD2"). Loudeye also has acquired the piracy

prevention firm OverPeer, which helps protect companies' digital media assets (Resnikoff, "Loudeye/OD2").



P2P NETWORKS



Peer to peer (p2p) networks have caused many problems and created many opportunities for the music

industry. They have allowed consumers to easily download large amounts of copyrighted content for free, and

they have allowed artists to cheaply distribute their content to fans across the world. According to BigChampagne,

a p2p tracking firm, p2p networks made 13 billion tracks available for download in 2004 (Resnikoff, "P2P").

Despite lawsuits brought about by the Recording Industry Association of America (RIAA), total trading

volume increased 28 percent in 2004. Some of the increase, however, can be attributed to companies such

as Loudeye's OverPeer, who help rights holders flood p2p networks with fake tracks in order to discourage file

sharing (Resnikoff, "P2P").



Legal Issues


In response to the mass distribution of copyrighted material, the Recording Industry Association of America

(RIAA), which represents the major labels, has gone after the companies who distribute the p2p software as well

as individual users of the p2p networks, who are illegally distributing copyrighted material. The RIAA has

won hundreds of lawsuits against users of p2p networks for illegally distributing copyrighted material, but hasn't






won lawsuits against the distributors of the p2p software. The problems arise from the fact that p2p applications

have legitimate uses, and software distributors can not be held liable for how their users employ the

software. Precedent on these subjects has been set by the Sony Betamax decision (Vance). In order to avoid

liability, p2p software distributors must prove to the courts that they do not have the ability to monitor the activity

of their users. The RIAA was able to shut down the original Napster because it was based on a centralized

network, where all files were transferred through a central location. Current p2p networks are based on

decentralized networks through which users share files directly with one another. This makes it hard for the

software developers to monitor the activity of users. Sharmen Networks, the owner of the Kazaa p2p application, is

in Australian Federal Court facing charges of copyright infringement (DMN). And in March of 2005, the U.S.

Supreme Court began hearing Grokster vs. MGM studios, which will determine whether distributors of

p2p applications can be held liable for the activity of its users.



P2P Opportunities


Until recently, major record labels and p2p companies have not been able to strike a deal by which the major

labels would allow their content to be distributed over a p2p network. Shawn Fanning, the creator of the

original Napster p2p application, has developed a proprietary Content Identification Service that uses

audio fingerprinting technology to identify, register, and track music (Jon). This system, named Snocap, will

allow artists and record labels to license their content to authorized p2p networks and online retailers.

Universal Music Group is already on board, with other major labels soon to follow (Resnikoff, "SnoCap Makes").

The first p2p application to use the Snocap technology will be Mashboxx (Resnikoff, "SnoCap Faces").

Snocap's fingerprinting technology can be integrated into p2p software several ways. When a user downloads a

file, the Snocap software can identify its fingerprint, and depending on the rights holder's request, make the user

pay for the content, allow the user to sample the content, or allow the user to download the content for

free. Alternately, the p2p network operator could pay for the downloads that are identified by Snocap and could

be reimbursed through advertising or subscription revenue (Borland). The difficulty is convincing the various

p2p operators to integrate the software into their networks. Chief Technology Officer Greg Bildson of LimeWire, a

p2p application, said, "We had a very similar idea run past us. We basically ended up not following up on it. It

is interesting, but we're not interested in building filtering and any centralization into our client" (Borland).



Another p2p application beginning to draw attention is Mercora, a p2p radio provider. Mercora allows users to

turn their music collections into radio stations for free. Users share music by streaming it to one another. As

such, the music is not being downloaded and the activity is considered legal. Mercora has approximately

300,000 registered users contributing 21 million songs on over 2,000 "radio" stations (Resnikoff, "Mercora").

Mercora has partnered with Grokster, a p2p application, to create Grokster radio. This will provide Grokster

users with a legal way to share music. Mercora anticipates paying $20,000 per month in royalty fees by the end

of 2005 (Tucker). Early in 2005, Mercora received a $5 million round of VC funding from Norwest Venture

Partners (Resnikoff, "Mercora").






MOBILE MUSIC


Cell phones are creating an opportunity for the music industry to add another revenue stream to its business

model. As hand set manufacturers continue to add features to cell phones and carriers continue to build

networks necessary to transfer large amounts of information, the mobile music market will increasingly become

a significant source of revenue for the music industry. Currently, the industry is mainly deriving revenue from

the sale of ringtones, which are clips of songs played on a cell phone in place of the traditional ring.



Consumers have the option of buying ringtones ranging in quality from imitations of songs, called monophonic

and polyphonic ringtones, to the actual recording released on CD, called master tones. Prices range from 99 cents

for low quality to upwards of $1.99 for the master tones. Consumers can buy ringtones directly from their

cell phones, and the cell phone provider will then send the track to their phone. Consumers also can buy

ringtones from websites, which are then sent to the cell phone in the form of a message (Smith).



The U.S. ringtone market is far behind those of Western Europe and Japan. In 2004, the U.S. ringtone market

was approximately $300 million, while Western Europe's was approximately $1.5 billion and Japan's $1

billion (Smith). Jupiter research projects the U.S. market to reach $897 million by 2009 (Resnikoff, "Ringtones").



The U.S. ringtone market is so far behind that of Western Europe and Japan because of complex licensing

issues between musicians, record labels, and publishers in the U.S., and because cell phones with music

capabilities are not as widely available and affordable as in Western Europe and Japan.



The newest form of cell phone music is ringbacks. They are a clip of a song that callers hear instead of the

traditional ring when they call ringback subscribers. As with ringtones, users can designate different ringbacks

to different people. Ringbacks require users to pay a monthly fee of 99 cents and cost $1.99 apiece. Ringtones

and ringbacks are not only music, they are fashion. Consumers buy ringtones and ringbacks to customize

their phones, and to show others who they are and what they like.



Top Stories in the Mobile Music Market


Mobile Music Videos. Early in 2005, Verizon Wireless will begin offering music videos and short video clips

to subscribers with 3G compatible phones. There are only a limited number of devices that are able to receive

the content. Verizon has set up its 3G network in 30 metropolitan areas. For an extra $15 per month,

Verizon customers can get data transmission rates of 300-500 kbps. Customers will also have to pay an extra

$3.99 per music video (Resnikoff, "Verizon").



Song Recognition. Shazam, a London-based audio technology firm, allows users to use their cell phones to

identify the name of a song and the artist when they hear it. Users in the United Kingdom dial 2580 on their

cell phone, point the phone in the direction of the music, and Shazam will then send an SMS identifying the name






of the song and the artist. Each successful "tag" costs users �0.50 ($0.73) (Brandle). The benefits of

track identification come with ancillary services such as ringtone purchases, mobile song greetings, track

downloads, and online CD purchases (Resnikoff, "Shazam"). In a partnership with Mean Fiddler Music Group,

Shazam users can download an entire "tagged" track or a ringtone to their mobile phone from the Mean

Fiddler Website (Brandle).



Original Ringtones. BlingTones has started one of the first wireless record labels. While most companies

offer ringtones that are clips of existing songs, BlingTones offers consumers ringtones that are exclusive,

original content. Blingtones has signed various hip hop producers/artists, such as Q-tip, Rockwilder, and

Denuan Porter, to make original ringtones only available through Blingtones. BlingTones also offers ringbacks

and BlingPix, exclusive screen savers/wallpaper with urban themes. In the future, BlingTones plans to sign

comedians to make original ringtones and ringbacks (Smalls).



Zingy, a mobile content provider, has made a deal with Timbaland, a hip hop producer/artist, in which Timbaland

will make a mobile only ringtone album. Also, Timbaland will make ringbacks, voice ringtones, screensavers,

wall papers, and voicemail greetings. MTV has partnered with Zingy to offer consumers "Made Hear," a

series featuring various artists making original ringtones. Initially content will be available through Virgin

Mobile (Resnikoff, "MTV").



Mobile P2P. Melodeo has developed a peer to peer (p2p) service for cell phones. The Melodeo Mobile Music

Solution allows consumers to distribute tracks among themselves via Bluetooth technology. Using

Bluetooth technology allows users to bypass network bandwidth issues. Consumers can preview, browse,

and purchase full tracks through the service (Resnikoff, "Mobile").



RADIO IN THE DIGITAL ERA



As with the other segments of the music industry, the radio industry also has been transformed by the Internet

and other emerging technologies. Consumers have a variety of options when it comes to radio in the digital age.

They can choose from traditional terrestrial radio, satellite radio, or Internet radio. Each differs on such factors

as price, delivery method, quality, and variety of music.



Terrestrial Radio


In recent years, the consolidation of the radio industry has led to stale play lists and an increasing number

of advertisements. This has reduced the appeal of this medium for many consumers. Terrestrial radio's most

recent answer to fleeting listeners and increased competition from satellite and Internet radio is "high

definition" (HD) radio, which adds CD quality sound to current play lists. In the future, HD radio will have

features much like TiVo, allowing consumers to store music and news, and receive on demand content such

as weather, sports scores, and traffic information (Green). The HD service is free to consumers, but they must buy






a HD radio in order to receive the higher quality transmission (Woolley). Terrestrial radio companies are beginning

to create Internet strategies to better position themselves in the digital market place. Most recently, Clear

Channel has plans to create original video content, a la sessions@AOL, to be featured on its various radio

websites. This will help increase advertising revenue. Also, Clear Channel plans to start selling online

subscription radio stations, ringtones, and paid downloads from its various websites (Resnikoff, "Clear Channel").



Satellite Radio


The two satellite radio companies, XM and Sirius, have begun in recent years to make an impact on the

radio industry. Satellite radio offers consumers a clearer sound, more variety, and better coverage than

terrestrial radio. Subscribers have access to over a hundred digital channels of commercial-free music, news,

sports, talk, and entertainment. Consumers pay a monthly subscription fee of $12.95 and must buy a

satellite enabled device to receive the service. Satellite radio's target market is mainly motorists (Breen). XM

and Sirius differ on the type of content they offer to consumers, the type and price of equipment used to receive

the services, and the alliances they have formed to spread their services to consumers. Satellite radio will continue

to gain subscribers as more electronic devices become satellite ready, more content becomes available, and

more alliances are formed. In the future, there is the possibility of satellite radio on PDAs, mobile phones, and

MP3 players.



XM. XM satellite radio is currently the market leader with 3.2 million subscribers (Resnikoff, "XM,

Nissan"). Consumers have various options when buying a device to receive XM's service. XM offers consumers

head units for their cars, adapters for existing head units, stereos systems, and a portable device. XM has

made alliances with Hyundai, General Motors, Toyota, and Nissan through which the car manufacturers offer

XM receivers as a dealer option (Resnikoff, "XM, Nissan"). XM offers exclusive content, such as college

sports coverage of ACC, Big Ten, and PAC-10 football and basketball games, major league baseball, various race

car events at the Daytona International Speedway, and a show with rapper Snoop Dogg (Resnikoff, "Sirius").



Sirius. Sirius satellite radio has about 1.3 million subscribers. Sirius also offers an assortment of devices to

receive its service. Sirius is allied with such car manufacturers as Audi, BMW, Mercedes-Benz, Chrysler,

Volkswagen, Mazda, Nissan, Porsche, and Toyota (Resnikoff, "Sirius"). Exclusive content includes NASCAR as

of 2007, the NFL, Howard Stern as of 2006, and the NBA. In the second half of 2006, Sirius plans to offer a

video service to customers to tap the growing demand for video in automobiles (Taylor).



Internet Radio


Internet radio, also known as webcasting, is the streaming of digital audio over the Internet (Resnikoff,

"Satellite"). The content streamed can be music, news, sports, and talk. While terrestrial radio is limited in

the number of channels it can offer, Internet radio has the potential to transmit an unlimited number of

channels worldwide. According to Arbitron and comScore Media Metrix, leading Internet radio services from





AOL, Yahoo, and MSN are collectively attracting over 4.1 million listeners per week (Resnikoff, "Online Radio").

As listeners continue to increase, advertisers will become more and more attracted. This revenue source will help

to bring this medium more into the main stream. Also, as broadband Internet and WIFI penetration continue

to increase, so will the popularity of Internet radio. Companies such as AudioFeast have begun offering consumers

an Internet radio service for MP3 players. Internet radio ranges in price from a few dollars a month to

free, depending on the amount and quality of content.



The Internet has also led to a new trend called podcasting. Various broadcasters, including terrestrial and

Internet radio, are beginning to record their content and post it on the Internet. This allows consumers to

download the content to their MP3 player, such as an iPod, and listen to it whenever they please (Resnikoff,

"Online Radio).



CONCLUSION



It is evident that the Internet and other emerging technologies are drastically changing the way in which the

music industry operates. From generating revenue to distributing content, the music industry is faced with

new opportunities and obstacles. Content creators have access to more media to reach consumers, and

consumers have access to a greater variety of content and more ways to discover and enjoy that content.

Companies that assist content creators in distributing their content, as well as companies that assist consumers

in filtering the vast quantity of content available, are essential to the digital music market. Digital Music

Services have arisen as an extension of the traditional brick and mortar store, where consumers can buy music on

a per song or a per album basis. P2p networks have created an extremely efficiently and cost effective system

for distributing large amounts of content over the internet. Mobile phone networks are providing consumers with

the ability to discover, enjoy, and purchase content whenever and wherever they choose. Internet and Satellite

radio are exposing consumers to a greater variety of content than previously possible. All of these mediums

will increasingly become more and more important to the music industry as technologies continue to proliferate.

The "record industry" is going through some tough times, but the "music industry" is doing quite well. In the

future, content will easily flow from creator to consumer, as well as from device to device. Creators will be able

to share their work with millions of people worldwide with the click of a button. Consumers will be able to

discover, enjoy, and purchase this content anywhere, anyway, and anytime they want, whether from

their computers, television sets, home stereos, car stereos, mp3 players, or mobile phones. The digitalization

of music is truly revolutionary.






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