53 701 03 ECommerce Internet and the Music

53 -701 -03 E-Commerce Internet and the Music Industry Jacques Robert

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce DIGITAL PRODUCTS • Books, News, Music, Video, Knowledge, Software Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce CHARACTERISTICS • Information is costly to produce… but inexpensive to reproduce (Variable costs / Fixed costs ratio is very low) • Digital goods can be altered, transformed, manipulated … at low cost (ex. Compression and error correction) • Production of digital goods entails major sunk costs • Digital goods are either very fleeting… or very lasting (they don’t wear out) • There are fewer capacity constraints Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce DIGITAL PRODUCTS • All bits are alike (convergence) • Can add bits that describe bits i. e metabits or "headers" – Television program + description of the program have the same format and can be processed by the receptor • Moving intelligence from the sender to the receptor Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce INDUSTRY STRUCTURE Technology Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce MAJOR PLAYERS (Big Five) • • • BMG (Arista, RCA) EMI (Virgin, Blue Note, Capitol) Sony (Columbia, Epic) Universal (Decca, A&M, Geffen) Warner (Elektra, Atlantic, Warner) 80% of retail sales Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce SOME DATA • Need to sell 500, 000 copies to break even • In 2001, 6, 455 new albums were released and only 112 sold more than 500, 000 copies • 5% of releases are profitable • Royalties: between 5% and 13% • Costs of a CD: $350, 000 Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce COST STRUCTURE Manufacturing CD and printing booklet $0. 75 Retail Markup $6. 23 Company overhead, distribution and shipping $3. 34 Marketing and promotion $3. 00 Royalties to artist and songwriter $1. 99 Contribution to fixed costs (Signing act, producing record) $1. 67 Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce QUESTIONS • • • Who has the power? Is it efficient? Who makes money? Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce IMPACT OF INTERNET AND MP 3 Technology Law Economics Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce MP 3 Format • • • WAV file (50 meg) Motion Picture Experts Group-1, Level 3 MP 3 about 1/12 of the original file – Near CD quality – MP 3 players – Computers with MP 3 Player (Real, Windows Media, etc. ) – CD players can now play MP 3 • IPod Jacques Robert & Jean Talbot, HEC Montréal

HEC MONTRÉAL – MBA 53 -751 -03 IT and E-Commerce IMPACT OF INTERNET AND MP 3 • How does file sharing create value and for whom? • How does file sharing destroy value? • How can file sharing capture the value it creates? • How should the industry react? • Pricing model for Digital music? • ITunes, Music. Net, EMusic • Shouldn’t recorded music be free? Jacques Robert & Jean Talbot, HEC Montréal