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Why talk about the music industry's options dealing with new technologies? Since the music industry has gone through major changes in the recent years, it is important to know, which of their strategies have proved successful and which have not. In these years of major changes, the sales revenues of record companies have rapidly and steadily declined. According to the International Federation of the Phonographic Industry (IFPI), the worldwide record sales revenues were US $10 Billion less in 2003 than 8 years earlier. In the USA the record revenues have declined more than 10% since 2000.

The reasons for the decline in record sales revenues are disputed. Some studies conducted by record industry associations conclude that the increased distribution of unauthorized music copies is the main reason for the recent decline of the sales revenues of authorized music copies (IFPI c).

Oberholzer and Strumpf contradict the above mentioned thesis in their study on the effects of file sharing. They state that the sharing of music files via the internet (which produces a major part of the unauthorized copies (IFPI d) has no influence upon record sales revenues (Oberholzer; Strumpf).

The fight against unauthorized music copies

One of the strategies of the record companies to counter the decline of revenues was to fight unauthorized music copies. In this study, the actions taken against unauthorized music copying as well as their outcome during the years 2000-2004 are described.

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Legislation: The legal warrant for the battle against unauthorized music copies in the USA has been defined in the ³Digital Millennium Copyright Act² (DMCA). It forbids the cracking of copyright protection devices for example (The UCLA Online Institute for Cyberspace Law and Policy). The DMCA is also the basis for lawsuits of the Record Industry Association of America (RIAA) against users that offer unauthorized copies through a file sharing system and for damage claims. Thus a legal basis for the fight of unauthorized copying in the USA has been established.

Yet, there is a grey zone about what is allowed and what is not, since laws can be expected to change rather quickly in the area of new technologies. In addition the DMCA has acquired a lot of counter activities. For example there has emerged an organization that wants to reestablish complete rights to make private copies of audio software (Röttgers; Krempl). The attempts to overthrow the new copyright law and reestablish the former rules have created insecurity among consumers about future laws and their enforcement. Lobbying to support the DMCA and similar legislation imposes costs on the recording industry.

Lawsuits: According to the current laws, record companies can sue copyright violators and software producers that support copyright infringement. In reality, record companies are not always successful suing software companies and not very effective stemming the tide of copyright violators. For example, lawsuits against the company that holds the rights of and markets the file sharing software Kazaa have not been successful; Kazaa was declared legal by the Dutch Supreme Court (Michaelson; Bernhard). Only a very small percentage of the total number of copyright violators can be sued, because there are simply too many and the process too costly. In 2003, there were up to 60 Million file sharers using the Kazaa network. The small probability of being sued inhibits the effectiveness of lawsuits against file sharers. There are various file sharing systems increasingly used for illegal purposes with a growing number of users, e.g. Bit Torrent for videos.

Copyright protection devices: Copyright protection devices integrated into CDs and music files could be an effective protection against copyright infringement, but this is offset by the constant developments of cracking devices sold by IT companies (np/mh; Bundesverband fuer phonographische Wirtschaft e.V.). Thus an expensive condition for the success of copyright protection devices is their constant enhancement concurrent with the enhancement of cracking devices.

Moral appeals: Moral appeals seek to keep people from making unauthorized copies by changing their attitude towards unauthorized copying. Record Industry organizations try to provoke a bad conscience (Hainmüller), citing popular stars saying that illegal copying is a bad thing. ³t.A.t.U² was cited saying ³Please don't steal our music, if you're really smart guys² (promusic.org). These and similar statements of pop stars hardly cause pity or a bad conscience, since the relatively high income of pop stars is well known to their audience. The pop stars also contradict each other on this issue. Robby Williams for example, in fact, encouraged his fans in a public speech to infringe his copyright (Schieb).

Legal supply of downloadable music: The recording and IT industry have developed their own online sources of music files in the recent years. The licensed supply should permit these industries to profit from the growth of the music market. It also should suppress unauthorized file sharing. However, the persistence of file sharing software shows that the latter goal has not been reached.

All in all, a complete protection of the property rights of music is only possible at prohibitive costs. Hence, it is unlikely, that the worldwide record sales volumes of 1995 and 1996 can be fully recovered just by the above mentioned legal efforts, technological copy protection, moral appeals and licit supply of downloadable music. The development of different strategies appears warranted.

Diversification as a strategy to overcome losses due to shrinking record sales revenues: An alternate strategy, which in the past few years has been pursued by companies in the entertainment sector, is diversification. Record companies have been in the publishing market for quite a while (Gould). More recently many of them added the merchandise and concert business to the scope of their activities (Kurp). By moving in these industries, record companies have turned into music marketing companies. Media corporations in turn acquired such music marketing companies or their divisions (Bertelsmann AG, a) and pop musicians have set up their own diversified music marketing companies.

A model of the music market: Record companies traditionally could be categorized as the interface between the musician on one side, and media companies and record distributors or retailers on the other side. Lately, many have added merchandise production, concert promotion and artist management to their business, i.e. their buyers' scope has expanded and includes among others merchandise retailers or distributors and concert locations in addition to record stores/distributors and media companies.

Record companies have turned into music marketing companies, entering the merchandise and concert market and the artist management business. Gold: First stage of production. Blue: Second stage of production. Pink: Distribution. Arrow: Targets of diversification.

Essentially, all different ways of offering the artist's content, from records to TV and radio shows, can be seen as different products of the same trademark. Records are only one of many ways of offering essentially the same content.

The recent development of music market segments: Why diversify? The recording segment of the music market has become much more competitive and unattractive due to the shrinking of the recorded music market. At the same time the merchandise and the concert segments have grown. The growth of sales revenues of the merchandise market and the concert market clearly serves as an indicator of the attractiveness of these markets.

There are few publicly accessible sources for sales revenues of music merchandise and concerts, and those that exist neither contain specific amounts for worldwide music merchandize sales nor the worldwide concert revenues. What is published are two years of general worldwide merchandise sales revenues, a forecast of their development, three years of worldwide concert revenues of US artists, and a forecast of their development.

The International Licensing Industry and Merchandisers Association (LIMA), the Yale School of Management and the Harvard Business School have published the data on licensing revenues, used in this study. The data was generated in a survey on licensors and licensing agencies (LIMA a). The US magazine ³Billboard² has provided data on the worldwide concert revenues of US rock and pop artists. This data has been collected from concert promoters. The reporting of the concert promoters was voluntary, so the numbers were not complete and not comparable over time (Allen a).

In 2003, the president of LIMA forecasted growth of the international market for licenses (LIMA a). The total licensing revenues in the US have grown 4% between 2001 and 2002 (LIMA b). Also the licensing revenues on the music market have grown 1.7% in that time span (LIMA a; Gottlieb). The worldwide concert audience of US artists has grown US$ 32 Million to US$ 39 Million between the years 2001 and 2003 in spite of rising ticket prices. The growth was especially high in 2003 with rounded 6.91 Million additional visitors (Allen b). According to industry analysts, this growth is part of a positive trend in the concert industry (Allen a).

With respect to the above mentioned figures, unauthorized copies should not be considered entirely from a negative perspective. First of all, the new ways to acquire music for free, by file sharing and CD burning, stimulated recorded music consumption. In Germany for example, the total consumption of recorded music grew steadily while the total record sales revenues declined. (Fig. 6). Future growth of the amount of unauthorized copies as well as of total music consumption is probable.

Second the growth of music consumption can have a positive effect upon the revenues of music market segments. Although in Germany, unauthorized copies have risen 25%, licensing revenues did not shrink. They even rose 1%, and future growth is predicted (LIMA a; LIMA b; IFPI d). Unauthorized copies do not seem to be significantly correlated with licensing revenues.

Intuition would suggest that the increased distribution and consumption of recorded music of a specific musician, no matter if authorized or unauthorized, augments the popularity of that specific artist. Increased popularity leads to increased sales of the artist's licensed goods.

This applies to concerts, as well. According to the Billboard's analysis of the concert industry, the concert revenues will grow. Thus, concert revenues do not seem to be negatively, but rather positively correlated to unauthorized copying of recorded music. A positive correlation between the level of concert revenues and the amount of unauthorized copies also makes sense for the following reason: You would rather attend the concert of your favorite artist than of an artist that you do not know at all. In case you developed your preference for the artist by copying their music, you attended their concert as a consequence of unauthorized copying activity. When people as a result of growing music consumption increase the number of musicians they know, this can also have a positive impact on the size of the concert audience.

Summarizing, unauthorized copies neither have negative effects on concert nor on merchandising revenues. Unauthorized copies of merchandise do not appear to cause as big of a problem as unauthorized copies of sound recordings do. Concerts, in turn, can not be copied at all. Consequently, the concert and merchandise industry is not significantly threatened by any kind of unauthorized copies.

The lack of significant unauthorized copying activities and the current and predicted market growth (Sperlich, 33) make the merchandise and concert markets attractive, compared to the record market.

Pro diversification arguments from an organizational perspective: Interdependencies between the marketing activities of record companies, concert promoters and licensing agencies are a reason to organize all of them in the same company. A general rule, pronounced by Picot, Dietl and Frank (Picot, Dietl , Franck, 73ff), is that interdependent processes should be organized in the same organizational unit, since the necessary conveyance of knowledge between them causes transaction costs (Johnson). This general rule is transferable to the conveyance of information between companies.

Usually the artist's manager and publicist, record company, concert promoter, licensing agent and eventually film producers participate in marketing and especially advertising activities for the artist. There are interdependencies between these activities, which make their integration in one company a less costly solution in terms of transaction costs caused by knowledge transfer.

External effects are a similar reason for integration of new functions into a company, i.e. diversification. If the artist's management is employed by the integrated music marketing company, the management can be obligated to preferably use internal record producers, concert promoters and licensing agents. As a consequence the positive external effects of the advertising activities of concert promoters, licensing agents and record companies work within the company.

An example of a successful, diversified entertainment company: An extreme case of diversification in the entertainment business is the integration of a music marketing companies into a media corporation. In the example of the Bertelsmann Group this has proven to be successful: The project of the German Idol Show DSDS, organized exclusively by the Bertelsmann group and there affiliated firms, such as BMG and RTL, has been of benefit for all companies that have participated in the project. All aspects of the production and marketing of performances and products related to the DSDS-pop musicians and their name ( i.e. trade mark) have been organized by the Bertelsmann group. The transmitting TV channel RTL, owned by Bertelsmann, reached 50% of their main target audience and gained subsequently high advertising revenues (Bertelsmann AG, b, 23; Kruse). The Bertelsmann-owned record company BMG produced No.1 hits and gained a bigger market share on the German market (ola/ct; dpa; Finkenwirth). The concert revenues and the merchandising revenues were also marketed by companies held by the Bertelsmann Group (Kurp; MMC Productions GmbH).

With the transformation of record companies into music marketing companies and sometimes their integration into media corporations, unauthorized copies and the subsequent loss of record sales revenues is not a major issue anymore, since a major part of the revenues generated by one artist often comes from different sources and growing markets, unaffected by unauthorized copies.



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