E-Commerce

The UK online music market is a potentially huge market. Over the last eighteen months a great number of legitimate music services like ourselves have emerged to take advantage of the new music distribution model pioneered by Napster’s Shawn Fanning in 1999. Although we currently hold 35% of the online music market, we will have to continue to develop our strategy and online practises if we want to build our market share and compete with the big international competitors, namely the iTunes network. This document is both an analysis of our current strategy and a proposal to extend it. Analysis of current system The strategy we have developed over the last two years centres around selling songs on a price per song basis. This is one basic strategy that all online music vendors have adopted. One of the key factors in Apple’s success was its famously low 99 cents per song price tag. Because of this, we, like many other online music providers will find it very difficult to compete in pricing. According to popular legend, Apple secured this low price by refusing to sign the terms offered by the record labels then going ahead and launching iTunes anyway, daring the record labels to pull out. Labels have repeatedly tried to renegotiate this deal to no avail. None of the labels are willing to risk pulling out of the iTunes network and losing their foothold in the paid download business. As well as ‘pay per song’ there are a number of other tactics for selling music online. One method proposed by Ken Hertz, who represents Alanis Morrissette among other recording artists, is a flat fee collective licensing system. In flat fee collective licensing customers pay a fixed subscription fee to be allowed to download as much content as they want. This income is then divided among the content providers based on the percentage uptake of their content, as opposed to the unit uptake of their content (Fisher. WW, 2004). Fisher believes this model will lead to a reduced profit per song but an increased uptake of the service. This has already been shown to be an effective business model when applied to video rental. Having been pioneered by Blockbuster with their £13.99 online video rental service it has since been adopted by Amazon and Screen Select to provide similar services. I believe this model would be successful for us as it lets customers believe that by using the service regularly they are getting good value for money. Value for money has been a sticking point for music fans for a long time. Often, many people justify using illegal services like Emule or Limewire by claiming that the cost of purchasing music legally is excessive for the product. The main problem with this model is that it would require the content owners (the record labels) to license their work to distributors. Review of competitor activity Our market is currently divided among a number of legal and illegal music services. These include services like Amazon where you can order a physical copy of a music CD online, services like the new Napster where you can search and download both free and paid for music and (semi) illegal services like Emule P2P where you can download anything you want for free. Napster: Napster has been involved in mainstream online digital distribution of music longer than any other company, and is arguably the most famous company in the field. Napster was launched as a free music sharing facility in 1999, and faced legal battles from the outset. It was finally forced to succumb to business pressure in 2001, at which point it began the six month process of re-inventing itself as a legal service. This brings us to the Napster we see today. Napster currently offers its customers three packages, ‘Napster To Go’ for £14.95 a month, Napster Membership for £9.95 and Napster lite. ‘Napster To Go’ and Napster Membership allows customers to download as much music as they like to their Computer. ‘Napster To Go’ also allows music to be downloaded via special terminals in high street stores and internet ready televisions direct to MP3 players. Napster Lite is Napster’s basic free package. It allows customers to pay for music on a per song basis at 79p. Customers can choose what they want by listening to 30 second segments of the content before they commit to purchasing. Napster lite also allows its users to access music stored on other Napster users shared space, but this is carefully screened to prevent piracy. One flaw in the Napster system is that in order to continue using the content you download, you need to keep paying for the service. This will to lead to consumer scepticism as people won’t like the idea of being trapped in the service to keep their music collection. iTunes Music Store: iTunes music store opened its door for service on 28th April 2003. Its strongest asset is its seamless operation with the Apple iPod. The iPod is the most popular MP3 player currently available and like most Apple products, usability was high on its priority list during development. The existing popularity of the iPod and iTunes combined made the process of extending the commercial attributes of the system a simple task. The music content is protected with Apple’s fair play digital rights management (DRM) but there are several hacks for this which Apple has so far been unsuccessful in blocking. Since its launch the range of features it offers has continued to expand. You can now buy gift certificates, download video and special content, create your own iTunes store and upload your own music via garage band, Apple’s music production suite. By allowing their users to produce and sell their own music apple has opened the door for their service to be used in many novel ways. For example Stanford has recently started using iTunes to freely distribute special academic and promotional content centred around learning and living on campus. P2P networks: The P2P networks are arguably the greatest threat to our model of business. Despite frequent law suites and attempts at sabotage record labels have been unable shut them down. A peer to peer network is basically a distributed file system where the shared content on every connected computer gets grouped together into one super directory. A search facility then allows connected users to find and download what they want to their local shared directory. As content gets spread across the network it becomes more accessible to other users. From the users perspective this has the advantage of being free, but the disadvantage of being unreliable. Content is often mis-labelled or incomplete. There are a number of tactics employed by content owners to further disrupt P2P activity including suing downloader’s, distributing mis-labelled content, and distributing content that harms a downloader’s computer. Record labels have also attempted to stop piracy at the source, by preventing users from uploading their music to their computers. However, this method has proven unsuccessful as it can be easily circumvented using real time encoding software, which encodes the music straight off the microphone jack. Record labels have also been sued by consumer rights groups and had their reputations tarnished over the legality of this tactic.