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2.1
E-business technologies:
foundations and practice
Block 1 Part 8: The effect of the
Internet on an industry
Introduction
Overview
Now that you have an understanding of what a value chain is and an idea of some of
the benefits and challenges that e-business can offer, I am going to look at the case
study of an industry that appears to have been rocked to its very foundations by
developments on the Internet and Web.
I have been looking at business process redesign or re-engineering as something
challenging, but within an organisation's control. However, imagine a product that
could be turned into pure information and so moved electronically through the value
chain; clearly, this would involve a radical move away from the traditional, physical
business model. I am going to look at one such 'pure information' product, one that
you should be familiar with as a consumer: music.
You've probably heard a lot about the effect that the Internet has had on the music
industry. In this part of Block 1 I am going to focus on the music industry value chain,
starting with a brief history of the recorded music industry and moving on to look at the
new opportunities and challenges to this business that the Internet presents. The
central case-study resource will be a video programme consisting of a series of
interviews with representatives of each stage in the traditional music industry value
chain. I shall direct you to this at an appropriate point in the text.
In the film and in this block I shall be looking out towards the competitive environment
and seeing what opportunities and challenges are presented to organisations in one
particular industry. As you will see, one organisation's challenge is another's
opportunity.
Aims
The aim of this text is to introduce you to an important case study on the opportunities
and challenges of e-business, that of the recorded music industry.
When you have finished this part of Block 1 you should be able to:
• Explain what is meant by the terms disintermediation and re-intermediation.
• Apply heuristic models as part of an industry analysis.
• Understand the concept of a value chain ecosystem.
Recorded music as a technological
innovation
When we talk about the music business or the music industry, what we often more
specifically mean is the recorded music industry; that is, the industry that has grown
up around the recording of music, its distribution and its sale.
I am going to start by taking a very brief look at the history of the recorded music
industry, in order to provide you with some context for current developments
concerning the Internet and the Web.
Recording sound
The ability to record sound has existed since the late 1800s. Thomas Edison, the
prolific US inventor, was a key figure in the development of the phonograph, a device
that could record and play back sound. It was an innovation that was later superseded
by Emile Berliner's gramophone, which used flat discs (records) rather than the
cylinders used by Edison's machine. Neither Edison nor Berliner envisaged their
inventions as becoming devices for entertainment: they saw them as primarily
Block 1 Part 8 | 2
business dictation machines. It was the business innovators and early adopters that
shaped the use of the gramophone for recorded music.
Prior to these inventions it had been possible to store music only in our (human)
memory or in written form. A large music publishing industry had previously grown up
around the publishing of sheet music: music in its written form.
Radio and cassette tape
By the 1900s, the recorded music industry was burgeoning. The British company HMV
opened its first retail outlet in 1921 in Oxford Street, London. About the same time
other innovations, such as radio, began to pose a big threat to the established
recorded music industry model. It was widely thought at the time that radio would
supplant records as the distribution medium for music. However, things eventually
settled down and the two technologies co-existed. Radio became primarily a means to
market, rather than distribute, recorded music.
The third Schumpeterian wave of technological revolution, which brought the
widespread diffusion of electricity in the first half of the twentieth century, also
facilitated the replacement of mechanical recording devices with electric counterparts.
This improved the quality of the recording and playback of music, and led to the term
hi-fi (high fidelity) to describe this new generation of consumer devices.
Improvements in the quality and playback of recorded music continued with another
innovation: the invention of stereo by Electrical and Musical Industries (EMI). EMI was
formed in Britain in the 1930s after a merger involving HMV. Stereo saw widespread
adoption by the early and late majority, replacing mono as the de facto standard used
for records towards the end of the 1960s. It was only the laggards who stuck with their
mono equipment in the 1970s.
The 1960s saw the fourth Schumpeterian wave of technological revolution.
Transistors replaced valves and this meant musical devices could be smaller. The
transistor radio made music truly portable for the first time. But it was the advent of
Philips' compact cassette tape, a popular re-recordable alternative to the record, that
posed the next significant threat to the traditional recorded music industry model.
By the 1980s, the threat of the re-recordable compact cassette seemed so great that
the BPI launched a campaign that proclaimed 'home taping is killing music'. However,
the industry survived and in a few years 12" and 7" records had been replaced by the
compact disc as the de facto format for recorded music.
Compact disc
The compact disc (CD), another Philips innovation, was born in the 1970s and came
to market in the early 1980s. After initial scepticism about the new format, a pivotal
year for the record labels came in 1985 when Dire Straits' Brothers in Arms became
the first CD to sell more than one million copies.
Brothers in Arms was the first commercially successful, fully digital piece of recorded
music. Shortly afterwards, the rise of the current digital revolution (the fifth
Schumpeterian wave) posed the latest and perhaps strongest challenge to traditional
music industry structures.
Prior to the commercialisation period of the Internet (1995 onwards), music existed in
a digital form on CD. Those with computer hardware and software that could rip and
burn CDs were able to do the digital equivalent of home taping using CDs, distribute
copies to friends, etc. However, it was the prevalence of digital networking in homes
that came with this commercialisation period that saw the distribution network grow as
it moved from the physical to the virtual.
Block 1 Part 8 | 3
MP3
It was another Philips-led invention, the MP3 compression format, that meant a typical
track from a CD could be compressed down from about 50 MB to 5 MB. Even before
home broadband had crossed the chasm and seen widespread adoption, it was
possible to move an MP3 file about on the Internet in minutes.
Although the MP3 standard (ratified by ISO as ISO 11172) is not a totally open
standard because a licence is required for its incorporation in hardware and software
products, it is much more open than closed. The open leanings of the standard and
the absence of any DRM restrictions meant that it became the de facto standard for a
digital music format. The widespread availability of software such as Winamp in 1997
gave the majority, not just the innovators and early adopters, the ability to play back
MP3s on their home computers. The arrival of file-sharing networks such as Napster
soon afterwards meant that the transaction costs associated with searching for and
acquiring music were greatly reduced.
Apple and the iPod
Music in this digital form can be seen to be pure information. Once Apple popularised
the MP3 player with the launch of its iPod in 2001, it had made pure music information
portable. Apple did for the 2000s what Sony had done with the Walkman in the 1980s
and the Discman in the 1990s. There was one big difference, however, that was a key
part of Apple's marketing strategy. The first iPod, which had a 5 GB hard drive, was
able to hold 1000 songs. Or as Steve Jobs, Apple CEO, succinctly put it (2001), 'you
[could] now carry your entire music library in your pocket'.
Apple did not endorse peer-to-peer sharing of music. In fact, each iPod came wrapped
with a warning, 'don't steal music'. But the iPod could play a variety of digital music
formats, including the DRM-free MP3.
In 2003 Apple further enhanced its position in the digital music market by signing
deals with the 'big four' record labels (EMI, Universal, Warner Bros and Sony BMG),
which account for some 80% of all recorded music output. The deal allowed Apple to
retail music owned by these labels through its iTunes store. Apple was now an
innovative retailer in a music industry value chain containing new B2C and B2B
relationships that were to have serious ramifications for those businesses that had
grown up with the traditional recorded music industry.
Activity 1 (Self-assessment)
The previous discussion has been a very quick look at music as a series of
technological innovations. I've taken a technological and business perspective, and
touched upon a number of the models that I introduced you to earlier in the block.
I now want you to go back through my account and identify which models I've used.
Look back at these models and see how I've used them. Compile a list of the order in
which they are used in my account.