Downloadable Music

Industry

Ryan Herring
Jinghua Luo
Kevin Mack
Shahram Rezaei

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Standards
 Downloadable music files are
generally available in three
formats:
 MP3 (MPEG-1 Audio Layer 3)
 AAC (Advanced Audio Coding)
 WMA (Windows Media Audio)

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MP3
 Became ISO standard in 1993
 Supported by a large variety of
software and hardware
 Popular in peer-to-peer file sharing,
but not in commercial downloads
 Thomson Consumer Electronics, which
controls MP3 patents, decided to
charge licensing fees for MP3 encoders
and decoders in 1998
 Potential lock-in led to proprietary
alternatives
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AAC
 Designed as an open-source successor to
MP3 and became an ISO standard since 1997
 Less widely supported than MP3
 Apple: iPod and iTunes
 Sony: PlayStation
 Cell phones from Nokia, Motorola and Sony
Ericsson
 Apple’s market share:
 iPod: 74%
 iTunes: 85%
 Dominant standard in commercial music
downloads
 Apple has developed proprietary extension 4
WMA
 Proprietary format developed by
Microsoft to avoid the licensing
issues associated with MP3 patents
 Widely supported by a large
variety of portable players and
online music stores
 Direct competitor against Apple’s
AAC but is still the minority
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 Prospects
 Standards war between Apple’s AAC and
Microsoft’s WMA
Apple Microsoft
Key Assets:  
Control over an installed base of customers X  

Intellectual property rights X X

Ability to innovate X X

First-mover advantage X  

Manufacturing abilities X  

Strength in complements X X

Reputation and brand names X X

 MP3 continues to dominate peer-to-peer file

sharing until a winner from the standards war
emerges 6
Pricing
 Downloading a song costs $0.99,
almost everywhere legal on the
web.
 Cheaper for album
 Wholesale music price is
~65c/song.
 Originally set artificially low in a bid to
stimulate demand.
 Apple sells 84% of all songs sold
online. 7
Subscription
 Apple competitors trying
subscription base music
downloading

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Switching Cost
 In order to increase switching cost,
providers ask for annual
subscription.
 In addition, users require installing
music engines.
 The music engine: 5 MB, 11 MB and 32
MB for Yahoo!, Napster, and iTunes,
respectively.

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Apple, One Year after iPOD
 Apple’s revenue was $2 billion at end of
2003.
 The company's net income grew to $63
million, compared with a net loss of $8
million last year.
 iPod and iTunes represent roughly 9
percent of revenue, they are expected to
eventually account for more than 50
percent of Apple's revenue.
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Apple, Present
(Source: CNN, October 12, 2005)
 In the last fiscal quarter, about 6.5
million iPods were sold.
 Accounting for nearly a third of Apple's
revenue.
 75 percent revenue gains on its iPod and
record profits
 The company's net income rose to $320
million, up from US$61 million in the
year-ago quarter.
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Why just iTunes & iPOD?
 Success of iTunes Music Store
(iTMS) is due primarily to:
 Great digital rights management
(DRM)
 The 99¢ per track song price.
 iPOD’s success because of:
 Great Physical Design
 Software & Syncing
 Music Store 12
Download Price Going Up?


CNN, February 28, 2005: The major
record labels (Sony Music, MEI Group, Warner
are in talks
Music, Universal Music, Bertelsmann)
to raise the price they charge
online retailers.
 Similar increase
rumored last spring

 Apple disagrees!
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Network Effects and Lock-
In
 iPod's large market share means
recording industry forced to sell
through iTunes.
 Access to most songs means
consumers attracted to the iPod
over other players.

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Apple's Competitors
 Subscription based music
downloading
 RealNetworks (Rhapsody)
 Napster
 Yahoo!
 Generic MP3 players
 Creative
 Samsung
 Others... 15
Complements
 Large, cheap supply of content
available through iTunes means
increased sales of iPods
 Large, cheap supply of generic
portable players means more
potential customers for other
content providers (Napster, etc.)

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Microsoft, RealNetworks
Partnership
 Microsoft increases number of
Windows Media Player users
 Microsoft can more easily control
piracy
 RealNetworks obtains access to
MSN customers
 Can increase subscription orders
 Good example of “Co-opetition”
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“All-in-one” Devices

 Cell phone, PDA, music, video,

email, internet all in one device
 Industry consolidation
 Apple now providing video on iPod,
iTunes on cell phones
 Microsoft, Palm create the Treo 650
 Companies can't be one dimensional

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Intellectual Property
 Copyright is the primary protection for
musical works
 Protects original works of authorship fixed in
a tangible medium
 Copyright owner has the exclusive right to
reproduce the copyrighted work
 Copyright protection extends to two
elements in a sound recording: (1) the
contribution of the performer(s) whose
performance is captured and (2) the
contribution of the person or persons
responsible for capturing and processing the
sounds to make the final recording.
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Online Piracy
 When a user downloads copyrighted
music without permission, the user is
violating the exclusive right of the
recording company and the artist to
reproduce the copyrighted work.
 The Recording Industry Association of
America (RIAA) estimates that each
year the music industry loses $4.2
billion to piracy worldwide.
 Availability of low-cost downloadable
music and threat of lawsuits are primary
means of combating online piracy.
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The No Electronic Theft
(NET) Act of 1997
 Sound recording infringements
(including by digital means) can be
criminally prosecuted even where no
monetary profit or commercial gain is
derived from the infringing activity.
 Punishment in such instances includes
up to 3 years in prison and up to
$250,000 fines.
 The RIAA is planning to use the Act to
prosecute illegal music downloaders in
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Digital rights management
(DRM)
 DRM, often referred to as copy protection, limits what
functions a user may perform with digital media.
 Apple, for example, reserves the right to change at any
time what you can do with the music you purchase at
the iTunes Music Store. For instance, in April 2004,
Apple decided to modify the DRM so people could burn
the same playlist only 7 times, down from 10.
 Microsoft, similarly, utilizes Microsoft's Windows Media
Audio (WMA) DRM.
 The future: Sony has announced that it plans on
shipping CDs with DRM built-in.
 DRM has become and will continue to be an essential
element to control access of downloadable music.

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Conclusion
 Apple
 Microsoft
 Online music stores
 Music labels
 Consumers
 Generic MP3 players

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