Hello there, cloudust-ga!
I have compiled some interesting information which should help to
provide answers to the series of questions you have asked. If anything
is unclear or you need further clarification, please don't hesitate
post a clarification request. I will try to help in whatever way that
I can. Otherwise, I hope this information will help you to understand
the current status of the online music industry and Apple's position
with iTunes.
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1. How does Lock-In effect influence value creation?
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The purpose of Lock-in is to create an atmosphere which encourages
repeat business and customer loyalty. A successful lock-in program
will certainly enhance and create product value.
Lock-in
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* "The value creating potential of an e-business is enhanced by the
extent to which customers are motivated to engage in repeat
transactions. It is also increased by the extent to which their
strategic partners have incentives to maintain and improve their
relationships with customers. These value-creating attributes of an
e-business can be achieved through lock-in."
"Organizations have adopted several ways to retain customers. Some
have adopted loyalty programs rewarding repeat customers with special
bonuses. barnesandnoble.com?s rewards program in collaboration with
Master card is one such instance. Some firms develop dominant design
proprietary standards for business processes, products and services.
For example Amazon?s patented shopping cart. A number of firms try to
nurture a trustful relationship with customer. Consodata, a European
direct mailing firm, for instance, demonstrates this ideal by
promoting in-house systems to protect data from misuse by
accommodating regular stringent inspections. If relationships can be
well nurtured, customers can be made to remain loyal to the site."
Lock-in
* Loyalty programs
* Dominant design
* Trust
* Customization
From "WINNING IN THE E-BIZERA." The Economic Times.
http://www.etgmr.com/gmrapr-jun2/art6.htm
==
Lock-In:
* "This refers to the ability of a business model to prompt users to
engage in repeat transactions.
"Lock-in can be enabled, for example, by creating switching costs that
customers would face if they were to switch to a different service
provider. Switching costs are created through loyalty programs
(beenz.com), by providing transaction safety and creating the
perception of trust, through familiarity with the site, and also
through customization and personalization. One simple example of a
company that uses lock-in effectively is Amazon.com, which has
developed an extremely simple "one-click ordering system" for
customers who order books, videos, CDs or other products. This ease of
use-as well as the fact that Amazon?s database has credit card
information on file for its customers that can be used for transaction
after transaction-locks in buyers who return for more purchases.
Another instance of a company that developed an effective lock-in
strategy is Hotmail, the e-mail service that now belongs to Microsoft.
Hotmail grew rapidly by offering free e-mail services to clients. Once
these customers had signed up to receive their e-mail through Hotmail,
the inconvenience of having to change e-mail addresses represented the
switching cost that kept them loyal even after other providers began
offering free e-mail."
From "Creating Value Through E-Commerce Business Models." Strategic
Management.(2000)
http://knowledge.wharton.upenn.edu/articles.cfm?catid=7&articleid=254
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2. What is the definition of Information Goods?
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Some definitions of "Information Goods" follow:
"A number of authors have provided definitions of the term information
good. Phetig (1988, p. 463), for example, defines an information good
as 'a set of information pieces which is well-defined in its contents,
its quantity and its specific presentation.'
"Information goods have evolved from goods that had to be instantly
consumed (because storage was not possible) to the current digitized
version, that can (in principle) be sent simultaneously, costlessly
and in no time whatsoever to anyone in the world."
From "Information goods, definition and history in a nutshell."
http://www.cpb.nl/nl/pub/werkdoc/119/gf/3.html
=
"Let us first seek a general characterization of the ICE economy. The
basic unit that is transacted is what I call ``information goods.'' I
take this to be anything that can be digitized--a book, a movie, a
record, a telephone conversation. Note carefully that the definition
states anything that can be digitized; I don't require that the
information actually be digitized. Analog representations, of
information goods, such as video tapes, are common, though they will
likely become less so in the future."
From "Markets for Information Goods," by Hal R. Varian. University of
California, Berkeley. April 1998 (revised: October 16, 1998
http://www.sims.berkeley.edu/~hal/Papers/japan/japan.html#SECTION00020000000000000000
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3. What is the role of the Internet in the music industry?
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The internet is providing a new distribution channel to the music
industry. Any new distribution channels will serve to increase sales
and promote the music industry to new audiences.
The following articles provide some recent statistics:
"More than 19.2 million digital tracks were sold online in the last
six months, according to Nielsen Soundscan, helping to narrow the
music industry's losses last year. Overall North American music sales
were down 0.8 percent last year over 2002 while album sales, which
includes cassettes and other formats, were down 3.6 percent, says
Nielsen Soundscan."
"Edgar Bronfman Jr., the former Universal Music chief who last month
led a group of investors in the purchase of Warner Music from Time
Warner Inc., said he believes digital music sales will eventually help
the industry recover - although continued pain will precede the
healing."
"I think that the industry is going to see continued difficulty for a
couple of years," Bronfman told The Associated Press. Bronfman said
the music industry has only begun to tap the potential for digital
distribution and that it's going to take time for the different
business models to develop and grow.
"Online Services Give Music Industry Hope," by Alex Veiga. Kansas City
Star. (Jan. 11, 2004)
http://www.kansascity.com/mld/kansascity/business/7686922.htm
(you may not be able to access this article without filling out a free
subscription)
==
"The vast majority of music is still sold in stores, but Internet
sales are increasingly rapidly. About 4.5 percent of global music
sales this year will come through downloads, subscriptions to streamed
music, and online sales of tapes and CDs, according to a report by
Informa Media Group, a British consultancy. That figure is expected to
rise to 11.9 percent by 2008."
From "New business models emerge in Net music," by Chris Gaither.
Boston Globe Staff. 10/6/2003
http://www.boston.com/business/technology/articles/2003/10/06/new_business_models_emerge_in_net_music/
==
"Last spring, when Apple Computer introduced its iTunes Music Store,
the company had the nascent field of legal music downloading mostly to
itself. By mid-2004 there likely will be nearly a dozen companies
jockeying for the same customers."
"Recorded music is "a $30 billion business worldwide, and $30 billion
is a lot of money," said Phil Leigh, an analyst with Tampa-based
Inside Digital Media, in explaining the rush to set up online music
stores. And it hasn't hurt that Apple proved there is a market by
selling more than 30 million songs since it kicked off its online
service last April."
"A variety of factors are contributing to the rush toward online music
distribution. Prodded by flagging sales and a surge in illegal
downloading, the music industry has become much less restrictive in
licensing its tunes to legal download services."
"High-speed Internet connections have also become much more common,
making downloading faster and more convenient. Consumers, particularly
younger music buyers, are now more comfortable with the notion of
buying things -- from music to books to cars -- over the Internet."
"I think we're witnessing a real gold rush, and there are a lot of
streambeds where companies can stake a claim," Leigh said.
"But like the Gold Rush of 1849, there will be plenty of big losers as
well as winners."
** "We're living through an important juncture in music history,"
(says Mitch Bainwol, chief executive officer of the Recording Industry
Association of America). "Six months ago, people didn't know they
could download music legally. Now the whole terms of the debate have
changed."
From "Sign on, tune in, download," by Clint Swett. Sac Bee. (January 18, 2004)
http://www.sacbee.com/content/business/story/8123034p-9055119c.html
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4. Business Models of Online Music Stores
*****************************************
According to a recent article on CNET, the online music business
models now being used include the A-la-carte approach, the
Subscription Model and the Streaming Model:
The a la carte approach
=======================
This approach is employed by companies like Apple iTunes. "Customers
can buy individual tracks for 79 cents to $1.20 or albums for $9.99
and up, and buy as few or as many tracks as they want. They can--after
downloading music to their hard drives--burn it to CDs, copy it to
portable music players or, if they have the right equipment, stream it
around the house by way of their existing entertainment centers."
The subscription model
=======================
"Customers pay a monthly fee and then download a specified number of
songs each month. For $9.99 a month, emusic lets its customers
download 40 songs and use them in whatever way the buyers want. For
$14.99, customers get 65 songs."
The streaming model
====================
RealNetworks'Rhapsody is one online company that uses this type of
business model. "Music lovers pay a monthly fee, then listen to as
many songs a month as they can stand. Downloading is extra, usually
under a dollar a track."
From "Online music's winners and losers." Knowledge@Wharton. Special
to CNET News.com (December 27, 2003)
http://news.com.com/2030-1027_3-5133561.html
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5. How is the competitive and operation strategies of Apple iTune's
music store going to sustain its survival in the Internet age?
*******************************************************************************
While there are differing predictions concerning which online music
business model will eventually be most successful in the future, Apple
iTune's model is certainly a success at the present time. Steve Jobs,
who is responsible for iTunes, does not hesitate to stress why iTunes
business model is poised for continued success.
=
"Apple's Steve Jobs recently told Rolling Stone magazine that music
ownership is an ingrained habit, one that will always prevail: "People
don't want to buy their music as a subscription. They bought 45s, then
they bought LPs, they bought cassettes, they bought 8-tracks, then
they bought CDs. They're going to want to buy downloads." Jobs, of
course, is the mind behind iTunes and so could be somewhat partisan.
But he may have a point because even with music it is important to
remember that people--especially Americans--like to own things."
"The possibility that streaming music providers could go out of
business, leaving subscribers with "nothing to show for their money,"
coupled with the prohibitive nature of subscription fees for those on
a limited budget, places iTune in an advantageous spot. Furthermore,
Apple's iTune customers can "flit from download site to download site
to fulfill their varied tastes in music, one track or one album at a
time," giving iTune a distinct advantage over other online music
business models."
From "Online music's winners and losers." Knowledge@Wharton. Special
to CNET News.com (December 27, 2003)
http://news.com.com/2030-1027_3-5133561.html
==
In fact, Apple iTune's business model has been so successful that
other companies are rushing to hone in on the market. Unfortunately,
such imitation will mean more competitors in the dowloadable music
marketplace.
"The rush of companies offering or working on download services
signals that established technology companies believe broad audiences
are ready to pay to download songs."
"Since Apple Computer Inc. launched its iTunes Music Store, which has
sold 10 million songs, established e-commerce and computing players
have signaled their intention to follow. The success of iTunes comes
in spite of the fact that the service is available only to the 3 to 5
percent of computer users on the Macintosh platform."
"The most recent entrant was Dell Inc., the leading maker of personal
computers. Following the path set by Apple, Dell said last month that
it would soon introduce a digital music player, as well as a
music-download service to fill the player with songs. Dell would not
reveal details about the service, such as how many songs it plans to
offer, or whether it would also allow streaming music."
From "New business models emerge in Net music," by Chris Gaither.
Boston Globe Staff. 10/6/2003
http://www.boston.com/business/technology/articles/2003/10/06/new_business_models_emerge_in_net_music/
===
Apple has recently made a radical departure from it's former policies
by announcing a joint venture with Hewlett-Packard to bundle Apple
iTune's online music store onto HP's personal computers. This strategy
should help the Apple iTune's remain near the top of the online music
industry for the coming years.
"The partnership is a coup for Jobs, who has gained significant
leverage in the past year because of Apple's success in the burgeoning
digital music business. The move gives Apple, which has long been
pigeonholed as a niche player in the personal computer industry
outside the Microsoft-Intel mainstream, access to major marketing
channels and retail chains like Best Buy, CompUSA and Office Depot
where Hewlett has a powerful presence."
"For Hewlett, the alliance provides instant access to Apple's
technology and music rights and the opportunity to offer a full range
of popular digital products to consumers while gaining newfound
independence from Microsoft and a significant advantage over Dell
Computer, which sells its own music players only online."
* ...the new alliance underscores the feverish deal making now going
on as computer makers, consumer electronics companies and content
providers all jostle for position in the uncharted territory
converging around digital entertainment."
"The next big thing isn't the next gizmo or killer app or hot box,"
Fiorina said. "Customers want all this to work together, and they want
a seamless approach. We're very much going to make sure that the
Microsoft and Apple worlds work together. That's part of the power we
bring to this thing."
From "Hewlett-Packard and Apple forge partnership on digital music,"
by John Markoff. International Herald Tribune (January 9, 2004)
http://www.iht.com/articles/124362.html
Additional Resources
====================
"Tech titans flex online music muscle," by Kevin Restivo. Financial
Post (January 15, 2004)
http://www.canada.com/technology/story.html?id=EBC850CA-D3E8-4230-822A-D45C8AC6E2BA
==
I hope you can put this information to good use!
umiat-ga
Google Search Strategy
"lock in" and "value creation"
"business models" online music
"information goods" definition
information goods
online music industry
Apple iTune
Apple ITune "competitive strategy" |
Clarification of Answer by
umiat-ga
on
21 Jan 2004 09:48 PST
Hello again, cloudust!
Thank you so much for the kind rating, comments and tip. Here are some
further references that should provide some more insight into Question
5!
Pricing of Music Content
==========================
It appears that the $0.99 per download price has been set by the major
vendors within the online music industry as a standard price.
Consumers will pay a premium to copy their music
------------------------------------------------
"Introducing untethered songs would dramatically increase consumer
demand over music that is restricted to the PC. In fact, online
consumers indicated they are willing to pay significantly more than
$0.99 for a single song, if it could then be copied off of the PC. For
single song downloads (which are relatively new to the market, and are
historically restricted from extensive copying), this signifies an
opportunity to charge consumers a premium for the ability to copy
their music."
"With the industry settling in on a price point of $0.99 per download,
Jupiter's report recommends online music distributors sell tethered
singles at $0.99 and look to introduce untethered downloads at premium
prices. If you guarantee high sound quality and virus-free downloads
at such prices, consumers (even file sharers) will purchase a-la-carte
downloads."
From "Opportunity for ISPs to Sell Music Online," by Peter Sargent.
Internet.com (April 2003)
http://www.isp-planet.com/research/2003/content_ownership.html
The price of downloaded music may have to change for companies to stay competitive
-------------------------------------------------------------------------------
(The following is excerpted from BusinessWeek Online)
"DIVIDING THE DOLLAR. Of course, competitive pressures this year and
next are likely to drive down the price of digital music. A flood of
new online-music services, inspired by the success of iTunes, is about
to hit the market. And even store-bought CD prices are starting to
shrink after years of existing in an oligopolistic universe, where
competitive pressures were nonexistent. Recently, Universal Music
announced it would lower the price of new CDs by 30%."
"Yet it's unclear how far the prices - at the store or online - will
fall. For downloads, "the market will explore where the price will
settle, but in the end it's going to have to be lower than 99 cents,"
says Harold Vogel, founder of Vogel Capital Management and author of
Entertainment Industry Economics."
"Some analysts are beginning to realize that lower prices could
greatly expand the size of the digital-music market, still minuscule
despite iTunes' success. A July survey by Jupiter Research of 2,500
adults who use the Internet found that 35% of people are willing to
pay 51 cents to $1 for a song by a favorite artist; 20% are willing to
pay 50 cents or less; and 19% would pay more than $1 [26% say no price
is right, they'll pay nothing]."
"Problem is, online-music services cannot significantly lower prices
without losing money. Under existing licensing deals, 65 to 75 cents
of each 99 cent download goes to the labels. If the record companies
lowered their royalties to, say, 30 cents to 35 cents, online music
services could make a profit while greatly boosting the total market."
THE NEXT STEP. "There's a market for 99 cents, but there could
conceivably be an even bigger market below that," says Jupiter analyst
David Card. That view is supported by a pilot test on RealNetworks'
Rhapsody service between February and April of this year. During a
six-week period, Rhapsody dropped the price of downloads to 49 cents
from 99 cents. Guess what? It sold three times as many tracks."
"After the pilot program ended, Rhapsody lowered its price to 79 cents
per download in May. But the service would like the price to go lower.
"The music companies have dropped the restrictions on what you can do
with the song, and they offer greater flexibility with what you can do
with it," says Rhapsody spokesman Matt Graves. "Now, all they have to
do is drop the price."
"The big record labels deserve credit for finally pulling their heads
out of the sand after years of pretending that file-sharing services
would disappear. But they need to go one step further. The harsh
reality of the Internet Age is that the industry will forevermore be
competing against free, pirated music. If it doesn't slice digital
prices to around 50 cents, the market will likely never go
mainstream."
LITIGATION OR SALES? "So far, most execs are reluctant to face that.
"I don't think music is overpriced," says Ted Cohen, EMI Music's
senior vice-president. But Cohen does think the industry should offer
consumers more pricing options, such as a higher price for a very
popular single. To his eyes, the digital-music market has failed to
take off because the industry hasn't spent enough money on marketing.
"Other than Apple, nobody has marketed to the consumer," says Cohen.
"People are hearing more about KaZaA and Grokster."
From "What Price Online Music?" by Spencer E. Ante. Business Week
Online (10/17/2003)
http://216.239.57.104/search?q=cache:T3cTsEWCBVkJ:biz.yahoo.com/bizwk/031017/tc200310171991_tc078_1.html+pricing+online+music&hl=en&ie=UTF-8
=====
Some further thoughts concerning drawbacks to iTune and competition
from other vendors and business models:
-------------------------------------------------------------------------------
(Excerpt from Marketing Wharton):
"Fader and Black say it?s far too soon to say that Apple has found the
best music model. According to them, streaming services get around the
problems that confront the legal downloading services like iTunes.
Quality of the subscription-based services like Rhapsody is excellent.
Users can hear what they want immediately. There are no annoying
pop-up ads as on the pirating sites, and users don?t have to worry
about viruses or that they are giving hackers access to their
computers-a major concern with file-sharing networks."
"Most important, says Fader, selections are extensive, because the
music companies don?t have to worry about illegal copies. "With no
downloading, you have access to a much larger selection of songs," he
notes. "I think that?s a very important point...Streaming is a much
more sensible business model from the industry?s perspective."
"For $10 a month, an iTunes user would get 10 songs, while a Rhapsody
customer could listen to hundreds. The flat fee approach allows users
to listen to unfamiliar music without worry about cost, and Rhapsody
offers a wide selection of commercial-free, radio station-like
channels specializing in various genres. The streaming service
involves considerably more interaction between the user and the
service than the downloading model does, allowing for many additional
features. By studying the user?s choices and those of others with
similar tastes, the service can recommend other music selections to
the user, much the way Amazon recommends books."
"Pressplay provides "lots of very cool value-added stuff," including
Billboard charts and biographical information on artists," Fader says.
"You can basically find out about other people who have tastes similar
to your own. There are all kinds of things like that." Moreover, the
interface-the steps for finding songs and listening to them - "is much
nicer than using any of the illegal services," he adds.
"And yet, streaming services have two shortcomings. First, users do
not own the music they hear. If all the music they want is available
all of the time, practically for free, this should not matter. But
pride of ownership is an old habit that many music lovers may resist
breaking. "Behavioral change is required for people to learn you don?t
need to own the music," Fader says. "Clearly," notes Black, "for these
services to compete with free [sites] they are going to have to allow
more ownership."
"Even more important, streaming audio can only be heard via an
Internet-linked computer. While the computer can be hooked up to the
stereo system, streaming is no good for users who want to take their
collections in their cars or download them to portable devices. But it
won?t be long before the spread of wireless Internet hot spots makes
this less of a problem, Fader says. Users will be able to log on while
they are on the go, perhaps with small portable devices."
"One thing is fairly certain, Black says: the CD will continue to lose
ground to online music delivery systems of one type or another.
"Downloading will become very pervasive. You will be able to get
downloads just about anywhere ... I don?t think you?re ever going to
return to the glory of the CD." He expects downloading to attract more
individual users than streaming, but adds: "I think your heaviest
spenders, your biggest music lovers, will come with the subscription
services."
"Indeed, at the end of June, AOL Time Warner announced it is working
on plans for a service to rival iTunes. Amazon, Microsoft and Yahoo!
are also reported to be preparing services. Some experts believe
competition will quickly cut downloading charges in half, to less than
50 cents a track. At some point, legal services may charge little
enough that they can truly compete with peer-to-peer networks,
especially if sound quality is top-notch, the purchasing process is
simple and the add-on features are captivating. "I think you will
always have a free [pirating] market," Black says. "What you have to
do is make the legitimate market much easier to use than the free
market."
From "Online Music Wings its Way to the Celestial Jukebox." (July 2, 2003)
http://knowledge.wharton.upenn.edu/articles.cfm?catid=4&articleid=815
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