Porter?s Competitive Forces Model consists of the following five elements:
1. Bargaining power of suppliers
2. Bargaining power of buyers
3. Barriers to entry
4. Threat of substitute
5. Rivalry among existing competitors
Until a couple of years ago, the global music industry was quite
stable and predictable: it consisted of five major record labels which
basically held all the strings. A lot has changed for the music
industry in the last couple of years though. This also means that the
competitive forces model for the industry has changed.
As it used to be:
An upcoming artist went to a major record label and tried to get a
record deal. Even if he got such a deal, the record label could set
most of the rules. For example, very few artists actually had
intellectual property right on their own music. All rights were held
by the record company.
The record company would then decide the strategy for the artist: how
many times will he have to perform, how much budget will he get for
his music videos, how much money is going to be spend on marketing?
The record company also decided on which format and in which packaging
the music was going to be released. This usually was only on compact
The record label also decided when a CD was going to be released and
through which resellers. In some countries (primarily in Europe, less
so in the United States), the record labels even had a great level of
control over the price for which the resellers were going to sell the
CD?s to consumers.
When applying the Competitive Forces Model on this situation, we get
the following picture:
1. Bargaining power of buyers: little. The format in which they could
buy the music was set. The channels through which the music was
available was set. The prices for which the music could be bought,
were for a large part controlled. If a consumer didn?t like the
current offering, there was practically no way to get a specific
artists? material through an alternative channel.
2. Bargaining power of suppliers: high. Artists? only changes of real
success were through one of the big five record companies. This meant
they had little to say during the negotiations. Basically, a record
contract for a beginning artist was a list of general terms which were
applicable to all. There was little an individual artist could do
This was also true regarding consumers: if a consumer didn?t like a
record companies? offering, there was no alternative way to obtain the
This basically meant that the record companies could set nearly all of the rules.
3. Barriers to entry: very high. Building up a new successful artist
as a profitable product requires a certain elements: lots of money,
know-how and an extensive network.
You need lots of cash in order to finance the required marketing and
music videos for a new artist. More important however, you need an
extensive network on different fronts to successfully sell your
product. You need to have contacts at major venues were your artists
can perform, you needed to have contacts at major stores through which
your music could be sold.
All in all it was really difficult for a new player to get sufficient
4. Threat of substitute: very low. Music was only available and
playable on one format and could only be obtained through one channel:
the record which held the rights to the music. As long as consumers
liked an artist, there was only one place were their could go: the
5. Rivalry among existing competitors: relatively low. The competition
between the Big Five was great. However, their relative positions and
market shares were pretty stable. More important, the total market was
more than big enough to serve five players. This meant that, although
competition between these five was fierce, each of them could be
pretty sure they would still be in the business in ten years.
Please note that this was how the competitive forces were for the Big
Five record companies during the nineties. They, and basically
everybody else, thought that it would stay that way. However, nobody
was able to predict the impact a new technology would have on these
competitive forces: the Internet
The Internet has completely messed up the competitive forces model for
music industry in the last couple of years.
Let?s look briefly at how this happened: computer technology quickly
meant that media, including CD?s, could easily be copied without loss
of quality. In the beginning, this wasn?t a major concern: a copy on
itself is quite useless if you can?t distribute it.
The new technologies changed that however: MP3 encoding and the Internet.
The arrival of MP3 meant that the copy could be hugely compressed
without a noticeable drop in quality. This made distribution much more
easy. The internet quickly provided a network through which the copies
could be exchanged.
After Peer-to-Peer programs like Napster came up, the chaos was
complete: people could easily obtain a near-perfect copy of a CD for
This meant the competitive forces have changed into the following:
1. Bargaining power of buyers: very high. Consumers can now decide to
download music for free, instead of having to buy quite a large amount
for a CD in a traditional store. This means record companies have to
offer their material for a lower prices and through different
channels. Luckily, they have begun to do this (think about iTunes from
Apple for example).
Record companies suddenly need to listen to the wishes of consumers.
They cannot prescribe a format. They can no longer prescribe a
2. Bargaining power of suppliers: lower.
We need to make a distinction between artists and consumers.
Because of the internet, artists were less depended upon the
traditional networks of the record companies. Artists can directly
promote their material through their own website. In some cases, they
have even started to sell their own music, completely by-passing the
record company all together. This means they have acquired more
control over their own product and that the record company has less
control over the artist.
The same is basically true regarding consumers: as I mentioned
earlier, if a consumer doesn?t like the price of the product, there
are alternative ways to get it.
3. Barriers to entry: lower. Because of the internet, it has become
more easy to sell music. It?s easier to set up your own record company
(as more and more artists are doing, like Simply Red for example),
because you are less dependant on the traditional sell-channels.
4. Threat of substitute: extremely high. If a record companies?
product isn?t priced right, or not delivered in the right format,
consumers will download it of the internet.
5. Rivalry among existing competitors: higher. As more players enter
the market (because more artists are creating their own record
companies for example), the competition naturally becomes more fierce.
The Big Five cannot take their market share for granted anymore.
I hope this answer is to your satisfaction. Please note that if you
need any more information and/or views, please ask for a clarification
as I will be happy to help you!