Digital Music Distribution Value Chain and Use Case Analysis

Jordan Greenhall

 

Overview

Elements of the Value Chain

Content Production

Marketing

Distribution

Consumption

Where DMM impacts the Value Chain

Opportunities

Obstacles

 

Elements - Production

Functions: invention, writing, performance, recording, editing, programming

Members of the value chain

The artists themselves: Central to production, May be involved in any or all of the functions

Producers: enhance the quality of the created work through understanding of the creative process and bringing together the right people to make it work.

Value added providers: make the content better

Songwriters: as important as the artists in many cases

Set musicians

Sound / studio engineers

The labels: provide funding to bring the right elements together

Output: a musical work of varying degrees of quality

 

Elements - Marketing

Functions: understanding what the market wants, tuning content style and content, presenting music to the market through appropriate channels, driving demand

Members of the value chain

The artists themselves: at the center of what the fans want, and live performance is a key method of marketing

Live venues: same

Radio: a business unto itself, but also a key enabler for promoting music to the mass market.

Merchandisers: again, business into itself but t-shirts and posters play a big role in marketing

Print media: business also provides reviews and advertisements that drive consumer adoption and information

Retail channels: in-store marketing can be very important

Grassroots / street teams: increasingly important

The labels: provide funding, and:

A&R – refine product to meet market demand

Marketing – present message through appropriate channels

Output: targeted product, increased demand, informed market

 

Elements - Distribution

Functions: delivery of music to consumers

Members of the value chain

Retailers: shelf space, customer support, in-store marketing, transactions (for now lets not worry about the credit card processing companies, POS software, etc)

Distributors: move content to retailers

Duplication

Wholesalers

Labels: fund a large part of this process

Output: a CD on the shelf, transactions to consumers

 

Elements - Consumption

Functions: playback, management

Members of the value chain

CE: CD players, home stereo, etc.

PC/IT: software players

Automotive: as integrated into the car

Output: consumption in multiple locations

 

DMM - Production

DM areas of impact:

Software enables production at lower costs and higher rate.

More people can have access to more powerful tools – increase quality of offering at a much lower final cost

Effect on Analog Model

Costs of production reduced

Greater supply at higher levels of quality possible (particularly at the bottom-end of the spectrum)

 

DMM - Marketing

DM Areas of Impact

P2P: can enable nearly costless presentation of content to marketplace

Portals and filters: similar to print media in the analog world – but can have broader reach at much lower costs

Filters and matching techniques (Amazon effect) – can radicalize segment by dramatically increasing the quality of match between consumers and product and can be virtually costless at scale (see Launch.com)

Streaming radio – to the extent that programming is done by humans this is virtually identical to existing broadcast radio

Effect on Analog Model

Value of analog value chain segments can be completely eliminated in a strong DM scenario.

Under any circumstances, costs of marketing can be reduced considerably (and effectiveness of existing marketing channels and techniques diluted by alternative channels)

 

DMM - Distribution

DM Areas of Impact

Can enable costless copying and distribution of content to all consumers

Effect on Analog Model

Everything except for retail undermined

Retail at risk or at center depending on business model

 

DMM - Consumption

DM Areas of Impact

Increased storage and portability – virtually all the music you could ever want can be carried in the palm of your hand.

Leverage commodity IT equipment for storage media

Convergence makes everything into an audio device (cell phone, digital camera, coffee maker, etc.)

Effect on Analog Model

Devices no longer tied to media or content

De-prioritize value or even location of medium in favor of content

 

DM - Opportunities

Total cost structure can be greatly reduced throughout the value chain.

Currently it costs millions (assume $2.5 MM) to bring a CD through the value chain to retail.

Eliminating marketing and distribution costs can more than cut this in half.

Using DM production tools, all but the highest levels of production can be achieved for a fraction of the price.

In principle, cost-structure can be reduced to the amount necessary to provide incentive to human factors in production.

Socio/Psychological factors aside, estimate that total costs could be reduced to k$ TBD for a mid to high end album

Enhanced marketing and distribution can dramatically increase both the quantity of music consumed as well as the quality of the experience.

Expanded consumption mechanisms can increase the ways and locations for music consumption. Music everywhere.

 

DM - Obstacles

Cannibalization: AM is a billion-dollar industry. To the extent that DM cannibalizes that industry, content owners will resist transition to DM.

Although efficiency provided by DM should increase margins for music distribution, that same efficiency could also dramatically decrease the size of the pie.

Power Struggle: because they are the principal source of risk funding (and marketing), labels have a strong position in AM. Disintermediation or risk of disintermediation due to DM will cause strong resistance (or modification of DM)

Copyright: existing copyright laws put emphasis on maximum exploitation of content, not on most efficient production and dissemination. This could prevent adoption of DM.

 

DM – Conclusion and Recommendation

This portion is nowhere near fully formed, but this is at least a cut at some recommendations.

An effort should be made to catalyze the key elements of DM necessary to make it into a vital force.

Any effort that requires participation from the existing major copyright holders will be suboptimal due to their vested interest in AM (and need to dominate any DM value chain).

Recommendation that DMP focus on building a DM market that is beside and alternative to the AM (and AM-derivative markets). This DM market will attempt to start from the core strengths of DM and build-out rather than using DM as an add-on to the AM world. Specifically, this market will consist of the following:

Key technologies for costless marketing and distribution of digital music.

A critical-mass of content and consumer participation with this technology.

An economic model targeting ~k$ TBD compensation to the production elements in the value chain for the equivalent of an "album" at some degree of scale.

This project should be considered as an open technology platform designed to enable "true" DM to develop and flourish on a global scale.

 

Open Issues

Economic Model

How is compensation generated, how is it distributed, how is it enforced?

What role, if any, does DRM play?

Copyright

How will the project relate to copyright?

Rely upon default rules, or use contract to create an alternative copyright regime (e.g., Creative Commons)

Participation and IP

In the best interests of the project it is suggested that no-one should own the platform (compare: Perl, Linux, HTTP, Apache, etc.)

The key stakeholders are consumers and content creators.