Read Case #4 Below: Out of Tune. Supported with the concepts outlined in your text and from your previous classes. Describe the business context facing the music industry in the case. Support your analysis using Figure 2.3 on page 39 of the text. Evaluate the strategic responses used by the record industry in coping with the changing environment. Describe how proponents of the industrial organization (I/O), resource-based view (RBV), and the guerrilla view would each analyze this case.
Please provide references and only use original work and now direct quotes for the references being used. 3-5 pages Double spaced.
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January 1999 might well be described as the month the music died (to paraphrase a popular song lyric). If the music didn’t actually stop then, at the very least, it was the date the music industry changed forever. Why? Shawn Fanning, a student at Northeastern University in Boston, launched Napster, the pioneering Internet file-sharing service that introduced people to “free” music downloading. As the music industry was about to discover, the incredible opportunities offered by the Internet had a dark side.
Music company executives insisted that they weren’t caught off guard by the digital distribution revolution. In fact, they believed that it would be a great way to market, promote, and sell directly to fans. However, they weren’t prepared for the excruciating efforts of trying to figure out the best ways to adapt to the changed environment.
What the music companies faced was an increasing avalanche of downloading by consumers. Because Internet file sharing offered convenience and anonymity, downloaders saw nothing wrong with it and flocked to Napster’s Web site. However, what consumers saw as harmless actions would ultimately have a major negative impact on the music industry as CD and album sales plummeted. The industry decided to fight back the best way it knew how—through the legal system. In December 1999, the Recording Industry Association of America (RIAA)—the trade group representing the U.S. recording industry—sued Napster for contributory copyright infringement. Due to the long appeals process, it was July 2001 before Napster was finally forced out of business. Yet, even with Napster gone, the downloading didn’t stop. Other sites such as Grokster (now gone) and KaZaA soon took Napster’s place. Obviously, digital distribution was here to stay. Perhaps what the industry needed was a way to work within the changed environment. After all, a report by Forrester Research predicted that by 2008, one-third of all music sales would come from downloads. Another industry report said that what consumers wanted was flexibility, choice, and extras. The challenge for the music companies was to find an acceptable and profitable way to give them what they wanted. How?
Apple’s iTunes Store is one example. Open 24/7, the site offers more than 3.5 million songs. As of January 2009, the store had sold 6 billion songs. Most downloaded iTunes files had digital rights management restrictions, but as of April 2009, those restrictions lifted. At that time, iTunes also moved away from its 99 cents pricing strategy and price songs differently. Many dropped to 69 cents, but the biggest hits and newest songs will be priced at $1.29 whereas moderately popular ones will remain at 99 cents. The music companies do receive a royalty percentage for each download. Other online music stores have opened—for example, Microsoft, Wal-Mart, Yahoo, YouTube, and Sony. Even Napster (of which Best Buy now owns 90 percent) is selling music downloads—legally now! Technology also created new markets for music. For instance, sales of master-tones (cell phone ring tones) were a gold mine. However, the total sold in 2008 was down 30 percent from 2007. Growth in this area is unlikely.
In addition to these strategic initiatives, the music industry continued its pursuit of illegal downloading—going after both organizations and individuals. The strategy seemed to work somewhat. According to the CEO of RIAA, “The problem has not been eliminated, but contained. We believe file-trading is flat.” However, in mid-December 2008, the recording industry dropped its legal assault—an “abrupt shift of strategy”—and instead focused on more effective ways to combat online music piracy. The industry will now work through the Internet-service providers and use agreements with them to stop customers from illegal file sharing.
Although sales of physical products (CDs, albums, etc.) continue to decline (7 percent in 2008), revenue from digital formats increased 25 percent. Maybe the music companies had finally found the ways to “get in tune” with the realities of this new context.