Development Plan for a New Firm in the Music Industry - Essay Example

Business Plan for a New Firm in the Music Industry Introduction The proliferation of technological advances in the current world market had facilitated numerous changes in the way business is done. The music industry has been revolutionized by changes in technology that ushered the internet which in turn spurred the introduction of peer to peer architecture and music file sharing. The digitization of music is also apparent in the advent of CDs, VCDs, MP3s, and the most recent advancement which is called streaming technologies. It is irrefutable that a new music industry has evolved, a sector, which began to take advantage of the benefits offered by these revolutions [1]. The utilization of new business models and strategies are essential in order for a business entity to efficiently compete in the current market environment. The new trend in the music industry posted radical changes in the overall industry value chain. It has streamlined the value chain by effectively lessening or fully eradicating some of the previously important players [2]. The most significant of these is the obvious displacement of traditional marketing channels by more technologically advanced ones. Brick and mortar distribution channels are now being complemented or fully replaced by online distribution systems [3]. These new trend necessitate the conceptualization and implementation of innovative business strategies to become profitable, capture a sizeable market share, maximize shareholder value, and compete head-on with other industry leaders. This paper will serve as a platform of a business, which will take advantage the advancement of technology in order to effectively compete in the new music industry. The creation of the company will show the responsiveness of a business entity to the new trend and changes in its environment. The Company The new changes in the music industry will give rise to the conceptualization of a company which will be known as eMusic Company. Business Operation The firm will be involved in the promotion and distribution of music of various artists of music labels and independent ones. Utilizing the present technologies available, eMusic will be employing an online distribution system of music in physical and digital format by establishing and building its own website where consumers can access their products and services. The website will offer a user-friendly interface where music lovers can find the songs that they want with the most convenience and speed possible. Realizing the new trend within the music industry, specifically the streamlining of the value chain, the company will try to bring artists with music fans directly. This will be done by adding a system where artists can directly upload their tracks and albums online to be viewed and heard by anyone online. Market Scope The evolution of a global market through the rapid spread and utilization of the internet technology will allow the company to service anyone in the world. The market scope therefore is a broad and as diverse as the total number of music lovers who have access to the world wide web. This eliminates the ageing population, as they are not usually familiar with the new technology. The most particular market segment to be serviced therefore, is mostly the young and middle-aged population. I. Competitive Environment (current) Figure 1 shows the recording industry's distribution chain. Since eMusic will be involved not only in the distribution but also promotion of music by various artists, it will be competing both with music producers (labels) and distributors. Production Production of music is currently undertaken by record labels which can be neatly classified in four major categories-major labels, independent labels, microlabels, and vanity labels [4]. 1. Major Labels Major labels are comprised of recording companies with over 100 artists. The labels' large number of artists implies a broad array of musical styles. Having huge financial muscle, these usually have national or international distribution channels. Examples of these are the music industry labels namely Sony, Columbia, BMG, EMI, Giant Records, Warner Brothers, Elektra Records, and Atlantic Records. It can be noted that these companies account for a large share of the entire market for music [5]. Figure 1. The Recording Industry Distribution Chain 2. Independent Labels Independent labels are the next largest segment of the music industry. These companies usually have a large base of artists like the major labels though independent labels typically concentrate on one or two genres of music. Examples of these are Soundings of Planet which focus on inspirational and healing music and Narada which concentrates on New Age music [6]. 3. Microlabels Microlabels are companies with typically fewer artists which range from 2-10. Like independent labels, these companies only concentrate on one or two music genres though they are more tightly focused than the former. Examples are Etherian, Evol Egg Nart,a nd Cuneiform Records [7]. 4. Vanity Labels Vanity labels emerged due to the rapid advancement of technologies which significantly cut down the price of recording. Presently, an individual artist can now produce his or her album. Vanity labels segment are comprised of artists who decided to record their own music without the aid of record labels [8]. Distribution Presently, distribution of music is being undertaken by different marketing channels. Foremost are the marketing arms of record labels armed with strong financial muscles to carry out aggressive marketing campaigns to effectively sell the album of their artists. Others are record bars and other independent distributors. However, looking at the value chain of the whole music industry, music distributors can be more neatly classified into three categories. The first one will be comprised by those utilizing the traditional distribution systems, those that complement their traditional business models with online distribution system, and those, which are purely virtual distributors. a. Traditional Distribution Sytems Traditional distribution channels are business which provides a physical establishment in the distribution of music in physical format. These include record bars and music stores which markets music in cassettes, CDs, VCDs, and MP3s. b. Traditional Distribution Complemented with Online Distribution System A lot of music distribution companies find it profitable to complement their brick and mortar business operations with online distribution systems. These distributors take advantage of the wider scope of market captured by utilizing different means where their target consumers may access their products. Firms operating in this line of business have stores to market products in physical format. Product and company information, customer service, and distribution of music in digital format are accomplished by their online stores. c. Virtual Distributors As opposed to the previously discussed distribution channels, virtual distributors generate revenue by solely putting up a virtual store. These types of operations do not have physical stores to sell music but mostly distribute digital music files online. In a broad sense, eMusic will be competing head on with all the music producer and distributor in the music industry. eMusic will be one of the newest net labels [9]. As it will be involved in the promotion of distribution of music, it will try to pursue profitability by snatching and eating up into the market shares of the present market players. eMusic will be contending with the ability of the record huge record labels ability to devise effective marketing strategy to promote their artists and their music. Also, eMusic will also be an indirect competitor of traditional channels. Even though these firms do not operate online, they post competition with eMusic as they also distribute music in physical formats. More specific competitors are Amazon.com, MP3.com, and Barnes and Nobles which operate in the same line as eMusic. I. Competitive Advantage Among the competitive advantage that a company can employ in its operation, eMusic will pursue an overall low-cost leadership strategy. Realizing that the market of the music industry has become price sensitive due to the proliferation of low cost music providers [10], this competitive advantage strategy seems appropriate to provide the maximum value to customers. Employing an overall low-cost strategy will mean delivering the features and services that a customer find essential at relatively lower costs than other competitors in the market place. Lower prices should then be accompanied with strategies to lower the cost of delivering the product or services to the customer. The competitive advantage will be supported by the following cost cutting activities by both trying to surpass competitors in performing major internal value chain activities efficiently and of minimizing costs by managing the company's cost drivers. Aside from this, eMusic will also feature a revamped value chain via the elimination of other levels in its value chain. Controlling the company's cost drivers can be possible by reaping the benefits of economies of scale, acquiring key resource inputs at lower price, and linking other activities in the company or industry value chain. Eliminating the role of music levels and other distribution channels in the industry not only streamline the value chain but also eliminate significant costs. Looking at the eMusic's cost structure, fixed cost is relatively high to cover for permits and licenses per song featured, high-tech devises to support state-of-the-art technology, facilities for the company's operations, office space, and personnel. It can be seen that higher number of tracks produced and featured by eMusic will bid down the per unit fixed cost. As eMusic would want to bring a wide selection of music from different genres and artists, benefits of economies of scale will be attained. Acquisition of key resource inputs will be possible by purchasing in bulk. Suppliers of music like record labels often grant discounts when a lot of songs are purchased for distribution. The business model of eMusic is designed to cut costs as it dislodged other players in the value chain. The costs are reduced as royalty for artists are eliminated. Also, since artist directly connect with their market, the thick chain of marketing channels are streamlined, thus cutting the mark-up charged by other intermediaries. II. Value Proposition Customers are often the determining factor in the success or fall of a business entity [11]. The profitability of a business operation is often tied up to the perception and value a customer associate with its product. As businesses are becoming more and more market driven and customer oriented, companies are relying on their customers on the conceptualization and design of the products that they offer to the market place. Market research often accomplish the feat of understanding the needs of the target market, relaying significant information which is helpful in conceptualizing and designing the appropriate product and service to be offered. Recognizing this, the value product and service which will be offered to the market of the music industry therefore, will be based on the market researches conducted to ascertain the customers' unique wants and needs. Cost Leadership One of the company's priorities shall be to maximize customer value through the delivery of products and services, which the customers find essential. The company will focus on the maximization of customer utility by charging prices as low as possible. This will involve the employment of cost leadership strategy. Nowadays, the key success factor of a music company is emphasized on its ability to deliver customer value at a reasonable price. This is particularly true in the current music industry where players charge for their products and services at the lowest possible price [12]. It is irrefutable that music has become a cheap commodity in the marketplace where the player who can bring products and services at the lowest price succeeds because they are highly preferred by the buying public. Recognizing this customer need, eMusic will painstakingly deliver maximum customer value by offering mobile music at the lowest possible price. In addition, as cost leadership strategy is often described as a "more for less," the company will also ensure the quality of music by utilizing state of the art technologies. Product Scope In order to provide all the possible needs of the customers, eMusic will broaden and lengthen its product line to cater to all types of music lovers. The company will exert effort in building a large database of music collections which will be comprised of different songs from different genre and artists. This will assure the customer that he will be able to find all the songs and music according to his needs. This will also help the company to serve a large portion of the potential target market and will not be constrained of serving only a specific market niche. The company believes that this value proportion will not only attract customers but will enable to establish a sense of loyalty to the customers and keeping them in the long run. Loyalty Reward Program A loyalty program will also be in place in order to reward customers who consistently avail of the company's product and services. This loyalty program will contribute the company's pursuit of offering the best value to the customers. Unbundling Previously, music lovers have to purchase the whole album of artists even though they dislike the other songs recorded in the album [13]. eMusic.com will lessen this inconvenience to customers by allowing them to choose only those songs that they want. Unbundling, as we can see is a good strategy as it allows the customers to make their choices adding customer value and reducing their dissatisfaction. III. Revenue Model The company's revenue will come from two sources-subscription fees from customers patronizing the company's products and services and subscription fees from artists who upload their songs for distribution in eMusic's website. Subscription Fees from Customers Consistent with the value proposition of eMusic and its commitment to pursue a cost leadership strategy, it will charge the lowest possible price for every subscriber. The company will employ a business model wherein a customer will pay a fixed subscription fee to cover all his downloads for the month. Consistent with the company's loyalty program, this subscription fee will be reduced as customers patronize more of the company's product. Initially, eMusic will charge US$9.99 per month for all music files download that a customer makes for a month. After being a consistent customer for the year however, eMusic will only charge US$4.99 subscription fee for all the months thereafter. The company has decided to employ this type of revenue model as it offers maximum customer value by being the lowest priced provider in the entire industry. The revenue model only seems to incur losses for the company because the price charged is relatively low. However, this low price will become an advantage for the company as it encourages more customers to avail of the company's products. Basic economics tells us that demand for a certain commodity shoots up when the price is lower. The company expects to capture a sizable market share and therefore generate significant revenue to cover its operating expenses. Charging a low price will not only bring in more demand for the company's products and services but also strongly encourage repeat business transaction with current customers. This, together with the customer loyalty reward program in place is seen to maximize the company's earnings through the acquisition of a large market share and music lovers' consistent patronage. eMusic will also maximize its profit through cost minimization. Since the company will only be operating as a virtual organization, all transactions will be done online. The company will only have to invest in domain name subscription and would not be bothered by expenses in physical facilities like buildings for distribution. The company should only be equipped with a user-friendly website which will facilitate the smooth transaction between customers and the company. Investments will be needed only to cover expenses for website development and a small group of manpower which will man the firm's operations and offer customer support. The company will also need to spend on purchasing rights to distribute a record label's music file. eMusic will exploit the new trend of establishing strong collaboration and partnership with its suppliers. In order to reduce the costs in acquiring products offered by its market, it will work hand-in-hand with large companies and serve as a marketing arm for music distribution. This will prove mutually beneficial to both parties as record labels will be aided in distributing their products while eMusic will be able to have a longer and broader product line to further attract customers. This will also possibly lessen the costs incurred by the company as strong collaboration usually involves price cuts and discounts. Subscription Fees from Independent Artists eMusic will take advantage of its distribution efficiency to market the tracks of individual artists who are not connected with large record labels. This will post a mutually beneficial partnership between the artists and eMusic as artists can easily find market for their music without the aid of record labels. eMusic will distribute the product, charging a mark-up to cover incremental expenses for distribution. eMusic will charge $60 for each track uploaded in the website. Artists can also upload 100 megabytes (approximately 15 tracks with a minimum of 65 minutes) for $495 with $29 storage fee. These relatively low fees are reasonable as eMusic is only a new player in the music industry and has not yet gained a sizable portion of the market. The price of promoting of artists' album will mount as the company gains a stronger foothold of the total market. As a new player, it is deemed that its promotional activities are not yet as efficient as the established players. II. E-commerce Opportunity (future) Changes in the business models, decisions and strategies of business entities are often due to the changes in the company's external environment. Technological advancement is just one of the changes which become a major driving force in the development and revolution of business operations. eMusic is poised to take advantage of the current technology to maximize company efficiency and profitability. It can be seen as the company employs a business model, which exploits the current trend in the evolving music industry. Distribution of music online and streamlining the industry value chain are just few of the trends which were used in the company's operation. eMusic will continuously employ its current business model and strategy and profit from these trends. In the long run, it will remain as an online music distributor and promotional agent for independent artist. However, the company's strategies will be eradicated or modified when alterations are needed. The company's main priority is to pursue profitability in the long run through the employment of strategies that are suited for the firm's external environment. Utilization of cost cutting mechanisms will be sustained as it supports the overall cost leadership strategy of eMusic. eMusic recognizes that the revolution brought about by technological changes is not a threat to the music industry. In contrast, it believes that these changes are necessary to boost the efficiency in the sector. Technological changes, which are deemed detrimental to other industry players, enhance the overall productivity and efficiency in the sector. Each player in the value chain must only recognize the suited strategies and business model to arrest and exploit the profitable opportunities presented by the change. The company will adopt an emergent strategy in order to take into account the possible developments and revolution in technology which can still affect the eMusic's business operations. In the long run, the company will ensure that upcoming trends and developments will also be used to generate revenue and enhance profitability. Notes 1. Aiges Scott, "Technology and it's Impact on the Music Industry," 1 December 2004, (28 November 2005) 2. Ibid. 3. Ibid. 4. Arthur Thompson, Jr. and A.J. Strickland (2002).Strategic Management.3rd ed. New York Mc Graw-Hill. 5. Ibid. 6. Ibid. 7. Ibid. 8. Ibid. 9. "Record Labels," Wikipedia--The Free Encyclopedia, 19 November 2005, < http://en.wikipedia.org/wiki/Record_label> (28 November 2005) 10. "Music Industry Attempts Price Increases (or Hari-Kari, Part II)," 30 August 2005 (28 November 2005) 11. Vishal P. Rao, "Business Opportunities: Success and Failure Statistics as Well as Possible Prevention," 2005 (28 November 2005) 12. Music Industry Attempts Price Increases (or Hari-Kari, Part II) 13. "Online music distribution providing both opportunities and challenges according to OECD report," 13 June 2005 < http://www.oecd.org/document/24/0,2340,en_2649_201185_34995480_1_1_1_1,00.html> (28 November 2005) References Arthur Thompson, Jr. and A.J. Strickland.Strategic Management. 2002. 3rd ed. New York Mc Graw-Hill. Dolfsman, Wilfred. "How Will the Music Industry Weather the Globalization Storm." 18 Apr 2000. (28 Nov. 2005) Fox, Mark. "E-commerce Business Models for the Music Industry." June 2004 (28 Nov. 2005) "Online Music Distribution Providing both Opportunities and Challenges According to OECD Report," 13 June 2005 < http://www.oecd.org/document/24/0,2340,en_2649_201185_34995480_1_1_1_1,00.html> (28 November 2005) Rao, Vishal P. "Business Opportunities: Success and Failure Statistics as Well as Possible Prevention," 2005. (28 November 2005) "Record Labels," Wikipedia--The Free Encyclopedia, 19 November 2005. < http://en.wikipedia.org/wiki/Record_label> (28 November 2005) Scott, Aiges. "Technology and it's Impact on the Music Industry," 1 December 2004. (28 November 2005) Zhu, Kevin, Bryan MacQuarrie. "The Economics of Digital Bundling: The Impacts of Digitization and Bundling on the Music Industry." 2003. < http://web.gsm.uci.edu/kzhu/PDFfiles/Papers_Abstract/CACM_DigitalBundling_p264 zhu_published.pdf> (02 Nov. 2005) Read More