Facing the Music - The Big Labels and Hollywood vs. Napster and the New Technology: Online Music Case (A) (B) (C)

Piracy and illegal downloading are just the main threats that now seem to be besetting the music and motion picture industry on all sides. The Roland Berger Chaired Professor of Business and Technology Soumitra Dutta examines how the "Big Four" record labels - who together hold 75% of the world market - have responded to Napster and all that it represents to them. Hollywood has been watching closely. But new downloading technology means that they might soon be in largely the same boat.

by Soumitra Dutta
Last Updated: 23 Jul 2013

Case (A): Napster Faces the Music

Few industries anywhere are so heavily dominated by a few key players as is the international music business. Last year, the "Big Four" of EMI, Sony-BMG, Universal and Warner held a staggering 75% of the global market. But computer technology; the anti-corporate attitudes of many popular music fans, and the lure of being able to customise one's own song choices have proven a profound threat to the Big Four's ability to maintain any tight control over product distribution whatsoever. The Roland Berger Chaired Professor of Business and Technology Soumitra Dutta's (A) study details the challenges now besetting the music and motion picture industry on all sides.

Napster, the Internet P2P song downloading and file-swapping service launched by a teenage American college student, briefly managed to become the Net's fastest-growing application in the late 90s, attracting nearly five million users before the US music industry's main lobbying group persuaded the courts to shut it down. The intense media publicity generated by Napster's legal battles saw recording artists and fans split deeply and passionately over the issues of copyright infringement and consumers' rights to choose. Many anti-downloading musicians alienated their fans who, while mostly acknowledging that what they were doing was illegal, simply didn't see it as wrong.

Dutta posits some of the questions that many have asked in light of the debate that Napster and its imitators has generated; is the music industry to blame for the antipathy it faces from so many music fans and recording artists alike? Why should consumers be forced to pay (arguably very inflated) prices for a whole album if all they want is one or two songs? Likewise, some musicians loved the way the new "digital economy" was so massively disrupting the big recording labels ability to distribute and market music. Many saw this as the prime weapon in the labels' arsenals for exploiting them, since they had no feasible other major outlet for their product - until now.

The author also considers the risks run by the major labels, which obviously are forced to deal with countless invariables that draw parallels to the typically high-risk/high reward environment of venture capitalists, who can rely on most investments failing, much like most groups and albums do. He leaves it largely to the reader to decide whether the industry as a whole was too slow to respond to the "threat" created by Napster-type services, as well as whether the slew of lawsuits against ordinary downloading citizens did the big labels any favours in the court of public opinion.

It does seem both evident and somewhat surprising, however, that the industry was so slow to visualise the possible impact the Internet could have on its modus operandi. Dutta concludes with a discussion of the tepid consumer response to legal downloading services, and also considers the argument that file swapping may actually have had a statistically insignificant influence on international music sales.

Case (B) Whistling a New (i) Tune?

"Our position, from the beginning, was that 80% of the people stealing music online don't really want to be thieves. But that is such a compelling way to get music: it's instant gratification."

Steve Jobs, Chairman and CEO, Apple Computers

In the (B) case, Dutta considers the music industry's response to the Napster-instigated assault on its domain, including paying a lot more attention to the power of music reality TV shows and new personalised products like the iPod. While Apple's legal online download site has been a success, the labels' own similar efforts have flopped. The Big Four are still struggling to adjust their business models to respond to the new reality - including considering further mergers, or possibly, demergers.

Case (C) The "Napsterization" of Movies

Hollywood studios are facing the same threats as the record labels, including piracy, illegal downloading and falling revenues. New technology is already making downloading films much faster, and by recent estimates, piracy already accounts for revenue losses of about $3.5 billion a year. Dutta also examines what countermeasures the studios have recently taken, and what they fear most in the near future.

INSEAD 2004

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