The music industry and digital music: Disruptive technology and the value network effects on industry incumbents

Jens Peter Larsen

Student thesis: Master thesis

Abstract

This thesis carries out a value network analysis, which identifies characteristics of technology development in the recorded music industry, and explains how and why technology-related characteristics have weakened incumbent firms, defined as the four major record labels, in the music industry. The analysis carries out a comprehensive Quality Function Deployment analysis, which hierarchially identifies the most important changes in customer needs. The analysis identifies four important customer needs as a result of the technological developments, namely convenience and quality as the two major customer needs, and pricing and social connectivity as two subsequent customer needs. The data from the QFD analysis is applied in a product platform analysis, which identifies some major differences between competing product platforms. In general, illegal platforms deliver an efficient bundle of such complementary services, which can explain the initial popularity of such sites. Traditional product platforms are not linked with actual customer needs. Furthermore, new entrants such as Apple Itunes tend to deliver an efficient bundle of service characteristics, specifically based on convenience, which explains Apple’s success in the music market. The disruptive technology of digital music has occurred outside the industry’s existing value network. This is the reason why the technology was initially not adopted by incumbents. Furthermore, the lower profit margins make digital music less attractive to incumbents, as their business models are based on high up-front investments, and high gross margins. The value network of the music industry has remarkably changed because of digital music. Entry barriers are lowered, as new linkages between artist and consumer occur. The success of P2P technology has redefined customer needs in the entire market, which has severely weakened the incumbents. The old technology is not able to deliver the requested customer needs, which has placed the incumbents in a dilemma. Furthermore, the Internet has become a major marketing channel, which has created opportunities for circumventing the former gatekeeper domination of the incumbents, where incumbents decided which artists to be marketed. Consequently, new entrants are competing with the major labels by introducing more flexible business models, which monetise on a number of revenue streams.

EducationsMSc in Management of Innovation and Business Development, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2009
Number of pages79