1. 53-701-03 E-Commerce Internet and the Music Industry Jacques Robert

2. HEC MONTRÉAL – MBA 53-751-03 IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal DIGITAL PRODUCTS Books, News, Music, Video, Knowledge, SoftwareBooks, News, Music, Video, Knowledge, Software

3. HEC MONTRÉAL – MBA 53-751-03 IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal CHARACTERISTICS Information is costly to produce… but inexpensive to reproduce (Variable costs / Fixed costs ratio is very low)Information is costly to produce… but inexpensive to reproduce (Variable costs / Fixed costs ratio is very low) Digital goods can be altered, transformed, manipulated … at low cost (ex. Compression and error correction)Digital goods can be altered, transformed, manipulated … at low cost (ex. Compression and error correction) Production of digital goods entails major sunk costsProduction of digital goods entails major sunk costs Digital goods are either very fleeting… or very lasting (they don’t wear out)Digital goods are either very fleeting… or very lasting (they don’t wear out) There are fewer capacity constraintsThere are fewer capacity constraints

4. HEC MONTRÉAL – MBA 53-751-03 IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal DIGITAL PRODUCTS All bits are alike (convergence)All bits are alike (convergence) Can add bits that describe bits i.e metabits or "headers"Can add bits that describe bits i.e metabits or "headers" – Television program + description of the program have the same format and can be processed by the receptor Moving intelligence from the sender to the receptorMoving intelligence from the sender to the receptor

5. HEC MONTRÉAL – MBA 53-751-03 IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal INDUSTRY STRUCTURE Technology

6. HEC MONTRÉAL – MBA 53-751-03 IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal MAJOR PLAYERS (Big Five) BMG (Arista, RCA)BMG (Arista, RCA) EMI (Virgin, Blue Note, Capitol)EMI (Virgin, Blue Note, Capitol) Sony (Columbia, Epic)Sony (Columbia, Epic) Universal (Decca, A&M, Geffen)Universal (Decca, A&M, Geffen) Warner (Elektra, Atlantic, Warner)Warner (Elektra, Atlantic, Warner) 80% of retail sales80% of retail sales

7. HEC MONTRÉAL – MBA 53-751-03 IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal SOME DATA Need to sell 500,000 copies to break evenNeed to sell 500,000 copies to break even In 2001, 6,455 new albums were released and only 112 sold more than 500,000 copiesIn 2001, 6,455 new albums were released and only 112 sold more than 500,000 copies 5% of releases are profitable5% of releases are profitable Royalties: between 5% and 13%Royalties: between 5% and 13% Costs of a CD: $350,000Costs of a CD: $350,000

8. HEC MONTRÉAL – MBA 53-751-03 IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal COST STRUCTURE Manufacturing CD and printing booklet $0.75 Retail Markup $6.23 Company overhead, distribution and shipping $3.34 Marketing and promotion $3.00 Royalties to artist and songwriter $1.99 Contribution to fixed costs (Signing act, producing record) $1.67

9. HEC MONTRÉAL – MBA 53-751-03 IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal QUESTIONS Who has the power?Who has the power? Is it efficient?Is it efficient? Who makes money?Who makes money?

10. HEC MONTRÉAL – MBA 53-751-03 IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal IMPACT OF INTERNET AND MP3 Technology LawEconomics

11. HEC MONTRÉAL – MBA 53-751-03 IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal MP3 Format WAV file (50 meg)WAV file (50 meg) Motion Picture Experts Group-1, Level 3Motion Picture Experts Group-1, Level 3 MP3 about 1/12 of the original fileMP3 about 1/12 of the original file – Near CD quality – MP3 players – Computers with MP3 Player (Real, Windows Media, etc.) – CD players can now play MP3 IPodIPod

12. HEC MONTRÉAL – MBA 53-751-03 IT and E-Commerce Jacques Robert & Jean Talbot, HEC Montréal IMPACT OF INTERNET AND MP3 How does file sharing create value and for whom?How does file sharing create value and for whom? How does file sharing destroy value?How does file sharing destroy value? How can file sharing capture the value it creates?How can file sharing capture the value it creates? How should the industry react?How should the industry react? Pricing model for Digital music?Pricing model for Digital music? ITunes, MusicNet, EMusicITunes, MusicNet, EMusicITunesMusicNetEMusicITunesMusicNetEMusic Shouldn’t recorded music be free?Shouldn’t recorded music be free?