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The Disruptor’s Puzzle: Investigation

in Digitalization of the Dutch Music

Industry

Narcis Odekerken (s2807068)

University of Groningen, Faculty of Economics and Business,

Nettelbosje 2, 9747 AD Groningen

2 February 2017,

n.j.odekerken@rug.student.nl

Word Count: 16.032

ABSTRACT

Disruptive innovation was first described by Clayton Christensen (1997). His theory sparked rich debates, as scholars argue whether incumbents or new entrants have the upper hand in disruptive

innovation. Nevertheless, there still seems to be a gap in the literature regarding the disruptor’s trajectory, especially regarding 1) how disruptor’s attempt to move upmarket and, in particular, 2) for those

disruptor’s that do not make it. This research attempts to answer how a disruptor develops over time in a disrupted industry by following the disruptive trajectory of KaZaA as an early disruptor of the

digitalization in the Dutch music industry. The goal is to build new theory that contributes to the field of disruptive innovation. In order to do so, the following research question was formulated: ‘What factors

play an important role to the failure of KaZaA as a disruptor?’. To answer the research question, an

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Table of Contents

INTRODUCTION ... 3

LITRATURE REVIEW ... 5

The incumbent’s threat ... 6

Disruptor’s Dilemma ... 8

The Disruptor’s Puzzle ... 9

METHODOLOGY ... 10

Research Setting... 10

Case Selection ... 12

Data Sources and Collection ... 13

Data Analysis ... 14

RESULTS ... 17

KaZaA’s Timeline ... 17

The Disruptor’s Trajectory: KaZaA ... 19

Phase 1: Early Disruptor’s (2001-2002) ... 20

Phase 2: Disrupt the Ecosystem (2002-2004) ... 22

Phase 3: New Entrants Race (2004-2006) ... 26

DISCUSSION ... 29

CONCLUSION ... 33

Managerial Implications... 33

Limitations & Future Research ... 34

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INTRODUCTION

Disruptive innovation theory was first described by Christensen (1997) in his book ‘’The Innovators Dilemma’’. He discusses low-end disruption and new market disruption. It concerns the introduction of innovations by new entrants that are lower priced or bring new performance dimensions. While incumbents are gradually moving more towards higher-end market demands, new entrants gradually move towards mainstream customer demand via development of product performance.

Ultimately, this causes consumers to choose for the new entrants offer, which disrupts the existing market and value networks, thus leaving the incumbents offer aside. The new entrants in this disruptive context are also referred to as disruptor’s (Christensen, 1997).

Scholars show great interest in the threats disruptive innovation pose to incumbent firms

(Christensen, 1997, 2006: Christensen and Rosenbloom, 1995). A lion’s share of the studies focus on how and why some incumbent firms struggle with disruptive innovation, especially compared to new entrants (e.g. Anderson and Tushman, 1990; Christensen and Rosenbloom, 1995; Danneels, 2004; Danneels, 2011; Henderson and Clark, 1990; Tripsas and Gavetti, 2000), while other incumbents can successfully apply the disruptive technology (e.g. Bergek et al. 2013; Macher and Richman, 2004). Nevertheless, research about the ‘’Disruptor’’ is rather underdeveloped (Yu and Hang, 2010; Ansari et al., 2015). Theory claims that the disruptor develops and moves upwards in product performance, but this theory however raises questions (Ansari et al., 2015; Christensen et al. 2015; Yu and Hang, 2010). How do disruptor’s move upwards in product performance and what steps do they take? What are the hurdles new entrants face as they enter the disrupted market? Such questions have received little attention within the extant literature.

In this thesis I address the disruptor’s path. I address this issue by focusing on the

digitalization1of the Dutch music industry. First, the industry is characterized by several disruptive innovations in the past decades (Christensen, 1997; RIAA, 2015). Second, many disruptor’s like KaZaA, LimeWire and Napster entered the disrupted market. Lastly, despite their efforts, not only incumbents but also disruptor’s have failed within the disrupted market (Mol et al., 2012; Moreau, 2013). RIAA (2015) statistics confirm how (in terms of sales per unit) the cassette took over the LP in eleven years, the CD the cassette in eight years. Due to the introduction of MP3 and internet, downloading/streaming of digital music was facilitated (Moreau, 2013). Downloading took over the CD in just three years. These statistics indicate how rapidly digitalization changed the industry. So was the industry prepared for such changes?

1 Digitalization is the conversion of music into a digital format that can be easily distributed throughout the

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Who came to perish and who flourished from their ashes? This highlights gaps in literature regarding the disruptor’s trajectory.

The disruptor’s that used the digitalization of the music industry are firms such as Napster, LimeWire, and KaZaA, which made their entry onto the market and developed the P2P file sharing application. Their application reformed the music industry dramatically (Fetscherin, 2005). The impact of their application made internet traffic shift from primarily web traffic to traffic generated by P2P file sharing (Leibowitz et al, 2003). Just one year after launching KaZaA, the application became the most popular and widely used P2P system. The application had over 85 million downloads worldwide and a user average of two million per any given time (Good and Krekelberg, 2003). The impact the disruptor’s had on the music industry made that incumbents blamed the application for their drop in sales figures (Fetscherin, 2005). However, KaZaA did not maintain its position in the new industry. Three years after launching KaZaA, its popularity started to decline (EntertainmentBussiness, 2004a). So what went wrong with the disruptor?

The goal of this study is to build a new theory revolved around the ‘‘disruptor’’ that will

contribute to the field of disruptive innovation. After all, not all incumbents perish and, similarly, not all new entrants rise to market dominance. For this study the following research question was formulated; ‘What factors play an important role to the failure of KaZaA as a disruptor?’ Given the limits of extant theory, an in-depth case study into KaZaA was conducted (Eisenhardt, 1989). The data of the case will consist of a triangle of different data sources: semi-structured interviews, empirical literature, published new articles, and firm publications (Eisenhardt, 1989). This study will track both field and archival data to create a detailed image of the challenges KaZaA dealt with in their efforts to introduce and promote their innovation. After a within case analyses was run, the findings were compared to the findings in literature.

Our study contributes to the disruptive innovation theory, specifically the study of disruptor’s. This study has identified that early disruptor’s pass through three phases that are influenced by four factors; Identity, Technological, Institutional and Incumbent. Each of these factors has a differential influence per phase. The phases provide managerial implications to avoid common pitfalls among new entrants and add to the field of disruptive innovation theory. The phases consist of first, the ‘Early

Disruptor’s’ phase. Within this phase communication is key to transfer an appropriate identity towards the ecosystem it is disrupting. Second, the ‘Disrupt the Business Ecosystem’ phase in which, the early

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early disruptor’s are not guaranteed that their technology will become the next dominant design. Newer new entrants are able to modify and transform early disruptor’s design in a widely adopted dominant design leaving the early disruptor aside.

The structure of the thesis is as follows: Firstly, this thesis will elaborate on known literature. Secondly, the research methods will be discussed in the methodology section. Thirdly, findings of the

within case analysis will be elaborated in the results section. Lastly, the findings will be discussed in the

discussion and conclusion section.

LITRATURE REVIEW

Disruptive innovation is deeply rooted within the innovation literature. It was first described by the American researcher Clayton M. Christensen in 1995. He defines ‘’disruptive innovation’’ as an innovation that introduces new business models and processes that disrupt existing markets and value networks. In 1997 he published his book ‘the innovators dilemma’, which explains ‘’why firms that do everything right, still manage to fail?’’. His theory of disruptive innovation has been praised by many scholars though sparking rich debate in the field of innovation literature (Danneels, 2004; Chesbrough, 2001; Cohan, 2000; Smith and Druehl, 2008; Ander and Snow, 2010; Bergek et al, 2013; Markides 2006). Most literature focuses on perspective of how incumbent firms struggle with disruptive innovation

compared to new entrants (e.g. Anderson and Tushman, 1990; Christensen and Rosenbloom, 1995; Danneels, 2004; Danneels, 2011; Henderson and Clark, 1990; Tripsas and Gavetti, 2000) or incumbent that successfully apply the disruptive technology (e.g. Bergek et al. 2013; Macher and Richman, 2004). It leaves research about the ‘‘Disruptor’’ underdeveloped (Yu and Hang, 2010; Ansari et al., 2015). This paper attempts to build an in-depth view of the disrupter’s trajectory. This chapter will first discuss the principles of disruptive innovation, incumbents, and the disruptor’s’ dilemma.

Uncovering Disruption

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time incumbents gradually move more towards higher-end market demands, while new entrants move towards mainstream customer demand via development of product performance. Ultimately this caused consumers to choose for the new entrants’ offer, disrupting the existing market and value networks, thus pushing the incumbents’ offer to the side. The phenomenon is illustrated in figure 1.

Figure 1: The Disruptive Trajectory. Source: Christensen et al. (2015)

The phenomenon illustrated in figure 1 demonstrates how the disruptor’s trajectory should move upwards as the disruption will become more mainstream to consumers. Their theory however, focusses on the disruptor’s success. In reality, many new entrants do not make it. For example, KaZaA, a p2p file sharing service introduced in the music industry in 2001 failed to follow the proposed disruptor’s trajectory set on by Christensen et al. (2015). Some scholars question Christensen’s definition of disruptive innovation (Ansari et al., 2015; Daneels, 2004; Chesbrough, 2001; Cohan, 2000). Danneels (2004) argues that the definition does not establish clear-cut criteria. Chesbrough (2001) also noted that Christensen’s study lacked common criteria to classify the different kinds of technologies. Furthermore, Christensen has been accused for cherry-picking only successful cases (Cohan, 2000). The contradictions make it difficult to understand why KaZaA, as a new entrant, came to perish. Ansari et al. (2015)

introduced the first general idea that studying the disruptor’s might reveal important contingencies that shed light on the entrant’s disruptive trajectories.

The incumbent’s threat

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Clark, 1990; Utterback 1994; Teece, 1986; Tripas and Gavetti, 2000). A large body of research has indicated why incumbents struggle with radical technological change. For example, classical theories mention organization inertia as an important factor for incumbent’s failure (Hannan and Freeman, 1977). Hannan and Freeman (1977) are the founders of organizational inertia theory. They define it as a force that limits an organization to adapt. It limits the way a firms respond to environmental opportunities (Hannan and Freeman, 1977), thus making disruptive innovation a threat to organizations (Christensen et al. 2015). Tripsas and Gavetti (2000) investigated how managerial cognition influences evolution that contributes to organization inertia. They state that these cognitive representations are in general based on past events. As people work together they develop a set of beliefs, also referred to as ‘dominant logic’. This is confirmed with the theory of Brown and Eisenhardt (1998) claiming that in rapidly changing environment managers lack the ability to respond due to their dominant logic. In line with Tripas and Gavetti (2000) and Brown and Eisenhardt (1998), Christensen and Raynor, (2003) claim that existing firms are able to respond to sustaining innovation, but do mostly fail to respond to disruptive innovation as they are bound by their existing value network in which they developed a customer’s base and business relationship due to past events. Christensen and Overdorf (2000) further elaborate that established firms are inconsistent with disruptive innovations since they are in conflict with the firms’ values and processes, because they offer low profit margins and address to unattractive customer segments. They claim that the strong values of new entrants, even with a lack of resources, is their ability to enhance small markets and accomplish low margins. Organizational inertia is influenced by organizational experience which is embodied in routines (Foil and Lyles, 1985; Nelson and Winter, 1982). Routines are stable pattern of organizational action that are executed automatically (Nelson and Winter, 1982). Firms tend to continue doing the same thing as they have been doing in the past due to path-dependency (Fiol and Lyles, 1985) and their resistance to change (Nelson and Winter, 1982), causing organizational inertia to occur, thus increasing the chance of an incumbent to fail in the face of disruptive innovation. Macher et al (2004) claim that incumbent organizations are less successful in the transition process, compared to new entrants, due to their lack of absorptive capacity (Cohen and Levinthal, 1990) and highly structured routines (Nelson and Winter, 1982). Thus leaving incumbents firms facing technological discontinuity to lose territory and face three options. They can either support one technology, both technologies, or delay until the uncertainty is resolved (Kretschmer, 2008).

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changing environment (Teece et al., 1997) by changing its set of resources (Eisenhardt and Martin, 2000). Disruptive innovation is characterized by fast changing environments, thus indicating the importance towards incumbents (Christensen et al. 2015). Dynamic capability theory claims that incumbents not having the ability to change resources fail in the face of environmental changes (Teece et al., 1997; Eisenhardt and Martin, 2000).

Even though a considerable amount of research has been carried out in an effort to illustrate why incumbents come to perish, literature is relatively silent, when it comes to new entrant failure during disruption.

Disruptor’s Dilemma

Several studies have shown that new entrants are more flexible to adapt to uncertainties, since they do not face the transition from the old to the new technology (Henderson and Clark, 1990; Tushman and Anderson, 1986). New entrants are better at commercializing the vast majority of new technologies, despite disadvantages in resources, experience and other factors, because of their, limited value networks, current technological paradigms, short path-dependency, limited commitment and their smaller size (Christensen and Rosenbloom, 1995; Foster, 1986; Teece, 1986). Other scholars argue that new entrants enjoy first mover advantages in a disruptive environment, leaving the incumbent to perish (Kerin et al., 1992; Lambkin, 1988; Lieberman and Montgomery, 1988; Parry and Bass, 1990; Robinson and Fornell, 1985; Urban et al, 1986

While many scholars argue the advantages of a new entrants, some scholars question their statements. Ansari et al. (2015) argue that new entrants are faced with a dilemma while introducing a disruptive innovation into an existing business ecosystem. Late entrants into an industry lack

development of important resources that affect performance, but firms that enter too early face more uncertainty as the ecosystem needs to adjust to the innovation (Ansari et al., 2015). Literature on

disruptive innovation documents a paradox: in order for firms to grow and survive, they may need support of the incumbent whose technologies, product, or business model they disrupt. This indicates that the disruptor needs to cooperate with the incumbent to support the innovation. In other words, for disruptive innovation to develop, disruptor’s need the support from the ‘’industry ecosystem’’. These are business networks that interconnect firms that depend on each other (Adner, 2012; Iansiti and Levien, 2004; Kappor and Lee, 2013). Due to the disruptive innovations these ecosystems are disturbed, which are likely to cause resistance to change (Garud et al., 2002; Glasmeier, 1991; Markman and Waldron, 2014).

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(2009) argues how organizational identity represents how both organizational insiders and outsiders perceive an organization. Her theory distinguishes internal- and external identity. Internal identity represents the shared understanding by the organizational members. Whereas the latter, represents how outsider audiences like, institutional actors, suppliers and customers view the organization.

Teece (1986) argues that an innovator may have to collaborate with other firms to spread costs and risks. Teece (1886) discusses that disruptor’s depend on three building blocks to gain profit from its innovation. First, the appropriability regime discusses environmental factors that govern the innovators ability to capture the profits generated by the innovation. It demonstrates the extent by which the innovation is protected by looking at legal instruments (patents, copy rights, trade secrets etc.) and the nature of the technology (tacit vs. codified knowledge). Second, complementary assets: When investment in an asset increases the marginal return of the other, they are said to be complements (e.g. KaZaA is dependent on the internet for downloading/steaming music). Third, the dominant design paradigm: Teece (1986) discusses that before the dominant design is set, imitators could copy and slightly modify the design and ‘‘run away’’ with the innovation. This reveals how important it is for the disruptor to arrange transactions, rules, relationships and arrangements with established incumbents (Ander, 2012; Glasmeier 1991; Jacobides, Knudsen and Augier, 2006; Santos and Eisenhardt, 2009; Teece, 1986). For example, Sony’s Betamax failed to recognize that the video cassette revolutionized the industry into an on-demand environment in which consumers decide what to broadcast on their TV (Cusumano et al. 1992). In line with Teece (1986), VHS on the other hand was able to attract more complementary assets causing them to win the format war. This demonstrates the importance to recognize the changing business ecosystem and the support needed complementary assets to establish an innovation in an existing ecosystem.

The Disruptor’s Puzzle

As discussed in previous sections it seems that the literature particularly addresses the advantages new entrants have over incumbents regarding disruptive innovation. Nevertheless, the literature is also fraught with counterexamples and “anomalies” to this standard model of entrant-incumbent dynamics: not all incumbents perish (Bergek et al., 2013; Tripas 1997) and, similarly, not all entrants rise to market dominance (Golder and Tellis, 1993; Ozcan and Eisenhardt, 2009).

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Hence, this thesis attempts to investigate ‘What factors play an important role to the failure of

KaZaA as an disruptor?’. In line with Christensen et al. (2015) is the digitalization of the music industry

seen as a disruptive innovation. KaZaA was a disruptor that used the disruption of the digitalization of the music industry. However, KaZaA did not follow the proposed disruptive trajectory, making it an

interesting organization to conduct the research with (Ansari et al., 2015; Christensen 1997; Christensen et al. 2015).

METHODOLOGY

The literature review showed the definition of disruptive innovation and the researchers

contradicting relationship between new entrant success and incumbent failure in disrupted industries. A clear gap has been identified in the theory of disruptive innovation. Literature is scattered when focusing on new entrant performance during a disruptive innovation. Concentrating mostly on a broad definition of disruptive innovation most scholars do not focus on a specific industry. In order to develop new findings this paper will focus on one disruptor (KaZaA) in one specific industry (Dutch music industry). This paper will use Eisenhardt (1989) “building theory from case-studies” as a guideline for research. The paper points out how qualitative research can provide new concepts and build new theory. It provides a step by step plan to gather accurate results. The following research question was formulated; ‘What

factors play an important role to the failure of KaZaA as a disruptor? A within-case analysis was used to

answer the research questions (Eisenhardt, 1989). Research Setting

The setting for our research is the Dutch music industry. This industry is relevant for several reasons. First, the Dutch music industry shows great similarities with the U.S; the industry is

characterized by a lot of competition (Mol et al., 2012) and both the Dutch statistics NVPI (2016) and U.S. statistics RIAA (2016) show the impact of digitalization on physical sales. Second, statistics produced by IFPI (2014) show that the Dutch music industry between 2004 and 2014 has always ranked around the 10th position concerning global music market share. Thirdly, did the Netherlands not lag behind on the global process of digitalization and did iTunes make its entry into the market just one year after its launch in the United States (IFPI, 2014; Moreau, 2013). Lastly, one industry reduces variation due to disruption or industry variations (Eisenhardt, 1989).

According to Francois Moreau (2013) the current developments of the music industry consists of streaming services which dates back to the MP3 technology, developed in 1992 by Fraunhofer

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peer-to-peer (p2p) networks emerged, these technologies enabled the free downloading of digital music files (Moreau, 2013; Leibowitz, 2013). The p2p technologies created new applications such as Napster and KaZaA. But their services differ from one another. Napster was the pioneer of p2p file sharing technology developed in 1999 (Saroiu et al., 2003). KaZaA was launched in 2001, but unlike Napster it used a different p2p technology that allowed, next to a more efficient downloading speed a decentralized

system (Leibowitz et al., 2003). Unlike, Napster’s centralized system, KaZaA’s decentralized system, did

not allow their application to save any data regarding downloads/uploads from its users (Leibowitz et al., (2013). Thus, KaZaA never owned the content shared by its users. The digitalization of the music industry also caused other services to emerge. Downloading services like iTunes introduced the first legit business model in 2004 (Moreau, 2013). Spotify, launched in 2006, developed a streaming service that does not allow users to download the MP3 content on their device, but provides users access to music (Fetscherin, 2005; Moreau, 2013). Despite these developments, the music industry has been slow in the adaption of digitalization (Huygens et al, 2001). According to Krasilovsky and Shemel (2003) the industry preferred to offer low-quality samples online instead of high quality MP3 files for two reasons; 1) organizations did not want to encourage piracy 2) and firms did not want to offer a product that would compete with their own CDs. Nevertheless, the introduction of these new disruptive technologies like MP3, sound compression and the internet led to new innovative services, like the P2P file sharing service offered by KaZaA (Christensen et al., 2015), that directly challenged the traditional business model in the music industry (Ander and Snow, 2010; Mol et al., 2012). The digitization of music is therefore in line with Christensen’s (1997) theory of disruptive innovation. The phenomenon displayed in figure 2 demonstrates the amount of units (songs) sold. The figure shows great similarities by the proposed ‘‘disruptive trajectory’’ of Christensen et al. (2015). The waves of disruptive innovation demonstrate how the LP was taken over by the cassette, the cassette by the CD and the CD by downloading. It shows how the disruptive innovation started at the low-end market and eventually moved upwards to become mainstream, eventually taking over the other product.

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Figure 2: The Evolution of the Music Industry. Source: RIAA.com

Case Selection

The focus of this report is to analyze the ‘‘Disruptor’s Trajectory’’ in the face of disruptive innovation. This report focusses on ‘‘KaZaA’’ as a disruptor during the digitalization of the Dutch music industry. For several reasons KaZaA is a suitable subject in which to conduct this research.

KaZaA was a disruptor of the digitalization of the music industry. It is one of the first to exploit

disruptive new technologies by introducing an innovative p2p file sharing service in 2001 (Leibowitz et al., 2003; Liang et al., 2003). The industry in which it operates is classified as being disrupted by Christensen (1997). What makes KaZaA particularly interesting is that KaZaA did not follow the by scholars proposed projected disruptive trajectory. Good and Krekelberg (2003) argue that KaZaA contributed to the rapid growth of the P2P file sharing popularity. Just one year after its launch KaZaA became the most popular and widely used P2P file sharing application. The application had over 85 million download worldwide and a user average of 2 million per any given time (Good and Krekelberg, 2003). Liang et al. (2004) argue that their popularity and distinction from other P2P file sharing

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13 Data Sources and Collection

The reason why KaZaA is considered a suitable subject for this investigation was explained in the previous section. Using a single case in a single market reduces variation in the findings (Eisenhardt, 1989). The open-ended nature of the research question made it useful for theory building (Miles and Huberman, 1994; Yin, 1994).

This paper uses two main sources of data. First, primary data has been collected from semi-structured interviews found in table 1. Interviewees were selected on the basis of their position or relation with KaZaA to ensure that the information provided during the interviews were valid and beneficial. Interviews give retrospective insights and provide a useful source of information (Gioia et al., 2013). They provide complementary insights, divergent perspectives, increasing the probability of new insights (Eisenhardt, 1989). Prior to the interview a protocol was created to ensure reduction of research bias (Eisenhardt, 1989). The interview protocol was semi-structured. The interview protocol can be found in the appendix 1.0. It contained general questions regarding the interviewee’s background, their function and/or relation with KaZaA, questions were formulated regarding the reason for KaZaA’s popularity and what the interviewee believed to be contributing factor(s) to KaZaA’s disruptive trajectory. After the interviewee agreed to the terms of the interview, he/she was informed about the contents of the interview. Providing the interviewee with information about the interview contents enabled him/her to adequately prepare and develop information for this investigation. The interviews were conducted via Skype, and took about one hour to conclude (Legard et al., 2003; Crobin and Strauss, 2014).

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After all the data has been collected then is it possible to conduct a within-case analysis (Eisenhardt, 1989).

Table 1 Overview of Interviewees

Interviewee Function/Relation with KaZaA

Erik Huizer Digitalization Expert

Kevin Bermeister CEO Brilliant Digital Entertainment/KaZaA

Paul Solleveld CEO NVPI

Tim Kuik Director at BREIN

Table 2 Overview of Archival Data Sources

National News articles Local News Articles Industry Specific Papers Firm Publications Algemeen Dagblad (1) Amersfoortse Courant (2) EntertainmentBusiness (9) ANP (5)

Het Financieele Dagblad (3) BN/DeStem (1) CBS (1)

NRC Handelsblad (5) Dagblad van het Noorden (1) NVPI (2)

Het Parool (4) De Gelderlander (1) IFPI (1)

De Volkskrant (2) Leeuwarder Courant (2) Rechtspraak.nl (1)

De Telegraaf (1) RIAA.com (1)

Trouw (3)

Data Analysis

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disruptor’s trajectory, both primary and secondary data were used to distinguish a critical timeline (van de Ven and Poole, 1989). The timeline can be found in figure 4 and an extended version in Appendix 2.0.

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1st Order 2nd Order 3rd Order

(Z) 2KaZaA wants to be a legal service

(F) Rather than working against the music industry like Napster did, KaZaA wanted to work together with the music industry and offer paid content

Reflections on Internal Identity

Identity (B) KaZaA was seen as the ‘Badboy’ of the music industry

(K) KaZaA wanted to be legal, yet they did not want to be responsible for their users actions by decentralizing their application

(S) The charms of Steve Jobs and their identity contributed to the legitimacy of the business model

Reflections on External Identity

(T) A decentralized system prevented KaZaA from being responsible for

the infringement of copyrights Controllable

(B) KaZaA was technologically superior to Napster Technological Competences

Technological Competences (B) New entrants new technology overran KaZaA’s technological

superiority Uncontrollable

(B) KaZaA depended on ISPs that had to cope with rapid changes Technological Competences

(B) At an accelerating rate more users were obtaining internet and faster internet

(N) The failure of Napster was attributed by the number of lawsuits.

(T) Downloading music from KaZaA is legal, as long as it is for own use External Organizational

(B,S) Despite efforts by KaZaA, RIAA, NVPI and Buma/Stemra sued KaZaA for the infringement of copyrights

legitimacy

Institutional Environment (B) KaZaA was not responsible for the infringement of author rights, but

the individual users were

(K) BREIN and RIAA started to sue individual users of KaZaA

Internal Individual support

(S) At that point in time, we thought it might be a good idea Uncertainty

(K) At first, we did not know what to expect from KaZaA among incumbents

(S) On the one side record labels kept their old business models. On the other side, the regulation had to be revised in order to make downloading possible, though record labels were not interested to make any changes’’

(Sh) Exchange of content via the internet is the same as theft Resistance to change Incumbents

(B) It was impossible to talk with them, they would not even hear you out. They were determined to shut us down

among incumbents willingness

(S) This day will be known as the day that altered the music industry Adoption of new business

(B) Steve Jobs copied KaZaA’s business model, and became the first legal business model

among incumbents (St) Sony will start an on-line service

Figure 3: Aggregation Model

2 Niklas (Z)ennstrom, Founder of KaZaA; Janis (F)riis, Co-Founder of KaZaA; Kevin (B)ermeister, CEO BDE/KaZaA; Paul

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The section below discusses the results that emerged from our data sources. First a timeline is provided to discuss the main findings of KaZaA’s trajectory. Second, the trajectory of KaZaA’s will be discussed in phases. Lastly, phases will be discussed in more detail and the reasons why KaZaA disappeared will be revealed.

KaZaA’s Timeline

Figure 4: KaZaA's Timeline

As depicted in the timeline a few important events occurred that influenced KaZaA’s lifetime in their initial period of 2001-2006. First, in 1993 the MP3 and Internet are introduced (Moreau, 2013). These formed the foundation for the p2p file sharing application (Moreau, 2013). The growth of broadband internet access and the availability of portable MP3 players increased the demand for digital music (Moreau, 2013; Leibowitz et al., 2003). Napster pioneered with the introduction of a centralized p2p file sharing service in 1999 (Volkskrant, 2000) Soon after, KaZaA introduced its P2P file sharing application in 2001 as an early disruptor (Volkskrant, 2000). KaZaA’s technology was superior to Napster’s (Liang et al., 2004). They did not use a centralized system that led to the downfall of Napster in various lawsuits (Het Parool, 2001a; Liang et al., 2004). KaZaA’s demand grew heavily due to a

temporary shutdown of their competitor Napster and the growing number of users on the internet (EntertainmentBusiness, 2001). Growing demand and fierce resistance from the business ecosystem led the service to introduce various versions e.g. KaZaALite in 2002 (EntertainmentBusiness, 2002b). The added features introduced a more user-friendly interface and minimized the amount of spyware and ‘fake songs’ on the application (EntertainmentBusiness, 2002b).

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that the contribution made on CDs was significantly higher. Paul Solleveld (2016), CEO of NVPI adds that investments had to be made to revise contracts with music artists which were based on their old business model. Additionally, governmental regulation regarding piracy had to be revised, to make the p2p file sharing services attractive to the music industry (Paul Solleveld, 2016). Despite KaZaA’s effort to introduce a legal, paid p2p file sharing service, they failed. This was due to resistance of change by the business ecosystem. In particular, from the American music industry represented by RIAA, which led the Dutch music industry to follow in their footsteps (EntertainmentBusiness, 2001b; EntertainmentBusiness, 2001c; De Volkskrant, 2000). Eventually in 2004, Apple’s iTunes introduced the first legal music service with a viable business model into the music industry (Het Financieele Dagblad 2003a).

Besides a fierce resistance from the business ecosystem the p2p file sharing services were sued by record labels and organizations that represent the music industry: RIAA and MPAA in 2001

(EntertainmentBusiness, 2001b); Buma/Stemra in 2001 (EntertainmentBusiness 2001b) and 2002 (ANP, 2002); NVPI in 2001 (2001). In order to avoid lawsuits, Australian organization Sharman Network acquired KaZaA in January 2002 (Het Parool, 2002b). The acquisition made Dutch law powerless and enabled KaZaA to continue their service (Het Parool, 2002b). In 2005, BREIN did not sue KaZaA

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19 The Disruptor’s Trajectory: KaZaA

As discussed in the previous section, KaZaA has passed through several critical events in its lifetime. These events can be placed within three phases that are influenced by four factors (Identity, Technological Competences, Institutional Environment and Incumbents) introduced by the aggregate dimensions. Table 3 introduces a brief summary of the findings found in each phase which are influenced by each individual factor. The first phases start in 2001 with KaZaA’s introduction. This phase is

important for early disruptor’s to communicate their identity accurately towards the business ecosystem. The second phase started in 2002. This phase is characterized by the business ecosystem response towards the new business model. Lastly, the third phase began in 2004 with the introduction of iTunes, the first legal business model in the Netherlands and terminates in 2006. This phase introduces new entrants that would ultimately overrun KaZaA. The phases overlap each other, meaning that events that happened in phase 1 affected what happened in phases two and three. The findings will be further elaborated in the following paragraphs.

Table 3 The Three Phases

Phase 1: Early

Disruptor’s (2001-2002)

Phase 2: Disrupt the Ecosystem (2002-2004)

Phase 3: New Entrant Race (2004-2006)

Identity Early Disruptor internal

identity to be a legal application

External identity as a ‘Bad Boy’ by the Ecosystem

Identity of KaZaA becomes a liability in the development of KaZaA Technological

Competences

KaZaA superiority over the pioneer Napster

KaZaA’s technological superiority depends on the development of the business ecosystem

KaZaA’s dominancy is challenged by the threat of new entrants

Institutional Environment Record Labels revision of

contracts / revision of EU author rights in 2001 to provide KaZaA with licenses

Music Industry attempt to sue KaZaA for the infringement of author rights

Music Industry attempt to sue individual users for the infringement of author rights

Incumbents Willingness NVPI initial positive

response to the new business model, though fierce resistance from RIAA

Incumbents follow the RIAA and resist to change the business model

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20 Phase 1: Early Disruptor’s (2001-2002)

Identity

KaZaA had to introduce their new p2p file sharing application to the market. From the start, KaZaA’s vision was to make their earnings by offering paid content to end consumers (De Volkskrant, 2000). Janus Friis, co-founder of KaZaA, argues that rather than working against the music industry like Napster did, KaZaA wanted to work together with the music industry and offer paid content (De

Volkskrant, 2000).Niklas Zennstrom founder of KaZaA quotes ‘‘What KaZaA differentiates from other

P2P file sharing applications is their willingness to pay for the content. To show good will towards the music industry KaZaA limited MP3 quality’’ (De Volkskrant, 2000). In other words, from the onset, the

identity that KaZaA wanted to project towards the music industry was one of a p2p file sharing service that offered legal contents on their p2p file sharing application.

Technological Competences

Within months of the introduction, KaZaA became more popular than its pioneer Napster (Volkskrant, 2001). How was it possible that KaZaA was able to overrun the pioneer of the p2p file sharing technology? KaZaA modified the Napster business model at three critical technical points. First, they introduced a more effective use of the p2p file sharing network. This was organized in a two-tier hierarchy consisting of Super Nodes (SNs) in the upper tier and Ordinary Nodes (ONs) in the lower tier. The interaction between these nodes ensured faster downloading (Liang et al., 2004; Leibowitz et al., 2003). Second, KaZaA’s design was more user friendly (Leibowitz et al., 2003). Lastly, they introduced a p2p system to be decentralized (Liang et al. 2004). This way KaZaA was not responsible for the

infringement of copyrights as they did not own the individually held content (NRC Handelsblad, 2002b).

Institutional Environment

KaZaA needs to receive legitimacy and support from the business ecosystem (Ansari et al., 2015). This indicates that KaZaA requires support from the very music industry it is disrupting. Niklas Zennstrom (Het Parool, 2001) quotes ‘‘the failure of Napster was attributed by the number of lawsuits.

He claims that due to this reason alternatives like KaZaA became popular. How was it possible that

KaZaA initially survived lawsuits? KaZaA was introduced three years after Napster. Therefore, they were able to modify the design in such a way that it decentralized their services. Erik Huizer (2015),

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NVPI CEO Paul Solleveld (2016) argues that record labels had to revise contracts with their artists. Paul Solleveld (2016) explains that contracts were based on the old technology e.g. sales per CD. Large investments had to be made to revise contracts that would support downloading. Paul Solleveld (2016) further elaborates that there was no European regulation regarding downloading, which was necessary to make content on demand available. In short, the institutional environment was not in place, investments had to be made, piracy could not be effectively fought, most record labels were reluctant to embrace digital distribution as consumers could not be forced, yet, to pay for digital content. Thus, KaZaA was depending on the willingness of the music industry to make these changes in order to make the legal service available.

Incumbents Willingness

Paul Solleveld (2016) argues the divergent point of view the music industry had towards the new business model. After the experience with Napster, the music industry was willing to think about the possibility of a legal business model for digital music. Paul Solleveld (2016) explains how the founders of KaZaA visited the NVPI regarding the new business model. He quotes ‘‘at that point in time, we thought

it was a good idea’’. Tim Kuik (2016), Director at BREIN quotes ‘‘at first, we did not know what to expect from KaZaA’’. It indicates uncertainty by the music industry. The situation however changed with

influence of the American RIAA and record labels. Their fierce resistance towards the new business model led NVPI and BREIN to follow in their footsteps. Kevin Bermeister (2016), CEO of BDE/KaZaA quotes ‘It was impossible to talk with them, they would not even hear you out. They were determined to

shut us down’.

From the above-mentioned forces identity in particular seems to have an immense influence. Internal identity has to be communicated accurately to be reflected in the external identity. It will influence the incumbent’s willingness to adapt new business models, and thus influence the level of resistance of change. For this reason, the following proposition can be developed;

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22 Phase 2: Disrupt the Ecosystem (2002-2004)

Identity

As discussed in Phase 1, KaZaA’s internal identity was to become a legal p2p file sharing

technology. Nevertheless, the music industry quickly revised that identity. Kevin Bermeister (2016), CEO of BDE/KaZaA, quotes ‘‘KaZaA was seen as the Bad Boy of the music industry. We were trash in their

eyes.’’. Tim Kuik (2016), Director at BREIN, quotes ‘‘KaZaA did not want to bear the risk of infringement by decentralizing services, yet they requested licenses to satisfy their users. That is just hypocrite.’’ Such perceptions by the music industry caused an identity crisis for KaZaA. It resulted that

the internal identity was not reflected in the external identity.

In an attempt to alter their external identity, KaZaA started to offer artists help. They offered starting artists with a package to promote, spread and manage their music on KaZaA to increase their popularity (Dagblad van het Noorden, 2002). Despite these attempts, the external identity of KaZaA was even damaged further when KaZaA partnered up with Brilliant Digital Entertainment (BDE) in 2002 (Trouw, 2002b). BDE was accused of gathering user information and providing them with spyware (Trouw 2002b).

In short, the internal identity of KaZaA was not reflected by the business ecosystem. The identity crisis at KaZaA towards business ecosystem is an indicator of the level of resistance to change towards the new business model. For instance, as already mentioned above, Tim Kuik (2016), Director BREIN, argues that BREIN was not willing to work together with KaZaA since they decentralized services, yet requested for licenses.

Technological Competences

In this period (2002-2004) downloading increasingly rose in popularity. Weeks before their CD release the music content was available on KaZaA (Algemeen Dagblad, 2002; Liang et al., 2004; Leibowitz et al., 2003). For example Britney Spears album ‘In the Zone’ was available weeks before its release. But also video content like ‘‘Lord of the Rings: The Fellowship of the Ring’’ was already available months before its release, even though the image quality lacked (mostly recorded with a digital camera at the cinema) and it took more hours to download the movie than their actually playing time (Algemeen Dagblad, 2002).

Research in that period showed that consumers that paid a fixed amount for their internet are the ones that download most (Algemeen Dagblad, 2002). The technology of the internet was changing rapidly as well. Kevin Bermeister (2016), CEO of BDE/KaZaA quotes ‘‘at an accelerating rate more users were

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over a five year period. ISP (Internet Service Providers) had to make massive changes in their

infrastructure to cope with the changes and demand.’’. Bermeister (2016) argues that by the time KaZaA

entered the market in 2001 the users who were downloading music, MP3 files at that point in time, were the front end drivers of disruptive change in the music industry. These users were the ones that moved to fast bandwidth. The increasing number of users that demanded increasing speed of internet downloading contributed to infrastructure upgrades that were taking place at ISPs, as they had to change to cope with this massive traffic demand (Kevin Bermeister, 2016).

In other words, KaZaA’s value highly depends on this new value network, in which new players in the music industry, like ISPs contributed to their business model (ANP, 2003c). In the traditional value network, there was no place for ISPs. Thus, KaZaA had to invest to establish and maintain this new value network that included new players that previously were not involved in the music industry.

Institutional Environment

In phase 1, it became clear that record labels had to revise contracts with music artists. These contracts supported the traditional business model (e.g. contribution made on sales per CD). Moreover had governmental regulations had to be tailored to protect the industry from piracy (Paul Solleveld, 2016). Was the business ecosystem willing to make the adjustments?

Kevin Bermeister (2016), CEO of BDE/KaZaA quotes ‘‘in contrast to Napster, KaZaA uses

‘FastTrack’ that decentralized the p2p application. By doing this, KaZaA was not responsible for the infringement of author rights, but the individual users were.’’ The exchange itself and so the infringement

of author rights is therefore the individuals responsibility, the same happened with the introduction of the VCR and the DVD that made it possible to record authorized content and was seen as piracy (NRC Handelsblad 2002b). KaZaA’s lawyer Christiaan Alberdingk Thijm, specialist in intellectual property law, quotes ‘‘downloading music from KaZaA is legal, as long as it is for own use’’ (Het Parool 2002a). Copyright law states that you are allowed to produce a home copy for study, practice or own use. Only if the CD is made public would it be illegal (BN/DeStem, 2003). For that reason, KaZaA could not be excused for the infringement of copyrights proposed by record labels and organizations that represent the music industry: RIAA and MPAA in 2001 (EntertainmentBusiness, 2001b); Buma/Stemra in 2001 (EntertainmentBusiness 2001b) and 2002 (ANP, 2002); NVPI in 2001 (2001). Although KaZaA was extensively sued by these organizations in this phase, KaZaA won these lawsuits. Nevertheless, in response to all the lawsuits KaZaA attempted to acquire licenses by suing the record labels for abusing their monopoly position (Bermeister, 2016; Solleveld, 2016). Kevin Bermeister (2016), CEO

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KaZaA down. On top of that, the ‘big five’ owned the rights of music artists. Thus, the ‘big five’ decided whether KaZaA could flourish as an organization. Therefore, KaZaA sued them for the abuse of a

monopoly position (Bermeister 2016; Solleveld, 2016).

In other words, the institutional environment was not open to change and would not accept the new business model. Instead, they resisted by launching various lawsuits against KaZaA. Owing to their decentralized system KaZaA was able to avoid similar lawsuits as those launched against Napster. Despite KaZaA’s efforts, working more closely together with the music industry, the industry was doing everything to shut them down.

Incumbents Willingness

KaZaA intended to gain licensing from record labels and offer paid content in order to prevent piracy (NRC Handelsblad, 2002a). However, the music industry accounted increased piracy and the drop of sales of CDs to KaZaA (Huizer, 2015). Paul Solleveld (2016) adds that the contribution made on CDs is significantly higher than downloading. What did the industry do to exclude KaZaA from licenses?

In 2001, KaZaA almost closed a deal with Buma/Stemra (Leeuwarder Courant 2001; Paul Solleveld, 2016). The situation altered when the RIAA sued KaZaA (Leeuwarder Courant 2001). Buma/Stemra supported the RIAA (Leeuwarder Courant, 2001; Paul Solleveld, 2016). In a response, Niklas Zennstrom, founder of KaZaA, states ‘‘at the moment musicians do not receive royalties for the

use of their music on the internet. We want to change their situation, but ironically the organizations that are supposed to support musicians do not want to cooperate. They abuse their monopoly position’’. As a

result the Amsterdam court declared that Buma/Stemra had to renegotiate with KaZaA, which should lead to KaZaA obtaining licenses from the music industry (ANP, 2001). Despite KaZaA’s effort to show their good will, licensing had again been declined by Burma/Sterma (Het Parool, 2002a). In May 2002,

Buma/Stemra decided to address to the higher court regarding the KaZaA case. The organization believes that KaZaA provides more than simply a p2p sharing application (ANP, 2002). In a response KaZaA temporarily closed their service to show good will towards the music industry (Het Parool, 2002a).

Kevin Bermeister (2016), CEO of BDE/KaZaA, argues that record labels kept thinking in their old business model. Paul Solleveld (2016), CEO of NVPI, quotes ‘‘on the one side record labels kept

their old business models. On the other side, the regulation had to be revised in order to make downloading possible, though record labels were not interested to make any changes’’. For instance,

Sony owned record labels, and the production of CDs. It had to cannibalize their own products (Bermeister, 2016). Paul Solleveld (2016), CEO of NVPI, quotes ‘‘the music industry initially had to

laugh about the thought to bring out their whole music catalogues for just 10 dollars’’. The difference in

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but on the other hand it was too extreme to just shift it all (Bermeister, 2016; Solleveld, 2016). A research conducted by Forrester in 2002 concluded that the drop in sales of CDs is not

contributed to P2P file sharing, rather by economic factors and competition of videogames and the rise of the DVD. Forrester claims that rather than working against P2P file sharing applications, the music industry should embrace it to gain profit from the internet (Amersfoortse Courant, 2002). Contradicting results from a report presented by OC&C Strategy Consultants arose. In 2002, when 55% of the Dutch population was connected to the internet (CBS, 2003), user were not be willing to pay for music content (EntertainmentBusiness, 2002a). Two years earlier, when less than 50% of the Dutch population was connected to the internet (CBS, 2003), 54% of Napster-users were willing to pay for the service (De Volkskrant, 2000). The drop in willingness to pay could be addressed by changing consumer behavior. Consumer’s got used to downloading content for free. As Forrester had concluded, the music industry should have embraced P2P file sharing (Amersfoortse Courant, 2002). It could have influenced consumer behavior to their advantages instead of their disadvantage. Yet, in a response the record companies tried to make illegal downloading less attractive by putting large numbers of ‘‘fake song’’ on the p2p file sharing application (Amersfoortse Courant, 2002). Instead of downloading the song of your choice you received noisy records. As a response, KaZaA introduced a new P2P file sharing technology

(KaZaALite), requiring high quality internet addresses, which aimed at limiting these ‘‘fake songs’’ (Trouw, 2002a).

In other words, the music industry saw the new business model as a threat. It would minimize their monopoly position in the distribution channel and earnings on CDs. Consumer behavior was altered to their disadvantage, as consumers got used to download for free. Ultimately, it resulted in resistance to change into the new business model of KaZaA.

As proposed in phase 1, the internal identity plays a key role. In the second phase, it becomes clear that the internal identity was not reflected by the music industry. It resulted in fierce resistance to change by the incumbents. Institutional factors caused multiple lawsuits to occur against KaZaA. It left KaZaA blind for developments within the disrupted industry. Technological superiority seem to be highly depended on new value networks (e.g. ISPs).

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26 Phase 3: New Entrants Race (2004-2006)

Identity

In phase 1 the internal identity of KaZaA was to become a legal downloading application. In phase 2 the external identity of KaZaA towards the music industry was an illegal application that

promoted piracy of their content. On the 28th of April 2003, Apple introduced the first legitimate business model of media content sharing on the internet with the iTunes Music Store. Steve Jobs argues that consumers have now a proper alternative compared to free p2p sharing applications like KaZaA (NRC Handelsblad, 2003). Steve Jobs quotes that ‘’Success of ITunes will be contributed by consumers that do

not want to be treated as criminals and artist that do not want their work to be stolen’’ (NRC

Handelsblad, 2003). Initially the service offers less content compared to KaZaA though Apple promises it will grow fast (NRC Handelsblad, 2003). Apples’ external identity contributed to the successful

acquirement of licenses from the record labels. Paul Solleveld (2016), CEO of NVPI, quotes’ ’KaZaA did

not have the identity of Apple, let alone the charms of Steve Jobs’’. He explains that the success rate of

KaZaA would have been significantly better if communication towards the industry was better organized and less extreme (Solleveld, 2016)

In other words, a new entrant like Apple had the advantage to be a well-known established firm that could build upon the negative identity of KaZaA to portray its own ‘good boy’ identity. Therefore, they were able to portray a different external identity towards the music industry which contributed to the willingness of the industry to provide them with licenses.

Technological Competences

In June 2003 a study by Nielsen/Netratings argues that the explosive usage of broadband internet is contributed by KaZaA and the porn industry. A total of 28% of the EU populations uses the internet, which is an increase of 136% compared to last year’s usage (Amersfoorste Courant, 2003). At its peak the p2p technology developed by KaZaA was an estimated 20 million dollars (ANP, 2003c). As of October 2003, KaZaA’s users dropped with 41% within a three month period (Amersfoortse Courant, 2003). Due to the high amount of fake songs and spam, users are switching to other competitors (e.g. LimeWire, eDonkey and ITunes) that use different technologies (EntertainmentBusiness, 2004). Chris Hedgecock, president from file sharing application ‘Zeropaid’ argues that KaZaA’s user-friendly interface contributed to their success. Users however, were frustrated by the huge amounts of fake songs and spam, and

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argues that the application slowed down and the functionality of the application was not great anymore. In short, competition started to develop improved technologies, diminishing the competitive advantage KaZaA had, leading users to shift to competitors.

Institutional Environment

In the previous phase the music industry tried to sue KaZaA as an application. During this phase the industry tries to sue the individual users of KaZaA. In May 2003, the music industry faced defeat in their legal battle. An American judge declared that the music industry was not able to sue p2p network application, but only the individual users (Het Financieele Dagblad, 2003a) The US Federal court declares that KaZaA does not infringe copyright law. Judge Stephen Wilson quotes ‘‘the p2p file sharing

application are not significantly different from VCR’s or CD burning. Thus, the applications are not responsible for the infringement of copyright law’’ (ANP, 2003a). Buma/Stemra losses their lawsuit

against KaZaA in December 2003. The Dutch Supreme Court declares that the service is not responsible for the infringement of copyrights made by individuals and they do not serve as a supplier (NRC

Handelsblad, 2003).

Apart from the American RIAA, the NVPI and Burma/Sterma, KaZaA was sued by the Dutch BREIN Foundation that supports author rights. Their efforts differ from the other organizations by their focus to take legal action against the individual users instead of KaZaA as an application. The BREIN Foundation wanted to gather disclosed personal data of customers from five ISP’s. Their actions were to take legal actions against users who offer unauthorized music files on the internet through KaZaA. Without that data BREIN cannot directly prohibit customers on their computer to download music files. The Dutch court concluded that KaZaA could not be held responsible for the infringement of author rights. In their conclusion they refer that by law it must be clear by which IP address, date and time the infringement has been made. In order to gather disclosed personal data BREIN has to gather IP numbers that are specific to the offending user. ISP offer in their consumer contracts a so called ‘session’ on the Internet in which the user is re-assigned an IP address. This means that a user per session had a different IP address and implies that the date and time when the breach had occurred cannot be determined. It could therefore not be detrminded which user / subscriber (Under Which IP address) made the offense (Rechtspraak.nl, 2005). The music industry’s lawsuit against telecom provider Verizon resulted to make the name of their users public. This way the users could be sued for infringement of copyrights

individually. By doing this the music industry hoped to shock other users (Trouw, 2003). RIAA CEO Carey Sherman quotes ‘‘we have announced that the exchange of content via the internet is the same as

theft. It is wrong and illegal. We need to stop these applications’’. Their plan is to sue individual users in

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strongly differs per country. ISP’s are in most countries not forced to hand over personal details towards to music industry (Het Financieele Dagblad, 2003c). In the US the RIAA was able to gain personal details of certain ISPs. The organizations took legal action against 261 music pirates (Het Parool, 2003). The BREIN foundation in the Netherlands wanted to imitate the same action in the Netherlands, but due to privacy laws regarding personal details ISPs do not need to share this information with the foundation (Het Parool, 2003). Tim Kuik (2016), Director at BREIN, argues that KaZaA still owned some central nodes that connected them with users exchanging content. Therefore, KaZaA could be held responsible for the infringement of copyrights. This ultimately resulted in KaZaA’s settlement in July 2006 with the ‘big five’ (Universal Music, SONY BMG, EMI and Warner Music) of the music industry leading to their termination on the 29th November 2006 (EntertainmentBusiness, 2006; NRC Handelsblad, 2006; Kevin Bermeister, 2016).

Though the institutional environment still fought against KaZaA, they started to accept the new business model in a modified version by Apples’ ITunes. Kevin Bermeister (2016), CEO DBE/KaZaA, argues that Steve Jobs copied KaZaA’s business model, but had the resources to gain licenses. Paul Solleveld (2016), CEO NVPI, explains that the charms of Steve Jobs and their identity as previously described contributed to the legitimacy of the business model. In other words, Apple was able to legitimize the business model instead of KaZaA.

Incumbents Willingness

Apple’s iTunes is the first web store that included the ‘big five’ – Universal Music, Time Warner, EMI, BMG and Sony Music - record labels. Steve Jobs achieved to gather the main records labels and convinced them to sell their content via the Apple-Store. Even Hilary Rosen, CEO of RIAA believes this will have a positive outcome on both sides. Steve Jobs quotes ‘‘this day will be known as the day that

altered the music industry’’. Though Apple’s store is only available for Apple computers, Steve Jobs

already mentioned it working on a windows version (Het Financieele Dagblad 2003a). Even incumbents started to adopt the new business model. Sir Howard Stringer of Sony America, announced that Sony will start an online service. He hopes to minimize piracy on the web and diminish losses made due to piracy (De Telegraaf, 2003)

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on Microsoft, Apple hopes to gain more users for their application (De Gelderlander, 2003).

Paul Solleveld (2016), CEO NVPI, argues that KaZaA introduced itself too early in the newly disrupted area. Erik Huizer (2015), Digitalization expert, adds to the argument that their early

introduction created awareness by the business ecosystem. He believes that the success of iTunes might be contributed to KaZaA, since they made the music industry aware of the new business model. Apple was unlike KaZaA able to gain licenses from the music industry to create a legal business model. Despite KaZaA‘s effort, they were too early, they had to disrupt the business ecosystem and faced identity problems.

From the above, we can conclude that in particular technological and incumbent forces left KaZaA aside. Technological factors diminished the competitive advantage KaZaA had. The application lost its superiority in fast- and user-friendly downloading to other new entrants (e.g. LimeWire, eDonkey and ITunes. Moreover did KaZaA’s technology appear to be less decentralized then thought, which ultimately led to the settlement in 2006 with the ‘big five’ in the music industry. Furthermore started incumbents to adopt the new business model (e.g. Sony), but not KaZaA’s, or providing new entrants with the required licenses (e.g. ITunes). For this reason, this report has proposed;

Proposition 3: As dominant designs are yet be set in a newly disrupted industry, early disruptor’s technological superiority over its competitors is vital for a successful disruptor’s trajectory

DISCUSSION

Most scholars focus on the success of disruptor’s during a disruptive innovation and how

incumbents become displaced or how famous companies like Kodak were able to overcome the disruptive threat. However, there has been little research on the disruptor and, more specifically the disruptor’s failure and the trajectory they take while disrupting an industry. Addressing this gap was necessary to further generalize the findings in disruptive innovation literature (Christensen et al. 2015) and to addresses common pitfalls and threats that disruptor’s face when introducing. To address this gap, this study has researched KaZaA as the disruptor of the digitalization of the music industry, causing a rapid shift from CD to downloading.

This in-depth case study method contributes to a detailed trajectory of how KaZaA met its

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Disruptor’s that appear early are in constant threat from newer new entrants in the disrupted industry, throughout all of these phases. These newer new entrants learn from their predecessors, and are also influenced by the factors that influence different phases. The ‘disruptor’s trajectory’ illustrated in figure 5 demonstrates the paths that disruptor’s take during a disruptive innovation based on the findings. As depicted in the figure, success can be achieved by both early- and late disruptor’s. Their success rate depends on the four factors that determine the impact on the disruptor’s during the three phases. Awareness of the new business model is the most important factor. In KaZaA’s case they entered the market too early. Even though KaZaA already made significant improvements in comparison to its predecessor Napster, the business ecosystem resisted to adopt KaZaA’s new business model. Since they were an early disruptor’s that disrupted their industry, KaZaA did not achieve the external identity it aimed for. Apples iTunes introduced their application at a better point in time, building upon lesson learned from KaZaA. By now, the business ecosystem was aware of the disruption and recognized that change was necessary. This results into a fourth proposition:

Proposition 4: Early disruptor’s create awareness of a new business model towards the business ecosystem, creating room for new entrants to legitimize new business models

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So how can disruptor’s introduce a new business model? First, Phase 1 is characterized by early disruptor’s, the pioneers of the new industry. The first phase has a crucial impact on the further response by the business ecosystem. Our first proposition is; ‘Early disruptor’s success is highly determined by the

identity the firm aims to portray towards the business ecosystem’. During the first phase the disruptor’s

introduce their new business model towards the industry. Identity has a crucial impact on the willingness of incumbents to adopt the new business model. In KaZaA’s case, their internal identity was to become a legal music service application. However, their internal identity was not reflected by the business

ecosystem. The discrepancy between these two created maneuvering space for other new entrants (i.e. iTunes). Unlike KaZaA, iTunes, did not struggle with an identity problem. They were therefore able to gain easier acceptance by the business ecosystem. On the one hand, lack of communication between KaZaA and the business ecosystem caused a negative external identity. On the other hand,

communication can therefore be the key to make sure that the internal identity is translated adequately towards the business ecosystem.

In phase two we proposed proposition 2; ‘External identity highly influences the business

ecosystems response towards the newly introduced business model, influencing the level of resistance to change by the incumbents’. As discussed above, the internal identity was not reflected by the business

ecosystem. As a result, rather than embracing the new business model, the music industry was stuck in old business models and expressed resistance to change. Ansari et al. (2015) discuss how disruptor’s success depends on the very industry they are disrupting. In KaZaA’s case, their business model success depends on licenses from records labels to offer legal music, which the music industry was not willing to share. Incumbents started to expressed resistance to change and the music industry responded by various lawsuits against KaZaA for the infringement op copyrights and piracy. NVPI was persuaded by RIAA to follow in their footsteps by various lawsuits against KaZaA. Despite KaZaA’s efforts to show good will they were only granted licenses in 2006 when other new entrants already took over KaZaA position.

In phase 3 we have proposed proposition 3; ‘As dominant designs are yet be set in a newly

disrupted industry, early disruptor’s technological superiority over its competitors is vital for a successful disruptor’s trajectory’. The underlying technology the disruptor uses can be distinguished in a

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was technologically superior compared with other early disruptor’s. In Phase 2, the firm started to face internal difficulties to cope with the rapid changes in demand. Moreover was KaZaA depending on the ability of ISPs that had to cope with the changes as well. In Phase 3 the firm was caught up by other new entrants, that used improved technologies (e.g. BitTorrent) diminishing their competitive advantage. Teece (1986) distinguishes between pre-paradigmatic phase wherein firms try to identify the design (e.g. KaZaA) and the paradigmatic phase, wherein the dominant design is set (e.g. iTunes). In other words, new business models are yet to become a dominant design, making the disruptor’s business model fragile. Other competitors are able to modify the underlying technology that KaZaA had proposed and turn their design into the accepted business model by the business ecosystem. In KaZaA’s case, we can clearly note that being the disruptor of an industry does not mean that your business model will become the widely accepted dominant design. Therefore, disruptor’s should put effort to maintain their technological superiority. In other words, disruptor’s should be alert for developments in the environment, pay close attention towards competitors and be active in technological research.

In our final proposition 4 we argue that: ‘Early disruptor’s create awareness of a new business

model towards the business ecosystem, creating room for new entrants to legitimate new business

models’. In Phase 3, Steve Jobs convinced the music industry to shift from one business model to another.

Teece (1986) argues late entrants ability to modify early entrants business models and create the new dominant design in case of an innovation. Apple’s iTunes copied KaZaA’s business model and made it legal. The business ecosystem was aware of the disruptive environment and recognized it could no longer ignore the new business model. Yet, it granted Apple with the first legal business model and not KaZaA. Incumbents in the industry shortly started to adopt the business model themselves (e.g Sony). By the time the licenses were granted to KaZaA it was too late. New entrants had copied their business models (e.g iTunes, LimeWire, eDonkey, BitTorrent) and modified the underlying technology to such an extent to be superior over its pioneer. We conclude that, new entrants benefit greatly from the technology and

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VOICE Speak up Stay and Speak up Leave and remain silent Resignation Speak up and leave Stay Remain Silent EXIT Leave Covert resistance Capitalizing on friendship with officials

This global plan is filtering to country level and following the most recent re-assessment of South African frog species for Red Listing (IUCN 2011) a strategy document to