Master’s Thesis Strategy & Innovation

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Master’s Thesis

Strategy & Innovation

Environmental Influences on Consumer Decision-Making in the

Dutch Music Industry:

Processes of Selecting, Obtainment, and Sensemaking, that Influence University Students in

their Music Consumption Behavior

Student

Justus Jorg Hoen s1533576

s1533576@student.rug.nl

Supervisor

Prof. Dr. W.A. Dolfsma

Co-Assessor

Dr. T.L.J. Broekhuizen

University of Groningen

MSc BA Strategy and Innovation

Master’s Thesis BA Strategy & Innovation (EBM723A25)

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Abstract

This thesis investigates how people are influenced by their environment in their music consumtion behavior. In particular, processes of sensemaking, selection and obtainment are studied among a selection of University students who live and study in the city of Groningen, The Netherlands. The market of commercial music has been subject to disruptive change, especially from widespread use of the Internet. Changes in the contextual environment of a market are assumed to consequently cause changes in consumer behavior. Therefore, this research studies the processes mentioned above in today’s context. The theoretical foundation of this research consists of scientific literature on consumer-decision making processes, diffusion of innovation processes, selection systems, and sensemaking. The main data collection method of this qualitative study is the use of focus group interviews. A total of three group interviews were performed, and in addition, three individual interviews. The individual interviews made it possible to discuss some of the subjects in more detail, and for cross-referencing with the some of the results from the group interviews. It is concluded that the information from the Internet is preferably used by opinion leaders of social groups, and that information from opinion leaders is preferred by the followors in a social group. The main source for obtaining among the student participants are Internet services such YouTube (streaming) and by us of Torrents (downloading). Based on the results from the interviews, the market for commercial music is to be charactized as a mix of market selection (from the perpective of opinion leaders) and expert selection (from the view of followers). The results show that people make sense of their environment mainly by learning from their personal experiences. Everyone has developed his own sense of taste and his own way of selecting and obtaining new music. However, among the particitants only a few buy CD’s and only rarely. This suggests and acknowledges that the industry misses out on a certain amount of income. The results furthermore show that people are genuinely interested in legal alternatives of music consumption. At this time, such alternatives are present. But the problem for the commercial music industry of missing out on a lot of income, cannot be solved by innovation alone. As long as people can obtain music for free, there is not much motivation for consumers to use legal alternatives. Therefore, other measures are needed to fix the leak in the value approtations models of music production companies. Perhaps, legal measures are the last step in the direction mainstream succes for new business models that music consumption services such as Spotify use.

Keywords: Strategy, Innovation, Sensemaking, Market Information Regimes, Institutions, Selection Systems, Diffusion, Consumer Decision-Making, Consumption, Music Discovery, Music.

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Preface

The choice for this subject is based on my personal preferences and is inspired by the knowledge presented in both the specialization course as well as in various other courses from the Strategy & Innovation master programme. With this research I will combine two of my favorite interests: innovation and music.

With this research I managed to combine two of my interests, music and innovation. It took my quite a while to find a suiting topic, but it was worth the while because this made it possible for me to enjoy the writing of this thesis to the fullest. In hindsight I would therefore say that getting started was the hardest part of the entire process. It wasn’t easy to find a subject which both spoke to my interest and that as well suited the research field of Strategy & Innovation. I have very much enjoyed performing a scientific study on my own. The time and freedom I had gave me the change to thoroughly investigate a subject of interest. This however also presented me with the difficulty of discipline. An abundance of time and freedom gave me the room to read almost everything there is to know about music in the scholarly realm. But it often also let me astray from staying focused on what was really relevant to my research. Foremost, I have experienced this period as being a very inspiring time in being a student.

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Jelle Oosting, Ingmar Hoen, Maarten Schuchard, Adriaan Burger, Joe Wilcox, Hannah Huizing, Femke Swarte, Leon Derksen, Hans van der Horn, Max Geelen, Anika Postma, Irene Broer, Richard Gerdes, Suzan Koning, and Frank Jansen, Vincent Prinsse, Karin Eijkelenkamp, and Reint-Jan Meijer. Thanks to all of you for making the time and actively taking part in the conversations. Doing these interviews was probably the most enjoyable part of this whole study. Using focus group as the heart of the empirical part of this research, which was a suggestion of my supervisor, worked out very well. Some guidance was need on occasion but there were also moments where some of the subjects that I wanted to discuss almost automatically came up. It was exciting to see the involvement of the participants and to experience how well these conversations went. This involvement was a bit expected considering music being the subject of interest, because as Irene rhetorically said in one of the group interviews: “But who isn’t involved with music?” And although you might expect to something to go well, it still came as a relief that is in reality worked out. Everyone shared his thought and opinions and sometimes the participants even started to ask and answer each other’s questions. There were some laughs and sometimes there was even room for some philosophical remarks. And some of these people even came up with some suggestions or additional insights days after the interviews had taken place. Moreover, these group interviews, but also the individual interviews provided the useful information that was necessary for finishing this thesis.

Justus Jorg Hoen

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1. INTRODUCTION:

Changes in the Music Industry

This first chapter will introduce the topic of this master’s thesis and will subsequently discuss the relevance of the subject. Thereafter, some previous work in the field of music consumption will be reviewed and the goal of this research will be discussed. Then, the research questions of this study will be presented, as well as several relevant definitions in order to set boundaries on the scope of this research. The chapter will then finish with an overview of what the reader can expect in the following chapters.

1.1 Introduction to the Topic

“Music is the child of its time.” – Anika Postma1

And the same goes for the way in which people consume music. People are influenced by their environments in all sorts of (consumer) behavior and the inherent decisions that come along with it. As times change, so does the context in which people live, and therefore also the way in which they are influenced in how they consume music. Change is caused by innovation, technological and non-technological innovation. I will now present the an example of the introduction of music television and the impact that it has had on the commercial music industry at that time. Music television thus being an innovation and a new influence in the environment of people who consume music.

After the indroduction of MTV on August 1, 1981, record companies could gain even more exposure (next to radio airplay) of the songs they produce and, in doing so, generate more income. MTV grew to have the power to turn unknown bands in to superstars though their exposure on television (Knopper, 2009: 13). More recently, the technological innovation that is the Internet changed the dynamics of the music industry in an even more disruptive way. While around the time that MTV became popular, people said that video killed the radio star, on can now argue that the Internet is killing the video star. The consumption of music via computer networks has been one of the greatest concerns for the music industry in the last decade, because, purchasing and listening practices are being reshaped by new technologies (Jones, 2000: 218). Over the last years, MTV decreased the airplay of music videos and replaced them by TV series and real life soaps. MTV has transformed from a music television channel into more of a regular TV channel. The decline of music television in The Netherlands started to show its effect when The Box, a music television channel owned by MTV, was taken off the air in 1997. And as of April of 2011, the Dutch music television

1_{Thanks to Anika Postma, one of the research participants, for providing me with this quote, which for me resulted in this particular insight.}

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2 channel TMF, also owned by MTV, can only be viewed on digital television. This new strategy seems to be necessary on account of the decreasing amount of viewers (and thus decreasing advertisement income). TMF was known for introducing new talents and for being a pioneer when it came to discovering the latest hits. What TMF played on TV was directly picked up thereafter by radio stations all over the country2. A TMF spokesman declared that the organization sees a promising future as an interactive channel, and that they are willing to invest in this future. Young people are tuned in on the digital highway, want to view on demand, request music videos, and want to able to directly click their way to the online iTunes store whenever they hear and see something that they like3. Nevertheless, not much came from this ambition. In recent news, it was announced that

TMF will also disappear from the digital tv later this year4.

The music industry has always been subject to change. Over the last decades the music industry in general has had to face several challenges just like the example described above. First there was the introduction of the transistor radio (technological innovation), soon followed by the innovation known as the Top-40 format (a non-technological innovation). After this, the record player caused a significant change in the dynamics of the industry. First with long play records and later followed by the CD player. The computer and mp3-player have brought us digital music as yet another variant of music product. Music television was introduced by MTV as a result of the invention of the television. And nowadays the Internet has once again disrupted the music industry on a global scale. Such events that significantly alter the dynamics and fundaments of an industry are referred to as ‘strategic inflection points’ in the research field of strategy and innovation (Burgelman and Grove, 1996). Significant changes like these affect the way in which people consume music recordings. For example, instead of discovering new music by listening to the radio , people might now get inspired to buy a new record by watching TV or listening to it on the Internet. How people consume music in this day and age is important to know for the people and organizations how produce music. More on this will be discussed in the following section.

2_{nrc-next, November 5, 2010, p.11, “Wat TMF draaide, hoorde je daarna op de radio.”}

3_{http://www.nrcnext.nl/blog/2010/11/04/tmf-straks-niet-meer-op-de-kabel, Retrieved on 23-11-2010.} 4

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1.2 Relevance of the Subject

Organizations are subject to relatively long periods of incremental change that are punctuated by environmental shifts and revolutionary change. In order to survive, organizations have to adapt to their environment and evolve through these periods of change (Tushman and O’Reilly III, 1996). The processes that organizations engage in in order to cope with its changing environment, e.g. the changing external conditions have been described as ‘adaptive learning’ (McGee et al., 2005: 602). As the introduction above exemplifies, that this is also the case in the record industry as. Change has impeded the record producing companies in being able to fully collect the economic returns from their innovations (new music productions). Meanwhile, the consumers and other industry participants benefit (Teece, 1986: 285). These music production organizations must therefore learn and seek new ways of appropriating value from their products. A contribution to this quest can be made when we learn more abouth how consumers choose and obtain music at present day. In competitive markets such as the commercial music industry, organizations that strive to derive critical resources from their market need to reduce uncertainty about their market in order to secure these resources from it (Pfeffer and Salancik, 1978; as mentioned in Anand and Peterson, 2000: 271). With the results of this research we could hopefully reduce a part of this uncertainty.

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1.3 Previous Literature and Research Goal

Researchers have written numerous articles with the music industry as subject of study, focusing primarily on the production and supply side of the market. Hirsch (1972), has addressed the structure of the popular music industry at that time, focusing on the production. He analyzed the filtering process by which records are preselected for public consumption. Zwaan and Ter Bogt (2009), have written an article investigating the success factors of the musician who try to enter the professional music business. According to Wierenga (2006), the focus in literature concerning the entertainment industries is generally on the supply part of the market. However, less is known about the demand side of this market, about the consumers of music. Delre (2007), adds to this by stressing the importance of understanding consumers’ decision making and consumer behavior regarding entertainment goods in general. The music industry has a pervasive cultural influence and economic impact. Therefore, Lacker and Mizerski emphasize the importance of studying the music consumption and purchase (1994). Because of the widespread use of the Internet and the steady growth of online-shopping, computers now play an important role in the decision making process of consumers. This makes it worth revisiting traditional models of decision-making (Bechwati and Xia, 2003: 139). In addition, Alba et al. (1997) also suggest that this increase in acquiring products through Internet requires research to better understand online consumer behavior. Today’s music complex and competitive music industry exposes consumers to a multitude of communication channels at the same time. Lee et al. (2002), therefore state that the interdependent nature of commercial and interpersonal communication, and its influence on consumers’ decision-making, calls for the attention of future research. Furthmore, Jones (2000) concludes that future investigation needs to focus on the effectiveness of high-tech interactive and multimedia communication. He also suggests other areas that seem worth investigating on the demand side of this industry. For example the ways in which consumers make decisions about what music to listen to or to buy, as well as research concerning the affective investments made in music.

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5 are aimed at promoting their music in ways that maximizes awareness among potential consumers of their products, and at the same time also at trying to maximize costumers’ propensity to actually purchase them (North and Oishi, 2006: 3077). So learning more about this subject could result in valuable information for companies who produce and/or promote music. Based in this information, these organizations can consequently adjust their strategies in order to get more exposure of their products, sell more copies and appropriate more value from the innovations (new music) that they bring into the market. Possibly, these organizations could even use this knowledge to develop new business models and generate additional income.

An example of what can be seen as ineffective promotion of music is provided by Wallis and Malm (1988: 282). They argue that the introduction of the video clip as a new promotion method has not led to a notable increase of the US music industry's income. Therefore they find it reasonable to infer that these new types of investments caused less funds to be available for recording a wide range of styles and artists. This was argued because of the decrease in annual releases of new records after the introduction of MTV in the USA. In other words, the expensive investments required to produce music videos prohibited the record companies from taking risks with new music and unknown talents. It is therefore important to find out which are the most popular and most effective ways of music selection and consumption so that record companies can invest their efforts accordingly.

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1.4 Research Boundaries: Research Questions, and Relevant Definitions

This section will elaborate on a number of topics that are central in this thesis. First, the main research question and its following sub-questions will be presented. Thereafter, several relevant terms will be defined in order to set boundaries on the focus of this research. And finally, a short overview will be provided of what can be expected from the following chapters of this thesis.

1.4.1 Research Question and Sub-Questions

Along the line of thought presented in the introduction of this topic, the main research question for this topic is:

“How do processes of selecting, obtaining, and sensemaking in the environment of the Dutch music industry influence university students in their music consumption behavior?”

I will explain some of the terms used in this question. The environment refers to persons, organizations and institutions that surround and somehow influence consumers and their decision-making. Selecting means choosing from a range of available products, in this case, choosing from the total supply of songs. With obtaining is meant that an individual comes in possession of the music that he or she has chosen. Obtainment can regard both the physical product (compact disc for example), or a digital variant. Furthermore, obtainment does not solely imply that one has paid money for the product. There are several ways for people to obtain music without having to provide a form of monetary compensation for the product (think of illegal downloading or copying CD’s). Sensemaking, refers to how people make sense of their surroundings such as markets and industries based on the information that they receive. It concerns their understanding of the music industry and the ways in which the ascertain meaning to different aspects of the industry, and, how they make sense of certain situations (Weick et al., 2005). Or, as Anand and Peterson (2000) put it, sensemaking is about the cognition of markets through the creation, distribution, and interpretation of a web of information about the ‘market’. Information that in the case of this research is received and interpretet by university students. In summary, when people want to consume music, they are affected in their decision making by three processes that are central in this study. These elements are graphically represented in the following figure:

Figure 1. Processes that Influence Music Consumption Behavior (source: Author)

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7 The two processes within the dotted line are subject to consumer decision making. The following sub-questions are dissected from figure 1 and the main research question that has been stated above. Before people can make decisions towards selecting and obtaining music, they first have to come to an understanding of the music industry and the information the receive from it. In other words, an individual first needs to have certain information on which he or she can base their decisions in the light of music consumption. Therefore, this is the first sub-question:

Sq 1. “How do consumers make sense of the music industry and the information they receive?”

The second sub-question is concerned with how people discover new music and how they come to a choice of which particular song or album they would like to consume:

Sq 2. “How do consumers come to a choice of which new music they will select?”

Consumers can base their decision on information retrieved from different kinds of sources. The aim is to find out which sources are valued the most and also why this is so. The third sub-question concerns the final step in the consumption process With this sub-question it is the goal the find out how people obtain they music of their choice, and again, to find out why they do so:

Sq 3. “How do consumers obtain their selection of new music after they have made a choice?”

A side note has to be made here, because it is not always necessary to obtain music to be able to listen it. Examples are listening to the radio, attending a concert or streaming music on the Internet. According to Kevin Kelly (technology philosopher and editor of Wired magazine), the socio-cultural trend of the current digital age is a shift in media consumption from ‘ownership’ to ‘access’5.

1.4.2 Relevant Definitions

I will now try to further clarify some of the terms used in the research questions stated above. The music industry is more than just the recording industry for it entails a broader range of activities than just production activities. One can think of live performances, publishing, licensing, and merchandising. These are some of the growing areas in the music industry that record labels acknowledge as alternative revenue streams which they can capitalize (Young and Collins, 2010). New music in this context means music that the consumer has either never heard before, or was already familiar with but did not have in his or her possession before the moment of obtaintment. New music in this case is not bounded to any musical genre. Music does not solely refer to compact discs. Digital audio tracks on the Internet and recorded music that is played at radio stations are also

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8 included. ‘Music’ also includes live music that that is performed at concerts or festivals. Recorded music can also be regarded to as a cultural good. A cultural good is defined as a ‘nonmaterial’ good directed at a public of consumers for whom they generally serve an esthetic or expressive, rather than just a utilitarian function. The profit-seeking firms who produce such cultural products for national distribution are referred to as cultural organizations. In this case, these cultural organizations are the record companies, also referred to as record labels. These firms produce replicas of music performances, mass-produced embodiments of performances (Hirsch, 1972).

Because this masters’ thesis will be on the subject of innovation within the Dutch music industry, a definition of what innovation is will also be presented. Wijnberg (2004) suggests such a definition of innovation which fits this subject. According to him:

“An innovation is something new which is presented in such a way that the value will be determined by the selectors”.

This is also the case in the music industry, where the popularity and thus the value of an innovation (a new song) are determined by the selectors in the industry. In particular, innovation in this research can be defined as a ‘new song’ that is created by artists and producers and that has ultimately been presented to and consumed by the consumer. The latter is essential because an innovation is an invention that is made available on the market (Schumpeter, 1934; as mentioned in Caves, 2000). So, a newly written song is initially an invention, but when it reaches the market it can be defined as an innovation. According to Jacobs (2007), there are different degrees of innovativeness, also referred to as the ‘radicalness’ of innovations. The radicalness of an innovation is related to the cognitive distance from the existing cultural framework. In other words, the degree of innovativeness refers to how new a particular innovation is (Orosa Paleo and Wijnberg (2008: 4). There are three main different degrees of innovativeness; incremental, new concepts for existing products, and totally new products. A new song is regarded to be an ‘incremental product innovation’ of a ‘non-technical’ innovation (Jacobs, 2007: 49; table 1). Incremental innovations are easier for consumers to understand than radical innovations. On the other hand, because of the greater cognitive distance, the success of radical innovations are more unpredictable. New in the context of this research regards to music that is ‘new to the consumer’. As mentioned before, new music in this case is does not mean new music genres or a new song that has recently been produced, but simply music that one in general has not heard before. This can furthermore be linked to the definition of innovation that has been stated by Rogers and Schoemaker (1971: 19; as mentioned in Hirschman, 1980: 1): “Innovation is an idea, practice, or object perceived as new by the individual.”

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9 the basic long-term goals and objective of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out these goals”. Another relevant definition of strategy is as a: “decisive allocation of resources (capital, technology, and people) in a particular direction”. Firms survive and thrive on what consumers buy. Therefore it is important for organizations to focus every resource of the firm on serving the consumers. This strategic commitment is called customer-centricity, and it involves producing new products focused on particalur market targets. This in turn has created the need of consumer analysis. This is the process of understanding consumer trends, consumption patterns, and communication methods in order to effectively reach target markets (Blackwell et al., 2006: 34).

A strategic inflection point, which has been previously discussed in the introduction of this topic, is a term used to describe a moment in time where a transformation occurs in an industry. More specifically, it describes a change from one type of industry dynamics to another, the change of one winning strategy into another or the change of an existing

technological regime by a new one. This phenomenon has been presented by Burgelman and Grove (1996) and is discussed within the context of strategic dissonance. A strategic dissonance exists when a firm’s strategic actions do not align with its strategic intent. When the dynamics of an industry change, this can have a negative impact on the prospected profitable growth of firms in the industry. In order to survive and to take advantage of the new industry conditions, the firm’s top management has to come up with a new strategy. Without adaption to these new conditions, the organization is likely to lose profits and may die over time (see figure 2). It this thus important for firms to recognize (‘strategic recognition’) these points of transition, so that they can adjust their strategies and adapt to the new organizational circumstances.

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1.5 Chapter Conclusion

The era of making easy money in the music industry is over. This refers to the period when the compact disc was still the dominant sound carrier, and to a period in which there was no competition from all the different legal (and illegal) ways of music consumption that exist today. The end of this relatively stable period is caused by the technological and non-technological innovations of recent years. And although people ultimately choose for themselves what music they want to listen to, and and how they obtain it, they are certainly influenced by their ever changing environment. It is thereby important to know how people make decisions concerning the consumption of new music at present day. And in addition, to know how they are affected by the different influences from their environment. This is particular of interest to music production organizations because they can then try to exploit this knowledge. By redirecting the focus of their resources on certain market institutions they can try to influence consumers more effectively.

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2. CONTEXT:

The Current State of the Dutch Music Industry

This chapter will analyze and describe the context of the subject that is studied. Chapter 2 is organized in a funnel-like manner. In section 2.1, an industry analysis will be performed, using several kinds of analysis frameworks.The second section will provide literature on creative industries in general. The third section will describe the dynamics of the music industry in The Netherlands. It will describe the relevant actor organizations that play a role in the Dutch commercial music industry. Their roles will be analyzed with regard of their potential influence on consumer decision-making.

2.1 Industry Analysis

There are several existing industry analysis that can be applied. These theories are helpful to gain more understanding on the structure of the industry and the context of this study. The following theories will be described in the following subsections: C4-Analysis, Porter’s Five Forces-analysis, and a DPEST-analysis.

2.1.1 C4-analysis

The four-firm concentration ratio, as described by Besanko et al. (2004), is a common measure of market structure. It can be used to measure the degree of market control of the music industry held by the four largest firms. It gives the proportion of the market controlled by the four largest firms in terms of market share. This particular analysis can thus provide insight in the relative power of the record companies who produce and sell records. These music production companies are the ones trying to influence consumer decision-making, trying to persuade them to purchase the records they have produced. This section will first present the most recently known C4 status of the record industry of the Dutch market, which is of primary interest in this research. The analysis for the Dutch market shares of record producers in 2010 resulted in the following figures (NVPI, 2010: 7):

1. Universal Media Group – 24.6%

2. Sony Music Entertainment – 17.8%

3. EMI Group – 10.1%

4. Warner Music Group – 5.8%

Total: 58.3%

The above presented record companies, also known as the ‘Big Four’6, dominate the international market with 75% of the total market share7. The same four companies also control most of the Dutch

6_{http://hitsdailydouble.com/news/newsPage.cgi?news08233m01, retrieved on 24-11-2010.} 7

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12 market. With 58.3% of the total market share they appear to have less power in The Netherlands. This figure indicates that this industry is can most likely be typified as an ‘oligopoly’. An oligopoly is a market in which the actions of individual firms materially affect industry price levels. According to the literature, this suggests that the intensity of (price) competition may be classified as somewhere between ‘light’ and ‘fierce’ (Besanko et al., 2004: 207).

2.1.2 Porter’s Five Forces-Analysis

Porter’s Five-Forces-analysis as described in Besanko et al. (2004) can be used to explore the economic factors and assess certain trends that may affect the profits of an industry. This type of industry analysis was first describe by Porter (1979) and consists of the following forces: (1) internal rivalry, (2) threat of new entrants, (3) effect of substitute and complementary products, (4) bargaining power of suppliers, and (5) bargaining power of buyer’s. The latter four forces may also affect the first force of internal rivalry. The greater their influence is on internal rivalry, the more it can eliminate industry profits in general. In other words, the greater the rivalry, the lower the prices in the market tend to be, and the lower profits become. The analysis of each of these five forces will now be applied to the Dutch record industry.

The force (1) internal rivalry refers to the competition for market share among the firms within the industry. The market of recorded music is dominated by four major record companies (see the Q4-analysis in the previous section). This indicates a relatively low internal rivalry for market share.

The force of (2) entry refers to possible threat of new firms entering the industry. More entrants in the industry mean that the total market share, and thus total profits, will have to be shared amongst more firms. In addition, entrants heat up internal rivalry because their entry decreases market concentration. Theoretical it can be relatively easy to start a record company and start producing new songs. High quality technical equipment keeps getting cheaper and there are lots of artists who are willing to record their songs. However, it is a lot harder to find good music with hit potential, music that sells enough copies to sustain a viable organization. And even if you find a potentially valuable artist, it is difficult to get your song in the attention of the large public. This in turn makes it very hard to sell enough copies to reach break even or even earn a profit. So it’s not that hard to produce songs and make them available on the Internet. The real challenge is to get your song promoted and played on the radio, the Internet, or on TV. Sufficient advertising and promotion of a new song is very expensive. Overall, this makes the threat of entry from really competitive firms small in this industry.

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13 profits of record companies. Illegal downloading is a popular substitute source for legally buying songs. Study has indicates that the Dutch record industry has lost 30% of total sales in the last decade due to this illegal substitute (IFPI, 2009). This makes it a serious threat for overall profits in the industry. In addition, music is also freely being consumed, instead of bought, via online services such as YouTube. Similar streaming services are also a substitute for listening to physical or downloaded records which erodes profits. But on the other hand, the Internet has also made it possible to buy digital tracks for instance via iTunes and record companies use YouTube as a promotional instrument for their songs, which adds to profits. Complementary products such as portable mp3-players have increased the demand for music. The (illegal) distribution of music on the Internet did not mean that people suddenly stopped purchasing music. With the introduction of Apple’s iTunes in 2003, it became clear that people were willing to pay for music downloads. Songs were offered at a reasonable price of 99 cents8, and a combination of style, ease of use, and seamless software/hardware integration were seen as the major strengths of the iTunes system (Garofalo, 2008: 486-487). However, Apple apparently does not earn profits by selling the music files, but by selling its complementary mp3-players (McLeod, 2005: 526). The advancement of mobile telephones has also increased the demand for music. With today’s mobile phones, also called ‘smart phones’, people can visit the Internet, play music from the it’s hard-drive just like an mp3-player, en even watch (music) video’s. Taking this information in to consideration, the overall force of substitutes and complements can be seen as a moderate threat: Illegal downloading (substitute good) has eroded profits while mp3-players (complement good) has increased demand. Another factor that might influence the lower record sales of the last through years could be caused by growing competition from other forms of entertainment. For instance, the growing amount of money spent in the movie industry, video games and cell phones (Oberholzer-Gee and Strumpf, 2007: 39).

(4) Supplier power, the fourth force, refers to the bargaining power of suppliers within the industry. This is the ability of supplying firms to negotiate prices and thereby to influence the industry profits. Suppliers are powerful for example when there are few of them. This implies a relatively low price competition and thus relatively high product costs. This can in turn drive down the profits of the company buying their inputs from them. Technically speaking, physical sound carries are an input good for the production of new records. Cinram is a manufacturing organization of pre-recorded DVD’s, VHS videocassettes, CD-Audio, CD-ROMs, and audio cassettes. In 2003 the company purchased the music- and movie-manufacturing assets of Warner Music. Subsequently, the firm bought the manufacturing operations of EMI and from the Universal Music Group9. This makes it one of the world’s largest suppliers of record companies when it comes to physical sound carriers. This suggests great power for this supplying organization. However, record companies purchase their

8_{Of the 99 cents per song, artists get 10 cents, the record companies who hold the copyrights receive 65 cents, and the rest of the revenues}

are costs that Apple has to pay for advertising, file-hosting and employees to run the service (McLeod, 2005: 526).

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14 products in very large volumes which drive prices of the suppliers’ product down. A greater and more important part of the input is the employment of artists and creative personnel who create the new songs. There are a lot of new potential artists from which record companies have to decide who they want to produce. New talent is crucial for the sales of new records, however, there are so much artists in any country that the bargaining power of these is very small. In conclusion, the force of supplier power is not a significant threat for the profits of record companies. (5) Buyer power, the final force, concerns the bargaining power of buyers e.g. the consumers in the market. This force is analogous to the force of supplier power, referring to the ability of individual customers to negotiate prices that may decrease profits from the sellers in the market. The larger the amount of customers, the smaller their power is to influence prices. However, buyer power increases when there are few customers or if there are customers in the market who purchase in large volumes. Records, either digital or physical, can be purchased at a lot of different places. For example, music retail stores, warehouses, super markets, gas stations, catalog order organizations, and via numerous Internet sites. This implies little buyer power for the end consumer. But when we look solely at retail stores things like a bit different. There are relatively far less retail stores compared to end consumers. And in addition, these retail stores purchase records in far greater amounts at a time. This makes their negation power larger. However, since records can be bought at a lot of different locations, their power cannot be very large. Since this research focuses on the end consumers of music and not on retail organizations, it is more relevant to keep their bargaining power in mind. And since there are a lot of individual buyers, their power can be seen as being weak. It is hereby important to note that consumers can exert some influence on production companies by illegal downloading. If the majority of consumers start to download music for free, record companies will be forces to lower retail prices. But this is not the case for there are still a lot of people who purchase music, either digitally or physically.

The five forces analysis of the Dutch record market is summarized in table 1. The strength of a particular force is indicated by the following classification: – = weak, + = moderate, and + = very strong. The stronger the force, the greater it poses a threat to profits in the industry. When looking at the total picture, the conclusion can be drawn that the greatest threat to the record industry is the force of substitute products, i.e. the illegal downloading of songs.

Force Strength

Internal rivalry –

Entry –

Substitutes and complements +

Supplier power –

Buyer power –

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15 2.1.3 General Environment Analysis (DPEST)

General environment analysis, commonly known as DPEST-analysis will provide more information regarding the macro-environmental factors which influence the industry (Leeflang, 2003: 94-101; McGee et al., 2005: 13). Several factors will be discussed in the following order: (1) Demographical, (2) Political and legal, (3) Economic, Socio-cultural, and Technological. In this case we are also interested to determine the implications of these environmental factors for consumer decision-making regarding music consumption. Its subsections will first describe the environmental status and will thereafter shortly the possible implications for production organizations and consumer decision-making.

(1) Demographic Environment

The music industry is used to dividing the total audience into several target categories based upon musical tastes. Known examples are categories such as ‘Hard Rock’, ‘alternative’, and ‘dance’. This enables them to reach each customer group in a specific way that is best suited. From the late 1950’s, the music market was oriented towards the age group of 15-24 year old people. However, this group of teenagers has been declining as a percentage of the total population. In addition, teenagers who grew up with having the habit to buy records are becoming an expanding market of middle-aged customers. In addition, the last decades have shown that young people also listen to old music and vice versa. Negus (1992) argues that the pop music industry has developed its own canon of classic songs. That this music is still popular nowadays and influences performers, audiences, and record industry staff is the result of what Negus calls ‘multiple inter-generational’ tastes and experiences. These demographic changes combined with the fact that record companies are dependent on selling large amounts of records, has implicated that new artists are no longer merely aimed at young people. The aim of record companies therefore has become to reach a broad possible audience (Negus, 1992: 67-69). A recent article in The Economist also commented on the notion of media’s ageing audiences. The mention that an important segment of the music market consists of relatively older people who want to revisit the pop music of their youth. This generation of middle age or (even beyond) consumers are increasingly driving the music market. Generally speaking the older segment has more money and does not want to download music. Whereas the young people cut back on conventional media, their elders are now consuming more of it10.

(2) Political and Legal Environment

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16 There are several political and legal factors that influence the dynamics of the industry. For instance, illegal downloading of music from the Internet is of major concern to record companies all over the world. Illegal downloading negatively influences the demand for legal music products. The IFPI have presented a report on the impact on illegal downloading. This report has combined information from several studies from different studies all over the world. Since the launch of Napster in 1999 (the first widely adopted file sharing software), the sources of free and illegal downloads on the Internet have proliferated. And in spite of increase in legitimate downloads, the record industry continues to lose sales to free, illegal sites and software services. There have been studies that claim that illegal downloading has no significant effect on music sales. However, there have also been many studies which have shown a link between illegal downloading and lost sales. Overall, most of the academic and market research strongly suggests a negative impact (IFPI, 2009). Two Dutch studies were included in the IFPI report. The first study was commissioned by the Dutch ministries of Education, Culture and Science, Economic Affairs and Justice. According to this report it is plausible that there will be a fall in receipts from the sales of sound carriers. File sharing does result in a reduction of sales due to replacement by illegal downloads. However, ‘consumer welfare’ is improved, meaning that consumers gain a net benefit due to the fact that they are able to acquire more music at a lower or at zero price. The survey of this study also showed that a large number of file sharers will eventually buy the music they first downloaded. However, there are numerous studies about the possible effect of file-sharing on record sales that report either a negative, neutral, or positive relationship. They conclude that taken all studies together, the effect of file-sharing on record sales is ambiguous (TNO et al., 2009). The second study was performed in request of the Dutch record industry association NVPI. It concluded that a third of lost sales from recorded music in the Netherlands between 2001 and 2008 were caused by online music piracy. The study forecasts that losses to illegal music sharing will continue to grow annually up to 201311. There are numerous studies about the effect of illegal downloading on income loss for the music industry that either confirm or deny the this negative impact. Proponents and opponents of downloading always seem to use arguments from research that are in their advantage. Therefore, the goal of a recent study, performed by Schermer and Wubben (2011), was to compare all of these different articles and to make an end to this discussion. This study shows that, all though exact figures of monetary loss are always hard to measure, that illegal downloading is definitely damaging the industry’s profit. .

Copyright and related legislation attempts to create a balance between the rights of record companies (and recording artists) to create a balance between the financial rewards earned from the exploitation of their work and the ability of consumers to have access to copyright works (Eversheds London, 2003: 132). Dutch copyright protects authors and producers of music recordings. These rights form the basis through which right holders can generate income from their products. They make

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17 it possible for record companies to keep investing in products and for creative people to make a living making music. The right holders have exclusive rights; this means that non right holders must ask permission for the use of their creations. The right owner can make exceptions in return for money or by setting a time constraint on the use of its product12. However, an important exception can be made by which it is not necessary to ask for permission. Commercial music products may be presented to the public (through radio of cable television) as long as the artist or producer of the music is reasonably compensated. This monetary compensation has to be paid to the foundation, called SENA, which in turn distributes the compensation back the original right owner of the music. Another important exception on the copyright law is the possibility to make a limited amount of copies of records for personal use13. However, websites like The Pirate Bay make it possible for people to freely share copies with other internet users. This has become a major concern for artists and record companies because they cannot appropriate money from this illegal file sharing process.

Implications for Industry and Consumer Decision-making

The legal and political environment influences individual decision-making. In conclusion, widely available opportunities for illegal downloading of music for free combined with the fact that illegal downloading has no direct legal consequences for consumers who download it, has caused illegal downloading to become very popular. In addition, people may find music in retail store too expensive. They therefore turn to downloading, while they might have bought the real thing if the price was somewhat lower (in this case, there is a discrepancy between the price of a product and the price a consumer is willing to pay, also known as the ‘Willingness-To-Pay’ concept). At first there were no legal alternatives, which added to the popularity of illegal downloading. However, since a few years, several legal alternatives have been developed to cope with this unprofitable situation. This will be further discussed in the section about the technological environment.

(3) Economic Environment

The Dutch economy was in a deep crisis in 2009 and shrank with 3.9%. A larger decline has never been measured before by the Central Bureau of Statistics (CBS), not even in during the economic crisis during the 1930’s14. However, according to the CBS, the Dutch economy has grown with 1.8% in the third quarter of 2010 compared to the same period one year ago. In addition, household consumption has shown a modest growth. Compared to last year, it has increased with 0.6% which is the largest growth in two years15. An increase of income can positively increase the demand for luxury goods such as recorded music. The total revenues in the Dutch audio market declined (-4.6%). This market can be divided in revenues from downloads and from physical record sales. 2009 showed

12_{NVPI, Auteursrecht en naburige rechten. http://www.nvpi.nl/nvpi/pagina.asp?pagkey=60414, retrieved on 02-12-2010.} 13_{NVPI, Naburige rechten. http://www.nvpi.nl/nvpi/pagina.asp?pagkey=60413, retrieved on 02-12-2010.}

14_{http://www.cbs.nl/nl-NL/menu/themas/macro-economie/publicaties/artikelen/archief/2010/2010-806-pb.htm, retrieved on 26-11-2010.} 15

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18 an increase in download sales, in particular of single tracks (=trend). Digital download sales now account for 6.0% of the total market. In contrast, physical revenues decreased with 6.3%. CD’s are still dominant when it comes to album sales (95% of all album sales and 80% of total revenues)16. Research done by the NVPI (2010) has shown that digital music sales represent a quarter of total sales. Worldwide digital sales are up to 27%, whereas to digital sales in the Netherlands are relatively low at 5.7%. The popularity of single digital tracks has caused the demand for physical singles to decrease. Furthermore, turnover in the music market has declined with almost 50% compared to 10 years ago. This correlates with the rise of the Internet and the increasing popularity illegal download services over the last decade. The report of the NVPI also mentions is that the number of new releases that sell large volumes keeps getting smaller. 2005 was the last year in which there was an album title released that sold more than 100.000 copies. This has a negative effect on the core activity of record companies which is investing in new talent. Record companies invest over 30% of their income in new artists and repertoire. The investments of record companies in The Netherlands are essential for the national culture of music. These firms invest about 35 million euro’s in talent and repertoire development each year. The same amount of money is being spent on promotion and marketing. The previously discussed report on the Dutch audio market can be found on the website of the NVPI organization17.

Implications for Industry and Consumer decision-making

This implicates that people spend less money on music products than before, even though they probably do not suffer any more from the economic recession. However, while physical album sales have decreased over the years, digital sales have increased. There is seemingly an increase in popularity of legal alternatives for downloading of digital music. Therefore they economy at this time is presumed to have no effect on consumer decision-making.

(4) Socio-cultural Environment

Nowadays people watch less television and spend more time on the Internet and on mobile phones. This is partly what caused TMF to focus on digital television, because digital television can watched on the Internet18. Furthermore, illegal downloading of music has become socially accepted over the years19. Among social groups there may exist a consensus about downloading pirated music based on the rationalization that ‘everyone else is doing it’ (Chatzidakis and Mitussis, 2007: 312). Research of TNO et al. (2009), has found that 32% of the Dutch population, from the age of 15 years and older, had downloaded music in the past year without paying for it. Downloading from paid and legal sites such iTunes and from promotional websites, was found to be less common that illegal file-sharing.

16

http://www.nvpi.nl/nvpi/pagina.asp?pagkey=60388, retrieved on 26-11-2010.

17_{http://www.nvpi.nl/assets/nvpi/NVPI%20Marktinformatie%20Audio%202009.pdf, retrieved on 26-11-2010}_. 18_{nrc-next, November 5, 2010, p.11, “Wat TMF draaide, hoorde je daarna op de radio”.}

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19 They also recognize downloading from illegal sources has become a widespread (and still growing) phenomenon.

In their research to ascertain the factors that govern consumers’ willingness to pirate a digital product, such as a digital music track, Shinha and Mandel (2008) have found that digital piracy is the social norm among American university students. Freestone and Mitchell (2004), support this notion by stating that only 5% of the student consumers agreed that downloading music for free was unethical or wrong. Shinha and Mandel therefore argue that attempts to decrease piracy by appealing to the ethical sense of consumers are unlikely to be effective. Such appeals to social norms might be more effective among the older, non-student generation of people. The same is true in the Netherlands where file-sharing is also a widespread phenomenon. However, file sharing and buying seem to go hand in hand for consumers who regard music as in their daily lives. According to this Dutch study, the percentage of downloaders who buy music is just as high among non-downloaders (TNO et al., 2009: 4). This study furthermore that 28% of the Dutch population between 15 and 24 downloads musis. This a significant portion of the total Dutch population, which could also be viewed as a large piece of revenue for production organizations.

This has created a situation in which the industry has to find alternative ways and create alternative (legal) downloading services gain back previously lost profits due to illegal downloading. This has probably not so much influenced the choice of music for consumers but more likely has influenced how people obtain it.

(5) Technological Environment

Finally, technological aspects also influence the market. Technological advancements have brought forth several complementary products that enable the consumption of music. Important examples are the television, Walkman’s, portable compact disc players, mp3 players and the Internet. In the context of purchasing and listening to music, new digital technologies have provided a considerable source of information that can be used for socially grounded music choice an music recommendations. New music consumption services such as Spotify and YouTube, derive users´s listening patterns from this information (O’Hara and Brown, 2006).

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20 that was consumed. In addition, physical sales also went down. However, the Internet could also be viewed as an opportunity. Several innovations have made it possible to download music in a legal manner through which record companies can collect income. Think of Apple’s iTunes web store in combination with services that make it possible to pay via the Internet. Furthermore, over the years, the connection speed of the Internet has made it possible to listen to music directly without having to download it. This is a technique that is referred to as the ‘streaming’ of music. Swedish software called ‘Spotify’ combines this new technique with advertisements that ensures appropriation for the record companies. In this way, copyright owners of the music that is played receive a part of the advertisement income. Spotify has become a major brand in Sweden with 1 million users in a population 9 million people20. As mentioned earlier in this chapter, the technological development of mobile telephones has also increased the demand for music, making it possible to consume music from the mobile network. Some say we are at the dawn of a digital future, a world where no one has physical data carriers containing music, movies, or games anymore. A world in where the presence of hard disks will become scarce or even redundant. This is because people access to digital databases more often, of which examples are YouTube and Spotify and many more of the like. People can access every movie or song wherever and whenever they like, and as much as they want to. In technology realm this is called ‘the cloud’; a database that always hangs above our heads. The cloud makes it possible for us to play games in an Internet browser, and for us to get music and movies from a database21.

Hayes (2006) has studied the growing popularity of consuming vinyl records, which seems to be a trend amongst consumers in the postmodern age. He attempted to answer the question of why young people have turned to this old-fashioned technique. Vinyl sales began to increase as CD sales declined after the turn of the millennium. Recognizing the growing interest in vinyl, record companies and artists have recently begun to publish new releases on LP’s. According to Hayes, consuming vinyl has “[...] has enabled these young people to operate with a reinvigorated sense of agency in an arena of cultural production and consumption largely over-determined by corporate interests.” (p. 67). These enthusiasts are exploring music by tracking down music based on leads from local store owners, peers, and their parents. This opposed to depending on MTV, VH1, or any other media outlet trying to influence their consumption of popular culture. Considering the current chaotic state of the current music industry, Hayes argues, this phenomenon is at the least understandable, perhaps even laudable. These people try to be different by rejecting mainstream practices of music consumption instituted by the capitalistic framework of the commercial music industry.

20_{http://www.billboard.biz/bbbiz/content_display/industry/e3if0dcc1217c8006b4ec61d7f5814d6858, Global Recorded Music Market Down}

7.2%, retrieved on 24-11-2010.

21

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22

2.2 Creative Industries and Cultural Industry Systems

This section will discuss the characteristics of type of industry that the music industry can be categorized in. The music industry can be classified as a typical ‘creative industry’. Creative industries, also referred to as ‘culture industries’, are dependent on satisfying consumer tastes that are changing rapidly (Anand and Peterson, 2000: 272). Further on in this section, the value chain of this particular industry will be discussed, as well as the actor organization that are participants in this market, the roles of these actors and their relation with the consumers.

2.2.1 Creative Industries

This thesis will focus on innovation in an industry referred to as a ‘creative industry’. The music industry is a typical example of a creative industry:

“Creative industries supply goods and services that are broadly associated with cultural, artistic, or entertainment value” (Caves, 2000: 1).”

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23 property, refers to the difference in quality of the creative goods that are being offered. Every creative industry has known top rated artists (A-list artists) and artists how are less known, for they produce cultural products that are less outstanding in terms of quality (B-list artists). This property actually decreases the complexity in search for successful music. Established A-list artists ascertain a higher change for success because their quality is already known at a production company and has proven to be successful in the eyes and ears of consumers. It is therefore harder to sell new songs from artists than new songs from already known artists. The sixth property is called the ‘time flies’ property. According to Caves, this property entails the reliance of economic profitability generated by creative activities on close temporal coordination of production and the prompt realization of revenues. The seventh and last economic property of creative activities is the ‘ars longa’ property and refers to the (legal) durability of creative products. For example, the recorded music of a certain band may be played on the radio long after its actual recording has taken place. The radio station has to pay for each time they play a song of this bands recorded music. How long the original creator or performers can collect these royalties (which are rents to the creator of the music) is determined by the legal duration of the copyright. They design of Dutch copyrights has influence on the way music is consumed. Thus far, Dutch consumers can download music for free without legal consequences, but with financial consequences for the music productions companies.

Implications for Industry and Consumer Decision-Making

Particularly the properties of ‘nobody knows’ and ‘infinite variety’, and to some extent also the ‘ars longa’ property, are of relevance to the challenges of the music industry. These environmental aspects are exerting influence on consumer decision-making towards music consumption.

2.2.2 Cultural Industry Systems and the Music Industry Value Chain

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24 receive mass-media coverage. Examples of mass-media coverage are magazine reviews, radio-station airplay, and presence in retail outlets. And ideally, the products’ performer should appear on television (talk) shows and in newspaper interviews. Hirsch views the mass media in their gatekeeping role as a primary ‘institutional regulator’. The media is furthermore influencing the consumer decision-making process of people who want to obtain and listen to new music. The following section will zoom in further to get better understanding of the industry system that is the commercial music industry.

All of the organizations involved taking a product from creation to final consumption can be defined as the supply chain of an industry. The supply chain includes everyone involved in determining what customers are able to buy. Traditionally, the flow of products transfers from manufactures (the artists and producers), to wholesalers (distributers), through retailers, to the consumers. In addition, the supply chain usually also includes many facilitating organizations such as financial institutions, governmental organizations, transportation and logistics firms, advertising and research firms, and so on (Blackwell, 2006: 14). Mol and Wijnberg (2005), have described the history of the music industry by categorizing it in three waves. These waves, or phases, are caused and characterized by technological developments (innovation).

The first phase was the period prior to recorded music. In this period, the main music product was sheet music that could be purchased for reproduction in theatres or at home (Caves, 2000).

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25 The third and last phase is the period in which current industry is

now still in. This phase is typified by transition from analogue to digitized music. It started with the introduction of the compact disc by Philips and Sony in the early 1980’s, and continued later on with the introduction of mp3-players and the Internet. These developments, however, undermined the traditional competitive advantage that record companies used to derive from the economies in scale in the areas of recording, reproduction, and distribution (Mol and Wijnberg: 2005). The (value chain of) the music industry is still evolving, facing certain challenges that have been previously described like illegal downloading for example. With every wave,

the dynamics of the industry were altered. This in turn altered the ways in which people choose new music to listen to and how they consume it, by providing new information sources, distribution sources, retail concepts and listening equipment. This research focuses on the transitions that the Dutch music industry had made, and is still making, from phase 2 (characterized by analogue recording) into phase 3 (characterized by digitized recording).

This traditional value chain of the music industry as described above has been subject to change over time. Therefore, Styvén (2007) presents a more up-to-date value chain, including digital online distribution of music. This figure (see figure 4 below) also calls to point out the subject of ‘disintermediation’ and ‘re-intermediation’ that has occurred in the music industry. The box in the right, modern, value chain of ‘direct online sales’ serves as an example of disintermediation. In this way, traditional distribution channels aren’t necessary to bring music to the consumers. Artists who own the copyrights to their work can share their music by making digital files available on the Internet. Consumers can obtain without the interference of intermediaries such as record companies and physical record stores. In summary, new technologies with the communication and distribution potential such as the Internet have allowed for the emergence disintermediation and reconfiguration of relationships in the music industry (Young and Collins, 2010). ‘Re-intermediation’ refers to the opposite phenomenon re-including new intermediaries between artists and consumers. An example of this occurred when record retail stores initiated their own legal download services on the Internet.

Master’s Thesis Strategy & Innovation

Master’s Thesis

Environmental Influences on Consumer Decision-Making in the

Dutch Music Industry:

Processes of Selecting, Obtainment, and Sensemaking, that Influence University Students in

their Music Consumption Behavior

Abstract

Preface

Table of Contents

1.

INTRODUCTION:

Changes in the Music Industry

1.1

Introduction to the Topic

1.2

Relevance of the Subject

1.3

Previous Literature and Research Goal

1.4

Research Boundaries: Research Questions, and Relevant Definitions

1.5

Chapter Conclusion

2.

CONTEXT:

The Current State of the Dutch Music Industry

2.1

Industry Analysis

2.2

Creative Industries and Cultural Industry Systems