QUESTION 1 Draw the bricks and mortar value chain by which records, tapes and CDs are created,

distributed, and sold in retail stores. Use formats similar to Exhibits 2.1 to 2.5, and write a one-page description of how this value chain works and how each player makes money. Traditional Music Distribution Value Chain (Bricks and Mortar) Content Creation: Artists / Producers / Composers / Ghostwriters -> Production / Publishers (Recording) -> Manufacturers -> Sales & Marketing (Publicity) -> Distribution (Pack & ship) -> Wholesale (Sales to Retailers) -> Retailers (Sales to customers) -> Customers (End Users) The process begins with the talent pool which includes artists, producers, composers, ghostwriters and among others. These artists are then contracted to a international record label to produce music recordings such as Sony BMG, Universal, Warner and EMI are examples of large music companies that own smaller record labels. The rest of the record label industry is made up of independent labels such as Sub-Pop, Epitaph, and Muse Music. Record labels add to the artists product by augmenting it with marketing campaigns, promotions, concerts, and most importantly, access to and bargaining power with distributors. Artists often find it beneficially to leverage the resources of a record label in order to reserve shelf-space amongst retailers. Best Buy and Wal-Mart are the two largest brick and mortar (versus digital) music retailers. The big four own their own distribution channels while smaller independent record labels rely on separate systems of distribution. Finally, the music is finally delivered to the end-user or the consumer. Though there are many separate steps in the value chain, many record labels and music groups, including the Big Four participate in several of these stages. For instance, Sony BMG may enter into a contract with an artist, then publish, manufacture, and distribute that artists work. Please refer the diagram for more details. QUESTION 2 Develop an alternative value chain structure for this industry, and justify your recommendations. Use formats similar to Exhibits 2.1 to 2.5, abd write a one-page description of how this value chain works and how everyone makes money.

Digital (Online) Distribution Value Chain

Artists and record industry Content Creation: Artists / Producers / -> Composers / Ghostwriters ->Production Sales & Marketing (Publicity) Digital Content Creation Online Music Store Rights clearance and royalties Hosting in server /proprietary & digitised format Digital record encoding Jukebox sotware / iTunes / RealPlayer etc. Billing / Fee Digital Asset Management Network and Device Provider Delivery over networks -> Device: Handphone / iPod / Portable Device etc Digital Networks/Devices

Digital technologies in the music market will drive changes in the underlying market structure and value chain. The adoption and diffusion of digital music, reduction in distance between artists and consumers, wide distribution networks through the online channel, reduced costs of replication and production and copyright protection and piracy issues will affect the music market structure. For digital music, the creation and recording of music and the signing and promotion of artists represent the gathering and organizing steps. Selection and synthesis occur when the artists and/or record labels produce digital recordings. Distribution of information occurs over the Internet when consumers purchase digital music files from a distributor and download or stream content. Intermediaries are economic agents that facilitate transactions between suppliers and buyers. They set market-clearing prices, make purchase and sales decisions, manage inventories, supply information and coordinate transactions. Their role in the music market is changing as a result of the digital music format. Physical retailers are being replaced by digital music retailers. Manufactures and distributors are becoming obsolete as record labels, producers and artists can go directly to digital music retailers without producing a physical product, reducing the distance between the music supplier and the consumer. The added value to the music product from manufacturing and distribution is decreasing, but digital music retailers add new value. With Internet distribution and music piracy, they can now add value through marketing, promotions, copyrighting and licensing. There is also value added through enforcement of IP rights and piracy prevention. As a result, the channel power dynamics change. Plus, there will be new incentives as the roles of the players in the value chain shift. The changed value chain is likely to be affected by issues that relate to IP rights. Though digital music also has advantages over physical formats, the product is incomplete. Digital music does not include some of the important attributes of the physical CD. These include artwork, lyrics, liner notes, and additional content found in enhanced CDs (video games, desktop wallpaper, video clips). But these can be made available in a digital form for value chain distribution of digital music and the price digital music offer much cheaper compared to analogue music and easy excess to the consumers. Under the income derive from digital music which is the two main pricing strategies for digital music: pay per song download and subscription services, these also should include monthly subscription and pre-payment credit. There are many opportunities to explore consumers willingness to pay in the context of illegal file sharing and piracy in the digital music value chain. QUESTION 3 Explain and compare the role of operations in the two value chain structures you developed in question 1 and 2. There are two main value chains structures: Brick and Mortar Value Chain for Traditional Music Industry **Artists / Producers / Composers / Ghostwriters -> Publishers -> Manufacturers -> Distributors -> Retailers -> Customers Brick and Mortar Value Chain for Digital Music Industry **Artists / Producers / Composers / Ghostwriters -> Publishers -> Retailers -> Customers The principal physical distribution channel of the recording music industry value chain has been standardized with a final physical media as CD's among other products. Unfortunately with the Internet and digital technology the recording music industry has been one of the most affected by companies like KAZZA, Morpheus, Grokster, Gnutella, and the like, which are all based in peer to peer networks or just selling music without taking care of the copyrights. When a person buys a CD, that person is acquiring a product that represents all contributions of a chain that are part of the music industry. The price that is paid for a CD compensates all the contributors involved in the production of the CD. The value chain for the music recording industry consists in basically a few components: Artists or Singers Publisher / Recording: Studios such as Universal Music, Sony Music, Warner Music, BMG or EMI Manufacturing: CD Manufacturers Marketing: Advertisement, catalogues, tours, concerts, Interviews, etc Distribution: Transportation, Packaging from manufacturing to distributors. Indirect distribution through traditional channels: chain music stores and chain bookstores. Indirect distribution through nontraditional channels such as gift stores, independent business entity. Retailing: Carried by major label and internet superstores until products become popular with particular segments. It is important to know that there are other types of distribution channels like radio stations which use music to make profits. These companies are known as professional users of music and in order to use any kind of music they have to pay fees for doing so. In this way some of the factors that make part of the recording music industry value chain are facing decreases in their sales and revenues. According to the forecast of iResearch, the global digital music market will remain on the fast track, and the market value by 2010 is expected to hit a record high of USD12 billion. The current bullish global digital music market is attracting a flock of industry heavyweights. Backed by the success of its iPod music player and iTunes music store, Apples performance in the marketplace has been nothing short of spectacular, making it the envy of all its rivals. The software giant, Microsoft, has likewise thrown its hat into the competitive digital music arena by recently launching its MSN Music online music service. It further plans to establish an industry chain alliance, which will

be centered on Plays for Sure. As a conventional retailer, Wal-Mart has also taken a hand in digital distribution. Apart from these household names, a wide array of professional service providers, have also emerged in recent months to join the ever growing digital music competitive arena. Thus, one might say, that the digital music market is abuzz with various kinds of players. With the development of value-added telecom services, carriers are also beginning to tap into the digital music gold mine (market), and have quickly found their feet in this highly lucrative market with the introduction of their knockout product the Ringtone. According to the report, the revenue for mobile music alone, by 2009, is expected to reach USD 9.3 billion. So, indubitably, digital music will become a virtual gold mine for telecom carriers and the music industry. When compared with conventional music, as well as allowing people to listen to music on a trial basis and buy downloads anytime and anywhere, digital music also features greater pricing flexibility, a new sales model based on the sale of a single track, as well as a wide variety of value-added services. Hence, with the continuous development of the 3G & 4G network, the potential of the digital music market will certainly continue to be further explored and exploited. Herewith the summary of comparison the value chain for music industry: Elements Production Marketing Function Invention Understanding what the market wants, tuning Writing content style and content, presenting music to Performance the market through appropriate channels, driving Recording Editing demand Programming Member of the The artists themselves: The artists themselves: at the center of what Value Chain Central to production, May the fans want, and live performance is a key be involved in any or all of method of marketing the functions Producers: Live venues: same enhance the quality of the Radio: a business unto itself, but also a key created work through enabler for promoting music to the mass market. understanding of the Merchandisers: again, business into itself but creative process and tshirts and posters play a big role in marketing bringing together the right Print media: business also provides reviews and people to make it work. advertisements that drive consumer adoption Value added providers: and information make the content better Retail channels: in-store marketing can be very Songwriters: as important important as the artists in many Grassroots / street teams: increasingly cases Set musicians important Sound / studio engineers The labels: provide funding, and: The labels: provide A&R refine product to meet market demand funding to bring the right Marketing present message through elements together appropriate channels Advertisement, catalogues, tours, concerts, Interviews, etc Output A musical work of varying Targeted product, increased demand, informed degrees of quality market Digital Music Marketing Software enables production at lower costs and higher rate. More people can have access to more powerful tools increase quality of offering at a much lower final cost P2P: can enable nearly costless presentation of content to marketplace Portals and filters: similar to print media in the analog world but can have broader reach at much lower costs Filters and matching techniques (Amazon effect) can radicalize segment by dramatically increasing the quality of match between consumers and product and can be virtually costless at scale (see Launch.com) Streaming radio to the extent that programming is done by humans this is virtually identical to existing broadcast radio

Distribution Delivery of music to consumers

Consumption Playback, management

Retailers: shelf space, customer support, instore marketing, transactions (for now lets not worry about the credit card processing companies, POS software, etc) Distributors: move content to retailers Duplication Wholesalers Labels: fund a large part of this process A CD on the shelf, transactions to consumers Can enable costless copying and distribution of content to all consumers

CE: CD players, home stereo, etc. PC/IT: software players Automotive: as integrated into the car and other transportation

Consumption in multiple locations including traditional and digital Increased storage and portability virtually all the music you could ever want can be carried in the palm of your hand. Leverage commodity IT equipment for storage media Convergence makes everything into an audio device (cell phone, digital camera, coffee maker, etc.) Devices no longer tied to media or content

Effect on Analog Model

Costs of production reduced

Value of analog value chain segments can be completely eliminated in a strong DM scenario.

Everything except for retail undermined

Greater supply at higher levels of quality possible (particularly at the bottomend of the spectrum)

Under any circumstances, costs of marketing can be reduced considerably (and effectiveness of existing marketing channels and techniques diluted by alternative channels)

Retail at risk or at center depending on business model

De-prioritize value or even location of medium in favor of content

Digital Music Value Chain: Opportunities Total cost structure can be greatly reduced throughout the value chain which is interference from middle parties had been cut off. Currently it costs millions (assume $2.5 MM) to bring a CD through the value chain to retail. Eliminating marketing and distribution costs can more than cut this in half. Using Digital Media production tools, all but the highest levels of production can be achieved for a fraction of the price. In principle, cost-structure can be reduced to the amount necessary to provide incentive to human factors in production. Socio/Psychological factors aside, estimate that total costs could be reduced certain extent for a mid to high end album Enhanced marketing and distribution can dramatically increase both the quantity of music consumed as well as the quality of the experience. Expanded consumption mechanisms can increase the ways and locations for music consumption. Music everywhere. Digital Music focus on unique product quality which is personally satisfied or meet the needs of certain market consumers and increase in volume of sales. More people listen, download and share the music thru various devices so it increase total sales or revenue to the related industry. Digital Music Value Chain: Obstacles Cannibalization: Analoge Music is a billion-dollar industry. To the extent that Digital Music cannibalizes that industry, content owners will resist transition to Digital Music which is give the power of choose to the consumers. Although efficiency provided by Digital Music should increase margins for music distribution, that same efficiency could also dramatically decrease the size of the pie. Power Struggle: because they are the principal source of risk funding (and marketing), labels have a strong position in Analoge Music. Disintermediation or risk of disintermediation due to Digital Music will cause strong resistance (or modification of Digital Music) Copyright: existing copyright laws put emphasis on maximum exploitation of content, not on most efficient production and dissemination. This could prevent adoption of Digital Music. Digital Music: Conclusion and Recommendation An effort should be made to catalyze the key elements of Digital Music necessary to make it into a vital force. Any effort that requires participation from the existing major copyright holders will be suboptimal due to their vested interest in Analogue Music (and need to dominate any Digital Music value chain).

Recommendation that Digital Music focus on building a Digital Music market that is beside and alternative to the Analogue Music (and Analogue Music-derivative markets). This Digital Music market will attempt to start from the core strengths of Digital Music and build-out rather than using Digital Music as an add-on to the Analogue Music world. Specifically, this market will consist of the following: Key technologies for costless marketing and distribution of digital music. A critical-mass of content and consumer participation with this technology. An economic model targeting total value of compensation to the production elements in the value chain for the equivalent of an "album" at some degree of scale. As comparable of value chain in music industry herewith the different and similarity of the both products in the music industries and the change of business structure in the global era. PLAYER Artist CONVENTIONAL VALUE FLOWS Music composition (creativity) Recording of music Performances and appearances Copyright enforcement Produce, mfg. of recorded music Distribution, mktg., promotion Limited intellectual property Rights enforcement DIGITAL MUSIC VALUE FLOWS Composition, performance (creativity) Recordings, performances, appearance Production and distribution arrangements Copyright enforcement Marketing, promotion, advertising POWER CHANGE More control of production, distr. Potential increase in profits Decreased copyright protection Loss of control over production and distribution Potential decrease in profits Increase control over the legal distribution of digital music

Label and Production Company

IP Rights Enforcement Body

Intellectual property rights Piracy prevention Prosecution of music

Traditional Retailer Digital Music Retailer

Distribution to customer Advertising None

piracy cases None Distribution to customer Advertising Services (recommendations, search, etc.)

Loss of customers/sales Growth of digital music market Potential increase in profits Increased competition New supply channel More product choices More power over prices

Consumer

Purchase music in physical format

Choice: purchase physical format or digital format or pirate digital format