The Digitization of the Recorded Music Industry: Impact on Business Models and Scenarios of Evolution

Marc BOURREAU*, Michel GENSOLLEN* and Franois MOREAU**

* Telecom ParisTech, Department of Economics and Social Sciences, Paris, France. ** Conservatoire National des Arts et Mtiers Laboratoire dEconomtrie, Paris, France.

Abstract. In this paper, we provide scenarios of evolution for the recorded music industry. These scenarios are based on two dimensions. First, we identify two strategies of revenue extraction in a digital world: either through the sale of content, which requires a direct or indirect protection of music files, or through the (almost) free distribution of content and the sale of complementary goods or services. Second, we argue that the informational structure of the industry is evolving from a situation in which works are selected before the production phase and promotion is centralized, to a situation in which there might be no selection and/or promotion is decentralized. We discuss the specificities of each scenario and provide case studies of emerging business models that fit with the scenarios. We also provide a test of the empirical relevance of our scenarios based on a survey of a sample of French record companies.

JEL codes: L2; L86; Z1. Keywords: recorded music industry; digitization; business model; scenarios.

1 Introduction
The recorded music industry is undergoing a profound transformation, generally referred to as the digital revolution (see, for instance, Peitz and Waelbroeck (2005); Bourreau and Gensollen (2006); Curien and Moreau (2006)). Over the last ten years, the digitization of content and the development of the Internet have not only reduced the reproduction costs of content dramatically, but have also had strong effects on every stage of the industry, from the creation to the promotion of music. Up until now, the economic literature on the digitization of the music industry has focused on the relationship between piracy and the decline in sales.1 Until the end of the 1990s, piracy which consisted mainly in bootleg CDs and private copies on blank CDs was not considered as a real issue. Bootleg CDs had a significant effect only in developing countries with insolvent demand, and private copying did not prevent the major music markets from enjoying strong growth. Silva and Ramello (2000) even found some virtues in piracy, arguing that it would allow consumers in developing countries to familiarize themselves with western music, which in turn would make these markets more profitable once developed. According to these authors, Hong Kong, Thailand and Bulgaria have already followed this path. For about a decade, the development of online piracy has challenged these views. Since 2000, the number of music files shared and downloaded on peertopeer networks has been negatively correlated with music sales in the main world music markets. Some authors have argued that there is actually a causal effect (see, in particular, Liebowitz (2006a) and (2006b)), while others have exonerated piracy of all responsibility in the music sales crisis (OberholzerGee and Strumpf, 2007), but many authors draw more cautious conclusions (see, for instance, Blackburn (2004), Hong (2004), Michel (2006), Peitz and Waelbroeck (2004), Rob and Waldfogel (2006), and Zentner (2006))2,3. Given this potential link between piracy and sales downturn, some papers have investigated the efficiency of policy measures aiming at discouraging piracy, namely lawsuits and the implementation of DRM4 systems that seek to prevent offline and online copying. Bhattacharjee et al. (2006) show that though lawsuits tend to reduce the activity of the biggest filesharers (much less so for smaller ones), the availability of music files on the Web is not significantly affected. Furthermore, the experimental results obtained by Maffioletti and Ramello (2004) suggest that if lawsuits can effectively lower the rate of copying, they do not necessarily stimulate legal sales because of the low willingness to pay for legal products. Liebowitz and Watt (2006) highlight that DRM systems are controversial because they may interfere with behaviors that were previously allowed (such as fair use). They also underline that DRM systems could generate an inefficient technology race between hackers (who try to break DRM protections) and content providers (who try to reinforce these protections).

According to the Recording Industry Association of America, physical sales of recorded music experienced a 43% fall between 1999 and 2007 (the decrease is about 29% if digital sales are included). 2 In a nutshell, downloads on peertopeer networks can have two potential effects on demand for legal music: a substitution effect, which leads to a reduction of legal sales, and a sampling effect, which can lead to the opposite result. Thanks to the zero cost of duplication of digital files, a consumer can sample new music on peertopeer networks, also at almost zero cost, before deciding whether to purchase it. Peitz and Waelbroeck (2006) show that this sampling effect can have a positive impact on music sales. However, several conditions have to be fulfilled: the vertical differentiation between peertopeer files and legal music must be high enough and consumers tastes heterogeneous enough. 3 Note that consumer interest in new forms of entertainment (DVD, video games, etc.) could explain the shift in household consumption away from recorded music and towards these new leisure activities. However, Boorstin (2004) and Liebowitz (2004, 2005, 2006a) for the United States, and Bourreau and LabarthePiol (2006) for France, all show that the decline in record sales cannot be explained by this increased competition from digital entertainment products. 4 Digital Rights Management (DRM) is an umbrella term covering all technologies used by publishers or copyright holders to control access to and use of digital content or computer material, as well as the restrictions associated with specific cases of digital works or systems.

Though the relationship between piracy and the music sales crisis has attracted a lot of research, very few papers have taken a broader view, to analyze the effects of digitization on every stage of the recorded music industry, from the production of music to its promotion.5 In the present paper, we aim to fill this gap by identifying and discussing the main effects of digitization on the industry. We build upon the economic literature on the development of decentralized promotion and the business models of digital goods to discuss which business models might be possible in the music industry. From this analysis, we then deduce potential scenarios of evolution for the music industry. We discuss the specificities of each scenario and provide five case studies of emerging business models that fit with the scenarios. We also provide a test of the empirical relevance of our scenarios based on a survey of a sample of 157 French record companies, that was conducted in 2006. Using some opinion questions from the survey, we show that our scenarios are consistent with the opinions of the labels on the evolution of the recorded music industry. Our paper is related to the digital economics literature. This literature suggests that digitization has two main effects on markets. Firstly, with the internet, decentralized promotion (wordofmouth) has been developing to the detriment of centralized promotion through the mass media (Godes and Mayzlin, 2004; Chevalier and Mayzlin, 2006). Decentralized promotion is actually the corner stone of the Long Tail theory6 of Anderson (2006) who conjectures that the digital revolution will benefit more obscure artists (niche products) rather than stars (mass market products). Secondly, digitization challenges traditional business models. In creative industries, intellectual property rights (IPR) represent a legal framework that ensures creators a fair return on the commercial exploitation of their production. In particular, in the recorded music industry, IPR protect both the author and the producer who makes commercial copies of the original from free riders who could otherwise duplicate musical works that have already encountered success, thus avoiding both the fixed cost of creation and commercial risk (Landes and Posner, 1989). By correcting this market failure, IPR increase welfare. However, in the digital era, copyright might be difficult to enforce, and new business models might be called for. The paper is also related to the broader literature on the economics of the music industry and cultural goods. This literature focuses on product diversity issues and the superstardom theory that seeks to explain the highly concentrated distribution of sales among artists. Rosen (1981) argues that small differences in talent are amplified, whereas Adler (1985) stresses that imitation among consumers could explain the rise of stars without talent. Hamlen (1991, 1994), Chung and Cox (1994), Strobl and Tucker (2000) and Krueger (2005), among others, have conducted empirical tests of these conjectures for the music industry. Other authors have dealt with the issue of music production diversity and examine whether we can observe a trend toward the homogenization of musical production and a negative impact of market concentration on diversity.7 Beyond these works, which all focus on the measurement and the determinants of product innovation, some researchers have analyzed the innovation process (the selection of talents) in the music industry and shown that major labels develop talents that are initially discovered by small independent labels (Burke, 1997; Ordanini, 2006). However, none of these works analyze the impact of a radical innovation digital technology on the business models of the music industry players, which is the focus of our paper.

One notable exception is Handke (2006). Using data on the German music industry, he argues that the simultaneity of the decline in music sales and the entry of new record companies into the market suggests rather a creative destruction process than a plain destruction. 6 The expression Long Tail comes from an article by Chris Anderson, published in Wired (October 2004, http://www.wired.com/wired/archive/12.10/tail.html). He takes Amazon.com as an example and observes that commercial web sites, because they offer greater diversity than physical shops, get most of their turnover from a large number of low demand items rather than a few bestsellers, as was traditionally the case. In particular, he conjectures that the distribution of sales according to rank follows a power law rather than an exponential law. 7 In particular, see Peterson and Berger (1975) and (1996); Burnett (1992); Lopes (1992); Alexander (1994, 1996) and Dowd (2004).

Finally, this paper is also related to the literature on business models. Chesbrough and Rosenbloom (2002) emphasize that while the term business model is often used these days, it is seldom defined explicitly, although it is built, among other things, on the concepts of value chain (Porter, 1985), which explains how value is created by a firm and what provides the source of its competitive advantage, and of value creation (Amit and Zott, 2001). Chesbrough and Rosenbloom (2002) have been among the first to provide a framework to define and analyze the business models of firms. According to these authors, the functions of a business model are to: (1) articulate the value proposition, that is, the value created for users by the offering based on the technology; (2) identify a market segment, that is, the users to whom the technology is useful and for what purpose; (3) define the structure of the value chain within the firm(s) required to create and distribute the offering; (4) estimate the cost structure and profit potential of producing the offering, given the value proposition and value chain structure chosen; (5) describe the position of the firm(s) within the value network linking suppliers and customers, including identification of potential complementors and competitors; (6) formulate the competitive strategy by which the innovating firm will gain and hold advantage over rivals. Another definition, based on an extensive survey of the relevant literature, is provided by Osterwalder et al. (2005) who define a business model as a tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams. As noted by Chesbrough and Rosenbloom (2002), the rise of ecommerce, with its myriad of new firms eschewing conventional ways of doing business, has thrown a spotlight on the topic, which is widely discussed by practitioners and investors, but not yet prominent in academic discourse. This paper aims to fill this gap in the case of the recorded music industry, following pioneering works from Varian (2005), Liebowitz and Watt (2006) and Slater et al. (2005). The rest of the paper is organized as follows. In Section 2, we present the variables that shape our scenarios of evolution of the recorded music industry. In Section 3, we describe five contrasted scenarios of evolution of the industry, and we provide examples of emerging business models that fit with these scenarios. Section 4 provides an empirical validation of the relevancy of our five scenarios based on a survey on 157 French music labels. Section 5 briefly concludes.

2 Variables That Characterize the Recorded Music Industry

Two variables will shape our scenarios and their consequences in terms of social welfare: (i) the technoeconomic nature of digital files, which transforms the valorization of music; (ii) the mode of matching the supply and demand of music, because, as music is an experience good,8 potential consumers must be informed and consumption must be initiated by a complex system that is currently being transformed. 2.1 The type of valorization of digital files 2.1.1 The characteristics of a digital good Nonrivalry and durability. A digitized content is reduced to a digital file (a sequence of octets) that is reproducible at almost zero marginal cost and very low average cost. Because copying equipment is a standard builtin feature of most personal computers, digitized music has become a technically non rival good: a file can circulate between users at very low cost. The spread of the internet, particularly

An experience good is a product or service whose characteristics, such as quality and price, cannot easily be observed in advance, i.e., before consumption (Nelson, 1970).

the highspeed network, and the fall in the price of computer equipment have thus enabled universal access to music, as they have for videos. In the case of digital goods, we must be careful to distinguish between nonrivalry and durability, two different characteristics that are sometimes confused, because the digital rights management of musical works often seeks to deal with the two questions at once. A good is durable if it is not destroyed in the act of consumption, or does not even have its technical characteristics altered. Durable goods are, therefore, similar to capital goods, which are not used up over the period under consideration.9 There is little doubt that nonrivalry and durability represent a gain in social welfare. But this new abundance must still be organized, because it is, by its very nature, opposed to the traditional functioning of markets, defined around physical supports (for the content) and mass media (for metainformation, i.e. the information consumers need about the contents available and their quality). To maintain the value of content, one of the first reactions was to lock up files using technological measures of protection, so as to limit their copying and/or use, either over time or in the number of plays. Thus, technology is put to work to reduce the advantages it has spontaneously provided, so as to keep business models unchanged. Technical or economic nonrivalry? It is important to draw the distinction between technical nonrivalry and effective nonrivalry, a distinction that also concerns durability. In certain cases, a good may be copied and circulated without cost, or not be used up in the act of consumption, and yet maintain a nonzero market value. A classic example is that of a piece of information that represents a claim on a rival good; this information clearly has the value of the rival good.10 Broadly speaking, we must distinguish between technical nonrivalry and consumption externalities: a piece of information, even if it is nonrival, may be such that its consumption by some consumers has an effect on the utility of its consumption by others. In this case, a consumer who possesses information with a negative externality11 will not be encouraged to disseminate it. In the domain of cultural goods, consumption externalities are usually positive: a consumer will not see his utility diminish when he makes a work available to others and widens its consumption. Quite the contrary; firstly because we may take pleasure in sharing something we like with others, but also because by contributing to the success of a work, we increase the probability that more works of a similar nature will be composed and distributed. However, if the consumption of cultural goods is conspicuous, we can imagine that consumers might not be motivated to copy and circulate the files corresponding to this type of consumption. The circulation of a nonrival good may have no detrimental effect on the person sharing it, but it is also necessary for this good to represent a certain utility for the other consumers. For in some cases, a good may be addressed, in the sense that it has been individually tailored to suit one sole user. In the realm of everyday goods, a pair of glasses is a good example of an addressed good, a

Note, however, that capital goods are subject to wear and are costly to maintain, whereas digital goods are not. It is true that fast technological progress leads to obsolescence comparable to a kind of wear: file supports and their corresponding players go out of fashion so quickly that a digital record library has to be recopied from time to time to keep up with the advances in computer equipment. 10 Raymond (1999) expressed this concisely in The Magic Cauldron, a text on free software where he stresses the meaning of the word free (open, but not necessarily free of payment): There is another myth, equal and opposite to the factory model delusion, which often confuses peoples' thinking about the economics of opensource software. It is that information wants to be free. This usually unpacks to a claim that the zero marginal cost of reproducing digital information implies that its clearing price ought to be zero. The most general form of this myth is readily exploded by considering the value of information that constitutes a claim on a rivalrous good a treasure map, say, or a Swiss bank account number, or a claim on services such as a computer account password. Even though the claiming information can be duplicated at zero cost, the item being claimed cannot be. Hence, the nonzero marginal cost for the item can be inherited by the claiming information. 11 A good presents a negative (resp. positive) externality, if the utility that a consumer derives from consuming the good decreases (resp. increases) when other consumers also consume the good. Negative externalities can arise, for example, when a good is subject to saturation, like a road network during the rush hour.

good for which one need have little fear of theft, and for which no secondhand market can be organized. In the case of nonrival goods, there is little utility in copying or circulating works that are addressed to one specific consumer or, to be more realistic, to a very limited audience. 12 The markets for these goods are less susceptible to circumvention and the nonrivalry of such works can be considered of little consequence. Technical durability can also be countered by negative externalities or specific addressing, in which case these are temporal externalities or addressing. Some goods lose part of their utility after consumption, while others keep it all: films, for example, are usually only seen once, although some consumers do take pleasure in watching a film more than once. In the case of music, on the contrary, the utility of listening to the same work can remain at the same level a long time or even increase. Strategies of temporal addressing can diminish the interest of this basic durability; this is the case when a good only has utility during a very short period of time, or up until a certain date (the fashion phenomenon, for example). Table 1 presents all the possible digital goods, indicating, for the two criteria considered (non rivalry and durability), the situations where the service offered by technological progress is countered, either by legal and technological means such as DRM or by strategies involving the economic nature of the good.13
Table 1: Diversity of digital goods Legal and technological protection Economic protection Nonrivalry Durability Zerocost copying DRM of copying loss of interoperability Nonwear DRM of expiration Personal addressing: niche Externalities: conspicuous consumption Temporal addressing: fashion

2.1.2 Generic strategies of value extraction From this, we can deduce the main generic strategies that companies can deploy to valorize content in a digital environment: (1) Direct protection of digital content by DRM of copying and/or expiration. DRM protection restores the rivalry of cultural goods. Record companies can therefore offer a perunit price for music titles or a subscription and rely on copyright enforcement. This strategy corresponds to the Digital Media Store model of Slater et al. (2005). Einhorn and Rosenblatt (2005) show that DRM systems might also allow content owners to design menus of services and to charge different prices to consumers. (2) Indirect protection of content by various procedures involving the very nature of the works distributed. Frequent renewal of content. Effects of fashion can be an effective means of making cultural goods transient, particularly in a model of mass media promotion. It should be noted, however, that music files, like videos of films or television series, can be downloaded from peertopeer networks very soon after their release, which limits the direct scope of such strategies of renewal. And yet, exchanges on such networks may eventually become necessary for the triggering of phenomena of fashion. Selling coherent sets of goods. This involves defining either a complex product made up of a package of goods (a bundle) or a homogeneous source of successive goods. In the latter case, each good has a fairly low utility when taken separately, and the consumer must follow the whole set of productions to benefit fully from the utility offered by the source. In the domain of videos, this is the

12 13

Varian (2005) gives the example of personalized newspapers with specific items for each consumer. On the business models that can be envisaged for digital goods, see also Varian (2005) and Liebowitz and Watt (2006).

case for those series which, in the United States, can spread over several dozen hours for each season, and which, if successful, can be renewed season after season (thus gaining two orders of magnitude, growing from the product twohour film to a televised series of two hundred hours). In this case, the piracy of certain episodes, far from harming the valorization of the source, favors circulation of the different episodes; whence the ease with which these files can be found on peer topeer networks. In the case of music, such a strategy consists in offering global products, either by subscription models (the potential of which is recognized as enormous by the International Federation of the Phonographic Industry (2008)) or by collection (a solution already implemented in the predigital era, e.g. offers like the Complete Works of Mozart 170 CD box set). Some independent music labels seek to build up a coherent production in this way, although it may comprise very different performers and genres. These labels hope that customers will end up basing their purchasing decisions on an overall appreciation of the labels output, rather than on the names of specific artists. For the record, we can note two types of strategy that are already widely used in the music industry: niche strategies that consist in the most precise possible adaptation of products to suit a very narrow public (on the internet, local niches can quickly be organized in extended communities), and strategies of development of conspicuous products. (3) The transfer of content value onto ancillary consumptions: Strategy of transferring value onto rival goods. The aim of such a strategy is to link free content to rival goods that are useful, or even essential, for full enjoyment of the product. In the case of music, presentation texts, librettos, scores, video clips, etc. can play this role and provide a physical support to the purchase of open content. Broadband internet access services, music players (digital mobile music players, mobile phones, etc.) are also linked rival goods. This corresponds to Varian (2005)s strategy of selling physical or information complements. Strategy of transferring value onto metainformation. In this case, the aim is to exploit the fact that cultural goods are experience goods and that, even if the content is now technically nonrival, the associated metainformation can be addressed to one particular consumer in the case, for example, of personalized recommendations from an online shopping site. However, by its very nature, metainformation does not easily lend itself to exploitation of consumers willingness to pay: the provision of metainformation requires trusting exchanges and personal knowledge that sits uneasily with such commercial considerations. In certain scenarios, we can imagine meta information not being limited, for a consumer, to the information needed to discover a cultural good that he likes, but that it could be extended to include the information needed for full appreciation of the product, or maybe even to adapt it to his particular tastes (the formation of cultural capital). Other forms of transfer (see Slater et al. (2005), Varian (2005) and Liebowitz and Watt (2006)): selfadvertising (a freely downloaded song can be an advertisement for a live concert, etc.); standard advertising (free music files which include advertisements); media tax: the government imposes a tax on some physical goods or services that are complements to the music files and often used for copying (blank CDs and DVDs, MP3 players, computer hard disks, Internet access subscriptions, etc.);14 ransom or tipping: consumers make voluntary contributions to cover the fixed cost of production of the content. In the constitution of the scenarios of evolution for the industry, we shall focus on two main strategies for the valorization of content: strategies of protection, where we distinguish between scenarios of technical protection and economic protection, and strategies of transfer, where we distinguish between transfer onto rival goods, transfer onto metainformation and other forms of transfer. We shall refer to strategies of protection as P.v, denoting that these are strategies of high price and low sales volumes, and to strategies of transfer as p.V, denoting that these strategies rely on the sale of music at a very low (or even zero) price (which entails a high volume of music
14

See also the seminal contributions of Netanel (2003) or Fisher (2004), and Curien and Moreau (2007) for an analysis of the way the complementarity between digital content and access can be internalized.

consumption), and an indirect collection of value, through advertising, for example, in the case of what are called twosided markets. 2.2 The role of metainformation One particularity of cultural goods, and especially music productions, is that supply and demand do not meet easily in a standard market; they depend on a complex guidance system that must prepare their qualitative adaptation. In a way, supply and demand only react with each other in the presence of catalysts, with the help of a variety of agents who inform, prepare, choose, acculturate, select, etc. The equilibrium of the market does not depend on the goods available and the utilities of consumers so much as on a technoeconomic system, designated by the term recommendation, that enables an adaptive supply and a developing, evolving demand to actually meet. The system of recommendation can be characterized by the crossing of two variables. The selection of works. This takes place before the production phase. It involves professionals, usually belonging to the A&R (Artists and Repertoire) department of a label, either sorting through finished works to pick those worth producing or guiding artists during the process of composing. It is often claimed15 that it is independent labels that actually discover new artists or new music, because they are closer to the artistic scene and because their decision process is more efficient, due to their light hierarchical structure. Whereas, thanks to their worldwide distribution networks and their large marketing and advertising resources, major labels are more effective in developing star artists. In what follows, we shall assume either that the phase of selection, carried out by professionals and experts, plays an important role or, on the contrary, that there is no professional system of selection, or one that only plays a minor role. The promotion of works. This takes place after the production phase. It involves making the works known to the public and, in a certain way, producing the demand corresponding to the supply. We shall assume that promotion is either centralized (promotion by the mass media such as radio and television), or decentralized (promotion by wordof mouth, direct or through the internet). Wordofmouth (WOM) has been for long recognized a as an efficient communication channel to influence purchase decisions.16 Direct interactions across consumers through WOM are indeed important in music consumption. However, Peitz and Waelbroeck (2005) cite a survey that suggests that radio remains the main promotion tool for music; 75% of music consumers claim that their music purchases depend on what they hear on the radio, whereas only 46% claim that they are influenced by their friends or relatives when deciding whether to buy a CD. Alexander (1994) argues that promotion and marketing expenditures by major labels are indeed used to raise their rivals costs and are one of the main determinants of the high market concentration that characterizes the music industry (the four major labels account for approximately 75% of the worldwide sales). For instance, while payola17 facilitated the rise of rock n roll in the 1950s (Coase, 1979), it has subsequently been used by the majors to exclude independent labels from radio programs (Dannen, 1990). Online WOM could challenge the preeminence of the promotion by the mass media in the music industry. As Chevalier and Mayzlin (2006) underline, online user reviews have become an important source of information to consumers, substituting and complementing other forms of firm toconsumer and offline word of mouth communication about product quality. Studying the effect of consumer reviews on sales of the two leading online booksellers, Amazon.com and BN.com,

See Burnett (1996) and Burke (1997). See, among others, Katz and Lazarsfeld (1955); see also Godes and Mayzlin (2004) for a general survey on WOM and its impact on sales and product adoption and diffusion. Katz and Lazarsfeld (1955) showed that wordofmouth was the single most important source of information for some household items. Kotler (2000) quotes a survey covering 7,000 consumers in seven European countries, of which 60% said they were influenced by family and friends when considering purchasing a new brand. 17 Payola consists in payments or other inducements by record companies for the broadcast of their recordings on music radios.
16

15

Chevalier and Mayzlin show that online reviews do indeed have a causal impact on consumers purchasing behavior at the two Internet retail sites. Four metainformational structures emerge from the coexistence of various modes of selection of talents and of promotion (see also Table 2): The Star System model combines centralized promotion by the mass media with professional selection, by independent labels, for example, which can ensure both diversity and quality. This is more or less the current situation, although there is a tendency to evolve towards the Push model. The Push model combines an absence of selection by A&R departments of majors or independent labels who are supposed to be able to distinguished talented artists among all wannabe artists with centralized promotion. This model is often associated with an American Idol model, characterized by a general fall in quality, uniformity of products, the formatting of tastes, etc. The Push model is adapted to fashion goods, the utility of which does not depend on their intrinsic quality and for which no selection is really necessary. The mass media have proved to be effective in manufacturing and imposing transient stars and promoting standardized works through repeated broadcasting. The Structured Pull model, similar to the current model of independent labels, is characterized by decentralized promotion, the provision of personalized advice, e.g. on web sites that sell cultural products (like Amazon), by online wordofmouth, in other words a fragmented system of critical review (by means of blogs, for instance) that enables the emergence of cultural goods adapted to small groups. Nevertheless, some standards of quality are still achieved through professional selection, particularly technical standards. This model allows, notably through the internet, a more diversified treatment of metainformation than that of the mass media; it also respects existing systems of valorization of content by rival supports. The Free Pull model is based on the possibility for artists to enter into direct contact with their public, without either professional selection or centralized promotion. For some observers, this is a utopian vision, and mediation that will no doubt be little different to current forms will soon become established; thus, on the internet (blogs, sites like MySpace), visits by web surfers are concentrated on the bestknown artists, precisely those who enjoy massmedia promotion. For others, even if the internet is itself a medium and therefore operates a certain selection in what it transmits, this selection is different to that exercised by the mass media: from a static viewpoint, it allows greater diversity (what is referred to, in this context, as the Long Tail) and from a dynamic viewpoint, it allows production to be recomposed according to reactions to the supply.
Table 2 The four metainformational structures Mode of selection Selection by professionals Centralized promotion Decentralized promotion Star System Structured Pull No selection Push Free Pull

3 Scenarios of the Evolution of the Recorded Music Industry

This section presents five possible scenarios of evolution of the recorded music industry. Firstly, we expose the logic of constitution of these scenarios, which relies on the crossing of the four meta informational structures previously identified with two alternative modes of revenue extraction in the digital world. Secondly, each scenario is detailed and illustrated with an emblematic case study.

3.1 Logic of constitution The scenarios for the evolution of the recorded music sector present a dual transition for the coming years: the change in the support for content, with digital support gradually replacing physical support, and the transformation of systems for the processing of the metainformation required for the development of matching demand and supply, with the internet enriching the mass media and transforming their logic of centralization. The two crucial variables on which the building of scenarios relies are firstly, the way the value of musical content is captured (either by protection or by transfer), and secondly, a variable expressing the evolution of the system of recommendation, i.e. the system of circulation of meta information (see Table 3). Today this is predominantly the Star System, and it could evolve towards one of the other three states, giving us three types of transition, although these are probably something of a caricature: from the Star System to Structured Pull; in this case, the current model of the independent labels imposes itself; from Star System to Push; the recorded music market is theoretically open to all, but in reality, in the Push model even more than at present, very few artists benefit from the media promotion necessary to become known to the public; from Star System to Free Pull; the record labels at least in the form in which we know them today gradually disappear, to be replaced by a totally decentralized system for putting artists and their publics in relation with each other.
Table 3: Dynamics of business models in the recorded music industry in the digital age Selection No selection Centralized recommendation Star System

? ?

Push

?
Decentralized recommendation Structured Pull

Free Pull

By crossing these variables, we obtain five contrasting scenarios (see Table 4). The sixth possible scenario has been left out, because it is highly unlikely that the protection of musical content could ever be compatible with the "Free Pull" system, which means the lack of selection of artists by professionals of the music industry. In such a scenario, that we could call "Amateurs", artists would try to sell their recorded music outside any professional circuit.
Table 4: The five scenarios of evolution of the recorded music sector Method of value extraction P.v p.V Star System towards Push Hit and Run Jingle Star System towards Structured Pull Happy Few NetLabel Star System towards Free Pull Consumartist

These five scenarios correspond to the growing involvement of consumers in the production of music. The transition from value extraction by protection to value extraction by transfer liberates content and permits greater freedom of use by consumers, particularly in terms of interoperability, copying and exchange. In addition, the transition from Push to Structured Pull provides consumers with a role as the producers of metainformation, while the transition to Free Pull gives them a certain degree of responsibility over the very production of content.

10

3.2 The "Hit and Run" scenario 3.2.1 Main features The actors seek to maintain, for as long as possible, the predigital business models. They prefer to maintain the method of value extraction from physical goods (like CDs) or from digital files. As highlighted by Hamaide and Wauthy (2004), the goal of business models that fit with the hit and run scenario is to generate revenue from content before it becomes a fully public good because of piracy. The aim is to sell several hundred of copies of an album not in one year but in a few months, through a massive promotion campaign, in order to very quickly skim the market. The hit and run scenario prolongs the existing situation, without really taking into account the new opportunities offered by digitization. Consequently, as in the age of vinyl records and their costly distribution, the supply seeks, over the shortterm, to follow a demand that has been created or has already been expressed, in order to minimize the financial risks of launching an original work. The timidity and lack of originality of the production are justified by emphasizing the objective of satisfying the tastes of the consumers. In this scenario, the diversity supplied is fairly mediocre and could even be lower than it is now. In the music industry, as in many other creative industries, the nobody knows rule holds (Caves, 2000). It is indeed very difficult to discover the drivers of commercial success. Firms are thus encouraged to produce a large number of artists, which is cheap because the bulk of fixed costs (promotion, distribution) is incurred by the album after recording, and to promote a selection of those which appear to match the demand (Burnett, 1996). The few successful albums fund the numerous failures. Two factors would appear to favor a strengthening of the industrial concentration of the sector while weakening the position of the independent labels. Firstly, the gradual disappearance of physical sites selling and offering information about musical novelties, especially independent recordsellers. Secondly, the persistency of centralized promotion through TV and radio that reduces the opportunity for independent labels to make their artists known to consumers. 3.2.2 An emblematic example: MyMajorCompany MyMajorCompany (MMC) is an independent label founded in December 2007 whose business model, close to that of firms like Sell A Band, is the following. MMC offers to promote unsigned artists on the mymajorcompany.com website and let the consumers decide which artist deserves to record a CD by asking them to invest a small amount in the production of her album. Once 70,000 have been collected from internet users, MMC signs up the artist and produces her album. As acknowledged by one of its founders, Michael Goldman, MMC's ambition is not to abandon the traditional system of promotion used by the majors, which he still considers to be the most effective. Once the album of an artist has been produced, a classic marketing plan is developed, a video is sent to TV Networks and the single is sent to radios to get airplay. In addition, in April 2008, MMC signed a distribution deal with Warner Music, one of the four major companies in the music industry. Hence, MMC has a dual business model. On the one hand, it relies on the Internet to ensure that consumers themselves not only select the artists to be produced (thus reducing, for MMC, the likelihood of a failure) but also finance production (which lowers the magnitude of any failure). On the other hand, it relies primarily on traditional tools to promote and capture value. Promotion remains centralized and value is still extracted from physical or digital content. MyMajorCompany is therefore an emblematic example of the hit and run scenario. The example of the success of the French artist Grgoire is particularly illustrative of the dual nature of this model. Appearing in early 2008 on the mymajorcompany.com site, Grgoire was signed two months later by MMC after convincing 347 surfers to bet an average of 200 on his success. The album recording was completed in June. Then MMC started a 200,000 marketing campaign and Grgoire received intense broadcasting on radio and TV, with a peak when the album
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was released in September 2008. Four weeks before the albums release, Grgoire ranked only 25th in the chart of the most broadcast artist on radio and only 87th on TV. The week the album was released, these two rankings were respectively 5th and 8th.18 He thus entered immediately into the top 10 albums in France. By the end of 2008, thanks also to the distribution expenses paid by Warner Music, Grgoire had sold about 250,000 albums. The analysis of the sharing of gross revenue ( 2.5 million net of retail margin and taxes) between the different partners, shows the similarity of this model with the one classically used by the majors. 53% of revenue goes to Warner Music. This figure reflects the importance of the distribution network provided by a major company in the success of an album, since using an independent distribution network would be less costly but would not ensure such a wide distribution of the CD, with good exposure in stores, and of the digital album on the main legal digital platforms. 14.1% goes to the surfers who invested in the album production (which should be considered as a fair remuneration, given the risk they incurred), 23.5% goes to MMC and 9.4% to the artist (which corresponds to the average remuneration he would have got from a major company). Early in 2009, the former CEO of Endemol took a 49% stake in MMC (valuing MMC at 10 million) with the ambition to create synergies with other assets he owns in the audiovisual sector. He is said to be thinking of creating a TV program based on the production of an artist by surfers and/or viewers. This would anchor MMC even more firmly in the centralized promotion model. 3.3 The jingle scenario 3.3.1 Main features In this scenario, as in the previous one, promotion is still centralized and the selection of artists by professionals is abandoned. However, the players do not attempt to collect the value created by recorded music through the sale of protected content. They consider that it is not desirable to check piracy, and that the negative effects of DRM on the development of the market are more important than their positive protective effects. Recorded music is then distributed freely and income is captured in other markets, the growth of which is boosted by the fall in the price of content. Within the context of an economy of attention,19 music acquires most of its value from mass media promotion. This value can be extracted either from spinoffs, such as mobile phone ringtones, or from advertising. Within the context of the jingle scenario, the diversity supplied at any given moment is very low, although the supply is likely to be renewed quickly. In this respect, we must distinguish between the renewal of songs and the renewal of genres. Works promoted by the mass media are quickly renewed, due to the effects of fashion, but genuinely new genres only emerge with great difficulty. With the jingle scenario, the key players are the mass media, which could even create their own labels or their own marketing sites, and the major record labels. In a scenario where the consumption of recorded music is dictated by the mass media, the biggest players have a strong advantage, because they are the only ones to have access to effective promotion. They are also in a position to negotiate advantageous contracts with partners in the spinoff markets. The market would therefore become more concentrated and independent labels would find it more and more difficult to obtain fair contracts. The changes could be even more profound, if some players in the markets for broadband access were to adopt strategies of vertical integration into the domain of musical production, as they have already done in the domain of distribution.

Source: Yacast An economy of attention is one in which goods and services acquire value because the publics attention has been drawn to them (Simon, 1971). They partly render this value by, in turn, drawing the publics attention towards spinoff goods and services.
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3.3.2 An emblematic example: Star Academy Star Academy is a TV reality show produced by Endemol, a world leader in entertainment programming. It was first broadcast in France, in October 2001. This reality show is emblematic of the jingle scenario, because it relies on centralized promotion (through TV), on the lack of selection of artists by labels (instead the wannabe artists are directly selected by consumers) and on a value extraction mainly achieved through a shift towards the advertising market. The basic principle of the Star Academy is the following. 18 candidates, selected after auditions throughout France, are taught, during four months shut away in a boarding school, how to sing, dance, etc. This production process of a star can be watched by TV viewers though a specific TV program that is broadcast twice a day from Monday to Friday and then on Saturday evening on the main French TV channel (one hundred hours altogether). Furthermore, a specific Cable TV channel allows viewers to watch the candidates at almost any time of the day or night (this program is broadcast 22 hours a day, every day). Each week, the weakest candidate, based on viewers votes, is dropped. When only eight candidates remain, they go on live tour in France and in other French speaking countries. Finally, the ultimate winner is given the opportunity to record a CD produced by Universal Music. Star Academy generates one main stream of revenue the adverts broadcast during the TV programs and several streams of ancillary revenue (CD sales, live concerts, magazines, video games, etc.). To generate revenue, a massive demand is created for ephemeral artists. The basic principle of this reality show is to pick up ordinary, unknown individuals, with whom TV viewers can identify and to transform them into Stars thanks to the massive advertising support that the TV program represents. In 2003, revenue from TV ads amounted to 170 million (while the one hundred hours of programs only cost 16 million). 17 million came from tickets sold during the live tour (for a cost artists earnings included of 12 million). Furthermore, 5 million copies of the Star Ac Magazine have been sold and the ancillary revenue from games such as Star Ac Karaoke or the video game for Play Station 2 exceeds 20 million. As for CD sales, they reached 1 million for albums and another million for singles, thus representing only about 5% of the total revenue generated by the Star Academy that year. Moreover, more often than not, these wannabe artists achieve notoriety and sales far beyond what their intrinsic talent would have allowed. Most of the winners of the Star Academy, especially in the most recent years, have not succeeded as professional artists. Hence, whereas artists from the various French reality shows accounted for 4% of CD sales in 2003, this figure dropped to 1.5% in 200720. 3.4 The happy few scenario 3.4.1 Main features The effectiveness of decentralized online promotion offers new opportunities to players who are no longer obliged to rely on the centralized mass media to promote works to the public. The model of reference is the Structured Pull. As in the hit and run scenario, the value of music lies in the content. But in the present case, the extraction of value is more inventive: it may still derive from the sale of protected files, but most often the producers and distributors resort to diverse commercial strategies: (i) bundling, in a way that amounts to the free provision of works that are not yet appreciated; (ii) personal addressing, using statistical systems of recommendation based on past consumption or on communitybased recommendations; (iii) temporal addressing (DRM of expiration), for example by free supply, during a trial period, of new works. 21

Source: Observatoire de la Musique. AlterMuzik relies on a viral distribution system and uses Weed software which allows consumers to download a track and listen it three times before being asked to pay. A surfer may freely share the song or post it on a Website. Any new
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The diversity of supply and consumption would be wider than it is today, particularly if independent labels and online distributors play their role. In the context of the happy few scenario, the independent labels, possibly grouped together (as they are in Merlin, their new international association), should indeed play a key role. This might result in less concentrated digital distribution, with actors tending to position themselves in market niches. Hence, eMusic, a subscriptionbased service with various pricing plans that allow customers to pay as little as 28c per track, became the worlds largest retailer of independent music and the worlds secondlargest digital music retailer overall, offering more than 2 million tracks from more than 13,000 independent labels spanning every genre of music. Within the happy few scenario, and if and only if the decentralized online promotion is effective enough, the model of the independent labels, favoring the search for new talents, would indeed become the model of reference, while the Star System would decline. 3.4.2 An emblematic example: ITunes Music Store Launched in 2003, iTunes Music Store (iTMS) is the musical content distribution service created by Apple. Because of its content based value extraction and of the numerous decentralized promotion tools that it offers, iTMS can be considered emblematic of the happy few scenario. The catalog from iTunes Music Store contains 10 million songs (from the four major labels, thousands of independent labels as well as from selfproduced artists distributed by CD Baby) and iTMS now has more than 50 million customers worldwide. With 5 billion songs downloaded since 2003, iTMS account for about 70% of world sales of digital music and iTunes is now the biggest music retailer in the United States (19% of US music sales, online or off). The price has long been set at $0.99 per song in the US (0.99 in Euro Zone and 0.79 pence in the UK) with an album price usually set at $9.99. Initially, songs went with the FairPlay digital right management system of Apple that generates three main restrictions. Only seven CD copies on any particular playlist are allowed, users can access their purchased songs on a maximum of five computers, and songs can only be played on one portable digital player: the iPod. Early in 2009, iTunes simultaneously announced the abandon of DRM systems as well as of the uniform pricing policy (three prices will now be implemented: $0.69, $0.99 or $1.29. The more often a song is downloaded, the higher its price). In 2008, the sales of music related products and services (iTunes Store sales and iPod services, and Applebranded and thirdparty iPod accessories) amounted to $3.34 billion (+ 34% relative to 2007) of which 70% came from music sales on iTunes Music Store. Being distributed through iTMS seems a good deal for the majors as well as for the largest independent labels, since Apple pays them 70% of the sales price. Though this figure is lower for smaller independent labels, thousands of them are present on iTMS because the unlimited shelf space that a digital store can provide allows them to be on an equal footing with majors as far as distribution and availability is concerned. Furthermore, iTunes offers decentralized promotion tools that can favor small labels unable to secure large advertising budgets and airplay. iTunes allows users to access hundreds of Web radios. Wellknown artists are invited to publish playlists of their favorite songs. Users can create iMixes and share their music (at least 30 seconds of each song) and publish them on the internet. Users can also share their library on iTunes with their friends for playback. A new feature, My iTunes, lets users embed little widgets on their Blog, My Space page or website that allow them to share their top reviews, favorite artists, etc. from the iTunes Store with anyone who visits their site. These decentralized promotion tools seem to favor a sort of Long Tail on iTunes.22

downloader will also benefit from three free trials and if he finally purchases the song, the surfer who provided it will earn 20% of the revenue. 22 In 2005, Apple claimed that each song from iTunes catalog had been sold at least once during a threemonth period.

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3.5 The netlabel scenario 3.5.1 Main features The netlabel scenario is characterized by the fact that the value of recorded music lies essentially in the metainformation required for its consumption. The effectiveness of decentralized promotion on the internet places the search for new talents at the heart of the activity of musical production. Centralized promotion by the media is replaced by promotion by experts (not selfproclaimed, but recognized by other users), which achieves a better match between musical production and demand. Within the netlabel scenario, various models can be envisaged for bringing artists, independent labels, musiclovers and consumers together. Although the band Radiohead recently gave a specific example of the netlabel scenario,23 the organization of musicoriented social networks of recommendation (such as MySpace, see below) seems the more relevant model. In such a scenario, instead of or in addition to the sale of files through the internet, each artist can be financed by shares in the receipts from concerts and by merchandising, which would gain all the more in relevance as the initial investments are freed of the costs of promotion and physical distribution and as the decentralized promotion is efficient. Hence, a large number of small, more or less independent labels are likely to coexist. Decentralized promotion can favor the emergence of segments of homogeneous demand. Entry barriers decrease significantly, because of the reduction in costs of promotion and physical distribution. The search for new talents becomes crucial, because of the widening in the supply. With this better adaptation of supply to the tastes of consumers, there should be a corresponding higher willingness to pay, expressed by higher spending in the spinoff markets and, in return, by greater financing of musical creation. With the netlabel model, there is a corresponding orientation of demand by an innovative supply. And yet, the communitybased nature of the appropriation of works could lead to information being transmitted upwards from the demand towards the record labels and artists. Over the shortterm, demand is subject to supply, but over the longterm, musical innovation could, to a certain extent, be subject to demand. The diversity supplied is very wide. This may or may not be further extended by a wide diversity consumed, depending on the effectiveness of mechanisms of community acculturation that become established. 3.5.2 An emblematic example: MySpace MySpace is a social networking website with an interactive, usersubmitted network of friends, personal profiles, blogs, groups, photos, music, and videos. It is emblematic of the netlabel scenario for three reasons: selling content is not seen as the main value extraction model (though it is still possible), decentralized promotion is at the very heart of the social network, and selection does matter, since labels use MySpace to search for new bands or to assess the potential of new songs by bands already signed. Founded in 2003, it was bought for $580 million by News Corporation (the parent company of Fox Broadcasting) in July 2005. MySpace operates mainly on revenue generated by advertising, which reached $750 million in 2008. About 120 million users and 5 million musicians have a page on MySpace. Usually, such a page provides songs through downloads or streaming, photos, videos, biography, tour dates, as well as the list of the artists friends and possibly links to them. MySpace Music was created in 2008, enabling musicians to sell their music as mp3 files and allowing users to download freely (the artists being paid through a share in advertising revenues).

The band put its latest album online (without any supporting label) and let each internet user decide how much, if anything, they wanted to pay. During the first week, the album enjoyed 1.2 million downloads (for an average price of $8) and only one third of consumers chose to pay nothing. In this example, the value is no longer captured in the music file (which can be obtained for free) but in the quality of the relation between the artists and their public.

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MySpace succeeds in creating a true sharing community based on a feeling of proximity: artists who have a MySpace page are at the same level as any other user, and anybody can join the thousandsstrong list of friends of wellknown artists and write emails to them or add comments on their page. If artists have their own music on their own page, their friends can also put this music on their MySpace page and thus leverage the efficiency of viral marketing. Now, when looking for information on a band, such as where and when their next concerts will take place, visiting their MySpace page seems the first thing to do. Hence, MySpace has completely revolutionized music promotion by allowing unsigned bands to reach an audience they never could before and established a sort of onetoone binary relation with their fans. For small indie bands, MySpace is a springboard, because it allows them to do their promotion for free, and their popularity among Internet users could potentially convince a label to offer them a contract. For instance, the Internet and especially MySpace is generally recognized as having played a big role in the success of the Artic Monkeys, who reached the top of the charts without any promotion through the usual media. Furthermore, the number of friends an artist has, or the number of plays on the audio player, can be used by radio playlist panels to measure the intensity of the buzz the artist creates, and their popularity on MySpace is used as an indicator as to whether the station should playlist them or not. In the same vein, negotiations with local concert promoters are much easier when the artist can boast of many friends on MySpace who live in the region. It is tempting to link the growth in the live concerts market over the last few years with the progress of decentralized promotion permitted by sites like MySpace. While the US market for recorded music fell by nearly 30% between 2000 and 2007, the North American live music market more than doubled in value, from $1.7 billion to $3.9 billion. This growth benefits both stars and much less wellknown artists. Thus, the 8% growth in the North American concert markets in 2007 has been more profitable for smallerscale concerts. Revenue from the top 20 concerts actually dropped about 15%! 3.6 The consumartist scenario 3.6.1 Main features In the consumartist scenario, the frontiers between professionals, occasional producers and amateurs become highly blurred. Part of the value remains nonmarket. Even more than in the other scenarios, the gains in welfare cannot be reduced simply to the profits and surpluses of the players; this is a profound transformation of the way that music is produced and consumed. The openness24 of works enables everyone to quote, modify and partially reuse them. Not all consumers are enlightened amateurs, and not all enlightened amateurs are artists, of course, but they are all potential contributors. With the consumartist model, there is a corresponding coevolution of supply and demand, to the extent that the concepts of consumption and production tend to get mixed up. This would lead, in the domain of musical creation, to the development of algorithms of consumption and the transformation of algorithms of production quite similar to the general trend of disintermediation that exists in other economic sectors. Just as, in the domain of travel, consumers can compose their trips by assembling raw services (travels, hotels, etc.) and so bypass travel agencies, so, in the consumartist scenario, consumers compose works by reusing raw productions. Value can therefore be extracted both from reused works (see the example of Radiohead25 or the MXP4 case

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Here, by openness, we mean not only the absence of DRM but also the possibility of reusing a work in a new, original creation (this is openness in the sense of the open source of free software). 25 In 2008, Radiohead gave their fans the opportunity to remix certain songs from the band's latest album "In Rainbows". To make remixing easy, all six 'stems' of the song (bass, lead vocals, backing vocals, guitar, piano/strings and drums) were

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study below) or from selling tools to compose music (see the Songsmith case study below). The first case illustrates a pure case of versioning (Varian, 2000), since each consumer is able to reuse existing works to create new items, possibly not with the intent to broadcast them but only to create a work that suits their own preferences perfectly. In such a scenario, the concept of authorship, like that of intellectual property, gradually loses its meaning. Such an evolution could, from certain points of view, stimulate great enthusiasm, but it also runs the risk of provoking insolvable conflicts of interest and prohibitive transaction costs if the definition of intellectual property rights does not evolve substantially. 3.6.2 Two emblematic examples: Songsmith26 and MXP4 The two case studies below fit the consumartist scenario because both are characterized by lack of selection (all enlightened amateurs are artists), reliance on decentralized promotion (works made by reworking existing music are usually posted on personal websites or social networks) and the fact that consumartists do not expect to extract value from the content they produce. Songsmith is a new software program released by Microsoft Research early in 2009 and costing $29.95 in the United States. It generates musical accompaniment to match whatever a person sings. The basic principle of Songsmith is the following. Users can choose from one of thirty different musical styles giving the song a reggae, rock, hiphop or jazz background and then press record and sing into the microphone on their Windowsbased computer. Songsmith software automatically composes accompaniment music for whatever tune a singer belts out, hums or whistles into a microphone, regardless of skill level, using signal processing and artificial intelligence techniques developed at Microsoft Research to analyze each melody the singer records. The software also enables users to edit the chords, instruments or arrangement without having an understanding of chord structure or music theory. Users can alter tempos or change the prominence of vocals and instruments in the mix and two sliders bars enable them to adjust the happy factor, which makes the song happier or sadder, and the jazz factor, which makes the chords more adventurous or more conservative. Users also can purchase more musical styles from PG Music Inc. or expand the size of their virtual band or orchestra by buying additional digital instrumental files from Garritan Inc. Songsmith users can easily share their completed recordings with friends and family, and even import them into Windows Movie Maker to create music videos. According to Microsoft Research, Songsmith will be a way that we turn people on to music creation who never otherwise might have picked up an instrument or written a song. MXP4. Musinaut is a company created in 2006 to develop, publish and market innovative tools and applications for musicians and record labels to provide a richer interactive digital experience for listeners. It received 5 million seed funding in March 2007, and in early 2008 it introduced the MXP4, a new digital format for music. This new format broadens the appeal and adaptability of music by allowing listeners to select from many versions (or skins) of a single song to fit their mood, moment or mindset. It allows musicians and bands to surprise and engage the listener with many variations and unconventional versions of their musical scores, songs and albums. The software created by Musinaut is called the MXP4 Creator and costs $400. The creator drags and drops segments of music into the software, picks the possible transition points, and then assigns a sequence and sets a probability that dictate which section gets played next. A song can also be set up so that the user selects which section plays. It is not uncommon now to see several versions of the same title being released: radio, remix, lounge, electric, unplugged, etc. The MXP4 format allows all these versions to be saved in the same digital file. Instead of keeping only two tracks on the final

available to purchase for the price of a single track. A contest has been organized in which the public could vote for their favorite remixes. 26 Source: http://www.microsoft.com

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recording, an MXP4 file may contain dozens of tracks recording the various instruments and several possible interpretations of the music. The listener can thus choose to listen to a song in an acoustic or electronic version, change the tempo, or listen to it in another language. But the changes can also be more subtle. The listener can also make only simple changes at the level of a specific part of the drums or piano, for instance. But the range of possibilities MXP4 offers is much wider still. The MXP4 format can also generate some randomness: surprise and nonrepetition of the same song via the distribution and balancing of the various tracks (skins). Here the artist can play on the accents he wants to give to his song. This may be the same most of the time, but then change and create a surprise only for one listening out of ten, for example. This is called unpredictability, and it is what renders MXP4 recording close to the surprise the user might experience during a live performance. For instance, a song may last two minutes or ten! Thus, the process involved in MXP4 is linked to the two main players in the music value chain: the artist and the listener. With the software MXP4 Creator, the artist uses all the tracks recorded to produce several versions or "skins" of the same song. Using a "player", the listener selects, or even creates, his preferred version.

4. An empirical analysis of French record companies

In this section, we use data from a 2006 survey of French record companies to test our scenario hypothesis. In this survey, we asked the record companies their opinion on the evolution of the music industry. Our aim here is to show that our hypothesis and evolution scenarios are consistent with these opinions.27 4.1 The data The data were collected from a survey of French record companies that we conducted between July and October 2006. A questionnaire was mailed to an extensive list of 871 labels, both forprofit and notforprofit.28 A week after the mailing, all labels were contacted by phone to help them complete the questionnaire. Eventually, 187 labels agreed to answer the questionnaire, that is, 21.5% of the total number of labels in our list. However, we had to exclude 26 questionnaires, for two main reasons: i) some labels had just stopped their label activities; ii) some questionnaires were not answered correctly. We also exclude two labels that had only been created in 2006, ending up with a final sample of 157 record companies. This sample contains record companies of different sizes; one major record company, a few large independent labels, and several very small labels. The questionnaire was composed of three main sections; a first section with general questions (name of the label, year founded, number of employees, etc.), a second section with questions pertaining to their label activities, and a third section in which we asked the labels their opinion on the crisis faced by the music industry. In what follows, we will use variables from the opinion section to analyze which business model each label is closest to, and variables from the two other sections to identify the type of label which is representative of each business model.

We drew up our scenarios after the survey was done, which is why we did not ask the labels their opinion on these scenarios directly. However, for each scenario, we can determine whether there are labels whose opinions on the evolution of the music industry are consistent with that hypothesis. 28 This extensive list of French record companies was constructed from the following professional directories: LOfficiel de la Musique, IRMA (2006), and Le Rseau, IRMA (2005) for popular genres of music; Jazz de France, IRMA (2006) for jazz music; Plante Musique, IRMA (2005) for traditional and world music; Le guide du disque classique, Editions Cit de la Musique (2005) for classical music. This list corresponds more or less to the total population of French record companies (only some very small labels might be missing).

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4.2 The opinions of the labels on the evolution of the music industry In the survey we asked the labels their opinion on different aspects of the evolution of the music industry. We use the answers to these opinion questions to determine which scenario each label is closest to. 4.2.1 Value extraction In the paper, we have identified two generic value extraction strategies; a protection strategy, when the label charges consumers for content, and a displacement strategy, when content is provided for free or at a very low price, and the label obtains revenue from other channels (e.g. advertising or the sale of concert tickets). In our survey, we asked the labels their opinion on six possible strategies for fighting against the negative effects of music piracy. One strategy was to find new sources of revenues (concerts, ancillary products, mobile ringtones, etc.). This corresponds to our displacement strategy; we therefore consider that labels answering that they view this strategy as suitable or totally suitable for fighting against the effects of piracy match with the displacement strategy.29 We also asked the labels whether they found pursuing legal actions (against pirates) and reinforcing technical anticopy systems (DRM) as suitable or totally suitable.30 We consider that labels answering that they viewed at least one of these two strategies as suitable or totally suitable match with the protection strategy. The following table shows the number and percentage of labels which match with the two generic value extraction strategies.31
Table 5: Opinion of labels on value extraction strategies Value extraction Match (#) No match (#) Match (%) strategy Displacement 113 35 76.3% Protection 58 94 38.2%
Number (#) and % of labels whose opinions match with the displacement and protection strategies

A majority of labels (113) have opinions which match with the displacement strategy, whereas less than 40% of the labels have opinions corresponding to the protection strategy. Note that labels can view both strategies as suitable, which explains why the total of the first column exceeds the total number of labels. Table 6 compares the views of the labels on the displacement and protection strategies. It shows that 21 labels have opinions which are consistent with neither the displacement strategy nor the protection strategy. 14 labels are more in line with the protection strategy, while 70 are more in line with the displacement strategy. Finally, 42 record companies have opinions which are consistent with both strategies.

That is, we can consider that these labels view displacement strategies as suitable. It should be noted, however, that they had not necessarily adopted such a strategy. 30 The three other strategies were to lower the price of recorded music, to improve the quality of the product (bonus tracks, packaging, etc.), and to accelerate the development of legal digital platforms. 31 The percentage of matches is similar for both forprofit and notforprofit record companies.

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Table 6: Displacement vs. protection Displacement Protection No match Match Total No match 21 14 35 Match 70 42 112 Total 91 56 147

Number of labels whose opinions match with the displacement and protection strategies

4.2.2 Evolution of promotion We also asked the labels their opinion on whether audio blogs, forums, and customer reviews on e commerce websites (that is, decentralized channels of information) would supersede centralized promotion channels (such as radio) within the next few years. We consider that labels which either agree or strongly agree that each of these three information channels will supersede centralized promotion channels also agree with the view that decentralized promotion on the internet will supersede other forms of promotion. Table 7 below shows that there are 47 such labels in our sample (30%).
Table 7: Opinion of the labels on the evolution towards decentralized promotion Decentralized promotion will supersede centralized Freq. Percent promotion No (disagree) Yes (agree) Total 110 47 157 70.06 29.94 100.00

Number of labels which agree or disagree that decentralized promotion will supersede centralized promotion.

Finally, we asked the labels whether they believed that, over the next ten years, a new or little known artist would be able to selfrelease his music, by realizing his promotion and distribution on the internet on his own. We consider that the labels which agree or strongly agree with this statement believe that the market is evolving towards a situation in which there will be no selection by professionals (such as record companies). As table 8 shows, a majority of labels (64%) think that selfrelease by new artists will indeed become more frequent, hence that selection of these new artists will become less severe.
Table 8: Opinion of the labels on the evolution towards no selection There is a tendency towards no prior selection Freq. Percent No (disagree) Yes (agree) Total 53 93 146 36.30 63.70 100.00

Number of labels which agree or disagree that in the future, prior selection of new artists will become less severe.

4.3 Characterization of the labels in each business model category 4.3.1 Evolution of the metainformation system In the paper, we have identified four possible metainformation structures, which we have labeled as Star System, Push, Structured Pull and Free Pull. Using the analysis above, we can determine
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how many labels have opinions which are consistent with an evolution towards each meta information structure. For instance, the Push model is characterized by centralized promotion and no prior selection. We therefore consider that labels are close to this model if they disagree that decentralized promotion is superseding centralized promotion while agreeing that selection is becoming less severe. We identify 63 such labels. With a similar method, we determine the number of labels for each metainformational structure.
Table 9: Opinions of labels on the evolution of the metainformational structure Mode of selection Evolution from Star System to Centralized promotion Decentralized promotion Selection by professionals Star System 38 labels Structured Pull 15 labels No selection Push 63 labels Free Pull 30 labels

We consider that a label believes that the market is evolving towards a given metainformation structure if its opinions on the evolution of the industry are consistent with the mode of selection and the type of promotion (centralized or decentralized) which characterize this information structure.

Table 9 shows that the Star System metainformation structure (which we identify as the baseline structure in the paper) and the Push information structure have the largest number of labels. Interestingly enough, the evolution towards the Free Pull information structure is consistent with the views of 30 labels including 18 forprofit labels on the evolution of the music industry. 4.3.2 Scenarios Finally, we determine how many labels have opinions corresponding to each of our five scenarios. To that end, for each label, we first determine whether it is in line with the protection and/or the displacement strategy; we then use its opinion on the evolution of promotion and prior selection to determine its belief on the evolution of the metainformation structure. By crossing these two beliefs on the value extraction strategy and the evolution of promotion, we can associate a scenario with each label. Table 10 gives the number of labels whose opinions correspond to each of our five scenarios of evolution (Hit and Run, Jingle, Happy Few, NetLabel, and Consumartist). The table also presents two status quo scenarios, corresponding to the belief that the meta information structure is not evolving.32 18 labels cannot be associated with any of the scenarios. This is because these labels agree with neither of the two value extraction strategies (protection, displacement). Table 10 shows that the opinions of the labels on the evolution of the music industry are consistent with our scenarios of evolution. Note, however, that since we use the general opinions of labels, we cannot claim that the labels have adopted these business models nor that they view them as relevant to their own goals and resources. Besides, a higher number of labels associated with a given scenario does not mean that this scenario is more relevant to the music industry, as our sample is composed of a large proportion of very small labels and a small proportion of large labels. The Jingle and the Consumartist scenarios are challenging for independent labels, given their current business model. In both scenarios, value is not extracted from content and the selection of new artists is no longer made by the labels. Hence, labels lose both their main revenue stream (CD sales) and their comparative advantage in the industry (talent scouting). In contrast, if only one label

32

The greyshaded area in the table corresponds to a scenario which we ignored in our analysis. Though 7 labels are associated with this scenario, we believe that it is not really a relevant business model for the music industry. What is more, 4 of these 7 labels are notforprofit.

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fits with the Happy Few scenario, it should be noticed that this is one of the largest independent labels in France, for which this scenario appears to be precisely tailored.
Table 10: Number of labels close to each scenario of evolution Method of value extraction P.v (protection) p.V (displacement) Star system (status quo) Status quo P.v Status quo p.V 7 labels 20 labels Star System towards Push Hit and Run Jingle 6 labels 50 labels Star System towards Structured Pull Happy Few NetLabel 1 label 13 labels Star System towards Free Pull Consumartist 19 labels
A label is considered as close to a given metainformation structure if its opinions on the evolution of the industry are consistent with the mode of selection and the type of promotion (centralized or decentralized) that characterize this information structure.

Table 10 shows that 27 labels have opinions consistent with a status quo in the music industry, with the Star system remaining the main promotion model. These 27 labels are on average larger in size than the whole population; for instance, they sold 785,176 CDs on average in 2005 compared to 183,635 CDs on average for the full sample. Interestingly enough, almost 75% of these labels agree with the displacement value extraction strategy. The major record company in our sample belongs to this subset of labels, which believe in the Star system promotion model and the displacement strategy. This might reflect the fact that this major is confident that it can maintain both an efficient selection of new artists and centralized promotion of its new releases, although the displacement strategy is unavoidable. An illustration of this status quo scenario associated with the displacement strategy is the development of free download music services supported by advertising, like SpiralFrog.33 In October 2008, SpiralFrog announced that it had 2.3 million registered users and that 3 million songs were available for download. An advertisersupported service like SpiralFrog favors centralized promotion, since advertisers are likely to prefer to associate their advertisements with popular artists. And it can indeed be observed that Spiral Frog distributes artists mainly from the major companies (Universal Music, EMI and Warner Music). There are other examples of displacement strategies by the majors. For instance, majors advocate the development of a new subscription model based on the concept of bundling music with other services or devices be it an ISP subscription, a mobile phone or a portable player. While the music comes virtually free to consumers under this model, record companies and artists get paid out of the sale of services or devices (Ifpi, 2008). In 2008, the majors also agreed to remove DRM systems from music downloads, which could favor the shift towards the displacement strategy. Similarly, the development of 360 contracts, where an artist shares all of his revenue with his label (live concerts, merchandizing, etc..), is also consistent with the displacement strategy.

The ads are presented in the form of banners, much as they are on any news website. SpiralFrog thus leaves the music uninterrupted by radiolike commercials. However, consumers have to wait 90 seconds for each track to download a requirement from music rights holders, according to SpiralFrog. Consumers are also requested to answer a number of questions each month on topics such as how often they attend concerts and whether they are more inclined to buy a bands music if they agree with the groups political statements. Furthermore, the tracks cannot be burned on blank CDs, and they cannot be uploaded on more than two portable devices (and only on Windowscompatible mobile players and phones, thus excluding Apples iPod and iPhone). Finally, customers must visit the site at least once every 60 days and renew their license by signing in or downloading a song.

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5 Conclusion
Digitization has two consequences of key importance for record companies. Firstly, content loses its value, because it can be copied and exchanged. Secondly, the modes of promotion of music are changing radically, and online wordofmouth is playing an increasingly important role in informing the public about their existence and quality. In this article, we have identified two dominant modes of value extraction for the recorded music industry in the digital age: either by content protection or by displacing value onto related products or services. We have also shown that the promotion of musical works can either take the form of a "push" model (mass media), a "structured pull" model (professional selection but decentralized promotion), or a "free pull" model (absence of professional selection, and decentralized promotion following a rationale similar to that of incremental innovations described by Von Hippel (2005)). By crossing these two variables mode of value extraction and mode of promotion we have built five scenarios for the evolution of the recorded music industry. For each of these scenarios, we have given concrete examples of existing business models. Then, based on a survey of 157 French music labels, reflecting the heterogeneity of this sector (from major companies through to notforprofit microlabels), we have verified that the scenarios described are indeed consistent with the labels expectations about the future of their industry. Thus, if 19% of the labels surveyed believe that the star system will continue (but with a majority believing that the system will be modified to incorporate the displacement of value), 63% foresee one of our scenarios, compared with only 18% that do not see any of them emerging. To our knowledge, our analysis is therefore one of the first to endeavor to combine two different types of work on the impact of digital technology on the recorded music industry: those exploring the new economic models that might emerge, but from a theoretical point of view (e.g. Varian, 2005; Liebowitz and Watt, 2006; Slater et al., 2005), and those analyzing the current reaction of record companies to the digital revolution, but not their future prospects (e.g. Easley et al., 2003). Our analysis could be usefully extended by seeking a reaction to our scenarios from the players in the recorded music industry. This could be done either through facetoface interviews or by setting up focus groups. It would then be possible, firstly to enrich these scenarios, which are sometimes rather simplistic, and secondly to envisage the different practical trajectories available and the strategies that might lead towards each of them.

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