Digital Music Distribution

Massachusetts Institute of Technology
Sloan School of Management

Digital Music Distribution

Shuman Ghosemajumder, Phil Bangayan, Giselle Bonet
Copyright © 2002, MIT Sloan School of Management, Digital Business Strategy Track

The recorded music industry is essentially a creation of the 20th century, starting soon after the invention of the first recorded sounds. Computer technology and the seemingly free distribution of music through so-called “peer-to-peer” systems such as Napster and its descendents threaten to destroy this industry, or at the very least, disrupt its current revenue model. Proponents of computer file sharing systems claim everything from the belief that “information wants to be free” to the belief that the systems are analogous to radio and only help to sell more music. The recording industry and many artists disagree, and believe that these systems are the lawless work of those who would wish to profit from the labor of others. Legal victories by the Recording Industry Association of America (RIAA) in the past year against Napster have resulted in recent rulings [i] which may make it difficult for major record labels to put up their digital music distribution systems. And recent indicators are showing that the recording industry is finally feeling the economic effects of competition with technology which essentially gives their songs to end users for free [ii]. Whatever the final outcome will be, it is clear that the music industry has been changed forever.

History of the Recorded Music Industry

The recorded music industry is no stranger to change. It has experienced dramatic changes since the development and commercialization of Edison’s cylinder to the advent of the CD. However, there is no single technology that has challenged and threatened the livelihood of the industry like the advent of the MP3 standard. Below is a table that summarizes the most significant events that took place in the music industry during the twentieth century.

1900	Edison’s cylinder (phonograph) begins to decline in popularity. First 12-inch diameter records were released. The Victor Company’s Victrola model gramophone first appeared. Victrola became a generic term.
1910	Electrical recording was in the experimental stage. Paul Whiteman and his Orchestra produced the first million seller ‘Japanese Sandman’ and began a major popular music craze that boosted the industry throughout the decade.
1920	Record sales were significantly depressed by the growing popularity of the radio. The first electrical recordings took place in the US. All major companies follow suit. HMV releases the first electrically recorded symphony. The Radio Corporation of America (RCA) bought the Victor Talking Machine Company.
1930	The Gramophone Co. (HMV) and the Columbia Graphophone Co. combined to form Electrical and Musical Industries (EMI). EMI was granted a patent for a stereo recording technique that provided the basis for present day techniques. Edison died at age 84. Magnetic recording tape emerges. AEG-Telefunken gave the first public demonstration of the Magnetophon tape recorder at the Berlin Funkausteilung.
1940	RCA Victor presented the first ever ‘Gold Disc’ to Glenn Miller for the million selling ‘Chattanooga Choo-choo’. Tremendous improvements to sound quality took place. During the war years background music came of age. The first demonstration of the transistor by Shockley, Britain and Bardeen cause a revolution in recording equipment design and performance parameters. RCA releases the first 7-inch diameter, 45 rpm microgroove discs.
1950	Cinerama presented multi sound track replay to the public for the first time. The stimulated public interest for stereo products heated up. Stereo LPs became available and new releases were issued in both mono and stereo versions. The Philips original cast recording of ‘My Fair Lady’ was one of the first million LP sellers.
1960	Stereo replaces mono as the recording mode. Philips introduced the Musicasette and did not protect its cassette as a proprietary technology but encouraged other companies to license its use. Pre-recorded 8 track cartridges appeared on the ‘in-car entertainment’ market. Dr. Ray Dolby introduced the Dolby Noise Reduction System, which became a universal standard. By 1968 cassette player manufacturers had sold over 2.4 million cassette players worldwide and in that year alone the cassette business was worth about $150 million.
1970	Quadraphonic records appeared on the market but public reaction was unenthusiastic due to the confusion of incompatible systems and the economic climate. In 1978, Philips announces the first Compact Disc. Sony introduced the Soundabout cassette player which was later renamed the Walkman. By the end of the decade the average house contained two or three ‘talking machines’. The cassette begun to challenge the disc as the most popular format and the number of LPs sold gradually declined.
1980	The Walkman II was introduced. MTV (Music Television) began transmitting video clips. During the next years, the music video became essential for the promotion of a recording and established as a promotional tool it became an entertainment product. Michael Jackson’s ‘Thriller’ album released by Columbia sold 40 million copies worldwide. Philips and Sony produced a commercial digital play back record. CD hardware and software was launched in Japan. In 1988, for the first time CD sales were higher than vinyl. By 1989, the CD accounted for over 200 million units and the LP was beginning to disappear from record stores.
1990	Philips introduces its Compact Disc Interactive (CD-I) that could play audio discs and films as well as computer games. Sony introduces the MiniDisc (MD), which combined the reproduction quality of a CD with the ease of recording the audiocassette. The CD remained the dominant format. The first Digital Versatile Disc (DVD) product was shown. The DVD is essentially a faster CD with a huge capacity capable of holding video as well as audio and computer data. Elton John’s tribute to Diana, Princess of Wales, ‘Candle in the Wind 1997’ became the fastest selling single ever and was certified 8 times platinum by the Recording Industry Association of America (RIAA) within 24 hours of release. Music piracy on the Internet, using the MP3 format starts to proliferate. SDMI specification published, aiming to provide a legal alternative to pirate music.