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The music media industry is one of the most dynamic areas of the entertainment sector. In the US alone, it amounts to 6% of the 703 billion dollar market, and its global parameters exceed 100 billion dollars in total (Cummings 2017). At the same time, music and media have been riding the wave of innovation, as new technologies enabled the creation, filtering, streaming, selling, and sharing of musical products utilizing the Internet has become increasingly popular. At the same time, the musical community had been ravaged by various controversies regarding fair use of the artistic license and copyright claims for the artists Remneland & Knights 2016). The internal and external environment shaped the application of innovation in the industry just like innovation shaped it. The fight against piracy led to the rise of services such as Spotify and Tencent QQ to provide a better and easier service while protecting the rights of content creators. However, the emergence of these services led to the emergence of different copyright-related problems with the division of royalties between key stakeholders.
Internal and External Situation in the Music and Media Industry
At the beginning of the 21st century, the majority of income for musicians and content creators came from life concerting. However, to achieve the notoriety needed to host stadiums of fans and viewers, music groups had to win the hearts and minds of the audience by producing record albums (Cummings 2017). Recorded music was relatively regulated, as only large studios could produce high-quality copies of music albums in large numbers and for an affordable price. Therefore, piracy was relatively non-existent, as it required specific equipment to produce. At the same time, the audience for individual artists was relatively small when compared to the modern market. Small groups and content creators had to compete with one another to get access to the local radio stations and recording facilities in the hopes of going through with their hopes and aspirations.
However, the face of the market changed with the emergence of computers, smartphones, and the Internet. These factors have transformed the external environment in the industry by greatly expanding the potential market share available to content creators. At the same time, it reduced their dependency on large media and production companies to reach out to these markets (Cummings 2017). The availability of voice synthesizing and rendering software enabled people with very little recording skills to produce musical products. The availability of digital products and Internet-based commerce allowed for non-material trading between the content creator and the customer, forgoing the need for a physical copy (Borja & Dieringer 2016). Although recording and producing studios retained some of their position, they no longer had to monopoly to determine the success or failure of a particular music band.
However, this revolution that came because of technology affected the external and internal environments of the music industry not only by expanding the potential for money generation and outreach but also by increasing the risks associated with copyright and piracy. The availability of specialized software to users made it easy to copy and illegally distribute musical content on the Internet free of charge. The differences in quality between pirated and original content were negligent, whereas the prices for legal content were significantly higher. Many pirate sites offered compilations of different music albums at the same portals, whereas legal content was usually sold at different platforms, making cross-searching and the creation of private compilations a tedious task (Borja & Dieringer 2016). This created a massive loophole in copyright with no real means of controlling and inhibiting piracy.
These issues in the internal environment are projected onto the external market. Although there was tremendous growth in market share, especially for small and novice musicians and content creators, it did not immediately translate into increased revenues (Cummings 2017). Starting and promising performers are more vulnerable to piracy than individuals with a name and a reputation for themselves. To summarize, the industry lost a sizeable portion of its potential income to piracy because there was a distinctive marketing need for a pirated product, while the segment offered no feasible solution to counter it except for appealing to the abstract values of the market and common decency.
Piracy – A Key Strategic Issue for the Music Industry
The musical industry is particular in terms of its internal and external strengths and weaknesses. Music is an irreplaceable commodity to fans, and the production of such a good does not require much in terms of resources. The internet can be used as a free online promotion tool as well. Weaknesses include the varying quality of work of different content creators, with poor quality and copyright violations ruining the experience for the listeners. One of the potential opportunities for it involves harvesting the exposure achieved through the internet and transforming it into value. With greater exposure, artists and creators have a greater chance of gaining notoriety and increasing the number of their fanbases. According to PESTLE and SWOT analyses of the music industry, piracy is a significant threat to companies and individual music creators (Cohn 2016). It violates intellectual property rights and robs the individuals involved of their rightful incomes and royalties while exposing the customers to the potential dangers of fraud and cyber theft. However, piracy as a concept does not deter from the theory of the free market, as it provides a product to the customer that has the potential to compete with the original product.
The strongest point of a pirated musical record as a competitive product is its cheapness (Cummings 2017). The customer does not suffer any direct expenses from acquiring an illegal musical copy. Of course, sites that host such files usually take their dues in private information and cookies as well as in viruses and malware that could potentially harm the downloaders, but in most cases, the risks are relatively low. In addition, musical piracy solves the issue of availability and comfort for the user. Pirated musical records often appear shortly after the official release (and sometimes even before that), have reasonably good quality, and enable the customer to download individual compositions rather than entire albums while paying exorbitant prices for them. In other words, piracy is a service problem that is effective only when it offers a service superior to legal content distribution channels.
Spotify and Tencent QQ – A Technological Innovation
The primary issue of the internal and external environment in the music industry was born from technological progress taking place outside of the industry. It changed the landscape drastically and broke the monopoly of large publishing and recording companies. However, it forced the industry to change and created an array of new issues and problems that had to be addressed through innovation and technology.
There are two approaches to fighting piracy, one being a legalistic approach and the other being a market approach. The legalistic approach focuses on laws, regulations, and means of enforcement to prevent pirated content from being used and distributed (Mitchell, Scott & Brown 2018). It involved closing down illegal torrent sites, persecuting individuals for piracy, banning YouTube content, and other kinds of measures. These were implemented for the last 15 years with little to no effect against piracy. The lack of government control over the Internet ensures that the majority of pirates and users are unidentifiable. At the same time, sites with pirated content can be duplicated with ease. As a result, very little has been achieved in the way of shutting down hubs of illegal activity (Mitchell et al. 2018).
The other approach is exemplified by Spotify and Tencent QQ, which revolves around providing a better, easier, and affordable service to customers that could rival that of the pirates. Spotify and Tencent QQ were created around the same time – between 2008 and 2010, during the zenith of pirated internet content in music, gaming, and literature (Wlömert & Papies 2016). They offered a distinctly different model of business from Amazon and other virtual content. The companies recognized that most customers did not want to purchase a certain song. Most people have dozens if not hundreds of favorite songs and want the ability to be able to listen to any one of them without having to purchase an album or even an individual song. Spotify is a rental service that provides access to millions of music files and compositions for an insignificant payment. The authors of the song receive royalties based on the number of people who listened to their specific songs. Such an innovative approach effectively provides all the advantages pirate sites had, such as a large selection and ease of use while removing the negative sides of the illegal enterprises, such as viruses, annoying banners, invasive information gathering procedures, and the moral dilemmas associated with not supporting the content creator.
This explains the massive surge of popularity these services had in the past years. It was innovation and not legislation that provided a market solution to the rising piracy problem, instead of Milton Friedman’s free-market theory, succeeding in places where government intervention had failed (Cohn 2016). As it stands, the company has over 217 million users, out of which over 100 million have purchased a subscription, showing that there is a huge potential market to be made out of ex-users of pirating services for a company that could provide them with a suitable alternative (Fleischer & Snickars 2017).
Negative Side-Effects of the New Innovation
According to their corporate statements, Spotify and Tencent QQ pay up to 70% of their revenues to outside sources (Fleischer & Snickars 2017). One of the biggest negative side-effects of Spotify and Tencent QQ is that both companies are dealing with content rights owners instead of creators themselves (Marshall 2015). Due to a complex and controversial system of contracts, many singers and musicians do not directly own the rights to many of their songs, instead of relying on third agencies to make a quicker cash-in or to get a promotion. As a result, all of the revenue received from these companies goes to contract owners instead, who then decide how much (if anything) goes to content creators. This system lacks transparency and undermines the effort of the viewers to support their favorite performers directly.
Therefore, innovations promoted by Spotify and Tencent need to be supported by a legislative effort to rectify and streamline the relationships between streaming services and content creators to ensure transparency (Wang & Kim 2017). Otherwise, the attention to these problems would keep driving people away from legal services and ensure the existence of music piracy as an alternative measure. Spotify needs to cultivate a relationship marketing strategy between itself, content creators, and the customers (Zhang et al. 2016). That way, it would be possible to attract and retain greater market share than they currently have, promote music and arts, and reduce copyright claim violations caused by piracy.
As demonstrated throughout this paper, there is a cycle between innovation, external conditions, and internal conditions within the musical industry. The existing pirate crisis was propelled by innovation in the Internet and computer segment of the market, which in turn affected the internal conditions in the music industry. External conditions changed from within as a result. However, the innovation generated problems associated with copyright. The new innovative solution came within the internal segment of the market and beneficially affected the externalities. The cycle will likely continue, with innovations disturbing the existing status quo and new problems arising because of it. The analysis showed that market solutions based on innovation offer better results when compared to legal solutions at countering the negative effects of destructive innovation, such as piracy. However, a legal framework is required to mediate the relationships between producers, providers, and customers.
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