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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

Marketing music online: An analysis of social networking tools that could revolutionize the ways music makes money on the Internet

A thesis Presented to The Faculty of Undergraduate Studies Of The University of Guelph-Humber In partial requirements for the degree of Bachelors of Applied Arts – Media Studies March 2010 By: Matthew Powell Student #: 0540421

Advisor: Prof. Twyla Gibson

Submission Date: March 29, 2010 Course Code: MDST 4022 – Senior Research Project Media Studies – Journalism

Number of Pages: 64 Number of words: 12,708

©Matthew Powell, March 2010

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

ABSTRACT Matthew Powell University of Guelph-Humber 2010

Advisor: Prof. Twyla Gibson

Recorded music sales fell 16% in 2009. These sales have fallen annually because of an increased consumer focus on online music practice – both legal and illegal. Social networks have become the Internet‟s fastest growing brands. This study will argue that the music industry must develop online revenue streams through the use of social networking because of the massive growth that industry has witnessed in recent years. Throughout, an analysis of social networks and the music industry will explore strategies for the music industry to develop social networks as key marketing tools necessary to generate new revenue streams. An understanding of the theories of Hjarvard‟s mediatization theory, its inevitability within the music industry and its connection to globalization theory will develop statistical relationships between qualitative and quantitative research. It will also be integral to understand the ways the music industry can adapt distribution methods to make music money without dependence on physically recorded music releases. This study will argue that the music industry must prove to ISPs that a music tax is necessary to off-set costs relating to piracy. It will also explore the “free” model and its importance to the future of online music practice, the need for the music industry to charge advertising premiums to the social networks, and

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

how artist development and maintenance is crucial to justifying social networks as key marketing tools in todayâ€&#x;s increasingly volatile music industry.

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

ACKNOWLEDGMENTS I dedicate this paper to Diane Whiting. Thank you for giving me the best friend I could have ever asked for. Your fight with cancer has truly inspired me to push the limits of my abilities. I would like to thank the University of Guelph-Humber for giving me the opportunity to write a piece of this magnitude – it was truly an adventure. To Twyla – thank you for being a great help throughout this whole process. To my parents for constantly supporting me and for giving me the opportunity to get an education. To the rest of my family for believing in me, and to my friends for being extremely patient with me for the past seven months.

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

TABLE OF CONTENTS ABSTRACT ..................................................................................................................................... 2 ACKNOWLEDGMENTS ................................................................................................................. 4 TABLE OF CONTENTS .................................................................................................................. 5 1. 0 INTRODUCTION ...................................................................................................................... 6 1.1 AIMS AND PURPOSES ........................................................................................................ 9 1.2 NECESSARY STEPS TO COMPLETE STUDY ................................................................... 9 2.0 BACKGROUND INFORMATION ............................................................................................ 10 2.1 DEFINING SOCIAL NETWORKS ....................................................................................... 10 2.2 THE MUSIC INDUSTRY: PAST AND PRESENT ............................................................... 13 2.3 THE IMPACT OF PIRACY .................................................................................................. 17 2.4 THE ONLINE MUSIC INDUSTRY....................................................................................... 17 3.0 REVIEW OF LITERATURE ..................................................................................................... 19 3.1 SOCIAL NETWORKS AND THE MUSIC INDUSTRY ........................................................ 19 3.1 ADAPTING TO A CONSTANTLY EVOLVING MARKET.................................................... 22 3.3 FACTORS IMPEDING GROWTH IN THE MUSIC INDUSTRY .......................................... 25 3.4 THE INEVITABILITY OF MUSIC MEDIATIZATION ........................................................... 28 3.5 UNDERSTANDING USES AND GRATIFICATIONS THEORY .......................................... 32 4.0 METHODOLOGY .................................................................................................................... 34 5.0 FINDINGS AND CONCLUSIONS ........................................................................................... 35 5.1 THE FUTURE OF SOCIAL NETWORKS ........................................................................... 35 5.2 THE MUSIC INDUSTRY NEEDS SOCIAL MEDIA ............................................................. 36 6.0 RECOMMENDATIONS AND OPPORTUNITIES .................................................................... 39 6.1 THE MUSIC TAX................................................................................................................. 39 6.2 DEVELOP THE “FREE” MODEL OF RECORDED MUSIC ................................................ 41 6.3 MUSIC INDUSTRY NEEDS TO JUMP ON AD PREMIUMS .............................................. 44 6.4 SOCIAL NETWORK SUCCESS DEPENDENT ON ARTIST INVOLVMENT ..................... 46 7.0 CONCLUSION......................................................................................................................... 48 8.0 REFERENCES ........................................................................................................................ 51 9.0 APPENDICES ......................................................................................................................... 53 9.1 APPENDIX 1 – NIELSEN SOUNDSCAN ONLINE MUSIC DESTINATION AUDIENCES . 53 9.2 APPENDIX 2 – TWITTER GROWTH BY TIME SPENT ON NETWORK ........................... 54 9.3 APPENDIX 3 – SOCIAL NETWORK STATISTICS 2009 ................................................... 55 9.4 APPENDIX 4 – VIDEO STREAMING COMMUNITY GROWTH ........................................ 56 9.5 APPENDIX 5 – MYSPACE UNIQUE AUDIENCE COMPOSITION .................................... 57 9.6 APPENDIX 6 – TOP ONLINE MEMBER COMMUNITIES ................................................. 58 9.7 APPENDIX 7 – TIME SPENT ON SOCIAL NETWORKS ................................................... 59 9.8 APPENDIX 8 – KEY TRENDS NOTED BY OMDC CANADIAN MUSIC INDUSTRY AUDIT ................................................................................................................................................... 60 9.9 APPENDIX 9 – OMDC – CHANGES IN THE MUSIC ECOSYSTEM ................................. 61 9.10 APPENDIX 10 – OMDC – EMERGING BUSINESS MODELS IN MUSIC ....................... 63

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

1. 0 INTRODUCTION “Today, it has become purely voluntary to pay for music.If I tell you to go listen to this band, you could pay, or you might not. It’s pretty much up to you. So the music business has become a big tip jar…"- Jim Griffin, Digital Music Strategist, 2008 The music industry desperately needs to understand and utilize the potential marketing tools social networks possess to make an effort to off-set significant financial losses in the recorded music sector. While piracy is not the only culprit affecting these losses, it is rampant and continues to prove unbeatable. Recorded music sale have fallen by 16% since 2008 (IFPI 2010). Industry response has been increasingly focused on legal action against music pirates instead of adapting to it, modern online models that would understand that the Internet provides a great financial source for today‟s increasingly digital music market. The online music industry now represents more than a quarter of the industry (IFPI 2010) through platform like iTunes, Rhapsody and the latest version of Napster. But, developed approaches have been lackluster in answering piracy issues; pirated music now represents 95% of all music downloaded on the Internet and represents an overall 30% decline in industry sales between 2004 and 2009 (Pfanner 2010). This fact only proves that a focus on subscription and paid download services have generally failed, and that they have failed to provide consumers with the attractions of illegal P2P downloading (Freeman 18).

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

It will be the purpose of this study to accurately analyze the current music markets, and understand why current market practices must be adapted to develop online marketing programs through social networks. It will be necessary to analyze current music markets, understand how social media works and to incorporate mediatization and globalization theories to accomplish this. Social networks will be significant in determining adapted market strategies for the industry as the social network and music industries are going in severely opposite directions. For one, social networking has become one of the greatest communication tools the Internet has ever offered, while traditional marketing techniques in the music industry no longer work. Research will also suggest that users of social networks seek to satisfy needs traditionally gratified by traditional media like television and newspapers (Sheldon 12). In the case of this study, we will analyze the way online social networks like Facebook, Myspace, and Twitter continually influence growth in todayâ€&#x;s increasingly digital music industry. Twitter, for instance, has 55 million unique visitors monthly (Bruno 16). 144.3 million users viewed their Facebook profiles in May 2009 (Nielsen Wire 2) (Appendix 3). By the end of 2006, Myspace had overtaken Google as the most visited website on the internet (Thelwall1321). Statistics relating to user growth and activity could be considered the basis of the social media argument. Social media is already making waves in developing strategies for the music industry. It has come to understand that consumers want to experience music, not just listen to it (Klassen, Lemonnier, 3). Using Myspace, Facebook, Page 1 of 64


Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

and Twitter, this study will demonstrate that the use of social media applications can provide viable tools to return profitability to the music industry. It will also be necessary to understand how Hjarvard‟s theory of mediatization was inevitable in the music industry, and how the theory makes an argument for newer globalization strategies through the use of online technologies. For today‟s music industry, it has seemed that mediatization was inevitable due to a constantly changing market, like its digitized inceptions when peer-to-peer sharing programs were introduced, and now can be mediated by regulated platforms institutionalized by media and technology corporations. Today‟s music industry is, ultimately, controlled and regulated by online activities that are no longer dependent upon traditional distribution platforms. Krestschmer notes that networked computer technology can eliminate overhead and traditional elements of the distribution chain, benefiting consumers with unlimited music choices, and cheaper prices for online music products (Krestschmer 5). The significance of this relates to the phenomenon social networks have developed due to their massive popularity, and the scope of their uses in relation to accessibility and convenience. The music industry has to develop its use of social networking. Statistics indicate the massive audience potential, and should the industry understand the “free” model which will be proposed here, it can begin to develop cooperative marketing partnerships with the networks and internet service providers. In an online environment, music will become a loss-leader to promote more valuable

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

alternatives like live music, merchandising and online advertising (Krestschmer 17). 1.1 AIMS AND PURPOSES Aims and Goals To identify new tools available to the music industry through social networking

To identify the current tools being used by the industry and understand why they are not working. To explain why social networking is a key tool in the success of a new music industry.

Purpose By identifying these strategies, the industry can adapt to them and develop newer, profitable practices through the use of social networks to answer the constant threat of piracy. By identifying the problems of the industry, it will be easier to develop arguments and strategies necessary to develop new revenue streams. To develop the industry in a way that is profitable, convenient, and develops the importance of understanding how these tools are necessary.

1.2 NECESSARY STEPS TO COMPLETE STUDY To successfully complete this study, it must understand the following: 1) 2) 3) 4) 5) 6) 7) 8) 9)

What is a social network? Why do people use social networks? What tools do social networks offer the music industry? What is the current state of the music industry? What business models are being employed by current music industry activities? What has piracy done to the music industry? What is the online music industry? What impact has the online music industry had on music consumers? Analyze trends in both American and Canadian music industry over the past five years to limit the scope of the study and make it more legitimate through understanding through statistical information like CD sales, online music sales, tour revenues.

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

2.0 BACKGROUND INFORMATION 2.1 DEFINING SOCIAL NETWORKS The popularity of social networking is a relatively new phenomena, but its prosperity is seemingly endless. Of the big social networks (Twitter, Facebook, and Myspace) all three saw significant growth throughout 2008 and 2009. Between April 2008 to April 2009, users spent 699% more time on their Facebook profiles.Twitter grew an amazing 3712% in 2009, and Myspace‟s music portal company, Myspace Music, grew by 190% from August 2008 to June 2009, beating music giants like MTV, according to Nielsen Soundscan (Nielsen par. 3) (See appendix 9.3 for further information).

For the purposes of this study, I will use Danah Boyd‟s definition of social network: A social network is a: Web based services that allow individuals to (1) construct a public or semi-public profile within a bounded system, (2) articulate a list of other users with whom they share a connection, and (3) view and traverse their list of connection and those made by others within the system. (Boyd, 211)

Social networks are popular because they add to self-gratification (Boyd 241). Boyd describes that social networks have the ability to indulge the selfabsorbed. They keep us in tune with our own lives, those of our friends, family members, even celebrities. Facebook, Twitter, and Myspace have grown to Page 1 of 64


Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

become the most popular. Especially because of inter-connectivity capabilities, users are able to use the three major networks simultaneously should they choose too through linking abilities. These sites act as a networked public that allow people to use them for a variety of reasons, because they are more accessible than physical publics (Boyd, 213). The Internet, along with social networks, erases time and space, allowing users to generate, view, and respond to content on an instantaneous basis. Parks and Floyd found that user who developed more personal relationships were those who posted often and more frequently. Research suggests that conceptualizing and measuring gratifications in terms of both gratifications sought (audiences reasons for using Facebook) and gratifications obtained (those benefits audiences believe they receive from Facebook use or from their frequency of using Facebook) from media use. Social network users are simply web users who are interested developing a community based on specific content, collaboration and communication (Sheldon 4). The networks depend on its users to generate content on an instantaneous basis, which means that the content on a social network is everchanging (Hoegg et al. 11). These tools develop a plethora of new information and revenue generating abilities. Table 1 – Minutes spent on social networks Rank

Site

APR 08 MINS

APR 09 MINS

GROWTH

1

Facebook

1,735,698

13,872,640

699%

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

2

Myspace

7,254,645

4,973,919

-31%

5

Twitter

7,865

299,836

3712%

*source: The Nielsen Company

One notable observation is that there is no true way to know the exact number of people viewing content on a social network profile at specific times. The numbers recorded by statistics corporations represent the least possible number of people who have viewed that page – two or more people can look at the same computer screen whenever they want. Boyd refers to these as “invisible audiences”. Variables such as this only expand the scope of a social network‟s reach. The Internet has become a driving force to connect people anywhere in the world, and now social networks have developed enough to the point that they represent the platforms the world needed to support the real-time necessities the world seemed to want. These new Web 2.0 technologies base themselves around the principle of a “free economy” (Hoegg et al. 10). This results in the development of content from internal and external sources that ultimately develop a community integrating user‟s lives with a network of “friends”. Content development and consumption on social networks is unique because its users develop content and consume at the same time (Hoegg et al. 11).

“The fundament of Web 2.0…is the concept of maximizing the collective intelligence. The interactive exchange of information and the continuous development and

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

maintenance of a group opinion us described as the process of collective intelligence.” – Hoegg et al. 13

For the most part, social networks generate revenue through advertising sales. In a survey of 1,000 marketers, it was estimated that about 70% would invest in the social-media sector (Morrisey 2010)). A web-marketer predicts that advertising revenue on Facebook alone will reach $3.63 billion in 2010 worldwide (Klassen 2007). Facebook for example, uses a platform called “social ads”, where advertisements are actually integrated into the network‟s “newsfeed” application (Klassen 2007). The platform that was launched in 2007 gives advertisers their own “profile” which is really a “fan” page users can join, and news-feed ads that costs $150,00 for a three-month placement (Vara 2007). Social networks may be the best example of the free-model in modern cultural industry. As Anderson argues, “the winners made their stuff free first”, and through the development of third-party markets, where a marketer is used to focus advertising efforts, but daily activities on social networks are mediated by a developing number of advertising potential. 2.2 THE MUSIC INDUSTRY: PAST AND PRESENT The music industry has suffered significantly since the Internet introduced piracy platforms that allowed users to illegally download music for free. In 2006, it was estimated that about 30% of Internet users in Canada downloaded pirated music, and that piracy accounts for $3.7 billion in lost revenue for the music industry

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

(Ontario Media Development 6). The same study noted that 68% of the 15-20 Canadian demographic downloaded music illegally. Table 2 – 2010 overall music industry statistics by IFPI The International Federation of the Phonographic Industry (IFPI) has reported the following music industry results for 2010: -

piracy has accounted for a 30% loss in overall music sales between 2004 and 2009

-

CD sales have fallen by 16% over two years – from $17.5 billion to $15.8 billion

-

Reports that the digital music business has massive growth potential

-

The music industry has been too slow to adapt to new business models that would attract consumers away from piracy sites.

-

worldwide music sales fell by 10% in 2009 Current industry structure retains a heavy focus on major label distribution

and marketing of physical product, despite declining recorded music sales. The following is a description of record label responsibilities as explained by Kreschsmer:

“Major labels are responsible for: sourcing new talent, producing recordings, manufacturing physical product, distribution and marketing of recordings, administering royalty income to artists” - (Kreschsmer 15).

Wikstrom explains that in the past decade, the music industry has experienced a process of consolidation. Market dominators grow by merging with

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

or acquiring competitors. Consolidation is represented by a music industry that is dominated by four majors (Universal, Sony, EMI, Warner). It is assumed that almost 70% of all recorded music is recorded and distributed by one of these four companies, or by a subsidiary owned by one of these four companies (Wikstrom 69). Wikstrom concludes that: 1. When centralizing control of strategic artist development, diversity will fall and eventually, demand, revenues and profitability will also fall. 2. This is a vicious circle that can be changed by breaking the structure of the current system through changing current A & R policies.

These conclusions tell us that in today‟s online-dominated markets, networks have the platforms and audiences necessary to handle an ongoing influx of material and still find new ways to understand and market it. Because the Internet can handle mass amounts of material, it represents a great opportunity to continually diversify music content. Piracy continues to play a significant role in the falling CD sales, which were at one time a leading revenue generator. But, because the market is changing towards an increasingly “free model”, it will be necessary for the music industry to adapt and develop new revenue streams that does not include focus on the sale of physical music releases, but instead on online revenue means, touring, and merchandising.

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

Traditional industry structure involving the mass production and distribution of recorded music is no longer sustainable. The industry must adopt new means of revenue generation. Mediatization with prove itself connected to globalization in two ways: 1) globalization presumes the existence of the technical means to extend communication over long distances and 2) it propels the process of mediatization by institutionalizing mediated communication and interaction in many new contexts (Hjarvard 113). Here, these globalization factors will be represented by the fact that industry has recognized that there are the technical means it needs to reconfigure distribution strategies. On the other hand, these means have been developed enough to actually develop profitable programs the industry should utilize to increase globalization via online distribution strategies. Statistics demonstrate that mass producing recorded music is not profitable because of an increased consumer focus on online distribution through legal and illegal platforms. Globalization theory would suggest that the future of music industry production is dependent on the platforms it provides its users to consume it. Social networks provide a vastly developed platform for mass consumption that has the ability to regulate production. While there has been significant recognition that the future of the industry lies in understanding online business models, there has been little action to develop newer revenue streams that seem risky because they may not benefit the record labels themselves (Freeman 3). The profit potential for bands could, however, be at its peak since the inception of the “dreaded� P2P pirate programs.

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

2.3 THE IMPACT OF PIRACY There is little doubting that piracy has played a significant role in the crippling of the recorded music industry. Sales of recorded music fell by 10% in 2009 (Pfanner 2010), and it has been suggested by IFPI that the figures used in a study of the music industry last year act as justification that the record labels need to understand focus a crackdown on digital piracy. In today‟s market environment, however, these responses could include increased implementation of a “free” business model that would focus on releasing music content for free, and generating revenue in other forms in an increasingly online environment. The IFPI estimates that 95% of downloaded music worldwide is pirated, and has accounted for a 30% revenue loss in the music industry between 2004 and 2009 (Pfanner 2010). These numbers seem justified considering that personal audio technologies depend on MP3 file-formats, meaning consumers have a reason to download illegally because the platforms where they listen to music is dependent on the file-formats that piracy programs provide. 2.4 THE ONLINE MUSIC INDUSTRY Online, the music industry has thrived, mainly due to its download abilities, but also because of convenience and ease-of-access. Other than live music, it is the only industry sector that has seen growth in the past five years. IFPI reports that in 2003, there was less than 50 legitimate download services, generating about $20 million in revenue for the industry. In 2009, there were 400, selling 11 million unique tracks that generated $4.2 billion, accounting

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

for 27% of the industry‟s revenue. Digital music sales are expected to increase to $14.8 billion worldwide by 2011 (Klassen and Lemonnier 3). TABLE 3 – GROWTH OF ONLINE MUSIC SERVICES 2003-2009

Licensed download services Catalogues Industry‟s digital revenues % of industry revenue

2003 >50

2009 400

1 million tracks $20 million

11 million tracks $4.2 billion 27%

Source: International Federation of the Phonographic Industry (IFPI) 2010

Although the industry represents more than a quarter of music‟s revenues, paid and subscription services are still unable to compete with piracy, suggesting that although legitimate download services are easily accessible in today‟s emarkets, there is still limited recognition that paid-for music is increasingly obsolete. IFPI argues that the demand for music is still there, but there is no longer the paying customer the online paid services need to survive. This could be due to the fact that subscription services have been unable to match P2P attractions like mass duplication (Freeman 18). The advantage the online market has, however, is that the Internet has mass audiences, mass memory capabilities and revenue stream development possibilities, like tapping into increased live music interests and social network content.

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

3.0 REVIEW OF LITERATURE 3.1 SOCIAL NETWORKS AND THE MUSIC INDUSTRY There is no doubt that social media platforms have significant effects on today‟s popular culture, especially everyday peer-to-peer discourse. The advent of networking sites like Facebook, Myspace, and Twitter has revolutionized the way people communicate. This study will show how social media networks have the ability to become significant marketing tools for musicians in a market environment that is increasingly volatile and has been too slow to respond to floundering sales and alleviate pressure placed on the eradication of pirated music. In 2009, 12,130,000 unique visitors viewed Myspace Music‟s homepage. Since launching in September 2008, Myspace‟s music portal has grown by 190% (Nielsen Wire 2009). Myspace has encouraged bands to invite “friends” to join their music profile, which offers free music and video streams, a discussion board, and news blog (Thelwall 1321). It acts as a platform to achieve significant convergence between bands and fans (Belzman). Thelwall explains that social networking through sites like Myspace and Facebook is not only a newer form of communication, but an important one as well. Teenage users often allow Myspace‟s influence on their lives to embed into characteristics affecting self-esteem (Thelwall 1321). The Nielsen Company shows that in 2009, Myspace users spent 4,973,919 minutes surfing profiles on the social network (Nielsen Wire 2009).

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

Nielsen‟s statistics also show us that Myspace Music beat MTV Networks Music by almost a million online hits (Nielsen Wire 2009). This is incredibly significant considering that MTV is the most widely distributed TV network in the world (Fung 72). Table 4 - Unique Audience by Age-Group (Myspace Music): Age Group Composition Index by Unique Audience unique audience 12-17 235 2,334,000 18-24 219 2,403,000 35-49 89 3,105,000 *source: The Nielsen Company

Table 3 shows that the three major audiences on social networks represent the three demographics with the most disposable income. In our case, these statistics are especially important in demonstrating audience scope in relation to newer revenue streams such as ticket sales and merchandising. In 2009, Facebook was the highest rated global social networking destination (Nielsen). The network had more than 75.4 million unique visitors - a 190% increase from May 2008. But, while Facebook leads in popoulatiry, it has yet to make the impact on the music industry that Myspace has. This is partly due to its failure to implement its planned music streaming application last year (Arrington 2009). But, it‟s become quite clear that Facebook could have the tools necessary to market artists independently without financial backing from major labels (Online: Servicing Online Fan Communities 15). Facebook as a social network has allowed artists to further develop fan-to-band interaction. It is also assumed these days that bands that make an effort to increase social network activity are more likely to be signed by record labels – this could crucial in the Page 1 of 64


Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

development of newer A & R strategies. Not only do record labels have a new way of uncovering acts, bands now have a more sufficient way to market themselves. The same study reveals that Twitter is 2009‟s fastest growing web brand 1448% increase from a year ago. Twitter grew from 1.2 million visitors in 2008, to 18.2 million in 2009. (McGiboney 2009) (See Appendix 9.2). Twitter is making a significant impact because of its simplicity (Bruno 16). “Tweets” are being used in increasing popularity to keep bands in touch with their fans via the network website. Bands now have the ability to simply “tweet” the URL of a website or social network profile where fans can listen to new songs or exclusive video content (Bruno 16). According to Forrester Research, Twitter gets about 55 million visitors a month in the U.S. The average time unique visitors spend on Twitter has also increased by 175%. Twitter could come to play an integral role in communication strategies between artists and fans and its growth in popularity shows the massive potential the network has for the music industry. It will give musicians a louder voice in spreading new content over a number of networks, starting with Twitter. Myspace could be a viable music market, especially considering the amount of recent growth in the digital music market. It is expected that by 2011, the digital music market will be worth $14.8 billion (Klassen and Lemonnier 3) – a questionable estimate considering increased consumer reluctance to succumb to the subscription and paid download services that Freeman argues have failed but

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

are still trying to force their way in. Also significant considering 95% of downloaded music is pirated (Pfanner 2010). By studying how these three social networks can affect the music industry, a shift in business strategies becomes inevitably clear, and necessary. The music industry is now a digitally driven business, and it has much to do with how convenience and ease-of-access play a role. Social networks play a big role in convenience and ease-of-access. Social media has become something of a necessity in today‟s incredibly uncertain market (Seay 2008). A close analysis of Facebook, Myspace, and Twitter should reveal accurate details about the validity of social networks‟ ability to act as legitimate marketing tools for the music market considering the industry‟s volatility. As these tools continue to evolve, this study will assume that the global digital music market should structure itself around using social networking as a brand platform for the development of revenue streams different to traditional ones.

3.1 ADAPTING TO A CONSTANTLY EVOLVING MARKET The music industry is a lifestyle business. These kinds of businesses depend on the perception that business is not serious until it is successful (Stokes and Wilson 223). The music industry was successful; now it is struggling. Recorded music is no longer profitable, and the industry has been too slow in recognizing that significant change is necessary. Today‟s music industry is of particular high-risk. Stokes and Wilson would argue that the industry‟s level of certainty is “compounded by short termism”. Page 1 of 64


Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

Market conditions are volatile, and the physical recording industry, is struggling significantly. Constantly evolving technology may be adding to industry confusion and lack of motivated action towards adaptation. Technologyâ€&#x;s constant flow of new content could be playing a significant role in how the industry has been slow in reacting to falling market conditions because it is clear that it has yet to understand and adapt to these new technologies. As consumers place a heavier reliance on pirated downloads, subscription services, like iTunes, are no longer proving legitimate alternatives (Freeman 5). It is estimated by IFPI that 95% of downloaded music is pirated. Despite the digital music marketâ€&#x;s valuation at $4.8 billion, represent more than a quarter of the overall music industry, legal download services have not made up for the losses caused by piracy (Freeman 18). The Internet is giving smaller labels and independent artists the power to give consumers more music choices by utilizing download services and social networking (Cohn and Vaccaro 46). The success of the industry will depend on a realization that constantly evolving technology is an unavoidable variable. Live music will become a significant money-maker as social networks become increasingly important to market conditions. Although live music has yet to digitally integrate into a structured format, bands are increasingly taking to social networks to make users aware of live events (Carter 19). Video streaming sites like YouTube have allowed bands to share live videos, and Twitter allows updating services to keep concert-goers in tune with the artist activities. Live music could be one of those revenue generators that would result in recorded Page 1 of 64


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April 2, 2010 Senior Research Project

music becoming a loss-leader to support other alternatives (Krestschmer 17). In Canada, the live music sector accounted for $752.8 million in 2005 – about half the country‟s over industry revenue (OMDC 22). Digital technology has provided bands with a number of new tools for selfpromotion through live performance such as video-streaming supported by video applications via social networks like YouTube and Myspace. The next wave of digitally driven live-music products are expected to be social (Carter 19).The common trend throughout this analysis is that the music market is now dependent on electronic and social media, and that record labels and bands must adapt to that to succeed (Seay 32). There is also evidence ticket agencies in the United Kingdom have started using social networks to sell tickets to live events (Carter 2009). Another increasingly notable trend is that bands have started to give away versions of new albums digitally instead of releasing physical versions (Seay 32). In 2008, Radiohead released their new album digitally, using the precedent “pay what you want” format. The band allowed fans to decide how much they thought the music was worth. It was a risky move, one surrounded by uncertainly commercial viability (Leeds 2008). Industry executives said the experiment was a way of testing whether or not digital downloads would eat into CD sales (Leeds 2008). The band also refused to sell the album to iTunes because it wanted the album to be sold in its entirety instead of individual tracks. A New York Times article also notes that the band risked losing its mass market connections

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because of record label skepticism that the release would turn into a niche market. The Radiohead example makes two factors obvious – 1) artists can release their own music without the help of a record label online; and 2) record labels are skeptical about releasing music in this format because there is no guaranteed pay-out (Seay 32). Most artists do not make money selling albums (about 12% comes back to the artist). Albums are usually loss leaders that instead turn to generate revenue through live performances, merchandising, etc. Radiohead‟s experiment gives independent artists the chance that making money on music is possible should they choose to take the chance (Seay 32). 3.3 FACTORS IMPEDING GROWTH IN THE MUSIC INDUSTRY About 10% of annual recordings are profitable (Kravilovsky 7). There has been significant focus on eradicating P2P illegal download services because of their significant impact on industry finances. Physical sales have dropped by 16% over the past two years (Pfanner 2010). It is estimated that 95% of downloaded music is pirated (IFPI 2010). The industry has maintained a significant focus on preventing piracy instead of generating new ways to adapt to it (Kravilovsky 10). Adaptation is necessary to success because piracy has proven unbeatable. The music industry suffers from a “culture gap” – a misunderstanding between the creative industry and the financial industries that support it (Wilson and Stokes 223). The problem exists for two reasons – 1) the industry and the banks do not speak the same language (financers are uninterested in

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understanding why the industry is not profitable – they want to know how to make it profitable; and 2) there is no cultural link between the two industries – they operated on very different circumstances argue Wilson and Stokes. A 2008 Consumer Profile by the Recording Industry of America shows that sound recording sales have fallen heavily since its peak in 1999-2000, especially in the younger demographics. Between 2000 and 2008, record sales fell 2% at the 15-19 year old demographic (RIAA 2008). While 2% may not seem significant, in the overall picture, decreases in that specific demographic can be highly damaging because that demographic is known to have the highest level of disposable income, especially in the U.S; the music industry‟s biggest market. The same study noted that record sales in 1999 peaked at $14,323,000,000. Eight years later, CD sales fell by almost $6 billion to $8,480,200,000 (RIAA 2008) Music piracy is easily the most obvious factor that has inhibited growth since the beginning of the internet and MP3 age. It is also the easiest variable for record labels to blame because it is so rampant. The piracy argument, however, is two-sided. In terms of finances, piracy has proven to inhibit monetary growth on the music industry because it impedes music purchases. It is estimated that piracy has cost the music industry $3.7 billion (OMDC 22). On the other hand, artists can reap significant rewards from piracy because it is a way to digitally distribute music without the high costs of distribution and marketing. Modern rock acts like

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Modest Mouse and Beck have admitted that piracy is a good way to hear about new music (Hadden 44) Sandulli and Martin Barbero present three mechanisms that‟s influence consumer willingness to pay for music online on P2P networks. They argue that the music industry has made specific efforts to curb piracy through the following defenses: 1. File pollution: the music industry deposits polluted files into P2P networks like replacing parts of songs with “white noise” and cutting song durations 2. Value differentiation: online music stores try to develop consumer value by providing better quality files, more compressed files to produce better reproduction quality and faster downloading times 3. Behaviour correction: the industry has tried to show consumers the damaging effects illegally downloading music has on the overall industry Based on the 95% piracy rate still rampant in today‟s market, it is incredibly obvious that these theories are not practical, or have not worked. To truly adapt to today‟s market, the industry has to learn to understand that piracy could help in the long run, and adapt new models to off-set financial losses associated with it. The music industry will continue to suffer until it can better understand its consumers (Cohn and Vaccaro 55). The use of relationship marketing, convergency and interactive marketing paradigms create a competitive advantage for the music industry. Utilizing these strategies should succeed in the developing legitimate music businesses (Cohn and Vaccaro 56). Social networks Page 1 of 64


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have the ability to develop relationship marketing tools because they can satisfy user needs through connectedness and relationship management tools. Network users like having the ability to “friend” other users with similar interests to develop a sense of community and connectedness (Sheldon 4). Community development represents a massive growth opportunity for bands wanting to get closer to their fans, as not only do they have the ability to reach people already interested in the group itself, but also the ability to reach users with similar interests to the fans they have already connected with. Understanding marketing and growth strategies should produce online tools that are necessary for the music industry. Traditional industry marketing techniques will no longer be sufficient in developing the market in today‟s eenvironment because they are no longer truly necessary. Massive audiences and convenience can act as platforms to share new material, video content, and develop fan-to-band interaction. 3.4 THE INEVITABILITY OF MUSIC MEDIATIZATION It will be necessary to explore and understand the theory of mediatization because it relates directly to psychological relationships between users and user generated social network content. Mediatization is also relative to the development of technology and its influence on the scope of social media‟s distribution abilities. Nielsen Soundscan statistics have shown that millions of people use social networks daily, and their use is becoming increasingly routine. Hjarvard would describe mediatization‟s relationship with social media as the way media is incorporated with social networks to distribute numerous forms of media Page 1 of 64


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through a single online platform. Here, mediatization will describe how artists now have the ability to use social networks as platforms for the development of new revenue streams by using music as a gateway to other material. Mediatization is an ambiguous term referring to a cultural increase and social significance (Hjarvard 107). Simply, it represents the way forms of media evolve through time. This study will analyze how both social networks and the music industry have inevitably evolved because of the mediatization phenomenon. Mediatization, according to Thompson, is inevitable for two reasons:

1) modern culture constantly evolves 2) it refers to the impact of social significance

Thompsonâ€&#x;s theory reveals that, on the internet, the sender (producer of content) retains control of the message. But, there is very little control over how the receiver uses it. Simply, the producer can decide what to put on a web-page, or a profile, but must allow the user to decide how to use it. In the music industry, this relates to an artist posting a song to a Myspace profile, allowing the pageâ€&#x;s viewers to decide whether or not they want to listen to it. The question is: will the receiver choose to listen to it? Krotz reveals that mediazation is an on-going process where the media change human relations and behaviour, therefore changing society and culture (Hjarvard 109). This description plays a significant role in defining the changes Page 1 of 64


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that both the music industry and social networks have gone. The music industry has suffered because of an intense influx of technology that has made recorded music easier to get at. On the other hand, social networks have had significant impacts on how people communicate. The reality is that the music industry has significantly failed to recognize the opportunities social media opens for its artists. Social networks provide a platform that has the potential to develop new revenue streams that stray from traditional music industry models, but because they may not benefit the record labels, they are reluctant to test the true benefits of social media. Krotz‟s theory explains that social networks depend on a constant flow of user-generated material. With the amount of new music that continues to emerge despite volatile market conditions, social networks have the ability to support music content should the industry realize the potential. Society‟s growing interdependence on mediated and live performances make it nearly impossible to distinguish the authenticity of any one format because mediated forms of interaction are not any more or less real than nonmediated interaction, according to Hjarvard. This theory explains that while interaction will always occur through a variety of social networked platforms, these platforms are the only way to distinguish specific forms of interaction because they have become so similar in nature. In a sense, communication through social networks is becoming more “real” than face-to-face conversation because users have the ability to express things they may not in real-life (Boyd 213).

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Social networks also allow communication to influence users because users are generally connected with users they already know, or are connected with users that have similar interests (Sheldon 41). Social interaction consists of both communication and action. This is dependent on activity by the producer and receiver. Therefore, for social networks to do their job, some sort of reaction between both parties has to exist. In other words, a social network‟s significance to the music industry is dependent on whether or not there a considerable audience exists that cares enough to react to new material. Social interaction is necessary to the music industry because of its globalization abilities. Mediatization relates directly to globalization because globalization presumes the existence of the technical means to extend communication and interaction (Hjarvard 113). Mediatization plays a role in regulating direct and non-direct communication, and both play significant roles in interaction on social networks. Direct communication makes visible how any social activity is substituted, or transformed to a new mediated form where it is easy to establish a „before‟ and „after‟, then examine the differences between them (Hjarvard 114). The media tends to always play a significant role in direct communication. A social network needs direct communication to incorporate different media forms to have their messages influence the network‟s users. In this study, the online music industry needs to utilize direct communication to incorporate other media forms within its social networking uses to influence users to come to an Page 1 of 64


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artist‟s page, develop interest and generate new revenue streams. This will involve an artist‟s understanding that control over online content and activity is realized, breaking one-directional ties between artist and fan. The theories of mediatization and social interaction indicate that it will be necessary for artists to develop closer relationships with fans through social networks to truly reap the benefits of a network‟s capabilities. More recently, communications technologies have gone through another transformation of mediatization. Now, cellular phones have internet capabilities. The major social networks have developed mobile models that allow users to update Twitter, Facebook, or Myspace pages on an instantaneous basis no matter where they are; the need for a computer is no longer truly essential to take advantage of services provided by social networks. This fact alone represents a new and significant distribution model for musicians as they now have the ability to reach users anywhere, any time. Again, the scope of social networks has been expanded, opening distribution streams unavailable in the past, representing another shift in the mediatization of social networks and the music industry. 3.5 UNDERSTANDING USES AND GRATIFICATIONS THEORY The uses and gratifications theory presents the idea that audiences differ in the gratifications they seek from the mass media. The theory is grouped into four categories: 1) diversion 2) personal relationship building Page 1 of 64


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3) personal identity 4) surveillance

The theory tells us that users of social media, or in this case, social networks, use them to satisfy the latter four characteristics. Facebook users like the opportunity to find others with similar interests, and by using the social network, they feel a sense of community and connectedness (Boyd 211). Morris and Ogan suggest that the Internet has the ability to satisfy interpersonal and mediated needs. Except for interpersonal needs, Flaherty, Pearce and Rubin have found that people use computers to satisfy the needs that were traditionally satisfied by traditional media (Sheldon 41). Flanagin and Metzger conclude that mass media needs are mediated by interpersonal needs, like feeling less lonely, maintaining relationships, problem solving and persuasion. Charney and Greensberg describe the eight gratification factors on the Internet: to keep informed, diversion and entertainment, peer identity, good feelings, communication, sights and sounds, career, and coolness. These factors all relate to opportunities for the music industry. It is clear that users of social network seek to connect on emotional and personal levels. Music generally affects listeners in an emotional or personal way. By combining these factors with the legitimate emotional connections through music, the music industry could thrive in a social networked environment simply because of the effect it could have on users.

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4.0 METHODOLOGY It will be necessary for the purpose of this study to employ a mixed-method research methodology, combining information gathered through quantitative and qualitative methods through secondary sources. The study will employ a quantitative method to develop statistical information relating to current variables of the music industry like CD sales, online music sales provided by the Recording Industry Association of American, and the Canadian Recording Industry Association. In depth statistical analysis will be necessary to prove why the music industry is such bad shape, but to also show how it can be turned around, by noting trends relating to growth in online markets and social networks. For the qualitative approach, the study will analyze behaviours relating to online activities on social networks. For instance, we will use Boyd as a source of understanding what social networks are and why we use them. The theory of mediatization will also play a significant role in the research of this study, and the study will therefore employ quantitative data relating to Hjarvardâ€&#x;s theory of mediatization and its relation to the use of social networks and their connectivity with new music industry business models. The purpose of this research will be used to understand behaviours used by individual network users and social trends relating to online activities on social networks.

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5.0 FINDINGS AND CONCLUSIONS 5.1 THE FUTURE OF SOCIAL NETWORKS The research in this study has shown that social networks have great potential in generating revenue for a number of industries. They have massive audiences that are constantly generating new content. This research has shown that a dependency on user-generated content only makes social networks more personal, and attractive to users seeking to stay connected with friends and others of similar interests. Theory shows that the social networks involved in this study contain gratification abilities that research shows users seek. They become more personal because they have the ability to link physical borders through instantaneous online activities (Boyd 213). A significant tool that the three social networks in this study possess is their ability to actually link with each other, again on an instantaneous basis. Twitter users can actually use the tool to update their Facebook status. Twitter is also able to connect live-link system with Myspace, allowing users to link to a profile page on Myspace in real time. This is of significant importance to how bands can market themselves, as although these three networks are individually owned and operated, they have been intelligently linked, developing new and useful techniques for users to communicate with one another. Naturally, it should be assumed that as these linking abilities become more and more profound, the growth statistics I have mentioned will grow further.

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All these technologies are still rather new, especially their new and improved tools, allowing new users to continually tap into this networked system. For musicians, these systems will change how the fan and artist relationship is developed, maintained and executed. Bands have a great growth opportunity if they choose to pursue the use of social networking because they will increasingly become routine in daily promotion activities. Not only do the social networks mentioned here have great growth potential, they are also, for the most part, free of charge, eliminating traditional costs like marketing, distribution, and paying back capital lent by record labels. 5.2 THE MUSIC INDUSTRY NEEDS SOCIAL MEDIA While there has been some steps towards utilizing social media in music industry activities, the industry is still too slow in acting profitably (Pfanner 2010). There is still a focus on maintaining a steady relationship with record labels. The issue, however, is that record labels are generally uninterested in pursuing risky revenue models because there may not be a pay out (Leeds 2008). There exists a more significant risk to the artist in this model because the band does not get paid until the record label does. Physical releases will render obsolete. There is no longer a need to maintain focus on physically releasing a CD because research has shown that the physical market has proven unprofitable in the digital climate. This is evidenced by significant declines in sales over the past five years, more recently a 16% decline over the past two years (Pfanner 2010). On the other hand, online

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sales have continually grown, now represent more than a quarter of music industry revenue (IFPI 2010). However, online sales have not been strong enough to curb industry losses (IFPI 2010). In todayâ€&#x;s climate, there is no significant market for physically released music because online options are too attractive (Freeman 18). While the idea of eliminating record labels as necessities to a bandâ€&#x;s success may eliminate financial backing for artists, there exists the possibility to self-market themselves through the use of social networks if they choose to maintain control and development of them. Capital may be attractive to an artist, but the truth is that they have to pay it back at some point. If the band is not profitable, debt looms, and the risk of being dropped by the record label is a constant threat. Until the industry can realize the true potential of social networks as key marketing tools, it will continue to struggle. It will continue to waste money by implementing business models that the research and statistics in this study have proven inadequate. On the other hand, not only will social networks play increased roles in digital music development, but there also exists opportunity for the music industry to invest financially in these social networks as well. Again, live music will play a leading role in generating income for the artist while the music has to act as the backbone of the business. In Canada alone, the live music accounted for almost 50% of industry revenue in 2005 (OMDC 22), which means there is a market for paying consumers of live music. The study by the Ontario Media Development Corporation reveals that Canadians are the highest downloaders of pirated music per capita (1.3 billion illegal downloads to Page 1 of 64


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20 million legal ones). This is a clear indicator that the “free” model will persist as a viable recorded music distribution model that can be used to support profit generation in other areas, such as live music. Social networks have the necessary tools and audiences to adapt to this kind of climate. Success, however, will be dependent on how the industry chooses to utilize them.

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6.0 RECOMMENDATIONS AND OPPORTUNITIES 6.1 THE MUSIC TAX While a significant amount of blogger attention has been paid to the idea of a music tax, and how it could kill the industry, the research in this study suggests that a music tax could be necessary to try and off-set the impact piracy has had on industry revenues, specifically relating to the recorded music sector. A 2008 article in Wired first brought the idea of the music tax to fruition, when a digital strategist working with three of the four majors (Sony, EMI, Universal, Warner) suggested that Internet service providers (ISP) should implement a $5 surcharge to its users that would go into the industry‟s pockets (Van Buskirk 2008). While the idea has taken significant heat, it is plausible. Piracy has shown to be unbeatable (95% of all downloaded music is pirated illegally) and the industry continuously struggles to find ways to adapt to it (Freeman 18). Implementing a music tax could play a significant role in stabilizing the music industry. While the argument first came to light before social networks had truly taken off as a significant source of user-generated content and the mass audiences it now obtains, both the music industry and the social networks would benefit from this. Through responsible social networking, meaning constantly updating and maintaining profile pages, artists have the ability to generate infinite audiences to their pages. The Internet‟s mass memory abilities also mean there

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will be a way to track statistical information or, in the case of Facebook, to “target” audiences based on personal interests (Vara 2007). On social networks specifically, increased audiences generate more advertisement revenue, which is necessary to fund the networks. By opening the online industry‟s doors to free music, artists will be more open to generating music content on their own profile pages available for download, which should increase the number of people visit the sites instead of depending on P2P platforms for their music. The music tax, however, is not an entirely new strategy. In 1999, when piracy started truly becoming an issue, the Canadian government implemented a tax on blank CD‟s and tapes to try and feed money lost from piracy back into the industry (Globe and Mail 2010). Consumers were charged a 24 cent tax on blank tapes, and a 29 cent tax on blank CD‟s. In 2004, it is reported that the tax generated about $39.4 million for the music industry (Globe and Mail 2010). Consumer listening habits have changed again, however. Now, we depend on iPods and MP3 players to listen to music which do not require the use of blank CD‟s and tapes. For example, in 2008, that same tax only generated $29.3 million (Globe and Mail 2010) – down more than $10 million. The music tax is not a farfetched concept. If anything, it‟s a superdiscounted unlimited subscription services to any music file on the Internet for $5 a month. iTunes users would spend that same amount for 5 downloads. The music tax would in no way impede the growth of the industry it needs to make money from music. By opening the market to free music, it gives artists Page 1 of 64


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and labels the ability to actually digitally release music in social network platforms for free-download, while still making a percentage of the ISP‟s $5 music tax. Generating increased audiences on social network pages also opens up new revenue streams for artists to make money through touring and merchandising ventures, and with increased focus on digital music, the industry has significant ability to decrease the costs of actually distributing music because physical releases will no longer be necessary. This way the industry can instead focus on adapting to new online models of making money instead of continually wasting money on releasing, marketing and distributing physical releases in a market climate that is increasingly volatile. 6.2 DEVELOP THE “FREE” MODEL OF RECORDED MUSIC “The winners made their stuff free first” ��� Chris Anderson, Wired, 2008 By implementing the music tax by ISP‟s, the industry can have a more focused ability to experiment with the free model. Major acts like Radiohead and Nine Inch Nails have successfully released music using the free model. In his 2008 article for Wired, Chris Anderson argues that the free model is the future of business, especially in online industries. Anderson argues that there is a huge difference between free and cheap from a consumer‟s perspective, resulting in which Josh Kopelman calls the “penny gap”. Anderson also says that the difference between free and cheap is why micro-payment systems have failed. Music subscription services are a good example of that “penny gap” because they have significantly failed the close the gap that piracy has cost the music

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industry. Services like iTunes have been unable to make up for the amount of money lost through decreased CD sales. Anderson believes “freeconomics” are driven by the technologies that power the Internet because it is all about scale. Today‟s market represents a scale that can no longer be supported by paid-for downloading services. The Internet offers these cultural industries a great opportunity to utilize technology that has greater flexibility in how they can define their markets (Anderson 2008). This flexibility results in the ability to actually target audiences through understanding unique user information (Vara 2007). Also, if the social networks place more of a focus on developing new advertising systems (which they depend on for income), the music industry could start to charge a tax of its own on the social networks. The social networks are taking in huge revenues through advertisements because of their massive audiences. The issue, however, is that the music industry could be making money off its social network profiles because they are ultimately brining people onto the networks and feeding advertising revenue. A move towards an increasingly free model would also represent how mediatization theory plays a significant role in predicting the inevitability of shifts in cultural markets. Because the Internet is a constantly growing platform with a massive communication scope, it lets users understand why these shifts occur. In the music industry, this has been represented by music download platforms, and has evolved into today‟s social network platforms where users can listen to music, and view other content generated by the artists. In mediatization, social Page 1 of 64


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networks represent the next-wave of downloading services, with bonus features. For that reason, developing the free model through social networks will represent a legitimate revenue generator through advertising, merchandising and tour sales. The industry needs to develop a strategy that would earn them a piece of the advertising pie on social networks. This, however, is dependent on the amount of content that artists can generate to keep audiences coming. By developing the free model further, the industry could keep increasing audiences to unique artist pages which in the end, not only helps them generate revenue through concert ticket sales and merchandising, it would also help the social networks garner increased advertising revenue as marketers would be more comfortable investing more ad money into the networks because of the massive audiences they can bring in. Anderson argues that Google is the perfect example of the free model because it was able to implement a three-way market. The three-way market consists of the online platform (such as Facebook, Twitter, or Myspace), its users, and the companies that choose to advertise on it. By providing content to its users for free, networks have the ability to open advertising markets which ultimately generate the revenue it needs to not only survive, but flourish. Anderson notes that the publishing business cannot sell their newspapers and magazines at high enough prices to cover the costs of putting the content together for consumer purchase, so they depend on advertising revenue to offset the costs they would otherwise lose. Social networks have developed this Page 1 of 64


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same model. Because the networks have a focused enough audience that ultimately generates the content it needs to stay current, advertisers can take advantage of the massive audiences the networks provide. The music industry can significantly benefit from this by maintaining artist profiles that release content for free, and reap the benefits of the networks ad-revenue business model. 6.3 MUSIC INDUSTRY NEEDS TO JUMP ON AD PREMIUMS The music industry should be charging the social networks a premium for advertisements on unique artist pages. Both industries are culture specific and generate audiences for each other; musicians bring users to social networks, while social networks provide the platforms artists need to distribute content. The networks would truly benefit from paying the music industry a percentage of its ad revenues for ads placed on artist specific pages. Through the free model, the development of artist generated content is truly infinite because there will always be demand for it. Video streams, MP3 uploads, photo updates, Twitter updating have proven to bring people to social networks, and should the artists take it upon themselves to truly take advantage of the tools the social networks offer them the abilities to generate content that can benefit them, the social networks would generate income because marketers would be more willing to purchase ads if there is proven to be audience growth. For this reason, the music industry needs to work with the social networks to develop a way that the industry is paid for the pages its artists maintain on the social networks that ultimately pay the networks but not the industry at this time. Page 1 of 64


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Because the industry is so high-risk, there is no way to truly estimate how much money the social networks could bring into the industry, implementing a “social network tax” could help off-set that. The industry should take 3-5% of the ad revenue generated by the social networks on profiles generated and maintained by artists within the music industry. Much like the music tax suggested earlier, the industry could develop ways of tracking who views what, where, and how much to determine who gets paid, and how the artist would reap that benefit. Considering the artist usually take about 12% of the revenue from a physical release, one could argue that the industry can afford to pay its artists 1-2% of the 3-5%. But, is there an advertising model that is sustainable enough to identify unique interests posted on social network accounts that can target specific users? The answer, in today‟s market is yes. For example, computer giant, Dell, has developed a framework that identifies value drivers for customers and businesses through identifying qualities like connections, recognition and advice to implement a social media marketing campaign that can attract and be useful to users on social networks relating specifically to Dell (Morrisey 2010). Not only does this mean marketers can identify unique user interests and target them, it also shows that there is a market for these types of campaigns. Facebook, specifically, generated a targeted advertising campaign in 2007 that was designed to provide marketers with the tools it needed to identify unique users based on information the user supplied on his or her profile (Vara 2007). Page 1 of 64


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The system called “SocialAds” shows up interspersed in Facebook news-feeds. The system develops “demand generation”, meaning it involves information directly relating to users to increase interest because of a direct personal connection to the advertisement (Vara 2007). A focused model for advertising will be integral. With unique user targeting abilities, the music industry can now focus advertising campaigns to unique user pages listing artists on specific label rosters. A web-marketer predicts that advertising revenue on Facebook alone will reach $3.63 billion in 2010 worldwide (Klassen 2007). Considering the mass growth rates on platforms like Facebook, or even Twitter, which grew by 190% in 2009, advertising revenues could be monstrous (see Appendix 9.3). Twitter does not have a formal advertising system yet, which represents another ad market for marketers to tap. Considering Twitter‟s growth over the past year, its advertising potential could be significant. 6.4 SOCIAL NETWORK SUCCESS DEPENDENT ON ARTIST INVOLVMENT For these opportunities to truly benefit the industry, the labels need to place an increased emphasis that artist need to place more focus on constantly maintaining social networks because of the potential the networks provide for the industry as a whole. Social networks have proven to be one of the fastest growing online phenomenons in the history of the Internet, and it‟s time that the music industry, another significant cultural industry player, reaps the rewards of its contributions to network success. Page 1 of 64


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To do so, however, the industry needs to demonstrate their ability to develop and maintain current and updated material. This also means that the need for physical releases is no longer necessary because there are big enough audiences on the networks to off-set the increasingly lower revenues the industry is taking from CD sales. Should the industry develop a model that would require artists to release new content on social networks for free, it would not only bring more people to the sites, but would also help generate revenue for both the networks and the industry through advertising income should the music industry and social networks come to an understanding that the music industry needs to be reimbursed by the networks for its ads on artist specific profiles. The benefits for both parties are inevitable.

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7.0 CONCLUSION The music industry continues to face numerous challenges in adapting an online market environment. The music market is increasingly dependent on illegal downloading services which now represent 95% of the music on the Internet. Subscription services have failed to compete with the attractions of illegal P2P download platforms, and the recorded music sales have fallen significantly. The Internet, however, offers a number of opportunities for the music industry to utilize should it realize that recorded music has truly become a lossleader. Only then can the industry focus on the development of these online technologies through social network practices that have been suggested throughout this study. The scope of the audiences social networks have reached is immense. Millions of Internet users log-on to their social networks at some point of every day. Hjarvard‟s theory of mediatization predicted the inevitability of these shifts in industry structure, and now the Internet proposes new globalization strategies relating to distribution practices. The Internet and social networks have allowed the idea of “free” music to exist. There is significant opportunity for the music industry, specifically its artists to take more money home through providing music as a loss-leader and make money through other revenue generators. This study has suggested that the future of music industry profitability is dependent on the following factors:

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April 2, 2010 Senior Research Project

Implementing a music tax, where ISPs charge a unique user $5 per month tax that is flushed into the music industry to start cutting into the $3.7 billion cost of piracy

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To develop the “free” model of music distribution through Anderson‟s “freeconomics” theory that would make recorded music a loss-leader for the other revenue streams like live music and merchandising, where the artists themselves actually turn more of a profit than they would on a recorded CD

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The music industry needs to start charging the social networks a premium for advertisements posted on artist pages. These pages bring people to the social network, which makes money for the network. But, the music industry does not take anything back. These industries can help each other, and the music industry needs to jump on these ad premiums they are currently missing out on

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Constant maintenance of social network profiles is integral, not only for user content viewing but to also provide the social networks with justification for paying the industry an advertising premium. These networks provide a platform that is constantly available for updating and maintenance – these factors need to taken advantage of.

The social networks represent a significant opportunity for the music industry, but also for these two industries to form partnerships as they both have reasons to depend on each other. The music industry can feed the networks with material Page 1 of 64


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while the networks provide platforms for that content to be received. There is truly great potential between both parties for future revenue generation. The future of the music industry is dependent on the development of legitimate online music distribution methods where music is a loss-leader and the development of musicâ€&#x;s relationship with social networks is a significant focus.

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8.0 REFERENCES “A Musical Divide”. Globe and Mail. March 19, 2010. http://www.theglobeandmail.com/news/opinions/editorials/a-musicaldivide/article1505376/ “A Strategic Study for the Music Industry in Ontario”. Ontario Media Development Corporation. Sept. 12, 2008. “Growth in digital music still not enough to counter drop in sales”. New Media Age. 1 Mar. 2007: ABI/INFORM Global, ProQuest. 6 Oct. 2009. “IFPI Digital Music Report 2010”. International Federation of the Phonographic Industry. Feb. 2010. http://www.ifpi.org/content/library/DMR2010.pdf “MySpace Music' Debuts”. Wireless News. 29 Sep. 2008: 6 Oct. 2009. “Research and Markets: “The Online Digital Music Market Reached Some $1.1 Billion in the US”. Wireless News. 1 Jun 2007. 6 Oct. 2009. “Online: Servicing Online Fan Communities”. Music Week. Aug 8, 2009. pg. 15 “Research and Markets: The Online Digital Music Market Reached Some $1.1 billion in the U.S”. Wireless News. June 1, 2007. “Social Media Stats: Myspace Music Growing. Twitter‟s Big Move”. The Nielsen Company. July 17, 2009. http://blog.nielsen.com/nielsenwire/online_mobile/socialmedia-stats-myspace-music-growing-twitters-big-move/ “Social Networking and Blog Sites Capture More Internet Time and Advertising”. The Nielsen Company. September 24, 2009. http://blog.nielsen.com/nielsenwire/online_mobile/social-networking-and-blog-sitescapture-more-internet-time-and-advertisinga/ “Time Spent on Facebook up 700%, but Myspace Still Tops for Video”. The Nielsen Company. June 2, 2009. http://blog.nielsen.com/nielsenwire/online_mobile/time-spenton-facebook-up-700-but-myspace-still-tops-for-video/ Arrington, Micheal. “How Warner Music Killed Facebook Music”. Q3 2009 TechCrunch Trends Report. January 15, 2009. Web. http://www.techcrunch.com/2009/01/15/howwarner-music-killed-facebook-music/ Belzman, Josh. Bands, fans sing new tune on Myspace. MSNBC. Feb 13, 2006. Berthon, J. “Music's manumission: Strategies for the music industry in a digital Era”. Management Dynamics 16.3 (2007): 18-23. 6 Oct. 2009. Bruno, Anthony. Twitter on the Highway. Billboard. March 7, 2009. Vol. 121. New York.

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Carter, Meg. Vertical Focus Live Music: Let’s Rock. New Media Age. June 25, 2009. London. Vaccaro, Valerie L., and Deborah Y. Cohn. “The Evolution of Business Models and Marketing Strategies in the Music Industry”. JMM: The International Journal on Media Management 6.1/2 (2004): 46-58. Fung, Anthony. “Think Globally, act locally: China‟s Rendezvous with MTV”. Global Media and Communication. 2006. Sage Publications. London. Hadden, David. “Digital Revives the Indie Pop Star”. In These Times. April 2007. p.43. Alt. Press Watch. Hjarvard, Stig. “The Mediatization of Society: A Theory of the Media as Agents of Social and Cultural Change”. Nordicom Review. 2008. 29: pp. 105-134 Klassen, Abbey and Jonathan Lemonnier. “Myspace milks music for monetization”. Advertising Age. Chicago. April 7, 2009. Klaassen, Abbey. "Facebook must spend to woo marketers." Advertising Age 78.43 (2007): 6. Communication & Mass Media Complete. 23 Mar. 2010. Kretschmer, Martin, and George Klimis and Michael Wallis. “Music in Electronic Markets: An Empirical Study”. New Media Society. 2001. 3:417-441 Morrissey, B. "Does Social Sell?” Mediaweek. 15 Feb. 2010: 14 Mar. 2010. Sandulli, Francesco D., and Samuel Martín-Barbero. "99 Cents per Song: A Fair Price for Digital Music? The Effects of Music Industry Strategies to Raise the Willingness to Pay by P2P Users." Journal of Website Promotion 2.3/4 (2006): 3-15. 14 Mar. 2010. Seay, J. "Music for nothing and your kicks for free: Giving Away Masters in the Digital Age”. Flagpole. 26 Mar. 2008: 13 Oct. 2009. Shields, Mike. "Facebook Growing Pains." MediaWeek 19.8 (2009): 10-12. 23 Mar. 2010. Shields, M. "MySpace's Social Dilemma.” Adweek. 22 Jun 2009: 6 Oct. 2009. Stokes, David., and Nicholas C Wilson. “Laments and Serenades: relationship marketing and legitimation strategies for the cultural entrepreneur”. Qualitative Market Research. 2004. pg. 218. Thelwall, Mike. “Social Networks, Gender, and Friending: An analysis of Myspace Member Profiles”. Journal of the American Society for Information Science and Technology. January 2, 2008.

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April 2, 2010 Senior Research Project

9.0 APPENDICES 9.1 APPENDIX 1 – NIELSEN SOUNDSCAN ONLINE MUSIC DESTINATION AUDIENCES

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9.2 APPENDIX 2 – TWITTER GROWTH BY TIME SPENT ON NETWORK

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April 2, 2010 Senior Research Project

9.3 APPENDIX 3 – SOCIAL NETWORK STATISTICS 2009 Facebook and Myspace Stats – The Nielsen Company 

With 144.3 million unique visitors, Facebook was the No. 1 global social networking destination in May 2009—the 7th month in a row that Facebook has ranked No. 1 May 2009 also marked the 5th month in a row that Facebook has been the No. 1 social networking site in the U.S., garnering 75.4 million unique visitors—a 190 percent increase over May 2008 Myspace.com continued as the top social networking site when ranked by total video streams in May, with 116.1 million video streams Unique viewers of video content at Myspace.com increased 22.9 percent monthover-month, from 9.9 million in April 2009 to 12.2 million in May 2009.

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April 2, 2010 Senior Research Project

9.4 APPENDIX 4 – VIDEO STREAMING COMMUNITY GROWTH

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April 2, 2010 Senior Research Project

9.5 APPENDIX 5 – MYSPACE UNIQUE AUDIENCE COMPOSITION

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April 2, 2010 Senior Research Project

9.6 APPENDIX 6 – TOP ONLINE MEMBER COMMUNITIES

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April 2, 2010 Senior Research Project

9.7 APPENDIX 7 – TIME SPENT ON SOCIAL NETWORKS

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April 2, 2010 Senior Research Project

9.8 APPENDIX 8 – KEY TRENDS NOTED BY OMDC CANADIAN MUSIC INDUSTRY AUDIT This report acknowledges some commonly held assumptions about the key trends in the music industry in Canada. These are:  

Recorded music is selling less, but other revenue streams in the music industry are holding their own or are increasing;

Digital downloading continues to increase, but the legal revenue-producing component has not replaced the decline in physical sales, nor is likely to in the near term;

The Internet is making it easier for potential music customers to discover and audition new and developing artists;

Labels, artists, and other members of the ecosystem are looking to other revenue streams to fill the piracy gap.

The strategic question is how the Ontario music industry can respond to the challenges arising from these trends and find ways to grow its revenue base on a profitable basis. Each of these trends is outlined in more detail below.

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

9.9 APPENDIX 9 – OMDC – CHANGES IN THE MUSIC ECOSYSTEM Figure 3 - Changes in the Music Ecosystem Ecosystem Key Changes Part Major Labels Main source of revenues (CD sales) declining Exploring new business models, expanding management and publishing arms Large reductions of workforce, including in Canada Less willing to take A&R risks (i.e. invest in artists) due to falling revenues But still important to Canadian music development as the chief distributor and financier/investor for Canadian indie labels Independent Labels

Music Publishers

Improvement in access to talent, owing to reduction in majors‟ A&R and a growing DIY attitude among artists Building on pioneers experienced in meshing traditional label roles with management and/or publishing (e.g. True North Records) Learning more about licensing and marketing in digital world and exports

Now able to own (digital) masters Exploiting new revenue sources on new platforms Administration costs increasing due to increasingly complex royalty collection

Distributors Less physical distribution as more goes online Adding publicity and marketing services to their offerings to labels

Ecosystem Part Key Changes

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April 2, 2010 Senior Research Project

Artists Highly dependent on touring and merchandise, though often playing smaller venues More control over their own careers More options available for business models (e.g. DIY or 360 deals), although success accrues mainly to acts with strong brands Recording costs have decreased, making the market easier to access Managers Increased competition from labels, as both parties take on each other‟s traditional roles Integrating marketing activities into management role, especially in artist-owned label scenarios Required to learn how to administer new revenue sources MMF Canada now active in developing management sector Promoters Remains a small, but profitable business in Canada Large(st) promoters taking on some label roles (e.g. Madonna and promoter LiveNation) Smaller niche promoters developing new marketing techniques and sponsorship strategies Agents Relying more on established heritage acts for revenue but expanding rosters of emerging acts Brokering increasingly complex deals Retailers Big box stores sell music as a „loss leader‟ Mid-size chains (e.g. HMV) diversifying content with DVDs and games; disappearance of record retailers (e.g. Sam the Record Man, Music World) Online retail is small, but growing rapidly Service Companies Other Parties (corporate interests)

Diversifying client base and services

Some corporate interests moving away from music industry sponsorships (e.g. Molson), while other move in An increasingly active role, beyond sponsorship (e.g. Bacardi and Groove Armada) among new entrants

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Matt Powell – 0540421 MDST 4022

April 2, 2010 Senior Research Project

9.10 APPENDIX 10 – OMDC – EMERGING BUSINESS MODELS IN MUSIC Figure 4 - New and Emerging Business Models Business Description Model “360” Deal

Brand Funding

Advertising Sponsorship

Off deck mobile

Crowd Sourcing

“Free” Music

Where labels share in all sources of revenue of an artist from CD/track sales through licensing, live performance and merchandising. Where non-music corporate interests fund and support the creation of music, beyond endorsements. Some brands (e.g. Jagermeister) also support artist development and promotion. The creation or licensing of music for a commercial advertising campaign (usually on TV) Music content sourced online and „side-loaded‟ on to a mobile device Music is not acquired through the carriercontrolled Wireless Application Protocol (WAP) decks, which is the equivalent of a web page. Where unsigned acts upload music to a website, fans vote on bands and invest their own money to support the emerging act Where music is uploaded to a website or digital distributor for free

Example

Parties Involved

Live Nation‟s deals with Madonna, JayZ, Shakira and Nickelback

Label Manager/Artist

Groove Armada and Bacardi; KRS-One and Smirnoff

(Manager) Artist Corporate Sponsor

Maynard‟s candies and Major Maker

Manager/Artist Licensor/Publisher Advertiser

Nokia‟s “Comes with music”; TXTunes

Artist, Music Aggregator Mobile Carrier/handset maker

slicethepie sellaband.com

Artist Service Company

Nine Inch Nails, Radiohead, Coldplay

Artist

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Other Platforms

April 2, 2010 Senior Research Project

(by the artist) and fans choose the rate at which they pay The delivery of music on or through other traditional creative „silos.‟ Such platforms include video games, online or traditional radio

Rock band and Judas Priest; Artwerk‟s partnership with Nettwerk are building exposure through games

Manager/Artist Music Licensor

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Marketing music online: A thesis