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The Music Industry In The Digital Economy

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In the boundless ocean of the digital culture, everything should appear as a blessing.  In the music industry, however, the digital age has been seen as a mixed blessing.  Because of piracy or MP3’s, whichever name we give to the mixed blessing of the digital economy as it concerns the music industry, the digital economy is presently not in a state to flourish as much as possible even if the steadily rising numerical figures related to the growth of electronic commerce tell us another tale.  In the year 1998 e-commerce was a relatively new experience in the business world.  All the same, business to consumer online shopping totaled a massive 7.2 billion U.S. dollars, increasing by nearly three hundred percent in the course of a year (Muhammad, 1999, 72).

     The music industry has reaped the benefits of its online presence along with the entire digital economy.  In particular, the music industry has been diligently selling physical products over the Internet as well as music downloads.  All industry sectors in the digital age are enjoying the grace of computerization over traditional paperwork.  In the music industry, the diffusion of digital music formats allows for the dematerialization and dispersal of music channels as far as music distribution is concerned (Jones, 2002).  The major music labels are facing heightened competition in the face of technological change.

The Big Five of the music industry, that is, BMG Entertainment, Sony, AOL Time Warner, EMI, and Vivendi Universal Music Group, historically holding eighty percent of the music market share, have seen a reduction in their market power in the area of distribution (Fox, 2004).  Independent music labels are on the rise.  More affordable equipment for music production and reception has created opportunities for new players in the industry (Bemis, 2004).  Yet, there is a downside to the digital age with regards to the music industry.

Artists cannot always make money by selling their hits because music on the Internet can be obtained for free.  Metallica has sued a company by the name of Napster that used music-swapping software (Mann, 2000, 39).  And, artists with whole albums out in the market cannot make their albums popular over the free mix of songs that consumers find available on the Internet.  Listeners generally pick the best songs on the album through the Internet and add these to a nice mix of songs of various artists on their Ipod’s.  As a result, album sales have fallen (Drew, 2005).

     Digital technologies make the production and commercialization of music less costly.  In the year 2000, global sales of CDs, cassettes, and vinyl records amounted to around $37 billion.  In 1999, this figure was approximately $38.5 billion, and in 1995 it was $41.5 billion.  The United States is the world’s largest music market, where recording sales are said to have been declining and reaching market saturation.  In 2000, music sales in the world’s largest music market dropped 2.6 percent, while sales of CD singles slumped by 36 percent.

Even music product shipments decreased from $6.2 billion to $5.9 billion between mid-2000 and mid-2001.  It was further discovered that an estimated thirty million American adults and seven million younger Americans were downloading music files over the Internet by the year 2001.  At least seventy nine percent of all those that downloaded music files did not pay for the music they retrieved from the Internet Younger Americans in particular reduced their music purchases by a considerable amount (Fox).

     The music industry, before the advent of the digital age, was known as the music monopoly given that it was able to secure its dominance by controlling the means of production.  Today it cannot do this.  Recording, production and distribution costs have dropped drastically since the 1990s.  The compact disc boom, the subsequent rise of digital distribution, and the consumer-led file-sharing explosion forced an unwilling music industry into the online marketplace.  Music companies faced considerable pressure to adopt new business models so as to meet consumer needs successfully in the e-commerce milieu.

It was found that common consumers appreciate a wide range of music and do not pay heed to the music label as much as they do to the quality of sound and the experience of music.  In addition to offering consumer choice, successful e-commerce models in the music industry had to incorporate music-related materials, such as video, lyrics, song sheets, interviews and links to relevant websites.  The digital economy has placed a greater responsibility on the music industry, as “free music online has redistributed power in the music industry from music labels to individual consumers” (Fox).

     Internet-based music has further impressed certain gurus of the music business.  Established orchestras, for instance, are quite pleased with the digital world of music.  Joseph Klueger, President of the Philadelphia Orchestra Association, has observed that “it costs the same amount for the Philadelphia Orchestra to record Tchaikovsky whether you sell 50,000 units or 10,000 units.  By using the Internet, we lower the breakeven point” (Salkever, 2000).  New technology also allows the release of music in new formats.  Price and sale increases often follow new releases in new formats, with gains for the music industry (Garofalo, 1999).

     The Recording Industry Association of America has filed copyright infringement lawsuits against downloading music fans indulging in free music on the Internet.  However, litigation has not halted the download of free music files, nor have copy protection technologies proved successful.  David Marsh, an old worker for the music business, has stated: “In terms of the American economy, the recording industry replaced the cotton industry with exactly the same labor relationship.  You know, recording artists are mostly treated like sharecroppers” (Mcleod, 2005).

     When we talk about the digital economy, we have to emphasize the convergence of computing and communications technologies in the Internet and the ensuing flow of information and technology that stimulates all of electronic commerce and tremendous organizational change.  One aspect of ‘new living’ in the digital world is the flood of unwanted messages in our inbox every day – an intrusion outside the music industry’s free music experience with the digital age.

Nevertheless, the digital economy is known as a prominent driver of economic and social change, attracting investment, reducing inflation, and increasing productivity.  In addition, this new economy is fueled by extraordinarily rapid technological and market innovation – something that was neither possible for the information economy nor the remaining fields of technology.  New laws have been introduced to deal with corruption at work within the digital economy (“Understanding,” 1999, 34).

  Credit card fraud within the framework of the exciting electronic commerce, for example, has led to new theories on privacy issues to counteract the effects of the problem.  The FBI in the United States of America has introduced a logo to be placed on entertainment products that warns consumers not to illegally copy and distribute computer games and digital versions of movies and music over the Internet.  Digital piracy is said to be costing U.S. companies more than $23 billion per year (“FBI Seal,” 2004, C10).

     Another well-known issue surrounding the digital economy is about the widening gap between the haves and have-nots of global society.  A hindrance to the new economy, the digital divide is described thus by Dr. Neal Lane, Assistant to the President for Science and Technology in the United States:

         We know that the functionality of information technology and Internet services has

    the potential to segregate non-users from users.  It can leave non-users out of important

    markets and virtual communities within the digital economy.  Such segregation not

    only diminishes the potential of those markets and communities, but also raises the

    specter of a class of outsiders who face isolation at many levels and in a growing

    number of contexts.  Ultimately, these outsiders may face increasing costs as services

    and sales performed outside the digital economy lose scale and become comparatively

    expensive to provide (“Understanding”).

Poverty is a crisis that the world has not found itself capable of resolving so far.  The digital divide is most obvious when we compare the digital culture in the first world to that in the third world.  Poverty ensures that the digital economy cannot be received as readily as it could have been received across the world.  In fact, the developing countries are where pirated digital versions of movies and music are sold out openly in the market, and most of the residents are not even aware that there is a way at present to conduct e-commerce.  To put it another way, there is a digital economy in place in our world and there is a world of no digital economy at all within the same world.  This second world within our world naturally includes the lawless underground economy making no profit for the original producers of music, for example.

     Darknets are small networks of users that share digital files.  In J. D. Lasica’s book, Darknet: Hollywood’s War Against The Digital Generation, Darknet refers to the illegitimate underground economy in which computer users share and trade music, movies, television shows, games, software, and porn.  It is the black market of the Internet – the curse of the digital age (Cochran & Moberly, 2005, 112).  This underground economy of the Internet is comparable to smuggling in the case of the old economy.  At the same time as the old economy and the digital economy made a supreme effort to tackle all societal and economic sicknesses, latest methods and techniques for enhancing trade and productivity were theorized.

Music labels were advised to price downloads in a way that recognized the lower costs associated with providing music via the Internet.  New business models emerged as music labels gained access to newly discovered revenue sources.  These record labels were additionally advised to provide value over and above that provided by free music (Fox).  Global free music meant that the music industry in the digital economy had to endeavor not only to help societal forces in dealing with technological crime, but also to produce music that would outperform that which is available via illegal sources.

     The digital economy is the founding father of the concept of eLeadership in all industry sectors.  Susan Annunzio has written a book called eLeadership: Proven Techniques For Creating An Environment Of Speed And Flexibility In The Digital Economy.  Discussing the high level of organization change required when a company decides to develop its trade through e-commerce, the author mentions that traditional organizations have to respond to the increasing level of change more rapidly than ever.

Besides, the advent of eBusiness means that winners will be organizations that can attract and retain the best talent while encouraging the free expression of ideas.  Annunzio counsels eLeaders in order to help them create “an environment that will keep the best and smartest people on board.”  Her definition of eLeadership is rather enlightening.

It is “shaking up your corporate culture and fostering an attitude of speed and flexibility in order to facilitate the internal transformation to an environment for the new economy.”  Also according to the author, eLeaders have not only to work at extreme speeds, but also be honest, responsive, vigilant, willing to learn and relearn, altruistic, and people with a sense of adventure and vision (Gibson, 2001).  Fred Luthans has described some of the most inspiring eLeaders in the digital age:

         Take Bill Gates, the ultimate techie but a great leader.  A reason he has done so well

    is because he believes in the people part of his leadership role.  In fact, one of his

    quotes that I like is “My inventory, the value of my company, walks out the door every

    night.”  I think Gates appreciates the human side of enterprise.  He has reward systems,

    he has teams, he has all the things we talk about in HR; you can find not only the most

    sophisticated technology in the world, but also textbook examples of effective OB/HR

    at Microsoft.  Gates is obviously the ultimate techie, but he is also appreciative, and an

    effective leader of human resources.  So is Jeff Bezos, the cyber architect of

    Amazon.com.  All of his top people have become millionaires through his HR policies

    of sharing the wealth through pay for performance and stock ownership in this

    amazing e-commerce firm (Hodgetts, 1999, 138).

The digital economy has brought about broad-based change in the corporate culture.  We have heard authors such as Annunzio stating that organizational leaders must in fact be the foremost in demonstrating commitment to change (Gibson).  Organizational behavior studies make a case for easy transition into the electronic world.  All the same, it would not be surprising if the academia makes up its mind to begin a new discipline called Digital Age to better understand the eBusiness world and the large-scale effects of the digital economy on human society.  So far the digital age has been referred to as “a period of turbulent, systemic change in the organization of the world economic and political order—a period comparable to the transition from the feudal to the modern era in the 16th and 17th centuries” (Kobrin, 1998, 361).

     Globalization by the end of the twentieth century already represented a systemic transformation of the world economy to result in new structures and new modes of functioning.  It entailed two interrelated, technologically driven phenomena.  First, dramatic increases in the cost, risk and complexity of technology in many industries, rendered even the largest of national markets too small to serve as meaningful economic units.  Second, the global world economy is electronic, and integrated through information systems and technology rather than organizational hierarchies (Kobrin, 1997).  The impact of globalization was everywhere, of course, and nations far and wide longed to participate.  Ki Da Jung (2000) writes about globalization in Korea:

         Globalization in Korea means a policy of liberalizing and restructuring the country.

    The intent of the liberalization policy is to adjust to international rules and regulations,

    and the aim of restructuring is to strengthen competitiveness so that we can win in

    international competition.

         Although the Korean people suffered a lot, indeed, due to the foreign exchange

    crisis, we also had an opportunity to globalize the country through openness and

    reform.  We learned the lesson that we can survive only when we offer the best

    possible goods and services to the world.  The age of closed national economies has


         Another driving force behind economic growth in Korea was our concentration on

    building knowledge-based industries based on information capabilities.  In the past,

    such tangibles as capital, labor and land were the core elements for industrial

    production.  But in the 21st century, such intangibles as knowledge, information and

    cultural creativity are the source of competitive strength (3).

Although the music industry had met with globalization with satellite music channels, etc., before many other industry sectors joined in, globalization saw its whole self manifested with respect to the music industry only with the beginning of the digital age.  The information age joining forces with the digital economy produced a greater need in consumers to know as much as possible about their products of choice, be they musical or not.  The music industry has had to respond therefore with business models relevant to new technology.

     The digital economy has also shown the idea of corporate re-engineering on a grandstand.  The new economy extends the methods of mass production to services.  Management no longer must find cost-effective ways to monitor and thereby control the performance of service providers.  This was previously accomplished in the factory as the logic and speed of the production process was built into an assembly line that could be controlled by management.  Thanks to the computer, this assembly line experience has been brought to the service sector as management is now able to more closely monitor the workforce.

Computers can instantly identify deviations from authorized practices.  Presently, workplace autonomy, privacy, personal style, pace, and initiative are increasingly under direct supervision and control of management (Prasch, 2006).  This is similar to the practice of electronic music in the digital age, doing away with the need for several musicians for a piece of music, and thereby reducing the cost of making music.  This aspect of the digital economy has a great impact on the production of music, too, as the latest in computing technology solves many a problem in the music factory.

     Marketing is a central activity in the digital economy.  Nowadays eMarketing is a worldwide phenomenon.  The Internet offers technologically advanced means of tracking the interests of website visitors, grouping folks with common interests, and selling advertising space to advertisers that are especially seeking to reach those people (Fox and Wrenn, 2001).  Mark Fox explains eMarketing with respect to the music industry:

         What the Web offers labels is a unique opportunity to understand for
the first time, what really makes the public tick.  Who they are,
why they buy, what else they do when we’re not buying CDs.  There’s
never been a marketing platform quite like it.  Armed with this
information, a label ought to be able to precisely target the
correct demographic for its artist, and cut out the wastage in its
marketing budget.

The digital distribution of music calls for online music communities with vast networks of information about the users.  As an illustration, Amazon’s Listmania permits consumers to establish wish lists of goods and services, favorite artists or music, videos, etc., and share these lists with other site visitors.  Such communities provide a sense of belonging to their members, and in the case of music should make consumers less likely to migrate to competing music services (Dayal et al., 2000, 42).

     The Big Five of the music industry have been slow to realize the potential of the Internet.  Digital economy calls for dramatic changes in thinking and infrastructure on the part of the music industry’s major players (Fox).  This new economy is said to offer limitless possibilities to each and every industry, including the music business.  The potential for the growth of the music industry is significant, provided that well-conceived business models are developed to provide value to consumers over and above that offered by free music downloads.  The digital challenge for the music industry is to ensure that it provides this value.


  1. Bemis, Alec Hanley. “A Small New Future.” A. Weekly, September 2004.

  1. Cochran, Terry W. and Moberly, Michael D. “Darknet: Hollywood’s War Against The Digital Generation.” Security Management, Vol. 29, December 2005, pp 112.

  1. Dayal, Sandeep, Helene Landesberg, and Michael Zeisser. “Building Digital Brands.” McKinsey Quarterly, 2, 2000, pp 42.

  1. Drew, Rob. “Mixed Blessings: The Commercial Mix And The Future Of Music Aggregation.” Popular Music And Society, Vol. 28, 2005, pp 533+.

  1. “FBI Seal Warns Against Digital Piracy; Cautions Heavy Fine Or Prison And Can Go On CDs, DVDs Software.” The Washington Times, 20 February 2004, pp C10.

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  1. ————– and Wrenn, Bruce. “A Broadcasting Model For the Music Industry.” International Journal of Media Management, 3, 2001.

  1. Garofalo, Reebee. “From Music Publishing to MP3: Music and Industry in the Twentieth Century.” American Music, 17, 1999, pp 318-53.

  1. Gibson, Jane Whitley. “eLeadership: Proven Techniques For Creating An Environment Of Speed And Flexibility In The Digital Economy.” Journal of Leadership Studies, Vol. 9, 2001, pp 133+.

  1. Hodgetts, Richard M. “A Conversation On Fred Luthans Leadership In The 21stJournal of Leadership Studies, 1999, pp 138.

  1. Jones, Steve. “Music That Moves: Popular Music, Distribution and Network Technologies.” Cultural Studies 162, 2002.

  1. Jung, Ki Da. “Limitless Opportunities In ‘Digital Economy.’” Presidents And Prime Ministers, Vol. 9, May 2000, pp 3.

  1. Kobrin, Stephen J. “Back To The Future: Neomedievalism And The Postmodern Digital World Economy.” Journal of International Affairs, Vol. 51, 1998, pp 361.

  1. ————. “The Architecture of Globalization: State Sovereignty in a Networked Global Economy.” In John H. Dunning, ed., Governments, Globalization, and International Business. Oxford: Oxford University Press, 1997.

  1. Mann, Charles C. “Heavenly Jukebox: Rampant Music Piracy May Hurt Musicians Less Than They Fear: The Real Threat – To Listeners, And, Conceivably, Democracy Itself – Is The Music Industry’s Reaction To It.” The Atlantic Monthly, Vol. 286, September 2000, pp 39.

  1. Mcleod, Kebrew. “MP3s Are Killing Home Taping: The Rise of Internet Distribution And Its Challenge To The Major Label Music Monopoly.” Popular Music And Society, Vol. 28, 2005, pp 521+.

  1. Muhammad, Tariq K. “Leaders Of The Digital Economy.” Black Enterprise, Vol. 29, March 1999, pp 72.

  1. Prasch, Robert E. “The New Ruthless Economy: Work And Power In The Digital Age.” Journal of Economic Issues, 40, 2006, pp 235+.

  1. Salkever, Alex. “Upbeat At Napster—And the Growing New-Media Music Crowd.” Business Week, 23 June 2000, pp 217-41.

  1. “Understanding The Digital Economy.” Presidents And Prime Ministers, Vol. 8, 1999, pp 34.

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