Maximizing Profitability in the Music Industry

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The Canadian music industry encourages development in technology as an aid to improving revenues. This has resulted in the current challenge which the music industry faces: loss in overall profits due to technological advances, and potential for product obsoleteness. Going forward, profits will be affected even more as technology advances further, and digital music becomes more popular. Therefore, the CRIA has asked industry experts to assess the current and future business environments and propose measure the music industry must take in order to adapt and survive. . The purpose of this report is to assess the music industry, evaluate the key decision criteria affecting the industry, and recommend a response to the changes in the marketplace. This report outlines several methods to improve long-term profitability, but the exact long-term profits are difficult to determine. Estimates for future profits were made based on the current path of the industry. For this report, the industry expert analyzed internal reports on the effects of piracy on the music industry. This information was compared with external statistics to determine opportunities for growth and profitability in the future. Consumer behaviour was also analyzed in order to choose the most profitable opportunity for the music industry to invest in This report reviews the current and future market, outlines key decision criteria around which the report’s recommendations are based, and suggests modifications to the industry’s current business model to increase annual revenue. THE DECLINE IN PROFITABILITY IN THE MUSIC INDUSTRY

In 2006, the music industry achieved a profit of 14 percent, illustrating the industry’s ability to turn a profit; however, annual revenues have decreased. From 1999 to 2010, the music industry faced a 57.5 percent decrease in global revenue. This has led to the industry’s inability to pay its debts, and reinvest its money into new materials and Canadian musicians. The long-term profitability of the music industry is in jeopardy. Refer to Exhibit A and Exhibit B regarding the assessment of the current state of the industry. Advances in Technology have resulted in a Decline in Revenue Due to technological advances, new entrants easily enter the market, preventing growth, and stealing market share from existing record labels. Two major entrants into the industry due to technology are •Digital music distribution which includes illegal peer-to-peer file sharing as well as legal downloading software such as iTunes •Internet sites that allow new and existing artists to utilize internet sites promote themselves and their music without being signed by a record label In a market where there is relatively ease for product substitutability, the introduction of digital music has resulted in a decrease in revenues for the music industry (see Figure 1)

Digital Music and CD Sales Revenue Decreased from 2007 to 2008 In the current recession consumers are unwilling to spend on ‘entertainment’ items such as CDs. Figure 2 shows the breakdown of CD and digital music sales in Canada from 2007 to 2008.

Year To Date

Units and dollars expressed in thousands20082007Percent Change Units Shipped - Physical Product
Other Formats108121-11%
Total Units3632942036-14%
Net Value of Shipments - Physical Product
Other Formats567850-33%
Total Value$365,071$430,991-15%
Net Value of Shipments - Digital Product
Internet Downloads454382756465%
Digital Mobile Content21632205925%
Subscription Model4599314446%
Other (Including Streaming)2829552413%
Grand Total $439,569482843-9%

The CRIA measured and compared the net value of shipments in physical and digital...
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