Impact of Unbundling on Digital Information Goods Market: A Case of Music Industry

For the first time since 2003, the sales of music albums increased by 3.6% during the first half of 2011 (Nielsen SoundScan 2011). This trend reversal was significant in the backdrop of steady decline of more than 30% sales of albums from the peak in early 2000s (RIAA 2011). The “rise of the digital technologies” marked the watershed of the traditional music market which was dominated by major record label companies (Hracs 2011). Music labels were vertically integrated and as they owned intellectual property rights over the content, they assumed monopolist power in producing, marketing and promoting recorded music (Cooper 2011), and preferred sales of albums over singles (individual song track) because of economic and strategic (IFPI 2004). Major record label companies have welcomed technological inventions like vinyl, magnetic tapes and CDs which significantly reduced production and distribution costs in the past (McLeod 2005), and it is surprising as why they were slow and often reluctant to adopt digital technology (Fisher 2000; Knopper 2009; Sisario 2011). This reluctance on part of the music industry is even more puzzling given the recommendation of academic literature that mixed bundling is optimal strategy when valuations are not perfectly positively correlated (Stigler 1963; Adams & Yellen 1976; Armstrong 1999; Bakos & Brynjolffson 1999). Digital technologies only reduce distribution cost of mixed bundles and thus music industry should have welcomed the arrival of these technologies very early on in late 1990s. We unravel this puzzle in this paper by developing an analytical model to study the impact of technology mediated “unbundling” on the revenue of a monopolist firm that has traditionally adopted pure bundling strategy for experience goods whose ex-ante consumer valuation is uncertain. We also examine the claim of music industry represented by RIAA that decline in music sales are due to increased illegal sharing of music on the Internet and study the impact on music labels revenue when they do not adjust their product-pricing strategy to emergence of digital distribution channel.