Digital Music Distribution

Executive summary The digital distribution of music grew out of the unauthorized file-sharing phenomenon of the late 1990s. As peer-to-peer networks gained popularity, a digital music value chain emerged comprised of file sharing software, Internet connectivity, personal computers, jukebox software, portable MP3 players, and a community of users providing content. These components were interchangeable and assembled at each user's discretion, providing a loosely-coupled infrastructure for the distribution and consumption of unprotected music files at a scale that quickly took the practice outside the realm of fair use. Legal action by the Recording Industry Association of America (RIAA) and other entertainment groups led to innovation in two opposing directions. On the one hand, unauthorized networks found more effective ways to circumvent authority. On the other, the authorized online music market was born, distributing protected content using digital rights management (DRM) technology. DRM has been used as a key strategic mechanism for tying content to different components, introducing pockets of scarcity in the value chain. Two key business models emerged from the first wave of authorized services: device centric and software centric. The former is the near-exclusive domain of Apple's iTunes Music Store (iTMS) and the latter comprises online stores selling music supported by Windows Media Player (WMP). More recently, mobile carrier services have added a third category of business model; network centric, where both the portable player and content are tied to the delivery channel (the carrier's network). This latter trend not only increases instances of scarcity in the value chain, it also shifts certain aspects of control back to network operators. Released in 2003, the Apple's iTunes Music Store dominates the authorized digital marketplace with 80% market share in the U.S. in 2005. 1 As a device manufacturer, the company's business model was predicated on the highly successful iPod, which had been released 2 years before the iTMS. Apple leveraged the iPod's icon status and made it a major control point in the iTMS value chain by providing a streamlined channel that tied content to the portable player through its proprietary DRM technology, FairPlay. Thus, while the iPod was initially marketed as an open MP3 player that supported unauthorized digital music, it is now the exclusive portable device for iTunes content. Two key trends threaten the iTMS model: the growth of the WMP-based player market, and the rise of the music phone as the portable playback device. As mobile networks …