KENDERAY: E-Commerce Strategy Development

E-Commerce Strategy Development - Online Music Case Study
by: Sam Harnett

The UK online music market is a potentially huge market. Over the last eighteen months a great number of legitimate music services like ourselves have emerged to take advantage of the new music distribution model pioneered by Napster’s Shawn Fanning in 1999. Although we currently hold 35% of the online music market, we will have to continue to develop our strategy and online practises if we want to build our market share and compete with the big international competitors, namely the iTunes network. This document is both an analysis of our current strategy and a proposal to extend it.

Analysis of current system

The strategy we have developed over the last two years centres around selling songs on a price per song basis. This is one basic strategy that all online music vendors have adopted. One of the key factors in Apple’s success was its famously low 99 cents per song price tag. Because of this, we, like many other online music providers will find it very difficult to compete in pricing. According to popular legend, Apple secured this low price by refusing to sign the terms offered by the record labels then going ahead and launching iTunes anyway, daring the record labels to pull out. Labels have repeatedly tried to renegotiate this deal to no avail. None of the labels are willing to risk pulling out of the iTunes network and losing their foothold in the paid download business. As well as ‘pay per song’ there are a number of other tactics for selling music online. One method proposed by Ken Hertz, who represents Alanis Morrissette among other recording artists, is a flat fee collective licensing system. In flat fee collective licensing customers pay a fixed subscription fee to be allowed to download as much content as they want. This income is then divided among the content providers based on the percentage uptake of their content, as opposed to the unit uptake of their content (Fisher. WW, 2004). Fisher believes this model will lead to a reduced profit per song but an increased uptake of the service. This has already been shown to be an effective business model when applied to video rental. Having been pioneered by Blockbuster with their £13.99 online video rental service it has since been adopted by Amazon and Screen Select to provide similar services. I believe this model would be successful for us as it lets customers believe that by using the service regularly they are getting good value for money. Value for money has been a sticking point for music fans for a long time. Often, many people justify using illegal services like Emule or Limewire by claiming that the cost of purchasing music legally is excessive for

the product. The main problem with this model is that it would require the content owners (the record labels) to license their work to distributors.

Review of competitor activity

Our market is currently divided among a number of legal and illegal music services. These include services like Amazon where you can order a physical copy of a music CD online, services like the new Napster where you can search and download both free and paid for music and (semi) illegal services like Emule P2P where you can download anything you want for free.

Napster:

Napster has been involved in mainstream online digital distribution of music longer than any other company, and is arguably the most famous company in the field. Napster was launched as a free music sharing facility in 1999, and faced legal battles from the outset. It was finally forced to succumb to business pressure in 2001, at which point it began the six month process of re-inventing itself as a legal service. This brings us to the Napster we see today. Napster currently offers its customers three packages, ‘Napster To Go’ for £14.95 a month, Napster Membership for £9.95 and Napster lite. ‘Napster To Go’ and Napster Membership allows customers to download as much music as they like to their Computer. ‘Napster To Go’ also allows music to be downloaded via special terminals in high street stores and internet ready televisions direct to MP3 players. Napster Lite is Napster’s basic free package. It allows customers to pay for music on a per song basis at 79p. Customers can choose what they want by listening to 30 second segments of the content before they commit to purchasing. Napster lite also allows its users to access music stored on other Napster users shared space, but this is carefully screened to prevent piracy. One flaw in the Napster system is that in order to continue using the content you download, you need to keep paying for the service. This will to lead to consumer scepticism as people won’t like the idea of being trapped in the service to keep their music collection.

iTunes Music Store:

iTunes music store opened its door for service on 28th April 2003. Its strongest asset is its seamless operation with the Apple iPod. The iPod is the most popular MP3 player currently available and like most Apple products, usability was high on its priority list during development. The existing popularity of the iPod and iTunes combined made the process of extending the commercial attributes of the system a simple task. The music content is protected with Apple’s fair play digital rights management (DRM) but there are several hacks for this which Apple has so far been unsuccessful in blocking. Since its launch the range of features it offers has continued to expand. You can now buy gift certificates, download video and special content, create your own iTunes store and upload your own music via garage band, Apple’s music production suite. By allowing their users to produce and sell their own music apple has opened the door for their service to be used in many novel ways. For example Stanford has recently started using iTunes to freely distribute special academic and promotional content centred around learning and living on campus.

P2P networks:

The P2P networks are arguably the greatest threat to our model of business. Despite frequent law suites and attempts at sabotage record labels have been unable shut them down. A peer to peer network is basically a distributed file system where the shared content on every connected computer gets grouped together into one super directory. A search facility then allows connected users to find and download what they want to their local shared directory. As content gets spread across the network it becomes more accessible to other users. From the users perspective this has the advantage of being free, but the disadvantage of being unreliable. Content is often mis-labelled or incomplete. There are a number of tactics employed by content owners to further disrupt P2P activity including suing downloader’s, distributing mis-labelled content, and distributing content that harms a downloader’s computer. Record labels have also attempted to stop piracy at the source, by preventing users from uploading their music to their computers. However, this method has proven unsuccessful as it can be easily circumvented using real time encoding software, which encodes the music straight off the microphone jack. Record labels have also been sued by consumer rights groups and had their reputations tarnished over the legality of this tactic.

Online CD sales:

Among many consumers a consensus seems to have formed that paid music comes with CD and downloaded music is free. I personally like to have something physical to own when I purchase music. For this reason online CD sales are still very popular. CDNOW, Amazon and HMV online are some of the most popular retailers for this in the UK. A CD has the advantage of being a more tangible asset than a download and is therefore better suited to being given as a present, which will make a big difference to sales over the holiday season. It also doesn’t require the same expertise to use as a downloaded track. A CD essentially works like a little metal version of a vinyl. It is self explanatory to every generation how to make a CD player play a CD where as many people, particularly in older generations don’t know how to use a computer. This gives a CD a much wider potential audience. It may be beneficial for us to also consider selling music on physical media.

E-Commerce strategy

In order to plan our future direction we need to take stock of our current position. We can do this using a SWOT analysis.

Strengths:

1) We currently hold 35% of the UK downloaded music market, in business terms this equates to a majority. This is a large base of customers who will hopefully stay with us if we can continue to extend our services to compete with those of our competitors.

2) With the help of this plan we have a number of new revenue streams that we will hopefully implement soon. These will, if implemented properly, lead to an increase in our revenue and customer base.

Weaknesses:

1) We have not attempted to compete in the international downloaded music market. It makes no sense for us to only sell to UK customers. Traditional geographic limitations don’t apply on the internet. The complication of extending our system to sell music in many currencies is small compared to the benefit of increasing our potential customer base a hundred fold.

2) We don’t yet have systems in place to deal with things like gift vouchers or coupons that could be used for promotion.

Opportunities:

1) We current only allow our customers to purchase one song at a time off us. We could also allow them to purchase whole albums or customised content off us.

2) Although iTunes has secured a much better per song price than we could, they do not currently offer a subscription service. Our second most popular competitor, Napster does offer a subscription service but their customers have to continue paying for the service to continue using the content they’ve downloaded. If we can negotiate a subscription service that doesn’t lock the customer in we will be seen as the superior service.

3) iTunes is never advertised by itself. It’s always ‘iPod + iTunes’. If we can adopt a similar music player, develop our software to work seamlessly with it and negotiate cross promotion we will be doubling our exposure and simplifying the use of our service for the customers. This would also allow us to extend our service in a similar way to ‘Napster To Go’. We could begin to sell our content in high street stores using dedicated terminals or via internet television. This would allow our customer base to grow beyond the computer literate.

Threats:

1) File sharing networks offer the same service as us for free. Attempts to close these services down have so far been mostly ineffective. Although the close of Napster in 2001 was highly publicised it was ineffective as by this point many more services with more tenable legal position had emerged.

2) Many people expect to get something tangible like a CD or DVD when they buy music. One of the major tasks that faces the downloaded music industry is convincing people of the value of an intangible asset like a computer file.

3) Our primary competitors, Napster and iTunes continue have a larger international customer base than us. They have more exposure and more assets to extend their service with. We can’t hope to compete by trying to out compete in existing models, we need to develop new methods of selling music.

4) Our primary competitor, iTunes, has negotiated excellent prices with the content providers. Without the same economies of scale on our side it will be difficult to make the same deal.

In order to build what we have achieved so far I have compiled the following list of extension to our service that we could implement in the near future:

1) Develop a subscription service – We should develop a subscription service based on flat fee collective licensing that doesn’t trap customers in the same way as Napster’s services. This will be seen as a superior product by our target audience as it allows them to get good value for money from the service.

2) Custom CD service - In order to take advantage of gift buying in the holiday season, we should provide a service where customers select a set of tracks to be put on a CD or DVD, design a cover, and maybe add a personal message. The CD will then be burned and the packaging will be printed and sent to the customer for an additional fee. Basically what I’m proposing is a professionally produced version of a mix tape. This provides an extra income for us on top of the audio track sales and gives the customer something physical to give as a present. This is a service that none of the music-download companies I have found currently offers.

3) Ally ourselves with a popular MP3 player – A big part of iTunes success is its strong links and seamless operation with the iPod. By adopting a similar MP3 player, possibly the iRiver, we could tightly integrate our software with it, negotiate cross promotion and develop special terminals to sell our content in music stores, super markets, airports, train stations or anywhere else people are likely to be in need of quick entertainment.

4) Develop our international presence – We should extend the functionality of our site to allow it to sell music in many currencies. By accepting Euros and dollars we would be extending our potential customer base to twelve European countries, America and a number of smaller countries. This is potentially ten times as many customers.

5) Host a music community – We should allow customers to upload and sell their own content, taking a percentage of the income for administration. We could get a much better percentage of income from independent artists than we could off a major label with bargaining power and experience. Some of the artists we host may well end up becoming the next big thing. This would be great advertising for our company.

6) Incorporate gift vouchers, coupons and special offers – Gift vouchers are a popular Christmas present. Coupons distributed in the music culture magazines or by email like “Buy two tracks, get one free” or “First five tracks free when you sign up” would allow people to try our service before committing to it.

7) We could extend our system to recognise the sort of music a particular customer is likely to want based on past purchases. This would allow us to promote the right content to the right users so long as they’re logged in. Amazon has a similar technology built into their website and it has prompted me to buy books and DVD’s I wouldn’t have otherwise found. People often have very specific music tastes, so once we ascertain which genres of music a customer likes it will be a simple task to predict what they will purchase in the future.

Social/legal challenges

If we are to start selling internationally how should we approach pricing? The relative value of currencies changes daily. If for instance we were to offer our subscription service for £19.99 GBP per month, at the time of writing this would exchange to $35.00 USD and €30.00 EUR. When the exchange rate changes what should our policy be about updating prices? A policy that results in a rapidly changing price scheme will confuse our customers but a policy where prices can’t change quickly could result in us offering our service for too much or too little financial return. Another option would be for us to offer our service at different prices in different countries. This would allow us to better match the pricing trends in the local music industry. However, if we choose this option there is a possibility that our customers would start signing up in the region that has the lowest prices.

In order to implement a subscription service we will first need to negotiate a collective licensing scheme with the content owners. As discussed earlier a collective licensing scheme will likely lead to a reduced profit per track downloaded but an increased uptake of the service. We therefore have to convince the content owners that this model is potentially more profitable than the current model of setting a fixed price per unit or collection of music content.

We will need to protect the rights of the content owners by incorporating anti-piracy measures. Preventing piracy is a very difficult task that no one has yet mastered. Every time a new anti-piracy measure is introduced it is usually circumvented within three months (Moser, 2001). Apple currently uses fair play digital rights management and Napster currently uses Windows Media digital rights management. Both of these systems have already been circumvented. Content owners might not want a new service to operate on a security system that’s no longer effective.