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NARM/Emerald
Solutions Study Says Digital Distribution
Will
Be Highly Disruptive But Ultimately Benefit Music Industry
Streaming May Pose Greatest
Challenge To Retailers
All Segments Must Create Strong
Consumer Value Propositions
Digital distribution—particularly streaming technology—will seriously
disrupt the music industry, but has
the potential to benefit all segments of the business if companies can leverage
their traditional strengths and create compelling consumer value propositions.
This is one of the conclusions of a new study entitled, “Creating
Industry Value From Digital Music Distribution,” completed for the National
Association of Recording Merchandisers (NARM) by Emerald Solutions, Inc.
“Entertainment retailing is currently
facing one of the most significant challenges in its history,” explains NARM
President Pamela Horovitz. “The
Internet presents artists, labels, wholesalers, and retailers with a tremendous
opportunity to innovate products
and
create powerful new marketing and distribution engines, which result in more
personalized relationships with consumers.
But meeting these challenges will have a dramatic impact on industry
structure.”
To help its members better understand these challenges and opportunities,
NARM commissioned Emerald Solutions’ Strategy Group (formerly Alliance
Consulting Group) to examine the impact of digital music up and down the music
distribution channel, evaluate various strategic options in terms of stimulating
competition and satisfying consumer needs, and recommend business strategies for
the various industry segments. Insights
and recommendations are based on in-depth interviews with industry participants
(e.g., labels, retailers, wholesalers), published secondary research and
Emerald’s past experience working with other industries facing similar
disruptive innovations.
“Assuming piracy is contained and
technology issues resolved, the overall impact of digital distribution appears
to be positive,” states Michael Norkus,
President and Founder of Emerald Solutions’ Strategy Group.
“Although some cannibalization is likely occurring among certain
consumer groups, there are benefits through greater exposure and points of
purchase. In
the final analysis, some industry segments will be better positioned to succeed
than others, and while incumbents certainly have the experience,
resources and relationships to win, they may lose out
to new entrants if they don’t give consumers what they want.”
Emerald focused its analysis on the three technologies at the
heart of the distribution shift—file sharing, downloading and streaming.
“As a sampling medium, file sharing
seems to increase consumer exposure to music,” Norkus states, “while
downloads offer a new alternative for storing, transferring and listening to
music. But we see streaming as
presenting the greatest concern for industry incumbents, especially the retail
segment, because it provides a new opportunity to listen-on-demand without the
constraints of physical ownership.”
Key
findings from the report suggest the following:
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Despite the
benefits digital distribution provides consumers, mainstream adoption will
take time, and will be influenced mostly by Internet and broadband
penetration. For the
foreseeable future, CD album and digital music sales will co-exist.
Over time, however, digital distribution—and in particular
streaming —will gain traction.
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Digital distribution offers significant
revenue growth opportunities—targeted promotions, innovative product price
configurations, and more opportunities to buy music.
To capitalize on these opportunities, industry participants must
build new value relationships with the consumer and create revenue-capturing
business models.
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Consumer need fulfillment is
significantly different in the digital world than in the physical world.
As a result, industry participants face critical customer service
issues. While on average,
costs per transaction may decrease, new customer and technology support
costs could be significant. These
new requirements for investment and competence building may favor larger
industry participants.
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Because multiple strategies and business models (physical
equivalent, agent retailing, subscriptions, “free” music) will co-exist
and no individual industry segment is likely to provide the consumer with a
total solution, it will be vital for participants to forge partnerships with
other industry participants to strengthen their positions.
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About
NARM
NARM serves the music and other
prerecorded entertainment software industry as the pre-eminent forum for insight
and dialogue for its more than 1,100 member retailers, wholesalers,
distributors, entertainment software suppliers, and suppliers of related
products and services.
About
Emerald Solutions’ Strategy Group
The study was
conducted by Emerald Solutions’ Strategy Group, a team dedicated to providing
high-level business strategy that helps business leaders take charge of their
organizations and achieve sustainable performance improvements.
The Strategy Group offers specialized services for three key areas:
profiting from e-business, mastering strategic transitions and launching new
ventures.