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In this assignment I will divide the question into two parts. Firstly I will provide an overview of how the prices in the vertical chain for music compact discs correlates with how prices are divided according to the mentioned links in production chain of the music industry. Secondly I will by use of Porters five forces explain the pattern of this. Very few big record companies heavily control the music Industry.
This Is also known as Oligopoly, which makes the record companies price setters in the music industry ND leaves them with significant more power than that of the artists and the retailers. This means that the record companies deterrents the price distribution between the links In the process from production to retailer. The record companies are responsible for managing everything in the process as above mentioned; signing up artists, handling technical aspects of recording, securing distribution and promoting the recordings.
Because the record companies holds the main responsibility according to the production process and possess the most powers due o oligopoly, the record companies holds 3/5 of the approximate earnings. The artists are the price takers due to massive competition. The artists are highly dependent of the record companies and with virtually no or little difference in the cost of the artists and differentiation between the artists. The retailers are the price takers. Since the music retail business exists with a relatively high concentrator of substitutes.
The threat that the record companies will create their own music retail business and the threat of the digital music leaves the retailers with very little Influence and power In the industry. To explain the pattern of why the income in the music industry has been divided as given in the question I will use Porters five forces. With the concept of Porters five forces It is possible to break down the economics within a certain industry and describe that The power of Suppliers The providers of material In the music Industry are the artists.
There is a broad -and large range of artists willing to represent the record companies which means that the record companies are able to choose the artist with the lowest price in order to increase their profits. The wide variety of artists and talent also means that the switching costs between the artists are very low since they are relatively easy to replace. Differentiation In the music Industry depends solely on the talent available. Since there is massive amount of talent 1 OFF supplier decreases.
Yet, some very big artists may be able to negotiate prices, but since the large record companies hold popular artists within each genre this again decreases the power of supplier. Bridge! Since the record companies today hold the of income, the establishment of subsidiaries is preferable for some artists. The establishment of a record company does demand a significant amount of money for start up, a larger network within the industry and energy to manage the tasks that the incumbent record company normally would have done.
This keeps many from establishing their own record company, but those that do establish a record company also increases the competition within the industry, which has a negative affect for the record companies. Yet, the threat of the suppliers’ forward integration is low and does not directly pose a threat to the large record companies. Ere power of buyers The powers of buyers (retailers) are in this industry weak. The retailers are threatened by the record companies, whom if they Mould, could distribute their own music.
Moreover the switching costs for the buyer are high, as the low number of large record companies forces the retailers to take Anteater price is given from the record companies. Unlike the record companies possibility for forward integration, the threat of backward integration by buyers is low. The idea of backward integration for the buyers are quite distant since the idea of the retailers entering the record production business seems very unlikely.
The low threat of backward integration means that the threat of competition from the buyers IS low. In other words, the buyers are fragmented and do not possess any significant influence on products or price. Yet there is one buyer in the music industry that is strong, which is of course tunes, an example of a nearby monopoly. Since the digital music industry develops so fast, the record companies depends on tunes Inch in this year, 2012, has a market share at 64% of U. S. Chital download sales and 29% share of overall sales. This reverses the relationship between the record impasses and the retailers. In this relationship the retailers are the price setters, Inch also explains why digital sound can be sold at lower expenses via online channels than the compact disc can. The threat of substitutes The threat of substitution in the music industry is high and is fostered from increase in file sharing, piracy downloading and online services like Spottily and Pandora.
The substitution forces the record companies to reduce its prices on Cad’s and conclude sales agreements at prices significantly below normal prices, which ultimately decrease profits and revenue of the companies. The music industry is under pressure from several of entrants like digital download services and piracy services offering music for free. This means that the threat of entrance is high since the digital services increases competition for everybody in the music industry.
Besides from the outside threat being the digital music services, also threats from the inside has happened during the last decade. Several of high profile musicians have already left the record labels and besides that some bands like Radioed have forced their record label to lease their album online. Both developments that indeed undermine and decreases the power the record companies and sets a brand new agenda for the way the record companies and the way they do business.
This means that in order for the record companies to thrive more efficiently through times of development and to crisis they have hade to rethink they way in which they perform their work. Ultimately Nat has become the main challenge of the music industry (technological development) has also become the reason why they can work even more efficient and infinite from economies of scale. The record companies forces like long-term experience, level of resources and network access makes them better off when having to navigate through a changing music industry with declining sales.
In 2007 CD sales in the U. S. Dropped by 19% and the music industry are increasingly aware that the next coming phase for music distribution is via services like tunes and so forth. Yet this does not change the fact that even though digital music distribution has been booming over the last decade the overall music sales are now slowing Rivalry he compact disc has for long been the most valuable asset in the music industry and has been the largest revenue for the record companies.
Since the development of the increased digital and technological integration, the sales of Cad’s have decreased. This has happened, as the need for multifunctional telephones such as the smart-phone and other tablets has demanded smaller formats of music like the MPH. This has increased the demand for online music stores like Tunes. Furthermore online services like Spottily and You Tube offering free music needs to be taken into consideration as well. The music industry has decreased the prices on Cad’s in an effort to increase sales of Cad’s and to increase market shares.
Besides decreasing the prices on Cad’s the large record companies have increased their marketing budgets to promote their artists. This makes it very difficult for the independent small record companies to compete. So the record companies can by larger marketing budgets increase their market share and stay dominant on the market. Conclusion After an analysis of the five market forces it is responsibility and risk. The record companies hold a larger financial risk and accessibility in order to promote their artists.