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INTRODUCTION
The music industry in UK in the past years has experienced a significant growth. With the growth of online digital music and the replacement of traditional methods of storage such as CDs with portable music devices, the industry has transformed significantly. Currently, the UK music industry is ranked third in the world, which accounts for 9.2% of global sales in 2009 and is the second largest repertoire in the world behind USA. The major players in the UK music scenario are EMI music, which is also the fourth largest recording company in the world, Sony music UK (Subsidiary of Sony Music Entertainment) and Virgin media. The total revenue recorded in 2009 was £3.9 billion which was a 4.7% increase when compared to 2008 (http://musically.com/blog/2010/08/04/uk-music-industry-revenues-2009/).
The following analysis attempts to evaluate the attractiveness of the UK music industry using Porter’s five forces model of industry competition.
PORTER’S FIVE FORCES
The five forces framework by Michael Porter (1980) is an industry analysis and business strategy development tool which allows marketers to ultimately create shareholder value through business operations. It analyses the market/industry attractiveness which means the ease with which a player can expect to make profit that needs to be compared with the level of risk involved in transacting in the market. The main determinants of attractiveness are demand & supply of goods in the market, number of competitors currently in the market & their strengths/weaknesses, rate of growth and margins offered. Undertaking the analysis has managerial implications to evaluate which industries a firm needs to enter or leave, how much competitive influence it can exert on the already established players in the market and how are competitors differently affected by the influences in the market.
This analysis usually comes under micro environment analysis and is used along with other analysis such as PESTEL and SWOT. Since this considers the factors which closely relate to the business, a change in any of the factors may affect their ability to serve customers effectively and therefore will require the business to re-assess their situation. A graphical representation of the five forces framework is below.
FIVE FORCES FOR UK MUSIC INDUSTRY
An evaluation of the competitive environment is carried out using the five forces. A detailed evaluation for the UK music industry is below;
1) Bargaining power of Suppliers
The first force that porter identified to be important in determining industry attractiveness is the power of suppliers as the presence of powerful suppliers reduces the potential for high profits in an industry. The bargaining power for a supplier becomes high if;
- There are less substitutes for the products or services they are supplying
- The amount which can be supplied is limited, which increases the demand for their products
- There are high switching costs of changing from one supplier to another
Unlike other industries, the main suppliers for the music industry consists of sources through which music labels get access to music. They include the artists and their managers. In addition, due to the rise of the reality shows, producers of shows have also become suppliers for music labels with new talent. The bargaining power of artists are high as it can be said that the voice and ability of each artist is unique and cannot be substituted. Due to the demand for new talent from a wide range of record labels, the options for artists are high which makes signing of new artists for a record label very difficult. This, hands over a high bargaining power to the artists.
In addition to this, the ability for artists to promote & sell their albums over their own web pages had eradicated the need for most services provided by record labels. In these cases, the record label serves only to provide studios and music support rather than the full services including promotion, distribution and sales. Therefore the internet has increased the bargaining power of suppliers although the success of self-promotion is less.
A lesser bargaining power can be expected by other suppliers such as suppliers of recording disks and other materials such as plastic casings which are needed for album packaging as there are large number of suppliers of these content over the world, especially from China and they are purchased in bulk and falls within a contract.
2) Bargaining power of Customers
Bargaining power of customers is another aspect which helps in assessing the industry attractiveness. In this scenario the customers for the UK music industry can be two fold, individual and corporate.
Corporate customers in the music industry include online & offline retailers who purchase albums in bulk from the music label. They may include stores such as HMV & Game and online music stores such as iTunes, AmazonMP3 & Zune. The bargaining power of the corporate customers can be said to be low due to prices being agreed between them and the labels at the time of contract signing.
Individual customers in this industry can be identified as the music listeners who purchase music either online or offline. The bargaining power of individual customers has been rising in recent years due to piracy which has forced the whole music industry to drive down album prices. In addition, with intense competition in the industry, price cutting is evident especially in online music sales. Therefore bargaining power of customers can be assumed to be very high.
3) Threat of new entrants
The next force in determining industry attractiveness is threat of new entrants which, to a great extent depend upon the barriers to entry or the ease of entering the competitive sphere. The barriers to entry are created by the following factors;
- Level of expertise required for successful operation
- Access to resources & distribution network
- Industry contacts
The music industry is a highly specialized sector. Typically selection of a talented artists and turning him/her to a success requires a lot of skilful application of marketing, talent management and investment. Established music labels spend millions in undertaking image development campaigns, recording and test marketing before the work of an artist is released to the public. These areas require specialist skills and having access to money. In addition they might need an extensive distribution network, including online partners for online distribution, which is handy in immediate distribution of albums to points of sale. Industry contacts are handy in organising concerts and shows for promotion of albums and creating a buzz for the artist.
It will be difficult for a new entrant to the music industry to undertake all above activities and beat the competitors in a short time. Due to the experience of industry giants such as EMI and Sony music and their financial power in the industry, it is very difficult for a new entrant to capture a significant share of the UK music market. Therefore it can be said that the threat of new entrants is very low when considering the music industry.
4) Threat of Substitutes
A substitute product or service can be identified as a rival product or service which meets the same customer needs approximately in the same way as the product or service of the firm. In music industry the substitutes for paid music purchases or downloads can be identified to be free streaming music online, pirated music downloads online and the TV & Radio channels playing 24 hour music.
Pirated music sites which offer music free of charge are the clearly identifiable substitute for the music industry. The choice of a customer to purchase music or to download it remains to be a battle in their conscience. Therefore the threat of this substitute is very high.
Free streaming music such as those on My-space allows customers to listen to tracks unlimited number of times without purchasing the tracks. Although they don’t receive the luxury of downloading it for free and listening on the move, it still can be considered as a substitute as it allows the entertainment of customers.
Extra industry effects have a part to play when it comes to 24 hour TV & Radio music channels as the requirements for activating those services such as TV set top boxes and monthly subscriptions are quite expensive compared to price of an album. But with added facilities of recording and choice of other channels on offer, they may have better price to performance ratio when compared to a music album.
As part of the entertainment industry, music can also be substituted by other channels of entertainment such as movies and games. Although they may not be direct substitutes for music, they still provide similar services in entertaining the consumer. It may be said that compared to music, movies and games have a larger utility although the prices are set higher than music. In terms of gaming, the complementary products required such as game-stations are higher priced than a regular MP3 player, but the price to performance ratio is still higher as the utility is higher. Therefore it can be said the threat of other entertainment sources are also posing a mid to low level of threat of substitution to music industry.
5) Industry Rivalry
The UK music industry has been competed for by the big three recording studios for decades. Although there is fierce competition among these players, their market shares remained stable for years as new competition rarely entered the market due to high entry barriers. The industry is flourishing when comparing online and offline sales put together, according to RIAA statistics (http://76.74.24.142/44510E63-7B5E-5F42-DA74-349B51EDCE0F.pdf).
The product differentiation achievable in the music industry is very low due to all genres being represented by artists being common. The differentiation may be achieved through the formats of music provided such as CD, DVD, Blue-ray and online formats such as MP3, WMV, etc. With digital downloads being more popular than the regular visit to the music store, music industry has continuously reduced number of outlets and focused on developing an online strategy. Through that they have been able to reduce high fixed costs such as outlet rentals and salaries of high number of outlet staff which has helped with their margins.
In terms of the attractiveness, the industry can be said to be highly attractive due to prospects of music boom which began in the 1990s. With more and more talent coming out through reality shows such as X-factor in UK, more and more prospective artists may be introduced to the market.
CONCLUSION
From the above analysis it can be understood that the Music industry in UK is flourishing. But it is dominated by big three players who have been in operation for decades and operates large shares of the markets. Due to the highly specialized form of operations, the music industry may be assumed to be presenting high barriers to entry for a new player. With the development of internet technologies, these barriers to entry are gradually declining with more and more new entrants are making their way into the market through small scale operations. With high margins expected through online operations due to reduced costs, it can be said that market attractiveness is continually increasing.
But the largest threat to the industry is posed from piracy, which is responsible for millions of pounds of losses (http://www.ifpi.org/content/library/DMR2010.pdf) for the industry. The margins for record labels and sellers have since 1990’s being driven down due to this, and the customers are increasingly relying on pirated music due to its availability and the sense of freedom associated with it. Although legal crackdowns are taking place, the chances of eradicating piracy remains slim, this remains to be a disadvantage to the industry.
The universal applicability of music as a form of entertainment may remain to be the largest selling proposition for this industry and is the largest reason behind the high profitability of the industry. Therefore in concluding it can be said that applying five forces theory is extremely important in industry analysis as it allows firms to develop better strategies through identification of forces operating in the market and the understanding the overall attractiveness of the industry.
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