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Strategic Management in Knowledge-based organizations - Case 1

The music industry before digital evaluation has been influenced by different technological
development such as phonographic records , cassette player and compact Disk. When the
market demand disrupted by the digital approach companies develop new product format
and distribution channel .the digitalization was spurred by younger a customer
demographics who in turn created a different customer need for the entire industry, one of
which is the desire for free music consumption (piracy). This in turn created the need for
government regulation in terms of higher copyright laws and other attempts to decrease the
use of pirated material. But the most significant development was iTunes .According to
Grant, R.M. (2019), “ dominated the music download through iTunes which was achieved
through a digital rights management (DRM) strategy that effectively locks in consumers
through the incompatibility of its music files with other MP3 formats.”

At the beginning of when Live Nation was founded, they focused on connecting the artist to
the fan. The company committed to meet artists' and fans' demand. The management was
looking for new sources of revenue around the live music event and the artists themselves
to increase shareholder value, which was done by increasing efforts into merchandising and
360-deals with artists .

In 2007 and 2008, Live Nation bought three merchandising companies. Entering the artist
merchandise business helped the company complement its core concert and venue
business.

As presented in Grant(2019,P87), the presence of complements increase the value of a


product, “we need to look more broadly at industries to include complements, extended
value chains”. The Live Nation took great advantage of complement with the merchandise
business.

Before the digital revolution, we see a strong competition of five major record companies
that holds that major part of the music market. Record labels provided full service package
(studios, support, publishing, promotion, sales) to the artists. They also had a strong
relations with radio stations especially after 1996 and telecommunication act which allowed
more concentrated ownership of radio stations.

To analyze the competitive advantages we can use Porter’s five forces framework. At the
beginning bargaining power of suppliers was low. Depending on the popularity and as their
contract lapsed their bargaining power strengthened and they were in position to easily
change the label. For newcomers was much more harder and their power was extremely
low. Therefore we can characterize artist force as mid.

The Consumers had low bargaining power. Consumers usually had to buy a whole album
instead of single songs and were mainly purchased at large retail stores such as Wal-Mart
and Best Buy. There were very few substitutes for the customers, regarding the possibility to
receive the music. The music market were dominated by the CD-format and there were
basically no substitutes to buying CDs at the physical stores. With five large record
companies and a few big retailers, the threat of new entrant of new labels and retailers were
low. Due to these strong positions of the incumbents, there were high barriers for potential
new entrants. The capital needed to promote albums, average of 300 000 $/ album in year
1999 (Bradley, Cesspits & Herman, 2010, p.3) is a barrier for new companies entering the
market. Moderate rivalry among five major record companies when it comes to signing new
artists and marketing the artists. With that said, it’s still an oligopoly on the market where a
few actors controls the distribution and the price.

After the digital revolution, artists had easier to promote themselves through the internet
and accessed a broader spectrum of fans. Through MySpace, the artists themselves could
put out music which lead to an increase in higher bargaining power. Therefore, it was mainly
record companies who lost some of its power.

The bargaining power of suppliers vary among artists, well established artists have high
power and the power of new/less famous artists might have increased because of more
options to promotion and distribute music using the internet, they can upload their music on
MySpace, and they do not necessarily need a contract to be a supplier in the industry. The
digitalization of the industry also enables more actors to enter the industry, making barriers
to entry to be lower nowadays. Moreover, we consider complements to have some
influence in the industry.

The digitalization enabled more options on how to get a hold of the music though streaming
and MySpace, etc is a substitute to signing to a label and get promotion through that. The
substitution in the music industry has increased in the industry, as customers now can
receive music in multiple formats. It is possible to download the music online, buy a CD or
use streaming websites. However, the streaming sites and social media to be substituting
the traditional signing and promoting artists. This in turn influences the profitability of the
industry.

It become easier to enter the market and to promote yourself through social media
platforms. The illegal downloading led the way for how ITunes standardized the industry.
The digitalization led to higher threats of new entrants in the industry, which leads to higher
rivalry for the already established actors. Easier to distribute and promote the music than
before the digital revolution, and the need of signing with a big record company is no longer
a requirement. Threat of new entrants became higher because of the change in the
distribution network, the old brick and mortar distributors faced a huge decline in market
share. New entrants for record labels was still low as it was very capital intensive.

For the consumers new software enabled the downloading of music to Mp3 players, Ipod
and Computers. Merchandise, Shows, Filming the concerts, VIP packages was made available
for the market.
The record companies suffered from loss of profit causing them to lose its position as market
leaders due to the digitalization and change in industry structure; more copyright cases and
mainly loss of control when it comes to the downstream sales. As the bargain power of the
artist and the consumers has increased, the rivalry between the competitors became more
intense. In general, there are a few major actors competing for the market share and
profitability in the music industry.

This is a map of the industry structure before and after the digital shift. The structure got
more complex in terms of distributions channels and the interrelations between them, which
led to the loss of control of the distribution for the record companies. Eg. Amazon, iTunes
came with downloading options and while retailers like Walmart, Target and Best Buy drove
traditional music chains out of market.

The source of competitive advantages in the music industry, is to have a big network and
strong relationships with stakeholders. This makes it easier for consumers to reach the music
and the artists to get to their fans, as well as artists can promote their performance and acts
in a more effective way. Reach ability and promotion are also enhanced by digitalization,
such as distribute music online to target the audience, promote concerts, record music etc.
Moreover, technology and contracts with a diverse set of popular artists help the companies
deliver high quality events and unique live music experiences.

The company faced a net loss 2006 and 2007, $31 million dollar respectively $12 million
dollar, probably due to long term investments in eg. venues and signing big artists such as
Madonna. The share price was relatively stable until about a year after the IPO
(12/30/2005). In the middle of 2007 Live Nations stock price started to decrease, which
might reflect that the company showed to be unprofitable. In addition, the stock price
possibly was affected by the general economic slowdown in the U.S. and a forecasted
recession in the near future. The negative outlook of the economy changed the investors’
market behavior. In particular, investors articulated skepticism in Live Nations Business
model and the music industry in general.

Live Nation chooses to invest in the old industry structure, paying 125,000,000 USD for the
rights to sell three of Madonna’s albums, license her name and promote her concert tours.
At the same time the big British rock act Radiohead releases their own album for free on
their own website, free of middle-hands. With Live Nation’s strategy as “connecting the fans
to the artist”, how can they do that better than a band providing their music for free to the
fans with no middle-hands.

Live Nation wanted to integrate the different activities within the industry. They did this
through aggressive mergers and acquisitions in acquiring venues, merchandising companies
and ticketing. They want to give the customer a seamless experience in attending a live
concert.
After many years in the industry Live Nation have developed very strong relationships with
artists and by agreements with single artists Live Nation ties the major stars in the industry
to its business which are what we have identified as Key Success Factors in the industry.
Through the development of a online platform the company facilitate for their artists,
offering them This includes database, digitalization of venues, ticketing and merchandise
sales online. (Bradley, Cespedes, Herman, Live Nation Faces the Music, Harvard Business
School, 23 July, 2010)

Live Nations competitive advantage is their strong and long term relationships with acts and
suppliers. By continuing to sign 360-deals with different performance acts they will be the
only go-to option for performers as well as their fans. By being responsive to the demands of
the fans, they will be the leaders within the Live Event industry. With the digitalization the
opportunity lies in segmentation and wider view of acts and our suggestion is to keep an
open mind towards signing 360-deals “new” creators..

By acquiring companies and other assets within different segments of the music industry
such as venues, merchandise-rights, ticket sales and promotion companies Live Nation has
expanded their value chain, which has created their ecosystem. The expansion into other
functions of the industry gives artists and fans a complete solution and making Live Nation
the only go-to for promotion, selling and performing tours. Live Nation set out to control the
whole experience for the concert. From buying tickets, to venues, concessions,
merchandising and recording. It created a barrier of mobility for other firms to enter as
acquiring venues and artists on contracts is capital intensive.

In a summary Live nation should continue expanding their business in not only the live music
industry , rather look for other potential market where they can utilize their expertise.

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