DIGITALIZATION RADICALLY CHANGES THE MUSIC INDUSTRY

Digitalization has brought radical changes to the music industry. At a supply chain management standpoint, digitalization removed raw materials, such as CDs and LPs, and transformed traditional distribution channels to online thus making substantial cost savings. It also increased the number of suppliers, songwriters and artists by offering easy access to market with digital audition programs.

On the other hand, digitalization had negative impacts on the music industry. One of the concerns was that digitalization lowered the topline, mainly because of the low quality of products.

With the constraint of storage and bandwidth, online distributors compressed and minimized the data size of products. Streaming and internet radio services provide the quality of less than 160 kbit per second, which is significantly lower than average 1,411 kbit per second of CDs[i]. During the distribution, high-frequency parts were lost or ignored, distorting the artists’ original intention. Consumers also preferred efficient and small pieces of music as they now listened through smartphones rather than large sets of speakers and amps. Most consumers chose convenience over quality. How can we bring back the quality to the music industry again?

[ii]

SM Entertainment(“SM”) is the most leading music label in South Korea with a business presence in Japan, China, Europe and the United States. SM is well known for a variety of K-Pop artists. The company is listed on KOSDAQ, the Korean version of NASDAQ, with market capitalization of USD 0.8 Billion.[iii]

Collaboration

FIGURE 1 ASTELL & KERN SUPER JUNIOR EDITION

SM approached the problem with behaviors of music consumption. In the short term, SM provided high-end audio devices to help customers experience their music differently. They collaborated with smartphone and audio makers and bundled products with the music album. To illustrate, SM closely worked with Astell & Kern, the high-end audio maker[iv], and offered the Super Junior’s album exclusively for the high-resolution music player[v]. Consumers were also given free streaming music so they could experience the differences between the original sound and the low-quality MP3 sound.  Products were immediately sold-out through Asia and SM keeps seeking collaborative opportunities to spread high-end speakers.[vi]

 

 

Content Platform[vii]

In the medium term, SM established its own e-commerce platform, providing high-quality songs and 4K music videos[viii]. SM had asked streaming players, such as Melon and Spotify to offer lossless music, but they delayed the adaptation, due to low demands and the high cost of storage and transmission. SM decided to supply FLAC with quality equivalent to CDs, through their own website and USB files through retail stores. SM has offered 420k songs through FLAC among 8 million MP3 songs until Dec. 2016. To increase the traffic, SM differentiated the release dates, giving exclusivity to limited music from their sites. Chen, Chinese member of Super Junior, released his new album, SM THE BALAD, in 2014 at the SM platform and sold approximately 300 thousand songs during the exclusive periods.[ix] Loyal fans purchased the music from SM’s website and initiated a discussion group within this website. They were now more engaged in the interaction with artists and other supporters, becoming the customer review similar to that of Amazon. It had never existed in the streaming music services, where individual consumers listened to music passively, according to the curation and recommendation.[x]

SM focused on building a direct channel to consumers and enhancing the quality of last mile equipment. Despite such efforts, most consumers still prefer to listen to convenient low-quality music. I believe that expanding distribution channels would be beneficial to the SM strategy.[xi]

Integration with smart television

FIGURE 2 SAMSUNG ENDORSED ‘MUSIC’ AT NEW SMART TV ADVERTISEMENT

I recommend SM to infiltrate television content channels. Contrary to the audio equipment, TV technology has developed rapidly. Key drivers are reliable manufacturers, such as Samsung and LG[xii], and innovative content providers such as Netflix and Disney. Nowadays televisions are equipped with not only a 4K screen but also high-definition sound, which could be the most appropriate channel to listen to music. Imagine people always turning on the television to play background music. SM could contract with Netflix to supply 24/7 music channels or on-demand music apps and stations. Smart television may be the perfect channel that brings high-quality music to customers.[xiii]

Smart television, with high-definition screen, also can afford to bring live concerts to living rooms. Once visitors sense the difference of telepresence and by combining their personal experiences with the thought that ‘music is a critical part of life’. Fans would pay more attention to high-quality music and come to the concert, where has the most advanced audio system. Smart television could be the gate way to the live music.[xiv]

But still, how can the music industry recapture the topline?

 

 

 

Endnotes

[i] “Battle of Sound” Sony Corporation Article, https://www.sony.com/electronics/hi-res-audio-mp3-cd-sound-quality-comparison

[ii] “Music Consumer Insight Report 2017”, International Federation of the Phonographic Industry, http://www.ifpi.org/news/IFPI-releases-2017-music-consumer-insight-report

[iii] “SM Entertainment Annual Report 2016”, SM Entertainment, http://www.smentertainment.com/Investors/IrLibrary

[iv] “Astell & Kern Kann Review: Zune resurrected”, Verge, https://www.theverge.com/2017/6/8/15752152/astell-kern-kann-review-audiophile-pmp

[v] “Collaboration between A&K and Super Junior”, Early adopter, http://www.earlyadopter.co.kr/61773

[vi] “SM Entertainment IR Conference call 2016”, SM Entertainment, http://www.smentertainment.com/Investors/IrLibrary

[vii] “Disintermediation in the Recorded Music Supply Chain “,Tomo Hosoi, Joseph Kim, Dennis Stainken, http://blogs.anderson.ucla.edu/global-supply-chain/2015/08/disintermediation-in-the-recorded-music-supply-chain.html

[viii] “SM Town website”, http://www.smtown.com

[ix] “Overseas advance instance and strategic study of Korean pop music”, K.S.Chang, http://www.dbpia.co.kr/Journal/ArticleDetail/NODE01426685

[x] “The Internet is changing the music industry”, Calvin K.M. Lam and Bernard Tan, https://dl.acm.org/citation.cfm?id=381658

[xi] “SM global strategy analysis”, Team GLC, http://www.kimfff.org/learning/data/1313822103.pdf

[xii] “Samsung rolls out new smart TV services for sports, music & video, plus an updated mobile app”, Sarah Perez, https://techcrunch.com/2017/01/09/samsung-rolls-out-new-smart-tv-services-for-sports-music-video-plus-an-updated-mobile-app/

[xiii] “Spotify on Samsung Smart TV”, Spotify, https://support.spotify.com/us/listen_everywhere/on_tv/samsung/

[xiv] “The Economic Impacts and Development Strategies of Cultural Contents Industry”, J.S.Kim, http://www.dbpia.co.kr/Journal/ArticleDetail/NODE01459925

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11 thoughts on “DIGITALIZATION RADICALLY CHANGES THE MUSIC INDUSTRY

  1. Great article! I have two thoughts on this.
    1) Definitely it is a very salient trend right now – it seems that the high-quality streaming concept is already putting pressure on the mainstream music streaming players, Apple Music and Spotify. My wife is a classical musician. In 2016 she recorded an album with a very specialized music producer Tacet Musikproduction. The producer did not allow to release the album on the streaming services because the quality (lack of high-frequency spectrum you mentioned) did not allow to recognize their true craftsmanship. This, however changed in the early 2017 as Spotify and Apple Music gave the artists and publishers the option to only allow for high-quality streaming.
    2) As for the viability of rolling the concept out on a broader scale, I would be worried about another set of players in the supply chain – the Internet Service Providers.

    Audio and video streaming services have already put a lot of strain on the ISP’s network and it is unclear whether they will be willing and able to accommodate the higher traffic generated by the high-quality services. Providing CD-quality for the same length of track can mean 8-9x higher data flow based on the specifications you quote, and this transfer is more likely to take up the cellular capacity rather than the landline-WiFi capacity, as we are more likely to listen to music “on the go” away from our WiFi networks. This may prove to be a particularly important obstacle as in the US the FCC is re-considering the “web neutrality” rule which prevents price discrimination by ISPs based on the type or volume of the content that is being pushed through their networks (https://www.economist.com/news/leaders/21731624-doj-right-oppose-att-time-warner-deal-fcc-wrong-scrap-net)

  2. A fascinating read. Digitization of music industry is a much discussed topic however the associated ‘bottlenecks’ in terms of storage and bandwidth which affect the quality of music, thus affect the heart of music, is oddly not an often highlighted subject. SM Entertainment’s initiatives to differentiate itself from the existing music distributors (e.g. Apple, Spotify) by providing higher quality of sound through both hardware and software seems like an effective idea, explaining the company’s explosive successes since its launch. While being a music lover and a supporter of this concept, in order to provide a deliberately critical eye on the company’s strategy, I would like to hypothesis that given the fixed capacity of data transfer, consumer would have to prioritize various conflicting factors, such as price, quality, speed and adaptability & capacity of peripheral devices (home wifi, etc). SM Entertainment’s product and services would attract those who put clear priority on the sound quality, however other mass consumers would consider the balance of these conflicting dynamics and may simply conclude that the existing services are sufficient to satisfy their daily needs. CNBC did a fascinating analysis on the public’s (actual) perception of ‘quality’ vs ‘non-quality’ sound system – I attach the link herewith (https://www.cnbc.com/2016/08/05/details-of-cnbcs-music-streaming-test-how-it-worked.html).

  3. As you point out, consumers nowadays prefer convenience over quality. With the rapid advancement of streaming services and mobile devices, this trend will likely develop a strong hold in the coming years. As a result, I wonder if tomorrow’s music listeners (i.e. millennials who lead a highly digitized lifestyle) will ever know or care about what they are missing. If this group is apathetic to music quality, I see an intense uphill battle for companies like SM entertainment to convince the masses that quality is key. If the goal is to create a world where music quality is increasingly valued, I wonder if the hardware (i.e. headphones) might initially play a more important role. Headphones provide a physical connection to music and are often an extension of a listener’s personality. Discrepancies in headphone quality might thus be a good opportunity to show listeners what the wonder of music quality is all about.

  4. As we noted in the Beats vs. Bose case, consumers have demonstrated a high willingness to pay for headphones that clearly do not deliver a superior listening experience. In our consumer centric culture, we always seem to want more. We live in an age where “unlimited” and “free” are defeating. As we lose art instruction in schools and children consume more media through mobile devices, I think we will continue to lose the mass market’s desire for quality music in exchange for the ability to fit as many songs as possible onto mobile devices. While there will always be a niche for enthusiasts, I’m afraid the days of mainstream demand for high quality may have passed until storage solutions improve to where it becomes a non-issue to store the larger files on mobile devices.

  5. An excellent follow-up to our case discussions on both Beats vs. Bose as well as Rdio. While the reduction of sound quality is unfortunate artistically, I worry (similarly to other commenters) that SM Entertainment is spending too much time and money trying to improve the quality of the listening experience. I believe SM’s bigger challenge is that the digitization of music consumption democratizes music access and reduces costs across the system. As a leading content engine for K-pop music, I believe SM should focus on its core competency by cultivating the best artistic talent and broadening its reach in the industry. If SM can broaden its ownership of content, perhaps it can eschew Spotify by creating more of a moat around its own content platform and becoming a digital community for K-pop fans.

  6. Good read. I think there are a number of additional hardware options that SM could pursue, a notable one being set-top box devices (Apple TV, Roku, etc.). These are readily accessible given their size and proximity to entertainment “center” within the home, such as the family room TV. Additionally, these devices have high performance software that has made enjoying streaming video services such as Netflix and HBO and convenient and hassle free option to entertainment. Streaming music through these devices would likely require an SM app downloaded from the device software store (ex: the App store on the Apple TV). This could require SM to contract specifically with these set up box creators for access, but I think there would be high motivation from the hardware producers given SM’s offers a niche content offering of K-pop content.

  7. As someone who listens to music nearly non-stop, I am fascinated by the effect technology and increased digitization are having on the music industry, and loved hearing your perspectives. I wanted to second your unique suggestion that SM focus on television content channels. To your point of imagining people turning on the TV to listen to music – I actually do this today! Every time we have a social gathering at home, whether just my roommates or a larger group, we pull up one of the music providers (Spotify or Pandora in our case, but I could imagine SM being an comparable) and put up a playlist. Not only is the quality high, but it also adds to the social experience where others can see what song is being played, see the album cover, read the lyrics, etc. So, via this approach, SM could thus reach its goal of playing the music in a high quality way, while consumers would perhaps be even more sticky as they start loving the experience. Ideally, consumers might even start being conditioned to high quality music and start demanding it!

  8. Seo, how does the ongoing shift of content viewing from televisions to phones and tablets factor into your recommendation that SM next pursue smart televisions? I would think that instead SM would need to partner with the phone and tablet hardware manufacturers such as Apple, Samsung and LG, rather than with either content providers like Netflix and Disney or smart television manufacturers. Content providers such as Netflix, unless they choose to enter the hardware manufacturing space, are unlikely to be able to help improve the quality of music being heard by listeners. Second, your article makes me think of Jay Z’s Tidal music streaming company, which has struggled to grow despite offering its own “high fidelity” music meant to be of a greater quality (and higher subscription price) than Spotify. Lastly, with the increasing decline in revenue from album sales, artists and record companies are increasingly reliant on touring for revenue. Does the music industry want to threaten the live tour revenue stream by helping provide concert-level quality music and visuals into people’s homes via smart televisions?

  9. Seo, this is a wonderfully written and thoughtful article! While reading your article I struggled with one question. Would today’s consumers, who may not understand the music quality they are foregoing, pay for higher quality music if it is not something they miss in the first place? This directly aligns with your question about how the music industry can maximize their top line. With regard to distribution strategy, I would like to see SM make a serious push into several urban cities in the US as larger scale test, in order to determine the viability of this product in a world that is dominated by compressed music files stored on phones. The notion of bandwidth and bottleneck that might arise due to the high file density is another concern which would be interesting to explore.

  10. Fantastic article from a savvy music X technology expert! My first thought on the SM’s effort is in line with your question – how do they recapture the top line? I.e. Is it possible to charge more with higher quality music? or the market will unavoidably be cut into two segments, with much larger portion of customers on the low-quality side? My take on this is that SM shall leverage “exclusiveness” to create high-end market, charging higher fee while providing significantly different experiences to customers. Firstly, current POP music doesn’t have significance difference in qualities both on the music software and hardware, that is also why when you buy cheap earphone, the vendor will say “it’s good for POP music”, and more sophisticated hardware is only sold for classical music. So the first step is to create POP music that the listening experiences differ significantly for high-end and low-end. Secondly, to educate the customers on quality difference, exclusive contract to launch album with high-end hardware and leverages social network to spread the good words is great strategy. Third, SM can also think of innovative way such as “freemium” model for high-quality music. For example, customer pays 0.99 to download high-quality music trial, after 2 weeks, the music will become low-quality unless paying 0.99 more. It’s exciting to see the music industry evolution real-time.

  11. I really like this article!! Great job, Seo. It is very interesting that high-tech digitalization significantly lowered the quality of the music we listen to almost everyday. The infinite online music database, the convenient streaming music, and the cheap headphones, have changed the way consumers listen to music, and, at the same time, reduced customers’ demand for high quality music. As a result, music producers are demotivated to produce high-quality music. Then the vicious cycle starts.

    Going forward, true artists need to re-educate their customers, and to emphasize the importance of high-quality music. I can see that the increasing demand of high quality music will not only drive the development of online music streaming technologies, but also boost the development of high-quality music accessories, such as headphones, speakers, and even TVs.

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