Managing Change and Diversity

Case study:

The Internet and the P2P revolution in the music industry

Group members: Wong Kuo Dik; Mgt(H)00138; 880716-11-5689

Mohd Feezal; Mgt(H)00204; 861028-43-5343

Heng Su Wan; Mgt(H)00129; 870907-23-5510

Aminath Seema Mohamed; Mgt(H)00196; PNA265533

Norvina; Ac(H)0075; 871118-12-5030

Lecturer: Dr Grace

Presentation date: 29 Sept 2009

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Introduction for the music industry:

19th century:

– The market for music began with the sale of sheet music

20th century:

– With the emergence of and demand for recorded music in the form of vinyl records,
cassettes and CDs, the market expanded enormously to become a global industry
– No matter in any place, the same records are being listened to and the same
companies are supplying them. However, through the physical product itself may
have changed, the distribution channels and the division of the labour within the
industry have remained stable. Example:
– Artists create music
– Record labels promote and distribute it and the fans consume it

Case study:

 The advent of the Internet and related software developments is causing a seismic shift
in the way music is distributed
 Threatening to sweep away the dominance of the big five record labels
 Shawn Fanning is the classic American computer geek who dropped out of college
because he wanted to spend his time developing a computer program which would
make it easier to find a swap movie via the Internet
 Fanning called the program and the company he launched, NAPSTER after his school
nickname

NAPSTER:

 Using Napster was easier than going to a record store, and easier than ordering
records online and it allowed the discovery of music in ways that had not existed
before
 If we were on the right time, we could also get the live versions of the song recorded
in Los Angeles in 1977, San Francisco in 1975 or Tokyo in 1972
 Type in a song and instantly be connected with possibly thousands of other users who
had what you wanted

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  If there was another Napster user whose songs we like, we could check what other
music they had on their hard drive and send them an instant messages
 We might also get the new Eminem album weeks before their official release dates
 The whole Napster experience is FREE

1. List the main way in which it could be said that Shawn Fanning changed the rules of the
music industry.

In the beginning of the market for music, record labels are the one that control the access and
in some cases actually own the major distribution and marketing channel. This prevent artist
from independently distributing their own material and it is this position that explain why the
label collect approximately 85-90% of the profit from the music store. This is how the rules
of the music industry that many artist and consumer need to be followed.

Later on Shawn Fanning the founder of Napster created software that can make the
artist and consumer easier in swapping the music via Internet. These systems are using the
peer to peer (P2P) basis. The way he changed the rule is by combining the Internet with the
program like Napster. By using this technology, in form of distribution, the Internet offers the
opportunity to replace ‘bricks’ with ‘clicks’ and thus improve organisations’ competitiveness
(profitability) by removing stages in the distribution process. An example is organizations
that created this system such as online banking. For the music industry, the online delivery of
music is transforming the industry supply chain and could lead to the elimination of its
physical manifestation such as CD’s.

As a distribution channel this Internet system is seen as a way of improving profit margin
for organizations. Before the advent of Napster, the record labels dominate the supply chain
for music rather than the artists who actually created the music. The rules have been changed
by Shawn Fanning and this is threatening the dominance of the labels. Napster allows
consumers to bypass the record labels by swapping music files directly between themselves
without any money flowing to the records label. P2P (Peer-to-Peer) offers enormous scope to
music pirates. Music piracy is not new, however what really scare the music industry is the
sheer scale and ease of the piracy allowed by the Internet. This technology also is the theory
that can increase in practice, make it possible to download any piece of music without paying
for the privilege of doing so. Other than that the Internet also offers an enormous potential to
reduce the complexity and the cost of the music production and distribution by eliminating

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the need for CD manufacturers, music shops and also transportation. All described above is
threatening due to its significant and adverse impact on the income of the record label.

2. What are the main strategic options facing the big record labels in coping with the
challenges posed by the Internet?

There are two main strategy options facing the big record labels in the coping with the
challenges posed by the Internet. The first option is in attempt to stop Napster and similar
organization from facilitating music swapping. The music swapping enables consumers to
bypass the record labels with swapping music files directly between themselves without any
money flowing to record labels. Beside that the P2P technology used by Napster offers
enormous scope to music pirates allowed by the Internet. It resulted in music industry income
fell down and the industry blame Internet piracy for most of the drop in sales. Hence, the
music industry might take the individuals who use such music swapping facilities to court for
copyright infringement.

The second strategic option for the big labels is to set up their own online subscription
services for music. Napster users could access between 500,000 and 800,000 individuals
track of music, it is easy for everyone to search and download the music they wanted. This
means no way to guarantee that record companies, artist, or distribution chains get paid for
the music.

As concluded by research, the combination of technological developments, consumer

preferences and industry economics means the record labels have no choice but to adopt a
subscription-based, as averse to a product-sales-based, model for supplying and being paid
for music. The subscription-based approach might mean that in future, customer who pay
monthly fee can download a set number of recordings directly to their PCs, portable devices,
home stereos and even their cars.

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3. To what extent does the case of the music industry support the arguments of complexity
theorists?

What is complexity?

Complexity theories are concerned with the emergence of order in dynamic non-linear
systems operating at the edge of chaos. Order in this system manifests itself in a largely
unpredictable fashion, in which patterns of behaviours emerge in irregular but similar forms
through a process of self-organisation, which is governed by a small number if simple order-
generating rules.

There are three central concepts that lie at the heart of complexity theories:

 The nature of chaos and order

 The ‘edge of chaos’
 Order-generating rules

Chao and order: Fitzgerald states that chaos and order are twin attributes of dynamic, non-
linear (complex) systems, and, within chaos, a hidden order maybe concealed beneath what
looks completely random. For complexity theorists, chaos described a complex, unpredic-
table, and orderly disorder in which patterns of behaviour unfold in irregular but similar
forms; snowflakes are all different but all have six sides. [Tetenbaum, 1998]

Edge of chaos: it is an intermediate zone which complex system exists between order and
disorder, never quite settle into a stable equilibrium but never quite fall apart. It is argue that
creativity and growth are at their optimal when a complex system operates at the edge of
chaos.

Order-generating rules: in complex systems, the emergence of order is seen as being based
on the operation of simple order-generating rules with permit limited chaos whilst providing
relative order. Under certain conditions they can even generate new, more appropriate order-
generating rules when the old ones can no longer cope with the change in the system
environment.

To what extent does the case of the music industry support the arguments of complexity
theorists?

Music industry was once relatively stable: artists create music, record labels promote and
distribute it and fans consume it. However, as the case shown, the advent of Internet and

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related software development is causing a seismic shift in the way music is distributed. After
the launching of Napster by Peter Fanning in 1999, very soon, millions of people exchange
music files through the program. Music industry became a chaotic industry due to massive of
piracy problem, and other problems like unfair repartition of money between artists and
labels, and loss of original music proponents. The labels in this situation are at the edge of
chaos, they are about to fall apart but due to their ability to self-organize in holding the order-
generating rules, for example not to lose money, the order maintained and they continue to
survive.

Complexity theorists argued that creativity and growth are at their optimal when a
complex sys-tem operates at the edge of chaos. The case is supporting this argument because
the music industry today is getting chaotic, yet it is obvious that in this situation the industry
becomes more creative and continues to growth. In term of the way of selling music, the
creativity can be seen by the advent of new functions of Internet in distributing music.
Besides that, music industry has been growing for the past few years because changes in
music publishing and licensing also created attractive opportunities.

For Tetenbaum, the move to self-organization will require managers to destabilize

their organizations and develop the skill of managing order and disorder at the same time.
The music industry, according to the case study, was facing challenge in surviving because it
was stable in their way of selling music. Instead of holding the right of music production, it
then destabilizes itself by selling the right to others, and starting to monitor the use of music
swapping facilities in Internet. Hence the case of music industry is supporting this argument.

Bechtold argues that people need the freedom to own their own power, think
innovatively, and operate in new patterns. The case is somehow supporting this argument.
Shawn Fanning without much consideration, innovatively use the P2P system to make money
and this is an example of new pattern in music industry. Other big label also holding to their
own power, manage to bring Naspter to court and change their pattern of selling music by set
up online subscription service.

Brown and Eisenhardt claim that organizations can only survive in highly competitive
environments by continuously innovating and improvising, which, they argue, relies on inten-
sive, real-time communication within a structure of a few, very specific rules. It is so true that
in highly competitive environment, without continuous innovating and improvising the
organization will easily fall apart. For the case of music industry, big label manage to survive

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because they are innovating, but it is yet to find out whether this support the argument
because the case never mention on the intensive and real communication within rules.

Stacey argues, people are not unthinking molecules; they can and do exercise free
will, they can and do pursue their own objectives, they can and do utilize power and political
maneuvering to gain their own ends, and they can and do interpret events in widely differing
ways. This argument actually says that self-organization may not occur even when appro-
priate order-generating rules are present. Bankruptcy of Napster can actually prove that it fail
to self-organize, but it is hard to say whether this support the argument because there is no
mentioning of appropriate order-generating rules for Napster in case study.