Is Windowing a Promising Distribution Model for the Music Industry?


Bachelor Thesis, 2016
39 Pages, Grade: 1,3

Excerpt

Table of Contents

Table of Contents

List of Figures

List of Tables

List of Abbreviations

List of Appendices

1 Introduction

2 Conceptual Framework
2.1 Sequential Distribution in the Movie Industry
2.2 Success Factors
2.3 Distribution Models in the Music Industry
2.3.1 Classification of Current Distribution Practices
2.3.2 Ownership, Access and Context Model
2.4 Approach for Windowing as a Distribution Model for the Music Industry

3 Application of Windowing in the Music Industry
3.1 Analysis of Capability for the Music Industry
3.1.1 Chances of Windowing
3.1.2 Risks of Windowing
3.2 Current Practical Appearance of Windowing in the Music Industry

4 Conclusion

References

Appendix

Executive Summary

Like in most industries, managers in the music industry have to ensure the profitability of their business model and are forced to adjust their decisions and actions while steadily paying attention to the changes and development on the market. As the behavior of music consumption has changed rapidly since the beginning of the 21st century, profitability is highly endangered by new distribution channels with their special requirements and lower revenues. The object of this bachelor thesis is to analyze if windowing could work as an eligible distribution model for the music industry. Methodically, it includes a literature overview based on the use of windowing within the movie industry, where this distribution model has been applied for several decades and still finds application today. The report procures a conceptual framework for sequential distribution and its success factors, supplemented by the examination of necessary knowledge regarding the music business and respective aspects such as the current distribution practices. It provides an approach for a possible configuration of windowing as a distribution model for the music industry. The analysis of eligibility itself is conducted with help of an evaluation of the chances and risks that would go along with an implementation of the distribution model.

Findings lead to the general possibility of windowing in the music industry, but point out that applying this distribution model is accompanied by a high number of risks that have to be carefully traded against the potential gains reached by these actions. This thesis recommends to pay attention to different factors such as genre and target market and to examine which specific player within the supply chain should benefit from the changes in the distribution model.

List of Figures

Figure 1: German Music Market Revenue Share by Channel

Figure 2: Traditional Movie Industry Windows

Figure 3: Home-Channel Timing Decisions

Figure 4: Effect of Window Reduction on Movies

Figure 5: ARIA Wholesale Figures 2005–2011 – Total Dollar Value

Figure 6: Downloads and Subscription Streams – Country Comparison

Figure 7: Music Industry Development

Figure 8: Spiral of Decline

Figure 9: Shifts in Relative Value-Added Role and Share of Revenues

Figure 10: NBC vs. Non-NBC Piracy Surrounding December 1, 2007

List of Tables

Table 1: Potential Music Industry Windows

Table 2: Key Streaming Exclusives by Platform

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

List of Appendices

Appendix A: Home-Channel Timing Decisions

Appendix B: Literature Overview: Sequential Distribution

1 Introduction

The music industry is one of the most important strings within the entertainment sector, both culturally and economically. With a total revenue of nearly 15 billion dollars per year, there is an enormous potential of optimizing marketing activities to increase profitability (IFPI 2015, p. 7). Especially due to the increasing digitalization, challenges such as new distribution methods, piracy and music rights ownership arise and therefore, problem solutions have to be found (Peitz and Waelbroeck 2004). The music industry struggles with decreasing physical sales that are progressively compensated by the flexibility and usability of streaming platforms (IFPI 2015, p. 7). Figure 1 demonstrates the development of revenue shares in the distribution channels of the German market, reflecting the rise of digital sales.

Figure 1: German Music Market Revenue Share by Channel

Abbildung in dieser Leseprobe nicht enthalten

Source: author’s own illustration adapted from Statista (2016); Bundesverband der Musikindustrie (2016).

Also the lower prices per song could be viewed as a reason for customers to change their consumer behavior (Wlömert and Papies 2016, p. 314). Industry and artists face the threat of losing high shares of their revenues, which are needed to reinvest into artists and marketing (IFPI 2014), therefore the recording industry should examine new distribution models to address the so called ‘value gap’ and protect their business model in the changing environment (IFPI 2015, p. 23).

This thesis analyzes the possibility of a reasonable usage of the windowing distribution concept within the music industry. On that account, the following section is concerned with the presentation of a conceptual framework of windowing. Here, the movie industry serves as an example due to its active deployment of this distribution model and because there is a lack of conducted studies directly concerning windowing within the music industry. An overview of potential factors for a successful implementation of the sequential release strategy is added initially, followed by a presentation of the distribution habits in the music industry. Here, the thesis provides an insight into the currently practiced music distribution models and continues with an approach for windowing with the similarities and differences of both industries taken into consideration. Subsequently, chapter 3 is the essential part of this document, where the actual analysis of a possible success of sequential distribution is conducted. The chances and risks are examined, followed by a summary of the practical appearance of windowing in the music industry today. Finally, the conclusion with its limitations and recommendations for future research and managerial implications closes the thesis.

2 Conceptual Framework

2.1 Sequential Distribution in the Movie Industry

Based on the high complexity of distribution possibilities in the product field of entertainment, channel coordination is highly relevant for reaching an adequate profit. Jeuland and Shugan (1983, p. 266) pointed out that “coordination can lead to results where all channel members received larger profits”. In this context, a lot of research has been conducted to enable optimal decisions and actions regarding the distribution. Due to the lack of available studies specified on sequential distribution in the music industry, the conceptual framework of this study is constructed on the sequential distribution as it is practiced in the movie industry. An overview of the used literature regarding this topic is provided in Appendix B. There is a high number of similarities between those two industries that are presented in detail in section 2.3.

The expression ‘sequential distribution’ is the common description of a firm's approach to make their products become more extensively available to the market over time (Lehmann and Weinberg 2000, p. 18). The film industry terminology for this sequential channel release strategy is called ‘windowing’ (Mukherjee and Kadiyali 2011, p. 986). Hennig-Thurau, Houston, and Walsh (2006, p. 559) describe this process as following:

“Specifically, a product is initially distributed through a restricted set of channels, often tightly controlled by the firm. Over time, distribution through an array of channels makes the product accessible to a wider range of customers.”

Calzada and Valletti (2012, p. 649) link this process to Lipsey and Lancaster’s principle of second best (1956) and recommend to first offer the product in the channel that generates the highest revenue in the least amount of time, which in the case of the movie industry would be the presentation in theaters. Then, successively, the film should be released in markets with lower returns per unit of time. According to Hennig-Thurau, Houston, and Walsh (2006, p. 560), this enables price discrimination and a sequence of revenue streams. Historically, these less profitable markets consisted of pay-TV programming, home video, network television, and eventually local television syndication (Owen and Wildman 1992, p. 37).

Eliashberg, Elberse, and Leenders (2006, p. 639) supplement the lower revenue windows with the video game and merchandising products. In their study they also refer to versioning, where the possibility of a consumer making multiple purchases over time is taken into consideration. However, the profitability of this strategy is limited by the risk of cannibalization for highly substitutable products. The authors point out that versioning even allows an improved price discrimination for customers who buy only one version.

Figure 2: Traditional Movie Industry Windows

Abbildung in dieser Leseprobe nicht enthalten

Source: Booz-Allen & Hamilton (2001), p. 4.

Luan and Sudhir (2006, p. 3) reflect the time preference of managers, who have a high interest in achieving the maximum profit of both markets as quickly as possible. This would lead to a shrinking inter-release time. This aim is opposed by the risk of cannibalizing the higher sales of the first product by preponing the second release. The trade-off between cannibalization and the preference of quickly gained revenue was first introduced by Lehmann and Weinberg (2000, p. 18 ff.).

Prasad, Bronnenberg, and Mahajan (2004, p. 1) support the idea of less cannibalization through a sequential introduction of substitutable products. They observe that also in the other product categories, such as books, technological goods and fashion, there are “no developmental constraints preventing the release of both versions simultaneously, but the firm chooses to introduce the high-margin version first”. A limitation of this cross-industry validity is stated by Lehmann and Weinberg (2000, p. 32), who argue that variations in the structural arrangements of other industries could appear.

According to Lippmann (2000, qtd. in Hennig-Thurau et al. 2007) public ‘buzz’ emphasizes the subsequent release of movies and is a phenomenon exclusively valid for the theatrical channel. A recent study conducted by Ahmed and Sinha (2016, p. 24) implies that strengthening the position of a temporally exclusive theatrical release could spark excitement among consumers and lead to both an increased anticipation, as well as a greater preference for the upcoming movie. Their argument is based on the Bass (1969) diffusion model, which presumes influence by innovators on adopters, respectively moviegoers on DVD purchasers (Mahajan, Muller, and Bass 1990, qtd. in Ahmed and Sinha 2016, p.24). The traditional view on the windowing practice expressed by Frank (1994, p. 125) goes to such lengths that the lower degree of excludability by not following the sequential distribution strategy can be described as ‘suicidal’. He even compares that step to starting an intertemporal price discrimination by setting the lowest price. This idea is being challenged by the findings of Wilson and Norton (1989, p. 1), who suggest deciding between releasing a line extension as early as possible or not releasing it at all, using a variant of the Bass (1969) diffusion model.

The traditional outlook on the justification of windowing is being “challenged by current market conditions” (Hennig-Thurau et al. 2007, p. 64). An example is demonstrated by Mukherjee and Kadiyali (2011, p. 985), who evaluated the dependency between DVD rental and DVD sales release by simulating a 28-day window with either initiating the purchase or the rental channel. The authors come to the result that windowing reduces the sum of revenues across both channels, originated by the consumers’ preference for a specific channel that leads to missed revenues by delaying the distribution for this channel. As presented in Figure 3, the recent development reflects a slightly decreasing, but stabilized gap between the box office release and DVD release.

Figure 3: Home-Channel Timing Decisions

Abbildung in dieser Leseprobe nicht enthalten

Source: Ahmed and Sinha (2016), p. 22.

The duration of theatrical availability, and time to DVD release with consideration to the box office revenue can have many different occurrences (see Appendix A).

2.2 Success Factors

For a successful implementation of the sequential release strategy, there are several influencing factors to consider.

The extant literature exhibits a broad consensus regarding the risk of cannibalization that can arise when sequential releasing is conducted and the time window between the channels shrink. Although they explore that the net effect is positive (see Figure 4), Luan and Sudhir (2006, p. 19) agree with the theory of cannibalization caused by windowing.

Figure 4: Effect of Window Reduction on Movies

Abbildung in dieser Leseprobe nicht enthalten

Source: Luan and Sudhir (2006), p. 38.

The findings of Eliashberg, Elberse, and Leenders (2006, p. 649 ff.) are in accordance with the cannibalization effect, pointing out that “the release of a new version expands the market but also cannibalizes the existing versions, as some consumers switch to the new alternative”. They augment these thoughts with the dependence on the degree of substitutability which influences the profitability while versioning is put into effect, saying that cannibalization occurs if two products are too exchangeable.

Another variable that has a substantial impact is the so called ‘buzz’. Luan and Sudhir (2006, p. 3) describe this phenomenon as “considerable critical attention, advertising support, and media coverage” and note that this attention tends to decline after a particular amount of time for most products. Elberse and Eliashberg (2003, p. 332) supplement this by proposing the perishability of buzz. According to their study, which is principally involved in analyzing the outcome of launching a product in a domestic market followed by the launch in a foreign market, an increasing time lag is leading to a decreasing relationship between domestic and foreign market performance. The decay also adversely affects the potential earnings that should have been gained through the usually cost-intensive introductory marketing campaign (Lehmann and Weinberg 2000, p. 20).

Extant research reveals that a company’s distribution habits should consider customer expectations as well (Prasad, Bronnenberg, and Mahajan 2004, p. 13 ff.). It is argued that the behavior of a whole industry forms these expectations, therefore, a common strategy could lead to a beneficial situation for the company. Hennig-Thurau et al. (2007, p. 79) extend the consumer preference criterion to a transnational level and state that “consumers' channel preferences and movie consumption decisions differ among countries”. Hence, they recommend to fine- tune the distribution strategy based on country peculiarities. A different study from Hendricks and Singhal (1997, p. 422 ff.) exposes the importance of consumer appeal for a product, arguing that a delayed release may result in a missed opportunity for potential sales, accompanied by lowering market entry barriers for competitors.

The results of a study conducted by Eliashberg, Elberse, and Leenders (2006, p. 650 ff.) reflect the influence of the channel structure on the success of sequential distribution. The authors point out, that in case of a vertically integrated production and distribution channel, windowing should be replaced by a so called ‘Day and Date Strategy’, meaning a simultaneous release of the versions. Another key criterion mentioned in a different study is the studios’ revenue share in each channel (Mukherjee and Kadiyali 2011, p. 66). As revenues are divided among the parties across distribution channels, it is essential to evaluate the percentage that is generated for the studio. Furthermore, a studio should explore if the data that is generated by sales in the first release channel could be used to improve decisions for the following channels, potentially leading to better results in profitability (Lehmann and Weinberg 2000, p. 33).

In addition to the specified success factors for sequential distribution, the factors of motion picture success in general should be paid attention to as well. As Hennig- Thurau, Houston, and Walsh (2006, p. 559 ff.) argue, “the importance of specific success drivers differs across motion picture channels”. Therefore, the authors derive three different categories of success drivers. First of all, the movie characteristics play an important role, namely the personnel attractiveness which reduces the decision risk, the cultural familiarity (e.g. through sequels and remakes), and other aspects such as country of origin and movie genre. Furthermore, the post-filming activities, such as advertising, number of movie screens or video units, and the timing of release, are strongly related to the ‘buzz’ that was described before. Eventually, external factors in the form of reviews, awards, and quality perceptions have a substantial impact on the success of a movie in its respective channels. Hennig-Thurau, Houston, and Walsh (2006, p. 560 ff.) complement their assumptions by alluding to the consumer risk and the ‘success- breeds-success’ statement, expressing that the increased media attention of a successful movie leads to even more resource allocation enabled by the studios (Elberse and Eliashberg 2003, qtd. in Hennig-Thurau, Houston, and Walsh 2006, p. 564 ff.).

2.3 Distribution Models in the Music Industry

To be able to fully understand the transfer of the windowing model from the movie industry to the music industry, an overview of the currently practiced distribution alternatives is presented.

2.3.1 Classification of Current Distribution Practices

Being the second most important sub-sector within the music industry after music events (27% gross value), music recordings (22% gross value) contain a significant relevance for the success of the industry as a whole (IFPI 2016, p. 34). Therefore, it should be viewed as substantial through which kind of channel the product reaches the customer. In this context, one has to keep in mind that physical sales, as the traditional distribution variant, decline (Peitz and Waelbroeck 2004) among further aspects due to both the uprising digitalization, as well as the cannibalization by digital sales. This is exemplified on the Australian music market in Figure 5.

Figure 5: ARIA Wholesale Figures 2005–2011 – Total Dollar Value

Abbildung in dieser Leseprobe nicht enthalten

Source: ARIA, qtd. in Peltz (2013), p. 102.

This leads to an increased importance of the digital sales, which can be discriminated into two different music delivery methods, more precisely downloading and streaming (Peltz 2013, p. 99).

[...]

Excerpt out of 39 pages

Details

Title
Is Windowing a Promising Distribution Model for the Music Industry?
College
University of Münster  (Marketing & Media Research)
Grade
1,3
Author
Year
2016
Pages
39
Catalog Number
V489125
ISBN (eBook)
9783668976214
Language
English
Tags
Musikindustrie, Music Industry, Sequential Distribution, Windowing, Spotify, Distribution, Vertrieb, Musik
Quote paper
Sebastian Strootmann (Author), 2016, Is Windowing a Promising Distribution Model for the Music Industry?, Munich, GRIN Verlag, https://www.grin.com/document/489125

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