Buyer Power

Number of Buyers

Overall, the threat the music recording industry faces from buyers is considered to be relatively high. From the value chain, one can see that CDs are distributed by the record labels to retailers and in this industry a few larger brick and mortar retailers account for the majority of music sales. As of 2007, Wal-Mart, Best-Buy, iTunes, Amazon, and Target control over 50% of the sales of CDs in the music industry. Because these five retailers control such a large market share within the industry they have substantial power in setting prices. The record labels are dependent upon these retailers to carry their products and therefore most offer prices that retailers must agree to. Furthermore, as an increasing percentage of music sales are occurring through the online channel, iTunes is gaining power and market share. iTunes controls over 70% of the digital music download market, causing record labels to be bound by pricing structures in which iTunes sets. These factors decrease revenues and decrease profits for the industry.

Product Differentiation

While music is offered in various formats overall, the differentiation among products offered by the various suppliers is low. Most of the large record labels have artists representing all the most popular genres that target all the various consumer preferences. In addition, the retailers have access to all the record labels for their artists’ music. This low product differentiation decreases costs and decreases profits for the music industry.

Threat of Backward Integration

Furthermore, the threat of backward integration by buyers is low in the music industry. In most cases, you won’t see the traditional retailers, nor the online retailers, enter into the business of recruiting talent and producing music. While there are some instances of backward integration, for example, Starbucks starting its’ own music company, these cases make up a very small fraction of the market. This low threat of backward integration works in favor of the industry and increases revenues and profits.

In this new age, buyers have significant power within the music industry. In the 1990s, the large music groups were able to control the distribution channel strictly emphasizing brick and mortar retailers (Refer back to the value chain). Today, however, suppliers are forced to offer their products in various channels including online. Having to offer various formats through various channels, increases the costs for firms in the music industry and decreases profits. The music industry has also been forced to reduce prices for their music. With the advent of peer based sharing applications, consumers have become increasing price sensitive with regards to buying music. Now, record labels must begin offering much lower prices for their music just to stay competitive. Overall, because of the high buyer power, revenues are decreased, costs are increased, and profits are decreased for the music industry. The diagram above to the right summarizes my analysis on buyer power within the music recording industry.

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