The Impact of Technology on the Music Industry

How does the increasing digitalization of media affect the music industry and record companies' business models? What can the labels do to avoid losing market share and stay competetive?

What is the next big challenge for Google?

Goolge is facing increasing competition in the field of social search and advertising. And what are the roles of Facebook and Bing in this environment?

Saturday, June 18, 2011

New revenue drivers in the newspaper industry


The newspaper industry is in big trouble. US Newspaper ad revenues sag to a 25-low in 2010. The classified ad revenues decreased by 92% since the year 2000 to $723 million in 2010. The total US newspaper ad revenue per capita fell from $213 to currently $84. Next to the decreasing ad revenues, more and more customers prefer to read their news online than a physical subscription.


The consequence of this collapse in revenues is a high and even increasing number of bankruptcies in this sector, accompanied by a desperate consolidation phase. Probably the newspaper industry is the one that struggles the most with the ongoing process of digitization.
A radical change in the business model and the integration of several value-creating elements is inevitable in order to survive. In this post, I want to discuss a new value chain for the industry that allows the newspaper publishers to captures additional value (also in terms of revenues) by integrating web-based components, social media and innovative payment methods.

Traditional value chain
Before introducing this enhanced publication process I shortly want to discuss the traditional value chain of the newspaper industry and from there start adding different value creating elements.

The content is produced by writers employed by the newspaper as well as by external journalists. The next step is putting together the different articles and adding classified as well as display ads. After the printing process, they are distributed to subscribers and to occasional buyers through different channels such as kiosks, retail chains, gas stations, etc.
The different shades of the steps show the bargaining power of the corresponding party. In the traditional process the newspaper publisher dominates the market.


New value chain



Content creation
Content in written form is no longer enough. Next to articles, new forms of media have to be introduced, like interactive maps, videos, etc.

Distribution/Aggregation
While distribution was purely offline, nowadays is it essential to combine it with online channels, redefine the target groups and extend the customer reach. Convergence offers great opportunities to distribute the content cross platforms and devices. One example would be a partnership with a telecom operator that wants to extend its offer by a news service. Another possibility is the development of mobile Apps offering customized news feeds. Within those newly established distribution channels, not only own articles can be delivered but also content from third parties.
Retrieving/Storing
While some years ago the only way to maintain the content accessible is to physically store the newspaper, today every news major site possesses a database that allows searching and reading previous articles. Linking these achieves to search engines like Google or Bing, directs additional readers to the site. The offering of past content is an important driver for the traffic of the page and therewith the revenue.

Connecting & Sharing
Next to providing interesting offline and online content, newspapers should offer a platform for its readers to comment and discuss articles. Furthermore, a community for its readers should be built where they can interact with each other about relevant topics. The efficient use of social media tools is a key success factor in this area. Furthermore, it is important to make these platforms accessible through the web as well as through mobile devices. These features are an important element to increase the newspapers’ customer retention. Furthermore, those interactive elements help the sites to increase their ranking in the search engines.

Changes in bargaining power
As shown in the illustration above, the bargaining power in this industry has shifted from the publisher to the consumer. This can be mainly explained with the increased offer of online news sites. While every site has its own core topics, styles and political orientation, the information itself is quite similar throughout the different newspapers. So, it is less the articles that decide about success or failure, rather it is the design, accessibility and additional features.

Revenue model
The enhancement of the business model also offers revenue opportunities. Next to the subscription and pay-per-unit model, a pay-per-article option has to be introduced. New revenue driver can include:
-          Fees from partners e.g. in the telecommunication industry for the provision of news
-          Feed from 3rd parties for using the newspapers distribution channel
-          Fee for reading a previous article saved in the database
Next to those revenue sources, the content can be divided into a free and a premium section. Furthermore, the new distribution channels offer additional revenue potential, for example monthly subscriptions for e-readers as Kindle or Nook. The main new revenue however will probably be generated through banner ads on the websites.

Conclusion
Although there are a number of opportunities that digitization offers, at the current state of the industry, the negative effects outweigh. The two main short to medium-term strategic targets for the companies should be to further reduce costs while trying to develop additional revenue drivers in the digital area. Furthermore, I think we will see a lot of mergers and acquisitions in the near future. On the one side, traditional newspaper will try to increase their digital exposure by buying promising technological advanced firms. On the other hand, decreasing demand for printed newspapers and high synergy potential will drive mergers within the industry.

Monday, June 13, 2011

Impact of self-publishing on the book industry

Some days ago, I read an article on Businessweek about the new trend of self-publishing and crowdfunding in the publishing industry. In this post, I want to explain what those changes mean for the industry in general and why it makes business models like lulu.com emerge. To make this analysis more practical, I will include a generic editorial income statement and show how it is affected by those trends.
Lulu.com is a platform where authors can publish their books for free. It takes care of the digital and physical distribution by providing an ISBN, charging a 20% share of the profits. Through this platform, authors that got rejected from the huge publishing houses have the opportunity to promote their work and make it accessible to the public. Among others, this happened to J.K. Rowling as well as Stephen King. Have a look at this link (http://londonstime.blogspot.com/2011/05/7-famous-rejected-writers.html) to see other famous books that were rejected repeatedly in the first place. In addition to the independence of the huge publishing firm, the platform offers the authors to keep the full rights of their content as well as artistic freedom in writing, layout, cover, etc.
To get a general overview of the industry, I will briefly explain the value chain of publishing.

Value chain in Publishing





Content
After writing the content the author presents his work to the publishing houses. Often there is an agent as middleman that recommends writers to the companies and at the same time keeps his writers informed about latest trends and preferences of the publishing firms.
Editing
If the company decides to publish the book, the editing phase starts. Professional editors go through the text and match the style and grammar to the standards of the company. In some cases, especially for non-fiction books, fact checkers are employed to review the text.
Design
After the modifications are completed, the design stage starts. The cover is designed and typesetting, page layout, binding method, etc. are chosen.
Advertising
As the front cover is produced, sales people start raising interest for the new book. In some cases, they also ask for feedback and incorporate it before going to the printing stage. Depending on the interest, the print-run may be reduced or the marketing budget cut.  
Printing
If there is a huge interest from oversee publishers, a co-publishing agreement can be made to increase the number of books printed and therewith take advantage of lower per-unit costs. Once, final changes are done, the text is finally checked for errors and sent to the printing department.
Distribution
The first finished books are sent to publishers as sample copies to aid sales as well as to pre-release reviewers. Shortly after, the publisher uses its distribution channels to make the book available to the public.

Sample value chain in self-publishing






So, how does this publication process work for self-publishers as lulu.com and in what differentiate those platforms themselves from traditional publishing houses?
After writing its book, the author can directly publish it without having to go through an editing process. Usually, this is in interest of the author because it provides him the freedom to publish his work without having to compromise with the publisher. On the other side, I think that there also are some authors who see this review phase as valuable in terms of quality and accuracy. However, according to my research most writers see it as a restriction in their artistic freedom.
The design also lies within the responsibility of the author. He can design his own cover page and after upload it, lulu.com offers a great number of advanced layout options. For writers that are not familiar with publishing or want to assure to produce a high-quality layout, lulu.com offers three categories of premium design services from basic to professional.
Promotion is done by the writer himself. There are several tools, premium and free of charge, offered by lulu.com to advertise the book.
The book is mainly distributed digitally but lulu.com also offers the service of printing on Demand. In this case, costs only occur after assuring future revenue. In terms of distribution channels, the author chooses himself. The listing of a title and ISBN in the major bibliographical databases and on Amazon.com is for free. GlobalReach, a service priced $75, offers the most extended reach and in addition to the channels above, the title is made available to further major retailers like Baker & Taylors, Barnes & Noble and NACSCORP, a subsidiary of the National Association of College Stores.
This process shows that in self-publishing, the author is in charge of most stages of the value chain.

Effect on income statement
But how does self-publishing affect the income statement of publishing companies? The logical answer would be that it causes a drop in the number of sales. I think this is a valid answer due to the fact that the publishers attract fewer new talents and famous authors may leave the company since they prefer to work more independently and their success is no more dependent on huge promotion and advertising campaigns. On the other hand, it may be the case that the companies attract fewer but more talented writers that prefer working with a publishing house to boost their success. I think this is also possible because the number of books sold is a good indicator for the future success of a book and this data make the search of talent for effective.

Analysis of Income Statement: Barnes & Noble, Inc.

The extent of the effect of self-publishing on the income statement of publishers however is unclear. There drop in sales of physical books is caused by the general trends towards digital media which also explains the increased number of books sold through Barnes & Noble, Inc. online distribution channel, B&N.com. Furthermore, the average distribution cost per unit decreased. This is true due to two factors: optimization of operations in the distribution center as well as the increased through the online channel which has much lower per unit distribution costs that the physical sale.

Conclusion
Summing up, I think that self-publishing is a great opportunity for authors to publish and promote their book. For many of them, who got rejected by the publishing firms, this is the only way to make their work effectively available to the audience. Many people argue that the revenue share when self-publishing is much higher. This is definitely true but what matters is the total profit that is the profit per book times the number of books sold. With the support of a publisher and its advertising and promotion campaigns the quantity sold will be much higher. For this reason, I tend to say that, especially for unknown authors, it is still more profitable to seek for a contract with a publishing house and in turn accept the lower per unit revenue share as well as comprises during the editing process. 

Crowdsourcing in the music industry


Recently, I read an interesting article about the increased importance of crowdsourcing in the music industry, stating that this new approach of funding and distribution has become possible through significant changes in this sector during the last years. Building up on my previous post about the music industry, I want to explain the model of crowdsourcing and how it changes the value chain. As a part of the analysis, I want to include the discussion of some successful crowdsourcing platforms and their strategies.
Wikipedia describes crowdsourcing as an act of outsourcing tasks, traditionally performed by an employee or contractor, to an undefined, large group of people or community through an open call. This concept has gained a lot of popularity in many areas such as the design of t-shirt or company logos.
Crowdsourcing in the music industry means that almost the entire value chain from writing a song to its distribution can be done with the help of the community. There are websites that focus their business model on specific areas like recording or talent scouting but also there exist platforms that offer almost the entire process.

For the following analysis, I want to refer to the value chain introduced in my previous post and discuss it step by step in the context of crowdsourcing.

Value chain of music industry





Content creation
Most artists enjoy the freedom of being able to write a song on their own without any external influence from e.g. the labels. On the other side there are artists that are looking for persons to jointly create a song. The main idea behind this collaboration is the search for inspiration by including elements from different cultures, instruments, genres, etc. Sites like jambassador.com or songwritingfever.com offer this service.

Talent scouting/Contract artist
There are a huge number of pages out there that offer artists to publish their songs for free. OurStage.com, Sellaband.com or thesixtyone.com are some of them. The quantity of songs published redefines the job of talent scouting. Instead of actively looking for new promising artists, the challenging task right now exists more in filtering and selective picking. The crowdsourcing approach allows users to choose their favorite artists through different voting or rating systems.

Financing and Production
Through crowdsourcing, singers are no more depend on record labels to get their album funded. They can publish their work on one of the crowdsourcing websites and if they convince the users, the have the chance to collect enough money to record their songs and enjoy more artistic freedom. OurStage hosts many competitions giving away cash and non-cash prizes. On Sellaband, artists have the chance to get their new album financed by the site’s users. Once, the required money is collected, the supporters in return receive the CD for free, as well as concert tickets, merchandizing material and dependent on the artist, sometimes a share of revenues.

Promotion
If a band manages to get the required funding they have already raised some awareness. The existence of a number of websites that offers them to publish their song for free is another great promotional tool. Furthermore, there is a lot of word to mouth promotion done by the supporters (financers) of the band. Social media plays an important role in raising awareness offering the artists a great platform to advertise themselves and their songs.

Distribution
The digitization of media offers the bands a great selection of sites to distribute their song. Next to websites like thesixtyone that focus on the entertainment experience but also offer to download songs for a small fee, there are a number of digital music online shops as iTunes, myspace music, amazonMP3, emusic, Nokia Music Store, etc. Amazon on Demand even allows interested customers to purchase songs on physical CDs. Costs only occur when the song is sold. Two interesting site in this area are cdbaby.com and tunecore.com, central publishing pages that facilitate the process of uploading the song to the different online music stores.
During my research I found an interesting graph that shows the revenue share of the label and the artist using the different distribution channels. These numbers show the advantage of crowdsourcing because once the financing is obtained the income per song sold is much lower. On the other side, in this context we have to mention that the number of songs sold probably will be much higher with support of a label since much more resources a spent in advertising and PR.



Conclusion
Crowdsourcing is a great tool for artists to fund their songs. Since listing the song on the platforms usually is for free, artists can try without any cost, and try as many times as they want. This new kind of financing makes them less dependent on the record labels and also established bands like Public Enemy have decided to fund their new projects with support of the crowd. Next to a huge number of digital platforms to promote the songs, this effort can be leveraged by the word to mouth promotion of the crowd. Furthermore, nowadays the songs can be distributed effectively without a record label behind. 

Evolution and Future of Online Gaming



Yesterday I visited the Electronic Arts headquarters in Silicon Valley and had the chance to talk to senior management about the company’s business model, its current situation as well as its future plans. In this post, I want to shortly share the main ideas we discussed and based on that and some further research explain the value chain of the gaming industry and how it is affected by recent trends.
Electronic Arts’ business model has been the development of all kinds of PC and console games. During the last years, the company invested a lot of money to gain market share in the field of online games because those offer a much higher return on investment.
I want to start this post with the description of the video gaming industry and based on the different stages of the value creation process explain how online gaming differs from the traditional business models. After this analysis, I will describe recent trends in the online game business and discuss how companies in this industry should modify their business model to stay competitive.

Video gaming value chain






Software Developers
Software developers are primarily responsible for the ideation and development of console games. Similar to the movie industry, there are a lot of small studios that develop a concept and then seek funding from major game producers or also called software publishers.

Software Publishers
The large publishing houses like Electronic Arts are responsible for the funding and distribution of the game titles. Besides, they act in the fields of product testing, packaging and user manual development, customer service, marketing and PR. Around 300,000 units must be sold to break even. Recent studies show that this is the case with one out of four games. The business is quite risky and an intelligent allocation of the resources essential.

Console Manufactures
This part of the value creation process is controlled by the three big console manufacturers, Nintendo, Sony and Microsoft. No game can be developed and distributed without their consent. In addition, developers are required to pay a licensing fee for each unit sold of about 15% of the revenue. With only three players, the value captured per company in this stage is the highest in the whole value chain. It is no exception that consoles are sold below manufacturing costs to increase the user base. Besides licensing, the manufacturers also develop games on their own (first-party development).

Retailers
After producing the disks and design the cover, they are distributed through a network of retailers. The main distribution channels usually are large software stores, electronic retailers like BestBuy and mass merchandizers as WalMart. In average, those retailers capture 40% of the final price per unit.


Online gaming value chain





Content creators
The value chain in the online gaming market is shorter. Since in most cases, online games are less complex to develop, especially in terms of graphics, software publishers are no longer required. The content creation process is done by both, small software developers as well as major video game companies, like EA.

Aggregators
The games are made available to mobile operators and web platforms through an aggregator which is in charge of combining content from different sources. The aggregator is also in charge of the communication to content creators, rights owner and in some cases a collecting agency. If the games are distributed by a telecom operator, latter in most cases is also in charge of the billing. Independent portal usually have an external billing partner.
For a few social gaming companies, like Zynga, there is one more step into the value chain: the interaction with social network sites. In order to be able to host the game on a social network platform, there are some requirements that have to be fulfilled and the game has to be licensed. Furthermore, the network takes a part of the revenues generated.

Distributors
This content is distributed through two main channels. The first one is the Internet. The other, rapidly increasing distribution channel is mobile. This can be done either via portals from the telecom operator (on-deck) or through accessing website (off-deck). The emergence of web and mobile broadband access further drove the evolution of new online game markets.

Key trends in online gaming industry
After the brief explanation of the online game value chain, I want to go on with the discussion of recent trends in this sector.
The number of platforms for hosting a game has been multiplying within the last years. For example, there are social networks, Steam, iPhone/iPad, Android, Raptr/Xfire, Onlive, and many more. Even though there will be some consolidation, I think that this high fragmentation is likely to persist during the next years. For online game developers this means two things. It makes the distribution more complex because the games have to be offered through many different channels. On the other hand, it means less dependency on the distributor. In general this is true but there are also some exceptions. For example, many social game developers are still very dependent on Facebook due to its dominating market power.
While this high number of platforms may seem like an obstacle for some companies it at the same time offers many opportunities. There will be a growing demand for cross-platform games referring to the development of different gameplays, on different platforms targeting different audience but linked. A promising interaction seems the integration of massively multiplayer online (MMO) games with social networks. Another interesting model is the combination of MMO games with the mobile web, offering opportunities to integrate features using geolocation or augmented reality.
Another interesting business model is the development of niche products. While many companies still are trying to launch games based on already proofed concepts, the introduction and sound implementation of new ideas will become an increasing trend in the near future. Developers should think outside the box and come up with something new. This probably includes a higher risk but at the same time, if the game is a success the rewards are much higher.
An important trend that many companies have missed until now is becoming more international in terms of offering modified versions of their games to regional target groups. This is still a great opportunity for many developers, especially on social games platforms. Failing to localize and customize their games to other markets is practically an invitation for local companies to develop a similar product and grab market share. An important recommendation for developers nowadays is to offer their products in more languages, taking in mind possible country-specific adaptions according to regulations, religion, traditions, etc.
Another trend is the concentration of the gaming industry. Many traditional publishers are trying to increase their share in the online gaming business through acquisition. For example, Mythic was bought by EA, Atari acquired Cryptic and Activision merged with Blizzard. As the online gaming market is growing, the number of B2B service providers (such as payment solution companies, ad networks, customer support software, analytics solution, etc.) also increased significantly. However, this business especially in the areas of payment and advertising has caught the attendance of many mid-size companies as well as global players. Furthermore, the products offered are standardized services with very low differentiation. For this reasons, I think that this sector is getting increasingly competitive and concentrated.

Conclusion
In summary, I think that will be essential changes in the gaming industry.  While in the last years, most development was done in the graphical area, players now want to be more connected and until a certain point also include their offline life in this experience. Online games offer a great new revenue driver with a very high ROI and low cots compared to traditional video games. Due to the increased popularity and profit potential, more and more companies are entering this industry, resulting in an increasingly competitive environment. 

Tuesday, May 31, 2011

What is the next big challenge for Google?


For the last years, Google has been the leading company in online business. To maintain its dominating market position and further increase its revenues, Google has been extensively diversifying its portfolio with products such as the Chrome browser, the mobile operating system Android and its lately launched service, Google Wallet. With this multitude of products and services (check it out on http://en.wikipedia.org/wiki/List_of_Google_products) it is getting increasingly difficult to manage the company. Due to its fast organic growth and an active acquisition strategy, Google now is competing against a huge number of companies in almost every segment of the digital industry. In my opinion, the biggest risk that Google is facing nowadays is the increased competition in its two core business areas: search (Bing partnering with Facebook) and advertising (Facebook). 

One future key success factor for search engines is the integration of social media in the algorithm. In this field, Bing currently has a clear advantage through its partnership with Facebook and is gaining market share. The social network exclusively allows Microsoft to include its users’ “Likes” of webpages and content into the search algorithm. With this new script, Bing has recently crossed the 30% mark in US market share and shows a continuously increasing user base. The picture below illustrates the market share of Google vs. Bing in US during the last 6 months. In my opinion, the gap between the two companies will further decrease and be marginal by 2012 although Google is trying to reverse this trend. To enhance its search algorithm it has started to include information of several other social network sites such as Twitter and Youtube. If they are successful, we will see during the next months.



Google’s main revenue driver is advertisement. In this area, the company faces increasing competition through Facebook. Although a recent study published in the Silicon Alley Insider shows that the revenue generated per user is still much higher for Google than for Facebook, the picture is changing. Facebook is redefining its business model, offering many advertising features for companies. Its main success factors are the long time users stay on the website as well as the fact that potential customers pay more attention to recommendation from friends than to Ads on Google.




I expect the competition between Google and Facebook to further increase and await some interesting developments in the next months.

Sunday, May 29, 2011

Impact of technology on the music industry

Enablers are the development of advanced hardware and software products as well as the increased importance of internet and especially social networks. During my research, I found a number of interesting statistics about recent changes in the music industry. Based on this data I will try to analyze each step of the value chain to explore how new technologies and the change in customer behavior affect the companies’ business models as well as the music industry as a whole.
Approach: After a short description of the music industry as it was some years ago, I will have a look at the most recent trends. Based on that I will point out the changes in the business model of record labels and identify some important areas in which companies have to act in order to stay competitive. To make this analysis more practical, I want to include the income statement of Warner Music Group, a leading record label to show how it is affected by recent industry chances.
The typical value chain in the music industry shows five steps. It starts with creation of the content by the artist. Traditionally, the artist tried to raise awareness by sending demo tapes to the record companies and participate in band contests. The artist and repertoire (A&R) unit is the division of a record label that is responsible for talent scouting, contracting and overseeing the artistic development. Once the contract is signed, the record company takes care of the financing and records the songs. The next step is the promotion and PR of the album done by the record company. The distribution traditionally was done through merchants and retail stores. Most of them were independent but there were also big retail chains, owned by the major record labels.


After this short description of the traditional music business, I want to show you some charts I prepared about recent trends in the music industry. For those of you, who are interested in the current development of the music business, I recommend to have a look at http://www.grabstats.com/statcategorymain.asp?StatCatID=9.
The first graph I want to discuss shows the development of global recording industry revenues. It clearly shows the decreasing importance of physical products such as CDs, LPs, vinyl singles and music videos. On the other hand, more and more users purchase their music online or via mobile phone. The main online distribution channels are so called digital music stores, subscription and streaming services and legal P2P sites. The revenues generated by mobile customers are mainly generated through ringtones, mastertones and full-track downloads. This trend towards digital music revenue is even clearer is US. Here, the revenue of digital distribution ($5.7bn) equals the sales of physical media.  
This strong trend of digitalization bears a great risk for the record companies’ traditional business model, not only from the sales side but for every step of their value chain. Let’s start with content creation. Due to the drop in prices of recording equipment and recording and editing software, the artist is less dependent from the labels. While some years ago, it was costly and time-consuming to produce a high-quality album, nowadays these obstacles do not exist anymore. Once the song is recorded, artists have the opportunity to publish it online instead of raising awareness through demo tapes and band contests. There are several sites connecting artists to potential customers or to mostly independent record label. After redefining its strategy, MySpace became the most famous social network site for this purpose. While most artists publish their songs at youtube, there are many other sites bringing artist and listener together. If you are interesting in browsing songs of yet unknown artists, have a look at www.ourstage.com, www.sellaband.com or www.thesixtyone.com.  Through the increasing number of online music publishing sites, it became much easier for the record label to find talent. The increased trend towards self-publishing has led to an ongoing reduction of most A&R divisions and in many companies is still an area that shows cost saving potential. Now we are coming to the recording of the song. As mentioned above, this process became increasingly cheaper. However, I think that the expertise and know-how of a recording company in most cases adds value to the artist, although less than some years ago. The financial benefit that comes along with signing a contract remains an attractive advantage for the artist of joining a label. Although, as we saw, promotion through the web is free and can be done by basically everyone, the extend of awareness cannot be compared to the much greater reach of potential buyers through a record label. It also provides a valuable network and expertise in terms of PR. Furthermore, it allows the artists to arrange concerts at a much bigger scope. Recalling the main conclusions of the revenue chart above, we see that the added value of a record company in terms of distribution is decreasing. While the artists were dependent on the labels because of their access to the distribution channel, the increasing popularity of digital sales allows the artist to offer the songs himself to potential customers. Regarding this trend, the advantage of being contracted by a record company in terms of distribution is decreasing rapidly.
The main conclusion we can take from this analysis is that the value added for the artist of being contracted by a record company is gradually decreasing. The main factors causing this trend are technological advancement and the increased popularity of social networks and content sharing. How should the record company react? As we saw, the main value provided by the label lies in the field of promotion. The companies should focus their business model on the provision of services in this field. For example, cost intensive offline marketing and network-based PR are still two crucial success factors in this industry. Furthermore, the arrangement of concerts and other live performances provides great value to the artists. On the other hand, there are some areas that become less valuable and need to be restructured, mainly the A&R unit as well as the distribution department. The easiness of self-publishing facilitates the work of A&R. Here, it is important to go with the trend and focus on talent search online. The even greater urge to act is in the distribution department. It is important to be innovative and keep up with digital trends to ensure the optimal utilization of the online as well as the mobile distribution channel. Crucial factors are among others the use of the right platforms, effective online-marketing and the alignment of the revenue model. A great way to generate further revenues is to offer additional products and services related to their music portfolio (e.g. ringtones, games, etc.).
To conclude this article I want to emphasis the importance of redefining the business model and to focus on new revenue drivers by a simple calculation. Assuming that a CD is sold for $15.99 and the label gets 60% of the revenue which makes $9.60. When selling it through the digital channel, due to the smaller involvement of the label in the value creation process, I assume a sales percentage of 55%. When the album is sold for the common price of $9.99, the record company receives $5.60. This example shows that even if the labels managed to successfully switch to the digital distribution channel, other revenue driver have to be created to compensate the decreasing income from their former core business.