The effects of digitalization on music industry operators and its money flow

Abstract

As digitalization is rapidly evolving and changing traditional ways of working in most industries, the music industry is in the middle of a complete transformation. Traditional record labels have had to change their business model and adapt to changes taking place in the industry due to the emergence of streaming services. The object and purpose of this study is to research how digitalization has affected the way the music industry operates today and how it is changing the industry’s money flow. The research methods used in this thesis are literature review, interview and benchmarking. In the theoretical framework we go through things like what are the 3 major record labels, how does the money flow of record lables work in practise, how does the money flow of streaming services work in practise and in which direction is the industry’s money flow moving.

A focused interview with Teosto music copyright society’s Senior Advisor of technology and foresight reinforces the theoretical framework and brings an industry experts perspective to the research. The interview points out challenges associated with digitalization, including data management difficulties, imbalances in compensation structures for streaming, and persistent data quality issues.The benchmarking study done in the research analyzes the financial statements of two Finnish music artist production companies Kaija Koo Tuotanto Oy and Shadowland Ltd from the years 2003 to 2019. The benchmarking study reveals a significant reduction in material purchases, which symbolizes the shift from physical records to digital music consumption. For instance, material purchases for Kaija Koo Tuotanto Oy dropped from 929,81 € to 0 €, and Shadowland Ltd had a decrease from 18 819,04 € to 2,946,85 €. Simultaneously, external services showed a harmonious increase: Kaija Koo's external services rose from 0 € to 20,532,88 €, and Shadowland Ltd’s external services increased from 217 351,48 € to 420 452,38 €. This suggests that in the digital music era, external services play a crucial role, outweighing the relevance of physical purchases for music artists' production companies. Even though the financial statements analyzed in this research didn’t include detailed breakdowns,the overall trends confirmed what is hypothesized in the benchmarking study.

This research contributes valuable insights into the financial shifts within the music industry, presenting a balanced transformation from physical to digital. The refined role of material purchases and the elevation of external services as essential expenses redefine the financial statements of artists' production companies, reflecting the industry's evolution in the digital era