No more shadow boxing with online music piracy: strategic business models to enhance revenues

Abstract

Novel online file sharing technologies have created new market dynamics and posed a great challenge to the music industry to try and retain customers. Consumers have created anonymous online networks to exchange audio files at little cost, which has led to millions of shared, illegal copies of music files and related sales losses to the industry. Legal efforts to counter this trend have lagged the advances in technology. This research presents an analysis of selling strategies that can increase a music seller's revenues as online piracy continues to flourish. We study and compare scenarios of traditional music store selling with those of online-based strategies. We model and analyze pure per-unit, pure subscription and mixed strategies for online music services. Analytical modeling, empirical study and simulation analysis were used to investigate the issues in detail. Our results suggest that the quality of pirated music and search effort have a significant impact on viable strategies. For instance, as the quality of pirated music approaches that of a legal online seller, the per unit service becomes the least viable option. An interesting finding was that strategies that minimize piracy do not necessarily maximize revenues. In fact, both revenues and social welfare can be maximized in the subscription-based environment, even though they may lead to higher levels of piracy. Our research findings not only offer insights into an online experience market, but can also serve as a contemporary reflection on other similar information markets.