Final Case Study: RealNetworks Rhapsody

Content

I. Introduction

II. SWOT-Analysis
II.1 External Environment
II.1.1 Industry definition
II.1.2 The macro environment
II.1.3 Industry Analysis
II.2. Internal Examination
II.2.1 The Company’s business model
II.2.2 Rhapsody’s resource situation
II.2.3 Financial Analysis
II.2.4 The Company’s Value Chain
II.2.5 The Company’s core competencies

III. Strategic Analysis
III.1 Business Level Strategy
III.2 The Corporate Level Strategy
III.3 Cooperate Approach
III.4 Global Strategy

IV. Conclusion

V. Literature

Introduction

The RealNetworks Rhapsody is a subscription service in the Internet, which offers streaming and managing digital media run by RealNetworks, Inc. . It has its origins in the acquisition of Listen.com by RealNetworks in May 2003. In this way, Real replaced its own Internet platform MusicNet with Listen.com’s Rhapsody service site and launched RealOne Rhapsody.

Through analysing the strengths, weaknesses, opportunities and threats (SWOT), this study sets out to identify RealNetworks Rhapsody’s current standing in the Multimedia Internet Industry. Relating to the SWOT, the study will additionally examine Rhapsody’s business strategy to look at future prospects including possible directions for a better positioning in the global context.

SWOT-Analysis

II.1 External Environment

II.1.1 Industry definition

RealNetwork Inc. is one of the leading creators of digital media services and software. It provides consumers an access to experience and download audio, video and game files. Furthermore, broadcasters, network operators, media companies and enterprises are offered products and services to create and deliver digital media to PCs, mobile phones and consumer electronic devices. Within the Internet media industry, RealNetwork offers music on a subscription basis through its Rhapsody service and serves its customers in the market segment of the legal music download industry. Its core business is to satisfy the demand of unlimited access to the music market via Internet and to offer the possibility to download tracks legally for a low charge to its subscribers.

II.1.2 The macro environment

Considering macro environmental segments, several forces have an immense impact on the online music market. Firstly, every Internet service is strongly dependent on technological development. Since huge investments by telecommunication providers in fiber-optic transmission capacity significantly accelerated data transferring and thus reduced costs, the online music industry has strongly benefited from it. Certain applications, like the downloading process or managing files, are more economic and provide better services to the customers. Furthermore, CD- and DVD-writers have become a standard preinstalled component in PCs world wide, which is a precondition to making full use of online music services. The introduction of portable music players (MP3) has additionally increased the interest in using music download platforms. So far, the technological environment has represented a great opportunity for the online music industry; the more so since the use of Internet is no longer limited to the younger generation. The availability and the easy handling of technological development have opened the door for any customer of any age to participate in the online market. Therefore, the percentage of U.S. households with broadband connections is still expected to increase steadily to over 40%^[1]. The only threat could be that consumers cannot keep up with the pace of development and lack the latest innovations and consequently cannot make use of the new more comfortable techniques offered by the Online Music Industry.

Another important force in the macro environment is the political and legal segment. With the announcement of the RIAA (Recording Industry Association of America) to sue individual users violating copyright laws by using P2P networks, a growing number of the users have switched to legal subscription services, such as Rhapsody. The growing concern about piracy has resulted in a further opportunity for the legal online music platforms. By offering subscribers song downloads at low prices to cover the license fees, they are providing a tool to fix problem.

As the Internet connects the whole world, the online Internet market can operate in almost any part of the world. Thus the companies in this market can reach any customer worldwide as far as he or she is connected. In the course of the globalisation a certain taste of mainstream music has come up and is in demand all over the world. While every country has its own unique music style and taste, there is a certain catalogue of artists and music styles which is in demand worldwide.

Additionally, in the socio-cultural segment, the Internet has changed the habits of many customers. It has become more and more common to complete tasks via Internet, such as home banking or shopping. Accordingly, ever increasing numbers of music lovers have shifted from buying CDs to downloading music in the World Wide Web, as they can manage the tracks immediately and more comfortably on their PCs.

II.1.3 Industry Analysis

Considering the forces shaping the competition within the Online Music Industry, the risk of entry by potential competitors is quite high. The many above-mentioned opportunities in this industry make it attractive to companies in the whole digital media industry, like Amazon.com or Yahoo! to broaden their services with music download platforms. Regarding their technological knowledge, these potential entrants do not have to bear great costs. However, the subscription model of the established companies tries to bind the customer to one brand and the expensive costs of switching from one music sample system to another make switching unattractive. An even higher barrier is the quality of editorial content and the coverage of different labels. As they are measured by the quantity and quality of their song-library, the companies already in the market can profit from their comprehensive catalogues. Therefore, they are able to satisfy the mainstream customer as well as fulfil extraordinary and rare wishes. Potential entrants lack these advantages and have to put great efforts into negotiating with the music companies about their subscription rights to build up and maintain attractive song-libraries.

Due to the fact that the Online Music Industry has developed the characteristics of a growth industry^[2] and demand has expanded rapidly (the industry’s revenues from online downloads increased tenfold in the years 2003 to 2004^[3]), smaller companies felt encouraged to enter the market. As a consequence, besides the few well-established large online music services such as Apples’ iTunes or Rhapsody, many smaller platforms are competing in a rather fragmented industry. However, the continuous growing demand normally tends to moderate competition by providing greater scope for companies to compete for customers. As a result, the rivalry among established companies is determined by a few large online music platforms in a competitive interdependence. They set prices and standards in services by watching, anticipating and responding to each other’s behaviour. So the six main Online Music Services do not differ that much in prices per song or subscription fee, but rather by songs available and services offered^[4].

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Figure 1: Stages in the Industry Life Cycle

The bargaining power of customers in the Online Music Market is considered as being low. As long as customers are bound by subscription services they suffer high switching costs such as big-time investment in assembling play lists. The weak bargaining position of buyers is a further opportunity for potential entrants because they hope to profit from their dependency on subscription service.

In contrast, the bargaining power of suppliers - the music label companies - is very high. The Online Music Market is strongly dependent on the decision of the music labels to extend or infringe the subscription rights to portable devices. The music industry itself has not been significantly affected by the purchases of the Online Music Services. However, due to the increasing piracy through the illegal P2P platforms, the subscription services have become the dominant alternative of a legal purchase platform for the music market in the Internet and an important partner in the battle against illegal downloading. Through this growing interdependency, the music label companies lose some of their strong bargaining power.

Furthermore, the music labels dispose of unique products of individual artists, which are not substitutable. Thus, if one music label is reluctant to extend subscription rights, whole artists’ bodies of work will be missed in the service catalogue and will make it less attractive to customers.

A second important consequence is that the music industry has no substitutes. The distribution of music happens either through CD or allowing online downloads on subscription platforms. This gives the few leading online service companies the ability to set the price-margin. The only real threats to the Online Music Industry are the illegal P2P platforms, which allow downloading of tracks for free.

On the whole, the Online Music Industry is very attractive to potential entrants. The low entry barriers for companies in the Digital Media Industry, the low bargaining power of buyers and especially the lack of substitutes offer a lot of opportunities for discovering the Music Service Segment. The only high hurdle new companies have to overcome is the building and maintaining of song-catalogues and the appropriate file managing system. As a result, many managers see the Online Music Industry as soon being glutted with entrants.

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^[1] See: Eisenmann, T. / Carpenter S. (2004): RealNetwork Rhapsody. In: Harvard Business School. Rev: June 21. P. 6.

^[2] See: Fig. 1

^[3] See: Eisenmann, T. / Carpenter S. (2004): RealNetwork Rhapsody. In: Harvard Business School. Rev: June 21. P. 18, exhibit 3.

^[4] See: Eisenmann, T. / Carpenter S. (2004): RealNetwork Rhapsody. In: Harvard Business School. Rev: June 21. P. 18, exhibit 4.