Chapter 9PROTECTING INNOVATION.ppt

Chapter 9PROTECTING INNOVATION Strategic Management of Technological Innovation Melissa Schilling The Digital Music Distribution Revolution In 1991, Fraunhofer IIS of Germany invents the MP3 format; by late 1990’s the format is wildly popular. Compressed digital audio to 1/10th the of the original size with minimal compromise in audible quality A song was now a file that could be shared over the Internet Franuhofer pursued a partially open licensing approach by partnering with Thomson Multimedia as the exclusive licensing representative of MP3 patents in 1995 Thomson then negotiated agreements with Apple, Adobe, Creative Labs and Microsoft to name a few. This gave consumers easy access to the technology Other companies developed competing technologies Sonywith ATRAC and MS with WMA but MP3 was dominant In 1999, Shawn Fanning releases Napster, a free software program that allows users to easily share MP3 files (“peer-to-peer”) The RIAA starts to worry about illegal trade of copyrighted music. In 2001 it gets a court ruling against Napster, taking it offline. However, new peer-to-peer music services began to sprout up to meet the demand of the large population of “music pirates.” 9-* The Digital Music Distribution Revolution Napster offered to partner with the RIAA and develop a legitimate digital distribution model. The RIAA turned down the offer, won the legal battle but were still challenged by a new business model that they were not prepared for. Warner Music and Sony Entertainment developed their own subscription services but they used proprietary digital file formats and very restrictive digital rights management schemes that frustrated the users. They also had a limited selection of recordings. In 2003, Apple opens its iTunes Music Store – a one-stop-shop for music files from the five major record labels. Now record industry is earning significant revenues from MP3s. Began with a catalogue of 200,000 songs for 99 cents each. 50 million downloads the first