Digitization, Unbundling, and Piracy : Consumer Adoption amidst Disruptive Innovations in the Music Industry

Digitization of music and the Internet have fundamentally disrupted the music industry by altering the way music is packaged, distributed, and consumed. These disruptive innovations have enabled music to be purchased as an individual song (digital single) or as an album (digital album) or to be enjoyed without paying for it (unlicensed digital music). Prior to these innovations, music was primary distributed as an album using a physical format such as CD. The migration of demand for music from CD to the newer consumption options and migration among these newer consumption options have different implications for the music industry. Building on multi-generation diffusion models, we identify and quantify the different types of migration of demand for music: (i) from CD to digital album (generation substitution), (ii) from CD to digital single (unbundling), (iii) from CD to unlicensed digital music (attrition from CD), (iv) from digital album to unlicensed digital music (attrition from digital album), and (v) from digital single to unlicensed digital music (attrition from digital single) as well as the sampling effect of unlicensed digital music on digital album and digital single. We then, by comparing these different types of migration, examine (i) the relative impacts of factors (digitization vs. unbundling vs. piracy) that drive each migration type, (ii) the role of the introduction of licensed digital music – digital album and digital single – in the dynamics of demand migration in the music industry, and (iii) the overall impact of unlicensed digital music on the music industry. We find that the introduction of licensed digital music has weakened the attrition effect of online music piracy (unlicensed digital music) on the demand for CD. Since the introduction of licensed digital music, the attrition effect of unlicensed digital music on the demand for CD has decreased about 11 percent every year. Cannibalization due to unbundling, rather than attrition due to piracy, is now a greater factor that contributes to the decline in industry revenue. However, attrition effect of unlicensed digital music is emerging as a challenge for digital single and, more importantly, for digital album. In recent years, the attrition effect of unlicensed digital music on digital single has increased by 3 percent and that on digital album has increased by 16 percent