The STEP analysis of the Colorado Creative Music aims at analyzing macro-environmental factors of the music business the company is engaged into. These factors fall into political, economical, social and technological groups (Pearce, Robinson, 2000).
Political factors affecting music business in whole and CCM in particular: strong political stability in the United States; regulatory and legal issues concerning music business including copyright laws for copyright protection of both music writing and recording, copyright-related legislation touching upon the issue of virtual internet promotion and distribution, such as The Audio Home Recording Act (1992), No Electronic Theft (NET) Act (1997), "The Digital Performance Right in Sound Recordings Act (DPRSRA) 1995, The Digital Millennium Copyright Act, "Pending legislation: Music Online Competition Act and the Consumer Broadband and Digital Television Protection Act (CBDTPA)" and others. Environmental regulations and employment requirement do not affect business CCM is engaged into. As for the tax policy, in 2000, from total income of $216,614.05 the company had to pay $4,744,97 of taxes, which is not high rate and amounts to nearly 2 percent from the total income. In whole, it should be noticed that political factors are favorable for music recording industry and for CCM particularly.
Economic factors include indexes in the macro economy that can affect music recording industry. Here also, macroeconomic factors, such as economic growth, interest rates and inflation rate are favorable for CCM. Thus, the U.S economy kept growing steadily since 1995. CPI falls down in 1997, 1998. Unemployment rate decreased gradually from 1995 to 2000.
Social factors, covering demographical and cultural aspects of the environment external to music recording industry are rate of population growth, age distribution and carrier attitudes. The population growth in the United States is steady and age distribution also favors the music recording industry. It should be noted that for music industry in whole, teenagers and 20-years-olds are primary customer segment, but CCM aims at attracting people of 40-60 age range. Thus, the considerable share of American population fits this target market.
Technological advancements in music recording, promotion and distribution have several effects on the recording industry. One aspect of the issue is that musicians are no longer dependent on major recording labels to create or distribute their products. (Viljoen & Dann, 2000) The MP3 software alternative to the CD becomes more popular since 1998. In the space traditional audio can fit 12 to 15 audio tracks; MP3 software can store approximately 150 music tracks. "The move towards MP3 as the new format to replace CD just as the CD replaced vinyl albums have been accelerated by the rush of new portable MP3 players on the market - some for less than conventional Sony Discmans." (Viljoen & Dann 2000, p. 173). On the other hand, new digital technologies which appeared in late 20 century not only facilitate the process of music recording, but make it considerably cheaper, providing the possibility for multiple firms with limited resources to enter the market. Thus, if in 1980s, professional recording studio with all recording equipment, working on vinyl or tape carriers, cost several million dollars and therefore was a domain of 5 or 6 major recording companies, in 2000, assembling professional recording studio could be carried out at cost of only $5,000. All the equipment and hardware, due to the global advancements in technology, are much more affordable for an average artist or businessman.
- Cost advantages with new technology arising from the digital revolution. Not only assembly of studio with all necessary equipment and hardware is cheaper, but duplication of CDs, storage and shipping are less expensive as well. Low cost of production, duplication (duplication of 500 CDs ranges from $1.90 to $3.63, duplication of 2000 CDs costs about one dollar per CD), shipping and storage makes the final product less expensive and more affordable for the customers, thus widening the range and scope of the target market.
- Positioning of CCM in a distinctive market niche. CCM is microlabel recording company which specializes on classic and traditional instrumental music.
- Growing customer base and customer loyalty within target group. Customer base growth due to expansion of product lines (4 already, each year 2 new product lines emerge), and geographical coverage of listeners.
- Good customer service shown through the direct contact between Darren and his fans.
- No clear strategic vision: CCM needs a long term vision which includes all areas of the business, from marketing and management to distribution and human resources. At the moment the company faces a dilemma of further strategic development, which will be focused on either enhancing or developing the recording company or more active promotion and distribution of the products through the possibilities of other companies (the company is currently regarded by its management as potential object of acquisition or investment)
- Competitive disadvantages: CCM are not able to enter the retail market due to its current level of sales. Competitors such as major labels have advantage because they have major market power and influence. Such firms can specify when their music should be played on radio and negotiate large contracts with distributors and retail outlets, hence giving themselves broader appeal.
- Limited channels of distribution: at present moment the company heavily relies on such distribution sources as direct sales, which include sales at the gig, shopping mall distribution and sales in the back end (800 number order, website order processing and mail orders). These channels are major sources of profit for the company. Nevertheless, to expand its consumer base, the company needs to acquire formal distribution channels, such as sales through traditional music distribution networks and others.
- CCM is short in financial resources to pursue new opportunities. Profits are thin, meaning new opportunities may be unobtainable and long term improvements may not be afforded due to initial costs. To conclude a contract with major labels, which would provide the company with the access to traditional product distribution, the firm needs to sale at least 15,000 copies of its products per year. From the other hand, high sales numbers are impossible to obtain without good traditional distribution channels.
- CCM is losing ground to larger firms because of limited exposure. CCM at present does not reach global or national audience like independents and major labels. CCM needs to broaden its reach and widen its customer base.
- Serving additional customer groups by expanding co-operation with other artists and enlarging the Acoustictherapy and other product lines with new marketing strategies.
- Internet through expanding e-commerce and releasing MP3s.
- Expanding sales nation wide.
- Acquiring channels of traditional distribution to reach wider customer base exposure
- Developing new technologies to cope with the driving forces of the industry.
- Releasing compilations with other artists has proven popular. One strategy could be to assembly the songs (such as Accoustictherapy) at the studio, and sell the completed disks at a discounted rate back to the performing artists in their hometowns. This method would cover the costs up front and give the players a financial incentive to push the product.
- Pushing sales into non-traditional areas such as weddings, shopping center music etc.
- High number of new entrants and growth of other smaller labels due to the digital revolution. In addition, major labels or independent labels could decide to enter into CCM's domestic markets and try to drive the smaller labels out of the market.
- Lose sales to substitute products like mp3s or internet downloads
- Vulnerability to industry's driving forces because of CCM's weak position in its industry, taking into consideration the fact that the company occupies microlabel segment of the market and is profitable primarily due to the low costs of digital recording.
Five forces model of competition
Michael Porter's model of competition (Porter, 1980), if applied to music recoding industry, comprises the following components: Rivalry among sellers of recorded music (competition for better market position and competitive advantage); artists and other suppliers of music to producers or sellers of recorded music; distributors, retailers and individual customers of the music; competitive pressure coming from substitutes of recorded music towards winning customers; and threat of new entrants to the industry of recorded music.
Perhaps, the strongest competitive force belongs to such factor as Rivalry among producers and sellers of music products. The music recording industry has 4 clearly identifiable segments: major recording studios, independent labels, microlabels and vanity labels.
Major, or first-tier, companies have large quantities of artists under contracts, reaching the number of 100, specialize on multiple types of music - rock, country, jazz, classical, traditional and other, and have formal and reliable national and international channels of distribution. The examples of such companies are Columbia, Sony Music, EMI, GMG, Warner Brothers, Atlantic Records and some others. As the mater of fact, such companies are not numerous and their recording equipment is rather expensive, amounting to no less that couple million dollars, since these studios record music with analogue and not digital equipment, thus receiving three-dimensional, saturated, rich sound, instead of correct but plain digital sound.
Independent labels have 10-100 artists under contract, focus on recording of one or two major music styles and have either national or most often regional distribution channels. Examples of independents are: Higher Octave, Metal Blade Records, Rhino Records, WAR, Windhan Hill, Soundings of the Planet. Such companies are more numerous than first-rank companies and can use analogue equipment as well as digital. Generally, independent labels strive to grow into major ones, but for that they need to invest large amount of money into amelioration of their equipment.
Microlabels have less then 10 artists under contract and are tightly focused on definite style of music. They are characterized by small staff and manager performing as the leading artist of the studio. Microlabels have rarely formal distribution system and heavily rely on direct sales to fans and wholesale to clubs and specialty retailers. On American market, microlabels are presented with Etherian, Evol Egg Nart, Cuneiform Records, CCM and a large number of others. Generally, such companies survive competition due to low cost of digital recording.
Vanity labels are the fourth, the last and the most specialized segment of the music recording industry. They are founded by independent artists for recording and selling their products. Examples of vanity labels are Bob Culbertson, Watson and Company, Lao Tizer, Esteban Ramirez and many others. (Darren & Winn , 2003). At present, CCM is the microlabel that strives to convert into independent label.
In the first place, the competition among rivals is carried out on the basis of popularity of the performer and songs recorded by their companies. Recording studios intensively compete to attract popular of promising artists to sign contracts with them. If the songs or artists are highly popular, price is secondary factor which may influence the competition. However, if the artist is lesser-known or songs recorded are not very popular, price does play role as the competition and strategy factor. In the distribution process of the rivals, the particular importance is attached to getting access to traditional channels of music distribution, such as retail musical stores, major chain record stores, independent record stores and Internet distributors such as Amazon.com. These means are very important for selling CDs of the artists apart from direct sales on their performances. Also, another factor that greatly influences CD sales is advertising of songs and radio promotion and transmission.
For CCM, rivalry is by far the most important competitive pressure source. The strong competition from rival producers and sellers of music can be explained by the fact that the performers of CCM are not known to the wide public in comparison with the artists of the first-tier and independent labels.
The competitive threat of new entry, is, to the opposite, by far the weakest competitive force, ranked between weak and moderate. Barriers for entry are not high for the new producers of recorded music, especially those targeting limited segment of the market and employing cheap digital technology of recording. CCM can serve the brightest example of such entry. Such cheap digital recording technology can be assembled nowadays for no more than $5,000. Still, expensive analogue technologies keep costing hundreds thousand or even millions. The technology employed by the firm automatically determines its resources and rank in the music recording industry. Besides cost of the equipment, the main subject of the competition for new entrants will be distinct market share and sales volume. Considerable sales volume, in its turn, depends on the ability of new entrants to attract famous, popular or widely known performers and singers whose songs are able to get to the top of the popularity charts. Given the fact that virtually all popular artists have already signed contracts with major recording studios, this is significant barrier for new entrants. Another important barrier is gaining considerable channel of distribution. Generally, large distribution centers and music CD retailers are interested in selling the music of famous performers and unwilling to accept the products of relatively unknown artists. For the CCM, the threat of new entry is not very strong, since the company targets rather narrow market segment. Though, if the new entrant uses the same recording technologies, distribution channels and targets the same niche in the market, the fact may become an issue of major importance.
Competition from substitute products can be considered moderate competitive force in the music industry. Such substitute products are be presented in the form of providing consumers with possibility to listen music with other that CD means such as radio, cable TV music channels, live concerts, local bars or night clubs with live performances or recorded music, and internet. Internet has become by far the most important and strong substitute to traditional buying CD, since music provided on the web is most often cheaper or completely free and is not much inferior in quality than .wma format of CDs. Therefore, for certain amount of people these means serve as effective substitutes, but for music fan, buying official CD is obligatory. In the case of Colorado Creative Music, people can enjoy the performance on live concerts of these artists and decide not to buy their CD. Therefore, from CCM's viewpoint, this may be regarded as fairly significant competitive force.
The forces left are bargaining power of suppliers and bargaining power of buyers and collaborative buyer seller relations, which are both strong competitive force.
The first, bargaining power of suppliers depends on the popularity and reputation of artists. Those who are popular and whose recordings sell well, have strong bargaining power, they can chose among numerous recording studios. CCM specializes on recordings of infamous artists, and therefore it enjoys weak bargaining power, since artists involved with CCM do not have many alternatives for studio record and CD distribution.
Bargaining power of buyers and collaborative buyer-seller relations is very strong competitive force. The major distributors of recorded music supply CDs to the leading music stores and other retailers of music, these leading distributors stock about 40,000 copies of a CD and work on 60-90 working schedule retaining the privilege of full return of investments for the unsold copies. So called "one-stops" are distributors which provide products for the independent music stores in smaller quantities and very often with limited range of music types. Generally such distributors prefer to handle stock CDs of the very popular artists or at least well-known artists and often they are not interested in going into distribution of CDs of unknown performers. Therefore, CCM faces great difficulty in acquiring decent and formal distribution, especially in getting its products sold by such music stores as Sam Goody, Tower Records, Borders Books and Music, and Barnes and Noble.
Also, a great role in the distribution process is played by getting the music heard by people so that they would be more willing to buy the CDs. This includes playing the music on the radio stations, on TV music channels and including soundtracks into movies. Until the performers and artists of CCM become so famous that they are asked for in retail music stores, the company has little chances to receive considerable representation by major CD distributors. The manager of the company, Darren Skanson, has contacted some retailers on his own and found out that it is very time-consuming and onerous task to get his CDs distributed by retailers in his own local area. The people he hired to tackle the problem had little luck either. CCM has had some experience of selling the CDs through one-stop distributor, but it was not very successful due to high markup imposed by the distributor on the CDs of CCM. In the long run, Darren plans to make his product lines such as Darren Curtis Skanson, Music for Candles and other artists, popular enough to have their CD distributed through major music stores. But at the present moment, predominant part of CCM sales volume stems from direct sales such as sales at the gig, shopping mall distribution and internet, mail and telephone orders of the musicians' CDs.