Editors Note: The following is an academic paper I presented in a managerial economics course while working towards my MBA. I have included it in its entirety with citations, only edited to reflect the launch of Beats Music.
Beats Music has tossed their hat into the streaming market. The popular company, known for their high-priced headphones, follows Apple, who jumped into the streaming ring in the fall of 2013. These two companies are attempting to capitalize on a market estimated to rise from $5 billion this year to $46 billion by 2018, and is currently dominated only by a handful of companies including Spotify, Pandora, and Google Play (Snider, 2014).
Streaming is encroaching heavily on the market for digital downloads, which has many in the music industry concerned. Billboard reported on January 3rd of this year that digital track sales fell 5.7% while digital albums fell 0.1%, which is a historic first since iTunes opened their doors. Industry managers and pundits alike have concluded that the consumers growing appetite for streaming is most likely the culprit (Christman, 2014).
From an economics perspective what the music industry, particularly the digital sales sector, is witnessing is a leftward shift in the demand curve brought about by a combination of the price of related goods (streaming) and changing consumer tastes. This demand shift will continue as more and more solid brands such as Beats, Apple, Spotify, Pandora, and Google ramp up their advertising to sway consumers into paid subscriptions, which, in turn, will lead to a decrease in demand for digital downloads (a substitute good).
In conventional economics, such a shift would lead to unsold inventories held by retailers, which would inherently lead to a decrease in the price by retailers as they attempt to achieve the new equilibrium. While this is certainly possible, it is also equally likely that this will not happen as companies such as iTunes and Amazon do not carry a physical inventory of digital downloads and have less of an incentive to reduce costs to unload excess product and achieve their new equilibrium point. Instead we may find that they attempt to shift the demand curve towards the right and back in their favor through more advertising and entering more untapped global markets.
References
Christman, E. (2014, January 3). Digital Music Sales Decrease For First Time in 2013. Billboard. Retrieved January 13, 2014, from http://www.billboard.com/biz/articles/news/digital-and-mobile/5855162/digital-music-sales-decrease-for-first-time-in-2013
Snider, M. (2014, January 11). First Take: New Beats Music may spur streaming growth. USA Today. Retrieved January 13, 2014, from http://www.usatoday.com/story/tech/personal/2014/01/11/first-take-look-at-beats-music/4430383/