Zhu, K., and B. MacQuarrie, 2003, ��Economics of Digital Bundling: The Impacts of Digitization on the Music Industry,"  Communications of the ACM, 2003, Vol. 46, No. 9, pp.264-270.


The Economics of Digital Bundling:

The Impact of Digitization and Bundling on the Music Industry


Kevin Zhu  and  Bryan MacQuarrie


In the last few years, electronic distribution of compressed digital audio files has been gaining momentum.  The proliferation of digital music, the exploding popularity of MP3 format, and the emergence of the Internet as a viable distribution medium have disrupted the existing music format, pricing and distribution standards. This has led to a popular belief that this digital transformation is the beginning of a sweeping change in the industry �C the power of current players will be destroyed and new music giants will be born in the coming turmoil.


Drawing from recent literature on the theory of bundling digital goods, this article focuses on bundling of digital music and its competitive implications. Bundling can be very effective as both a profit-maximizing tool and as a competitive weapon. By analyzing how competition in the industry might change, its attractiveness to new entrants and some bundling strategies for competing in this market, this study finds that bundling will lead to greater industry concentration and increasing market power for the large music companies.  Despite the disrupting forces caused by digital technologies, the economics of bundling, the control of content, and the existing industry structure suggest that the big labels will retain their power and the industry will continue to be concentrated, perhaps even becoming more so in the future.