How the New Five Forces Work In Industries and Markets

For many years – indeed since Edison’s invention of the phonograph in 1877 – the music recoding industry didn’t change that much. While technological changes did come to the market for recorded music over the years, in the form of improved recording techniques, hi-fidelity stereo, and the advent of the compact disk (CD), essentially the industry remained stable, with its structure largely unaffected by technological developments. Recording companies found and recorded talent and marketed it, and the products of the industry – essentially disks and cassette tapes – were distributed through record stores. Artists were remunerated in the form of royalties, retailers in the form of margins, and the record companies kept the rest.

The fundamental distribution issue of assortment was (and in many ways still is) perhaps the most significant dilemma in the market for recorded music. The structure of the industry and the way the product was produced held an inherent problem for both the retailer and the consumer. The retailer’s predicament is that of inventory – the need to hold very large stocks of records, in order to provide a selection to customers, and to be able to make available to the customer the one that they will choose when they want it. This means that a lot of capital is tied up in stock, much of which moves slowly and often needs to be discounted in order to meet working capital requirements. The consumer is also in a quandary: Will the particular retailer stock the one album that they are looking for? And, will they be able to find it among the thousands of other items? Even once found, the consumer’s problems aren’t over – there may be 12 songs on the album, and they may only really want three or four. But they are forced to purchase the entire album, with all 12 songs.

Players wishing to have a wager on a football game, or a flutter on a horse race, or to back up their opinions on a political election or the outcome of the Oscars, have until recently had few alternatives. In a majority of European countries, Canada, and most states in the USA their only option would have been to place a bet on a pari-mutuel or totalisator system, while in countries such as the United Kingdom and Australia, and in U.S. states such as Nevada, they would also have access to licensed bookmakers. Both of these systems place the player at a significant disadvantage, not least of which is the fact that the “rake-off” or house percentage is considerable. This means that winners get paid well below the “true” odds against their choice. Furthermore, neither of the two systems allows a player to pick a “loser” – the player can only stake on a winning outcome. In simple terms a player can’t back team to lose – they can only back the other team to win or on a draw. A specific disadvantage of pari-mutuel systems is that subsequent weight of money for a player’s choice will reduce the payoff, so that there is no opportunity to exercise any skill in the timing of a bet. Both systems profit not from the losers (as most inexpert gamblers believe) but from winners, by paying them out at less than true odds. In the case of parimutuels the house percentage is around 20%, and even the most generous bookmakers make books that have an edge of around 14% in their favor.

Betfair (www.betfair.com) which commenced trading in 2002 is the world’s largest betting exchange. As a business, Betfair has no interest in the outcome of any event it makes available to gamblers. It simply provides a market for opinions and for trades to take place. It re-quires players to make and/or take fixed odds and all income is derived from a small percentage commission (ranging between 2 and 5 percent, depending on a player’s turnover) on a player’s net winnings on an event. In general terms, the greater an event’s turnover, the more revenue and profit Betfair generates, although Betfair’s income is strictly a function of the total net winnings on an event, not turnover.