Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world - and down your street.

Bob Dylan’s The times they are a-changin'  may feel like an appropriate refrain for anyone observing or working in the music industry over the last decade. First it was the launch of online retailers selling CDs at reduced prices.

Then came the rapid growth in file sharing sites such as Napster, that allowed the copying and downloading of music onto PCs, often without royalties being paid. And just as the music industry has come to terms with new bands launching themselves on the internet without a record deal, the next big challenge seems to be bubbling under: mobile music.

What is mobile music? 

Although mobile music has been with us since the Walkman, the current use of the term is to describe the downloading and listening to music on mobile devices such as iPods and mobile phones. Whilst Apple’s iPod is currently the dominant device in the mobile music market – with their iTunes site selling 600 million downloads in 2005 – the iPod is expected by many to lose its dominance to mobile phones.

The power of the mobile phone in the music industry was demonstrated recently by Madonna. Some have put the success of her recent single Hung Up down to the fact that a ringtone was available one month before the record was released.

Mobile phone ownership is higher than that for most types of music players, so if the music industry can get mobile right, the returns could be significant. Indeed they may even be enough to reverse the downturn in music industry revenues witnessed in recent years.

Understanding adoption

However, to ensure they are not left behind by the growth in mobile music, the music industry must be sure that they have a clear understanding about what consumers want on their phones and how they want it served up. To help them with this understanding they should consider how new products and services are adopted by consumers.

The definitive work in this area undertaken by Everett Rogers more than forty years ago is still relevant today. Rogers identified five factors that influence both the level and rate of adoption of innovations. Understanding these factors, how they interact, and how to influence them, will help the music industry find its place in the mobile music future.

The five generic factors identified by Rogers are:

1. Relative advantage – how much the new idea or service is perceived to be better than existing alternatives.


2. Compatibility – how the new idea fits with the way users currently do things. This not only includes compatibility with existing hardware or networks, but also how users live or work.


3. Complexity – how difficult the new product or service is to use or understand.


4. Trialability – the ability to test the idea out on a limited basis.


5. Observability – how visible adoption or use of the new idea is to others.

Increasing or improving any of these aspects of a new product or idea – except for complexity which obviously needs to be reduced – will increase both the level and rate of adoption.

Mobile music adoption

So, what does this mean for the adoption of mobile music? Relative advantage rests on the ability to be able to access and to listen to music whilst on the go. In contrast to music downloads or CDs, there is no need to pre-download music or take a selection of CDs out with you.

"A great opportunity for the music industry"

You can access and buy music whilst out and about, allowing you to match listening to your changing moods and keep up to date with new releases. Such instant gratification is seen as a big attraction for many users and a great opportunity for the music industry.

With the ability to access one track at a time, and on a mobile handset that you are already used to carrying around, the trialability of mobile music is excellent. Provided interfaces can be kept simple and appropriate for small screens, then the complexity can also be addressed.

The power of observability to drive adoption was demonstrated powerfully by the iPod. Being seen with characteristic white ear pieces became a very visible sign of using an iPod. After a number of celebrities were seen with them, they became the thing to be seen with – a fact that was leveraged in the iPod ad campaigns.

"Compatibility may prove to be the Achilles heel"

But it is compatibility that may prove to be the Achilles heel. Users are increasingly using the mobile phones for various activities – which will help the transition to them being thought of as a music player. However, with regard to systems and formats, there are a number of proprietary approaches that prevent sharing music between devices and networks.

For example, iTunes will only download to iPods and not to the majority of mobile phones. Observers of the industry are keen to remind those trying to protect their own systems that, as the growth of the internet has shown, open standards can grow usage and demand to a greater extent than competing standards.

If the music industry do not take the opportunity to understand and shape this next wave of change, then Dylan may have got it right..."You better start swimmin' or you'll sink like a stone, for the times they are a-changin'".

Further reading

• 'The Impact of Electronic Commerce on Market Structure: An Evaluation of the Electronic Market Hypothesis' by E M Daniel and G M Klimis in European Management Journal (Vol 17, No 3, p.318-325)
• Radical innovation – sometimes a new idea changes the landscape, and even well-established companies struggle to cope
• Managing innovation – creativity can make or break an organization – how do companies get the creative juices flowing?

About the author

Elizabeth Daniel is Professor of Information Management at the Open University Business School where she undertakes research and teaching in the fields of e-business and information systems. Elizabeth also undertakes consultancy work for a number of blue chip and leading public sector organisations.

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world - and down your street.

The last ten years have seen the level of personal debt in the UK nearly triple in size. The total of personal debt passed £1 trillion in 2004 and currently amounts to £1.2 trillion.

Faced with burgeoning debts, millions of borrowers have taken out payment protection insurance (PPI) to provide the upkeep of payments on loans, mortgages and other commitments in the event of accident, sickness or unemployment.

The market has become huge with around seven million policies being taken out each year generating some £5.5 billion in premiums for the lenders and the insurance companies underwriting the products. The majority of the products (about 60%) are sold in conjunction with unsecured personal loans with the remainder being related to credit card, store card and mortgage borrowing.

On the face of it insuring against such risks would seem to be a prudent course of action – it is little over a decade ago that a period of high unemployment and high interest rates forced thousands of homeowners to default on mortgage payments and lose their homes during the recession of 1990–1993.

However, increasingly evidence is being gathered that questions both the way PPI policies are being sold and the value of the products themselves. In many cases the terms of the policies may mean that a financial lifeline may not be forthcoming in the way expected by policyholders in times of need.

In response to these growing concerns the Financial Services Authority – the body that regulates the UK financial services industry – undertook a review of the selling practices for payment protection insurance and its results were published in November 2005 in the report 'The sale of payment protection insurance'.

Then, in December, the Office of Fair Trading (OFT) published its initial response to the ‘super-complaint’ submitted to it by the consumer advice body, Citizens Advice, on the cost and effectiveness of PPI. This followed Citizens Advice’s own survey, 'Protection Racket', that suggested that aspects of the PPI market are damaging to the interests of consumers.

Further question marks about PPI have now come in the Competition Commission’s report on store cards published in March 2006.

So what are the issues?

There are three main areas of concern: price, insufficient cover and mis-selling:

1. The price of PPI products appears excessive

This finding was supported by the report 'UK banks: PPI – Time for change', carried out by the investment bank Credit Suisse First Boston (CSFB), and the OFT which found the claims ratio for PPI products (claims as a percentage of premium income) to be around 20%. That is, for every pound paid in as a premium, the PPI schemes were paying out just twenty pence in claims.

This figure is markedly lower than for other types of general insurance: for instance 74% for motor insurance and 55% for household insurance. For an industry facing tight margins in many conventional areas of business the high margins offered to financial companies by PPI have clearly been attractive.

The risk of purchasing an overpriced product is exacerbated by the fact that PPI is a secondary transaction involving little in the way of shopping around by consumers. The Competition Commission’s inquiry into store cards supported this view and found "that little or no competitive pressure is brought to bear on the elements, or the pricing, of insurance sold with store cards".

2. The protection offered is only partial, with many policies having unreasonable exclusions of cover for common causes of credit default

Around one in six claims under PPI policies are rejected by the insurers. The evidence from the recent surveys sheds much light on the reasons for this high rate of rejection. The FSA found that nearly half of the firms it visited that were selling PPI "were not providing the customer with balanced information on the exclusions as well as the benefits".

Indeed, firms offering products are not required to reveal exclusions verbally in face-to-face sales. In one case the FSA found that a policy with an age limit of 65 had been sold to a 68-year-old man. Not only did this mean that he would have been ineligible to claim on the policy but also, because he was retired, the majority of the benefits from the policy were not relevant to him!

More generally the exclusions in PPI policies are wider than many consumers might have anticipated – including claims by those with chronic illnesses or mental health problems. Citizens Advice also discovered some cases where customers have been unable to claim because of unreasonable requirements to provide medical evidence.

3. There is evidence that products are mis-sold and that high pressure and unfair sales tactics are employed

The FSA survey does not criticise the sales techniques in all the firms it surveyed. However, in two-thirds of the firms visited aspects of selling practices were discovered that did not stick to all the rules, therefore posing a risk to consumer protection.

In certain cases, the FSA found incentive structures in place that risked increasing the scale of non-compliant sales. In one loans company staff were paid a £20 bonus for each PPI sale and the bonus system was structured in a way that could double staff salaries. Individuals not meeting their targets got no bonuses and were earmarked as having a training need.

Another example of poor sales practice emerged from the sales script used by one loans company for PPI products. This stated that "we do not offer advice but will provide you with information on accident, sickness, unemployment and life cover" – but then later, the script tells the salesperson "if the client is unsure then you can tell them that we strongly recommend that you consider taking out PPI".

A further angle on the issue of mis-selling has come in the Competition Commission’s report on store cards. It found that PPI is being sold to customers in a package with price and purchase protection. (Price and purchase protection insure the policyholder against, respectively, the risk of the goods being subsequently offered for sale at a lower price and the risk of damage to, or loss or theft of, the goods purchased.) As a consequence customers are at risk of buying insurance they do not want or need.

In addition to these three main issues the survey evidence also found that, in certain cases, the administration of PPI claims is slow and unfair, thus exposing consumers affected to serious debt reinforcement action.

Following its initial response in December 2006 the OFT is now planning to undertake a detailed study of the PPI market. We will learn more about the OFT’s intentions later in 2006. Following the publication of its survey, the FSA sought feedback from the companies providing PPI and is expected to undertake a further review of sales practices in the near future.

The prospect, given the current apparent shortcomings, is that the sales of PPI will become more tightly regulated. Already the FSA’s Insurance Conduct of Business rules, introduced last year, have resulted in many retailers stopping the in-store sale of PPI with telephone sales being used instead to market the product.

For consumers the phrase caveat emptor (buyer beware) clearly applies. You may be paying over the odds for PPI and the insurance product may not offer you financial support when you need it.

Further reading

• Association of British Insurers
• The sale of payment protection insurance – results of thematic work (pdf document) by the FSA
• Financial Services Authority
• Response to the super-complaint on payment protection insurance made by Citizens Advice (pdf document) by the OFT
• Office of Fair Trading
• Protection racket – Citizens Advice
• Citizens Advice
• Storecard Credit Investigation – Competition Commission
• Competition Commission
• 'They get you to buy cover, then leave you naked' by Esther Shaw, from The Independent on Sunday (12 Feb 06)
• Why do we get into debt? – is debt always a bad thing? asks The Big Question
• You and Your Money: Personal Finance in Context (DB123) – the course includes coverage of personal debt and the insurance markets

About the author

Martin Upton is lecturer in finance at the OU Business School. Previously he spent 20 years in treasury management, including 12 years as Treasurer of Nationwide Building Society. Martin's particular interests are financial services, the housing market, financial markets and risk management.