The case study throws light on the disruptive theory to analyze the effect of transition from traditional tape based music to decoded mp3. There were two small disruptions that grabbed the attention:

Magnetic recording & Vinyl records: Phonograph was the 1st foil to record a music in 1877 which was sold commercially by victor talking machine in 1901. These phonographs were later used to transmit the music through radio by Radio Corporation of America in 1929. But the key invention called magnetic recording was manufactured on a large scale for the distribution of recorded music. However Vinyl records made a significant disruption by offering good quality of music and the invention of portable cassette players helped the firms to keep the costs down.
Digitization into compact disc: Year 1979 brought a radical change into the music industry where Sony and Philips developed a standard format of putting music into polycarbonate plastic discs called Compact disc. The disc had storage capacity of upto 90 minutes of music. The discs were very expensive initially but the improvement trajectory of the laser tools helped the firms to keep the costs very low. As a result CDs were outselling vinyl records in 1988.

The most significant disruption that was brought in the music industry was the emergence of MP3. The invention of MP3 brought value network within which the firms meet consumer demands (Christensen, 1997). As a thumb rule, the more the industry grows with its competitiveness where it thrives to kill the competitors product with innovation. The problem was that the CD could only hold 90 minutes of music with a very good quality. However the users were ready to compromise on the quality of sound in order to reduce the size of the file. This gave the researchers an opportunity to carry the further research to come with a revolutionary low size music file called MP3. The music files were compressed using decoder called codec where the size of the file varied with the quality of music. The MP3 files gained wide popularity as people started ripping the music cds into separate MP3 files on their computer. Secondly as the time passed, the size of the hard drives on computer kept on increasing and MP3 gained wide popularity. The portability of the music on a player was first invented by Sony as a portable cassette player. However the portability of the mp3 players came into existence in 1998 with a small flash memory. People saw the disruption when entire mp3 player segment kept on increasing their hard drives and at the same time reducing the size of players. The sales of the mp3 players kept on increasing with the time and the market was dominated by Apple iPod.
Focusing now on the MP3 and its impact on the recorded music industry, what can you say? What happened? Why?
The growth of internet and personal computer has changed the entire picture of the music industry. The conventional way of listening music on radio and highly sophisticated cassette players has changed to hifi music systems and portable music players. The recorded music industry faced major glitch in their sales as the preferences of the customers were shifting. Initially the people were limited to only couple of options to listen the music i.e. radio, cassettes and cds but the invention of MP3 gave them plenty of options and recorded music industry faced a stiff decline in their sales. Now a day the listeners are not constrained to the traditional way of listening music but they have shifted their taste to personal computers, iPods and hifi music systems which have the compatibility to play the music with iPod and USB sticks. There are certain aspects that brought the changes:

Standards: The MP3 maintains a standard whose rights are controlled by ISO where any company can use the file without paying any royalty. This was the one of the most important factor where a firm needed can cut down its cost on paying royalty and copyrights.
Economic sides: Many companies in recent past have been developing products based on MP3.Firms like macromedia and EA sports are developing programs and games based on layer 3 algorithms which have helped them to generate good revenues on both supply and demand sides. Microsoft has recently experienced that most of their customers who uses windows started maintaining their own MP3 libraries.
Internet: Every aspect has pros and cons and internet is not an exception. It provides a platform for massive distribution of music but at the time it opens door for piracy. There was a point of time when a prerecorded cassette and cds were priced between $20-$30 whereas the internet subsidized the cost of sharing music on internet. For eg – ITunes store sells a song for 99 cents and till date it has sold more than billion songs.
Quality: A prerecorded cd and cassette has of certain amount of time and after the period, the quality of music decreases. On the other hand a MP3 file can be played for unlimited number of time without compromising on the quality.
Portability: Carrying music on your laptops and portable players is extremely easy as compared to the prerecorded cassettes and compact discs. The listeners are always concerned with the amount of music they can carry on the lowest possible space. E.g. – An iPod carries 80 GB of music while 90 compact discs have to be taken in order to get that music.

Can you explain why some parts of the music market appear to have been commoditized, while companies like Apple with the iPod have been able to earn profit?
A product is commoditized when one offering is totally different from another  . The scenario was almost similar in the compact disc industry which transformed its entire business model. The economy of scale in the industry helped the business to cut down the cost as low as $2 per compact disc and innovative way of supply chain models were adopted by several online supermarkets such as amazon and best buy. The cd industry was showing good numbers as the people could rip the music into mp3 while retaining unlimited sharing rights. However Steve jobs innovative iTunes model turned to be one of the best music distribution platforms. Given the fact that iTunes model was by far the best in segmenting the customers and they basically targeted the people who want instant music. This model was truly appreciated by the end users of iTunes and it was highly profitable for both Apple and music industry. There are certain reasons that made this model a success:

Instant music: People these days don’t want to walk into store to buy a cd and it is costly most of the time too because listeners do prefer to select only few songs and don’t want to pay for the entire album. ITunes helps them to download the songs instantly and they don’t need to download the entire album.
Copyrights: This is a special feature where ITunes helps the users to restrict the copying of music to number of times. This helps in stopping the piracy.
IPods: Apple’s iPod is a very innovative product which runs on the iTunes platform. The major reason for the success of ITunes is that the number of IPods sold worldwide enhanced the network of iTunes which eventually helped the ITunes to gain wide recognition.

Can you identify the main issues faced by the major record labels vis a vis their customers in relation with the MP3? Explain the reasons.
Issues faced by record labels in relation to MP3:

Customized music market: The record labels were offering an album for 15 to 20 dollars which had 10 or more songs. However the listeners don’t listen to all of them and at the same time ITunes and amazon were offering individual songs as MP3 files for 99 and 88 cents each. The quality of sound as compared to the disc was very similar at an affordable price.
Portability and multi-tasking: In order to transfer the music, mp3 is way easier than the cds. Mp3 can be attached in a mail or can be easily transferred on a pen drive in a fraction of seconds whereas the compact discs are time consuming. Secondly mp3 can be played on different players such as personal computer, laptops, portable mp3 players and hifi systems whereas cds are limited to some players. At the same time cds do have compatibility problems and on the other hand mp3 play like a Porsche running on the German highway.