Music Industry Stops Losing Money, Finally

Yesterday The New York Times picked up the hopeful news from the global music business that the revenue free-fall from $38 billion a year more than a decade ago appears to have stopped at $16.5 billion, leaving the industry at less than half its pre-digital size. This bottoming out of the revenues will come as some relief to industry executives who have wished and prayed for this day because, until it actually arrived, nobody knew for sure what type of revenues to expect in the future. That can make running a business pretty tough.

The music industry is everybody's favorite example of digital disruption done wrong -- including mine, since I covered music for Forrester several times. I have some classic stories I could tell to illustrate the point about executives who believed that suing customers was the path to profitability and so on, but I'll spare you those. However, as the author of a book called Digital Disruption, I actually owe it to the music industry for teaching me a few key principles of how to manage digital disruption:

  • Disrupt yourself before someone else can. There's no point in taking it personally. Sure, it's human nature to respond to threats by digging in and fighting back, but if the music industry taught us one clear thing, it's that digital disruption is a force you can't avoid or even postpone. The best path to surviving digital disruption is to become a digital disruptor, taking advantage of free digital tools and the efficiencies that they bring, exploiting digital platforms like those created by Google and Apple, and remaking yourself -- one digital decision at a time -- rather than watching other people do it for you.
  • Build a digital customer relationship. The music industry fought the first wave of digital disruption -- it didn't help that Napster was ultimately illegal, making the industry fail to realize that the bigger phenomenon was legitimate even if its current manifestation was not. But then, when iTunes came along and offered some relief, the industry gave away all the keys to the kingdom, with the most important one being the digital customer relationship they could have had if they had insisted on different terms or created their own digital music service without hampering it with impossible DRM expectations. As a result, iTunes built a digital customer relationship on top of the industry that is still paying dividends to Apple, expanding to include video and ultimately, apps. It's this relationship that has allowed Apple to continue to insist on a premium for its physical devices and to preserve a relatively closed development environment. 
  • Care more about convenience than quality. I remember in 2007 when a music industry professional tried to explain to me that digital could never really replace physical because the quality would never be there. He told me about DVD audio and other ultra-niche, high-quality audio solutions that were going to solve the industry's problems. It didn't happen, and it won't happen. Because digital makes terrifyingly real the observation that Clayton Christensen of Harvard Business School has taught for years, that "good enough is good enough." The only reason that quality drove so much behavior in the past is that people had no other options. The industry determined the quality in the moment it determined the distribution mechanism. But once people had the option to rip their CDs or download legal or illegal digital audio samples, they did so. Because it was easier to do. 
  • Anticipate a reduction in revenue on a per transaction basis. This is the hardest one to face. Digital simply makes things more efficient. That gives hungry companies the opportunity to reduce prices, and anybody unwilling to imagine lower prices, whether in the taxi business thanks to Uber, or the book business thanks to Amazon, will fail to understand that even as revenue per transaction falls, the additional volume you can extract, as well as adjacent services you can offer to your digital customer, should make up for it in the long run. Even if it doesn't, as it didn't for the music labels, do you have a choice?

We all owe a lot to the music industry. As the business that went through digital disruption in such a highly visible way, we can be grateful that we now know what not to do. And we also see in more recent decisions what to do -- from the VEVO music video service to the subscription models, like Spotify's, that the industry has finally embraced, we see that partnering promiscuously and experimenting rapidly will pay off. So even though the global music revenues are so much lower than before, what has emerged at the bottom of the revenue trough is a tougher, wiser industry that now has some solid footing on which to launch a digital counteroffensive. I wish them good luck.

Comments

Jobs had enough to do with this that he deserves a spot

Thanks for the summary. I'm not sure where it fits but I think that there is another point which deserves it's own mention. The demise of music started in Japan, when KDDI invented single-tune download and 'iTunes" in 2000. They did this is response to the huge success of NTT DoCoMo launching the app store in 1999. Steve Jobs watched all this, and improved it.

The key to his success was (1) the Japanese telcos were incapable of taking this to an international market, although DoCoMo tried several times and failed, and (2) they had power to force the Japanese music labels to allow them single-song access in Japan, but not other labels and not elsewhere.

Jobs broke the back of the dead hand of the Western telcos and he negotiated a break-through agreement for global access to singe tunes. The consequences were the global demise of the music business which simply paralleled what had already happened in Japan up to say 2008.

I guess that the point is (1) no one thought that Apple would succeed in mobile, (2) the industry did not realise the power of Job's vision, and (3) they were too myopic to realise what had happened in Japan on the back of mobile and single tune downloads.

Now, if I move on and I think about banks and digital disruption I can see it happening, but I'm not knowledgable enough to see a parallel with Jobs and Japan, but perhaps it is out there under our noses right now. Surely banks are in the firing line for massive digital disruption in line with your points above.

Walter @adamson

Adapt to What You Can't Change

I lived through the digital disruption of the music business, too. I agree with your principles wholeheartedly, but if I could add a corollary to your last principle, it would be, quoting from Jack Welch:

"Face reality as it is, not as it was or as you wish it were."

As you noted, the root of the industry's resistance to digital distribution was the recognition that they would no longer get $15 for an album of songs that included only a couple of hits. Much lower revenue per transaction was a certainty - consumers and industry outsiders with nothing to lose were going to make it happen - but no industry leader could accept the idea. They hated it so much, they were unable to act.

David Bowie say what the music industry would not

Chet, good observation and I liked your insight. Especially "they hated it so much that they were unable to act".

There WAS one person in the music industry who did see the disruption coming way ahead of time, and that was David Bowie. I wrote about it a while back "What Best Buy could learn from David Bowie" http://www.walteradamson.com/2012/01/what-best-buy-could-learn-from-davi...

He saw it coming. And Bowie said this about it "But on the other hand it doesn’t matter if you think it’s exciting or not; it’s what’s going to happen".

He is a very smart man.