Beating a dead horse - is there any future to the music industry? Part II

In Part I, we explored how the market and world within with the music industry operates has changed, especially in the last decade. Clearly a new business model is necessary, as any turnaround or strategy expert could have predicted as far back as the late 1990s, while one well-attuned to the technology sector could have predicted even earlier. In this section, we will explore what are the barriers preventing the major labels from abandoning its current model and thinking creatively enough to come up with a new model.

• Psychology: Undoubtedly, a major barrier is psychological, also called inertia. Quite frankly, the industry has been making money more or less the same way for a very long time. They will undoubtedly argue that they brought talent (the ability to identify, groom and promote music ability) to the mix, but in the end, they paid for that with capital. Leopards do not easily change their spots. The ancestors of the Big Four labels go back to the 1930s and 1920s, nearly a century. People who have grown up in this industry, have learned that this is the way to make a lot of money, have it in their DNA. They are highly unlikely, with a few rare exceptions, to find new ways to do so. In the famous words of Bill Gates, "Success is a lousy teacher. It seduces smart people into thinking they can't lose." Most of the very smart people running the music industry are desperately looking for a way to go back in time. 
• Organization: In theory, every business organizes around the primary products and services (divisional) or functions (functional) it provides. In actuality, every business is some mix of the two. The classical music industry model (ignoring standard administrative overhead common to every business like financial management, information systems, etc.) involves the major functions of talent discovery, recording, distribution, and promotion. Any new model will, by definition, change the functioning of all of these. Some will shrink, some will grow, others will disappear entirely, while new ones will arise. The incentives in each of these silos works against new ideas coming to fore. Until the businesses involved in the industry are willing to step outside the organizational model in place, innovative thinking will be confined to either (a) those outside the silos, who are normally too far removed from the day-to-day market and customer to really get a feel of what will work or (b) mavericks who almost always suffer for their innovative thought, since it benefits the organization as a whole, but to the detriment of the particular division or silo.
• Systems: Having done business largely the same way for decades, many systems, especially financial and information systems, have been built around the current model. Although one should view these as sunk costs, executives are loathe (psychology again), to write the investments off. Further, these investments are normally capitalized, thus requiring an actual financial write-off if these are made obsolete ahead of schedule. As one example, purchasing music online as singles, as distinct from albums, has been available for upwards of five years. The iTunes Music Store has been in operation since April 2003. Nonetheless, almost every music label still pays royalties and compensates artists by album sold, and their systems know of no other way to do so. Recent estimates as to the cost of conversion run past $50MM per label. Per-track as opposed to per-album is not a very new model, and is far less radical than any major strategic change, yet the cost of conversion is enormous and daunting to the labels. One can only imagine what the costs of converting the existing model to a new model would be.

Given the above major hurdles - psychology/inertia, organization, systems - how can the CEO or board of any major label create an environment that will allow them to thrive in the years ahead? It is important to remember that thrive does not mean, "we make as much money as we make money, or as we did on our heyday." Thrive does mean, "we might make as much money, or possibly even more, but we survive as an important, profitable entity, not driven to the ground by forces that we fought against." There is the old paradox, "what happens when an irresistible force meets an immovable object?" The market forces here are, despite the industry's best efforts, an irresistible force (or, more correctly, many millions of small forces that are jointly irresistible). The industry, its trade group, and the businesses themselves need to remember that they are not an immovable object.

How can a player create the innovation to thrive? These are broad brush-stroke recommendations; the details are unique to each company and situation.

1. Step outside the organization. The CEO and Board of any label needs to create a separate team, preferably a separate subsidiary. Here are some key features it must have:

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  • It must operate totally and permanently outside the normal organization, with its own Board, reporting directly to the CEO and Board of the parent as they are investors. As long as any individual in the group has to worry about going back to the normal organization at some point, these will bias his/her thoughts, however subconsciously. 
  • Populate it with a mix of insiders and outsiders. Outsiders doesn't mean someone from Universal, if the company is EMI. It means someone who knows just enough about the music industry to be dangerous, but not enough to have become assimilated, i.e. "drunk the kool-aid." 
  • Populate it with a mix of ranks. If it is all senior executives, you miss a lot of "ears-to-the-ground" input that is invaluable.
  • Give it a clear mandate: "Build a music business that will be profitable in ten years." 
  • Free it from shackles: it must be completely free from the normal administrative and financial processes of the parent. Very few start-ups succeed when they must buy equipment from some slow-moving corporate parent.
  • Give it access: It must have complete access to the parent, but any value it gets, it must pay for.
  • Give it funding: agree on a strategic plan to get to the new model, and fund it like a VC.
  • Get out of its way.

How many companies have really successfully done this, built a subsidiary whose job it is to compete with the parent, and possibly put it out off business? The list is painfully short. On the other hand, the list of companies that have failed because they could not bear to cannibalize their own business, and thus left it for other upstarts to do, is very very long.

In Part III, we will explore some perceived directions of the industry, and possible models.