David Stoughton of ValueKinetics writes:
This is a reconstruction of my earlier post kicking off this series. If it varies a little I apologise, but I hope the core of the analysis is preserved.
I'd better start once again by repeating my original apologia about serialisation. It remains true that I'd never have the time to get the whole of the investigation I'm attempting down in one sitting and that it would, in any case, be much too long for a single blog. So, as before, this is part 1 of an intended series of posts exploring the impact of changing technologies and patterns of social use on business. My, admittedly ambitious, intention here is to develop a framework for evaluating likely developments in media, and I hope other sectors, using the fate of the recording companies as an example.
The impetus for this excursion is my increasing discomfort with oversimplifying the changes that are engulfing so much of business. Because, in this blog, we address primarily the impact of social and technical change on the trust, attitudes and behaviour of customers, we tend to adopt a shorthand when addressing it - as I did when talking about music here and here. It is easy to forget that, unless you share our perspective, it is not obvious that, for instance, the record companies must adapt or die, even if they can enforce copyright.
Michael Bayler has summarised the process by which value chains are dismantled under the combined onslaught of technical evolution, standardisation, diffusion of know-how and finicky customers, very succinctly elsewhere in this blog, From value chain to ecosystem. I want now to build on that excellent summary by exploring a particular example, hoping that illuminating how the pattern unfolded in that instance, reveals lessons of more general applicability.
As I said earlier, the focus of the first stages this enquiry will be the music business and, in particular, the recording industry - not just because we have written about it so extensively here - but because it does, in fact, offer an almost ideal case history. As we will see, the pattern of development and the state of the industry when it came under attack, offer extensive insights into the prospects of other media businesses and, I hope, those in other sectors as well.
Don't blame the Internet ...
I will focus in Part 1 on an overview of the changes that have swept across the music industry, creating substantial disruption - to the recording companies in particular. In a sense the history is well known, but to discern the pattern and the key drivers of the change it is important to see the big picture, not simply rehearse recent events. As is often the case, it didn't all start with the Internet, it began with changes to the cost base of the industry, especially to the cost of production.
Cast your mind back to the 70's, then no unsigned band could afford more than a few hours in the, recently developed, multi-track studios. The door to professional recording was firmly locked, and the record companies (and sometimes music publishers) held the key. Only they were willing to offer the advances (for which read loans) required to meet the cost of producing a quality recording. Roll forward 15 years and any aspiring band could afford to produce a respectable album. Of course, that change accelerated with the advent of digital recording, but the significant fact is that it all began on the supply-side of the industry.
... OK, it was an accomplice
Add the Internet and the cost of distribution, until then largely controlled by the recording companies, fell to near zero, and marketing, as practised by the recording companies at the time - stimulating word of mouth - became increasingly the domain of the public.
Everything changed. Now artists can, and do, record, distribute and promote their own material - at a fraction of the old cost. That opportunity inevitably leads them to question the meagre royalties on offer if they sign up to the majors. Simultaneously, hitherto passive customers have become increasingly aware, if only unconsciously, that real costs have declined markedly - leading them to question whether the price point is justified.
It isn't just access that has altered ... the way music is used has too. Digital music is so easy to sample, and professionals have so comprehensively shown how, that consumers inevitably do it too. Snippets of music are extensively used, not just for ring-tones but to communicate personality, affiliation or mood on social media sites and in messaging. This co-option as a language of communication doesn't just change the pattern of use, it broadens and deepens the very meaning of music. What consumers value has changed and any business that serves them must respect and respond to the new needs.
The remainder of the history - changes to the pattern of sales, to attitudes and to behaviours (including, of course, illegal downloading) - has been comprehensively documented here and elsewhere. But, as I hope to show, the essentials of the scenario outlined above are common to all media and perhaps to other industries similarly affected.
The modus operandi
Time to pull back and look at the big picture. As with all good murders there is both opportunity and motive here:
The tools, the knowledge and the skills become universally available.
The personal, social or financial rewards of engagement with the production process grow as new opportunities are revealed.
The order and relative importance of these factors varies, but the pattern is common to the transformations we have been observing, across a wide range of industries. An important feature to notice, and one that proves no exception, is that the Internet is not the only, and perhaps not even the most significant, cause of change. Changes to the cost of entry and control of distribution are critically important, and may result from a combination of different causes.
Before we leave the music industry behind I want to explore what made the recording companies so peculiarly vulnerable, but that is for Part 2. Finally for this piece you might want to note the relatively minor role played by illegal downloading in this scenario. As we will see its importance has been greatly exaggerated, mostly because a scapegoat was needed, but perhaps also to avoid acknowledging past strategic miscalculations.