David Stoughton of ValueKinetics writes:
Previously this strand of thinking has rehearsed the surface history of the recording business as it is affected by technology change and the impact of the Internet. In this entry I want to explore some deeper aspects of the business model in music that will inform both an analysis of the wider media industry and, l hope, of other sectors.
The bonfire of the brands
First then the issue of brand. Recording companies have proved astoundingly inept at branding; over the years they have taught us all an object lesson in how not to do it. It is a fair bet that, collectively, the big labels have destroyed far more brand value than Coca Cola has created over the last 30 years. Why do I say that? Well, just look at the history. Since the seventies, which you will gather I identify as a turning point in the history of recorded music, the big players have steadily acquired almost all the small labels that were the only brands the industry had, apart from the artists themselves ... and ritually sacrificed them to the god of corporate identity. We are at the stage now where stars like Madonna or the Stones command a multiple of the brand value of all the record companies combined and, as a result, they hold the companies to ransom - if they want any involvement with them at all that is.
Attributes of the acquired brand that were lost, and which each acquisition paradoxically diluted in the buyer, include creative quality. I am not making value judgements about the music here, just observing the salient facts. It is clear that most of the modern recording industry (as usual there are exceptions especially among classical and jazz labels) has nothing to say about the quality of the content it turns out. Everything is, of course, "brilliant" - but in reality it is up to the listener, the media or, increasingly, the buzz to judge. This may seem to be a red herring but, as we will see, it is a key factor in the strategic defensibility of business models in media.
What is important here is the value of a brand in creating meaning for the consumer. Small labels mostly form around musically genres, and are informed by the tastes and interests of their founders. They take a stand, and as a consequence the label itself stands for a musical selectivity and is, for the genre's fans, a stamp of quality. Whilst offering no guarantee that a particular item will appeal, the brand signals what the customer can expect, and as such it helps reduce search time in an increasingly crowded marketplace. By contrast the big labels that absorb and kill these, sometimes iconic, brands say nothing about their content, they are little more than logos.
The ghost at the party
If a record label carries no assurance of the quality of its product ... it has no presence either. A good brand either has proximity to its customer and manages their contact and experience, or it provides proxies for those attributes. The big labels, after venturing briefly into live music and, in a few cases, record retailing - aspects of the industry that touch the customer directly - have withdrawn into commodity production. Without a strong brand this leaves them with no presence in the increasingly important social space, which is otherwise heavily populated with musical snippets, allusions and the musician as celebrity, and so with no ability to assert their value.
Immediately associated is the issue of marketing. Although record companies always made much of the 'promotional budgets' that went with advances, the entire industry was relatively unsophisticated in the ways of marketing. There was good reason not to be, the risks in signing new acts were high enough - given the low breakthrough rates - without raising the stakes with big budget advertising. Only established acts, who could demand it, manufactured acts (where the risk was deemed controllable), and compilations, saw any significant marketing investment.
Peer recommendation was always the most important influence in music, and in that sense it led the way where other industries have been forced to follow. But opportunities to stimulate word of mouth were restricted in the early days, and music was not a sophisticated industry. Promotional efforts were mostly confined to attempts to get radio airplay, rare TV appearances, and press coverage. Contrast this with recent behaviour, where their very powerlessness has forced record companies into using more conventional marketing techniques - advertising, posters etc. Although arguably too little too late, this constitutes a tacit, if belated, recognition that industry-produced music really is a commodity product now. Perhaps the companies also delude themselves that it helps justify the price point.
The combined impact of these branding issues leaves the record labels with no command over customer attention. Stars get attention; to a degree the (increasingly digital) outlets for recorded music get attention; the music itself can still command total, immersive, attention, when it is not being used for signaling purposes. The labels get no attention, except press coverage of their persecution of the customer.
The weakest link
Neglect of the brand is connected with the industry structure, an aspect of the business that has profound effects on the strategic options available once a sea change, such as the advent of the Internet, arrives. Despite huge consolidation, the music industry, as a whole, is vertically fragmented. Like so many industries it is dominated by a few key players, but the extensive consolidation has been one of building portfolio businesses. A record label, one or more publishing companies, stakes in a few associated businesses and, increasingly, large holdings in (or more often ownership by) other media companies forms the typical portfolio. Attempts at vertical integration through owning the performing music circuit and retail outlets were, as noted above, largely abandoned in the seventies when the accountants moved in.
Once again this might have been appropriate then, when the recording companies were the capital intensive part of the industry and few others would take the risk, but it leaves them at a comparative disadvantage now. Especially so because, while the perceived monetary value (let's be careful here, music still has enormous value) of recorded music has dropped, the equivalent monetary value of performance has risen sharply. Companies are making frantic efforts now to acquire stakes in performance businesses, but acquisition is more likely to run the other way, given the logic of the transformed industry, and their efforts at digital retail have produced mixed results.
And the secret sauce is ...
Finally, and this issue may seem obscure but turns out to be of critical importance to the strategic options for media companies, we come to product quality, which for record companies means sound quality. Until the seventies, quality of recording and reproduction marched in lock-step, music fans acquired bigger and better music systems on which to play their collections as a matter of course. Then, in a Gadarene rush to profit from repeat sales of the same product, the industry turned to promoting, successively, cassette tapes and then CDs. Although efforts to promote the CD as having better sound quality were made, they never really gained traction - they were disputed even in the early days, and it was convenience, not quality, that sold the product. For the majority of buyers, an almost simultaneous shift to small, convenient, sound systems went along with it. The link between professional sound recording and quality reproduction was broken. Record companies continue to emphasise the role of the producer, but the argument is weak when so much amateur recording sounds so, comparatively, good.
The relative inability of record companies to differentiate themselves from amateurs, let alone each other, by virtue of product quality hamstrings any attempt to preserve strategic advantage, and leaves them vulnerable to questions about the very validity of their role. As we will see, when we explore other media industries, this need not necessarily have been the case.
On becoming a victim
Had any of these factors - brand leverage, customer experience, marketing sophistication, industry structure or product quality - been different, the strategic position of the recording companies might have been stronger. It turns out that, in their twisting and turning to maximise profit and minimise risk over the last 30 years, record companies were the authors of their own present weakness. Victim status was acquired, not thrust upon them.
As we will see, the handling of these critical aspects by different industries turns out to hold the key to understanding the differences, as well as the similarities, within and across the media sector and the strengths and weaknesses of the players. But I'll finish this lengthy diatribe here and save that for Part 3.
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