‘’Resistance is futile…”

Big Music’s Lesson to Big Banks: Don’t Ignore Innovation

Resistance is futile and Hindsight is 20/20. Duh.

I’m sure many a music exec would have appreciated that advice in the late 90’s. As Napster quickly gained popularity amongst the MP3 listening crowd, the music business was unwillingly thrusted into the threshold of systematic and digital change. The tried and true existing business model of physical media and distribution was a cash cow and made the industry and the artists it represented very wealthy. This golden goose was about to lay it’s last egg as it’s world was set upside down and into existential crisis by the digital spectrum. Everything from pricing, distribution, talent and every other aspect of control was now brought into question. Basically, the entire music industry and it’s ecosystem was under threat from upstarts such as Napster and other P2P services.

At the time, no one really had any idea of how big ‘the cloud’ actually was and what implications a few college kids sharing MP3 copies of Pretty Fly (For A White Guy) would have for the industry. The industry’s collective response to these file sharers was litigation, the threat of litigation and the fear of litigation. I’m not here to discuss the impact of music piracy on the industry in the first decade of the 21st century, but I do know that P2P platforms fundamentally changed the music industry. I also know that the initial refusal and skepticism that the greater music business had to digital also contributed to that fundamental change. Sometimes resistance to change is the perfect catalyst for change. If I had a time machine and had to go back to 1998, I’d tell Mr. Bigwig Music two things: Resistance is Futile and Hindsight is 20/20.

He was a nobody a decade ago, now he’s passing you by.

I don’t know if the music landscape would be any different if things were different 15 years ago. Maybe if labels embraced MP3 and file sharing things would be radically different, but we don’t live in a world of hypotheticals, do we? We live in a world of facts here is a fact that you may not have come across: although the industry took a significant revenue hit (peak of $27 B in 2000 in a downward trend to a low of $16.5 B in 2012), revenues are rising from the industry adapting to, creating new and optimizing existing revenue streams. Who would have thought that going with the zeitgeist, embracing new digital technologies and having a pulse on user behavior would be a positive factor towards your bottom line. Sure, it’s taken a while to get back on the path of recovery, and sure you may never see the revenues you had in the glory days, but at least you’re not dead/obsolete/forgotten (looking at you Taxi Inc.).

So what changed for Big Music? Let’s pinpoint the inflection big bully to nimble navigator.

The 2000’s were painful to the music industry (labels, artists, rights holders et al.) as it tried to understand the changing world around it and recapture lost revenue before it was doomed to be lost forever. The moment that the industry realized that digital was not just another business line, but the core of their business is when things started to get less painful and back on track to clearer waters. The paradigm shift from physical (total control of product, control of scarcity/supply) to digital (less control of product, unlimited/intangible) meant that the industry had to ‘go with the flow’ of what consumers wanted and understand how their once-paying customers used contemporary tools to access music. In this ‘seeing the light’ period of rapid digitization, the industry had to coalesce around startup players who could solve the underlying issue of getting customers who have been conditioned with potentially a decade plus of free, oftentimes illegal, music to once again pony up money for the product.

In this scramble to crack the distribution and monetization nut, young and dynamic startups came onto the scene. Pandora was one of the first to bring a mass appealing product to stage and soon thereafter the internet and the world saw the likes of Spotify and Rdio, both being subscription based services that paid labels and rights holders a royalty for their music.

Amongst this outcrop of music startups there were stars (Spotify) and failures (Rdio) but that’s just par for the course in startup land. Once these startup players demonstrated their value to labels, antagonism and skepticism has eroded and given way to cooperation and symbiosis. Music labels adapt just as fast as startups to changing customer desires and leverage their listeners’ digital footprints to map out concert and tour locations as well as determining what products will succeed with what demographics. The industry has fundamentally changed and this change did not come from the industry conference rooms of Hollywood or London but connected startup hubs such as Stockholm, Berlin and of course, Silicon Valley.


Big Music’s lessons for Big Banks.

Unlike the music business of the late 20th century, most big banks and their leadership see the writing on the wall. Fintechs are poised to disrupt the financial space in all areas from payments, trading, lending and retail. Big banks and the existing financial old guard have four options in how they deal with Fintech startups and entrepreneurs:

  • Ignore and risk suffering the same fate as Big Music.
  • Partner and potentially reap the fruits of innovation.
  • Acquire in hopes of jumpstarting internal development.
  • Compete and eventually give up and acquire/partner.

The question for legacy financial players is then naturally what’s the optimal situation to partner with a Fintech going to be? It will only be natural for these incumbents to do what they do best and weight the risk/rewards of working with individual startups, but that’s still the old way of doing things. Instead of point partnerships with individual startups, larger players would be best served in creating their own ecosystems which facilitated young startups with the core business of the incumbent for the Fintech to do with as they please. This arrangement allows for the legacy player to stick to their core competencies while allowing the startup to not worry about capital intensive frameworks and regulatory minefields. An example of such an ecosystem would be if a retail banking giant like Bank of America created its own banking ecosystem for startup banks (such as my own project, Enrich).

(Long-term) Greed is good. Go with the flow of innovation.

These Fintech startups would have the ability to create savings and checking accounts which would be held with BofA and naturally would be FDIC insured. The startups would manage KYC, customer support and service, front end app development and marketing, effectively making BofA a white label partner. This win-win scenario allows the new Fintech to initially bypass the costly regulatory hurdles of starting a national banking franchise and gives BofA more money on their balance sheet without ever having to hire additional staff or expend marketing dollars. The fintechs with a winning formula will naturally succeed and those that fail will fail without causing too much disruption to the legacy facilitator of said ecosystem.

The lesson learned from the music industry for big banks and other established financial giants is a simple one that I’m hopeful will be heeded: you can either be a rock in the stream that resists the flow of water and eventually erode and disintegrate OR you go with the flow.