Evolution or Transformation?

Transforming a business is hard work.

It’s even harder when the business eyeing transformation is already successful.

Consider major record labels and the business of music. The business reaped incredible revenues off recorded music and it’s associated offerings for years. Over time, a complex business model was created around physical product sales and production that included pressing plants (for CD’s, vinyl, and cassettes) as well as sales & support mechanisms for getting the product into stores for consumers to purchase.

These mechanisms employed thousands of people all connected inside a complicated ecosystem. Record store managers, product buyers and “street teams” were employed by the record companies to “service” the physical stores and ensure product was stocked and well positioned for the consumer to purchase. With the conversion of physical product to digital file based formats, those systems became less and less relevant and onerous to support. Even as the business model was slowly being disrupted, the illusion of success was strong. Revenues remained strong through the 1990's.

“Success” however began to seem illusory as the 90’s closed and consumers sought new ways to get music in digital formats. Napster, Limewire and other services threatened the old model from the business of music and the record companies began to feel the walls close in from consumers “illegally” procuring music through these services (among others).

The conversion from physical product to digital media became official with iTunes launching in 2002 and has lead to a remarkable sea change in the business of music. In less than a generation we’ve seen the demise of record store chains (Tower, Sam Goody, etc.) and thousands of employees displaced on both the retail side and from record companies. The result of these changes is a new space that has developed quickly from the launch of iTunes to new music delivery offerings (Spotify, Pandora, Rhapsody) and business models for artists to leverage representing a new vision of a “full service” distribution deal (Topspin).

Interestingly, rather than seek to understand these changes within the model, the old guard fought them aggressively (through lawsuits against Napster to name a few) and passive aggressively (launching failed models that sought to capture the new desires from consumers such as PressPlay). The opportunity to transform the model was ripe for the picking in the late 90’s but rather than pursue change the old guard clung to the illusion of success in the form of false positives within big revenue numbers. The margins would shrink considerably through the early 00’s and consolidation would be the only means of survival for the major record companies.

In the end, consumers were able to dictate change to the business of music. Consumers have driven transformation in the business of music, not the corporations. The proof of this transformation can be found in data released last week by the IFPI (http://www.ifpi.org/news/IFPI-GLOBAL-MUSIC-REPORT-2016). The data clearly shows that digital music purchases have for the first time overtaken physical product sales. Some of the key points made:

  • Digital sales contribute 45 per cent of industry revenues; overtake physical music 39 per cent share
  • Streaming revenues up 45.2 per cent, helping to drive 3.2 per cent global growth
  • Total industry revenues grew 3.2 per cent to US$ 15.0 billion, leading to the industry’s first significant year-on-year growth in nearly two decades.
  • Digital revenues now account for more than half the recorded music market in 19 markets.

Revenues are now growing after years of market shrinkage, consolidation amongst major record labels and increasing debate over the viability of streaming as a legitimate music delivery experience. There are many lessons in this story to be found. One could argue that had the business of music joined with the hearts and minds of consumers that transformation could have been less disruptive and more fluid. This would have taken tremendous effort and hard work. Rather than take that opportunity by the proverbial coattails, the business spun and let change be dictated by consumers and artists. The end result is a true transformation into a growing digital ecosystem that is evolving month over month not year over year. And this is happening without the business of music playing a lead role.

Transforming a “successful” business is challenging. Success however must be challenged and questioned. It must be broken down so that key constituents can accurately decide what success means. Once understood, plans can take shape for how to evolve the business through reason and measure. In the case of the business of music, none of these happened. The end result is transformation through disruption. Only the future will tell us if this transformation was successful for the creators and the consumers.

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