Digital disruption has radically transformed music from a product to a service, and the evolution of that industry offers guidance for every category
The digital disruption of the music industry has been widely touted as the toppling of major labels by digital insurgents, yet major labels remain at the center of the industry. In all industries, digital technologies are enabling challengers to contest incumbents with new business models that bypass the centrality of a product in creating value and growth. From its earliest days, the recorded music industry revolved around a product: sheet music and cylinders, then records, then CDs and eventually downloads. Napster dealt the first digital blow; file sharing meant consumers no longer had to buy or own a music product to listen. Major labels took legal action, but the impact could not be outlawed. U.S. recorded music revenues peaked in 1999, the year Napster launched.
Steve Jobs seized the moment with iTunes and the 99-cent song. But even downloads have been unable to check the sales decline of music products. Streaming has overtaken the music industry as the engine of growth. Streaming is not another product. It is a business model that uses digital technologies to sell music as a service, meaning access without ownership that is available on-demand and paid for by use or by subscription. The two biggest services are Pandora, a personalized radio service, and Spotify, offering a catalog of music.
Service-based offerings are not new, but technology has made it possible for such offerings to make inroads into categories that have long been exclusively product-centric. Digital disruption does not reward traditional centers of power. It re-channels the flow of industry revenues. Unless incumbent brands give up old ways of operating, new sources of value and growth will elude them because the new flow of revenue will not renew existing streams or automatically redirect new streams to incumbents. Consumers can get the benefits they want in new ways. The old ways aren’t coming back.
As it will in all categories, digital disruption is forcing the music industry to remake itself. There are four critical lessons brands can learn from the digital transformation of the music industry.
1. Look to Experiences for Value and Growth
In music, this is seen in the booming opportunity to build value from live concert experiences. Music festivals have become a worldwide cultural phenomenon, to the point that observers now worry about “peak festival.” Clubs, live streaming, awards shows and house concerts are part of this, too. Live music is buoying an interrelated ecosystem of auxiliary revenue streams such as food, transportation, lodging, clothing and other merchandise.
The service-based business model of live concerts offers value and growth that premium music products can no longer command. Historically, music ticket prices have risen faster than inflation. This continues, even as the value of recorded music products is falling. In 2015, the average live music ticket price hit an all-time high. Technological innovation in virtual and augmented reality will add even more value to live experiences.
Brands in all categories can include an experiential layer, even for low-involvement products that are purchased habitually. This could entail things like personal curation or concierges, instruction, insider access, collaboration or technology enhancements. Brands must look at the future differently and think about how to use experiences to build more value.
2. Relationships Win Out Over Branding
This is obvious in music, where the shared experience has always been powerful. But music is not the only thing that people want to share. People rely on social guideposts for everything. Digital disruption brings relationships to the forefront in all categories.
In fact, building closer, stronger relationships with customers is critical for brands that want to compete for experiences. In the world of digital platforms, it’s all about winning the competition for relationships, which is why Amazon has a soup-to-nuts ecosystem of customer engagement. Amazon uses brands to build its own relationship with customers. No brand is safe unless it secures its own relationships.
3. Small Brands Have a Bigger Opportunity in a Marketplace Upended by Digital
The prevailing narrative about digital is that it is winner-take-all. Indeed, this has been borne out many times. Network effects are the reason. They create natural monopolies. The more people in a network, the more value it has to people. So people migrate to the biggest networks, which makes them even bigger and thus even more valuable, which in turn, attracts even more people. Pretty soon, almost everybody is in one network.
But network effects matter only when networks are essential to the value of the brand, which is not the case for most brands. Music demonstrates this because digital disruption has opened up the industry rather than narrowing it down.
More artists, not fewer, can get a share of the business nowadays. In 2000, the top 100 tours commanded almost 90% of annual concert revenues. In 2014, this figure was halved to 44%. Certainly, the biggest artists still command the lion’s share of revenues from music product sales and streaming. But artists are more likely nowadays to see more types of opportunities to build a steady, long-term career, rather than having just one long shot at success.
The transformation of categories by digital has shaken loose a lot of new opportunities for brands and companies willing and able to pursue value and growth in new places.
4. Brands Must Get Outside of the Data
Streaming services and other digital music platforms use algorithms to classify people’s tastes and then predict what people might like to hear. Such algorithms are not unique to music. Recommendation engines, to mention one example, are commonplace.
One criticism of algorithms is that they lock people into echo chambers of existing tastes, thereby shutting people off from new or different things. In fact, this is exactly what digital delivery and distribution platforms are trying to achieve. To survive, brands need to get outside of the data.
This is the paradox of the digital era. Old-timey analog or non-digital connections have become more, not less, important. Analog is critical to mastering digital. Brands want to drive algorithms, not be driven over by them. The good news is that brands have many options for doing this, some of which are already familiar, like traditional media, sponsorships, partnerships, placements, apps, tie-ins, opinion leaders and personal solicitations. Digital makes these more important, not less, as it ushers in an era of algorithms. Brands must find ways to escape the commoditizing pull of algorithmic modeling.
The music industry is learning as it goes. The marketplace of music as a service is a work in progress, but it is the future. Brands in all categories must rethink their propositions and business models. Music offers some lessons and guidance, but brands must approach the digital future with a willingness to experiment and a commitment to reinvention. As every musician can attest, perfection takes lots of practice. That is perhaps the biggest lesson that music has to teach brands.
By: J. Walker Smith
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