• by J. Walker Smith , Op-Ed Contributor, December 26, 2017

Digital disruption is transforming industries, and the music business was arguably the first to be impacted and has transformed the most over the past two decades.

Major music labels were supposed to be facing extinction at the hands of digital insurgents; yet today they remain at the center of the music industry. However, labels no longer make products; instead, they deliver music-based services.

The experience of the music industry makes it clear that success in the future means adapting to new business models, rather than delivering new products.

How people consume things is changing fundamentally. Business models based on accumulation, possession and ownership are giving way to new models rooted in experiences, relationships and algorithms. 

From its birth, the recorded music industry revolved around products — sheet music; wax cylinders; vinyl records; CDs; eventually, downloads. Product formats changed, but there was always a product to sell.

Major label companies dominated because producing, distributing and marketing any product at scale requires sizable financial investment. Labels limited the number of artists to increase profitability by creating artificial scarcity and so higher prices to consumers.

Napster rocked this product-centric ecosystem by enabling people to freely share its music libraries. Major labels tried and failed to kill such services via the courts. U.S. recorded music revenues peaked in 1999, the year Napster launched, according to the Recording Industry Association of America.

Steve Jobs then launched iTunes and the iPod in 2001 and the iTunes Store and the 99-cent download in 2003. But even downloads could not check the decline of music product sales. 

Nevertheless, Apple created a legal digital market that changed expectations and foreshadowed the transformative digital disruption that followed.

Global recorded music physical product revenues fell 4.5% in 2015 versus 2014, and download revenues fell 10.5%. But global recorded music revenue in total was up 3.2%, according to the International Federation of the Phonographic Industry.

This is because streaming was up by 45.2%, more than enough to offset declines in music products.

Streaming is now the engine of growth for recorded music, but streaming is not another music product. Instead, it is a different business model which uses digital technologies to sell music as a service. 

A service-based business model does not mean there are no physical assets, only that the benefits provided by these assets for end-users are enjoyed as a service to use rather than as a product to own. In particular, benefits are available on demand. Pricing can be per use or by subscription.

By decoupling listening to music from owning a music product, the artificial scarcity that labels were able to enforce in a product-centric music ecosystem has been all but eliminated. 

More music is now available, and it turns out that consumers like genres and types of music as much as individual artists. If a particular artist’s music is not available, consumers are often indifferent to substitution and will happily listen to something similar instead. This has driven down revenues to labels and payments to artists.

Consumers benefit from greater selection and lower prices. But the lost revenue for labels and artists is forcing them to find new models for value and growth.

Increasingly, the battle is becoming a struggle for relationships with consumers. But in an era of digital disruption, delivery and distribution, more companies than ever have an easier time gaining strong relationships with end-users, making user relationships with incumbents fragile. This is the risk posed by Amazon. Think, too, of the ways in which comparison sites have sucked value from the insurance, electronics and automobile sectors.

Future success in a digitally disrupted world will come from three things, which can be summed up by the acronym ERA – Experiences, Relationships and Algorithms. 

People don’t want to buy products any more, but experiences. They don’t want to be sold to, they want to have a relationship with a brand. And, finally, the rise of digital marketing means marketers must start targeting not people, but the algorithms those people use every day to help them find what they want to buy online — or what they want to listen to, or watch, or read.