Thursday, November 4, 2010

The Music Industry – Mixing Art and Value Creation

(Kind of a long post - skip if you want)
The music industry, as you know, has a big problem today. People don’t pay for its products.  OK, some do but a lot don’t.  File swapping, free downloading and CD counterfeiting (piracy) are widespread, virtually unstoppable and have now seriously reduced the profit margins and growth of the industry.  People still love music as much as ever and it permeates everything we do. 

I don’t work in or near the music industry but I am a huge fan of music (and part time musician).  So I don’t have its solutions, just making some observations.  It is going through the kind of tsunami scenario you don’t wish on anyone.  A lot of hardworking folks, musical, technical, marketing, sales and financial make a livelihood making and selling recorded music. 

“Market Attractiveness” is a model which analyzes whether an industry is worth competing in based on its ability to generate profit (Value Creation) to existing as well as new entrants.  It examines the drivers of growth, power of suppliers, substitutes, competitive ease of entry, etc to define the factors around value creation.   It’s the heavy lifting analysis of consultants etc.  For some real fun,  there is a really cool and comprehensive music industry business case study on Biz,net UK site:
The music industry’s market attractiveness is poor.  This is interesting in that it has implications as a textbook case study in the need for business model transformation in the face of disruption.  I mean, how long would the business model of making another product (say, canned peas) stay constant if suddenly consumers could have them free.  Not long.  Gone in days.  There is no nostalgia to manufacturing and distributing canned peas if there is no profit in it and there shouldn’t be for music as a product either.   
“In summary, the music industry is an unattractive industry as the threat of entry is high, supplier power is low, intra-industry rivalry is high, threat of substitutes is high, and buyer power is high. With a high level of threat from four of the five environmental forces, the music industry is one to shy away from.”

Another great view of this kind of work based on Porters Competitive Forces Model can be found here:

How will the industry improve attractiveness? 

Structure – Still set up like the days of old.  While it has consolidated to 4 or 5 companies that are huge stables of smaller labels and artists of all genres – the smaller artists probably don't make much money.  The artist virtually funds their own recording by using most if their record sales and publishing fees to pay back a loan or “advance” given to them to pay for large fixed costs of recording and selling required by the record company.  Artists assume a lot of the risk upfront which is why the industry is reluctant to change their model.  

Cost Structure -   The cost of recording has remained hugely expensive, even though I can buy the equipment needed to record an album pretty cheaply in my basement on a laptop.  The industry needs to get very lean  almost like a virtual mode – a skeleton staff that outsources temporary project teams.  Recording and mixing will also go much cheaper and you will only pay for producer talent at fixed rates. In fact, the distributors and bands could form smaller co-operative project teams. The problem here is in subsidizing the artists that are not profitable.  It likely has to end.     

Pricing – is it really worth paying $1.29 for a single song if the alternative is to get it free?   Supply and demand are now adjusting the real value of a song (my guess is closer to $0.25).   My math goes like this – 160 downloads done for free and 40 downloads at $1.29 – so about $0.25 on average.  Why not just charge everyone $0.25? Or go even further, by looking at the value advertising revenue stream of a much bigger audience when you give the downloads away free (sort of like how Linked in, Facebook, Google are free and make money).

Distribution – brick and mortar stores are gone. It is also hard to find more than 4 feet of shelf space at Target anymore.  Its all digital.  Apple company pretty much owns the pay-to-download market but others like CD Baby are now going up to expose you legitimately to smaller independent artists. Videos and DVDs are going there now. 

I don’t want to see the recorded music industry fail.  It’s personal for me since I love the music.  But when an industry is not growing or maintaining its value creation, it will go under quickly.   It all seems a bit stuck in those glory days.

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