We are all familiar with the disruptions the music industry has faced from a technological standpoint. These disruptions have manifested slowly over the past few decades, as physical media has evolved from the vinyl album to the compact disc to the mp3. With the addition of mp3 players and websites like YouTube, the music business continues to change.
A panel discussion during the 2010 Coach K Leadership Conference examined the evolution and challenges faced by the music industry.
What’s an Album?
Leadership Implications of Disruptive Technology: Lessons from the Music Industry was moderated by Professor Tony O’Driscoll, Executive Director of the Center for Entertainment, Media, and Information Technology (CTEM). He started the discussion by relaying a simple yet thought-provoking question asked recently by his 8-year-old son: “Dad…what’s an album?”
Upon showing his son what he called a “cultural artifact of his first vinyl album,” his son replied: “Well that must’ve sucked…” and walked away. Amidst the laughs, the question set the proper framework for the panel, contrasting the tangibility of what an “album” was and has become today with how record companies have continually been unable to muster responses to similarly simple questions and demands that have been posed by consumers over the last 30 years.
Fred Goldring, an entertainment lawyer, producer, and brand and marketing strategist who was appointed by President Obama as a member of the President’s Committee on the Arts & Humanities, continued the discussion about the progression of technology from vinyls to CDs.
“Compact discs were the first disruptive technology,” he said. “It was an unprotected digital format,” with no copy protection like Digital Rights Management (DRM) in place, which explains why “record companies zealously guarded their master tapes in vaults.”
What Goldring stresses with this point is how the record companies ignored the natural progression of the technology that contained music, and clung, both literally and figuratively, to a medium in CDs that would soon give way to a more popular, intangible format. In the ‘80s, the record companies had the opportunity to preempt the boom of the MTV supernova that in many ways personified the media and entertainment age of that decade.
“The record companies had the opportunity to produce music videos of the big artists at the time, and package them in a DVD format for $30 a disc. They passed on the proposition, concerned only with their belief that ‘you got to produce great music first and foremost’. Of course, MTV was born a few years later and blew up into the huge media brand we know today…and there was no money in it for the record companies.”
The late ‘90s brought the mp3 to light, and artists were able to upload their work to mp3.com. Napster was perhaps the most quintessential example of “disruptive” that the industry could ever have imagined. The instant availability of music through this peer-to-peer network may have infringed upon the copyright laws protecting artists, but Goldring feels the technology itself could have actually been leveraged by the record companies themselves. “Music consumers were speaking, and the record companies were not listening. There was a substantial rise of digital consumption and a resulting drop in sale of physical goods, which was a big problem in the record industry.” There was certainly a difference between the record business and music business, but did there have to be?
Eric Garland, the founder and CEO of Big Champagne (a well-known technology-driven media measurement company), expounded upon this idea. “The record companies failed to put locks on CDs, and that’s what they think failed them. But that was beside the point. Better locks on content were never going to protect what was going to happen.” Like Goldring, Garland also felt it was inevitable that technology would disrupt the music industry, but that there were benefits to the Napster technology that could have ultimately been reaped by the record companies whose artists were losing money in album sales.
“The record companies had a fiduciary responsibility to shareholders and artists,” Garland said. “But Napster presented a way to track the consumption of music somewhat like Nielsen. The record companies maintained that there were no beneficial parts of Napster, that it was just a vehicle for piracy. But Napster was actually collecting information that was not available to the industry prior.”
The demographic and artist and genre preferences of consumers Garland is inferring here would of course have been very valuable pieces of information for the record companies from a marketing perspective. But ultimately, the most basic bit of knowledge that could have been gleaned from Napster for the record companies’ profit or at least elucidation was how much we, as the consumers, valued the ability to own a single track rather than an album full of songs we didn’t necessarily want.
“In the ‘90s, the CD eliminated a core product—the single,” Garland said. “It had a low price introductory product, and there was no real financial commitment to it. With the CD, if you wanted to hear a song on demand, you had to pay $16-17 dollars for a CD with one good song.”
Goldring added that before Napster came out, in college dorms around the country there would be boxes left outside of doors that would be filled with CDs, CDs that were themselves full of songs that were mostly unwanted by their consumers save one or two tracks. “With the advent of Napster,” Garland said, “an entire generation felt entitled to get back what they should have had.” It was the singles in the albums that we wanted. It was an entitlement to the freedom to choose what we wanted to have.
Failure of Leadership
To this end, O’Driscoll asked the most important question of the panel: “Did leadership fail in the record industry?” To this, Goldring remarked that there was a specific opportunity for the record companies to actually take leadership. “The record business forgot what business they were in. They forgot that they were in the music business. There was a failure of leadership in not anticipating the inevitability of Napster. A disruptive technology was bound to come up sooner or later.”
Goldring continued with some specific and stunning figures about the demand that the record companies never allowed to be heard. “Before Napster was taken down, there was a poll conducted that found that a large percentage of people said they would pay $15 a month for something like that.” This poll was conducted in the fall of 2000 by an online music research firm called Webnoise, and the actual percentage of users was 68%. “Some quick math reveals that, with Napster’s user base at the time, $1,500,000,000 a month could have gone to the record companies’ direct bottom line.” Garland added, “And the only problem with that would have been how exactly to divvy up the money between the record companies and the artists … but that’s actually a good problem to have, though!”
Goldring summed up the succession of the record companies’ oversights toward the end of the panel. “In the early ‘80s, you had the creation of MTV. The record companies were so anxious to get paid on CDs that they missed the boat on owning the big brand of MTV. Fast forward to the ‘90s … record industries felt they had to educate consumers about the value of music by focusing on $17 CDs that gave way to the digital technology of mp3s and Napster at the end of the decade. Fast forward to iTunes. Steve Jobs had a hard time getting record companies to agree to be sold, pricing, etc … the record companies ultimately lost sight of what business they were in and empowered iTunes. 85% of music that’s sold is now through iTunes. Fans, artists, and record companies don’t have it. And Apple’s not even in the music business.”
“The record industries were playing checkers, Steve Jobs was playing chess,” added Garland. “Apple understands their customers. Record companies dealt with radio stations, etc. They did not want to create another MTV, but were unsure how to proceed because … of the single. All the money is in selling the [album] bundle. They felt that: ‘If people can peel off this $1 [typical price of any single song on iTunes], we’ll never get $17 dollars again.’ So what Steve Jobs did was remain hard and fast 99¢ for a song and $9.99 for an album, and the record companies fought Apple forever on this. They wanted to bundle three and five, and also consider maybe raising the single song price to $1.29 over time [which has since become a reality in the iTunes Store]. But regardless, it is a singles market now. It just is, and everyone loves it.”
So fundamentally, we arrive back to the simple concept of listening to what the consumer wants, and answering a question as innocent as “Dad, what’s an album?” In the ‘50s, we may have called that the $64,000 question. In the decades since, a particular kind of inflation has ballooned that figure to multi-billion dollar proportions—the inflation of disruptive technology. Acknowledging, answering, and at times asking such questions requires a degree of leadership that record companies have not demonstrated through the years where companies like Apple have. And something we all can take away from this panel is that the most successful companies will never be shaken from their missions and core values by disruption that is, if anything, predictably inevitable.