Due to digitalization and digital convergence, the value chain of the media industry has been radically transformed in the past decades. Before digitalization, the value chain followed content creation, publishing, distribution, retail and consumption and now we can observe how content creation is directly sent to consumers through digital channels or better yet, the consumer is the one creating its own content (prosumer).
Even though TV, film, newspapers, magazines, book publishing and radio has been affected by this phenomenon, I would like to talk specifically about the music industry. An industry in which we have all seen and experienced several disruptive technologies that have changed two main things 1) music consumption and 2) the industry’s business model.
Music consumption transformation
The introduction of several devices, such as the MP3 format (1997), the iPod(2001), iPhone (2007) & smartphones and now streaming applications like Spotify (2010), have changed the way we listen to music and consume music. As consumers, we experienced mobility with the invention of portable ways to carry our favorite music and with the introduction of digital libraries like Napster (1999) and the iTunes Store (2003) we also switched our mindset from the acquisition of the entire album to only our favorite singles. In addition to this, the introduction of streaming applications is switching the perspective of “owning” the music towards “lending” perspective where we are paying a monthly fee (subscription model) for listening our favorite singles of all times (hits or not) and most importantly where we are sharing our music with the community. Spotify is the leading disruptive application that has succesfully transformed the music industry one more time with $889M of revenues in 2012.
Business model transformation
Music consumption transformation has had a negative impact in the traditional industry’s business model. Just in 2011, trade revenue generated by the global recorded music industry in 2011 dropped by 3% to $16.6 billion, according to the International Federation of the Phonographic Industry’s (IFPI) annual “Recording Industry in Numbers”. Even though digital music consumption is increasing, the margins are not as high as the traditional business model.
We can observe in the graph how each disruptive technology mentioned above have impacted US record revenues turnover. Besides of disruptive technologies, the industry has experienced a focus change from “hit creation” towards “long-tail leverage” where they need to develop new capabilities to transform its business model and capture more value.
A very interesting approach is exposed by the Financial Times in its article “Music industry new business model” where they analyze a different busines model being used by the band Radiohead. According to its manager, Brian Message, “We’re trying to get away from a copyright trading model more towards a venture capitalist approach with artists”. Instead of signing away copyright ownership of songs in exchange for an advance and royalties, as happens in most record deals, the bands Message signs get to keep ownership of their work. The contract is a so-called “360 deal”: all income – from records, concerts, merchandise, commercial tie-ins, everything – is split between band and backers, after the initial investment has been repaid”.
Transforming the music industry business model is not unattractive when we can observe an increasing demand of digital music going 8.0 percent up from 2011 to $5.23 billion. According to Message and Barton in its article published in Harvard Business Review, there are two lessons to be learned: 1) stop treating artists as commodities, interesting when they produce hits and disposable when they don’t; and 2) value the artist-fan relationship as copyrigths.
As music consumption continues to change, the music industry has to be able to adapt to these patterns instead of fighting against them. Adaptability of its business model to monetize from a digitilize music era is imperative to succeed and will demand innovations leveraging on artists community base.