Music Industry - Strategic and Change Management for the New Era - Book Report/Review Example

Music Industry - Strategic and Change Management for the New Era  Introduction: As the ongoing technological advances become the marking points of the modern time, human life and economy is more affected by these than ever before. The technological revolution seen in the last few decade has been ‘disruptive innovative’ for the most cases. Sometimes theses technologies are embraced by the masses and cause visible changes in the whole population, sometimes the effects are concentrated on some niche sector of the society or the economy. On the business front the open lines of communication, transport and information transfer have made it possible for organizations to move across countries, reveling in the freedom of globalization, while e-commerce has greatly reshaped the retail sector and consumer behaviors as a whole. Internet and the wide digital network which connects world’s consumers and economy have been the biggest instigators of this technological revolution. In this era the opportunities provided by the new digital frontier have been smartly utilized by many organizations as they move towards more effective and efficient ways of production. On the downside, the digital revolution has been a something of a shock to those industries who were unable to adapt and evolve to accommodate the new media available and take into consideration the changing consumer attitudes and preferences. No other industry suffered these negative consequences more than the music industry which even today has been unable to design a sure fire strategy to enhance the potential profitability of the internet network and its many users. A late start in accepting the changes which were taking place, poor forecasts of expected trends in the music buying population, a reluctance to accept the end of old and traditional business models, competitiveness, lack of cooperation and ultimately an over confidence in their own power to influence the climate of music were all factors which led to the diminishing control of the major players in the industry and decrease in their profits. Today the situation can only be completely reversed if extensive and planned change management is practiced throughout the industry along with revolutionary strategies which would align their interests with that of their core consumers- who have become increasingly value conscious and expect fast service and quick downloads compatible with their various handheld devices. Music Industry, early struggles: The problems that the music industry had to face were evident from the late 1990s which was a period of significant and crisis-ridden changes. The internet had become mainstream and with it came the convenience of digital streaming, file sharing and illegal downloads- all this when the industry was just overcoming the problem of CD copying and their lack of foresight in introducing CDs and Mp3s without any copyright protections. The development of the technology and patent of CDs in the mid 1980’s had given a boost to the sales and profits of the industry; five companies dominated the global market: Universal/Polygram, Sony Music Entertainment, EMI, Warner Music Group and the Bertelsmann Group (BMG) and in 1997 they alone held over an 80 percent of the total share of the market (Dolata, pg4, 2011-12). With lucrative deals with artists and a direct control over how the music was published and distributed the oligopoly of these labels was unchallengeable until the technological advances provided consumers an alternative and more convenient way to share the music they wanted. Copying CDs and distributing them through centralized networks like Napster or decentralized ones like Kazaa was much easier for consumers as it provided the oprion of selecting units of music as they pleased instead of albums as dictated by the labels and the global nature of these databases meant that a much larger population could now get in touch and share music illegally. The toll of this for the industry was great, with profits decreasing worldwide from $40.5 billion in 1999 to $31.8 billion in 2006 and to $27.8 billion in 2008. The initial industry reaction was slow but defensive; while they had predicted that the digital networks could give them some trouble this trend had not been anticipated and they were unprepared to accept the ultimatum. The industry utilized a two pronged effort of containment and applying pressure on lawmaking bodies to build stronger protection against copyright thefts. The major labels and their supporting organizations like RIAA (Recording Industry association of America) worked towards lobbying for harsher punishments and lawsuits to be filed against those found involved in illegal downloading and sharing of music files. The benchmark case was the shutdown of Napster in mid 2001 which was considered a major victory by the music industry, even though, instead of Napster they now had to contend with a growing number of smaller imitators. The containment strategies focused on improving the security of the CDs and other distribution materials through various access control technologies collectively referred by the labels as DRM ‘Digital Rights management’. The following few years saw various experimental platforms launched by the labels in collaboration or otherwise as they saw the consumer interest in digital streaming rather than physical purchase of music. But late introduction of these platforms couldn’t gain the popularity they needed; other problems were related to the restrictions posed by DRM and low variety of selection available as each label could only sell its own products. It wasn’t until 2003 that an external player finally brought into existence a platform which catered to not only consumer preferences in their music purchase but also their preferred devices- the apple itunes store launched in 2003 was the first legal downloading option which appealed to the consumers. It gave them choice of selection as all the labels had been forced to cave in to pressure and offer their songs for sale to this online retailer as they saw their profits slipping further. While they had tried to be the sole controllers of the digital music industry, the labels instead had to cede to online retailers which were fast replacing the physical retailers. Reasons for failure: For the music industry the biggest problem they face with the technological changes was that the industry has always been influenced by external developments and there is no internal control in these cases. “Due to their hierarchical and centralized structures as organizations, its core companies were at first blind to the explosive potential of the new technological opportunities” (Dolata, pg4, 2011-12). The observers who could identify the shift taking place in the distribution channels of the music and the growing clout if internet were too far on the fringes of these organizations to be able to do anything much about it. Worse when the policy maker first realized the impact of the digital revolution instead of immediately harnessing its power they took it as threat and reactive likewise. The ‘hesitant’ and ‘defensive’ strategies applied by the industry couldn’t change the customer’s new acceptance for digital sharing as a way of life. It was easier, more convenient and provided a better backup option than physical storage and purchase. Even for sonsumers who would have been willing to purchase music legally for a long time there were no options available. When there were attempts to resurrect Napster as a legal operation utilizing the vast and well managed database already available, the labels quickly put the pressure to end the project. Even though it would have ultimately benefitted them through legal sales they were too narrow minded in their approach towards adapting to the new technology. This was reflected in their attitude when competitiveness and internal rivalry forced the major players to form their own platforms which weren’t compatible with each other. A coalition could have had the power to persuade buyers towards their new platforms but instead they managed to push them away even further because of the incompatible DRM programs adopted by each platform. Consumers couldn’t listen to all types of music on different type of players and this took away a feeling of control and ownership from them. The labels, meanwhile, still resisted any major changes to their traditional core business strategy- protecting CDs as a medium which still had a hope for revival and keeping a tighter control on the copyright management even though customers were clearly dissatisfied. While it is true that the changes in strategic direction needed in the music industry were too unpredictable and drastic to have been prepared for. But the major organizations also had rigid, controlled management systems which were extremely resistant to change which could disrupt their standard operation. After investing so much in the physical, digital mediums they were unwilling to abandon that ship even when sails were in trouble. They never expected that the technological revolution would put the power into the hands of the consumer and to a smaller extent, the artists. Current Situation: “ It is a myth that consumers are not willing to pay for music anymore. They are just not willing to pay for it in the traditional way it was packaged and distributed.” (Cornwall, 2011). After the ups and downs of the first decade of the millennium, the music industry operators and analysts have finally conceded to the fact can physical sales might never recover and even the spending on digital sales will not be enough to recover their lost profits. In 2008, some 95 percent of the music downloaded from the Internet, or more than 40 billion files, was illegal- showing a significant loss of profit even as more consumers than ever are enjoying the music. Some of the significant responses from the industry in the latter half of the decade have revolved around meeting customer criteria for optimum digital experience of music. Pressure from itunes store and Apple CEO, Steve jobs along with negative feedback from the new players in the online music retail business like Amazon.com and Nokia finally convinced EMI to be the first big label to let go of the DRM program. The reason was simple, unless the consumers were given a level of authority over their purchases they would simply move elsewhere with their business and that was something the industry could not afford. There has also been a growing trend that while the customers might not think of music as something they would like to spend money on, the surrounding culture of live shows, merchandise, artist brand and other factors still hold a lot of interest for them. Concert-ticket sales in North America alone increased from $1.7 billion in 2000 to over $3.1 billion in 2007, according to Pollstar, a trade magazine. So now the labels are moving to cash in on these fronts as well (Economist 2007). All this have required a change in business model which has put the industry under severe strain. Even as they cut down on the advances and upfront money provided to artists they are introducing all inclusive deals such as the ‘360 deal’ in which they give a bigger advance to the artist in return for a share of the profits from the artist’s revenue stream beyond music sales including merchandise, live performance and tours. EMI was the first label to move away from the operations of a traditional ‘record label’ instead it accepted the new reality “by fundamentally reorganizing its business around comprehensive rights licensing” (BusKirk, 2006). These attempts are crossing over into the duties typically carried out by Artist management Agencies. The artists have not responded well to the greater control exerted by the industry which while works out well for well established artists is not a feasible solution for new artists who lose much of their earnings to the labels. Many independent artists are opting out even as the internet and the social media present them with greater forums to interact directly with their fans and form solid profit opportunities through marketing live shows and merchandise. Artists have responded by taking greater control of their business. "The risk is shifting away from the label and toward the artist," says David Kusek, chief executive officer of online music school Berkleemusic.com (Knowledge@Wharton, 2011) Innovative strategies by artists: As artists turn entrepreneurs and the trust in the music industry to garner interest in the consumers is fading, some interesting strategies have come up recently in the race to make a profit from the internet. The L.A.-based indie record label Stones Throw  initiated its own “Digital Discography,” digital music subscription service which is an artist supporting model based on consumer trust in a label. Palo Alto-based Lala For every 1,000 songs streamed at Lala, users pay the 99¢ download fee for only 72 of them. They pay 10¢ for only 108 out of 1,000. The remaining 820 songs are played for free. (Hutchings,2012) Some artists are utilizing tracking listener data online to learn what the consumers really like and how it can be marketed better. It also helps them identify potential markets they might have overlooked before. These artists are better at utilizing the amazing tools available on the internet and utilizing them innovatively to form better strategies to market their talents. The industry can surely learn a thing or two from them. Strategic Management for new era: The increasing consumer control has always been a problem for the industry as whatever solution they bring up to solve the digital crises they are always one step behind the user demand. It took them years to finally let go of the DRM format and even longer to accept the subscription and ad revenue option of letting people listen to music. The theory behind the subscription model is such that by exposing consumers to new music and letting them have control over what they hear and when, they would be able to interest them back into digital (or even physical) purchases. This is proving to be a wrong idea as “Researchers and industry consultants say online music sites are being used by a growing number of listeners as a substitute for purchasing music, rather than serving as a catalyst for more purchases (MacMillan, 2009). In fact, it is expected that the overall spending on music will shrink by a further 4% by 2013 according to a recent report by Forrester Research (FORR). The industry started out adapting by trying to cater to the ‘Millennials’ those 20-34 year olds who formed the transitional stage from analog to digital and paved the way for digital streaming and the concept that the consumer can choose what to pay. Now the generation in focus will be the ‘Digital Natives’, 12-16 year olds who have grown up internet, networking, smartphones and iphones. This generation as consumers will be even more demanding, choosier and more in control of their music listening than before- to form products that will entice them to pay. The music industry has to adopt an organizational structure where information is free flowing and decisions can be made quickly to suit turbulent conditions. Strategic management tools can help them identify their environment and their threats and opportunities but there has to be a culture of change and flexibility which will let them make the right decisions even when the situation is an unexpected one. In the paper written by Vrontis (2006) soon after the merger of Warner Brother and EMI labels, he identified the Porter’s Five forces which were affecting the industry at that time: Vrontis, D., 2006. Warner EMI Music. Strategic Development for the First Decade of the New Millennium. Pg 68 Innovative Marketing, Volume 2, Issue 1, 2006. Even though a few years have gone by since that analysis much of the situation holds true for the industry except the strength of the factors and the Threat of New Entrants. While the points about the situation within the industry with innovation opportunities and better organization are still true the supplier power has increased along with the threat of new entrants by no other than the artists themselves, who are increasingly seeking greater control over their music and how it reaches the customers. The formal channels and power struggles have proven to be too much for the artists and they might prove to be a very strong threat for the industry unless the labels can work with them as partners and come up with better business models which satisfy both of them. The power of substitutes is strong and ever growing, even as the music industry is trying to introduce models which incorporate these substitutes. Similarly the buyer power is much greater in 2012 than it was in 2006- they have more internet channels including giants such as Youtube or Pandora to cater to their music needs and the artists seem to have better insight to what the consumers want and are in a position to cater directly to them. So what can the industry do to remain afloat? One of the basic steps it must take it is to take account of its strengths and weaknesses and correctly work according to them as the opportunities arise. Strengths: Large companies, large investments, media connections, competitive on international scale, successful franchises, technologically advanced , growing internet presence, can use diversification to minimize risk Weaknesses: Large size, inflexible culture, market orientation is weak, lack of industry unity Opportunities: Transition, globalization, internet revolution, new media formats and distributions channels, changing customer tastes Threats: Increasing competition, artists going independent, piracy of music and downloads, low consumer switching costs Given this SWOT analysis, applying the Ansoff Matrix formula to designing the correct strategy, we see that the industry would better be served by diversification. While the labels are indulging into this strategy cautiously through their music subscription channels and 360 Deals with artists, in the digital playground these tactics might not be enough- they have to change the nature of the product itself as music might not be able to be sold as a separate commodity to the digital Natives. They would want much more than that before they are ready to pay. The two other strategies the big labels can apply are of Consolidation or cost leader ship. By merging all the aspects of the music culture and providing it neatly packaged to their consumers the labels might be able to win some sales back. Or they could try to become the Cost leaders in the industry by utilizing their large pools of investments to streamline their operative overhead costs and cut down their margins to give a product of superior quality but cheaper than the rest. However, these arguments were given by Vrontis in 2006 when the situation was a bit different and now when consumers have even gotten the taste of free music, low costs might not be able to persuade them to return to labels. Another interesting direction as proposed by Mark Mulligan the vice president and research director at Forrester Research is that in their diversification efforts the labels should produce music which will directly appeal to the Digital natives, he calls this type of music SPARK- standing for: “Social: Put the crowd in the cloud. Participative: Make them interactive and immersive. Accessible: Ownership still matters but access matters more. Relevant: Ensure they co-exist and join the dots in the fragmented digital environment. Connected: 174 million Europeans have two or more connected devices. Music fans are connected and expect their music experiences to follow suit”. (Mulligan, 2011) The genre of SPARK music will let the customers choose what they want to hear, how they want to hear it, how they can directly participate in the experience of music and how relevant it will be to their social and digital lives. This will be something which the industry can adapt if it moves forward from the current models in practice- packages like 360 Deals and free music streaming can be connected together using the power of social media and gain back the customers that the music industry lost. Bibliography Hutching, E., 2012. New Subscription Model Is Disrupting the Digital Music Industry. PSFK Saloon [Online]. Available at: [Accessed 12th July 2012] Knowledge@Wharton, 2011. Risky Business Becomes Riskier: A New Playbook for How Artists Are Compensated. [Online]. Strategic Management. Available at: < http://knowledge.wharton.upenn.edu/article.cfm?articleid=2715 > [Accessed 12th July 2012] Buskirk, V.E., 2006. EMI evolves along with music industry changes. [Online]. Wired.com, Business. Available at: < http://www.wired.com/business/2010/06/music-revolution-forces-major-label-emi-to-evolve/> [Accessed 12th July 2012] Editorial, 2007. The music Industry- A change of Tune. [Online]. The Economist. Available at: < http://www.economist.com/node/9443082 > [Accessed 12th July 2012] MacMillan, D., 2009.  The Music Industry's New Internet Problem. Bloomberg Businessweek- technology [Online] March 06. Available at: < http://www.businessweek.com/stories/2009-03-06/the-music-industrys-new-internet-problembusinessweek-business-news-stock-market-and-financial-advice/ > [Accessed 13th July 2012] Dolata, U., 2011-12. The Music Industry and the Internet- A Decade of Disruptive and Uncontrolled Sectoral Change . Research contributions to organizational sociology and Innovation studies, SOI Discussion Paper 2011- 02 , University of Stuttgart.  Holton, K., 2009. Music industry urged to embrace the Internet. Reuters, US Edition [Online]. Available at: < http://www.reuters.com/article/2009/01/20/us-internet-idUSTRE50J03U20090120> [Accessed 13th July 2012] Butcher, M., 2012. Assimilate UK! The British Music Industry Now Controls Your Internet [Online]. TechCrunch. Available at: < http://techcrunch.com/2012/06/18/assimilate-uk-the-british-music-industry-now-controls-your-internet/ > [Accessed 13th July 2012] Cornwall, J., 2011.Music Industry Change May Require Forgetting Old Business Models [Online]. Business Insider. Available at: [Accessed 13th July 2012] Mulligan, M., 2011. Why the music industry must change its strategy to cater to the digital natives [Online]. Mashable Social Media. Available at: < http://mashable.com/2011/02/04/music-industry-digital-natives/ > [Accessed 13th July 2012]   Vrontis, D., 2006. Warner EMI Music. Strategic Development for the First Decade of the New Millennium. Innovative Marketing, Volume 2, Issue 1, 2006. Read More