I recently stumbled upon a blog article titled “Broken Record: Four Mistakes that Killed the Record Industry – before File Sharing” authored by Jeff Balke, an interesting take on the demise of the record industry. The article suggests, “The industry, including radio, made four mistakes that preceded their ignorance of technology”.

Summary of the Four Killer Mistakes:

1. CD Sales are not the same as record sales. The premise is that the CD created substantial profit margins (because of lower production/distribution costs) in contrast to vinyl and tape, and a “gravy train” effect ensued for several years as people converted their collections to the new digital medium.  After people replenished their collections, the off-the-chart CD sales came to an abrupt end.  The author suggests that the “bean counters” failed to see this coming because they lacked creative insight?  This is a convenient scapegoat, but I’m not sure it’s quite that simple..
2. Longevity trumps the flavor of the week. With shrinking revenues, evil corporate budget constraints ensued, and the labels began aggressive cost cutting, consolidating distribution, and mostly, marginalizing artist development.  This isn’t recent news, so if record labels were the only effective way to develop an artist, we should have, in theory, no worthy talent today… Regardless of your musical taste, that is simply not the case.  If anything, we now have more choices than ever, do we not?
3. Destroying the chain of distribution is death. Here, consolidation of distribution channels are also pegged as causal. According to Balke, “What the suits failed to realize was that the chain of people working on selling music for them was key to making sales. Even now in the age of blogs, people still listen to what others suggest when it comes to buying music. Prior to the Internet, those people included DJ’s and record store employees…”  So here’s my question: How would have the retention of traditional distribution channels prevented the author’s acknowledged evolution in consumer behavior brought about by the “age of Blogs and the Internet”?
4. Killing the DJ. The argument here is that the radio DJ was “killed off as the primary link between the listeners and stations”. Centralized programming, again in the interest of profits, ended the variety and the relationship between DJ and listeners. The record industry didn’t cause this per se, but they indirectly benefited because it cut their promotional costs down significantly.  I think the most preferred and sought after relationship has always been between the artist and consumer, no?

I was intrigued by the warm reception of this article, but try as I may, I do not agree that the above were causal to the record industry’s demise. I should preface that I am not an “industry insider”, but I was a partner at a major international consulting firm during the time this supposed blind incompetency was occurring; and many of the marquee record labels were our clients – this experience taught me to honor the words of Arthur Schopenhauer:

All truth passes through three stages: First it is ridiculed; Secondly, it is violently opposed; third, it is accepted as self-evident…

So here’s my take. First, there is a long list of seemingly unaccountable failures in once dominant organizations and industries; this is not a phenomenon unique to the record industry. Sears Roebuck missed the advent of discount retailing and home centers and let Visa and MasterCard usurp the enormous lead it had in retail credit cards; IBM dominated the mainframe market but missed the emergence of minicomputers; DEC then dominated the minicomputer market but missed the personal computer market; Xerox missed the desktop printer/copier market; then there is the American steel and auto industry …

But consider this: Just as with the record industry, the decisions or indecision that lead to these failures were made when the organizations and leaders in question were widely regarded as among the best in the world! So, it’s either the case that these once successful companies and once dominant industries succeeded with very poor management, OR there’s something more to the story, and I believe there is.

In my opinion, this is best understood by studying the “Failure Framework” proposed by Clayton Christensen of the Harvard Business School. The key concept in Christensen’s work (The Innovator’s Dilemma & The Innovator’s Solution) is the distinction between sustaining vs. disruptive technology, and its implications.  Christensen, presents compelling evidence that good managerial practice is, ironically, the reason that sustained growth is so difficult to achieve. Why? Because well-managed companies follow a strict set of rules: They listen to their best customers, invest aggressively to provide these customers improved products and services, carefully study market trends and allocate capital to innovations that promise the best returns.

I like to think of “good management” as being akin to classical music: Wonderfully essential, but stringent.  Managing “disruptive innovation” is more like playing Jazz! It’s more about breaking the rules! And, yes, there are times when you need to break conventional management rules, and NOT listen to your customers! There are times when you need to invest in developing lower-margin, seemingly nascent markets with lower performing products. Christensen’s body of work codifies these ALTERNATIVE RULES and the changing market conditions that mandate their application.

So what happened to the record industry? The record industry viewed its product as MEDIA, not CONTENT. Each successive format (from vinyl, tape, to CD) was all about “sustaining” a business that required the consumer to buy media in order to get content – music.  As computers became more powerful, content such as music and video was no longer confined to physical media, and growth of the Internet spurred new delivery methods. All of these factors were significantly disruptive to the entrenched record industry. Consumers no longer needed to buy a CD to get what they wanted in the first place:  a few good tunes.

As Christensen’s “Failure Framework” suggests, these early adopters did not represent a very profitable segment. They weren’t even customers!  They were “criminals”, reckless kids and teenagers stealing intellectual property! The record industry went on the defensive by treating this as a problem, instead of recognizing it as disruptive innovation. It attempted to do what Christensen labels as defying a slippery slope. But, was this because record industry executives were arrogant and incompetent? Not entirely. They were rightfully following good (conventional) managerial practices by attempting to protect the profitability of their core business.

Christensen presents this paradox: Disruptive technologies enable new markets to emerge, BUT these markets are usually too small, or even non-existent, to satisfy the growth needs of large companies even if logic says they might be big someday.  The investment process in “well managed” companies demands quantification of market size and financial returns before entering a new market, and for this reason, it’s very rare for incumbent leaders to seize a first-mover advantage.

Apple was not in the music business at that time, but they understood the principals and application of disruptive innovation.  They also understood (and still understand) the difference between selling media vs. selling content, and they eventually made customers out of these “renegades” – and lots of them!   The overwhelming success of iTunes proves that “illegal downloads” was never the real problem – It also proves something else: businesses are rewarded more so for brilliant execution than fabulous technology!

So rather than playing Monday morning quarterback with the battered record industry, I suggest we recognize what happened as being neither unique nor unprecedented. Scores of outstanding companies that had their competitive radar up, listened to their customers, and aggressively invested in new technologies still lost their dominance.

In my opinion, the best defense for business leaders is to recognize when to play classical and when to play jazz! Embrace creativity as much, if not more so than conformity! It will help you recognize these sorts of conditions, convert threats into opportunities, and give you the gumption to apply alternative rules.

“I can’t give you a surefire formula for success; but I can for failure: try to please everybody all the time” – Herbert Bayard Swope, first winner of the Pulitzer Prize

As for the perceived lack of quality in today’s music? I fail to see how the demise of the record industry can be linked to a supposed degradation of music quality. I think it’s more the case that the Internet has opened the flood gates and we now have so many choices that finding (one’s own definition of) quality has become the “new problem”.

This entry was posted on Tuesday, August 26th, 2008 at 9:23 pm and is filed under Other. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.