February 27, 2013
Yesterday The New York Times picked up the hopeful news from the global music business that the revenue free-fall from $38 billion a year more than a decade ago appears to have stopped at $16.5 billion, leaving the industry at less than half its pre-digital size. This bottoming out of the revenues will come as some relief to industry executives who have wished and prayed for this day because, until it actually arrived, nobody knew for sure what type of revenues to expect in the future. That can make running a business pretty tough.
The music industry is everybody's favorite example of digital disruption done wrong — including mine, since I covered music for Forrester several times. I have some classic stories I could tell to illustrate the point about executives who believed that suing customers was the path to profitability and so on, but I'll spare you those. However, as the author of a book called Digital Disruption, I actually owe it to the music industry for teaching me a few key principles of how to manage digital disruption:
- Disrupt yourself before someone else can. There's no point in taking it personally. Sure, it's human nature to respond to threats by digging in and fighting back, but if the music industry taught us one clear thing, it's that digital disruption is a force you can't avoid or even postpone. The best path to surviving digital disruption is to become a digital disruptor, taking advantage of free digital tools and the efficiencies that they bring, exploiting digital platforms like those created by Google and Apple, and remaking yourself — one digital decision at a time — rather than watching other people do it for you.
- Build a digital customer relationship. The music industry fought the first wave of digital disruption — it didn't help that Napster was ultimately illegal, making the industry fail to realize that the bigger phenomenon was legitimate even if its current manifestation was not. But then, when iTunes came along and offered some relief, the industry gave away all the keys to the kingdom, with the most important one being the digital customer relationship they could have had if they had insisted on different terms or created their own digital music service without hampering it with impossible DRM expectations. As a result, iTunes built a digital customer relationship on top of the industry that is still paying dividends to Apple, expanding to include video and ultimately, apps. It's this relationship that has allowed Apple to continue to insist on a premium for its physical devices and to preserve a relatively closed development environment.
- Care more about convenience than quality. I remember in 2007 when a music industry professional tried to explain to me that digital could never really replace physical because the quality would never be there. He told me about DVD audio and other ultra-niche, high-quality audio solutions that were going to solve the industry's problems. It didn't happen, and it won't happen. Because digital makes terrifyingly real the observation that Clayton Christensen of Harvard Business School has taught for years, that "good enough is good enough." The only reason that quality drove so much behavior in the past is that people had no other options. The industry determined the quality in the moment it determined the distribution mechanism. But once people had the option to rip their CDs or download legal or illegal digital audio samples, they did so. Because it was easier to do.
- Anticipate a reduction in revenue on a per transaction basis. This is the hardest one to face. Digital simply makes things more efficient. That gives hungry companies the opportunity to reduce prices, and anybody unwilling to imagine lower prices, whether in the taxi business thanks to Uber, or the book business thanks to Amazon, will fail to understand that even as revenue per transaction falls, the additional volume you can extract, as well as adjacent services you can offer to your digital customer, should make up for it in the long run. Even if it doesn't, as it didn't for the music labels, do you have a choice?
We all owe a lot to the music industry. As the business that went through digital disruption in such a highly visible way, we can be grateful that we now know what not to do. And we also see in more recent decisions what to do — from the VEVO music video service to the subscription models, like Spotify's, that the industry has finally embraced, we see that partnering promiscuously and experimenting rapidly will pay off. So even though the global music revenues are so much lower than before, what has emerged at the bottom of the revenue trough is a tougher, wiser industry that now has some solid footing on which to launch a digital counteroffensive. I wish them good luck.