Monday, August 24, 2009

Changing Technologies and Business Models

The following article from the New York Times demonstrates a fascinating illustration of the impact of technology and then changing business models on an industry that most can relate to: Swan Songs?, by C.W. Blow, NYT, August 1, 2009. The visual says it all.

From 1978 to 1999, the prevailing business model was acquiring music albums from thriving retail outlets. What changed each decade was the media in which the albums were sold (the chart is in constant dollars so it is hard to compare growth rates of the overall industry during this period). In 1978, the vehicles were LP’s and to a lesser extent 8-track tapes; in 1988, cassette tapes dominated while in 1999, CD’s had nearly 100% of the volume. The principle challenge of the retail industry was adjusting to selling different technologies but the “Unit of Business” and business model remained the same – selling albums.

The internet changed all of that but maybe not in a way that you think that has resulted in an incredible decline in sales since 1999:
…..since music sales peaked in 1999, the value of those sales, after adjusting for inflation, has dropped by more than half.

Note, the download for a fee of music has not made up for the decline in CD sales as the changing technologies did in earlier decades—the overall revenue of the industry is declining rapidly:

“First, piracy punched a big hole in it. Now music streaming — music available on demand over the Internet, free and legal — is poised to seal the deal (Free music is available on the internet via web sites containing free “radio stations” with no or limited advertisements that categorize music in a host of categories. All you need is access to the net. The one I use that is Blackbery friendly is……
…..The problem is that if people can get the music they want for free, why would they ever buy it, or even steal it? They won’t. According to a March study by the NPD Group, a market research group for the entertainment industry, 13- to 17-year-olds “acquired 19 percent less music in 2008 than they did in 2007.” CD sales among these teenagers were down 26 percent and digital purchases were down 13 percent….
….Even if they choose to buy the music, the industry has handicapped its ability to capitalize on that purchase by allowing all songs to be bought individually, apart from their albums. This once seemed like a blessing. Now it looks more like a curse.”

Two fundamental things changed:
• The business model is changing from acquisition to one of access (music streaming); and,
• The Unit of Business has changed from the album to individual songs:

“….of the 13 million songs for sale online last year, 10 million never got a single buyer and 80 percent of all revenue came from about 52,000 songs. That’s less than one percent of the songs.”
The implications to the industry are significant:
“… In previous forms, you had to take the bad with the good. You may have only wanted two or three songs, but you had to buy the whole 8-track, cassette or CD to get them. So in a sense, these bad songs help finance the good ones. The resulting revenue provided a cushion for the artists and record companies to take chances and make mistakes. Single song downloads helped to kill that.”

”So it was no surprise that The Financial Times reported on Monday that Apple is working with the four largest labels to seduce people into buying more digital albums. It’s too little too late”

I do not have the answers to cure the industry –if any of you do, you could make a lot of money –but this example highlights the greater difficulty of adjusting to new business models vs. just changes to technology. In this case, the route to market, profit models and Units of Business changed dramatically. It also highlights how changes instituted to adjust to a changing environment –in this case selling individual songs vs. albums over the internet – can come back to bite you.

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