However, this relatively constructive attitude towards novelty has not always been a given. To a large extent it was the emergence of Rock & Roll and Rhythm & Blues which reshaped the music industry during 1950s and 1960s and showed how disruptive musical innovations can overthrow music industry incumbents. Based on their experiences, many record labels revised their structures in order to be more agile and innovative and not ever to be threatened by disruptive musical innovations. The new strategy is illustrated by this quote by Arthur Taylor, the president of CBS in 1973:
“We think Columbia Records is particularly well suited to maintain its leadership of the recorded music industry. Because of the versatility of our catalog – which covers literally every point of the music spectrum – we can and do capitalize on the rapidly changing public tastes. As I speak, black music and country music appear to be two primary growth areas in the coming year. If that perspective changes by the time you leave this room, I can still assure you Columbia Records will have a major entry into whatever new area is broached by the vagaries of public tastes” . [Peterson, R.A., & Berger, D. (1975). Cycles in symbol production: The case of popular music. American Sociological Review 40: 158-173.]
This volatility is one of the music business’ most fundamental characteristics. It is difficult, if not impossible, to know for certain if a new song or a new performer will be able to resonate with the audience. Regardless of all the structures and practices which have been put in place in order to cope with risks, most music marketers would probably still agree that the audience behaviour remains an uncontrollable mystery. Our business will always be risky, and those music companies which have been able to survive and succeed have simply learned to how cope with this matter of fact.
The insights from the music business is in perfect accordance with research on how organizations in general cope with environmental uncertainty. The basic conclusion from this research is that the longevity of organizations doing business in turbulent environments is mainly determined by their capability and audacity to actively experiment with new initiatives. Many music companies have indeed developed such capabilities in those areas of their business which concern new talents and new sounds. However, it is interesting to note that they often lack these capabilities in other equally vital business areas - for instance areas related to how to make money from the recorded music. As a consequence of this deficit, many music companies have had considerable problems embracing unconventional business model innovations even though they may be legitimate, popular among the audience and capable of generating revenues to the rights holders.
Several innovative models for online music retailing have been meticulously suffocated by rights holders because they have not played well with the traditional industry practices. For instance, eMusic, which is one of the largest and oldest online music retailers, use a subscription model where members pay a monthly fee and is allowed to download a certain number of songs during a month. Sixty percent of the revenues from the subscription fees are (in very general terms) then split by the total number of downloads during the month and shared between rights holders. This means that hypothetically, the fewer songs the subscribers download the more money will be shared among the rights holders and vice versa. The logic behind the model is similar to that of a health club, which is based on expectation that some members will pay their subscription fees even if they do not use the facilities very much. eMusic has been fairly successful during since its relaunch in 2004 and has been able to attract 400,000 paying subscribers in North America and Europe. Apparently eMusic is doing something right which is appreciated by the consumers. However, this model goes against a fundamental practice of music licensing, namely that a licensee should pay a fixed fee for every song download or played. Due to the locked positions of the negotiating parties, eMusic has been unable to. Actually the first agreement to license a considerable part of majors catalogue was not signed until 2009, when sales of recorded music already had dropped by fifty percent compared to the good old days. It should also be mentioned that this agreement (with Sony) only included the Sony’s back catalogue and only covered users in the U.S.
Another example of an innovative online music retail service which does not fit the rights holders traditional models is Spotify, a European based music service. Spotify offers two different versions of their service – a ‘basic’ version, funded by advertising and offered for free to consumers, and a ‘premium’ version which gives the user improved sound quality, mobile phone access, etc and is offered to consumers for a monthly fee but without the annoying adverts. Spotify has argued that rights holders and retailer should share revenues generated from both advertising and subscription fees. Following this model, revenues from subscription fees would vary in a similar way as in the eMusic case, while revenues from advertising can hypothetically be as low as zero.
Initially rights holders were not interested to sign up for this model arguing that rights holders were unable to influence the operation of Spotify and should not suffer if Spotify were unable to generate enough advertising revenues. Eventually after lengthy and difficult negotiations Spotify agreed to let rights holders acquire eighteen percent of Spotify’s shares which would enable them to gain influence and reap shareholder benefits from the Spotify business.
Indeed the model is different to traditional licensing schemes. For instance, during the first month of its operation there were no paying subscribers and very few advertisers, even though millions of users actively used the basic service. During this initial phase, even though thousands of songs were played, very little revenues were paid to the rights holders. However, this initial problem eventually disappeared when advertisers and subscribers began to accumulate. Spotify is now available in six European countries, including the UK. Seven million music listeners in these countries use Spotify’s basic service and 250,000 users pay a monthly fee for the premium version of the service. In Sweden, which is one the six Spotify markets, Spotify has quickly established itself as the biggest generator of online revenues and is dwarfing revenues from Apple iTunes. As with eMusic, Spotify seems to have created an music innovation which in demand and which provides a healthy business to both the rights holders and the retailer.
Even though the model apparently works quite well, major rights holders in a number of large music markets, including USA, Canada and Germany, have not been willing to license their music to Spotify. The rights holders argue first of all that the revenues from Spotify’s advertising business will never be able to generate the kind of revenues they qould require and secondly, they doubt that music listeners indeed will convert from online piracy to the free Spotify service and further to the subscription service.
How can this apparently irrational behaviour be explained? How is it possible to passionately encourage creativity and innovation within one part of your business and with an equal amount of passion suppress innovative (and legitimate) endeavours in another? The consequences of being too risk-averse and too conservative in a turbulent environment is as equally devastating regardless of the area is talents and sounds or revenue models and online retailing.
One possible explanation is that rights holders still hope that the decline in sales of recorded music eventually will end, online piracy will be obliterated and that everything soon will go back to normal. Another explanation could be that they wait for The New Business Model that will Save Us All. I would like to argue that either one of those two strategies will be like waiting for Godot. It is not likely that things ever will go back to normal and it is highly unlikely that the ultimate business model for the music business is waiting round the corner.
Music companies should revisit their conclusions from the Rock & Roll revolution and transfer those insights to the area of online music retailing. There are very few legitimate online retailing outlets which rights holders can afford to deny. This is not the time to hold on the railing and wait for a more handsome pursuer – this is the time to get up and dance.
0 comments:
Post a Comment