The Recorded Music Revolution(s)

I’ve been thinking a lot lately about innovation. In particular, the idea that no organisation exists in a vacuum. It seems critical to know where your organisation’s goals fit in the bigger picture before charging off on some innovation or product initiative.

An example everyone is familiar with is the music industry.

In the 30 years to the late 1990s, the primary business model for recorded music was physical distribution (vinyl, cassette, CD). A few big, powerful players – giant recording labels like EMI – dominated. Gaining a contract with one of these powerful players was the only meaningful way for aspiring artists and bands to get exposure to markets. While taken seriously by some, many artists used live music as a marketing tool; a “loss leader” to promote sales of recordings. Charts of recorded music sales dominated.

In the late 1990s executives at major recording labels were counting their money. They had no idea of the dark clouds forming.

The deadly storm hit in the late 1990s. Illegal file sharing services made it possible to download any music for free. Revenues for recorded music plummeted overnight. With their time freed up from counting money, the recording labels reacted with legal challenges, but as soon as they shut down one service, another 10 came to life. The genie was out of the bottle.

It took a few years for experimentation to begin in earnest. And the innovation did not come from the recording labels. Last.fm launched in 2002, with a music recommender that built a profile of each user’s music taste based on their listening history and allowed users to share and recommend tracks to others.

Apple introduced iTunes in 2003, the first large legal service to sell music tracks for download. Whilst iTunes seemed revolutionary at the time, it left the business model largely unchanged. Customers were still buying ownership of music (admittedly, downloaded tracks as opposed to physical objects) and major labels were still the intermediaries with all the bargaining power.

In the late noughties, more experimentation took place. Pandora (2005), Soundcloud (2007), Bandcamp (2008) all launched and experimented with combining streaming and social features. They also pioneered a new business model, based not on ownership, but on a service with ongoing subscription fees.

More recently we have seen the proliferation of music streaming services: Apple Music, Tidal, Amazon Prime Music, Google Play, YouTube Music, Spotify, amongst others.

Spotify is the largest of the music streaming services. It began in Europe in 2008 and after negotiating rights deals it expanded to the USA in 2011. It is now the largest dedicated streaming service, with a total of 200 million users, 87 million being paying customers. Spotify pays around 70% of total revenue to rights holders and whilst they are yet to make a profit, the continuing rise of revenue means streaming is here to stay.

In fact, music streaming is rapidly eating the recorded music world. In the first half of 2018, streaming made up 75% of all revenue from recorded music in the USA, the world’s largest music market, up from 21% just 5 years before.

Music Streaming Percentage.jpg

As we sit here early in 2019, it is clear that the industry transformation from ownership to subscription is well advanced and unstoppable. As subscription services become commodities and compete on price, the next wave of innovation is likely to be around who can make the most of the vast data collected on customer behaviour and listening habits, and the interconnections with social networks.

Here’s a chart that illustrates the overall transformation of the recorded music industry. Numbers are in US dollars and approximately adjusted to 2018 values. Full 2018 figures are not available yet, so the chart extrapolates from the first half of that year.

US Recorded Music Revenues.jpg

Revenues peaked in 1999 before crashing to their lowest levels in about 2015. They have only started growing again in the last couple of years, and streaming is starting to dominate.

On a side note, live music has boomed since the internet changed everything in the recorded music world. The largest music companies in the world in 1999 were the major recording labels. The largest music company in the world in 2019 is LiveNation, an American global entertainment company that owns, leases, operates, has booking rights for and equity interests in many US entertainment venues. They have also established presences in more than 40 countries via acquisitions and partnerships. In 2018 they ran 30,000 shows, more than 100 festivals, and sold more than 500 million tickets. That’s an astonishing shift in power from recorded music giants to live music giants in just 2 decades!

To wrap up, we all know that technology is changing the world, and the rate of change is accelerating. Tracing the revolutions in the recorded music industry over the last 2 decades highlight that to succeed with innovation and product development, you must understand the bigger picture.

Attempting some cool sounding but “random” innovation with your product is unlikely to fit with the trends transforming your industry by sheer accident. Executives of the major record labels in the late 1990s didn’t see the revolution coming, so they were caught off guard and saw their positions of power quickly disappear.

You’re probably not innovating in the music industry. But think about it: What is really going on in your domain? How are technologies transforming your industry, in the grand scheme of things? Unless you understand this, you are probably doomed to fail.

Why Is Innovation So Hard?

Companies centred around products need to innovate to survive. We all know that.

Innovation is hard.

Fossils of corporate dinosaurs who dominated in decades past litter the business world.

Sun Microsystems was an IT giant and an innovation powerhouse for a couple of decades but failed to adapt its innovation efforts to serve a changing market.

Nokia’s share of the mobile phone market went from 50% in 2007 to 10% in 2011, because it failed to keep up with the innovation spurred by Apple’s introduction of the iPhone.

Many companies have lengthy periods of innovation success followed by collapse as they fail to keep innovating, and competitors inevitably take market share from them.

One reason innovation is so hard is the simple fact that not all innovation is the same.

To set yourself up for successful innovation, you must understand what type of innovation you are attempting.

There is a diversity of research on types of innovation.

In the mid-20th century, Schumpeter popularised the term “creative destruction” to describe the way technological innovation can disrupt and destroy existing dominant players. A modern example is the way online publishing is destroying traditional newspapers.

In the 1990s Henderson and Clark looked at the difference in innovating new components (the building blocks of a technology) versus innovating new architectures (the way components are organised into systems or products). They showed– surprisingly – that many organisations struggle with architectural innovation. The reason being that they gather significant architectural knowledge over time and become entrenched in one mode of thinking, so entrenched that future architectural innovation is difficult or impossible without fundamental organisational change.

More recently, observers have noted the difference between business model innovation and technology innovation. In fact, we can represent distinct types of innovation in a quadrant diagram.

Business Model vs Technology Innovation.JPG

Incremental innovations are improvements on existing technologies using existing business models. Volkswagen releasing a new model Passat is an example. Same business model (consumer buying a car) and an incrementally better product (perhaps new features such as lane detection, parking sensors).

Disruptive innovations do not focus on technology innovation at all; they focus on business model innovation to disrupt existing players. Music streaming services like Spotify or Tidal are examples. The technology is important, but not as important as the introduction of new ways to make money.

Radical innovations are major new “components” that fundamentally change the delivery of an existing business model. An old example is the introduction of jet engines to the airline industry. Same business model (selling tickets to people to fly somewhere) but obviously delivering much shorter journey times.

Architectural innovation is the combining of new “components” in a novel way to deliver a new business model. Web publishing of news is a good example. Traditional newspapers have both adapted new technology and implemented new business models.

Why does this matter to product people?

Remember, every product organisation must innovate to survive. Each of the 4 types of innovation covered here demand different product strategies.

Unless you understand the type of innovation you are attempting, you cannot hope to align your product strategy.

For example, the introduction of a disruptive innovation (a new business model) requires an innovation strategy that encompasses far more than just the technology aspect.

Think of Spotify. The strategy for a music streaming service is fundamentally different from a company that sells physical vinyl records and CDs. The way they brand, the marketing channels they target, the relationships with suppliers (the musicians), the relationship with distribution partners (who provide server and network hardware), the way they collect royalties, the way they manage long-term relationships. All of this requires a coherent innovation strategy to align all parts of the organisation: marketing, sales, operations, development.

This shows that an innovation strategy must cover not only the technology, but all the other aspects required for success.

So … Do you understand the type of innovation your organisation is really trying to achieve? It might pay to spend the time to understand this, if only to ensure you have an appropriate innovation strategy in place that covers not just the technology aspects, but also all the other things required to succeed.