The Doom of Disruptive Change for Incumbents

My friend Rags Gupta wrote a post today on how the record labels can save their dying business, (published on GigaOm… nice!), a comment on David Hyman’s manifesto on the same topic.

The back story, for the even-less-initiated than me, is that the amazing efficiency of Internet-based digital music distribution has eroded the big four record labels’ main, historic business model—the sale of physical media. It’s the classic old story of a disruptive technology coming along and not leaving enough table scraps for the old, fat-cat incumbents. It’s now nearly free to get a piece of produced music from the artist to the consumer. No more expensive media (CDs, tapes, records), no more physical distribution chain, no more brick & mortar retail outlets… all the little way-stations that used to clutter the path between you and, say, Boston 90’s underground sensation,Morphine—are gone.

Why the cost isn’t appreciably lower to you is something Steve Jobs still has to answer for. But that’s beside the point right now.

Rags is a smart guy, and so is David Hyman; I wouldn’t presume to analyze their prescriptions for the music business, but the situation does beg the question: what should we expect a big, slow, intractable business to do when faced with a disruptive competing technology / model / business / competitor? They are, after all, big and slow and intractable. Even for private companies, it’s just not realistic that they will do the most rational thing: recognize the coming change (or, in this case, the one that’s already here), and accept the new reality—that they get to keep pennies-on-the-dollar of their old business.

Kodak is a notable example of what’s possible: they were a huge, market-leading company which made a sharp and painful move to follow the consumer & professional trend away from film, toward digital. They dismissed 20-25% of their workforce at one point. They have survived the changeover from film to digital, but as you can see from the chart below, that’s about all they’ve done: survive. Kodak is virtually flat since 1970, whereas the Dow has increased roughly 15 fold in that same time.

KodakVsDow

A company like Warner Music Group, notoriously non-progressive with regard to digital distribution, will try its damndest to preserve the old way, even when faced with logical, inventive alternatives like the ones Rags and David Hyman outlined. They’d much rather fight to the death than surrender to the disruption and adjust their expectations to something more reasonable given the new realities.

But as I say, the question isn’t just what should they do to save their businesses, it’s: what can we reasonably expect from a dinosaur? More to the point, what do investors expect from a public company? I’m not sure how Kodak proceeded, but what happens to the already beleaguered WMG stock if they announce that they’re doing away with DRM, slashing their rates for streaming, or doing anything at all but fighting the uphill battle against change? That’s probably something they can’t just do without being badly punished by Wall Street, which has serious repercussions to their ability to compete.

WMGvsDow

What amazes me now is how the big four have focused so exclusively on changes to their distribution model, when they’re sitting on marketing gold. They don’t always own the rights to online and/or mobile distribution—my understanding is that these rights are negotiated per artist—but they should endeavor to do so in future, and modernize their marketing efforts to take full advantage of the rights they do maintain. In theory, they are. But in practice, would-be innovators like my friend Dan Pelson face uphill battles, I assume in all the big four.

Whether you bend with the winds of change like Kodak or fight against them like Warner, the moral of the story is the same, in business, in politics, or anywhere else: being on the incumbent side of an industry facing major disruption is no good. It’s much more satisfying, lucrative, and inspiring to be on the motive side of change!

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