The music industry vs. the file sharers

Citation

Randall, D. (2004), "The music industry vs. the file sharers", Strategy & Leadership, Vol. 32 No. 1. https://doi.org/10.1108/sl.2004.26132aab.001

The music industry vs. the file sharers

Doug Randall is a Senior Consultant at Global Business Network (GBN), a Monitor Group company based in Emeryville, California (Randall@gbn.com). This column is created in collaboration with GBN consultants and network members.

Strategy & Leadership's new column, "Disruptive scenarios", highlights an uncertainty impacting business executives, explores its potential outcomes, and identifies its immediate implications. The column, appearing occasionally, is meant to keep us mindful of early signs of discontinuous changes in markets and the business environment and to be aware that a number of distinctly different possible futures may be just over the horizon.

For more than three decades, scenario thinking has been used to imagine possible future industry disruptions and then to practice how to effectively manage if they occur. Scenarios enable business leaders to learn to anticipate the strategic decisions they would make under a variety of business conditions much different from those they face today. The goal of scenario thinking is to prepare organizations to anticipate and effectively adapt to discontinuous changes in the business environment.

Scenarios are equally useful when an industry is in chaos or is stuck in fright/flight mode, paralyzed by an oncoming crisis. Scenarios of alternative business environments can help your organization's managers rethink their assumptions about what makes your business successful, what your customers want, and what governs their behavior in the face of disruptive technologies, regulations, and changes in values.

The traditional challenge for strategists is to achieve competitive advantage by being the first to imagine events or forces that could possibly disrupt your industry and to create winning strategies for succeeding in the new environment. But what if the evidence of disruption is clear to everyone, but the strategic alternatives all appear to be ineffective?

The music industry vs. file sharers

Consider the current dilemma facing the music industry. Historically a lucrative industry for the large record companies, today it is trying to cope with a powerful industry disruption: file sharing. File sharing services such as Morpheus, Grokster, and KazaA allow users to download music over the Internet. Music fans love it. They have immediate access to more music than ever and they don't have to pay for it. Over 60 million users share online today; and the number will surely grow. Music industry executives say that this avalanche of free music will destroy their ability to hire artists and sell music, thus causing the industry to wither away. As evidence, CD sales have been down for three straight years despite public acclaim for a number of new recording artists.

Yesterday

Lets look at some scenarios industry executives could consider. Music companies might start with an optimistic scenario: a world where the recording industry maintains control of its intellectual property, and where social disapproval for intellectual property violation curtails music sharing. In this world, the price of music would fall as value chain power migrates toward distributors and consumers. But music companies could still earn a profit on the CDs, MP3s and cassettes that they produce. In order for this scenario to come about, the effective efforts of intellectual property rights enforcers would have to outpace software developers who design systems for anonymous file sharing. Consumers would have to curb their temptation to download free, though illegal, music. And, the shift from manufacturer to consumer power would be curtailed. We might call this scenario: "yesterday".

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  Modern scenarios planning in the early 1970s. Oil prices had been stable since World War II, but Pierre Wack and other planners at Royal Dutch Shell challenged the status-quo scenario by imagining an alternative. The Shell planners imagined a disruptive scenario. The evidence: early signs that the USA was no longer able to meet its oil needs by domestic exploration, demand for oil was rising globally, the Organization of Petroleum Exporting Countries (OPEC) was gaining a new degree of unity. OPEC was made-up of countries that resented Western support for Israel after the six-day Arab-Israeli war in 1967, and as a result they were increasing more politically cohesive.

  The scenario planners mentally prepared Shell executives for something that was unheard of before then: a sudden increase in the price of oil sparked by a newly unified OPEC. When the price shock struck in October 1973, Shell executives were better prepared than their competition to make appropriate business decisions. Some of these decisions are credited with catapulting Shell from one of the weakest of the seven largest global oil companies, to one of the two largest - and some say the most profitable.

The Recording Industry Association of America recently filed 261 lawsuits against file sharers. The legal action was clearly intended to produce fear or at least some restraint among the millions of people who routinely download music files from the Internet. By taking legal action the executives seem to be attempting to promote the realization of the "yesterday" scenario.

Ticket to ride

But what if there's an alternative future where consumers gain control of intellectual property and there is only minimal respect for the music industry and traditional intellectual property regimes?

Picture a "ticket to ride" scenario where the price consumers pay for music plummets. As the marginal cost of distributing a music approaches zero, prices for music would fall as consumers transition from physical formats such as CDs to virtual formats such as MP3s. CD prices would be slashed in an effort to maintain sales; but the competitive price (free) would be so attractive that the industry's giants would struggle to cover their fixed costs as their currency, CDs, is devalued. Record companies, like travel agencies or real-time stock information companies, would face a massive industry re-structuring and yesterday's winners could see their profits tumble even further than they already have.

Imagine

There are other scenarios, too, but they are more painful to conjure with if you have a heavy investment in yesterday's conception of intellectual property rights and consumer rights. Such another scenario, "imagine", is where industry executives should look to generate new business ideas. It is the scenario created to encourage innovative solutions. For example, what if intellectual property control were shared fairly between record companies and consumers? What if record companies earned consumer respect by creating communities that engage music lovers in meaningful ways? What if an equitable system of micropayments was developed to reward all parties?

Imagine if music companies renew their industry to meet customer needs. Rather than striving to preserve the old way of doing business, they would focus on what will work, given the taste of file sharing music lovers have experienced. Music companies would focus on the business opportunity surrounding networks of listeners-for example, community-oriented Web sites, live online performances, and user-created music videos. Just as network television stations recently embraced reality TV, where low-paid nobodies are put in the spotlight, music companies would hire less expensive artists and promote their work on Web sites. Music companies could promote search engines for music consumers that would lead them to the style, tempo, and genre they requested. Record companies would become a market maker for peer-to-peer transactions, encouraging sharing of music, re-mixing, and re-ordering tracks to suit the listener. A system of micro payments would reward success throughout the value chain. Music could become a utility. Consumers get what they want, when they want it, at a metered fee – and as long as there's value added to the songs, they'd be willing to pay.

In this scenario, suggests rock artist David Bowie, songs may become analogous to advertisements for concerts and merchandise which become the primary sources of revenue. Or, industry economics could develop as proposed by William Fisher, a Harvard law professor who argues that creating a 15 percent tax on Internet access on devices used for storing and copying music and movies like CD-burners, MP3 players and blank CDs would generate sufficient funds to keep the music and film industry content.

It's hard for music industry executives to take a scenario like "imagine" seriously when the emerging business models are untested and chaos seems chronic. But there are historical precedents for surviving market turmoil. Radio offered free music and theater when it first became a popular entertainment medium and thus posed a threat to the fledgling music industry. A decade ago Encyclopedia Britannica's executives were stymied when the new combination of CD-ROMs and home computers was undermining their historically successful business model. In recent years, Tivo, an innovative recording system that can screen out ads, brought terror to the hearts of TV industry executives who feared that it would soon undermine their revenue source. All these businesses found ways to survive in their new business environment.

But now all industries that are based on the control of intellectual property are currently facing similar threats to those roiling the music industry. Book, magazine and newspaper publishers and filmmakers are already wondering what will be the impact of sites facilitating original and modified content sharing.

To be clear, the current buzz in the media is about a few hundred lawsuits, many against college students who have been sharing music with their friends. But the signal is about much deeper questions. As consumers, to what extent do we own what we buy? As manufacturers, to what extent do we control what we sell? As innovators, to what extent is what we create ours? The tension between these interests – who controls intellectual property and how will creativity be rewarded – grows as teenagers download the latest Guster song, college students mix a new version of 50 cent's latest tune, and CD sales plummet.

As the very nature of intellectual property is challenged, what does it mean for your business? To be prepared for the future, you might tap into additional sources of value – that are less reliant on intellectual property. For example, Coca-Cola now protects its secret formula with a private security force, including former FBI agents, but the company also focuses its marketing on lifestyle and entertainment so that consumers will feel a special connection with the company. A new consulting specialty now measures such consumer relationships in terms of "emotional loyalty". This is the new secret weapon in the wars between Coke vs. Pepsi, Chevy vs. Ford, and Tums vs. Rolaids and some version of it may be useful in promoting the cause of intellectual property.

Revolution

It's not clear which scenario will play out in the music industry nor is it obvious what the future of intellectual property will be. As power moves toward consumers and creators, we can bet on creative new types of music marketing and music making. Let's hope we also see some creative new business models that renew an industry facing customer pressure to change the rules.

And the best way to give these new business models a trial run is to test them in creative scenarios of the future of the music business.