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Beats of Change in the Music Business

The music business has been rocked in the past few years by the immense impact of streaming. The emergence of such a ground-breaking new distribution channel has created a number of critical questions to be addressed by companies in the industry. Policy makers, too, must regulate the distribution of value among different players in the business. Recently artists are making headlines in the UK by asking for a more sizeable share of royalties from streaming. This in light of the fact that at the moment, most of the value generated by music streaming actually goes into the pockets of music labels, with artists and songwriters getting a pittance in these returns. So the current revenue distribution model needs a major overhaul.


Yet this issue of firms being slow to adjust to major changes comes as no surprise. Indeed, there is robust empirical evidence across industries showing how companies have a particularly hard time adapting to technological disruption. The transformation in technology brought about by digitization is recent proof of this struggle. Research in technology strategy shows that already-established companies, or incumbents, experience difficulties in the phase of change for a number of different reasons, but technological competence is usually not the main one. In fact, most key players in an industry are well-equipped for technological shifts and invest in different technological trajectories; sometimes they even invent new technologies. Olivetti is one case in point with the development of the Olivetti Programma 101, which is considered the first personal computer. Yet, it was not Olivetti that brought this new product and technology to the market because the first product labeled as personal computer was the HP9100A, launched to the market by Hewlett Packard, breaching, apparently, Olivetti Programma 101’s patent. It is true that leading players face all sort of barriers to change - from cultural, to cognitive, to economic ones - hindering or slowing such trends even when they appear to be inevitable.


The music business and its leading players have not been spared from a similar fate. They have faced transformations brought on by digital revolution, first with users downloading music and subsequently streaming. The advent of Napster in 2001 introducing the first platform allowing illegal peer-to-peer music sharing represents the first fundamental step in technological transition of the music business. Unsurprisingly, the reaction to Napster’s challenge did not come from leading companies but from a new entrant in the music business: Apple with iTunes. In 2003, Apple launched the first legal platform for downloading music. Then the second wave of digitization set in motion by streaming platforms such as Spotify and Deezer emerged in 2008. Yet even this did not trigger immediate reactions from leading music labels. What appeared to be a pure disruption in music distribution in reality set off a chain reaction encompassing not just the way music was consumed but also how music was ideated and produced. But it was not until 2012 that companies start reacting. Why so late? Because it was not till then that labels felt the impetus to react, no longer seeing streaming as a niche distribution channel, but as something that was actually modifying the way music was consumed.


But companies react differently to technological shifts and consequently adopt diverse strategies. In my work with colleagues Paola Zanella and Gianmario Verona, we explored the innovation strategies put in place by leading music companies after the advent of streaming. By leveraging on massive data collection from multiple sources such as Billboard, Discogs, and Spotify, we investigated how streaming has impacted the strategies of leading music companies. We focused our attention on a specific time frame: 48 weeks before and 48 weeks after Billboard’s decision to incorporate streaming sales in their charts.


Our reasoning was that labels didn’t have much motivation to do things differently until streaming sales emerged as a relevant factor in making it to the charts. Companies responded to this new scenario for two reasons. On the one hand, they finally had the economic incentive to modify their behavior because a higher position in the charts would enact a virtuous circle for the song and the artist in question. What’s more, thanks to this new way of compiling the charts, companies could leverage new information about consumers’ actual preferences. Up to that point companies were aware of the streaming performance of their songs but had no idea about the competition. The inclusion of streaming sales in the charts provided them with a clear picture of what consumers were listening to across labels, artists and genres, thus triggering a substantial modification in their mindset. They finally understood what streaming was all about and the dramatic impact it was having on the music business.


Interestingly, a disruption in distribution pushed labels to transform their products too. First, our evidence shows that, consistent with the long tail phenomenon, streaming allows greater heterogeneity in consumer preference to emerge. Thanks to the lower cost of access to niche genres and artists, together with peer-to-peer recommendations, even products that were once considered niche have become successful.


However, not all companies have taken advantage of this more apparent heterogeneity of preferences. Indeed, product diversification across a range of music genres and artists is a costly strategy that requires experience that not all companies have on hand. They need to be able to scout emerging genres and artists and bet on them before they get popular. Only the firms that invested over time in a broad product portfolio have gained this competence, which, of course, consumes a huge amount of resources.


Luckily, while very successful, this is not the only strategy that companies can pursue to succeed in the new digital ecosystem. An alternative option is to defend their niche from potential competitors seeking to diversify, and to invest in enriching the products and artists in that niche. This is a viable strategy for companies that don’t have experience with portfolio diversification, but that can leverage on their knowledge of a specific market niche.


Two salient learnings emerge from the story of the disruption caused by streaming in the music business. The first one is that an alteration downstream in the value chain has had an enormous impact on the innovation strategies of companies in the upstream part of the chain, where value is created and new products are ideated. The second big learning is that standing still is not a viable strategy in the face of technological transformation. A clear understanding of consumer preferences, on the one hand, and the unique resources that each firm can leverage on the other are two key components to successfully riding the turbulent waves of change.