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When Your Business Model Dies: Lessons from the Music Industry

When a business is rolling along and all is going relatively well, it doesn’t typically strike anyone to consider viewing what’s happening through a new lens.

Let’s time travel back to a not-so-distant past, say sometime between 1980-1998, when music was discovered in one of three ways: hearing a song on the radio, listening to a record at a friend’s house, or seeing a music video on MTV. If you wanted to hear that music again, you would save your money and head down to the local record store where you could purchase your very own LP, CD or cassette.

But in early 1999, the startup Napster transformed that entire ecosystem. Co-created by two teenagers who met on a hacker message board, Napster revolutionized the music world by allowing people to share music files over a network. All of a sudden, the very product the recording industry relied on to survive was being offered to anyone with a computer, free.

This created a domino effect of disruptive innovations that created completely new models for the way the world consumes, makes and markets music.

“For eight decades, the music industry was built around a sales model,” says YPO member Michael Huppe, President and CEO of SoundExchange, an organization that provides royalty solutions, including collecting and distributing digital performance royalties on behalf of more than 200,000 music creator accounts. “The revenue driving the industry came from people buying records, CDs and cassettes. Then Napster came along and suddenly you could get music for free. This was followed by Apple’s iTunes in 2001, which started the download period, which was quickly supplanted by streaming.

The industry has fundamentally segued from being a sales model, to a listening model; that’s a pretty radical change.”

Disruptive industries: Goodbye sales; hello streaming

Music discovery was once a top-down process — an artist signed with a label, their songs were played on the radio, they toured and promoted their music. Radio was the promotional tool that compelled listeners to purchase a physical album or concert ticket. Today, that model has become a bottom-up process, with consumer behavior, social media and organic “buzz” driving streams while radio play and stores have become much less essential.

Today, streaming makes up 80% of revenue for the U.S. recorded music industry. Services like Pandora and Spotify offer subscriptions for USD10-15 a month, which gives consumers unlimited access to music anytime, anywhere.

disruptive industries

This has led to a profound change in the way we consume music and how the recording industry operates. On the plus side, consumers no longer have to commit to buying a specific track or album, which leads to greater experimentation — buying a song you may not love for USD1.99 is much less of a loss if you don’t love it, than an entire album for USD15. The ability to stream radio stations from around the world is a boom to diversity and discovery, and music catalogs that once lay dormant have been given new life.

On the creator side, barriers to entry are no longer as high as they once were, offering artists more ways to be heard and wider audiences to be reached.

“Under the old model, if you wanted to be even moderately successful, there were a few tried-and-true paths to get you there via the established players,” explains Huppe. “Now someone can record a song in their bedroom with equipment that sounds as professional as the top studios, push a button and distribute it to millions of people around the world.” Record labels still play an important role in the industry, although that role is quite different.

But every rose has its thorn, and this limitless scale has made it incredibly challenging to track all of the songs being played at any given time — an imperative if the artists who made the music, are to get paid.

Monetize the democratized

Under the old remuneration system, records sales from stores were calculated on a monthly basis. These stores were buying records from specific labels, which provided a unified structure for reporting sales data. Today, there is no unified structure for tracking digital music.

Of course, the old system wasn’t perfect, but a generally agreed-upon structure existed. With the decentralization of streaming, the many platforms that enable it and the volume of recordings being released has made it much more difficult to track and execute payments to the artists.

“Whatever business you’re in, you need to take a fresh look every now and again to see where the true value lies.” Michael Huppe, President & CEO SoundExchange 

“Today, there are trillions of music-based transactions happening every second across the globe,” says Huppe. “Songs are being played across dozens of music services, satellite radio, social media sites and YouTube, which makes the information behind the music and how it gets delivered, very important. Data, especially meta-data surrounding music usage, is the oil in the engine.”

To that end, SoundExchange licenses more than 3,600 streaming services in the U.S. that send them monthly logs of what was played on their platform. SoundExchange then takes that data, aggregates it and cleans it to remove any errors, terabyte by terabyte. From there, they pay out as many as 40,000 accounts per month. To date, SoundExchange has distributed more than USD6 billion to music creators since they started in 2003; nearly USD1 billion in 2019 alone. Their advocacy efforts have generated a 700% increase in royalty rates for SiriusXM and a roughly 200% increase in rates for other webcasters.

“Making the music industry work better is now as much a data issue as anything,” says Huppe. “Done properly and cooperatively, if you have the right metadata attached to the right reporting, there are ways to do this pretty efficiently.”

disruptive industries

Keeping the hits coming

When a business model is doing well, we often don’t take the time to consider viewing it differently. But as Huppe told YPO members during a fireside chat at January 2020’s Consumer Electronics Show in Las Vegas, Nevada, it behooves anyone interested in staying ahead of disruption, to step back every once in a while and review.

“Whatever business you’re in, you need to take a fresh look every now and again to see where the true value lies,” says Huppe. “For the longest time, people judged success in our industry by how many records or CDs we sold. In a world where 80% of the revenue comes from something that isn’t a sale at all, it drives home the lesson that the value in what we do is the music and what it means when listeners hear it.”

It is this kind of proactive looking and listening that has helped usher the recording industry into its third “up year” in a row, after a massive 10-year decline after the start of Napster.

“There is a vibrance and hope in the music industry we haven’t seen in a long time,” says Huppe. “As we move further toward a streaming world, I see more experimentation, innovation and possibilities than I ever have in my career. But in the end, it’s about listening to the music, which is why the people that make it deserve to be recognized and protected.”

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