RECORD INDUSTRY CONFESSIONS: Distribution & The Years Of Denial

David M. Ross

The music industry has partnered with technology many times during the past century and embraced business models that helped it survive and thrive. It is only now in the midst of the digital age that the industry seems unable (or unwilling?) to adapt. Although there are many windows through which to view the current situation, one interesting perspective centers around distribution. Could it be that the music industry, which has always controlled distribution of its product, is now stymied by its inability to recognize it can no longer “lock the store at night?” But first, let’s take a brief look backward…

One of the first truly disruptive technologies to affect the music industry was the invention of the phonograph in 1877 by Thomas Edison. It wasn’t until a few decades later that the format became commercially viable, but the complicated manufacturing process afforded the industry total control over the music and its distribution. By the ’50s there was a battle brewing over various vinyl sizes such as the 45, 78 and 33. Again, although the formats evolved, the industry maintained and expanded its tight grip on distribution. In some cases, companies like RCA Victor owned the music and the players.

By the late ’70s, cassettes had found their way into the mainstream. And although the format with the enclosed tiny tape reels made copying easier than ever before, the quality of copies suffered and the resulting piracy did not prevent the industry from continuing to grow.

But in the ’80s, the CD arrived with a Trojan horse-like, secret surprise. The ones and zeros embedded on the shiny plastic could communicate directly with computers and therefore the Internet. That power grew exponentially in 1994 with the MP3 file. The compressed format boasted the ability to make unlimited exact duplicate song copies distributable worldwide. The cat was out of the bag, the genie out of the bottle and the industry’s established model out of luck.

Jay Frank

Napster (1999) embraced the MP3 file and gave disruptive technology a whole new meaning as it grew from an idea, to a community with over 80 million registered users virtually overnight. Record companies reacted angrily, and fought to regain control of distribution through litigation. Could this event have been exploited to become an ally for the music industry? Undoubtedly. But feeling a threat to its way of life, record labels destroyed Napster and scattered its users. The distributors won the battle, but did not regain control of distribution.

“Napster came on board and caused such an upheaval in the distribution of music that it fundamentally altered the entire music experience,” says Jay Frank in his book FutureHit.DNA (page 28).

After Napster, labels proceeded for years believing that they would soon find a way to lock the unlock-able, to somehow hobble technology and limit the Internet’s ability to freely distribute pirated music.

Charlie Anderson

During the Years Of Denial, the period from Napster’s demise, through the tumultuous years during which the record companies tried to reclaim distribution control using Digital Rights management (DRM), the six majors underwent convulsive change. Sony purchased CBS; and PolyGram and MCA merged into Universal. Then Sony and BMG merged, shrinking the major players from six to four. Plummeting sales and massive declines resulted in additional layoffs and downsizing.

Today industry leaders such as Charlie Anderson, CEO/President of Anderson Cos. which distributes to over 12% of the U.S. CD market, predicts that without substantial change, the CD business could be dead in three years. “If nothing is done for CD sales there will come a day when Walmart, Target and Best Buy will say, ‘It’s just not worth it anymore,’” he says.

Digital entrepreneur Paul Schatzkin who in the mid-90s developed Songs.com, one of the first online music sales sites for independent artists says, “The industry hasn’t merely lost control of distribution, the entire concept has become obsolete. Distribution is predicated on the analog notion of limited supply. Digital technology has made supply effectively both infinite and ubiquitous—which eliminates the need to distribute anything. Those creators and content providers who can foster a stronger sense of connectedness will find value outside the conventional supply chain.” (Schatzkin currently is involved with www.CohesionArts, a digitally-oriented artist management firm.)

Paul Schatzkin

Jay Frank also notes the disruptive force unleashed by the change in distribution. “Nearly every industry maintains some control over distribution in order to maximize profits,” he tells MusicRow. “The digital shift created multiple rapid changes including product configurations, primary retail outlets, music distribution methods and more. Having these all occur at once would cause difficulties in any business. Profitability is still possible, but everyone has to learn new skills and languages quickly.”

Navigating change, however, can be made more difficult by corporate inertia. A recent Wall Street Journal article by Alan Murray and taken from the author’s book The Wall Street Journal Essential Guide To Management presents possible scenarios which may apply as to why adapting has been so difficult for record labels.

“Corporations, whose leaders portray themselves as champions of the free market, were in fact created to circumvent that market,” says Murray. “They were an answer to the challenge of organizing thousands of people in different places and with different skills to perform large and complex tasks, like building automobiles or providing nationwide telephone service. Corporations are bureaucracies and managers are bureaucrats. Their fundamental tendency is toward self-perpetuation. They are, almost by definition, resistant to change. They were designed and tasked, not with reinforcing market forces, but with supplanting and even resisting the market. Yet in today’s world, gale-like market forces—rapid globalization, accelerating innovation, relentless competition—have intensified what economist Joseph Schumpeter called the forces of ‘creative destruction.’ Decades-old institutions like Lehman Brothers and Bear Stearns now can disappear overnight, while new ones like Google and Twitter can spring up from nowhere. A popular video circulating the Internet captures the geometric nature of these trends, noting that it took radio 38 years and television 13 years to reach audiences of 50 million people, while it took the Internet only four years, the iPod three years and Facebook two years to do the same. It’s no surprise that fewer than 100 of the companies in the S&P 500 stock index were around when that index started in 1957.”

Murray points out the shortcomings of the corporate model, but notes that envisioning what’s next is a bit more difficult. “The new model will have to be more like the marketplace, and less like corporations of the past,” he says. “It will need to be flexible, agile, able to quickly adjust to market developments, and ruthless in reallocating resources to new opportunities. Resource allocation will be one of the biggest challenges. The beauty of markets is that, over time, they tend to ensure that both people and money end up employed in the highest-value enterprises. In corporations, decisions about allocating resources are made by people with a vested interest in the status quo. The new model will have to instill in workers the kind of drive and creativity and innovative spirit more commonly found among entrepreneurs. It will have to push power and decision-making down the organization as much as possible, rather than leave it concentrated at the top. Traditional bureaucratic structures will have to be replaced with something more like ad-hoc teams of peers, who come together to tackle individual projects, and then disband. Can the 20th-century corporation evolve into this new, 21st-century organization? It won’t be easy. The innovator’s dilemma applies to management, as well as technology. But the time has come to find out. The old methods won’t last much longer.”

Murray’s premise is already playing out in the music industry as we see barriers to entry such as high recording, marketing and publicity costs come tumbling down. Uncontrolled supply, demand and scarcity have degraded the record industry’s ability to set prices.

Exactly what the new music industry will look like is unknown, but already we are seeing small-yet highly successful examples of corporate enterprise that have taken Murray’s management warnings to heart. It’s a proven fact that the industry can no longer force consumers to pay as they leave the online store. So perhaps they’ll find a way to get them to pay on the way in…regardless, wasting resources desperately trying to achieve a goal which is not achievable —locking distribution—benefits no one.