What is missing to Compete in the Music Industry?
For every major record company, there are hundreds of start-up technologies that don’t have the capital or industry clout to make waves in the music industry. Countless platforms are being created to grant short-term licensing deals with major record companies for underfunded or under-networked start-up technologies.
Why is this important?
The music industry has always used legality to assert their market dominance. Think about all the technology platforms for streaming. They either started outside of the US (Spotify, Soundcloud) or were founded by an industry veteran (Apple Music, Tidal). Every company that doesn’t fit that domain was litigated to death…
“You know, unfortunately, early adopters make the roads that we all travel down, and they are usually paved over in the process. The first guy through the door gets shot. You know, but somebody’s gotta go through the door, but they’re gonna get shot.” — Alex Winter, Banking on Bitcoin
As an example, let’s take the very first streaming service: Grooveshark. Grooveshark was minimalistic. The site consisted of a single search bar. The user would search to play songs, artists, or albums of interest. The company was founded 3000 miles away from the music industry bubble housed in La-La Land by Josh Greenberg and two other scrappy University of Florida freshman. Needless to say, the company fit the bill of both underfunded and under-networked. To abbreviate a long story, Grooveshark became too large for the music companies to ignore. The company refused to face the reality that their product, needed to become a music company. This would mean hiring industry veterans, lawyers, and relationship managers. Instead, They did what every start-up does, spend to grow. The big labels retaliated: Universal, Columbia, and Sony sued the start-up under the Digital Millennium Copyright Act (DMCA). Grooveshark shut down April 30th, 2015.
Copyright laws are a huge deal in this industry. Laws always protect incumbents. Start-ups cannot afford negotiating licensing deals or litigation costs. Start-ups are designed to be “cheap” experiments.
Products to prevent litigation are good.
Music Companies own a digital asset. The industry calls these Master Recordings. A digital asset is different from from a physical one, because their is no sense of scarcity. During the height of piracy, Steve Jobs notably stated people don’t want to steal music, but they don’t have an adequate alternative. To combat this, he invented iTunes. My pervious article goes into more detail here.
This isn’t to say the music industry is the bad guy. Digital Assets require more stringent legal oversight. Unlike a physical good, there is no incentive to protect a digital good from theft. If I make a copy of digital asset and share it with a friend, that doesn’t affect my ability to use it. In fact, it creates social capital for the person sharing the asset. The incentives encourage people to steal. This is why litigation is such an important tool for music companies. Because of this record companies need to be cautious with how they distribute their goods, only trusted partners can hold the keys to the licenses for their products.
Existing in another companies supply chain is impossible. Every company optimizes for profits, this means the companies closest to the money wins.
A Separate Entity
Record companies need to embrace the idea that the product is a Digital Asset. Since music companies are a supply side (and horizontal) company, they should find ways to encourage competition for the product’s distribution. Record companies should strive to incentivize differentiated streaming platforms and consumption mechanisms. The goal should be to make distribution channels become as ubiquitous as record stores in the 70’s. The next logical step is a reversion to the 1970’s business model. The distribution relationships and licensing services become the companies moat for their customers, the artist.
By creating separate entities that are encouraged to disseminate licensing deals to small companies, record labels can encourage competition to for their differentiated product, the music. Record companies could consider pay-as-you-grow business models. This ensures entrepreneurs have incentives to innovate and record companies have opportunities to acquire or secure exclusive deals with the trending distribution channels. In theory, this would make distribution companies work in the record companies supply chain.
Digital Music Sandbox
This is Digital Music Sandbox. Their founders all have roots in the licensing business. They have spent time in the industry, specifically, Universal Music Group. As it takes lots of crappy musicians to differentiate the good from great, it take lots of distribution channels to differentiate good from great.
The sad truth…
The reality is horizontal business models are a way of the past (with a few exceptions). Companies need to vertically integrate. This strategy may help the record companies fight aggregation in the short-term, but ultimately, it will be unsuccessful in the long-term. The strategy isn’t stable. Aggregation always wins. Aggregation is better for the consumer. The industry is better off having a major label acquire Spotify after their direct listing to the public markets later this year.
If you enjoyed, Don’t forget to click and hold the 👏 so other people can find the article. Incentive Theory is a publication that focuses in data science and direct to consumer strategy.
