What can retail learn from the music business? | KPMG | BE

Lessons from other industries: What can retail learn from the music business?

What can retail learn from the music business?

With the internet poised to transform retail, the record labels’ experience of the digital revolution could well prove instructive.


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Convenience is king

And consumers are willing to pay for it

The most intriguing aspect of Moby’s new album Innocents isn’t the music, it’s the fact that the musician – credited with helping bring electronica to the musical mainstream – has open-sourced the drum, guitar and keyboard parts so fans can remix his songs. So far, Moby’s bundle of music has been downloaded two million times from BitTorrent and 21,000 fans have remixed his music to suit their personal taste.

Innocents is the culmination of a revolution that started in 1979 when Sony launched the Walkman portable cassette player. The success of this device – and the CD version launched in 1984 – proved that consumers were willing to pay to play music where and when they wanted to, integrating their favorite songs into their everyday lives.

Yet this revolution had limits. Even with the Walkman, music still had to take a physical form (cassette or CD), be bought from a store – principally in a format (the album) that was profitable for the labels – and the CD player, though portable, was still hefty.

The internet changed all that. With digital files, physical products were a choice, not a necessity. Artists could circumvent record labels by distributing music from their websites as Radiohead did, selling 1.25 million copies of their album, In Rainbows, this way.The major labels, having invested millions in the 1980s in digitizing their music for CDs, initially saw the internet as a threat, rather than an opportunity. Their business model had been built on revenues generated by the album format. Millions of consumers still liked albums, yet many others preferred to download, share or rent music – and were happier paying 99 cents for a song than $20 for an album with a few fillers.

Anxious not to cannibalize their existing business, the labels allowed ‘outsiders’ such as Napster and Apple to drive this digital revolution. Then in 2000, global recorded music revenues began to decline – and kept declining until 2012 when they grew, by 0.3%, to US$16.5bn.

To be fair to the labels, the disruptive power of the internet was not obvious. The major known unknowns included: how severely it would hurt traditional music retailers, what kind of consolidation it might trigger among the labels, and how artists would view this revolution. And despite repeated predictions of the CD’s demise, CDs still accounted for 57% of the industry’s global revenue in 2012, compared to 35% for digital, the fastest-growing sector.

Like many large companies forced to reinvent their business in a hurry, music labels initially found change easier to articulate than to execute. Defining a new strategy was tough. Aligning leaders and divisions behind that strategy, measuring – and reacting to – success or failure and changing behavior was even harder.

Music is now everywhere – and the labels are profiting from new revenue streams. Some have invested in Spotify, a service with six million who subscribe to stream music rather than purchase it. Sony and Universal Music partly own Vevo, the biggest music video outlet on YouTube, on which Miley Cyrus’s latest video generated a record 19.3 million views within 24 hours. Some have also negotiated deals to take a cut of their artists’ total income, including revenue from merchandizing and live performances.

Moby’s fans can remix his album for free, but if his innovation succeeds, artists, companies like BitTorrent and labels could charge consumers to personalize the music they love. Rock and roll is an unlikely open sourcing pioneer but such initiatives suggest the industry is rediscovering its mojo.

The bottom line

Key takeaways for executives

1. Be strategically vigilant

The internet creates new products and services, kills existing ones and accelerates the pace of change. In IT, it’s a case of survival of the fastest – that may soon be true for music and retail. CEOs must look ahead, be strategically nimble, and ready to innovate with new business models.

2. Weigh risk and reward

When transformational change beckons, it can be easier to quantify likely losses than potential revenue from completely new products and services. The winning companies will be those whose goals are not impeded by a legacy mindset.

3. Put the customer first

Are you providing the service your customers need – or one that is convenient for you to offer? The labels’ past focus on traditional formats and outlets let new entrants flourish. Many retailers are struggling to create a multi-channel strategy that lets consumers buy what they want, when, where and how they choose.

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