Digital Disruption

On 17 March 2015, Spencer Stuart hosted a dinner in London on the theme “Digital Disruption: Leadership lessons from the music industry” attended by senior leaders of media businesses from sectors including music, terrestrial, digital and satellite TV, newspapers and advertising. The speaker was Edgar Berger, Chairman & CEO, International, Sony Music.

This article begins with an account of the disruption that has taken place in the music industry over the past 15 years and then builds on Edgar Berger’s key learnings for leaders.

A brief history of disruption in the music business

The internet has been at the very heart of digital disruption in the music industry.

In 1966, the music industry was tiny, $1.5bn in revenues ($10bn in today’s terms). The biggest record was Herb Alpert in the US and The Sound of Music in the UK. It was a vinyl business; 20% was singles, the rest albums.

Fast forward to 1999, the heyday of the music business. The industry produced revenues of $27bn, the all-time high. It was CD and album-driven, singles only making up 4% of revenues. The biggest album was by Backstreet Boys and sold more than 20 million copies. This was also the year that Napster came into play. Today, Napster has moved from a piracy platform to a legal streaming platform.

12 years ago Apple introduced commercial download models. It wasn’t until last year that paid subscription streaming models accelerated growth around the world, the biggest player on a global scale being Spotify.

Since 1999, the industry has been in steady decline through piracy. Today, $15bn, our industry is half the size it was then; and it is 50% digital. Music is the most digitised and most global media business in the world. To put that into perspective, filmed entertainment is 15% digital, books are 14%, and newspapers are 7% digital.

The music industry had to manage three transitions at the same time:

1. Physical (DVD to digital)
2. PC to mobile (driven by smartphone penetration)
3. Download to streaming (very recent)

If the music business is half of what it used to be, is music still relevant in the digital age? The answer is emphatically yes and the facts support this:

• The #1 video ever was a music video, "Gangnam Style" (2 billion views)
• The #1 celebrity on Facebook is Shakira (more than 100m likes)
• The #1 artist on Twitter is Katy Perry (67m likes)
• 29 of the top 30 videos on YouTube ever are music videos
• 16 of the 20 most liked/followed people across Facebook and Twitter are musicians as well.

There is no question that music is more relevant than ever. Everyone carries a music listening device.

So what happened? Why is music half the business it used to be when everyone likes to consume music? Where did the value gap comes from? How did we lose $15bn? The industry lost the revenues to illegal consumption, piracy. Now consumers get the same product for much less money. 20 years ago you would hear a song and go and buy the album for $20. Today at best you spend 69p and you get the song.

The industry also lost income to tech platforms. Some have quite high valuations and the music industry probably did not get its fair share. The revenues certainly did not go to artists or the investors in music rights.

One thing is clear: the music industry does not have a problem with the product, but it does have a huge problem with monetisation of the product.

What leaders can learn from the music industry

1. The leadership and talent dimension is critical. The threat of digital disruption has a significant impact on leadership across the media industry, raising the stakes both in terms of the demands on leaders and the skills they need to possess. Leaders will need to have a real appetite for risk, be comfortable operating in an ambiguous environment in which business models are constantly shifting or under threat, be aware of what is happening in related sectors and be flexible about importing talent as the situation requires. Commercial teams will need to be highly creative, experimenting with alternative monetisation models. Identifying, securing and retaining creative talent will be key in this content thirsty world. Finally, people who can unlock big data and drive insight from the analytics will be critical members of the team in the future. And, as before, it will be key to attracting and retaining the best creative talent.
2. You cannot fight technological development and consumers. Consumer behaviour is changing, partly as a result of demographics and the digital native effect. For the first time ever, it seems that there is a cohort of people in their middle age and older whose media consumption habits are not transferring to the next generation – children are not growing into their parents’ behaviour. In this world of consumer choice there has been a transition from push to pull. No business can protect itself from this shift: you have to be prepared to give the consumers what they want, where they want it and when they want it. There are 400 legal streaming services around the world now, with 43 million songs licensed, but it took too long to reach this point.
3. You have to be prepared to cannibalise yourself. You have to make bets, be brave and accept some trial and error, particularly if no-one has been down this particular road before. The music industry came under attack at its maximum point of profitability: selling downloads at the beginning was a real bet; allowing Steve Jobs to unbundle the album was a real bet. It was inevitable but also timely, since piracy might have become rampant. Jobs and iTunes retrained a whole generation to pay for content.
4. The digital world is in a constant state of flux. You need to continuously adjust. If you look at the download world, a model that only started 12 years ago, revenues are already declining. Everyone has been surprised by that. With streams rising, music companies have had to change their charts and provide methodologies that account for how music is consumed. Until now, they have released on separate days in different markets, which is impossible in the digital world – regional windows collapse. Companies have to constantly adjust. Sony started out with a few digital experts in a cubicle, but digital is now 50% of its business and the company has to deal with global accounts (Spotify, Google, Amazon, YouTube and many others).
5. Disruption equals opportunity. It’s open 24/7 and there is no limitation in shelf space. Today, distribution is much more cost-effective than it has ever been and this opens up new regional growth opportunities (e.g. Africa, China, India). It also opens up the opportunities for artists to travel more easily with their repertoire around the world because with streaming consumer taste travels more easily. Artists can be known anywhere in the world, which is a new phenomenon. Making money out of user-generated content was impossible in the old physical world, but through disruption this has become possible in the digital world. 
6. The paid subscription streaming model is the future. Providing all the music for free to the consumer in exchange for the consumer exposing themselves to advertising doesn’t monetise the same way as paid subscription does. Paid subscription models are the future. The world is moving towards access models and a decline in ownership – you can access all the music but you don’t have to own it. The challenge is to work out what should be paid for and what should be free. Streaming is the final destination in the music business.
7. Control the data.  Today, you have to give a much clearer picture to advertisers and their agencies of what they are getting for their money. Control of data is going to be extremely important, since consumer data and the advertising model are going to become more interlinked. As distribution gets consolidated through third parties, there will be further disruption to the model.