Spinning into oblivion - the death of the music business, and the habits of a mouse

Record store owners Tony Sachs and Sal Nunziato wrote a touching editorial in the New York Times about the death of the retail record store, and the music business in general. They started a record (CD) store in New York City in 1993. They closed in 2005. The exact same story could have been written by owners of small book stores, travel agencies, retail stock brokers, small newspapers, and magazine publishers. They have all been dramatically changed by the Internet.

The changes were inevitable and the reactions were predictable. It is easy to blame the industry giants for stubbornly holding on to their way of doing business. But it was the small players who were hurt the most. Business, like life in the wild, is ruled by Darwin's "Survival of the Fittest". The environment is constantly changing. The strongest last the longest but unless they adapt, they too will die. The Innovators Dilemma tells us that very few businesses in any industry make the transition to the new way of doing things.

Did Napster kill the music business? The record labels like to blame Napster and other Internet file sharing services for killing the CD business. But the seeds of their demise were sown long before Napster. The album (CD) was the record label's way of selling two good songs for $20. They got away with it because there was no alternative for the music buyer. The Internet, MP3 compression technology, and services like Napster changed all that.

Listen to the story from the perspective of a retail record store owner. Here are several excerpts from the New York Times story;

The sad thing is that CDs and downloads could have coexisted peacefully and profitably. The current state of affairs is largely the result of shortsightedness and boneheadedness by the major record labels and the Recording Industry Association of America, who managed to achieve the opposite of everything they wanted in trying to keep the music business prospering. The association is like a gardener who tried to rid his lawn of weeds and wound up killing the trees instead.

In the late ’90s, our business, and the music retail business in general, was booming. Enter Napster, the granddaddy of illegal download sites. How did the major record labels react? By continuing their campaign to eliminate the comparatively unprofitable CD single, raising list prices on album-length CDs to $18 or $19 and promoting artists like the Backstreet Boys and Britney Spears — whose strength was single songs, not albums. The result was a lot of unhappy customers, who blamed retailers like us for the dearth of singles and the high prices.

The recording industry association saw the threat that illegal downloads would pose to CD sales. But rather than working with Napster, it tried to sue the company out of existence — which was like thinking you’ve killed all the roaches in your apartment because you squashed the one you saw in the kitchen. More illegal download sites cropped up faster than the association’s lawyers could say “cease and desist.”

"But instead, those labels delivered the death blow to the record store as we know it by getting in bed with soulless chain stores like Best Buy and Wal-Mart. These “big boxes” were given exclusive tracks to put on new CDs and, to add insult to injury, they could sell them for less than our wholesale cost. They didn’t care if they didn’t make any money on CD sales. Because, ideally, the person who came in to get the new Eagles release with exclusive bonus material would also decide to pick up a high-speed blender that frappéed."

The retail record store owners got hit from all sides. The record labels continued to put out junk CDs with two good songs for $20. The labels made deals with big box stores like Wal-Mart and Best Buy that allowed them to sell for less than the small retailers cost. The Internet allowed millions of kids to download singles for free. Amazon did the same thing to small book stores. Travelocity and Expedia put pressure on the travel agents. E*Trade and Fidelity crushed the retail stock broker. The story goes on and on.

The real story is how entrepreneurs adapt. The record store owners who wrote the New York Times story are now in the online music business. I am reminded of the cute little book "Who moved my Cheese?". The story of a mouse who followed the same routine everyday until someone moved his cheese. Then the mouse had to figure out how to adapt to the change and create a new routine. The smart mouse figures it out. The dumb mouse keeps looking for the cheese in the same old place.

How do you like that? Business all boils down to the habits of a mouse. Take that, Harvard Business School.

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Comments

[motocute]

Napster didn't kill the music business. They just nicely opened an alternative distribution channel in the online/PC space. Similarly, though based on different concept and technologies, Didiom is now openning an alternative distribution channel in the wireless/smartphone space.

[Kurt Burris]

If Tony reads this, all I can say is you carry the burden of speaking truth.

[Marc Cohen]

I would agree that Napster by itself didn't kill the music business, but expanding on Don's allusion to Christensen's The Innovators Dilemma, Napster did introduce the innovation that is re-making the recorded music industry. Christensen talks about how successful innovation brings features and benefits to groups in the market that couldn't afford them before. This is exactly what file sharing did. The biggest music consumers are young people who also have very little disposable income. So when Napster unleashed free music it combined with overpriced CD's to create the perfect storm. The recent DRM free music from EMI fuels this perfect storm because in the end it really just raises the price of digital music. The next innovation in digital music is ad-supported music. By eliminating the hassles of getting free music from illegal P2P networks, ad-support makes it even "freer" than P2P obtained music.

[Jesse]

Regarding Napster, the key line is:

"...rather than working with Napster, it tried to sue the company out of existence — which was like thinking you’ve killed all the roaches in your apartment because you squashed the one you saw in the kitchen."

There were a hundred other roaches behind the refrigerator.