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Now that we have an understanding of the downstream and

upstream impacts of technological triggers in the music industry, let's examine

whether the recording company's value network would endure in the new world.

And that requires a look at the new revenue model for digital music.

The case tells you that the costs of creating music may be split

into content creation costs and content production costs.

The costs of content creation include the royalty paid to the artists, the costs

of marketing and promoting the track and the company's profit that it pockets.

The costs of production include manufacturing and

packaging, distributing and retailing the finished product.

Now contrast these costs with the online world.

Do the content creation costs persist in the world of digital music, yes.

The recording company still has to pay artists their royalty.

The recording company still has to promote and market music.

In fact, just a few seconds ago I illustrated that the artists on MP3 and

artist aloud actually faced a lot more clutter and

challenges in getting to market.

We concluded that they needed the marketing repertoire of recording

companies to cut through the clutter.

So assuming we hold the recording company's required profit margins

constant in the new environment, content creation costs were relatively unaltered,

enhanced even in the new digital environment.

Therefore, have taken these costs forward as is normalized to the new price of

INR 10 which is the cost of digital music in India.

The case is set in India.

These estimates are in Indian currency.

The second set of costs, that of packaging and

distribution, those are a different story.

These costs are largely rendered insignificant

in the world of digital music.

Indeed, the marginal cost of creating the MP3 and distributing it.

Which involves little more than adding a line to a product database attribute.

Close to zero.

Therefore, I've removed this in the online world and

substituted them with an online delivery cost of INR 1.2.

Now finally, consider, and this is important, the retail mark-up.

For now let's normalize this value to the new retail price of digital music and

take it forward as INR 4.

Now stare at the breakup of costs of retail music.

Which of these costs, which of these

cost components do you believe is more difficult to acquire?

Clearly creation or acquiring content.

The most vulnerable piece in the world of digital music was the retailer margin.

In the old world retailers had to provide costly physical space to store

CDs and the like.

In the new environment this was completely obviated.

And if you are the company that own and control the content, it was far easier for

you to forward, integrate and retail music than for

the retailer to backward integrate and acquire music.

So it were capabilities of the music retailer that were at risk,

not that of the recording company.

Yet The recording giants gave way to the Apples of the world, to own that piece.

Which could have well been theirs.

Why is that?

Remember when I discussed the value network as part of the disruptive

innovation framework, I mentioned that if you're able to leverage your existing

resources, processes and values to service your customers, or your

supply chain partners in the new world, then that innovation is a sustaining one.

A disruptive innovation challenges your existing resources processes and

values, and requires you to adopt a fundamentally new value network,

at least a fundamentally altered one, if not a new one.

In the case of the recording company they had to relinquish all of the resources,

processes and values of their old value network in the new world of digital music.

You didn't need recording studios of the kind you had earlier.

Your manufacturing centers and

distribution warehouses were laid to waste.

You need a new ways of marketing and promotion, think social media, analytics,

recommendation systems.

You need a new recording contracts with your artists.

We saw that established ones could reach out directly to consumers, so

you needed to redraw your contracts with these artists

to focus more on elements of their life cycle other than music sales.

There was an article in The Atlantic which remarked recently about this phenomenon.

It said now that music is superabundant,

the business thrives where scarcity can be manufactured.

In concert halls, where there are only so many seats, or

in advertising, where one song or band can anchor a branding campaign.

And that's why this was disruptive.

The new business required a shift in resources,

processes and capabilities of the recording company.

The good news was that the core competencies that the recording company

had built in the old regime would still endure here.

Breaking new artists,

pulling risk across many tracks, managing the life cycle of established artists.

These are capabilities that best belong to the recording company, and

recording companies were best equipped to execute these capabilities.

Yet the required shift In the value network just did not allow them

to see this good news and adapt to this new reality.

They could have taken advantage of it, and they could have been in the best position,

in fact, to create a business model around this.

But the relinquishment of all of these assets and capabilities that they had

in the old economy rendered them incapable of doing so.

They gained what they stood to anyway so it all worked out.

But did it?

No.

Because music consumption had changed fundamentally.

The old order was completely gone.

The CD is dead.

Consumer behavior as we knew it well up to the early 2000s is dead in terms of both

unit sales as well as revenue singles are what people are consuming.

In fact purchased music itself is rapidly becoming a behavior of the past.

If you read Nielsen's 2014 annual review of the music

industry you'll find that nearly every number is preceded by a negative sign.

Including chain store sales, total new album sales,

total CD sales, and sales of new songs online as well decreasing at 10.3%.

Two things are up, streaming music, vinyl album sales.

For relevance in the new world,

the music companies needed to adopt the new order and rebuild themselves

as organizations in this new order to respond to this new consumer behavior.

It was not just about getting their due in the new world.

It was about being an organization that could thrive in this new world.

In giving up control of the interaction with the customer and

giving it away to companies like Apple,

recording companies were now reduced to a mere content provider.

And you see the same in the mobile music chain as well.

Although what I have up here is for the Indian music industry,

the outcomes are qualitatively similar for the rest as well.

Content providers in the US get 40 to 50% of revenues, versus ten to 15% in India.

That's a big one.

And that's because the mobile operators play a critical role in this part of

the world in marketing, delivery, and revenue collections for the content.

So here is a summary of changes that we've documented so far to the music industry.

A shift from album sales to individual track sales.

Losses due to piracy amounting to nearly 75% of industry revenues.

Of course in the US equivalent estimate is a ratio of 20 illegal downloads for

every track sold.

The proportion of recorded music sold through digital channels

rising from 9% in 2006 to around 15% just a year later in 2007.

And of course, 5% of all digital music transactions involved an album.

Singles a scheme.

We also saw that even purchase music itself is on the decline

leading to more streaming models and vinyl and

more classic models that used to exist in the earlier regimes are back.

Artists making music available free on their own sites, so,

on social networking sites, new pricing models, new players in the value chain,

all of these were significant changes that came into play in the recording industry.

At this point, let me talk about Sony that's what the case is set in

the context of.

Sony India at least had

the benefit of learning from its parent's experience in the West.

When digitization and digital music became a reality in this part of the world,

the company could learn from the experience of its parent abroad.

And therefore it could reorient itself to not just focusing on sales of music,

but taking sales of music as the threshold which to operate the rest of the business.

You find the breaking new artists this was especially relevant to this part of

the world, where copyright laws were getting stronger and in the music or

non-film music was set to grow at 24% compared to 5% for film music.

They engaged in building capabilities in music publishing, music curation,

music analytics.

And all of these became viable extensions of their mainstream business.

This is reflected in a spate of acquisitions that you could look at

which the case details in the last few years.

They also acquired new marketing and promotion capabilities.

If you remember the song this was Sony's experiment and success with social media.

All in all, Sony was able to transform itself into a company that was

better equipped for the digital economy in this part of the world.

And this is what the value chain looks like now.

New players, different parts to consumption, an empowered customer,

new functions for the recording company, and more empowered artists.

It is my hope that through this module you have acquired a deeper understanding

of the attributes of disruptive innovations, as well as the constraints

that operate on incumbents in responding to these innovations.

In responding to a disruptive innovation we saw that a company

has to typically seed an old way of doing business to survive.

Such agility and ambidexterity will be

critical to organizational survival in the world of business tomorrow.

The recording companies not only needed to know what we do now, but

also needed to prepare their stakeholders to transition to a fundamentally new

way of doing business.

We saw this is not easy.

But I hope that now when your leadership calls you to the table and ask you,

what does this new technology mean for us, should we adopt it or should we ignore it?

I hope at that point,

you are able to make an informed commentary about the trajectory of

that technology, the constraints that act upon your firm in responding to to it, and

most important, I hope that you will be able to implement a plan that will

facilitate your organization's shift to respond to this disruptive technology.

In the next module, we will discuss a new class of business models.

Platform mediated business networks that are especially salient

to the digital goods that we discussed today.

We will talk about the nature of competition amongst these models and

strategies that platform mediated business networks use to compete and grow.

That's up next, see you soon.

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Case Discussion: Impact of Technological Innovation on the Recording Company

Digital Transformations

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