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Resnikoff's Parting Shot: Teaching Dinosaurs New Tricks

Wednesday, April 23, 2008
by  presnikoff

Some would say that the majors never stood a chance.  That no matter how intelligent their strategies, broader shifts in media consumption would ultimately render their businesses extinct.

Take a peek at The Innovator's Dilemma by Clayton M. Christensen, a book that carefully outlines the principle of disruptive change.  Christensen argues that incumbent, well-performing companies are ill-equipped to adapt to disruptive competitive changes, until it's too late.  The reason is that their existing infrastructures and revenue streams are totally inconsistent with newer models and consumption patterns, and that gives every advantage to the newer entrant.

Sound familiar?  There's another principle at play, one that is starting to accelerate the extinction process.  After a critical mass of users started getting comfortable with digital formats, connected media, and devices like the iPod, a sales cliff started hitting the pre-recorded CD.  And, in turn, the album itself, which dropped 15 percent last year in the United States alone (this includes digital album downloads).

Meanwhile, labels are still suing file-swappers, insisting on high-priced downloads, and pursuing questionable licensing strategies with everyone from iTunes to fledgling startups. 

And despite the disruptive carnage, the nosebleed executive salary is still in play.  The brass at Warner Music Group still rake multi-million dollar salaries every year - do these guys really want to grow anything beyond their bank accounts?

Wall Street finally gets it.  They no longer believe in Edgar Bronfman's digital rebound, they only see an industry in rapid decline.  Shares of Warner Music Group have been languishing below $10, less than half year-ago figures. 

Elsewhere, Citigroup is having problems repackaging its $5 billion loan to EMI owner Terra Firma.  And on Sand Hill, VCs are weary of the softer multiples surrounding music pure-plays.

Journalists love to beat up on major labels, and perhaps the biggest drubbing in recent memory affected Doug Morris.  Wired Magazine writer Seth Mnookin caught Morris in an ill-timed, ill-conceived moment of candor, and skewered the Universal Music Group chairman like none other.

But regardless of what you think of that article, Mnookin exposed the flat-footed response that has defined the traditional label for most of this decade.  And Morris, a master in an earlier generation, is mostly out of his element when it comes to newer formats and consumer habits.

But the story doesn't start and end with Morris.  And Universal is starting to pursue some more interesting experiments.  Part of the credit goes to executives like Rio Caraeff, a smart mind that somehow resisted the brain drain invariably affecting distressed companies.

Sure, Universal still pays its RIAA dues, and its name is found on silly lawsuits nationwide.  But other initiatives, including Total Music, are shifting the business into a more progressive stance.

The Total Music concept, from a top level, attempts to draw revenues by bundling content into pre-existing accounts or purchases.  For example, those already carried by ISPs, or consumer electronics and mobile manufacturers.  That includes Comes With Music, a concept spearheaded by Universal that packages content into Nokia device purchases.

Indeed, the Total Music concept carries innumerable flaws, and restrictive DRM could render the implementation dead upon arrival.  But Universal is also shifting beyond the CD, and licensing its recordings for innumerable mobile formats, online uses like a-la-carte downloads, and streamed consumption within social networking destinations.

This stuff has been going on for years, though Universal now wants a bigger chunk of the social networking action.  The company just recently invested in music-focused network Buzznet, banking that its editorial and content involvement can ultimately produce fresh dividends.

And it's not just Universal.  All four major labels are pursuing 360-degree deals, and properly recognizing that recordings must be considered within a broader basket of music-related assets.  They are also jumping into deals with heavyweights like MySpace, and taking equity stakes in the process.

So, does this mean that the labels are actually progressive after all?  Unfortunately, each one of these new initiatives carries serious problems, and most are still speculative.  Sure, the concept of 360-degree sounds elegant, but superstars Jay-Z, Madonna, and U2 are now striking broader deals with Live Nation.  And smaller artists are wary of more restrictive relationships - or any major label relationship, for that matter.

Then again, almost every new concept happening in the music industry is ultimately an experiment.  Because the pressing riddle is not whether consumers are interested in music, but exactly how businesses can effectively structure themselves around that demand.

So far, the answers are scant, and educated guesswork defines newer business models.  But one thing is clear: the traditional recording label is not a viable, standalone entity moving forward, and the marketplace is screaming that fact out loud.

Whether the big four can successfully diversify themselves against that reality is less clear.  Because the Universal Music Group of tomorrow, if it still exists, will be an entirely different animal, built for an entirely different jungle. 

And this game is just beginning.  Indeed, a minority of companies have successfully survived disruptive transformations in the past, though survival is never, ever a pretty process.  And transformed labels can only happen through increased experimentation - and a willingness to walk away from failures.



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