Thursday, January 10, 2008

Watching an industry shrink

While it is fascinating to see new industries come up and grow to behemoths, it is equally fascinating (at least for the outside observer) to see an industry shrink and watch a behemoth being cut down to a smaller size by forces outside its control.

Something like that is happening to the music industry. The Economist this week carries a very interesting analysis of this industry titled: The Music Industry|From Major to Minor

The music industry is a glitzy one. But below the glamor and the extravagant image, it is a rather traditional business model. The record labels are basically giant distribution channels that control the supply chain to the customers and have slowly risen to sizes where their sheer muscle gives them tremendous channel power and precludes others from entering their space. Because they have controlled the channel, they have controlled everything else including production facilities (artists) and inventory (music). In this sense they are no different from OPEC with its control on the oil supply and therefore pricing.

But as technology has made digital distribution more and more easy, this channel power power has started to dilute. Alternate channels to reach the customers have matured and the customers have accepted these alternates. Indeed embraced them.

So what will happen next ? Will all artists start to release their own music ? will the music industry as we know it die completely ? Well, if recent history is any example, then yes, some artists will go direct, but at the same time new powerhouses will emerge in the music distribution business. These powerhouses will have very different skill-sets and strengths, they will probably operate at lower margins too, but some of them will be as big and powerful as the record labels they replace. So we will have some dis-intermediation but a lot of re-intermediation.

Of course, there is the opportunity for record labels themselves to remake their business models and become one of these new players - and they are trying. But so far it has proven to be a difficult transition. They simply don't have the skill set to manage this new model and it will take them time to get there.

It will be an interesting transition, watch this space !

No comments:

Post a Comment