behind the streams: why don't they see it?
    • MONDAY, JANUARY 31, 2011

    • Posted by: David Moffly

    I think we are all tired of hearing about how the Music Industry is a terrible business. I get several email newsletters every day chronicling the steady, downward spiral of the major labels. These emails also report about infringers, pirates and the fact that you need more zeros than most simple calculators can handle to find your percentage royalty share from the much loved and hyped Spotify. Doesn't anyone in the music business talk to people who have been through gut-wrenching changes before in related (or perhaps not related) businesses?

    So what are the problems? Buying and consumption patterns of the customers have changed, the labels have lost control of pricing, and barriers to entry across the spectrum have evaporated (to name a few). When I see these problems which seem completely insurmountable, I think of two companies who have lived through this firestorm, and as of today, are thriving, globally dominant operations. The first is IBM and the second is Getty Images.

    IBM, a number of years ago, was faced with the challenge that its core business of manufacturing PCs was rapidly commoditizing and margins on a global scale were getting hammered. Factories pumping out low cost PC "clones" were popping up seemingly daily in the Far East. This was a terrible dilemma for IBM, as its whole identity at the time seemed to revolve around the PC and brand dominance. The company had been at the forefront of the PC revolution. It was an office status symbol to have an IBM at your desk. In 2004 Sam Palmisano, the CEO, made the extremely controversial decision to sell the PC manufacturing division and brand usage to Lenovo in China. This move was met with horror and government investigation driven by the fear of transfer of technology to the Chinese (who were of course already making a huge number of PCs). The CEO made the very unpopular and courageous decision to sell what many considered the company's heritage and focus on selling mainframes (which are still very much around — even today) and services to a select group of companies and governments.
    IBM smartly segmented the market, got out of the low margin commodity business and then focused their already established global reach on those most interested and able to pay for their expert services. Here is a graph of the result as judged by the stock price of IBM vs. Warner and Sony. IBM by selling their patrimony and focusing on large scale relationships has become an even stronger company with close to 400,000 employees and $100 billion in sales.

    IBM Stock Price Versus Warner and Sony

    Now onto Getty Images; Getty operates in one of the more esoteric parts of the world: commercial, news and celebrity photography, on a global scale. They are the dominant company which, when they were public (they smartly or luckily went private right before the crash), reported around $800 million per year in sales. As a photo distribution industry veteran, I'm familiar with the grind. I almost sold my last company to these guys. It is a fact that the internet changed everything about the stock photography gig, an at times very slow and traditional industry. Business in this space in recent memory was conducted by sales people traveling the world with suitcases full of film transparencies for clients to review and buy. Getty built itself up to be the global leader by smartly acquiring (sometimes at seemingly nosebleed prices) the leading brands in whatever space they were focusing on. This mostly worked and sometimes spectacularly flamed out (read: In 2005, we all saw that we were losing control of the traditional licensing model. Mavericks who didn't have anything to protect were entering the market and using the power of crowd sourcing and the low barrier to entry in digital photography to turn the traditional photo licensing business on its head and drive pricing into the ground. The price for a web license for an image went from on average $35 to under $1 in around a year. Sound familiar?

    The leading maverick in the pack was a company called iStockphoto. The creators were web savvy guys who originally didn't care about photos or pricing. They just knew that there was a world of pro-sumer photographers whose photography they could monetize on a highly efficient scale. No company was impacted by these mavericks more than Getty. They lost millions in sales virtually overnight. They bought iStockphoto and harnessed its growth and also used it as an automated way to identify the best photographers and images to move up to higher priced products and services. Today iStockphoto asserts that they are selling 55% of all stock images in North America and are paying out $1.7 million a week in royalties to photographers. At an estimated 20% blended royalty rate (the website offers 15%) this implies that their sales are around $600 million per year. Getty bought this business in 2006 for $50 million. They also at the same time invested heavily in the less commoditized area of celebrity photography and news. No doubt Getty had some extremely painful times as they harnessed these new engines but I am sure they are a much stronger and more diverse company today. Getty is winning today by flexing their financial muscle to essentially kill off its traditional business lines. It was a huge gamble that today is surely be paying off.

    So what do the stories of these two powerhouses tell us about what the music labels needs to do?

    Get out of crappy low margin businesses and focus their efforts on those most able to pay for it. Essentially, do like IBM did and focus only on medium to large acts that can afford to pay the labels to run their distribution, marketing services, tours, etc.

    Use scale to buy the mavericks such as Sonicbids, Bandcamp and others to handle the essentially retail elements of the music business to the millions of wannabes on a global scale. Think iStockphotos' 90,000 contributing photographers; these businesses, if global, would eclipse the size of a small major. Think of the millions of aspiring musicians globally with money to burn promoting themselves to their friends and families. Do like Getty did and take the chance on an emerging model that is showing great, but disruptive, potential.

    Become media companies. Again, use scale to buy the Spotifys and Pandoras of the world. The majors have vast libraries, leverage them to become programmers.

    Talk directly to the consumer. Use the power of the global web to move product. Stop relying on intermediaries to talk to the customer. Universal and Sony have made a step in the right direction with Vevo. Someone should buy the long suffering Fuse and turn it into the channel it deserves to be.

    This is the outsider's soap box, but I think these ideas have some potential. Even if companies like Warner are highly leveraged and for sale, perhaps their next owner can sweep an obvious and proven set of strategies into place to bring themselves back to relevance and scale. Most of all, I am just tired of the continued death watch.

    Someone needs to transcend the complaining and man up.

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