There’s an episode of King of the Hill where Hank Hill’s wife, Peggy, first meets her new neighbor, an Asian man named Khan. Peggy asks Khan if he is Chinese or Japanese. Khan repeatedly explains that he is from Laos. Peggy keeps responding by asking him if that means he’s Chinese or Japanese.
Those are the only two frames that Peggy could place an Asian person into. Creating a new frame is hard … so she keeps trying to cram Khan into one she already knows. Even if it doesn’t fit.
I could go on about Khan. He turned out to be one of my favorite series characters ever. I still catch myself humming his Karoake version of the Beverly Hills Cop theme. (“BEV, BEV, BEVERLY HILLS COP!”) (Here he is on Youtube.)
But the point here is Peggy.
When it comes to disruption, we have a lot of Peggys.
Music: Disrupted before disrupted was cool
We’re seeing the whole music industry “pull a Peggy.”
The music industry, of course, got disrupted by digital before getting disrupted by digital was the cool thing to do.
But digital disruption hit the music industry around 1999, when Napster and others made song-sharing easy (even if, in retrospect, illegal). This cut into album sales. Then came iTunes in 2003, which made digital music legit and shifted buyers from album sales to single song sales. Revenue dropped more. The current wave of disruptors are streaming music services like Pandora, Spotify, and Rdio. They’re creating enough disturbance in the force that they’re even disrupting the past disruptor, iTunes.
(If you’re wondering if the newspaper and music disruptions are a fair comparison, I’ve included a music industry revenue graph from Michael Degusta’s Business Insider piece back in 2011 (“The REAL Death of the Music Industry,” which includes a brilliant takedown of some sloppy Bain analytics work) along with this well-traveled graph of newspaper ad revenues. Both are adjusted for inflation.)
By the way, if you need proof the previous disruptor, iTunes, is now getting disrupted, check out this graph has been heavily passed around social media circles recently. It comes from a great short article entitled “Why Would Anybody Ever Buy Another Song?” that ran earlier in March in The Atlantic. Correlation doesn’t equal cause and effect, but that’s a new trend for digital sales.
Are you radio or record store?
Last week this all got a fresh round of coverage when a decision came down in the lawsuit between Pandora and ASCAP.
There’s good analysis and details about the decision here on GigaOm. Or, if you’re a glutton for punishment, you can read the full 136-page decision here. It concerns the royalties Pandora has to pay songwriters, not performers, and as is often typical of these types of cases, both sides are claiming victory. Most analysts are saying Pandora came out better this time.
Details aside, though, at its root the argument is a Peggy question: Are you the new radio, or are you the new record store?
Pandora argues that they are radio, just distributed online. And as such, they should pay the same royalties as broadcast radio pays. Which are low.
The recording industry, on the other hand, understands that consumers are replacing the purchase of music (physical and digital) with streaming, and argues that Pandora and should pay much higher rates – ideally, rates that make up for the revenue that streaming services are taking out of the system.
Radio, or record store?
It’s the wrong question.
The recording industry was always willing to cut radio a break on royalties because they relied on radio to get exposure for their artists. No exposure, no album sales, no concert ticket sales. High royalties for radio would be counter-productive. In fact, the shady history of the music industry is littered with examples, illegal and quasi-legal, where labels concocted ways to pay radio to run their songs.
Radio doesn’t play that role as well as it used to. Station ownership has consolidated, audiences have declined, and playlists have shrunk.
Increasingly, discovery happens on the streaming services. And the labels know it, even though they’re sometimes loathe to admit it.
But, to the recording industry’s point: listening on streaming services has started to replace purchases of music.
Attempts to get the same money out of streaming services that music companies have lost in physical and digital album sales, though, are a dead end – Pandora, for example, already pays out nearly 60% of its revenue in royalties, and is still struggling to prove it can make a profit under that model.
Digital music streamers, as it turns out, fill both functions. They are often the primary avenue for listeners to discover new music. AND they are becoming the primary avenue to listen to music they already like. If anything, they are the radio AND the record store. In addition to doing some new things that neither the radio or the record store could ever do.
Trying to force them into one box or the other doesn’t work. Charge them like just like radio, and all revenues would bleed out of the system. Charge them like the record store, and they’d go out of business, taking audience discovery with them.
Causing friction in all this is one of the typical patterns of industry disruption – in any industry, disruptors typically appear first on the low end, particularly with regard to margin. The disruptors gain a foothold because they’re chasing margins that are so thin that the incumbents don’t believe competing for them is worth their time. And because of this, disruption typically initially bleeds money out of the system, at least for a while. Good old, medieval, Clayton Christensen Innovator’s Dilemma stuff. It’s unfortunate. But real.
So stop trying to figure out which old model to apply to music streaming companies. Build a new frame. One that fits. And start trying to build this thing back up.