Digital Matters - Issue 39

A traditional music-business organization like Sony, Virgin, or Warner is a mishmash of competencies that, taken as a group, once added up to a competitive advantage (and, in many ways, still do). In a fully digital world, however, individual companies will do each piece of work -- at every stage of the process -- better than Sony, Virgin, or Warner does.

There are and will be state-of-the-art recording studios built specifically for just that purpose. There are and will be CD manufacturers, such as DataPlay, that make much more useful products. There are and will be promotion companies that do promotional campaigns much better than the corporate pr geeks in New York and Los Angeles. There are and will be video companies that make much more interesting music videos. And, of course, there is and will be that distribution channel known as the Internet, which can reach -- directly, in people's homes -- 1 billion customers worldwide.

The music business has long lived off the proposition that tours sell albums. That was grand news for recording companies, which historically have received much of the revenue that comes from album sales. What revenue they did not receive, they "recouped" from artists as costs related to marketing, advertising, or promotion. "Recoupables" are the music business's version of Hollywood accounting. Only after an album went double, triple, or quadruple platinum did an artist see any revenue. And even then, companies often claimed that additional revenue was needed to "recoup" previous marketing, advertising, or promotional expenses.

In the Digital Age, albums sell tours -- as well as promotional possibilities -- in which, happily enough, artists have traditionally made their money. No company is going to make big money by selling CDs, because digital technology transforms one copy into 1 million copies (now through Napster, but soon enough through countless peer-to-peer computing programs).

The only way to keep the traditional CD business going in the short term is to cut prices aggressively. That would buy time for the recording companies while they reinvent themselves as what Evans and Wurster call "navigators," and as what others call "infomediaries."

As in so many other categories, the greatest profits in an Internet-based music business will go to those companies that serve effectively as navigators through a world of unlimited choices. This change has already happened in financial services. Charles Schwab reinvented itself as a navigator of financial services, and it went from being a "discount broker" to being the most powerful financial-services brand in the United States. Merrill Lynch did not reinvent itself for the Internet, and it paid the price in terms of its market cap. The change has happened in retail as well. Amazon is probably the premier retail navigational service extant and is now worth $2 billion more (in terms of market cap) than Sears.

The future of the music business lies in helping people navigate a wide range of music choices, and in making those choices coherent. Companies like Sony, Virgin, and Warner would be well advised to take the money that they're spending on legal fees to sue companies like Napster and to invest that money in collaborative-filtering software and other navigational tools that help customers get the music that fits their tastes.

A larger opportunity is for companies like Creative Artists Agency and William Morris Agency to reinvent themselves as creative navigators. Talent companies have traditionally "cut deals" with major labels, studios, and advertisers; have taken a cut of the action; and have moved on to the next deal. With digital technology, they are now able to cut out record companies and to partner with other navigators to distribute, promote, and enhance the value of their client's product and brand. In a sense, they are well positioned to become recording companies, since they presumably have the best interests of their clients at heart. (The more money the artist makes, the better it is for the agent.)

That is why, in the great coming music-business shakeout, the prime acquisition targets will be the talent companies and the law firms that represent artistic talent. Traditional music companies own the catalogs and the master-recording disks. But the future value of the music business will be in the head of Bruce Springsteen or of Sheryl Crow or of some unknown-but-talented kid. Own the representative relationship with those artists, and you own the future. Partner with the best collaborative-filtering service, and you can take the music of Bruce or Sheryl or that kid -- and you can play it for almost any person who might be remotely interested in paying to listen. The rest is job work.