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How Apple saved the music biz

The Apple iTunes store has been selling a million tracks a day, it was announced recently. And no, that is not a misprint: a million a day. This will come as no surprise to readers of this column. Quite why the music industry didn’t spot the opportunity will be the subject of innumerable MBA dissertations in the years to come.

But for now the significant thing to note is that it was a computer manufacturer and not a record company that cracked the problem of providing legal music downloads. On a global scale, you might say that the inadequacies of record (and movie) companies is a trivial issue. They make a lot of noise and command much public attention, but actually they are relatively small beer compared with, say, computers, energy or cars.

But the case of online music is instructive because it illuminates a far more interesting question, namely, why do large companies find change and innovation so difficult? The official line, of course, is that they don’t. Listen to any chief executive in PR mode and you’ll hear a lot of guff about ‘new’ products, ‘progress’ and innovation. This year’s model has enhanced features and superior performance. And next year’s will be even better. This is the process by which most cars now have air conditioning, power steering and electric windows – features that used to be optional. Or by which this year’s PCs have 3 gigahertz processors rather than the 2.8GHz standard last year.

This is innovation – of a sort; it’s called ‘incremental innovation’ and everybody does it if they want to stay in business. The only problem is that it’s not the most important kind of innovation: disruptive innovation – the kind that creates new industries, new business models, new commercial realities. And that’s what established companies seem unable to do.

Back to the music industry and the net. Why didn’t record company executives spot the revolutionary potential of the technology to distribute their product? It was partly due to ignorance. Most of those who ran record companies in the 1990s knew little about the net They knew a lot about media and showbusiness, but nothing about communications technology. And the people in their organisations who did understand it were low-status techies with poor lines of communication to board-level folks. So those at the top failed to spot what was happening because it was going on in a universe they didn’t inhabit.

The entire industry, in other words, suffered from a serious knowledge deficit. This was fatally reinforced by the dominance of lawyers and accountants in large media companies – especially in the US. The result was that when the net finally burst onto the radar of the industry, it was seen purely as a threat to intellectual property. The clear strategic imperative was then to try to stop the technology by legal and legislative means (which inevitably turned out to be futile).

Some fascinating light was shed on this recently when Ken Kutaragi, a very senior Sony executive, broke ranks and spoke frankly about the whole issue of online music. Kutaragi is president of Sony Computer Entertainment, but is tipped to become the parent company’s next chief executive. ‘Sony missed out on potential sales from MP3 players and other gadgets’, he told the Foreign Correspondents Club in Tokyo, ‘because it was overly proprietary about music and entertainment content’.

He went on to say that he and his colleagues have been frustrated for years with their management’s reluctance to introduce products like the Apple iPod, because of the influence of Sony’s music and movie divisions terrified about implicit threats to intellectual property.

A third factor that rendered the record industry blind to the opportunity was the incentive schemes under which executives were rewarded. As always, these were couched in terms of the business model prevailing at the time of appointment. In the 1990s, the music industry was built on doing what one analyst described as ‘shipping atoms in order to ship bits’. Music was digitally encoded, but the way the industry transported bits from recording studio to CD player was by stamping them on to bits of plastic and ferrying them in containers to retail outlets. The economics of this meant, among other things, that albums were more financially attractive than singles. So the industry shipped albums and gave incentives to its executives to do just that.

The only problem was that many consumers wanted tracks, not albums. The industry couldn’t – or wouldn’t – give them tracks. But Napster could, and did. In the end, Napster was killed off but illicit file-sharing thrived. And still the industry provided no workable legal alternative. Apple has saved them from themselves. The real question is whether they deserved to be rescued.

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