Sunday, March 25, 2007

Substitution in the Music Industry

In case anyone is still pondering what "substitutes" mean in a Porter model, consider the recorded music industry. In the first three months of this year, CD sales have declined by 20% relative to a year earlier. Why? Downloading, both legal and illegal! Music is still all around us, maybe more so as the ubiquitous ear-buds that are everywhere in any urban landscape attest, but that is scarce solace for those firms who populate the CD value-chain. This is a classic case of where new formats, in this case digital transfer of individual music tracks, has the potential to severely threaten the industry's existence. The situation has become so grim that a recent Wall Street Journal article quoted one entertaiment agent saying that CDs had become little more than "advertisements" for all of the other things -- T-shirts, concerts, etc -- that today really bring in the revenues to an artist. The article also observes that "the music industry has found itself almost powerless in the face of this [technological substitution] shift." Is this true? Are they really powerless, or are they, instead, stuck in a past mindset, unable to make the necessary diffcult choices? Where are the strategic responses [remember, strategy is all about choice] that the industry should be making to counter this threat to industry attractiveness? Why haven't they haven't they been more aggressive? iTunes has been the one bright spot in the recent past, yet that did not come out of the traditonal industry players, but from Apple, and even there the industry has had difficulty making timely and aggressive choices. In addition to the substitution effects, tradtional customer channels are also under tremendous pressure from low-price retaliers, such as Wal~Mart, and Best Buy; all of which recently led Tower Records, one of the venerable players in the music retailing business, to cease its operations. All in all, this is a tough time for the industry, but a fascinating time for those of us who rely on the Porter framework to appreciate how the competitive terrain really works.

1 comment:

stevet said...

This reminds me of Einstein’s famous quote “We can't solve problems by using the same kind of thinking we used when we created them.". When the paradigm of a business radically changes, it typically takes fresh new thinking, stemming from a new insight, to successfully address it and even to take advantage of it. Unfortunately, most of us don't know how to have insights, so we continually churn through our existing perspectives and historical thoughts (which might have been appropriate to the old paradigm), hoping, with each iteration, that we will find a new answer. When viewed through this lens, it is not at all surprising that so few companies are able to thrive when confronted with a paradigm change.