What Happens to a Risk Averse Industry When Disruption Hits? The Fall of the Traditional Music Industry


When I grew up in the 80s, I remember going from vinyl and 8-tracks to cassettes and finally to cd’s. I spent a lot of my money on “upgrading to cd” in high school and in the years after. In those days, the music industry ran the show. You couldn’t easily record music played on the radio. In high school and college, we traded rock concerts on cassette, but the quality wasn’t a threat to the music industry.

In the 1993, two events turned the music world upside down. First was the creation and release of the “mp3”, a compressed music format which allowed music to be uploaded and downloaded easily, even on the slow connections of the 1990’s. That same year, the early web browser, Mosaic, was released. Mosaic was the first browser with the ability to display text and pictures on the same screen. The internet was born, and with it, a world of pain and challenges for the music industry.

As the 1990’s progressed into the 2000’s, the music listening public was downloading and trading mp3’s. An entire generation stopped buying physical cd’s. Mp3 download sites gained popularity. The music industry faced a crossroad. What did they do?

Business in Denial

From the legal standpoint, the music industry was right to fight illegal copyright violations. They sued Napster and other music file sharing services. The RIAA (Recording Industry Association of America) didn’t stop there. They began a campaign of suing internet users who downloaded pirated music. In one case, a 12 year old was served papers and paid $2,000 to settle the case. The 12 year old was the first of 261 defendants to settle lawsuits with the RIAA.

When you are suing your potential customers, something is wrong.

Fast Forward to Today

According to the New York Times, the music industry revenues are down by billions of dollars a year and are not expected to rebound. According to the RIAA, revenues went from nearly $12 billion in 2006 to $7.65 billion in 2016. Only $1 billion in cd sales in 2015, down from $12 billion in 1999, the peak year for cd sales. Music downloads are down too as the paying public has moved to streaming.

According to the New York Times article, “The result is that the music industry finds itself fighting over pennies while waving goodbye to dollars. For instance, the growing but still specialized market for vinyl records is generating more revenue than the music on YouTube, one of the biggest destinations on the Internet, but that’s because YouTube pays royalties in the tiniest fractions of cents.”

Music is no longer a physical product or commodity. It is data.

The music buying public doesn’t see music as something they will ever own. Music is streamed data. The music industry had a lot leverage over local and chain music stores when music was “comprised of atoms” — a cd and a booklet with text and photos. They have little leverage over Spotify and YouTube. YouTube gives and sells a lot of content — music and video — and they know the public isn’t willing to pay a lot for music today.

What If the Music Industry Had Taken a Few Risks?

Let’s go back in time to the year 2002. By then, mp3s and file sharing were huge and torrent sites were starting to flourish. Peak sales were down, and it was obvious something big was happening. A growing number of people began to have music collections on their computer and the first wave of music store closings had begun.

The music industry insisted on the $15-$20 per cd price point. Within a few years, the only people who bought cd’s were the hardcore collectors. It’s hard to resist a download when a “printed” version costs $20. The industries could have done what others did in times of crises and lowered prices. It’s called reality.

Today, I’m shocked to see cd’s go for the same $15-$20, as if nothing has happened. At $3-$5 a cd, the public wouldn’t have weaned itself so quickly off of the physical disc. Even if this was a stopgap for a few years, continuing to sell cd’s at $20 a pop was seen as an insult — and a joke — to a person with broadband at home. “I can download the entire disc in mp3 format in 2 minutes, or the lossless FLAC version in 10 minutes. Why would I pay $20?”

The second major risk that the music industry could have taken was — “if you can’t beat ’em, join ‘em!”. By the time Spotify and YouTube grew to enormous audiences sizes, it was too late. But in the years 2000–2010, the industry could have realized where this was going and created their own “uber-streaming network” and adopt a new approach of “if you’re going to stop buying cd’s, we will be the pipe from which you obtain our content.”

They did not do this, and now, the music labels are a line item for much bigger — and more influential — streaming services.

Music executives failed the system. They refused to see the writing on the wall and innovate, and remained in the tunnel vision of certainty. They took zero risks, expected the world to return to the way it once was, and they lost. Today, bands make a living the old fashioned way — by playing live music — and they owe little to their label, who doesn’t bring them a lot of profits.

Imagine that — the jet set music executive’s biggest problem was that he was too conservative.


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Yonatan Levy