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What Music Teaches Retailers: Part One

Stuart Poyser Thursday, 27 February 2014.

The music industry was the first and hardest-hit by the digitisation of the way people consume their product. Many hard lessons were learnt, and some are still being absorbed. However, the industry today is unquestionably one of the most digitally creative, compared with any other field which is not online native.

shutterstock 84112909The lessons of the music industry have applicability not just to other forms of media, but to other sectors as well. Many of these still believe their core business models to be essentially untouched by digital.

The 5 Stages of Music's Digital Grief:
At the end of the 1990s, the music industry was on a high. The move from LPs to CDs had taken sales to all time highs. The assumption was that the next replacement cycle into digital would be equally benign and the same model of A&R (artist acquisition), advances and sales recoupments would function equally well. Besides, it was inconceivable that a few early-adopters of digital consumption could disrupt the model when CDs were purchased by such a wide range of people. Especially when being used ubiquitously from cars to computers to living room hi-fi's.

In 2003, the Recording Industry Association of America (RIAA) sued a 12-year old girl in New York City for breaching federal copyright law, seeking up to $150,000 damages. It was one of hundreds of cases around that time of the industry attempting to change the habits of consumers by force and fear. Like King Cnut standing on the shore, the sector had failed to realise that it was facing a tide that was impossible to turn back.

In psychology, bargaining is seeking to protect oneself through a deal with a high power. As it turns out, in the music industry this would ultimately turn out to be with their (double-edged) saviour Apple. But, before we reach the point of iTunes hegemony, there were a whole host of inappropriate relationships with anyone who seemed to know more about digital than they did: AOL, Real Networks, Bertelsmann, Vodafone, etc. These alliances were not changes in the business model, however, but get-digital-quick add-ons. Religious talismans dangled from the rear-view mirror to ward off falling CD sales.

Apple launched iTunes in 2003, and sales of digital downloads grew every year until 2013. And yet, the increase in sales from this near-monopolist came nowhere near close to stemming the decline in record company profits. The industry was at a loss what to do and when the broader credit crunch hit the market in 2008, it was widely felt that nothing could staunch the flow of economic blood.

It was only with this realisation that the basic business model needed to change, that companies started to rationalise and re-shape their approach to making money from music. The crazy advances have been ratcheted down, a smattering of science has been applied to (some) A&R, and most importantly the business of "selling music" has been reshaped to one of monetising usage. The labels have realised that the future will not be about selling boxes or downloads. Instead it will be about tracking every sphere where their music is heard, figuring out who in the ecosystem has the money and going about extracting their share of it. From cloud lockers to DJ streamers, TV producers to mobile games, from car manufacturers to smart TVs, the music business is increasingly about tracking its IP and getting rewarded for its use. From one revenue stream 20 years ago, to two 10 years ago, to hundreds today.

Part two will be published online next week.

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Stuart Poyser

Stuart Poyser

Stuart joined Ariadne Capital as the Director of Corporate Finance & M&A Advisory in February. Stuart Poyser is a seasoned corporate finance professional with 14 years' experience of providing strategic advice to corporates and entrepreneurs.
Since joining the investment bank of Salomon Smith Barney (part of Citigroup) in 1999, Stuart has focused on the TMT sector, working in London and New York. From 2005, he covered media and entertainment clients in Europe, where the massive disruption to business models from new technologies drove corporate activity, with companies seeking new revenue streams, rationalising portfolios and raising growth and defensive capital.
From 2011-2012, Stuart led the European investment banking team responsible for music company EMI during Citigroup's ownership of the business. He supported the executive management team and ran a highly-successful sales process that required a de-merger, pension fund buy-out and multi-jurisdictional antitrust process. Stuart joined Ariadne in 2014 and is focused on bringing best-in-class corporate finance advice to entrepreneurs and connecting corporates and investors to exciting companies in sectors being transformed by disruption to their business models.
In his spare time, his main passion is music: he is a trustee of the Bloomsbury Chamber Orchestra and plays violin with several London-based ensembles.Stuart has an M.A. in Economics from St John's College, Cambridge University.

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