Tuesday, June 05, 2007

A Link in the Value Chain

This article about the latest front in the music industry's war against its customers got me thinking about the tough spot that record labels are in, and about how value and viability work in other markets.

The latest news, if you're curious, is the appearance of state laws that treat people selling used CDs as if they were selling enriched uranium:

In Florida, the new legislation requires all stores buying second-hand merchandise for resale to apply for a permit and file security in the form of a $10,000 bond with the Department of Agriculture and Consumer Services. In addition, stores would be required to thumb-print customers selling used CDs, and acquire a copy of state-issued identity documents such as a driver's license.

And you just wanted to get rid of those old Flock of Seagulls discs because, well, the 80s are quite over? Think again.

The concern, of course, is that in the age of digital music, selling CDs is no longer a transfer of your listening rights to somebody new; there's nothing to stop you from ripping all the music into MP3s and then getting rid of them, in effect having your cake and eating it too. Or your spare change and your music. And I understand why that bothers record labels.

But they're so blinded by the short term revenue threats (illegal downloads, used discs, etc.) that they're missing the big picture: in the 21st century digital music age, what is the role of the record label? More specifically, what is the value that they add the chain that links creator to listener.

Let's think of a completely different example. Let's say that I have a business making hand-crafted houseware items. I sit in my studio and create designs and hire people to make them. Now I want to sell them.

I probably don't sell them to customers. At the very least, I probably sell them to stores, who sell them to customers (marking them up along the way). That's fine - there's value in each link. I provide the store with things their customers like, and they provide me with access to customers (and cash). The store gives me business and customers the products they want. The customers give the store cash and get things they want.

Maybe the chain gets longer: I start selling to a distributor. Now, assuming the retail price hasn't changed, maybe I'm making a bit less. But the distributor is giving me access to stores I might not sell to on my own, and I'm giving them products to show to the retailers who are their customers. The retailers are getting a better selection of products... and on it goes.

Does this sound like Business 101? Of course it does... but I don't think the record labels have looked at their business this way.

In music as in so many industries, electronic distribution has changed the equation. And so everyone has to ask not "How can I protect the profits I made selling plastic discs with music on them?" but rather, "What's the value I provide, how much is that worth, and how do I organize my business to make money off that value?"

I don't buy the idea that record labels have no role. As romantic as the idea of the inspired musician strumming away in Austin or Cambridge or the West Village and her fans downloading MP3s from her web site is, the reality is that we live in a pop star culture, and its not going away. An organization that can identify performers who will be big, and market them, has a place, no matter what any of us might think of the quality of the product.

What they don't have anymore is a stranglehold on the actual music, or the ability to keep people from accessing it in ways that suit their needs. As the last few years have shown, if you try to lock down the content, the customers will simply find ways to steal it.

You can keep fighting that battle, or you can figure out what you're good at and what somebody else can't easily duplicate, and design your business around that.

That's not easy, and it often involves major pain - giving up revenue, giving up margins, and restructuring your organization. The alternative, though - whether you're in the music business, some other content-producing industry, or actually any business at all - is extinction.

Look at your own value chain. Where do you fit in? Are you adding anything, or are you just an excess link that can be removed?

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