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Record companies faced mergers in saturated market

But can they find the golden road to the nodal lode?

By David James

The two smallest music majors, EMI and Warner Music, are reportedly circling each other with a view to merging. This follows last year's merger between Sony and Bertelsmann (BMG), a 50/50 joint venture. The big four could soon the big three (the biggest is still Universal).

The pattern of rationalisation is something that has occurred in many global industries. While music industry proponents are fond of blaming piracy for their ills, it is a trend being seen elsewhere. The reason is market saturation. Authors Jonas Ridderstrale and Kjell Nordstrom write in Funky Business that consumer markets are becoming saturated:
"This is the age of more. More choice. More consumption. More fun. More fear. More uncertainty. More competition. More opportunities. We have entered a world of excess: an age of abundance."

According to the International Federation of the Phonographic Industry, sales of music CDs and other physical formats fell by 6.3% in the first half of 2005, but sales of digital music more than tripled. On-line CD sales are increasing rapidly. In the first half of 2005, the IFPI estimates that 180 million downloads were sold in the first half of the year, compared with 157 million for all of 2004, a growth rate of more than 100%. Music downloads and mobile-phone ringtones now account for 6% of retail revenues.

This suggests that the industry is beginning to adapt to an environment in which distribution outlets are proliferating, and product offerings will need to be more flexible. So why the prospect of mergers and only three global companies?

The probable reason is that the music industry is subject to the same trends that put pressure on most consumer product businesses; market saturation and over-supply. This is especially a problem in the music industry because their products do not die: music catalogues accrete. In many industries, global companies are becoming too big for their markets. In the car industry, for example, it is estimated that if the entire production of vehicles in North America ceased, there would still be a world over-supply of automobiles.

The response? Mergers. Almost all the major car companies, with some exceptions, such as Toyota and Honda, are now in a web of cross-ownership so complex it is becoming hard to tell the companies apart: Daimler-Chrysler; until recently Fiat and General Motors, Renault and Nissan. The pattern emerging in the global economy is for there to be a very small number of large players, often as few as two, and a wide gap to the next level of more nimble and smaller companies.

This is leading to some rethinking of the nature of competition. Authors C.K. Prahalad and Venkat Ramaswamy write in The Future of Competition that businesses must look to "co-create" with customers. Using Napster as an example of the process, they write:

"Obviously, millions of music fans are eager to proclaim, 'I, the consumer, will choose and use the music I like in my own way.' For the entertainment establishment, Napster and its successors represent piracy and theft - an enormous financial threat. But interpreted differently, the Napster story represents the best hope for the music industry's future. Napster demonstrated that consumers really like the music industry's products and want to consume more - but in their own way."

Prahalad and Ramaswamy describe the emergence of "nodal firms": enterprises that are at the centre of networks of customers and suppliers who use the market space to profit in a variety of ways, not just from the simple sale of procucts to customers. They say the networks are typically in three layers: the firm and its innovation, the extended enterprise of supplier, systems and solutions, and a third "enhanced network of competence including consumer communities": various aspects of experience assciated with the firm.

Developing into nodal firms should not be too difficult for large record companies should they decide to stop hanging on to the old ways of doing business. They have already outsourced much of the product creation (usually on cruel terms) to musicians, which allows them to control their cost base. They have easy access to the so-called "experience" networks. The long standing use of merchandising is an example of profiting from the experience of being associated with a product, usually a band.

The greatest barrier is the lack of business model innovation in the industry. There is plenty of product innovation, but David Austin, principal of innovation consultancy Bailey Austin, says that although innovation is normally associated with new products or perhaps new distribution channel, what is typically far more successful is innovation in the way of doing business. Austin says:
"Over the last 10 years, far and away the most effort in innovation has gone into products and product performance. What may be more surprising is that if you then look at the cumulative value creation over the last 10 years, it is not coming from products. With innovation you might always say it is not about the product. If you look at where the value is created, it is things like business models and networking."

The conclusion? That innovation matters, but not the obvious innovation. As Prahalad and Ramaswamy imply, the music industry has failed to recognise the changing character of business represented by on-line businesses like Napster. Instead, they have tried to hang on to their old ways of doing business, and struggled to survive. There has also been a tendency to think that somehow the "music industry is different".

It is not. The tendency towards superfluity is pressuring many industry sectors - witness the travails of General Motors. Only the business innovators will survive.

David James knows what he's talking about. He's bloody brilliant really. He certainly impresses the hell out of me. You should listen to him.

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This was the part that struck me: the boy (as I've always called Nguyen in any conversations I've had about the case) had a lengthy wait in a small cell as the clock ticked down to the hour of his death.

Few of us will have this experience when it comes time to shuffle off this mortal coil. We know not the hour nor the day, but Van Nguyen did because he heard it announced on the TV news: 6am on December 2, 2005.

The question that interests me is how does any human being cope with knowledge such as this? It's one thing to prepare yourself spiritually for death, as this boy reportedly did with the aid of Catholic priests and friends.

But it's another thing altogether to know how to pass the time.

Nguyen wrote letters in his final days. He also prayed and sang hymns. I cringed when I read this: the quality of Catholic hymns these days is abysmally low. What comfort for anyone can be gained from mouthing tuneless dirges that even devout churchgoers find to be less a joy than a form of aural torture?

Nevertheless the facts must be accepted: the condemned man found some personal comfort in the process of singing unaccompanied as he knelt or lay on a mat on the concrete floor of Changi prison.

We'll never know, but there could have been comfort also in hearing his death row inmates singing for him - a Chinese version of the Ave Maria, we're told - as he made the short walk to the gallows.

The commercial music industry invests billions in the finer points of recording, production and dissemination of product, to make it appeal to the human spirit in the hope that it will sell. Consumers show their appreciation by spending billions buying those products, in the hope that the experience of listening to their purchases will somehow connect them with their fellow human beings in a beneficial way.

But I wonder whether any polished commercial product could have created the same effect in the ears of Tuong Van Nguyen as those rough prison voices sang him to his death.

English soccer fans traditionally sing "You'll Never Walk Alone," which is an appealing song because it is obviously not true. Some time in life, each of us must walk alone as Van Nguyen did.

What's unique about music is that it lets us turn that truth into something we can share. We still have to walk alone, but by singing about it - and singing about it with others - the act of solitary perambulation takes on a new significance.

Not sure what that significance is: an assertion of our indomitable desire to be with others, perhaps. To be part of a community, even when we're leaving one.

They hooded him, they handcuffed him and they prepared to break his neck. I'm glad their one act of charity was that they didn't also block his ears.

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