- Disruption occurs as a result of technological and socio demographic change
- Disruption and innovation are inhibited by legal and regulatory legislation
- Innovative business models and taking risks play a big part in surviving disruption
Risk and strategy expert Ben Stevens witnessed the music industry ripped apart through digitisation. Stevens worked as a Director of Internal Control at Warner Music International’s head office in London at the height of when the industry was being disrupted.
Supervised by one of the UK’s leading professors in strategy, Stevens spent two years researching the impact digitisation and the internet were having on the recorded music industry, an industry he is passionate about. One of Stevens’ highlights was interviewing music industry heavyweight, Seymour Stein, Vice President of Warner Bros. Records and a co-founder of Sire Records (responsible for signing Talking Heads, Madonna and The Ramones).
Stevens’ extensive background in risk has reached a variety of industries across the globe, but the music industry is one of the most dramatically disrupted. His observations about how the music industry managed to survive the impact of digitisation is a noteworthy lesson for other sectors to heed in their pursuit to transform and prosper.
Commoditisation and the value chain
When it comes to the disruption of the music industry, Stevens says commoditisation plays a big part.
”The writing’s was on the wall for a long time,” says Stevens. Research for his Executive MBA on the effects of digitisation of the music industry put him right at the sharp end, where he made discoveries before data was available and when ideas weren’t publicised.
One of the biggest findings he made was the collapse in price and volume of CD sales which had a crushing effect on the business model. Researching ticket stubs sales on eBay, Stevens also discovered concert prices had skyrocketed.
The price of a CD dropped dramatically from 13 GBP in the 1990s to 6 GBP in early 2000s. Stevens says the retail price should actually have been worth 25 GPB. The volumes of CD sales also plummeted with each breakthrough in technology. An example was the launch of iTunes which allowed people to cherry pick tracks.
“No business can sustain this kind of collapsing impact,” says Stevens.
“It’s interesting to observe what happens in the industry wide value chain, someone else creates value and picks up the money. Sure enough, touring was experiencing a massive boom - with the price of a Madonna concert ticket skyrocketing from 13 GBP to 300 GBP. Music became a commodity and a promotional element for touring.”
Commoditisation has occurred in many other industries. Business models become increasingly blurred as businesses become cloud based.
“50% of a car is a computer, so it’s no surprise Google’s going to have a crack that market, it’s up for grabs even though it’s a totally separate industry,” says Stevens.
“Some of these industries have taken decades to establish. The systems, processes and culture are ingrained in a business. Overlaying a digital business model over that is impossible.”
The recorded music industry may have survived digitisation but it’s not completely out of the woods. Stevens believes Spotify isn’t yet the silver bullet, because not everyone in that value chain is happy. He says neither the artists nor Spotify are making sufficient money from recorded music.
What causes disruption?
1. Intersecting technologies create new models
The digitisation of content (CD), the Internet, the mp3 and player were the key technologies that intersected to create a disruption. The traditional business model was obliterated through monetisation.
Monetisation is one of the biggest issues in disruption, says Stevens. “It’s not a viable business model if you’re not monetising.”
“The business model is what disrupts a business, not technology. It was dissatisfaction with the old business model in the music industry that led to it becoming obsolete. The digital business model is totally frictionless.”
2. Socio-demographic change reinforces the disruption
Disruption is facilitated by socio-demographic change. People have changed over the past 20 years. The emergence of the sharing and gig economy has helped create new business models, which are less about ownership. These changes fuel a more connected and open society, making models like AirBnB and Uber possible.
3. Legislation doesn’t keep up with technology
If you’re looking at a macro environment the regulators don’t get technology and they can’t keep up, says Stevens. He believes legal change will inhibit disruption and innovation such as driverless cars. Start-ups, he says, flout the law pushing the boundaries of what is legal then later on cover their tracks. That’s why a lot of bigger corporates don’t survive digital disruption, because they don’t take the risks.
Rules around privacy, for example, have come quite late to the table in catching up with technology. Stevens believes the interplay between the regulators and disrupters over the coming decade will be interesting.
Risk meets strategy
Stevens is fascinated with strategy and corporate failure. For him, the link between risk and strategy is very strong, and he believes one of the biggest risks is not taking a risk.
To assist businesses in capturing the risks Stevens has created a product called Risk Dashboard ™. The tool was originally created to replace excel risk templates, however, he notes that ironically most clients are not using it for risk but for strategic planning.
Take Xerox, a market leader in selling office equipment. They took the risky strategy of switching their business model from selling photocopiers to leasing.-Within 10 years their market cap climbed from nothing to USD8billion. In the 1970s they developed the mouse, GUI, and pioneered the development of the personal computer. Worried that this new technology would cannibalise their photocopier business they sat on the technology. They could have owned the computer market but 10 years later Steve Jobs and Bill Gates bought the technology off Xerox and owned the market.
Stevens explains that all these businesses have been disrupted because they didn’t take measured risks with their core revenue streams.
“It’s really hard for big business to take risks because risk is seen as a negative thing, not a positive. “You have shareholders worried about share price and directors worried about liability.”
“The conundrum of disruptive innovation means the only way to disrupt is to disrupt yourself.”
“We’re heading for seismic change and an industrial revolution. The growing gap between machine IQ and human IQ is also perplexing. Human intelligence is pretty flat, a machine’s doubles every 18 months.”
Tips for finance professionals to survive disruption
“The writing’s on the wall for anything vaguely repetitive,” says Stevens. The Oxford Martin study revealed that out of 702 professions, tax preparers were second from the top, behind the telemarketer, most ripe for obliteration.
As a result, the finance function is changing from being a back office to looking forwards and creating value.
1. Find opportunities to redeploy
The skillset of an accountant is going to change as the profession evolves. The amount of processing will decrease, allowing space for more creative value added services. Monetisation is a key element of any business model. As business models proliferate, the accountant will play a central role in ensuring viability.
2. Create value
Transaction roles and even analysts roles will disappear. Maximising human skills will be a priority, and interestingly, HR was one of the last on the list predicted by the Oxford Martin study to be replaced. Getting the finance function to engage with the rest of the business and be forward looking and creativity is key.
3. Monitor trends
As socio-demographics change and technology evolves Stevens advises to take time to think about the business, and continually ask not what products and services should be sold, but what is the problem that your business or organisation is trying to solve.
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