Markets 2.0 – Toppled Business Model
From Throwingsheep
The iPod, once considered only a trendy fashion accessory, ended up toppling the business model of the global music industry. Apple – with a little help from pirate download sites -- crushed once-invincible music retailers and is now calling the tune of the Big Four music labels. In the United States, iTunes now outsells even major retail giants. One of Apple’s victims is Musicland, once a retail powerhouse that once boasted more than 1,300 stores. In early 2006, less than three years after iTunes hit the market, Musicland filed for bankruptcy in the United States. Another market loser is Tower Records, one of the world’s biggest store music retailers. Like Musicland, Tower declared bankruptcy, liquidated its assets, and went out of business in 2006. In London, Tower had been famous for its flagship store in Piccadilly Circus and another outlet in fashionable Kensington. Both outlets have been shut down. In Piccadilly, Richard Branson’s savvy Virgin MegaStore brand is now making a go of it. Tower Records, like the Sam Goody music chain, packed up and left the UK market altogether.
Now Apple has gone Web 2.0 in a deal with MySpace. In April 2008, MySpace announced a deal with the major music labels to offer a one-stop online music service to its members worldwide. It’s a no-brainer when you think about it. In a business driven by word-of-mouth, shared tastes, and communities of fans formed around favorite bands, pop music has finally discovered the power of social networking.
Here’s the big news: MySpace Music is offering its music free. No cost, zip, zilch. MySpace members can stream music free-of-charge and share customized playlists with online “friends”. The music is free because revenues are generated by advertising and selling concert tickets, cell phone ringtones, and band merchandise like T-shirts. For MySpace, which had started off as a website for indie bands in California, its foray into the music big leagues is a logical return to its origins.
“This is really a mega-music experience that is transformative in a lot of ways,” said MySpace chief executive Chris DeWolfe. “It’s the first service that offers a full catalogue of music to be streamed for free, with full community features, to be shared with all of your friends.”
Sounds like a great deal for MySpace members. It’s also a great deal – in the short term, at least -- for the world’s major record labels. They’ve been struggling to find their way out of a severe crisis that has seen their global revenues dramatically plummet over the past decade. At the end of the 1990s global music sales were declining by only about 1% annually. That was a severe crisis at the time. By 2007, however, the drop was a steep 8%. On a topline revenue basis, the major labels grossed $36.9 billion in 2000, but only $29.9 billion in 2007. This negative trendline continues to head south today.
Against this backdrop, the so-called “Big Four” music labels -- EMI, Universal Music Group, Warner Music Group – need all the help they can get. It’s not just fed-up consumers who are turning to the Web to avoid paying high-markup retail prices for music. The pop stars who make the music are also getting their acts together online by connecting directly with their fans through innovative channels. Pop bands have realized that, thanks to the Internet, they no longer need the Big Four labels to produce and market their music.
When the labels signed their deal with MySpace to launch MySpace Music, it was actually an astounding about-face. They previously had been suing MySpace for copyright infringement. MySpace only agreed to launch its new one-stop music service on the condition that Universal Music drop its copyright lawsuit against the site.
MySpace Music should have been a no-brainer for the Big Four many years earlier. MySpace had been launched in 2003 as a platform for indie bands in California and within two years the site was rapidly becoming a must-go-to place for aspiring bands seeking recognition by uploading their music. In a profile of MySpace in 2005, Wired noted: “The real economic beneficiaries of MySpace are the ambitious young musicians in Pomona (California) and around the country who are creating a new, life-size kind of stardom. Over the past couple years, MySpace and other community sites, like Purevolume.com, have launched a number of acts: Fall Out Boy, My Chemical Romance, Relient K, and Silverstein, among others.”
The Big Four labels were happy to appease MySpace if only because they had another agenda. They were hoping to turn social networking sites into powerful distribution outlets that would recapture value, boost flagging revenues, and – most of all – loosen Apple’s stranglehold on their business. In short, MySpace Music was the commercial product of a corporate truce. Making virtue of necessity, old enemies were suddenly best “friends”. It didn’t take long before Facebook, paranoid about getting outmaneuvered by MySpace, was negotiating its own deal with the major labels to offer free music to its members. The major labels finally realized that social networking sites can leverage network effects through gossip, chatter, and buzz. Sites like MySpace and Facebook and Bebo have the potential to become viral marketing powerhouses.
We are looking for other examples of how Web 2.0 social e-ruptions have challenged existing business models – not just in the media and entertainment industries, but in any sector. Are there examples of Web 2.0 platforms disintermediating existing suppliers or disrupting entire business models? We would like to know if the Web 2.0 e-ruption that turned the music business on its head is happening in other industries.
