Evolution Shift
A Future Look at Today
March 28th, 2007

Disintermediation is Rarely Partial

There have been many posts on the subject of disintermediation in this blog. For those new to evolution shift, please check out this post and this post. I firmly believe that we are living in one of those short periods of time when the world gets rearranged in large part due to historically powerful agents of disintermediation. Gutenberg’s printing press in 1455 changed the world so much that fifty years later it had become a different place. The Internet is doing that right now. I believe that we are in an age of disintermediation. Every week there is a news story that brings this home.

It is well documented that the CD business has been in decline ever since Napster came on the scene in the late 1990s. The industry became alarmed that sales first stopped increasing on a unit basis. Then when they arrogantly increased prices without adding value to stem the decline, sales declined further. Then, having no historical awareness of the winds of disintermediation that were starting to blow through their industry they actually started to sue customers.[ It is clear that an industry has no clue about what is happening to it when it initiates legal action against its customer base]. All of this was done when sales were decreasing annually by single digits. The alarm of course was that sales had historically always gone up, so a drop of 5-10% a year was both unheard of and terrifying.

Well, last week it was announced that on a year to year basis, sales of CDs were down 20% for the first three months of 2007. Not 5%, not 10% but a full 20%! Those are numbers of an industry that is truly in decline and in the process of being fully disintermediated. CDs still account for 85% of all music sold, but the sharp slide this year is far greater than the growth in sales of digital downloads. Legal download sites such as iTunes are generating substantial revenue, but come nowhere close to offsetting the declining sales of CDs. Music can be downloaded from illegal sites or from MySpace pages or MP3 blogs. In addition, many music stores have closed. In just the last year, more than 800 music stores, including 89 Tower Record stores have closed. The old distribution system is shutting down. This means that the experience of going into a store to buy a CD and walking out with two or three due to impulse buying is an ever rarer experience.

When an industry gets disintermediated, the basic product model falls apart. Since the days of the 1960s and such seminal theme albums as Sergeant Pepper, music has been sold as albums. What that usually meant was that you bought a product that had 2-3 great songs and 6-9 songs that were filler. Now with digital downloading the music business has increasingly become a business of singles. The album model is falling away. The phrase that comes to mind is ‘cherry picking’ what you want and leaving the rest behind.

In the 1950s the music business was built on singles. When albums became the product, industry revenues exploded. Due to disintermediation we are now going back to the singles model. In the 1950s an artist was sent out on tour to build demand for the record, which was the product. Now managers of music groups look at the CD as the promotional vehicle for the tour, which is now the product. Attending a concert and hearing music live is not an experience that can be disintermediated, so it has now become the product again.

All this has happened at a time when it seems that people are listening to more music than ever. On the way to work, while working, while working out, while walking to class or down the street, people everywhere have earpieces that are delivering self selected soundtracks into their ears. So the demand for and listening to music is stronger than ever, but the structures of the music business are collapsing. That is a definition of disintermediation. Those of you in the real estate, publishing, and insurance industries take note. If you remain smug, well, perhaps you should talk to some people that used to be stock brokers or travel agents to clear your head. Or call a music executive if you know one.

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