(MSc) Sebinomics

Must Read!

On the plane from Nagoya to Paris, I read The Starfish and The Spider: The Unstoppable Power of Leaderless Organizations, a great book by Ori Brafman and Rod A. Beckstrom. I especially liked the part where they analyze what has happened to the music industry. I’d like to share with you what I highlighted in chapter 2:

“[L]et’s go back to the nineteenth century, when the power of the music industry was held by live performing musicians. In 1887 Thomas Edison figured out how to play back sound and invented the phonograph. This changed everything: now you could take music home with you. With people listening to more and more records, hundreds of little recording studios started up. The power of the industry began to shift. Instead of independent musicians holding the power, a recording studio could discover a new talent and market a given record on the radio and in stores. This marked the birth of the record deal. By the end of the twentieth century, 80 percent of the global record industry was concentrated among five labels: Sony, EMI, BMG, Universal Music, and Warner Brothers. Over the course of a hundred years, music labels gained massive power, and small labels and independent musicians were squeezed out. Then, as we’ve seen, Shawn Fanning’s Napster shook up the industry.

The Music Industry: From Starfish to Spider and Back Again

Take a look at the progression of the music industry over the past 115 years. Notice that in 1890 the market was dominated by artists. In the next snapshot, 1945, the independent record labels came onto the scene. They both increased the overall revenue of the industry and reduced the artists’ market share—the money in 1945 was in record deals. The 2000 snapshot depicts an industry that had undergone gradual but massive centralization. The Big Five had the vast majority of market share and were making good profits. We know what happened when Napster entered the scene. By 2005, the industry was vastly different. Sony and BMG had consolidated, Tower Records had filed for bankruptcy, and teenagers were no longer flocking to CD shops to get the latest music. The combined revenues of the remaining four giants were 25 percent less than they had been in 2001. Where did this revenue go? Not to the P2P (peer-to-peer) players. The revenue disappeared.

This is the sixth principle of decentralization: as industries become decentralized, overall profits decrease.”

Lars Ulrich, drummer and co-founder of Metallica, started a crusade against Napster and became one of the most popular opponents of P2P platforms. If he only knew this before he started fighting Napster, to become one of the most hated personalities in the entertainment industry, major record companies might not be in such a bad shape today. More about Metallica vs. Napster in my next entry.