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14 Nov

Are you ready to face the music?

I am from a time when accessing music was a hassle:

You came across a track on TV or, more likely, the radio. After you realized that enough tracks from an album were good enough to warrant a purchase, you headed out to your local music store and bought a cassette. You played this cassette in your home cassette player, or your Sony Walkman.

CDs came a few years later. And it was years after CDs you got your first internet connection and looked for websites that allowed you to download your favorite tracks.

Today, we have Spotify.

Technology has made it possible to go from a single album accessible on a single device to any album or track available on demand and accessible from multiple devices. We no longer need specific devices like a Walkman, iPod, CD or cassette player to listen to music.

Essentially, our access to music has, in some ways, always been a function of technology at the time.

So, let's look at how the music industry has evolved over the years.

We will focus on the record labels (imagine Universal, Sony, Warner), artists (imagine your favourite lyricists, singers and composers), and ourselves (the consumers) as the stakeholders involved in this business.

Let's start with the 1960s.

Between the 1960s to late 1990s, record labels held a monopoly over music production and sales.

Artists and bands performed locally. Record labels had scouts to discover these artists and decide which artist or band to sign a contract with. Once signed, the record label would commission a professional studio recording for the artist and grant access to the label's international distribution network. The label would also pay the artist an advance.

Then the label would handle public relations, promotional tours for the artist, and sales of CDs or cassettes at retail stores.

This overarching control over music-making meant that record labels were the first stakeholders to make money from the multiple sales channels.

Although later, this monopoly proved to be a double-edged sword.

Here's what happened—

A sudden shift

This control got challenged big time with the advancement of the internet and how it generally disrupted access to information.

Before the internet, music was sold as a bundle in the form of a music album by one artist. Even if a cassette or CD had a mix of artists, you couldn't add or remove tracks on a whim or only choose to buy the tracks you loved. You had to buy the whole album.

Internet and piracy helped unbundle music albums. Music listeners would now visit local gigs, use their phone cameras to record the set, and upload tracks individually, which others could then download.

Companies like Napster and PirateBay were right in the eye of the storm because they allowed piracy to take place at scales no one anticipated. Record labels failed to stop piracy from being popular because there were too many constraints to accessing music legally:

You first bought CDs or cassettes, which also required having access to a CD or a cassette player. If you only liked one or two tracks from an album, you still had to buy the whole album. And piracy was the cost-efficient alternative because it allowed you to download individual tracks sitting at home.

But this shift in consumer behaviour directly threatened the record label and the artist's ability to make money. Obviously.

This insight led Apple to give rise to the next shift.

Against a backdrop of legal battles between record labels and piracy organizations, Apple introduced the iTunes Music Store.

With the iTunes Music Store and the insight that consumers preferred unbundled music, Apple convinced major record labels that consumers would buy music legally:

If a simple service was offered to consumers that allowed them to buy and download music for less than a dollar per track, they'd pay.

You can look at the official press release below:

iTunes Music Store was the first online retailer of music and was a major success because the pay-per-track model ensured that royalties were paid to the record labels, who then passed them on to the artists.

For consumers, they could now pay for a track they liked instead of the whole album. While purchasing, consumers could access short, free previews of all songs on an album.

With iTunes, Apple established a proof of concept by designing a better music listening experience for a paying consumer. The shift improved the user experience as well as curbed rampant piracy. It accounted for all stakeholders in the music industry.

Yet, a business like Spotify managed to outcompete Apple, and created a dent in the industry with an altogether different business model.The insight that brought about this shift had to do with a deeper understanding of music listeners that Spotify’s tech enabled.

The turning point

Daniel Ek, Spotify’s founder, launched the company with the mission,

“Music for everyone.”

And ironically, Napster — a piracy site where one could download any music illegally for free — was his inspiration behind Spotify.

This also was the reason why between 2006–2008, when Spotify was in its early stages, Daniel struggled to get across his vision to record companies, who thought of it as another failed experiment to provide free access to music. The initial business model only had one revenue stream: platform advertising, which provided free access to music listeners but proved to be a hindrance when Spotify approached record labels. The hindrance:

Spotify couldn't explain why music should be freely available.

They allowed all users to access music for free with ads playing in between and created an opt-in nudge for users who would prefer to pay a one-time subscription fee to get rid of the ad breaks when they listened to music.

Solely depending on ad revenue wasn’t a sustainable business model. And thus, using the data from their listeners, Spotify decided to try the subscription business model to fix sustainability.

You see, Daniel wanted music to be like air: free and available to everyone at all times.

Imagine you came across a new track your friend was listening to and loved it. But you couldn't just simply Shazam it and add to your playlist like you can do today. You had to engage with the thought of buying it.

This added a lot of friction to how consumers engaged with music. Essentially every new track became a purchase decision, which wasn't ideal. Daniel wanted to solve this problem.

The ability to have access to any album or track at all times and the ability to create personalized playlists put the consumer at the centre of the music streaming activity. It made the act of listening to music and sharing both personal and social.

And this is the shift Spotify engineered.

It became a turning point not only for music access but also for how money changed hands within the music industry.In the case of record companies, Spotify pays royalties to the rights-owner (the record label) or the distributor (in the case of independent artists), who then pass on a part of the royalty to the artist.

Spotify created a unique position by creating a system of least resistance for the end-user as compared to Apple. The pay-per-track feature of Apple’s iTunes left out chances for a user to not pay individually and instead download it illegally.

Spotify won by truly making all of music accessible at your fingertips at all times with a periodic subscription fee.

With me so far? Great. Time for a quick lesson.

Imagine you were Daniel Ek in 2006. Given this context of the music industry and how it evolved up until 2006, if you had the chance to pitch Spotify to a VC, which features would you mention in your pitch?

Would it be the dual revenue streams?

Would you boast of enabling easy access to music for consumers?

Could you perhaps hype the advanced technology that Spotify uses or would you try to incorporate all of these features?

More importantly, do you think an investor would recollect all of the features you mention while pitching a company? I doubt that.

Your understanding of the music industry and the shifts it underwent are the keys to helping you position your business in contrast to the incumbents.But to make a business pitch stand, you could highlight just one or at best, two differentiating features that best plug the gaps in your market.

When you craft an elevator pitch for any product you cannot risk rambling. You have to be crisp and clear. Also, you can't risk sounding vague, boring, or like a close substitute to what already exists. But how do you achieve that?

I tend to rely on Geoffery Moore’s positioning framework when I am working on a business pitch.

Using the example of Spotify, I’ll help you figure out the key ingredients required to make that succinct positioning statement.

  • For (target customers)
  • Who must (solve a specific problem)
  • Our product is a new (new product category)
  • That provides (key breakthrough benefit vs. the current way of doing things – which solves a dilemma)
  • Unlike (competitor in new category)
  • We have (a useful key differentiator that makes the product more relevant and useful)

Now, let's craft one for Spotify.

For (music lovers) who (want easier access and discovery to music), (Spotify) is a (subscription-based music streaming service) that (allows a user to listen to the entire collection of music anytime, anywhere, for a monthly or annual subscription fee.) Unlike (Apple's iTunes), Spotify (doesn’t make a user pay every time they want to listen to a new track.)

Parting thoughts

As a business that's trying to make space for itself in a market as messy as the music industry, clarity on what precisely differentiates your product from incumbents is key.

Geoffrey Moore's positioning statement acts as a clarity-forcing function on any founder who wants to communicate their product's unique value proposition in a crisp and concise way. And to arrive at this clarity, you need to have a solid understanding of the incentives of all stakeholders involved in the market and where they're coming from.

This piece was meant to be a short exercise in building that clarity before you arrive at your strategic positioning.

And to that end, I hope it has been a useful read.

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