Business Matters: Lessons For Music Biz In Kodak's Chapter 11?
Business Matters: Lessons For Music Biz In Kodak's Chapter 11?

Lessons For Music Biz In Kodak's Chapter 11?
-- The music industry is often compared to the buggy whip business that was decimated -- but not entirely killed -- by the rise of the automobile. Perhaps the tale of Kodak provides a better warning for music companies.

The fabled, 131-year-old company filed for Chapter 11 bankruptcy protection on Jan. 19 after a long slide into financial trouble. The company says it has $5.1 billion in assets and nearly $6.8 billion in deficits. "Since 2008, despite Kodak's best efforts, restructuring costs and recessionary forces have continued to negatively impact the company's liquidity position," the company's CEO said in a court filing.

Kodak has tried to evolve with the times. It sells digital picture frames, digital cameras, video cameras and printers. It also offers an online picture-printing business. Additionally, the company also has a multi-faceted commercial business. Kodak has closed manufacturing plants and processing labs, laid off tens of thousands of employees and shut down some divisions since 2003, chief executive Antonio M. Perez said in a press release.

So what went wrong? Why wasn't Kodak able to manage the transition to digital and away from its traditional business? An article at Knowledge @ Wharton paints a picture of a company that didn't properly utilize its researchers and focused its efforts on solutions (uses for its existing products) rather than needs (which would require new products). Like other entrenched companies, Kodak showed a hesitancy to move beyond its familiar, high-margin products.

Kodak's problems will appear familiar to people in the music business. Music companies are still trying to stabilize after a decade of layoffs, an altered retail landscape and the emergence of new ways of delivering music digitally.

But Kodak only goes so far as a metaphor. Upstart competitors can't simply supplant entrenched record labels and publishers. Whereas Kodak's products -- film and processing supplies -- were rendered irrelevant by new products, legacy music companies have exclusive rights to the products people want: the most popular music. (Piracy infringes on those exclusive rights, but that's another issue.) While Kodak fell prey to outsiders, the music business must change from within. Either today's entrenched companies evolve or new companies will be formed to replace their business practices.

There are signs of evolution everywhere you look. Take changes in physical distribution, the part of the business that's drying up. Three of four major music groups have outsourced physical distribution to Anderson Merchandisers. Many other distribution efforts had been consolidated in recent years: major distributors have absorbed the operations of their wholly owned independent distributors, while smaller distributors have been acquired by larger independents. And while lower prices and altered packaging aren't exactly celebrated as innovations, they are tactics that have helped buoy CD sales as the sales shift to digital.

There is no doubt the industry is now in a transitional phase in which record companies are carefully managing the shift away from the CD to digital formats. Companies have become more diversified businesses that reflect a future filled with digital and sponsorship opportunities. But seeing Kodak's Chapter 11, one has to wonder if the music business's evolution has been enough. After all, Kodak tried to change with the times, too. It diversified. It sold digital products. It reduced its workforce.

What will make music companies have a better outcome than Kodak? As the Knowledge @ Wharton article explains, the deciding factor in managing change is leadership.

"Adapting to technological change can be especially challenging for established companies like Kodak, Wharton experts say, because entrenched leadership often finds it difficult to break old patterns that once spelled success. Kodak's history shows that innovation alone isn't enough; companies must also have a clear business strategy that can adapt to changing times. Without one, disruptive innovations can sink a company's fortunes -- even when the innovations are its own."
( Knowledge @ Wharton)

A2IM: Piracy Matters To Smaller Music Companies, Too
-- Popular opinion seems to hold that digital piracy is entirely a Big Music issue, while smaller music companies (let's call them Small Music) welcome the benefits of illegal distribution of their music (such as greater visibility). It's a variation of the "Tortoise and the Hare" story. Big Music is obviously the tortoise -- and a slow, stupid tortoise at that.

But the letter from American Association of Independent Music (A2IM) to the Office of the United States Trade Representative shows that piracy matters to small music companies, too. It's not that independent labels are luddites, A2IM president Rich Bengloff explains. "We honestly feel there is no other industry that has embraced new forms of economic and delivery models as completely as the music industry. Our members also, on their own terms, give away free content to reward existing fans and cultivate new fans of their label's artists," he says.

Big Music gets the attention because it often takes the lead in piracy issues -- because it has the most resources. Smaller companies don't have the same resources. They may differ on the finer points of addressing piracy, but they're firmly in the fight. As Bengfloff put it, piracy is not "a fight between Silicon Valley technology and the unfortunately shrinking Big Media Content industry," but rather "a fight for (small- and medium-sized music enterprises) that want to create intellectual property artistry that creates cultural diversity, innovation, jobs and exports."

Orchard's Marketplace Adds New Services
-- The Orchard's Marketplace has added a slew of new services, including Act Local, DIY Music and SoundOut. Act Local builds apps with an emphasis on keeping the tools simple for non-technical users. DIY Music is a direct-to-consumer platform that allows users to built storefronts and gives them online sales tools. SoundOut is a research service that provides music fans' assessment of songs' hit potential.
( Press release)