The year was 1999 and the likes of Britney Spears, Cher, Shania Twain, Christina Aguilera and the Backstreet Boys were topping the music charts. The recording music industry was bringing in more money than ever, in excess of US $22 billion in 1999 alone. Fast forward to 2015 and revenue had dropped by 70%, driven by an industry wide failure to adapt in the wake of technology driven disruption. Yet, since 2015, having seemingly learnt its lesson, the industry has been experiencing a renaissance, driven by embracing modern technology.
This is a familiar story for many established organisations and industries facing disruption, and it leaves investors wondering why their tried and tested approach to investing is no longer working.
Source RIAA. Nearly 85% of all legitimate recorded music produced and sold in the United States is created, manufactured or distributed by RIAA members.
The backstory of the decline from 1999 to 2015
In the era of vinyl and cassettes, consumers demanded a quality product because they would listen to an artist’s whole album. When CDs came along, consumers could skip tracks, which quickly changed the way music was consumed.
Record companies took advantage of this by pushing a number of quickly produced filler songs from an artist’s catalogue onto an ‘album’ with only a couple of popular singles. Consumers were paying $20 to $30 for a CD but only listening to perhaps 10% to 20% of the content.
When consumers noticed this, they complained about having to shuffle many CDs just to listen to the music they wanted. CD changers and stackers were introduced, but this was a band-aid and did not fix the real issue.
Shawn Fanning and Sean Parker recognised the problem and developed a solution centred on a rising technology at the time – the Internet. They approached record labels with their software that would reduce or eliminate CD production and distribution costs, satisfy consumers and position their label for the future. Every company turned them down, choosing to instead maintain the old-fashioned way of operating, despite the serious threat of disruption from the Internet.
Fanning and Parker went on to release their software, Napster, in 1999 and made it free worldwide. It was short lived as the recording industry shut them down only two years later, citing that the software encouraged wholesale copyright infringement. However, the damage had been done. Consumers did not want to go back to listening to music on CDs packed with filler content.
Only in recent years have services allowing the legal sharing of music through a subscription model become mainstream and the rise of Spotify has accounted for much of the recovery of the music recording industry.
How to keep your investments relevant in a rapidly changing world
This is the story of just one industry facing disruption. Decades later, the Internet continues to disrupt many others and the onset of the COVID-19 pandemic has accelerated this trend.
The world is undergoing a technological revolution and the way you have invested in the past by holding shares in established companies or industries for the long-term is not likely to produce the same results it once did. BDO Private Wealth Advisers partner with investment specialists who understand and can navigate the rapidly changing investment environment to make agile decisions and invest in companies that are on the forefront in their response to the disruption.
Classical is a trend best saved for music rather than investing. If you want to ensure your portfolio can continue generating sound returns in these times of rapid change, get in touch with a BDO Private Wealth Adviser.
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