A Music Downloading Software and an Mp3 Player Are Substitutes for One Another.
History of The MP3
How An Algorithm Transformed The Music Industry And Created The Mobile & Social Web
As the music industry recently announced its get-go annual revenue growth afterward 15 years of uninterrupted wrinkle, I thought information technology was a proficient time to share some of the things I learnt from reading Stephen Witt's book How Music Got Free. It provides a fascinating account of how a relatively obscure scientific breakthrough — the discovery by German engineers of "psychoacoustic" principles according to which most of the information in recorded music is in fact inaudible to the human listener and can exist thrown away — coupled with the distribution power of the Cyberspace, radically transformed a large and profitable industry in a affair of years. Every bit such, the history of the MP3 gives an excellent framework to conceptualize how confusing 10x innovations impact a market place, and who the winners and losers of such breakthroughs volition be.
- The MP3 is a perfect instance written report of Innovator'south Dilemma.
Compared to the CD, the MP3 was an inferior product (lower sound quality) but radically cheaper and more convenient (one/twelfth smaller information footprint). Information technology initially targeted a tiny niche of users: few people were on the Internet with a fast plenty connexion at the time, no one had an MP3 player, and in that location was nowhere user-friendly to download MP3 files. Just post-obit the rapid development of its ecosystem (desktop and and so mobile MP3 players, Torrent then download and streaming services), MP3s speedily became a amend option than CDs for the majority of the population, rendering the previous paradigm obsolete.
"The music industry does non believe in electronic music distribution"
As with other disrupted industries described by Clay Christensen in Innovator's Dilemma, the incumbent players in the music sector at the fourth dimension (labels, CD manufacturers and distributors, CD thespian manufacturers) initially dismissed the innovation as a depression quality hack that would never accept off. When Karlheinz Brandenburg, the genial inventor of the new format, approached the big record companies to recommend that they adopt a new copy-protected version of the file, he was "informed, diplomatically, that the music manufacture did non believe in electronic music distribution". Similarly, when his group showed their prototype of the showtime portable MP3 player at an engineering fair in 1995, an executive from Philips told them: "At that place volition never exist a commercial MP3 player."
Not only did the incumbents fail to grasp the potential value, but it would accept made no sense for them to go later on such a small unprofitable niche, which would take been irrelevant to their top line, and eating away at their bottom line (CDs were 90%+ gross margin products back so). Past the time they realised what was coming, it was already also belatedly for a lot of them to react — most of the value created would accrue to new entrants.
The dilemma extends beyond misaligned economic science incentives. In that location is also a DNA issue at pale — incumbents simply did not accept the correct teams to adapt to the changing surroundings. "There's no one in the record company that'due south a technologist," Morris explains. "That's a misconception writers brand all the time, that the record industry missed this. They didn't. They just didn't know what to do. It's like if you were suddenly asked to operate on your dog to remove his kidney. What would you practice?" Personally, I would hire a vet. But to Morris, fifty-fifty that wasn't an option. "We didn't know who to hire," he says, becoming more than agitated. "I wouldn't be able to recognize a good engineering science person — anyone with a proficient bullshit story would have gotten past me."
2. Applied science Vs. Craftsmanship
In Zen and the Art of Motorcycle Maintenance, Robert Pirsig contrasts the narrator's classical approach to life (and motorcycling) to his artist friend John Sutherland's romantic opinion. While the former owns an older motorcycle which he is usually able to diagnose and repair himself through the use of rational problem-solving skills, the latter merely hopes for the best for his bike and focuses on being "In the moment", and not on rational analysis.
"Still, this was technology, where verified results should by necessity triumph over human being sentiment."
A similar dichotomy lies at the middle of the MP3 story, which helps explicate the sector'southward initial dismissal of the new format as an inferior product. As Witt puts it: "The studio engineers hated the mp3. These were the knob-twiddling soundboard jockeys who actually mixed the albums. Responsibility for the audio quality of recorded albums vicious to them, and, in their consensus opinion, the mp3 sounded like shit. […] But it went beyond that — the studio engineers were irredeemable audiophiles who regarded even high-quality mp3s with disdain. For them, capturing the subtle acoustic qualities of recorded music was a professional person obligation that bordered on obsession. Now Brandenburg was proposing to irretrievably delete 90 percent of their life'due south work. For the studio guys, audio was an aesthetic quality that you described in terms of "tone" and "warmth." For the researchers, sound was a physical belongings of the universe that you lot described in logarithmic units of air displacement."
We at present all know how that battle played out. As Witt concludes: "Still, this was engineering, where verified results should by necessity triumph over human sentiment."
Watch out for whatsoever instances where incumbents bet their future on romantic, non-rational arguments. There is value to exist created past betting against them and building better products based on first principles.
iii. Network effects win: the revolutionary power of free
While the MP3 was genuinely meliorate than the competing MP2, information technology was not as adept as the AAC, which was designed to be its successor. However, the MP3 won the format war because it was the first "good enough" digital format to reach disquisitional mass. Consumer adoption created a de facto standard that was then impossible to bypass due to network furnishings.
"Why would anyone purchase a music player if in that location was no music to be played on it?"
Merely how exactly, did the German researchers at the Fraunhofer Plant manage to win the market, confronting ameliorate funded and more business-savvy competitors? Past doing what countless other consumer social apps accept since washed: giving existent value away for gratis. Afterward launching the format, they quickly realised that information technology had no chance to succeed if users did not have a simple mode to listen to it. This was the typical chicken and egg problem that any new format faces: it cannot grow unless consumers are equipped to use it, simply consumers don't want to invest in expensive equipment until they know there is enough available content to justify it.
They therefore started by giving away a elementary desktop-based MP3 encoder.
"Later on some internal word, Brandenburg fabricated an executive conclusion: to promote the mp3 standard, Fraunhofer would just requite L3Enc [an encoding software they had developped] abroad. Thousands of floppy disks were made, and these were distributed at trade shows through tardily 1994 and early 1995. Brandenburg encouraged his team members to distribute the disks to friends, family, colleagues, and fifty-fifty competitors.
The freeware was quickly appropriated by pirates and turned it into a weapon of mass MP3isation.
"Using Fraunhofer's L3Enc encoder, NetFraCk had started a new coiffure, the world's first ever digital music piracy grouping: Compress 'Da Audio, or CDA for brusque. On August 10, 1996, CDA had released to IRC the world's first "officially" pirated mp3: "Until It Sleeps," by Metallica, off their album Load. Within weeks, there were numerous rival crews and thousands of pirated songs."
The German researchers so proceeded to develop the 2nd disquisitional component in digital music consumption: the desktop MP3 player, which, this time, they decided to distribute as a freemium product.
"Grill finished the program in July and began distributing it on floppy disk as "crippleware." WinPlay3 had the capacity to play twenty songs, and then, like a message from the Incommunicable Missions Force, it self-destructed. If yous wanted to continue using it by that point, you were required to ship a registration fee to Fraunhofer and wait for them to transport you back a serial number."
Hackers quickly cracked the arbitrary twenty songs limit, heralding the era of free, unlimited, digital music.
"The Fraunhofer squad were no strangers to the Internet, but the Cyberspace they knew was a collaborative tool for research and commerce, not some grimy subculture of anonymous teenage hackers. In their naiveté, they had not seen what was coming. Somewhere in the underworld, L3Enc, the DOS-based shareware encoder Grill had programmed several years dorsum, was being used to create thousands upon thousands of pirated files. Meanwhile, somewhere else in the underworld, the commercial WinPlay3 player that supposedly self-destructed after twenty uses had been cracked, enabling full functionality. Together, the 2 were now being distributed in chat rooms and websites as a bundled package."
While it may not have taken the shape they had originally envisioned, Brandenburg and Grill's freemium distribution strategy is what created the MP3's network effect it needed to dominate the marketplace, even against more technologically sophisticated formats.
four. From the MP3 to the P2P revolution
But no affair how efficient the format and how user-friendly the player, no user would have been interested in taking part in the MP3 ecosystem without an easy way to access all this heady new content. A new distribution infrastructure had to be built, superseding the brick-and-mortar tape stores.
"With torrents, the more people who attempted to simultaneously download a file, the faster the download went."
Only sharing large catalog of heavy digital files on a global scale presented unique technical challenges, which the invention of torrents and their underlying P2P applied science brilliantly solved.
"The greatest do good of the torrent approach was the manner it solved one of the Internet's long-outstanding problems: the traffic bottleneck. Historically, popular files tended to crash servers, equally millions of users crowded effectually a narrow doorway and tried to push their fashion in. Merely the matching schematic of torrents opened hundreds of doors at once, taking pressure level off the server and transferring it to individuals. This inversion of the traditional image of file distribution had a startling consequence: with torrents, the more people who attempted to simultaneously download a file, the faster the download went."
Launched in 1999 as the more than commercially mature incarnation of P2P tech, Napster demonstrated how quickly the applied science could scale, both from an infrastructure and consumer demand point of view.
"Napster was a natural monopoly whose pick and speed only improved as more people joined. By early 2000 there were almost twenty meg users, and by summer over 14,000 songs were being downloaded every infinitesimal. Every song ever produced anywhere could be procured in seconds. Download speeds were improving rapidly, even from a home connection, and songs often arrived in less time than they took to listen to. In essence, the vocal could be streamed. Napster wasn't just a file-sharing service; it was the infinite digital jukebox. And it was free."
Despite its eventual shutdown, Napster and other successful file sharing sites laid the technical and business foundations that the social web built on subsequently. It is no coincidence that early participants in these ventures ended up in the founding teams of companies like Facebook and Skype.
5. The emergence of a new value chain
The MP3 didn't merely change the style music got distributed, but transformed its entire value chain, from production and manufacturing to the role of the labels, and even the job of an artist. Every bit with every other industry touched by the Internet, by dramatically lowering barriers to entry, the new format made information technology possible to bypass various middlemen and gatekeepers.
"Morris had once been a gatekeeper, the guy yous needed to get past to get into the professional music studio, and the pressing plant, and the distribution network. Simply yous didn't need any of that stuff anymore. The studio was Pro Tools, the pressing plant was an mp3 encoder, and the distribution network was a torrent tracker. The entire manufacture could exist run off a laptop."
Labels have not disappeared though, but their revenue model has had to change, moving abroad from album sales towards all-encompassing "360" deals.
"Even as they abandoned the album, fans started arriving in droves to big-scale integrated music festivals. […] from 1999 to 2009 concert ticket sales in North America more than tripled. At the same time, increased need from advertisers and sample-driven music producers led to a period of spectacular growth in the music publishing concern. […] In response to these shifts, music executives began pushing artists to sign "360" deals that guaranteed labels not just a portion of album sales only alive music and publishing rights as well. While 360 deals were controversial, artists nevertheless seemed to need labels, even in the digital era, and many, sometimes against their improve judgment, signed on."
vi. Second and 3rd order consequences: value goes up for complements and downward for substitutes
A recent commodity in the Harvard Concern Review titled "The Unproblematic Economics of Machine Intelligence" offers a useful framework to call back almost the systemic impact of disruptive innovation. Information technology goes as follows: "When the cost of a foundational input plummets, it often affects the value of other inputs. The value goes upward for complements and down for substitutes. In the instance of photography, the value of the hardware and software components associated with digital cameras went up as the cost of arithmetic dropped considering need increased — we wanted more of them. These components were complements to arithmetic; they were used together. In dissimilarity, the value of movie-related chemicals fell — nosotros wanted less of them."
In the case of the MP3, while it rendered the CD (a substitute) and its value concatenation obsolete, it created large complementary winners in distribution (Spotify), connected speakers/headsets (Sonos, Beats), or alive music. But the well-nigh successful complementary engineering science of all has unquestionably been the portable MP3 player, the iPod in particular. It kickstarted Apple's renaissance and served as the launching pad for the iPhone and the smartphone manufacture as a whole.
Whether it's artificial intelligence, self-driving, blockchain, 3D-printing, or whatever other new disruptive applied science, information technology's useful to think in terms of complements and substitutes to identify winners and losers, and more accurately predict second and tertiary club consequences, beyond the immediate bear on on a narrow market.
7. Are VCs music labels in disguise?
As Witt was describing the 24-hour interval to day job of Doug Morris, once the almost powerful executive in the history of music every bit head of Warner, I couldn't assist but notice how similar it was from mine as a VC. Find ways to identify talent earlier than competition, fight to sign exclusive agreements with them, spot the future winners and invest massively on them, every bit most returns are generated past a few outliers. Sounds familiar?
Morris even rose through the ranks by leveraging some other ane of VCs' favourite tools: information.
"The shift in roles required Morris to pay closer attention to sales, just in the 1960s keeping score was difficult. Record stores weren't always inclined to share their sales figures, and fifty-fifty if they had been, in an era before computers, collecting and sorting the information from thousands of retailers effectually the country was impossible. But one person at Laurie could provide the numbers Morris needed, a functionary clerk whose real-world chore was about every bit far abroad from the glamour of the music business organization as you could get: the gild-taker. Morris haunted him similar a ghost. Whenever a large gild came in Morris demanded to know who had placed it, exactly how many units they wanted, and why. The order-taker was understandably perplexed. Shouldn't Morris be at a nightclub somewhere, looking for the side by side Jimi Hendrix, instead of here, in the accounting department, pestering a back-office employee? But to Morris the order-taker was the fundamental to the whole thing. How could he know what to sell if he didn't know what people were buying? […]
Morris never forgot the experience of his first gold record, and he began to trust market enquiry more than he trusted expert stance — more, sometimes, than he trusted his own ears. Let the other A&Rs scout bands, and become to nightclubs, and fall in beloved with demos. Permit them guess at trends, and fool themselves into believing they had some special insight into the adjacent big thing. From at present on, Morris was scouting the guild-taker."
The development of music labels can therefore provide a relevant blueprint for the VC industry. In the same way that the switch to digital rendered the labels' analogue monopolies obsolete, and made it possible for artists to bypass them and get direct to their audience, new tools like crowdfunding, online market or fifty-fifty Initial Coin Offerings can challenge the traditional VC model, congenital around privileged LP access and proprietary dealflow. Some new VCs accept attacked the marketplace by offer more than services to entrepreneurs (eg. A16Z). Others by sourcing talent earlier and at scale with a standardised low toll high volume model (eg. YC). All forcing established players to go on improving on their offering.
The analogy is not perfect: VCs never enjoyed the marketplace power and subsequent hire that music labels did, which has forced united states of america to remain modest and nimble. Online has so far been complementary rather than substitutive. Merely it is an interesting analogy nonetheless, as the fundamental question remains the same: how can intermediaries proceed providing value in a fully digital economy where platforms can lucifer supply and demand with greater efficiency and scale? Tomorrow's winning VCs will be the one who find the right answers to this question.
Conclusion
Equally a conclusion, I'd highly recommend reading Stephen Witt's volume. His account of the nighttime underworld that powered the early days of the digital music ecosystem is fascinating, equally is his in-depth description of characters every bit extraordinary as Brandenburg and Morris. Just even more interesting is the pace by footstep breakdown of the bear upon a single algorithm has had on both the music and the tech industry at large. It provides another splendid example study of innovator's dilemma, and a great framework to predict the future bear on of nascent disruptive innovations. Whether information technology'southward autonomous vehicles, 3D press, bitcoin or AI, many radical innovations accept recently appeared which have the potential to upend existing industry value chains past offering 10x improvement in price and convenience. And every bit with the MP3, some of them may unleash 2nd, or even third order consequences, as significant every bit Apple'southward rise to dominance.
A Music Downloading Software and an Mp3 Player Are Substitutes for One Another.
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Source: https://medium.com/@martinmignot/as-the-music-industry-recently-announced-its-first-annual-revenue-growth-after-15-years-of-115e424338f
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