Big corporations have it bad. The past few years have seen big business (and its leaders) burdened by public humiliation on issues of ethics, misconduct, stealing, cheating, and lying. The recent economic downturn has not helped. Listen to the news and the latest talk is about organizations getting ‘too big.’

The music industry is no different. The fact that technology is re-inventing the music biz is old news. Topics around copyright, licensing, distribution, and price are all over the web. Exactly how that change will occur is still up in the air. I’d like to look back at some of the beliefs that limited the industry, specifically big business, in the idea that a digitial tsunami was coming. (Most of these revolve around the idea of music being free.)

* The idea that free can’t support a business – The big wigs inside corporation are all driven by a single motive – to make money. That’s neither good nor bad, it just is. However, when you use a single variable to guide your decision making, it creates tunnel vision. Everyday the execs deal with budgets, sales forecasts, revenue projections, and record sales numbers. And they evaluated their options based on money. So when they heard music being given away for free, it confused them. “How the hell can you make money on something that’s free? ” was a typical response.

Of course, the issue here is about revenue, it’s about the source of the revenue. Rather than money from music sales, the money would come from other sources, like touring and merch and licensing.

(On a side note, this issue of free is not peculiar to the music industry. In the tech world, the rise of Linux and other open source projects brought this exact same response. In fact, the quote above was a response from one of my old managers. I had approached the owner of the tech  company with the idea that we should be keeping an eye on Linux as a growing competitor. The rebuttal above was spoken in both a condescending and frustrating tone. I guess I just didn’t ‘get it’ in his eyes. )

* Old mindsets and unwillingness to change – This is a particularly nasty one.  How often do you hear, ‘Son, I’ve been in this business for 25 years and I’ve seen everything.’

Well, the unwillingness to accept change as a constant is often catastrophic. The famous quote goes ‘The only constant is change.” (source: Heraclitus) Industry leaders were repeatedly downplaying the impact of the web and the internet. It would never disrupt the music industry in their eyes. In some cases, they tried their damndest to stop it with legal action and lobbying, which is still going on today. But you can’t stop change.

To be clear, there are numerous business principles that don’t change. Profit and revenue are still important, as well as keeping expenses aligned with your revenue. Marketing and sales will always be critical for success. In the years ahead, we’ll look back and discover these principles still govern successful businesses. The parts of the industry that changed were structural issues like distribution and promotional channels.

* Failure to recognize how fans really find music – Spending millions of marketing is one way to find success, but only because you are bombarding the consumer and training them to want to buy the music. If I see a picture of an artist enough times, eventually I’ll listen to it if only to see what the fuss is about. Will I become a die-hard fan? Doubtful.

The music I absolutely love comes from shared experiences and recommendations from friends. It was the people I really trusted that led me to give new music a really good listen. Besides, who else besides my friends knew me the best? The radio station didn’t. Neither did a magazine ad. Once someone I trusted told me about a new artist, the chances that I became a fan increased exponentially.

How could the music companies have cashed in on this? If they had implemented a review and recommedation system at the same time Amazon started theirs, the music industry woulud be owned by them today. And I don’t mean they would be ‘big.’ If they had started a recommendation system back in the 90’s, they would be so big the FCC would be attacking them alongside Microsoft and Google.

[ Part 2 is coming. We'll discuss at least 3 more reasons the big corporations didn't see the 'free' issue. ]