The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2019

Independent record labels on the Cape Flats: How new technology can lead to new business models

Independent record labels on the Cape Flats How new technology can lead to new business models

By Arthur Price

  • DEC 2019
  • Tags Strategic Management
19 minutes to read

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What was this study about?

The Cape Flats, a disadvantaged area of Cape Town, offers a rich cultural heritage. Here, independent record labels help to create awareness through music genres such as hip-hop, R&B, house, kwaito, soul and jazz. But how did technology change the way in which these independent record labels operate? Can technology help these producers to become more sustainable?

Until now, research on digital disruption in the music industry mostly came from the developed world. However, it is also important to gain an understanding of how industry professionals can leverage technology in a localised context.

This calls for a better understanding of how digitalisation affects the design and shape of business models, and how the industry, market forces and innovation shape opportunities to monetise music through the use of digital technologies.

About digital disruption in the music industry

First we had the gramophone and radio. Then came vinyl records, audiocassettes and CDs, followed by the internet, ICT and social media. This has changed the way in which recorded music is distributed and consumed. But it was the development of the MP3 music format, better storage technology and increased broadband internet speeds that really drove the digital disruption of the music industry. Digital interfaces for music production was developed, which eradicated revenue streams monopolised by large record companies. This enabled music professionals to self-produce and publish music far more cost-effectively.

Digital interfaces for music production … enabled music professionals to self-produce and publish music far more cost-effectively.

Next, online music services, music downloading and music streaming led to new platforms for artists to distribute their music and for consumers to find this music.

This changed when music aggregation sites became central hubs for individuals to access music and when music labels created music that could not be sold on major digital distribution hubs because they did not have an agreement with a professional distributor.

The rise in social media has led to online service companies putting more effort into gathering customers than making money from them. Social media gives business owners with a direct route to market and increases consumer-to-consumer promotion.

In addition, crowdfunding has become popular in the music industry due to the success of fan involvement in the creative side of music production. Crowdfunding can indeed provide a revenue stream to help artists and independent record labels to overcome financial limitations associated with music production.

About business models and value chains for the music industry

A business model is a strategic management tool that improves a company’s competitiveness in an industry’s value chain. It can help a company to structure its business for operational efficiency. Four elements are essential for the development of a good business model: A value proposition, supply chain, customer interface and financial model.

The traditional value chain in the music industry went from composing tunes, song writing, live performances, publishing, recording, reproduction and distribution to retailing. But now, fewer people are buying physical music products. This allows music to be classified as information, which calls for a new value chain.

The rise in social media has led to online service companies putting more effort into gathering customers than making money from them.

A virtual value chain is created when value-adding steps are performed through and with information. With the increase of digital technologies in the core of products, services and operations, business models need to change accordingly. This means we need to ask what such a business model should take into account, how networked interdependencies can influence the design of such a business model, and how technology can facilitate two-way links between stakeholders.

A review of the existing literature on this topic says the music industry value chain should be seen as a network. The creation of a musical concept, digitisation and collaboration serves as a value-creation loop. Value is captured by ensuring a personalised delivery and experience for consumers. Expenditure during the value-creation process includes tangible and digital product development, aggregator fees and royalties to rights holders. Revenue is generated, among others, via digital downloads, streaming revenue and crowdfunding.

But what about smaller record labels?

This study wanted to develop a business model and value chain for independent record labels with digitisation as a core competency in order to improve business sustainability. The argument was that if there is a better understanding of the variation in business models and virtual value chain perceptions among independent record labels on the Cape Flats, then surely this will provide much-needed insight into sustainable economic development in a geographical space that would benefit from favourable growth? What’s more, this growth may even help to off-set youth unemployment.

To find out, semi-structured interviews were conducted with eight participants who collectively had over 100 years of experience as independent music professionals. Thematic analysis was used to identify repeating themes, which enabled the researcher to propose a better business model.

What did the study find?

Four themes surfaced from the participant interviews: musical concepts are shared visions, virtual organising is important, digital distribution is important for value creation, and crowdfunding is not necessary for success. Each of these themes were developed to gain a better understanding the respondents’ views.

When delving deeper into why the strong emphasis on the musical concept, most participants referred to the criticality of a shared vision between all parties for an independent record label to remain consistent …

Theme 1: Musical concepts are shared visions

Theme 1 refers to a shared vision between owner and artist, which is critical for musical concepts to be developed. Musical concepts are more than establishing a theme for a project; it is a prerequisite for strategic musical narratives that create label identity and improve business sustainability.

The interviews with the independent record label producers started with a discussion around musical concepts. It probed the creative process when artists and the label decided to embark on a project, and how the parties involved choose to interact with each other. Various participants mentioned that the musical concept is important for independent record label producers. In most cases, it related to what job they want the music to perform and whether they were planning to distribute the project commercially. In many cases, single releases and experimental projects are designed to be given away for free.

When delving deeper into why the strong emphasis on the musical concept, most participants referred to the criticality of a shared vision between all parties for an independent record label to remain consistent and sustainable over the long term. According to them, incongruence in this “shared vision” can lead to creative instability and even derail projects.

Theme 2: Virtual organising

This theme reaffirms the importance of virtual organising through digital technologies when performing the tasks of creating musical concepts, music production and customer interaction. The interaction of these elements integrates the asset configuration and customer interaction sections of the theoretical business model. This theme explains the key technologies together with the respondents’ rationale for using tools such as WhatsApp, Google Drive and WeTransfer.

Yes, software allows them to record in real time with everyone being in different places, but then they need to deal with bandwidth, speed and reliability …

Virtualness as a strategy facilitates interaction via digital technologies between customers and stakeholders that are geographically dispersed. To assess the relative importance of virtual organising within the local context it is essential to explore the driving forces behind the chosen channel and platform for virtual interaction across the supply chain. These interactions are discussed from the perspective of musical concepts, music production and customer interaction:

  • Musical concepts: In terms of virtual organising, all the participants referred to digital tools such as social media platforms, iTunes, Google Play and Spotify. However, affordability and access to the internet are also shaping their interactions. This means that file size, download platforms and interaction platforms were considered as important for a successful digital strategy. Most participants said they use WhatsApp groups to interact with stakeholders, finalise concepts and coordinate schedules. Even though sophisticated platforms designed for cloud-based interaction offer a lot of functionality, the affordability of data and challenges like sign-up procedures can hamper their use.
  • Music production: The importance of owning one’s own recording studio was emphasised. This circumvents the challenges associated with using digital audio interfaces. Yes, software allows them to record in real time with everyone being in different places, but then they need to deal with bandwidth, speed and reliability, which is why these independent record producers preferred to record the final product together at the same time.
  • Customer interaction through social media: One participant mentioned that the use of social media makes it easy to interact with his customers and to enable his record label to have a presence on various digital platforms. However, he added, one must also nurture followers on a personal level (through “personal communication” and “physical presence”) and never overestimate brand strength merely based on social media reactions of support. Another participant stressed the importance of quality content and a solid work ethic to gain a tangible followership (“which calls for a lot of hard work”). They agreed that social media interaction is critical for maintaining the public image of the artist or independent record label, but does not necessarily create revenue streams. They said that social media, Facebook in particular, can be used as a reference point for potential bookings from corporates and event managers when determining the influence and likeability of an artist.

Theme 3: Digital distribution is for value creation

All the participants viewed digital distribution via major distributors such as iTunes, Google Play and Spotify as a key factor for business success. For them, digital distribution via these platforms is not about revenue generation. Instead, it is a way to improve brand equity which is needed to unlock revenue generation through business-to-business interaction. Their primary revenue come from live performances. As one participant said, “These are just like little things that give you legitimacy but makes no money…”

Digital distribution via major distributors is therefore a component of the value-creation process and not their main revenue stream.

Theme 4: Crowdfunding is non-essential for success

Most of the respondents considered crowdfunding a non-essential activity despite agreeing that it could add value to their business. This opinion was largely driven by the enormous effort required to ensure a successful crowdfunding campaign. For these independent record label producers, sustainable fund generation mostly happened a personal manner within business networks. As one participant explained: “I believe as an artist you first need to be able to invest in yourself.” The participant believed that these entrepreneurs should be willing to invest in their businesses and that the loss of money will result in critical lessons learnt. Another participant believed that crowdfunding only “works if you have a compelling story”. Furthermore, crowdfunding is a technical process, which does not guarantee returns or success of the campaign. Based on the participants’ feedback, it was clear that crowdfunding is a contentious subject that has not yet reached maturity.

What is the take-out from this?

Key findings from the in-depth interviews with the eight independent record label producers from the Cape Flats included the following:

  • Have a shared vision: The independent producers said that musical concepts need to be expanded to factor in the vision of the independent record label. What’s more, the artist and the business owner should agree on this vision. This will help to ensure that musical concepts become strategic musical narratives that ultimately translate into label identity. It is recommended that the initial business model incorporates shared vision as a prerequisite for a strong label identity.
  • Use WhatsApp groups for virtual organising: All the participants referred to the use of WhatsApp groups for communication with business partners and customers. Exclusive content distribution and direct interaction with customers via WhatsApp can create a cost-effective and vibrant online community, which provides a direct route to customer interaction. It is recommended that the initial business model incorporates WhatsApp groups for efficient virtual communication.
  • See digital distribution and social media interaction as a system: Virtual organising for digital distribution and social media interaction with customers serves as a key driver to grow brand equity when followers increase. This leads to an enhanced value proposition, which drives revenue generation. However, primary revenue is generated from live shows. Digital distribution is not crucial for revenue creation. Instead, it forms part of a complex system that incorporates social media interaction, increased downloads and investment in brand identity to build optimal brand equity. Digital distribution via major distributors is therefore a component of the value-creation process and not their main revenue stream.

Previously, corporate clients were neglected as a source of revenue. However, it is now possible for independent record labels to attract revenue from event managers and corporate clients if their brand equity justifies the investment.

  • Ignore crowdfunding for now: Globally, independent music artists have benefitted from crowdfunding. However, most of the participants were hesitant about the potential return of crowdfunding. For the participants, the probability of a successful crowdfunding campaign is not high as they have limited resources while crowdfunding calls for a huge investment of resources. So, crowdfunding is currently not considered a key activity for them.
  • Distinguish between corporates and consumers: Independent record label producers should segment customers into corporates and consumers. Previously, corporate clients were neglected as a source of revenue. However, it is now possible for independent record labels to attract revenue from event managers and corporate clients if their brand equity justifies the investment. This will, of course, also depend on the successful use of digital as a core competency.
  • Manage the customer value proposition: A key expansion from the prior business model is that customer interaction is actually a value-creation system. Social media success requires a mix of online platforms such as Facebook and Twitter, but value optimisation takes place through communication of strategic musical narratives via WhatsApp groups. Integrating strategic musical narratives with digital distribution and social media interaction as a system is critical for managing the customer value proposition across the various customer segments.

Suggested changes to the business model for independent record label producers

What insights can be incorporated into the business model for smaller producers?  Firstly, start with a shared vision to ensure alignment between all parties. Secondly, incorporate WhatsApp groups for efficient virtual communication. In addition, focus on live shows for revenue generation (with a strong focus on corporate clients), and on digital distribution and social media interaction to build brand equity. Most importantly, see customer interaction as a value-creation system.

… personalised delivery and experience management for the consumer segment is now seen as part of the value-creation process.

Suggested changes to the value chain for independent record label producers

The independent producers did not regard digital distribution as a key source of revenue because the earning potential via digital distribution was too low. However, they do realise that it is important to build brand equity. Live performances – whether self-managed, contracted through event managers or corporate clientele – were important as these generated revenue. This triggered key changes to the theoretical value chain. Firstly, personalised delivery and experience management for the consumer segment is now seen as part of the value-creation process. Secondly, successful value creation is necessary to build the brand equity required to capture optimal value, which includes the ability to tap into corporate revenue streams.

The future of music on the Cape Flats is digital

Smaller, independent record labels – such as those on the Cape Flats – can unlock new revenue streams and improve business sustainability if they enhance their digital competencies in the areas that help to build their brand equity. What’s more, digital technologies can help them to save costs and leverage advantages when competing against firms with similar service offerings.

    • This article is based on the research assignment of Arthur Price – an MBA alumnus of USB. The title of his research assignment was: Business models of independent record labels on the Cape Flats to stimulate business sustainability.
    • His study leader was Prof Marius Ungerer, who teaches strategic management, leadership and change management on programmes such as the MBA, the MPhil in Management Coaching, and the PGDip in Leadership Development at USB. Prof Ungerer is an annual Visiting Professor at the NUCB Graduate School, International MBA Program, Nagoya, Japan, and a visiting faculty member of the University of Johannesburg.

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