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Diminished but not dead

I talk a lot about diversity in my work. Not in the sense of a more balanced and equal workplace or society, important though that is. But rather how technology has lowered the barriers to innovation and market entry, inviting more competition at every stage in the value chain.

This is one of our five ‘Vectors of Change’ that form part of our Intersections foresight tool.

Sometimes the rapid innovation of new entrants will completely kill off incumbents. In describing one of our other Vectors of Change, Agility, we give lots of examples of this. Companies that were so bound to their way of doing things that they couldn’t change when the time came, even if they saw it coming. Kodak, Blockbuster, HMV. There are many more.

Most of the time though, new entrants don’t completely destroy the incumbent. They just diminish them. Limit their opportunities for growth.

Like physical music sales in the face of digital. Often when I’m speaking to an audience and talk about digital music destroying HMV, people retort that HMV has returned from administration and is now profitable again. That vinyl sales are on the up.

These things are true, and I give my hearty congratulations to Hilco, which has turned HMV around. But this success needs to be put into perspective.

Over the last year, worldwide revenues from digital music sales — downloads and streams — significantly overtook those from physical sales. 45% to 39%In the UK, streaming climbed 82% with digital formats now representing 54% of all UK music consumption. Vinyl accounted for just 1.7% of album sales, albeit it saw significant growth. CD sales fell (as did downloads) in the face of streaming growth.

When you take into account other physical format sales, like video (down 15% by these figures), the future does not look bright for large-scale high-street media stores. That’s not to say that there won’t be retailers of physical media, but they will probably be relegated to cheaper back-street locations where the economics make more sense.

Low-friction, digital formats increasingly hoover up the mass market — half a billion music streams a week just in the UK. But the physical formats still have a place. Their retailers will still be in the market in the future, but will represent a small proportion of it, catering to one niche in an increasingly diverse economy.

The caveat to this is experience. Based on some research I’ve been doing for a client recently, there remains a big demand for the physical shopping experience. People like to experience goods and socialise around shopping. The challenge is translating this experience into revenue, but solve that problem and our high streets may stay a little more diverse.

 

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Tom Cheesewright