Managing Expectations

I just finished reading an article about the declining sales woes of the recording industry. It occurred to me that the RIAA and the major labels need to start managing their expectations.

The term “managing expectations” may be familiar to some but is probably not generally known. It is a common marketing term that refers to the practice of making sure the clients expectations for a product meet the reality of what can be provided so that there isn’t wide spread disappointment. As an example let’s take a group of people attending a conference. The conference provides several events that people can participate in which run the gamut from boring to extremely fun. Unfortunately not everyone can attend the fun event since there are not enough slots, in fact let’s say only around ten percent will be able to attend. The conference must now manage the expectations of the people by only hyping the average events so that only the people in boring events will complain rather than everyone not in the fun event.

For years the recording industry had brought in record breaking sales every year. The popularity of physical media was so high that it allowed them to go through two standards changes without losing ground; from records to tapes and from tapes to CDs. If the recording industry tried another change at this point it would almost be guaranteed an abysmal failure. The introduction of CDs was an incredible success due to their low cost production and high initial price point they made a great deal more profit per sale than ever before. Over the years the price per CD really hasn’t gone down and the profit expectations of the industry have become wildly inflated. Some would call the pricing collusion and extortion by the RIAA but the argument doesn’t really matter any more. Today the demand for physical media has severely declined leading to a sharp drop in profits. Everyone agrees that the reason is the Internet but very few people agree on the specifics whether piracy, iTunes, radio, etc.

It is not surprising, given the hit that profits have taken, that the RIAA is striking out to try to increase revenue from other aspects of its business. Recently they pushed for a extremely large increase in the royalties that Internet radio stations need to pay to play music. Unfortunately the planned increase is based on greed and is more likely to have an opposite effect on royalty profits. Most radio stations will immediately close their doors since they could not hope to be able to pay without going bankrupt. In protest, Internet radio stations went dark today showing solidarity on the issue. Given the power the RIAA has in the American political system the protest will likely fall on deaf ears but here is hoping.

I learned something about business when I was younger that I will never forget. “In a finite universe an economic model based on constant growth doesn’t make sense”. Yes it is a quote — by who you ask? David Suzuki. All business can only grow finitely before slowing and eventually contracting. There are of course various reasons for this but it is absolutely true; no exceptions. In the last few years the recording industry has seen its core business contract and the trend will continue. It is time for them to realize that physical media will only generate less and less profit and adapt by managing their expectations. The only problem is that it is almost impossible to manage your own expectations, especially for a corporation. I foresee a crash in their future and I can only hope that music as a whole will not suffer.