The Perfect Storm (part 2)

Singer and his colleagues didn’t have any more success winning hearts and minds when it came to demonstrating their technology. At a demo session for top executives at one of the major labels, they called up files of some of the company’s most popular songs and played them through an expensive sound system. The songs had been encoded with an algorithm that produced smaller files and better sound quality than the MP3 standard that would later dominate the market.

The team figured the executives would be wowed by how good the files still sounded, despite the compression, and by how much value consumers would get from being able to carry their music collections with them. But the executives didn’t respond that way. Instead, they concentrated on the sound quality, which wasn’t comparable to what one got from a CD. One executive, put off by what he was hearing, dismissed the whole effort with a line he must now deeply regret: “No one,” he told Singer and his colleagues, “is going to listen to that shit.”

Stymied by such reactions, a2b Music went nowhere and AT&T ended its trial. Change was coming, of course. “It is feasible,” Pekka Gronow and Ilpo Saunio wrote dreamily in An International History of the Recording Industry (1997), “that at some point in the future, recordings, as such, will no longer be produced at all, but that music will be supplied to the listener on request. … In theory it should be possible to develop a sort of gigantic jukebox from which the listener could choose the music he wants at the time he wants it, working either by telephone lines, by cable, or on the air waves.” But at the same time, this still seemed a distant prospect to most in the industry – the kind of thing for which no right-minded executive would consider abandoning the current cash cow.

A few years later, Apple stepped in; then came Rhapsody, Pandora, Spotify, and all sorts of other services. The rest is (still evolving) history. By turning the a2b team away, industry executives missed a chance to maintain their grip on one of the central pillars of their business model: the control of distribution.

“No one is going to listen to that shit.” We didn’t quote that line in order to make fun of the executive who uttered it. In his shoes, most people, whether they will admit it or not, would have reacted exactly the same way. As we have said, the effects of technological change are extraordinarily hard for market leaders to recognize – especially when, as in the above case, it represents a radical departure from how they established their market leadership in the first place. And even if you do see technological change coming, knowing what to do about it is still surprisingly difficult – as the publishers of the Encyclopaedia Britannica learned the hard way in the 1990s.

In 1990 the Encyclopaedia Britannica was riding high. Over the course of more than two centuries, the company that owned it, Encyclopaedia Britannica Inc., had painstakingly built its reputation as the most comprehensive and authoritative reference work in existence. Sets of the encyclopaedia sold for $1,500 - $2,000 each and took up entire shelves in libraries and living rooms. They were luxury goods, but the company’s enterprising in-home sales force had managed to convince droves of Americans that owning one was a requirement for – and a sign of – education, culture, and middle-class success. Production costs per set came to only about $250, and in 1990 the company made $650 million, its highest earnings ever. Britannica’s prospects seemed bright. In 1989, staffers at Microsoft investigating the launch of a digital encyclopedia certainly thought so. In an internal strategy memo about the Britannica, they wrote “No other broad-appeal content product in any category in any medium has a well-established single-user price point anywhere close to this.”

Britannica sold not only encyclopedias but also an aura of trustworthiness and sober authority. Decades of research, planning, and editing went into the creation of each new edition of the encyclopedia (although a modestly revised “New Printing” was offered for sale each year in between editions, along with the highly profitable Britannica Book of the Year). Other companies produced encyclopedias that were smaller, cheaper, and friendlier to use, but the Britannica team didn’t care. They wanted to serve customers willing to pay a premium for the very best product available – even if, as Britannica’s own research revealed, most of those customers opened their encyclopedias at a rate lower than once per year. “These books aren’t for reading,” a sales manager once declared, “they are for selling.”