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How to survive in a world of perpetual transformations

CLAUDIO GARCIA

It took twenty years for the recorded music industry to fully recover its total sales from its peak in 1999, at least in absolute numbers (if adjusted for inflation, it would still take a few more years). All changed when file sharing peer-to-peer services became available on the internet, specifically Napster, which developed an interface in which it was easy to catalog and search for song files. In less than three years, it reached about 80 million users — that’s half of Spotify’s current number of paid users — sharing an unimaginable amount of song files for free. This was a significant revolution for an industry that, in the 40 years before Napster, had the cassette tape and the Compact Disc player — physical formats to store a tiny amount of music (usually 10-20 songs) — as its major technological advancements.

But Napster could not leverage its success. It was slaughtered by lawsuits from major record labels and artists angry with copyright infringements. After many losses in court, a little more than two years after its foundation, Napster shut down its peer-to-peer services. Since then, the company has tried other formats to stay alive and changed ownership many times — today it is owned by MelodyVR, a live music streaming platform — but never recovered the clout and popularity of its early years.

Napster is an essential part of the history of early internet entrepreneurship and a commonly used history of disruption. While it is far from a successful business story, Napster sowed the seeds of new behavior in the consumption of music. Even after the shutdown of the peer-to-peer service, users continued to shift from buying physical formats to downloading music based on their demand, supported by other alternative platforms and ever-improving internet bandwidth. In the recorded music industry, the bottom of revenues came in 2014. In some countries, that represented less than half of the peak of 1999 (not adjusted for inflation). So, Napster is a story of disruption. It put a whole industry through a process of reinvention which has lasted many years without yet reaching a happy ending. Even the most prominent global player in the field today, the streaming service Spotify, is still to show a profit.

As with many other stories of disruption, Napster shows that it is not easy to see where transformations are precisely coming from, which format they will take, and how long it will take an industry to find a new sustainable path. And yet, it is crucial to be ready for the unexpectedness of a world undergoing perpetual transformation, even if it is a rough path.

A transformation does not mean something better will automatically emerge.

The change of the consumer of music habits triggered by Napster was a misfortune for the recorded music value chain. It significantly reduced the size of the pie for everyone. Even though it is much easier to publish a new album nowadays, it is challenging even for a mid-sized artist (which means having songs streamed a couple million times) to make a decent living.

Similar dynamics can be seen in many other disrupted industries. The ride car revolution (Uber, Lyft, Didi, among others) brought significant transformation in the personal transportation industry. However, there’s no clear winner since these players are still burning cash significantly to keep their operations working, and most traditional taxi businesses lost substantial market share. Or, another example, the food delivery industry, where around the globe, companies like Door-dash, Deliveroo, and Grub-Hub, despite massive adoption by users, are far from profitability. Even the surge in food delivery caused by the Covid pandemic was not enough to turn the financial statements of these companies green. In both these industries, there are still many questions about how sustainable the companies’ relationships with drivers and delivery workers are — a critical element for the survival of their business models. Many reports question the working conditions and pay levels of workers in those industries. In some cases, this has led to legal complications which threaten already fragile business models.

This reality has been hidden by unrealistic valuations seen in stock markets and mainly in the venture capital industry. In times of extreme low cost of capital, liquidity has flown to riskier opportunities with apparently higher potential of return, many of them aggressive startups trying to disrupt traditional sectors. The tactics of those following the path of Uber, Lyft, and the food-delivery companies, are focused on aggressive client acquisition, most of the time driven by price subsidies to foster the rapid increase of adoption. These subsidies are difficult to remove to keep the same level of revenues and increase profitability.

In these industries, as in the music industry, the disruption has already affected the whole system that needs to adapt. Consumers who experience cheaper music, greater convenience, subsidized rides and so on, do not want to go back to the previous reality nor pay more. For organizations impacted by the changes of these pioneers, which in transformations are the large majority, there is no return to the golden times. Instead, they must rethink. They need their business to be more adaptable for this new — though not exactly fair — reality.

Innovations are built through a cemetery of failures; learn from them well to not become one.

Transformations happen because of many apparently disconnected events and less because of conscious intentions that organizations and their leaders believe will build their future.

In a recent conversation, a private equity executive shared how frustrated he was with the failure of many of their investments, some of them trying new business models. What made his disappointment worse was to see that many of the leaders behind these failures were somehow succeeding in other similar ventures. His realized that his private equity fund was effectively serving as a training platform to feed the success of others.

It is not a new discovery that failures can teach us much more than an eventual success. And that this happens many times without organizations being aware of or and actively acting to leverage it. Many of the innovations and brands we regard as successful are an outcome of many others that failed before them, and left remains absorbed by those who eventually succeeded. Highly innovative environments are those where more attempts, and consequently, failures happen. The sacrifice of many makes the whole system more robust. Platforms like Spotify and Apple Music are what they are because many others failed before them to find a new way to provide music experiences to users. They left successful features, experienced people, frustrated users, and many other valuable things for today’s players.

Much has been said about the acceptance of failure in organizations. This is often misinterpreted as forgiving, forgetting, and moving to the next thing, when it should be seen as a rich and desired path to boost learning and wisdom. An even more significant opportunity, intentionally leveraged by very few is to learn from the failures of others outside their organizations, being appreciative of and honoring them rather than stereotyping them as losers, as many constantly do to protect their self-esteem and justify their choices.

Pay attention to where your clients are going — that is the real threat.

For artists, the advent of Napster threatened a big chunk of their incomes from sales of albums in physical formats. It also meant that new routes to fame were increasingly available and important. The British band Radiohead had never reached the top 20 in the U.S. Billboard ranking. But, in 2000, some of the songs from the new Radiohead album were leaked to Napster months before the album launch and were shared by millions of users. When launched, the album reached number one on the Billboard list. This was later attributed to the leak.

Many other bands noticed the opportunity to save them years of mailing physical demo tapes to fans, record labels, and concert organizers trying to find space to show their talents. Arctic Monkeys, now a well-known alternative rock band, learned their way through file-sharing, which ultimately helped them sign a contract for their first album. While many big-name artists like Metallica, Dr. Dre, and Madonna were focused on suing (rightfully) Napster for copyright violations, others were learning and benefitting from a transformation that had just started and would not stop. Many famous artists such as Shawn Mendes, The Weeknd, Adele, and Justin Bieber, would not be who they are today without benefitting from these accessible paths to reaching an audience. The new way became the standard.

None of this is instant. Compact Discs, even declining, were still selling significantly five years after the decline of Napster. Early detection and acceptance that these changes in habits could become the ‘new normal’ would allow companies and artists to try new possibilities. In parallel, efficient management of a declining business could generate enough cash for the transition.

The only way to notice these subtle movements is to stay close to those who your company exists for: clients. In times of perpetual transformation, that is the most effective way to observe trends and start learning how to adapt or even innovate with new possibilities. Many ventures are being launched every day with exciting solutions and new approaches to disruptive markets. But they are, in fact, a big distraction. What matters is where your clients are deciding to go. It can be to one of these new ventures. It can be to something completely different.

The best alternative to deal with complexity is through an effective diverse team.

Napster was a straightforward solution: each member had an available folder in their computers so millions of others worldwide could download files from it. But it mattered that the focus given by the founders was to easily catalog MP3 files (a popular digital format). Its founders were young computer hackers who had no previous experience with the music business. It didn’t matter — the impact of this ‘ingenuous’ solution to the recorded music industry was massive. For artists and record labels, the means to make money and increase audiences were completely transformed. Besides good composition and finding spots for presentations, they now need to develop expertise in social media, video-streaming platforms, and search engines, to be minimally visible. They need to understand the intricacies of the constantly changing algorithms of these platforms, adjusting their communications, language, and even their compositions, so they can become attractive. For example, many reports suggest that as most algorithms tend to make recommendations based on similarities in the preferences of users, it has been more difficult for original pieces to thrive.

With new interventions, solutions, and ways to overcome the new challenges, it is a much more complex environment with significantly more different elements to interact with. To be effective, a company is required to dive into this complexity, and it can only do so through a diverse group of people. People are the ultimate source of capabilities. And organizations have the advantage of composing their teams to match the complexity of their environment. By not doing so, they are depending on luck. In the music industry, players are adjusting their operations to accommodate beyond their business and artistic casts, hiring technologists, statisticians, social media experts, and streaming specialists, all intended to increase their effectiveness in a new field.

But beyond the technical capabilities required to face complexity, companies need to absorb different perspectives about this reality, which is more subjective and difficult to tackle. It means that they need to accommodate profiles of people that have been in the social and technological context where the transformation is happening, people who breathe the changing reality of current and prospective clients.

The growing focus on diversity has (rightfully) focused on having a more equal and fair representation of society in an organization’s workforce. This still requires the ability to leverage all these differences to benefit the business. Bringing together a more diverse group of people comes with the onus of more complexity to be managed. But it also brings much higher potential of matching the complexity of the environment through different points of view and capabilities that, if well managed, can trigger efficacy, creativity and increase the company’s desired adaptability.

Mainstream management processes do not deliver this. Competence frameworks, selection, performance, evaluation, and promotion processes incentivize similar behavior and attitudes based on stereotypes of what is a ‘talent’ and definitions of organizational cultures that narrow the rich diversity that people could bring to their jobs.

Companies need to redefine their management systems to avoid the trap of having only people that fit their definitions of talent and organizational culture. Management systems and leadership environments must be capable of adding and promoting diverse capabilities. In a world of perpetual transformation, to match the complexity of transformations, adaptative advantages come from adding capabilities, not narrowing them.

Everybody wants to transform the world, but it is highly probable you will be changed by it.

For each disruption that transforms the world, ten of thousands of organizations will need to adapt to it. Yet, many are more interested in the former, ignoring that acknowledging the latter can mitigate the risks imposed on their organizations. Aside from a few exceptions, successful transformations mean, most of the time, adapting to survive and, maybe, thriving again.

Organizational leaders can give too much attention to things that will not make them more adaptable to an environment in perpetual transformation. The transformation of the recorded music industry is an example of how raw the path can be. And also an alert to areas that leaders need to pay more attention to:

• The genuine nature of transformations can be tricky and many times shows no clear light at the end of the tunnel. That requires organizations to honestly acknowledge it and be open to possibilities.
• The flow of the future follows the habits of clients who, on many occasions, do not want to go back to their previous experience. Follow them and try playing in the new paths they are moving along.
• To succeed, many have failed, honored, learned and absorbed their lessons. To do so is much cheaper and easier than many acquisitions and investments in ‘innovative’ bets companies do most of the time.
• The power of a diverse team needs to be intentionally leveraged — so stop narrowing it. Do an audit of your management processes, especially in people management. They might promise to deliver on the organizational strategy, but at the end are reducing its adaptability to the world.

The never-ending quest for adaptability should already be part of the organization’s mindset and its design. Leaders can have high aspirations of transforming the world, but the reality is that it is much more common to be surprised by a world that is unpredictably moving ahead of most of us.

About the author

Claudio Garcia is based in New York where he is an entrepreneur and teaches at the School of Professional Studies, New York University.