Judging market timing when change is inevitable

Yesterday I wrote about the emerging evidence that digital is starting to pay for the music industry and Rhitu Baria commented that it is only a matter of time before the music industry allows new technologies to permeate through, and linked to a post on her blog detailing the history of change in this sector:

I sometimes wonder why we have all the noise about streaming music services and the associated revenue losses for record labels. At every stage of the music development cycle – live concerts, sheet music, gramophones, vinyl discs, magnetic tapes, CDs – there has been a huge hue and cry about the change i.e. no one will go to live shows or buy sheet music or buy tapes or buy CDs thus leading to a loss of sales for the musicians.

That’s not to say that there wasn’t an impact on sales in the traditional way of operations of the industry at each step. But the music industry as any other has moved with technological developments, been flexible and adjusted its business model, finding new ways of surviving even thriving. After all, no industry can put on blinkers to the world around them and hope to survive or better themselves.

These historical analyses of technology change are a useful reminder that new developments are often greeted with fear and scepticism, particularly if they have social ramifications – TV will destroy society by stopping us from reading books and computer games will stop kids being social are two others I remember well, and the Daily Mail’s dislike of Facebook is a more recent example (see How using Facebook could raise your risk of cancer).  These histories also a useful reminder that in the end society and companies always adapt and life always goes on, often looking a little different, and sometimes very different, but life always goes on.

Technology driven change is therefore a constant of modern society and for many observers (including a lot of VCs) it is easy to form very strong opinions about how the world will change.  In fact many VC investments are bets on a vision of the future, making it a part of my job to form these opinions (which is one of the reasons I write this blog).

For me forming the future vision is the easy bit – unfortunately we also have to bet on timing, which is much harder.

Rhitu’s point in the comment was that it is inevitable that streaming music will come to be a major part of the music landscape – and I agree with that.  It is a superior user experience than having to bother about downloading and storing files, and then being able to access them from your various devices – for me it is as simple as that.

My reply to her comment was therefore to agree it is only a matter of time before these new technologies permeate through the music industry, but to add that the question is ‘how much time?’, and ‘how many startups perish in the interim?’.  Remember the story of Imeem, the popular music streaming service that raised a lot of venture capital, did deals with the music majors and ultimately had to sell out to Myspace for $1m.  Hopefully Spotify will be more successful.

Other markets where the future was clear for a long time before it happened include mobile network operators and their evolution to being dumb pipes, and the software as a service business model for software companies.  The transition to hosting apps in the cloud and everything that means for standardised hardware and virtualisation is another that is underway right now.

All of which begs the question of how to judge the timing.

Most of these markets tip pretty quickly when they go, especially the ones that are interesting for startups.  So judging the timing is about spotting the tipping point, and knowing the extent to which you can make it happen sooner.  With hindsight tipping points are periods when massive demand was created (Ben Horowitz today defined winning a new market as 1,000 enterprise customers or 50 million consumers) – so judging timing is all about understanding the obstacles to creating that demand and the extent to which you can get over them.

In the music industry the chief obstacle to (legally) creating demand has been getting a service to market.  The problem has been that the startups need co-operation from the players with the most to lose (the record labels).  The result – slow innovation.  The key to judging timing in this market is understanding the point at which the writing is so obviously on the wall for the old model that industry veterans can only look forward AND when their legacy revenues are declining sufficiently fast that there is a financial imperative for them to face up to reality.  Unfortunately that is a very hard call to make.  The two things that startups can do are a) generate consumer pressure for change by building popular services, which Spotify has done well, and b) look for win-win solutions with the old guard – but the biggest driver of industry acceptance of change comes from within.

Similarly, in the mobile industry the services that would turn operators into dumb pipes have to run over those same operators networks, giving them a control point which they have used to hold back the future while they continued their (in my opinion) futile search for an alternative business model.  It took the consumer power of Apple and the iPhone to really make a change here.  In this market there was next to nothing startups could do to help speed operators towards their destiny.  The key to judging timing was spotting the catalytic effect of the iPhone before anyone else.

In contrast, back in the 1990s Yahoo! was more easily able to quickly beat AOL and realise their vision of an inevitably open internet because users on ISPs other than AOL could easily switch to their better portal service.

This post is already overlong so I will end here with a quick summary – which is to look for the value chain blockers that slow down the transition to an inevitable future and not to underestimate how long they can take to overcome.  Often it is years and years.