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Mike McCready and Music Xray: Business Model Innovation in the Music Industry1

New models have to be built around ways to monetize recorded music. You have to be able to make a living as a recorded music artist that maybe doesnt tour, or as a songwriter who doesnt even perform. How do you do that? said Mike McCready, co-founder of Music Xray. Music Xray was launched in January 2010. The travails over the past few years had taught McCready many lessons, not least of all that senior corporate executive was not his lot. As CEO of Polyphonic HMI, a company that marketed a computer algorithm that predicted the hit potential of songs2 he had witnessed major record labels struggle to cope with the massive shifts in the industry. He had wondered if the music business would ever return to being the stuff of corporate empires. Though the music business was alive and well it was now so fragmented that it defied traditional industry business models. Where once there was a dominant model there were now several models struggling to gain traction. McCready now knew that developing a sustainable model was to be a priority of his. Music Xray is really a continuation of what I was trying to get done at Polyphonic, McCready reflected. The starting point for both of these companies is that the music industry is historically extremely inefficient at finding and developing the next top talent, managing to achieve only a 10% success rate. It wouldnt take much to improve on current results reasoned McCready and his initial thoughts were on raising the success rate. On a trip to LA he confided to a friend, Initially I was not even aware of the fact that I should focus on a business model, he said, My main concern was to develop a site that would improve the success rate of putting industry professionals and artist together. Music Xray Music Xray provided an online platform that connected music industry professionals (hereinafter referred to as professionals) and artists. The concept was simple artists and songwriters uploaded their music to the site (musicxray.com) and professionals listened to the music with the idea of potential development . While an artist could upload his or her music for free it did not guarantee that it was heard. There was a cost involved in submitting to opportunities listed by professionals, i.e., making sure you were heard. The fees worked like this: There was a $4 service fee charged by Music Xray when a song was submitted to a professional, regardless of whether the professional charged a submission fee or not. Professionals could provide an evaluation of the music and other services for an additional fee. At a minimum, if a song was rejected the professional was provided with a drop-box checklist of reasons for the rejection which was returned to the artist. Music Xray also provided song to opportunity matching, which matched original music to specific criteria established by a professional in search of something special for a specifc application such as an advertising song, movie theme or background. .

Januaryy 2012 IESE Business School. Case prepared by Azra Brankovic under the supervision of Prof Paddy Miller and Thomas Wedell-Wedellsborg. 2 See case study Polyphonic HMI: Mixing Music and Math, HBS Publishing, 2005.

The Music Industry in 2011 The music industry landscape that Music Xray entered had been dramatically altered by the Internet in the preceding decade. With a huge drop in compact disc (CD) sales, for which the designated culprits had been file-sharing and the appearance of Apples iTunes store in 2003, the revenue flows to artists and record labels had changed. Revenue streams in the music industry with the global recorded music market worth were an estimated US$25.4 billion in 20093. Digital sales and performance rights revenues had increased, as had touring revenues, which brought in an estimated US$4.5 billion globally in 2009, more than triple 1999 levels4. If one included sales of music hardware, such as iPod sales, it was clear that music related revenue continued to be strong, but extracting value from music was taking different forms. File-sharing and iTunes were not the only changes the Internet ushered in. The phenomenon of the long tail was very apparent with there literally being thousands of artists offering their music on sites such as youtube.com. However very few artists such as the Rolling Stones, Madonna, The Birds and Neil Diamond cornered a major share of the touring revenues during the decade. While the price of downloaded music trended downwards towards zero the price of live performance moved upwards. For budding artists needing to make a living out of their art this created a cruel dilemma they could now record their music for almost free but generating revenues would have to be done in some other form. For the record labels the process of development, distribution and marketing of music had been altered. The traditional model, where record companies controlled the process from talent discovery to production, distribution and marketing, had withered. The discovery of new music had become fragmented as artists now marketed and distributed their own material online. Production had become easier and the role of producers was shifting.
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On a retail basis. Source: IFPI, Recording Industry in Numbers 2010. Source: Billboard, personal correspondence.

With the shake-up going on in the music industry for the past decade, producers have become kind of content creators, McCready said. Powerful producers acting as A&R (Artist & Repertoire) agents, will produce an artist on their own dime, and when they have a finished product they will go to the label. Record labels were becoming marketing companies that would invest in completed music products whereas in the past they would have been involved in artist development. With a huge oversupply of Internet-boosted self-made acts, labels losing interest in developing acts and producers repositioning themselves, , industry players scrambled to find a business model. . The space Music Xray saw to exploit was that of the job of scouting on behalf of the labels. It helped professionals scan acts and provided artists with a channel by which they could be heard by the labels. Web 2.0 and Social Media McCready called the advent of Web 2.0 a sea change for his business. The crossover point from Web 1.0 to Web 2.0 came in 2005; that was the year when more digital files were being uploaded and shared on the Web than were being downloaded5. In the time period between the Polyphonic and Music Xray initiatives, MySpace emerged and artists began putting their music online, without feeling that they had to protect it and understanding that they had to expose their music to as many people as possible if they wanted to gain traction. The proliferation of social media followed, and Music Xray leveraged the social media aspect, so that when artists submitted a song they could simply click a button that posted it to Facebook, for example. There was a lot of collective knowledge of how social media worked, and Music Xray started making assumptions about user experience in it. The main difference between Polyphonic and Music Xray was that artists were online, knowleable and learning fast, McCready said. Evolution of the Business Model Once again engaged in exploring the need to identify the next top talent, McCready this time entered the market with a different idea. He had seen Polyphonic as primarily an offline business, where the company would visit the record labels and try to sell them an algorithm service, called Hit Song Science, and then deliver the service offline. Of the three main constituencies in the music industry artists, producers, and record labels Polyphonic largely targeted the labels. This concept had been based on the state of the music industry at the time. In contrast, Music Xray focused on artists and, professionalscreating an online community of two constituencies. Music Xray lumped producers and labels into one constituency of professional, and reclassified them as anybody who was seeking music or providing a service based on that music, such as a producer, manager and so on. The other constituency, of artist, was defined as anybody who was a content owner, somebody who had created that music or even a small publisher looking to place songs into the professional domain. The way the platform worked was, professionals who conducted A&R as part of any aspect of their business came to the site and described what they were looking for. They also determined
From Organizing the New Dynamic Capabilities, by Amy Shuen and Sandra Sieber, IESE Insight Review, 2009, p.65.

their fee rate for evaluating submissions. Artists visiting the site could browse the professional boxes and choose opportunities for submission, paying the appropriate fee for each submission. Alternatively they could simply upload their music without submission in the hopes that professionals looking for something particular, would discover it and upload the MP3 file featuring that particular artist. In addition Music Xray actually analyzed the acoustic properties of all the songs that artists uploaded to the site. If there were a match been professional need and an artists offering, the artist received an email that there was a professional looking for a song similar to theirs, in which case they could consider paying the fee for a submission. The fundamentals of the business changed as new constituents were targeted. In the years since Polyphonic, artists have moved online, while the music industry has been reticent in adopting new technologies. Its really clear now that its the artists that are more interested in paying for the advantages this kind of technology provides, McCready said. He compared the business as it was now to eBay, where there were two distinct audiences on the site, buyers and sellers. The company (Musix Xray) focused its marketing efforts on the more difficult constituency to attract the professionals getting them to use the platform for free so they could see its value. Having professionals on the site provided opportunities within the music industry, thus attracting artists, who paid to interact with professionals. The Submission Platform The submission platform proved to be crucial for Music Xray. McCready and his team had struggled with the issue of artist feedback and evaluation for some time. At the outset both Polyphonic and the early Music Xray had offered a hit prediction report on a song. The report proved to be a problem though, for once artists received it, and especially if it was favorable, they would contact the company and ask what they could do with it and whether the company could connect them with someone in the music industry, as most of them had no contacts. The music industry itself, meanwhile, had no way of efficiently screening all the music being uploaded by artists online. McCready struggled with the problem realizing that probably it held the key to a solution. He and his team spent a year thinking up a way that professionals would be willing to expose themselves to an onslaught of music, while promising artists, for a small fee, their music would be heard. Around this time Bruce Warila, a known blogger in the digital music area, joined the team as a consultant. Warila came up with the idea of the submission platform, which Music Xray adopted and continued to develop. McCready thought this to be a turning point for the business. Meanwhile Music Xrays COO, Burt Hartman, whose team handled all customer service inquiries, had been getting an increasing number of inquiries from artists saying they got confirmation their song had been heard but nothing further, so he suggested that the company oblige the professionals to provide feedback. He also came up with the idea of having professionals offer feedback on what they did not like about the songs they rejected. McCready pushed back against this idea, worrying that professionals would leave the site in droves. Hartman proposed doing a simple drop-down list, which was adopted. Warila independently came up with this idea too. Also in reaction to customer inquiries, Hartman proposed that the company enable the downloading of MP3s by professionals, rather than just streaming music on the site. McCready resisted the idea, because of the musician rights that would need clearing. The company decided

on a pop-up box that artists would uncheck if they did not want to enable downloading of their songs. When Music Xray introduced the drop-down list of not selected reasons, it experienced its highest revenue day ever, as the feedback on their music made the site that much more worthwhile to artists. So when we say, what problems are we solving for our stakeholders for musicians, were helping them get deals and get better, because they get feedback from the industry professionals. Many professionals actually provide song critiques and career coaching. In addition to helping them get deals, it helps them improve, McCready related. Crowdsourcing the Experts As for what problems Music Xray was solving for professionals it was helping them increase efficiency, offset costs by being able to charge a submission fee from the artists, reduce risk by increasing certainty surrounding a songs potential, and use the matching system so the songs they received were closer to what they were looking for. In addition, the company locked on to another Web 2.0 idea, that of crowdsourcing. It crowdsourced a crowd of experts, however, not a crowd of potential fans. Every time professionals received a song, Music Xray asked them to rate the song across five different criteria, those of arrangement, production, composition, performance, and hit potential. Its a human evaluation, weve moved away from the computerized hit potential evaluation, McCready said. The industry professionals were contributing to statistics; each time they rated a song the information went into Music Xrays system. The company had a back end where all the professionals could look and see top-rated songs of the day, the week, or the month as rated by 1,100 professionals that were using the site. This enabled the professionals to leverage the expertise of all the other professionals on the platform. New Technologies The development side of the business, which dealt with programming, was another pipeline of ideas for the business. The companys CTO, Jeff Durand, kept an eye on new APIs (application programming interfaces) that were developed by software companies. Increasingly, McCready said, to put together a commerce website, you dont have to develop every single aspect of it, as somebody has already developed the elements that you need. Because Durand knew of the other innovations that were going on in Web 2.0, offered up superior solutions. So harnessing Web 2.0, social media, music analysis technology, and online commerce, and kind of bringing that all together, specifically for these two constituencies, and doing that better than anybody else, I would say has been our innovation, McCready concluded. Competitive Advantage McCready was CEO of Music Xray until handing over the reins to a new CEO in early 2011, in order to focus more on product conceptualization and strategy. As CEO, he followed music blogs and considered the many ideas offered up there. He proposed ideas to his team, inviting them to punch holes in them. He also looked at what other companies and platforms were doing. What is Facebooks advantage? he asked. Its the fact that everybodys there. As long as you

keep creating more and more value and more and more anchors that keep people there, they dont go anywhere else. Music Xray did not use the algorithm technology that was Polyphonics competitive advantage, as it had been commoditized. With Music Xray, the initial competitive advantage was contacts and trust, borne out of building relationships in the music industry for over 20 years. The music industry has always been very slow to adopt new technologies, McCready said, and Music Xray was trying to make cutting-edge technologies available to be harnessed by the music industry for its benefit. At the same time, the company was attempting to open the doors of opportunity to the millions of unsigned musicians at a time when recorded music was losing its value. The next problem the company was working on was how to help artists monetize fans.