Word Count: 15.792
The Entrant’s Development
An Explorative Study on Entrants in the Disruptive Music Industry
Master‟s Thesis
Author:
Jonne Omvlee (S2616122)
MSc Business Administration Strategic Innovation Management
Supervisor:
A. Geurts
Co-Assessor:
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Abstract
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Table of Content
1. INTRODUCTION ... 3
2. LITERATURE REVIEW ... 4
2.1 Basic Principles ... 4
2.2 De Novo and De Alio Firms ... 5
2.3 Entry Time ... 6
2.4 Opportunities and Threats ... 7
2.5 The entrant‟s development ... 8
3. METHODOLOGY ... 9 3.1 Research Setting ... 10 3.2 Case Selection ... 10 3.3 Data Sources ... 10 3.4 Data Collection ... 11 3.5 Method of Analysis ... 12 4. RESULTS ... 15 4.1 Case description ... 15 4.2 Industry Sentiment ... 19 4.2.1 Commoditization ... 19 4.2.2 Industry challenges ... 21 4.3 Differentiation ... 22
4.3.1 Venturing into other markets ... 22
4.4 Early and Late Movers ... 23
4.5 De Novo and De Alio Firms ... 24
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1. Introduction
In the 1980s and 1990s, Music labels ruled supreme, selling cheaply produced plastic discs at high margins to consumers eager to buy their music (RIAA, 2016). The Compact Disc was the dominant tech-nology and selling in millions (NPVI, 2016). Discs that only cost pennies to produce were sold at prices around 14 euros per disc (NVPI, 2016). Since its introduction in 1982 in the U.S, an impressive list of best-selling albums has been carried by CDs. The 1980s and 1990s feature multiple 10x Platinum albums per year in the U.S. with many selling over 10 million copies each (RIAA, 2016). After the year 2000, the hype stopped: in 2000 there were five albums that went 10x platinum, followed by two in 2002, one in 2004 and then a long dry span until Adele‟s 2011 album „12‟(RIAA, 2016). This was very much a global trend, kickstarted by Napster and later Kazaa. Digital distribution – illegal at first – toppled music giants and sent shockwaves through the industry (Moreau, 2013). A new technology had arrived and they were wholly unprepared.
This is a classic case of what has been described in the literature as „disruption‟ as first formulated by Christensen (1997). Disruptive innovations “[…] change the bases of competition by changing the performance metrics along which firms compete” (Dannels, 2004, p. 249). The performance metric changes arise gradually and are in many cases overlooked by incumbent firms at first (Christensen et al., 2015). This can be explained by the fact that most disruptive innovations start at the low-end of the market and target customers which are not appealing to incumbents (Christensen, 1997). In the case of the music industry, the novelty of download services only appealed to first-movers and not to mainstream customers (Moreau, 2013). Distribution via the internet was still in the developing stage; downloading was slow and the quality of sound was inferior to CD quality (Moreau, 2013). However, as time progressed and services such as Napster, the iTunes store and Spotify improved their technology, more customers started to shift to streaming music via the internet, leaving firms that relied on physical music sales with a crooked busi-ness model and an obsolete infrastructure (Moreau, 2013).
Current literature on disruptive innovation covers how incumbents react to disruptive innovations (e.g. Christensen, 2006; Christensen & Overdorf, 2000; Hill & Rothaermel, 2003;
Charit
ou & Markides, 2002). However, literature on entrants following the disruptive path is underdeveloped (Yu & Hang, 2010; Ansari & Garud, 2015). According to Christensen et al. (2015) the true disruptors will improve their prod-ucts and drive upmarket. How they innovate successfully is still fuzzy (Christensen et al., 2015). If they were to follow the official playbook, entrants could avoid organizational baggage, focus on small niches and seek no long-standing commitments to customers (Hill & Rothaermel, 2003). Yet, the majority of entrants fail (Hill & Rothaermel, 2003; Kerr & Nanda, 2010).4
extant theory, we studied nine entrant firms in a multiple-case, explorative study (Eisenhardt, 1989). We explored the entrants‟ development trajectory and the challenges they faced.
Our study contributes to the theory of disruption and to the entrepreneurship literature. A key in-sight is that the commoditization of music has made it difficult for entrants to capture profit from music. In response entrants move into unrelated markets, using music as a marketing mechanism. Following the development trajectory, we observed that firms starting as a start-up (de novo) are more committed to pursue a serious digital strategy than firms that differentiated into digital music (de alio). De novo firms have a clear focus and try to capture the next innovative wave early on. These findings provide more in-sights for the literature on the survival strategies of these firms; particularly practical inin-sights on why some firms struggle in their development or even fail. Moreover, by studying the developments of en-trants, we add more insights to the literature on the current black box of the entrants‟ development pro-cess. Specifically, we investigate how their development strategies came to pass and the choices they made along the way.
The Dutch music industry was chosen as a research setting. It saw a big influx of de novo and de alio players around the time internet distribution had become a popular way thanks to services like Nap-ster (Moreau, 2013; Suarez & Lanzolla, 2005). The technological progress that drove the digitalization of the industry provided opportunities for both de novo and de alio firms to innovate. Apple, for example, can be classified as a de alio firm, whereas Spotify is a typical de novo firm. This makes the music indus-try an interesting setting to investigate the gaps in the literature.
2. Literature Review
Disruptive innovation is a popular principle, rooted in the innovation literature. In 1989, Christen-sen started thinking about the question “why firms that do everything right still manage to fail?”, and pub-lished his findings in 1995, followed by a seminal book in 1997 (Christensen, 1997). The theory has suc-cessfully been received by scholars, managers and students. Amongst scholars the theory aroused plenty of rich debate (Yin & Hang, 2010). In 2003, the theory of disruptive technology was broadened such that it is now called „disruptive innovation‟ (Christensen & Raynor, 2003).
2.1 Basic Principles
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cording to Christensen et al. (2015) overlooked customer segments are situated at the low-end of the mar-ket, or in entirely new markets. In these markets, entrants apply simpler, easier to use functionalities and lower prices to their business model (Markides, 2006).
Most incumbents target profitable customers at the high end of the market, while ignoring the less profitable customers (Christensen, 1997). In their pursuit of more customer value, incumbents often try to add more features to their products, giving customers more than they demand. In their chase for higher margins, incumbents gradually move to the higher end of the market, providing opportunities for entrants to pursue disruptive innovations at the low end of the market (Christensen, 1997). Figure 1 illustrates this phenomenon.
Figure 1: Market trajectory. Source: Christensen et al. (2015)
There is some confusion in distinguishing disruptive innovations from non-disruptive innovations (Christensen et al., 2015; Danneels, 2004; Markides, 2006; Schmidt & Druehl, 2008). The discussion is muddled by the fact that „disruption‟ as a regular English word has a much wider meaning than the mean-ing assigned to it by Christensen (1997). For example, an established industry can be disrupted by new entrants that come in from the high end. A good example of this is the phone company Nokia. They were the victim of a problematic market disturbance but not the victim of disruptive innovation. iOS or Android devices competed with Nokia‟s high-end customers at first and not their low-end customers (Christensen et al., 2015).
2.2 De Novo and De Alio Firms
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resources is also challenging for them, especially for financial resources (Brunderl et. al, 1992). De novo firms, however, enjoy greater flexibility because of underdeveloped capabilities (Carroll et al., 1996) which enables them to react to changing markets faster than de alio firms (Khessina, 2003). Looking at the market focus, de alio firms typically derive their identities from activities outside the focal market, whereas the identity from the de novo firms is more focused on the new market (Khessina & Carroll, 2008). Additionally, de novo firms have a tendency to introduce products that are universally more ap-pealing in their technological characteristics compared to de alio firms (York & Lennox, 2013).
De alio firms are generally more advanced in their organizational development; they possess more resources and have more experience than de novo firms. These characteristics contribute positively to the survival chances of de alio firms (Khessina, 2003). Research shows that the mortality rates of de alio firms are lower than the mortality rates of novo firms (Carroll & Khessina, 2005). Additionally, products of de alio firms tend to stay longer in the market and possess stronger competitive pressures than products from de novo firms (Carroll & Khessina, 2005). However, having an established organization, possessing old resources and the availability of previous experience serve to increase the organizational inertia (Carroll & Bigelow, 1996), leading to de alio firms having a bigger stake in the status quo (Haveman, 1992).
2.3 Entry Time
Entrants can enter a disrupted market at various stages. They can be first and kickstart the entire disruptive process or they can spot the disruption in another party and follow. The literature makes this important distinction by categorizing them as pioneers, early entrants and late entrants (Golder & Tellis, 1993) or first-movers and followers (Teece, 1986; Suarez & Gianvito, 2005). It does not follow automati-cally that the first-mover can capture all the value from the innovation (Teece, 1986). The music industry will once again serve as an example. Napster was quickly sued by the music industry, while iTunes took its position by eliminating the mistakes Napster made and changing the business model. When Napster later wanted to reinvent itself along the iTunes or Spotify model, they were too late (IFPI, 2015).
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riers, increasing return to adoption, the ability to withstand early losses, the availability of resources and reputation are just a few of these factors (Schilling, 2005).
Teece (1986) has offered a framework that identifies who wins from innovation: first to market or followers. In this framework, three building blocks to profit from innovation are important: the regime of appropriability, the dominant design paradigm and complementary assets. Studying the regime of appro-priability helps to determine whether the innovation is easily copied and what measures can be taken to avoid this. The dominant design paradigm helps guide the focus of the firm. For example, if the dominant design is already established, it would be wise for a firm to move from product innovation to process in-novation to be able to scale up manufacturing and distribution, and to lower prices. By examining the complementary assets a firm has to rely on, it can create a competitive advantage for followers. By, for example, integrating with distributors, synergy can be created. However, some cautious strategizing is helpful because firms providing complementary assets can copy the innovation.
Empirical evidence shows disappointing results for entrants. Approximately 50% of the entrants fail in the first four years. That number rises to 70% after ten years (Kerr & Nanda, 2010). Despite these bleak outlooks, the literature suggests that entrants have a better chance at success in discontinuous inno-vation compared to incumbents (Yu et al., 2010), mostly because of their smallness, short path dependen-cies and limited commitment to clients, allies and previous products (Christensen, 1997). According to Christensen and Rosenbloom (1995, p. 256), the entrant‟s advantage is not because of unique skills or abilities but because of “[…] its differential ability to identify and make strategic commitments to attack and develop emerging market applications, or value networks”. By „attacking‟ new value networks, en-trants avoid performance oversupply of goods in established value networks. When performance oversup-ply occurs, firms tend to compete with, for the customer, fully satisfied products on price, moving their products more towards a commodity (Christensen and Rosenbloom, 1995). They do not compete on other dimensions, such as functionality, because this already has been saturated (Christensen, 1997). Christen-sen and RoChristen-senbloom (1995) studied this phenomenon in the drive industry. In this industry new disc-drive models by entrants were introduced. These products were more expensive and lacked in quality, but they were a lot smaller. These aspects made the product not interesting for mainframe computer manufac-turers but the small size of the device was crucial in developing the mini-computer that ended up disrupt-ing the established mainframe computer paradigm. These disc-drive manufacturers did not compete in the same value network as the incumbents, but focused on product attributes such as size, weight and power consumption.
2.4 Opportunities and Threats
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can compete with higher-cost incumbents (Christensen et al., 2015). Disruptive firms can also operate in a new market, before entering another established market with a completely different value proposition (Christensen et al., 2015). In both cases the development of the disruptive trajectory depends heavily on how fast the technology develops (Christensen, 2015; Suarez & Gianvito, 2005).
Incumbent firms typically do not find it attractive to compete with disrupters because low-end firms pursue less attractive margins and new market entries focus on different products (Christensen & Overdorf, 2000). This gives entrant firms that pursue a disruptive innovation the opportunity to build a business model via trial and error without competitive interference from incumbent firms (Christensen et al., 2015). If entrants pursue a non-disruptive path, they can expect several threats. Incumbents are often skilled at what they are currently doing, and will defend that position (Christensen, 1997). These incum-bents have rich resources and processes to do exactly this (Christensen & Overdorf, 2000). According to Porter (1979), incumbents have economies of scale advantages which can provide them with cost ad-vantages. Additionally, incumbents can differentiate their product via advertising and customer services. Moreover, they mostly have established distribution channels. This gives them the means to compete head on with entrants that enter the same market they are operating in. Incumbents with strong market power also tend to protect against entering firms via intellectual property protections mechanism, such as a pre-empting patent strategy or copyright enforcement (Ceccagnoli, 2009). For example, by building a wall of patents they can foreclose rivals the ability to introduce substitution technology. Only when the innovation is radically different, it is impossible for these incumbent firms to use a pre-emptive patenting strategy (Ceccagnoli, 2009).
2.5 The entrant’s development
There is not much literature about entrants following a disruptive path (Yu & Hang, 2010; Ansari & Garud, 2015). Moreover, the development of entrants in general has received limited attention in litera-ture yet (Christensen et al., 2015). The theory suggests that entrants develop and move upmarket in a dis-rupted industry (Christensen et al., 2015; Yu & Hang, 2010; Ansari & Garud, 2015). This statement is vague and raises questions, such as how they move upmarket and what steps they take. By investigating these entrants up-close, we provide a finer understanding of the development process of entrants to the literature, and hence start to fill the gap on how entrants move upmarket. The understanding of this pro-cess particularly resolves around the obstacles and opportunities these entrants encountered and the strate-gies they used to develop further. Additionally, empirical evidence has shown that approximately half of the entrants fail in the first four years (Kerr & Nanda, 2010). This research also contributes to a finer un-derstanding of the difficulties entrants face and can provide an explanation on how these firms fail. To fill the research gap, we try to answer the following research question:
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- What strategies do these businesses use to develop further in a disrupted industry?
The music industry is an ideal setting to further investigate the development of entrants in a disruptive industry. Following the reasoning of Suarez and Gianvito (2005), the faster technology develops the more difficult it is to control the market. Even in markets controlled by incumbents with high budgets, entrants drive technological progress. In the music industry, the internet was the technological base that enabled new entrants to develop a wide variety of new technologies, such as selling and distributing MP3s, devel-oping handheld devices and the exploration of mobile technology to name a few opportunities (Moreau, 2013). Companies such as Napster (1999), Apple‟s iTunes (2006) and Spotify (2009)1 pursued some of these new market opportunities which turned out very successful for them (Moreau, 2013). There are, however, numerous entrants that did not succeed in the digital music industry or did not grow to become as large as iTunes or Spotify; hence, their attempts remain relatively unknown. This provides an interest-ing opportunity for research since these firms can paint a more complete picture of entrants‟ challenges in the dynamic music industry. Moreover, the speed – in both market and technological development – with which this industry developed required challenges for all firms to keep in check with the latest develop-ments (Suarez & Lanzolla, 2005). The number of households with fast broadband access, for example, has more than doubled in the last eight years (CBS, 2016), enabling new innovative business opportunities. While streaming might not have been a valid option in 2006, it was in 2009 due to the continuously in-creasing internet speed (Moreau, 2013). Furthermore, what makes the music industry interesting is that it had a few powerful incumbent record labels with great bargaining power before the disruption had oc-curred (Mol et al., 2005). Due to scope and scale advantages, these companies can create barriers for new firms to enter, enabling them to benefit from a competitive advantage (Porter, 1979). Finally, the parties in the value system of this industry are traditionally dependent on one another to create value for the custom-er (Mol, et al., 2005). The dependency may make it more difficult for entrants to innovate. We think this might produce interesting data on the road that entrants follow.
3. Methodology
Given the limited sources of theory about entrants in disruptive industries, we chose theory devel-opment as the research method in this study (Eisenhardt 1989). In theory develdevel-opment research has to be triggered by a business phenomenon that is generally recognized in companies or industries; in this case disruptive innovation (van Aken et al., 2012). Additionally, when a business phenomenon is still explana-tory, a theory development approach is required. Therefore, multiple specified cases were chosen to ex-tend the theory via a collection of comparative data (Eisenhardt, 1989; Ozcan & Eisenhardt, 2009; Patti-grew, 1990).
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3.1 Research Setting
We chose the Dutch music industry as a research setting. Even though the Dutch music industry is small, the findings in this paper can be applied to other industries. The U.S. music industry, for example, shows various similarities with the Dutch music industry (Mol et al., 2005), highlighting the international applicability of the paper‟s findings. Both industries have similar value systems and industry clusters. Moreover, approximately 80% of music in the Netherlands is imported (Mol et al., 2005). Most im-portantly, disruption has also occurred in the Netherlands, where streaming is the main source of digital revenue today (NVPI, 2016). During the disruption, large physical music retailers filed for bankruptcy, such as the Music Store and the Free Record shop. Various entrants sought to find new opportunities in this changing market with well-developed strategies, such as A4m, DT and AVA, but failed. Finally, the speed of market and technological development is still moving fast in the music industry. Downloading was the dominant technology three to five years ago, but has almost completely been replaced by stream-ing in 2016 (NVIP, 2016). All in all, the similarities between the U.S. and the Netherlands in market, technological and disruptive development, the high entry rate and the high failure rate make the music industry an ideal setting to research the developments of entrants in a disrupted industry.
3.2 Case Selection
The focus of this research was to analyze the digital developments of entrants after the introduc-tion of Napster in 1999 until today (2016). During our exploratory research we observed that de alio firms frequently shifted to other digital business opportunities up- and downstream the value system in this peri-od. This made it difficult to select a specific type of business model. What interested us most in selecting the cases was the entry in the digital music industry. In selecting our cases, we chose five de novo firms and four de alio firms. Moreover, we distinguished between early entrants and late entrants. The mark in distinguishing early versus late entrants was set in 2006. In this year iTunes entered the market, using a strategy that sufficed as the first legit business model. Table 1 provides general information about these chosen cases. These samples were chosen to be able to make comparisons and distinctions (Eisenhardt, 1989). By selecting cases based on these terms, it made it easier to compare the findings with the existing literature.
3.3 Data Sources
We used interviews as our primary source of information to build our cases (Eisenhardt, 1989). Additionally, company documents (e.g. bankruptcy statements, officially released documents), news arti-cles, online interviews, and observations were used to complete the cases (Denzin & Lincoln, 2009). Each case contains a firm summary of approximately one page, a timeline with the most important events (van de Ven & Poole, 1989) and descriptions of the key factors of disruption theory.
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ticular characteristics of the study so that they could be replicated in other studies (Swanborn, 1996; Yin, 2003). For our interviews, voice recordings and transcripts were used to make the study as transparent as possible (Corbin & Strauss, 2008; van Aken et al., 2012). Interviews were structured beforehand but at times it was relevant to expand the interview when interesting findings turned up (Eisenhardt, 1989); these were documented as well. The duration of the interviews ranged from 60 to 90 minutes. After the data was collected, a second researcher revised the results to ensure they were interpreted correctly (van Maanen, 1979). In addition, to control for the reliability of the interviews, multiple other data sources were used, such as business publications, internet sources, corporate materials, news reports and informal follow-ups by email and phone. Data from two other researchers was added to complete the cases. These same re-searchers also verified the results, enhancing confidence in the findings (Eisenhardt, 1989; van Aken et al., 2012). We triangulated all sources to control for shortcomings and biases in the collection methods (Yin, 2003). Finally, we controlled for retrospect bias by using a time-line to remind the interviewee of certain events in time (van de Ven & Poole, 1989).
3.4 Data Collection
Pre-field study
Prior to the field study, a thorough industry analysis was conducted. Music websites, news reports and branch organization information from NVPI were used to get the initial overview of the industry. This information assisted in painting a picture of the different firms that operate in the music industry. After-wards, four industry experts with multiple former executive positions in the Dutch music industry were selected. These experts helped to broaden our knowledge of the music industry and to direct us to relevant cases for our study. After the pre-data collection, a time-line was constructed that helped to put certain events from our cases into perspective (van de Ven & Poole, 1989). Moreover, the pre-data investigation helped in constructing relevant interview questions and helped for critical in-depth questions during the case interviews (Bogdan & Biklen, 1997).
Field study
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company questions were useful for in-depth information, e.g. causes for certain critical events in their history. The generalized questions were useful to structure the data afterwards by comparing categories and dimensions (Gioia & Corley, 2012). These questions were formed according to disruptive innovation characteristics (Christensen, 1997). An example of one interview guide can be found in appendix I.
Nine interviews were conducted with managers and CEOs that are currently or were in the past responsible for the company‟s general strategy. They were selected based on work experience and current position in the company. We mostly interviewed high-level managers or CEOs, since they are generally responsible for the firms‟ direction (Eisenhardt & Bourgeois, 1988). For every firm one interview tran-script was used. Next to the interviews, we examined the website of each firm and approximately seven news articles, two former interviews and five official company release documents. The total volume of data was overwhelming for each case. To cope with this problem, we applied a within-case analysis (Ei-senhardt, 1989; Pettigrew, 1990). By filtering the most relevant data into a structured case, we became familiar with each as case as a stand-alone entity (Eisenhardt, 1989). Table 1 shows an overview of the type of entrant companies that were used for this study, including entry date, digital pursuit, interviewee information and related business.
3.5 Method of Analysis
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Company Interviewee
Date of en-trance in
digital Digital pursuit Other business Entrant type
T2 Sales manage 2011 Classical music download
platform
Distributor of Physical Goods
De alio
TM President 2004 White label service - De alio
RR Vice president 2005 Ringtones platform,
entertain-ment platform & downloads
Metal Label De alio
PM Director Benelux 2006 iTunes, Spotify and web sales World Music Label De alio
DT CEO 2004 Dance download & streaming
platform
- De novo
AVA Head of sales 2006 Online download/ streaming
platform
Retailer of CDs and games
De novo
A4M CEO 2004 White label service - De novo
MC CEO 2004 Download platform for 70/80‟s
hits
Online vinyl sales De novo
hNL CEO 2015 Streaming platform of NL
language music
De Novo
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1st order concepts 2nd order themes Aggregate dimensions
Used to be a row in front of the store for a new MJ album (AvA)
Customers don‟t want to purchase individual music
Commoditisation
People don‟t want to own music, they use it and throw it out (MC)
→
→
Too big of a difference between a CD and a digital albums (PM)
The perception that music has any value is almost zero (TM)
→
Devaluation of individual music→
For clothes people want to see what they buy, not for music (Ava) Why do they want to buy from me if they can get it for free? (MC) On iTunes you don‟t have the info. book that makes a CD special(PM
Fully digital is not interesting. There is no money to be made (PM)
→
No profit from digital music sales only→
The margins were too low, and the investments too high (A4M) Nobody can make any money with that anymore (hNL)
We used to get our investment back in 3 months, not anymore (RR
The reality is that music becomes an advertisement model (TM)
Music as means for advertisement
Differentiation
Musicians should create some added value to profit from music (DT)
→
→
I mean, Apple also created iTunes to stimulate the Ipod sales (hNL)
leverage our brand to sell additional concepts (PM)
Totally different products
Connect fans, sell data to marketing partners (DT)
→
→
Ringtones were getting popular back then, there was the money (RR
You can never change the industry as independent (RR)
Labels
Industry Rigidity
Labels wanted to restrict geographical music sales (DT)
→
→
there is not much left, 70% of my revenue goes to labels (TM)
We wanted something different, they did not want to cooperate (MC
Advocate institutions of musicians
They would profit as well but they stick to their rules (PM)
→
→
Paying for music is being influenced negatively by them (TM)
People got a role where they did not have any knowl. (A4M)
→
The value systemAggregators: if you want music, you have to buy the catalog (A4M)
→
Everyone is connected through years of cooperation (MC)
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4. Results
We start the result section with a short case description of the studied entrants' development paths. Thereafter we continue with the general industry sentiment by describing the difficulties all entrants face and how they reacted to it. Then we take a closer look at the differences between entrant types. We specif-ically make a distinction between early entrants and late entrants and between start-up entrants (de novo) and entrants that decided to differentiate into the digital market (de alio). The distinction assisted us in highlighting several development paths which are heavily influenced by the general market sentiment.
4.1 Case description
In the following section we briefly describe the development paths we observed in the cases. First, we describe the history and initial core business of the firm. Second, we describe what issues these firms face and how it affected them. Third, we describe the strategies they used to respond to these issues. Last-ly, we discuss the result of the strategies. By describing these cases first we hope to provide context to the findings that follow.
PM
PM is a world music label and it entered the Dutch music industry in 1998. It combines cultural music from all continents and sells those on CDs via small shops such as book stores, fair trade shops and clothing stores. They claim to differentiate themselves by providing a feeling and an experience to their customers. “Music is important, but we like to give people a travel experience [...] we don’t sell CDs in a plastic case, we supply our CDs in a nice carton package” (PM manager).
The decrease of physical music sales had its effect on PM. “It is no secret that business in the mu-sic industry is bad. This goes for us as well” (PM manager). To cope with the turn of events, the company decided to be careful with its digital content strategy. “We offer some albums in a digital form, but we are very cautious […] we deliberately do not want to hurt the added value for our retail customers and [...] opening up old contracts for digital purposes is rather difficult. If one artist refuses, we cannot release the CD in a digital form” (PM manager). Nevertheless, the turnover from their digital content was not a prof-itable business for PM “[…] the receivables from digital are just too low. I don’t see a future in a digital direction” (PM manager). With the decrease of physical music and the low turnover from digital content, PM started to shift its focus to a lifestyle brand by selling coffee products, travel journals and children products. “Music will still have its place in our company; the products need to have a link with our mu-sic” (PM manager).
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T2
T2 was founded in 2009 as a distributor of physical products. They mainly facilitated the distribu-tion of classical music labels. Four years later, the company experienced difficulties. “[…] early 2013 we noticed a strong reversal in physical sales caused by the development of Spotify and other digital down-loads” (T2 Manager). Due to their dwindling core business, they sought to distribute different products and to investigate the possibility for digital music sales. “We tried to intercept the decreasing sales of classical music with gadgets […] and we were interested in a digital channel for classical music” (T2 Manager). The gadget business turned out to be a profitable business but the digital channel for the classi-cal music turned out to be “costly in relation to the expected revenue” (T2 manager). In 2013 the physiclassi-cal market for music started to decrease faster than expected.” […] a business good for millions of traffic was completely killed in just a few years; it all went too fast” (T2 manager). T2 filed for bankruptcy in 2014.
TM
TM was founded in 1995 as a media company and payment servicer in the online entertainment industry. In 2001 it entered the music industry with its White Label service. A White Label service is a B2B service that provides the content and infrastructure for online downloading or streaming. In short: “the customer provides their brand, TM delivers infrastructure for the platform” (TM manager).
Low margins in digital music sales resulted in difficulties for TM to capture a profit. “[…] nobody can profit in this business, you need to invest millions to obtain interesting market share […] and we have to share the low margins with our market partner” (TM manager).
TM‟s main profit came from marketing contracts with large multinationals such NS (Dutch Rail-ways) and Shell. “We are influenced by the economic tendency, and in the past 5 years firms did not have a budget for these initiatives […] now parties have access to more marketing money and are starting to search for something new.[…] suddenly music is interesting again for them” (TM manager).
Today, TM is the only White Label service that survived in the Dutch music industry. Their close collaboration with marketing departments from multinationals helped TM to stay in business: “[…] we are alive due to a substantial amount of digital album sales via Shell” (TM manager).
RR
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RR searched for new opportunities in the ringtones business. In 2005, ringtones was a profitable business and RR responded by setting up an online ringtones platform. Next to that, RR started to adapt to the digitalization by promoting its music on YouTube and by integrating an online news blog for fans.
The ringtones platform did not manage to become popular: “[…] we were not able to connect to our target audience with these ringtones” (RR manager). The news blog for fans also did not succeed. “The people responsible for the blog did not provide new content every day; it will not work without re-newal” (RR manager). In 2007 Warner purchased 73,4% of RR shares and in 2012 RR closed its last of-fice in the Netherlands.
DT
DT was founded in 2004 as a dance music download platform. The company cooperated with X-dance which could provide the initial customer data and connections to grow the platform. “[…] we were able to contact 60.000 potential new customers via X-dance […] and because we knew the DJs we could quickly make deals with them” (DT manager).
The quick growth of a strong customer base did not guaranteed profitable business for DT. “In hindsight we maybe did not have a viable business model because the margins were very thin” (DT man-ager). When DT investigated investing in a streaming service in 2007, it encountered expensive infrastruc-ture costs and an underdeveloped internet capacity to provide a viable streaming service for its customers. To recoup the losses that resulted from high cost and low margins, DT produced and sold CDs to their customers and supplied music for large marketing parties. “[…] these side businesses provided enough margins to keep our business alive” (DT manager).
In 2011 DT realized that it still did not profit from digital music sales and decided to sell the com-pany for an interested party from the Middle East.
AVA
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A4M
A4M was founded in 2004 as a White Label service. At that time, A4M focused on the music of the future: downloading and later streaming. The founders knew the digital market was underdeveloped. They expected the market to mature in 3 to 4 years; in the meantime the business could be developed fur-ther. “[…] luckily we had large financiers that could support us until the market would mature” (A4M manager). In 2007 A4M had created a substantial customer base, with notable names such as KPN and Sony.
However, the market did not mature in 3 to 4 years and the significant customer base did not pro-vide enough revenue to make a profit “The margins were too low, investments too big and guarantees so high that it was not possible to build healthy business model” (A4M manager).
In the end A4M did not make it, and sold its remaining business to TM in 2009. “There are multi-ple reasons why we had to quit […] one thing that is clear to me is that various parties in the chain do not have enough knowledge to make a digital business possible […] They wanted to operate a digital store as if it was a physical store” (A4M manager).
MC
The owner describes MC as “a hobby that got a little out of hand”. MC started in 2004 with a web shop that sold a few records and downloads and has grown to a turnover of half a million euros and three employees. It is the smallest company in our sample, but it's interesting since it focuses on music that cannot be acquired via popular channels such as iTunes or Spotify. “[…] back catalogues are popular these days. Mainstream songs provide substantial unit sales in the first months, and then it rapidly de-clines. The old music has relatively low sales but they never really decline and are even growing these days since vinyl is getting popular again” (MC owner). Half of MC‟s revenue comes from downloads, the other half from vinyl records. The company is still gradually growing.
hNL
hNL was founded in 2015 as a Dutch language streaming platform. According to its website, hNL aims for a more convenient listening experience and for a flat fee of 4 euro users can get access to all Dutch language music on their streaming platform. The platform provides music from all Dutch language artists and also figures as a platform that combines all social media feeds from the artists.
The interesting aspect about hNL is that the platform was backed via a collaboration between competing Dutch record labels. The reason be: “[…] if the labels want the market to grow, they have to collaborate” (hNL shareholder).
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with existing parties is difficult […] I estimate that 25% of the users consciously subscribe for the service” (hNL shareholder). As for the growth chances of hNL: “I will definitely not exclude this thought, but a next step could be to combine the music platform with other services […] in the end they then might have a marketing product that they can sell” (hNL shareholder).
4.2 Industry Sentiment
In this section we describe the general industry sentiment we observed in most of our cases. We begin describing the two main difficulties entrants in our study face, namely the commoditization of music and the industry challenges. We continue explaining how the entrants in our study responded to these difficulties.
4.2.1 Commoditization
The data indicates that all entrants are struggling to cope with the continuously decreasing per-ceived value of music to the consumers. While all businesses used for this study strived for online pres-ence, about half of them remained active in the physical market as well. Sales in this market, however, are rapidly decreasing and consumer behavior in the physical market does not translate to the digital market. One manager of AVA explained: “[…] people used to stand in line for the new Michael Jackson CD; nowadays you have to be happy if you have a single customer.” In 2010 by far the largest share of the Dutch music industry‟s revenue came from music sales. However, in the years that followed, this revenue has dropped from 203 to 81 million euros (NVPI, 2016) and while digital sales have improved, they have not been able to make up the difference. Some firms like PM try to cope with these losses by exploiting the digital market via the same strategy they used for their CDs: “[…] we try to sell our albums on iTunes, but the sales are hardly profitable and our artists don’t make any money” (PM manager). Indeed, the competences that made these firms perform well in the physical market do not work in the digital market “[…] we used to hang up posters and bring our CDs to the retailer, that was it” (RR manager). While expressing his concerns for their digital strategy, the PM manager explained their physical strategy: “[…] our CDs have a nice collection of songs from all over the world and we provide a nice booklet with infor-mation.” The promotion, booklet and the collection are difficult to reproduce in digital form, and albums do not work well in a digital environment like iTunes where all songs on an album can be purchased indi-vidually. “Back in the day albums sales were very popular. Then Apple came and divided the albums into singles, this was a turning point in the industry” (MC manager).
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they called it upon themselves” (MC CEO) and “[…] if they would have acted sooner, there would not be a generation of people that find it normal to pay nothing for music” (industry expert). Moreover, the new streaming trend with its all-you-can-listen business model decreases the value of individual songs. “[…] the moment you do not offer streaming, people refuse to purchase the music; they rather get it from an illegal source” (industry expert).
The decreasing perceived value of music to the consumers and their unwillingness to own and purchase individual music makes it difficult for these entrants to capture profit from digital music sales. A PM Manager explained: “[…] we would never pursue a 100% digital strategy, as there is just no money to be made”. This made investing in new talent also very difficult for RR: “[…] we used to get our in-vestment back in the first three months, but with this streaming we have to wait longer; we only slowly receive our royalties now” (RR manager). A4M had the perception that the market would evolve and the value of digital music would gradually go up. This did not happen, “[…] the margins were too low and the investments and costs too high” (A4M CEO). The same principle was observed at DT and TM: “In hindsight we maybe did not have a viable business model because the margins were very thin” (DT man-ager). “[...] nobody can profit in this business, you need to invest millions to obtain market share [...] and we have to share the margins with our market partner” (TM manager). The decreasing value that firms face indicates that their core business has been commoditized. We saw this happen in online platforms (A4M, DT and TM) as well as in record labels and distributors (T2, PM and RR). Additional quoted ex-amples from our interviews are listed in table 2.
Company Quote
T2 “Building a download platform is costly in relation to the expected revenue” “[…] a business good for millions of traffic was completely killed in just a few years; it all went too fast”
TM “The perception that music has any value is almost zero”
PM “A fully digital strategy is not interesting for us since there is almost no money to be made” “Our artists almost receive no royalties from our digital sales”
DT “The margins are very thin” “You have got to sell a lot of songs, and receive pennies, to be profitable”
AVA “People used to stand in line for a Michael Jackson album, you have got to be happy if you have one customer in line today”
A4M “The margins were too low, and the investments too high”
MC “Why do they want to buy music from me if they can get it for free?” “People don’t want to own music and throw it away”
hNL “Again, nobody can get a profit from this”
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4.2.2 Industry challenges
A4M tried to be a disrupter in the B2B market. With its White Label service, it gave access to a variety of businesses that wanted to have their own music platform. A4M was not good enough to com-pete with Spotify or iTunes due to a lack of scale and branding. It could, however, assist other stronger brands in setting up a platform. “[…] we enabled other parties to sell all kinds of music products” (former A4M CEO). A4M could do this job cheaper and more reliable than if their customers would do it them-selves. Unfortunately for A4M, they failed. The reason was a strong rigidity of parties in the value system, such as labels, distributors and the Dutch agency that advocates for musicians‟ rights. The former A4M CEO described during the interview that “[…] the digital world was very new and the people that had a decisive role did not have the knowledge of the digitized market.” Initiatives such as White Label services rely on parties in the value system to make the innovation a success. Labels have to agree on royalties and distributors have to offer the music for reasonable conditions to make it work. “The aggregator (digital distributors who aggregate content from multiple sources) represented a particular catalog, but in order to purchase from a specific label, you have to purchase the whole catalog, which means that you have to pay a substantial sum in distribution fees and bandwidth” (former A4M CEO).
Another example is DT; they created a dance platform with low prices and DRM-free software. However, after a few years labels demanded more restrictions: “Once again we received a message to block our music to foreigners” (DT manager). An MC manager ran into similar problems when trying to introduce new initiatives to partners: “I tried, but fear stops most initiatives. Everyone is connected with one another. They just remained faithful to the old business model.” Additionally, when we asked why RR chose for their incremental digital approach via the introduction of news blogs, the manager responded: “[…] as an independent you don’t have the power to change things. It is just like Sony and Betamax; you have to come together to win” (RR manager).
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Company Quote
TM [...] We are not the only party that has issues with BUMA Stemra […] the recent podcast-issue of 538 is another example of the problems they create” (TM manager in open letter to Entertainment Business).
PM
“We wanted to distribute free promotional songs, but BUMA opposed. They could have also benefitted from it, but they were unreasonable.”
“We signed contracts, if we want to go digital we have to open these contracts again and renegotiate.”
DT
“Every Major that does not make its songs digitally available automatically stimulates illegal downloading […] the Majors wanted us to believe that the youth did not want to pay for music”
“I was convinced that digital rights management was useless. Customers copy music anyhow; it was just a waste of money.” AVA “I think there will be long and complicated disputes about what is legally possible in the music industry”
A4M
“What became clear to me is that a lot of parties in the chain did not have the right knowledge” “I was forced to pay for 5000 artists and there was no way to earn back these investments” “We had an obligation to the labels to use Digital Rights management”
MC “They all thought, if we do something different the large retail stores will not buy from us anymore”
Table 3: quotes industry challenges
It seems that industry rigidity, legal issues and a lack of knowledge in the value system hamper the development of innovations, as in new disruptive initiatives and also more sustaining initiatives. If an entrant wants to move upmarket, it does not make any profit because the margins are too low and if a firm wants to be radically different, in a disruptive manner, then established players will block the initiative.
4.3 Differentiation
With music being commoditized and an industry that is resistant to change, the firms we studied all realized they needed to find a different strategy to make a profit. Simply selling the equivalent of CDs did not work. Most companies compensated for the commoditization of music by trying to find new mar-kets that are more profitable, using music as a means to an end. A TM manager explained in an interview with Business Entertainment: “[…] the reality is that music becomes an advertising model”. This enables firms to find value elsewhere. A former DT manager describes on his blog that value can be obtained from connecting to fans and analyzing patterns: “[…] fan data can be sold to marketing companies for exam-ple, since you can know in detail what your fan prefers”. More straightforward strategies are being ex-plored as well. We observed two strategies on how these entrants move into different markets. The first group deliberately used their brand to try and get a foothold in different markets themselves. The second group offers music as a marketing tool for other companies in different markets. The next section will elaborate on these two strategies further.
4.3.1 Venturing into other markets
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and entrant in digital classical music downloads, pursued a different market with the sales of gadgets. “We tried to intercept the decreasing sales of classical music with gadgets.” (T2 manager)/ However, this new pursuit did not save the company from bankruptcy: “[…] the decreasing turnover in the traditional enter-tainment could not be compensated for by gadgets” (former T2 manager).
RR, PM, T2 deliberately used their brand to try and get a foothold in different markets themselves. Those that chose to focus just on music, and did not pursue new markets themselves, often offered their business as a marketing tool to other companies in different markets. We observed this trend at DT, hNL and TM. First, DT did not profit from digital music. “[…] I can be very brief about this; we never profited from music” (DT manager). To generate additional revenue, they had to search for new business. “The other desperate measure was that firms wanted to sponsor X-dance’s festival and they wanted us to pro-vide the music” (DT CEO). Second, TM had similar issues: […] nobody can profit from this business, you need to invest millions to obtain interesting market share [...] and we have to share the margins with our market partner” (TM manager). TM profits from contracts with large multinationals that use music as a promotion mechanism to attract more customers “[…] we are alive due to a substantial amount of digital album sales via Shell.” Lastly, “[…] growth without bundling is difficult […] in the end they (hNL) have a marketing product that they can sell” (hNL shareholder).
In conclusion, the results indicate that the commoditization and industry challenges have made it difficult for entrants in the digital music industry to capture the value from innovation or to develop radi-cally different innovations. Therefore, music in a digital form does not seem to be used as a main profit generator. Entrants firms rather move into new markets, using the music as a marketing mechanism to attract customers.
After establishing the general industry sentiment, we continue by categorizing entrants in the next section. We start with comparing early movers and late movers. Thereafter, we elaborate on the develop-ment trajectory of de novo and de alio firms. We see that these entrants use different strategies to develop further. The distinction enabled us to give a more detailed picture about the development trajectories of entrants.
4.4 Early and Late Movers
In our research, we noticed a strong similarity between two firms, DT and hNL. Both tried to set up a streaming platform focused on a specific niche. The interesting difference is that DT started in 2005 and hNL came exactly a decade later. While comparing the two cases we could see a clear example of the disadvantages that early movers face and how later entrants can avoid those.
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Another problem DT faced was that they launched before the advent of cloud services such as those offered by Amazon or Microsoft. They had to buy hardware and server racks in data centers them-selves. The cost of servers was prohibitive and required large up-front investment: “At that time there was no cloud server. We had to buy large racks for our servers. One server at that time had to be bought for around 15 to 20 thousand euros. On average, I could host between thousand and two thousand streams with that“(DT CEO). Nowadays, building a scalable web service is simpler and cheaper. No large up-front costs are required either. It seems that in 2005 setting up such a service was only an option if servers were one‟s core competency. Today, thanks to the advent of cloud computing, this can largely be out-sourced to cloud platforms such as AWS or Azure.
4.5 De Novo and De Alio Firms
In our research, we also noticed strong differences between two type of entrants, de novo and de alio firms. By distinguishing between de novo and de alio firms, we were able to give a more fine-grained development path for these entrants.
All de alio firms (T2, RR, PM) decreasingly noticed the decline of physical sales in their turnover at some point. A PM manager explained: “[…] it is not a secret that business in the music industry is bad. We used to be with 35 employees, we restructured in 2010 “[…] today we are left with 9 employees.” T2 had a similar fate. “Around 2012 it was clear to us that the turnover was decreasing. We had to do some-thing differently because we just saw our sales decreasing and it was only going to decrease more” (T2 manager). RR did not receive their usual fast returns in the first three months: “[…] usually we receive 70% from our turnover in the first three months […] it is impossible to release 10 albums today since it is not likely to get a return on investment.” The fast decrease of turnover in physical products did not make them hesitative to abandon “bad business”. Instead they tried to fill the gaps from physical sales by pursu-ing a half-hearted digital strategy. “At the time, rpursu-ingtones were a hit and there was a lot of money to be made” (RR manager). T2 had a similar strategy: “[…] we looked at what was not available. It seemed to be a classical music channel [...] it was a large investment in comparison with the progression we ex-pected” (T2 manager). The pursuits of PM were even less committed: “[…] we tried to offer our music digitally but it is difficult to do this for the old titles. We decided to do this only for new titles.” These digi-tal pursuits were however still overshadowed by the remaining focus on the physical market. “The core business was still the distribution of CDs and DVDs but if 20% of our new pursuits contribute to 80% of the turnover, then something is wrong.” And for PM: “We offer a select catalog digital, but we have to be very cautious since the relationship with the small shopkeepers is very important for us” (PM manager).
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ing. Not surprisingly, the digital strategies did not succeed to gain a substantial foothold in the market. As time passed, the physical strategy that they were so keen of became a burden for them that could not be filled with digital alternatives.
TM is the only de alio firm that does not meet the generalization that we made earlier. We think we can explain this discrepancy by the fact that TM is the only firm that did not move in the digital music market from a related market such as the physical music market. They originally were a technological media company that used their technological infrastructure for the digital music market. The TM manager said while explaining his Media business: “[…] we provide everything related to online payment.” (TM manager). Their former business indicates that they have the right resources to enter and further develop in this market. This should remove the bias of a once profitable physical market that hampered most other de alio firms to be radically innovative.
De novo firms, DT, hNL, and A4M, on the contrary, recognized the diminishing physical market and therefore consciously focused completely on a digital strategy, treating physical products as outdated and a burden to the core business. The entrepreneurs that founded these firms seem to be more forward thinkers; they have a clear goal in mind. According to a former DT CEO: “I decided to focus solely on digital, I kept in mind that the worst thing you can do is trying to go digital with analog minded people”. The former A4M manager ceased his previous record label when he saw that the physical sales reducing. “I decided it was time to focus on the music of the future”. With a strong focus on the digital future, these de novo firms developed their business, resulting in a rapidly growing customer base. A4M grew quickly and acquired, according to the former A4M CEO we interviewed, one of the largest Dutch telecom pro-viders, one of the largest Dutch radio stations, the Dutch chart maker and a large mobile phone producer between 2004 and 2007. At the same time, the digital database of DT grew quickly with 550,000 tunes only three years after its release. In 2007 DT was polled number one in brand recognition amongst digital platforms according to the interviewed DT manager.
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Comparing both de novo and de alio firms, we see that de alio firms are hesitative to dismantle the old physical business, even partially. They develop further by adding new services such as a digital plat-form, ringtones or merchandising. They constantly look where new profits could be found and then move in that direction regardless of whether they have the competences to succeed in that market. De novo firms on the contrary have a clear goal and are digitally more advanced. They are long-term minded and try to be the first-mover in what is technologically possible. Moreover, in their development trajectory, they seem to catch the wave of new technological advancements.
5. Discussion
According to Christensen et al. (2015) entrants will improve their products and drive upmarket. How they develop is still unclear (Yu & Hang, 2010; Ansari & Garud, 2015). This study has attempted to explore the black box that is the entrant‟s development trajectory. We sought to find an answer to the fol-lowing question: how did entrants in the disrupted music industry develop over time? And more specifi-cally: what were the obstacles or opportunities these firms encountered and what strategies did these busi-nesses use to develop further in a disrupted industry? To answer this question, nine firms that entered the digital music industry were selected. A case was created for every firm which enabled a pattern finding process among these nine cases.
Christensen (1997) claims that entrants in a disrupted industry tend to move upmarket, meaning that they have to improve their products and charge higher margins (Christensen et al., 2015). In our study we analyzed two difficulties in the upmarket development of entrants. First, commoditization made capturing profit from music sales almost impossible. Moving upmarket would mean substantial costs in exchange for low margins. Second, industry challenges such as rigidity in the value system, legal con-straints and a lack of knowledge by other parties in the market hampered the development of these firms. This directed entrants back to the status quo and made it difficult for them to innovate within the digital market and to move upmarket. Instead they differentiated into different markets where margins were high-er.
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purchases of uninteresting music via packaging deals. Thus, these challenges made it difficult to innovate, find related value networks or move upmarket – it forced them to move into unrelated markets with fewer restrictions.
Disruption in the music industry caused the old way of doing business to become slowly irrelevant (Moreau, 2013). As a result, entrants could pursue new technological opportunities. What these opportuni-ties looked like, however, remained uncertain in the early stages of disruption. Entrants applied different strategies to respond to the disruption. The de novo firms observed in our study had a clear goal and were committed to invest in the new technology. This resulted in technologies that were further developed than the technologies of de alio firms. We see similarities with the claims of York & Lennox (2013). In their study they explain that de novo firms tend to introduce products that are technologically more appealing than de alio firms. Additionally, the de novo firms in this study were more flexible to react to changing markets as explained by Khessina (2003). De alio firms, on the other hand, were more hesitant to invest in new digital technologies and to dismantle the old business; even when it was no longer valuable as in the case of RR‟s classical music business. Their digital pursuit seems to be overshadowed by the remaining focus on the once so profitable business. This is in line with what Christensen & Overdorf (2000) describe about the challenge of disruptive change. Managers tend to think that change resides in allocating the re-sources differently. However, change is rooted in processes and values (Christensen & Overdorf, 2000). According to these authors, processes that reside in the firm are built not to change but to do a particular task effectively. Values are the way the firm sets priorities to whether an idea is attractive or not. These (processes and values currently in place) were built to do the sustaining development well. In our study, the de alio firms did not abandon the old business because the value of the new digital business was less attractive than their physical business. The digital strategies they followed were either based on higher margins, such as RR‟s ringtone business and T2 with gadgets, or based on the same processes, such as selling digital music in a physical manner as we observed at PM.
The characteristics we used to distinguish de alio and de novo firms do not account for TM. This entrant had more in common with the de novo firms in establishing clear goals and commitments to invest in the next technology. We think this difference has to do with their experience in the previous market - that is, online payments instead of music. According to Khessina (2003), experience is positively related to the survival of a de alio firm. In this case we do believe experience is important, especially the type of experience. Following Christensen & Overdorf (2010), TM originated from another market, a market that required the same technological processes as the digital market but did not have similar market values. We think this enabled them to have comparable development trajectories as the de novo firms used in this study.
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paradigmatic phase wherein firms are trying to identify the design and between the paradigmatic phase wherein the design is already established and firms move more towards process innovations. We observed this phenomenon when comparing DT, a first-mover, with hNL, a follower and late entrant. DT tried to set up a downloading platform without a single song to begin with. Additionally, the technology that supplied this platform was costly and the customer demands were unknown. They ended up experimenting with different features to optimize their platform. hNL on the contrary knew what the market demanded an started its platform with all the necessary label contracts in place. Moreover, they could copy the preferred customer design and use the developed infrastructure to enter the market. In its existence DT never profit-ed from its innovation due to high investment costs and low margins. We suspect that hNL might have an advantage of being a relatively late mover by avoiding exploratory research and undeveloped distribution channels as suggested by Hill et al. (2014).
We contribute to the literature by providing more insights on the development path of entrants in a disrupted industry. First, although not all industries face commoditization, more industries are facing dis-ruption that could lead to a commoditized products or services. The banking industry for example has multiple entrants that compete with low price online banking applications, diminishing the need for offic-es. This study provides extra insights on how these entrants can profit by leveraging their current compe-tences in other markets. Second, de novo and de alio firms have different development paths. De novo firms have a clear goal in mind and are committed to invest in the new technology, whereas de alio firms are hesitative to invest in the new digital business and to abandon the old business. This could indicate that de alio firms are influenced by their process and values when trying to innovate. Last, being a late mover in a commoditized industry should have its advantages over being first to market since expensive explora-tory research and undeveloped distribution channels can drive the entrant to more costs than revenue from the low margins they eventually face.
6. Conclusion
This study has attempted to explore how entrants in the disrupted industry developed over time. Existing literature claims that entrants move upmarket. Yet how these entrants developis still unclear (Yu & Hang, 2010; Ansari & Garud, 2015).
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However, the pursuits in a digital market had its difficulties for both de alio and de novo firms. A rigid industry sentiment, strong incumbents and a lack of knowledge forced most entrants that tried to be radically different back to the status quo. Moreover, the decreasing perceived value has led music to be-come commoditized. These obstacles forced all the entrants in our study to move to unrelated markets because profits had dried up. The music did not turn out to be useless, but proved to be valuable as a mar-keting mechanism for these unrelated markets.
We also observed that the profound technological changes and the establishment of a dominant design in the last decade have changed the market. Early movers had to outfit their own data centers, whereas the late movers could just build on top of established cloud infrastructure. Moreover, the early mover from our sample did not know how to interface the service. Thus, we concluded that late movers benefit greatly from developed customer preferences and technologies, and are therefore able to enter the market with fewer barriers.
6.1 Implications
This study contributes to the theoretical discussion of entrants moving upmarket in a disrupted in-dustry. We observed that these entrants did not move upmarket but differentiate into unrelated markets. The theory claims that when a market is commoditized another becomes decommoditized (Christesen and Raynor, 2003; Christensen and Rosenbloom, 1995). In this process, firms move into other value networks. We revealed that when industry challenges occur such as rigidities in the value system, legal issues and a lack of knowledge by other parties in the market, firms rather differentiate into unrelated markets. These dynamics could also help managers to leverage their competences and find value elsewhere to stay in the market.
We have also strengthened the notion in the literature that new innovations from de alio firms are hampered by their processes and values as suggested by Christensen and Overdorff (2000), resulting in more sustaining innovations. We suggest that de alio firms can have similar development paths as de novo firms as long as their technological base and prior market is distant from the entering market. These find-ings provide clarification to the type of experience de alio firms require to be different from de novo firms.
In a commoditized market, it would be preferable to be a late entrant. Being first to market in this case, contributed to unknown customer requirements and underdeveloped technologies which resulted in high costs - and no feasible way to earn back on those investments. Managers that recognize these patterns can use this information to either wait to enter a market or to develop additional diversification strategies by leveraging their core competences into other markets.
6.2 Limitations
