There is a bit of a debate going on in the twitterverse right now about the proper analogy to use when trying to figure out disruption in the energy field. Everyone agrees things are going to be different in the near future as electric vehicles grow, coal shrinks and renewables and storage rise. But there is disagreement on what will happen and when. There isn’t a template for this. Maybe we should look toward the music industry.
I lived through the early days of disruption of the music business, when CD sales were collapsing, iTunes was just starting to sell $1 singles, MySpace was a thing (and facebook wasn’t), and streaming services like Spotify were barely in rumour phase.
And while no analogy is exact, there are similarities between what happened in the world of music – and more broadly entertainment – and what is happening and maybe going to happen in the energy/electricity realm. Could there be some learning?
A quick music biz history
The music industry and the larger entertainment industry operated on a we-make-it-you-buy-it system.
The music was largely controlled by the major labels, who decided what artists were going to be signed, who was going to produce the artists, where they would record, what radio station audiences their music would be aimed toward and how they were going to be promoted. Product was shipped to retailers and consumers bought it.
This was a system that worked on the foundation that people had to buy a physical thing to hear the music. (Other than going to a live show.) The physical thing changed over the years, going from records to cassettes to CDs, but the consumer had to purchase a tangible item to enjoy an intangible benefit. It was so intrinsic to the business that the companies were called ‘record companies’, not music companies.
There is a lot of money in tangible items, because a lot of things are involved in making those items: pressing machines, the vinyl, paper sleeves, CDs, CD jewel cases…and everyone involved in the making of the tangible item gets a mark up. ‘Steps on it’, they might say in the drug trade, but I digress.
The other thing about a tangible item is that if a person wanted to increase their music collection, the only practical way to do it was to purchase more and more tangible things. Sure, you could make cassettes and mix tapes, but largely you had to buy more stuff. And even with tapes you had to grapple with tape hiss and scratches on the records you were recording.
Coupled with the significant expense of building a recording studio, all of this benefitted those large corporations because they were the only ones that could pay the production and promotion costs. They controlled the shipping also, so they made money on that, and the volume of items sold with those considerable markups made it enormously profitable for them.
Then the home computer came along
When someone had a home computer and a CD to that CD and even more importantly burn their own CD, the change began. Now, if they wanted to expand their music collection, they didn’t have to buy another piece of plastic. They could borrow it from a friend and transfer the digital file, which would be an exact replica with exactly the same quality. In effect, people started to become another arm of the distribution business, but without any money or extra purchases involved. The record companies didn’t like it. But the people did.
So when Shawn and Sean – Fanning and Parker – came along and put that idea together with the internet to form Napster, nobody had to buy anything at all to increase their music collection. They could simply log on and get a copy of the music every bit as perfect as when it left the studio. (Or close enough in quality for the overwhelming majority of people.)
Not surprisingly, CD sales started to falter. Then when iTunes came along and made the digital thing legit, the disruption process speeded up. CD sales started to crash. (See the chart below, which comes from an excellent blog called Music Business Research.
The computer was starting a revolution at the other end, also. Recording studios, as I said, used to cost hundreds of thousands of dollars to put together. They were expensive to rent, and the only ones that could rent them were the big music companies.
But Apple now put recording software on your computer – GarageBand – for free! So the artists didn’t need to impress people from big music companies to get the money to record. They could do it themselves.(I am not going to get into the discussion here about whether these people were great musicians and SHOULD have been making ‘music’, the point is that they could.)
Musicians became their own record label and distributor
And when MySpace came along you could be a distributor as well. Get your own fans. Do your own marketing. They could download your mp3. You were essentially your own record company. There wasn’t much money to be made, but you could do it.
As CD sales fell record stores started to close, and then it became less profitable for the music companies to send the CDs to the stores, so they only sent the guaranteed huge hits to the bigger store, but when the people went into them there wasn’t any selection and it became a vicious circle of diminishing returns and eventually the huge record store chains collapsed.
The visual entertainment side of things began to go through changes too. There used to be major studios and major television networks, both with limited supply and lots of demand. But movie stars stopped working under contract for studios (which is how the MGMs and Foxes of the world initially made their fortunes) a long time ago, and cable quickly brought in the 500-channels-with-nothing-to-watch universe.
On the movie side, fewer and fewer people felt it was worth it to go to a cinema when the VCR let you watch movies from the comfort of your own living rooms by going to a store to buy a physical thing, like a VHS cassette, then a CD, then a DVD. Just like the record business.
The same thing that happened to music started happening to films
On the production side the disruption was also taking place just like the audio side. YouTube let everyone broadcast their own videos made on hand held ‘camcorders’. They weren’t as good as the 35 millimetre film cameras Cecil B. DeMille used to ride around on with 30 people moving lights and holding microphones. But you could do it yourself. And they were certainly good enough for a video of your cat in a hamster ball, and the quality of the cameras (if not the videos) got better and better.
So we went from a centralized system where the creation and production and distribution were controlled by the few companies that could afford the investment (and reap the rewards) to a place where millions of pieces of music and video were being distributed from a million places to a million other places through this thing called an internet which was a network specifically designed to be decentralized.
That is not to say that the ‘original’ forms of creation and distribution simply disappeared. What it is to say is that the creation and distribution of content took on many different forms, and with many different payment schemes. Big companies still control the mega stars and blockbusters, but there are thousands of indie bands now on small labels, and most films are financed on an individual basis that doesn’t require an ongoing permanent studio structure.
Everything went to the cloud
The final – or at least the latest and most disruptive piece in all this – fell into place when the smartphone came along and nobody had – or wanted – the limited storage on their phone or computer being taken up with entertainment files. So those files went ‘to the cloud’.
There is, comparatively, almost no physical product sold any more. The big centralized companies lost their power to exert control over the way everything worked. They still control a lot, but nowhere near as much as before. And while the cloud is run by big centralized companies like Spotify or Apple or NetFlix, they run an entirely different system, one in which anyone can have whatever they want whenever they want it. One where the consumer decides what they want to do, not the producer. The electronic distribution of digital bits and bytes makes it possible. As well as the decentralized web of the internet. The internet providers get the money from that.
What does this have to do with electricity?
So what, you may well ask, does this have to do with the price of eggs – or electricity – in Oregon?
The first similarity between entertainment and electricity is that entertainment has been digitalized. And there is nothing more digital than electricity. While music previously required physical distribution, it has always been possible to distribute electricity to any place at any time as long as the wires and production facility were in place.
The key part about what changed the music and entertainment industry so drastically, though, is that part about producers and consumers. When people started to be able to record music and video at home (or for business) without needing the expensive infrastructure of a 64 track recording studio or 35mm movie camera and crew, we entered the world of the producer/consumer, or ‘prosumer’.
As I said, no analogy is perfect, but think of the music/electricity metaphor this way:
In broad terms, we have long lived in a world where the energy and electricity has been brought to us from large centralized entities – large utilities, (both public and private) that built hydro electric stations and dams, coal burning electricity generators, and nuclear facilities. Oil companies built huge platforms and drilled miles under the ground to provide the physical thing that is refined (stepped on) that we burn and consumer to provide energy for our transportation.
Think of them as the movie moguls and original television networks and record companies.
As it relates to ‘physical product’ like CDs and records, we didn’t actually buy physical product from the coal plants (although some of used to buy coal in order to heat our homes) but the product (energy) was dependent on continuing to feed the maw needed to make that product. The average person or small business certainly couldn’t go out and build a nuclear reactor or hydro station even if regulations allowed.
In the case of energy for our cars, the oil companies, were integral to and controlled the distribution of their physical product (Which is kind of unique and weird when you think about it. It would be as if the record companies had their own stores and if you would have to go to different stores to buy music by different artists. But I digress.)
The big disruption is coming, but how?
It doesn’t seem a big stretch to predict – as many have – that the big disruption in the energy world is going to come from solar power and electric vehicles. You can’t build a nuclear reactor, but you can put up a solar array and connect it to a PowerWall and the battery of your Nissan Leaf.
As this system becomes more widely adopted it will bring the change enabling the prosumer revolution where millions of things are attached to a complex web and energy from small residential solar/battery systems and EV batteries will be constantly taking energy out or putting it in to an interwoven network shared by other similar prosumers. Depending on the circumstances and time of day, you could be making or taking. Kind of like recording a personal cat video in the morning and watching other peoples’ cat videos at night. And as that happens – or is already happening – the old guard of utilities and centralized generation will need to adapt.
What happened in the music world was that some people clung on to the old model, selling CDs and renting videos as the market became smaller and smaller. Maybe think of coal burning plants and the mines that supply them or the oil companies and their drilling rigs and multi billion dollar pipelines.
Others predicted that people would still buy things the way they always have, but on a new format – the iTunes system where they would purchase by the song or collection of songs or by the movie title or TV series, but would get a digital reproduction instead of a physical one. Think of large scale solar and wind, perhaps coupled with large scale storage and batteries – the old model done in a new way.
And some people thought that it would go to streaming and the monthly subscription for ‘all you can eat’. The analogy falls apart a bit here, but in terms of something farther in the future, think of this as a kind of shared energy service made up of residential and small commercial solar/storage coupled with EVs and batteries.
The other key player in both music and energy was the distribution network – the cable company or internet provider. Think owner of the electricity transmission grid.
The entertainment world is a mish mash of solutions
Where we are at in the entertainment world is in a place where all of these things coexist. Millions of people still watch network television and go to movie theatres, but millions of others don’t even own a television set and stream their entertainment via NetFlix or Spotify. Or Hulu or Apple TV.
And millions of people still buy Beyonce and Justin Bieber’s latest albums. But also millions of people never listen to anything other than music from small niche artists.
It seems pretty evident that is where the energy market will end up, with a bunch of different ways for a bunch of different producers to satisfy a bunch of different consumers, some of whom are producers themselves. The specifics are less easy to figure out, though.
The issue with the music industry, ever since the collapse of the CDs, has always been the pricing and who gets to keep the money.
At one time it was the major music and movie companies – and the companies that supplied them with CDs and videocassette cartridges who got all the spoils. Along with the retailers
Now, the CD and cassette manufacturers are all but gone, the retailers are gone and the major entertainment companies can’t make the same kind of money with production and sales because everyone can produce and there is not extra money around from physical product being marked up. Digital distributors like NetFlix and Amazon and Spotify are taking the share that record companies used to make trucking things to stores. In fact now the distributors are making so much they are becoming producers themselves. And some portion of the whole entertainment pie now goes to YouTube stars, which was unheard of a decade ago.
The change will be gradual. And we’re in it now
None of this happened overnight. Some of the ‘old’ companies tried to become ‘new’ companies through different strategies, but most of those were incompatible with the old business models. Sony and Universal did try to set up digital music stores where only their own artists’ music was for sale. Didn’t work. Lots of new websites selling mp3s and forward-looking streaming companies started up but failed. Digital albums were sold on plastic gift cards. And there were lots of different pricing strategies attempted by everyone.
As I said, no analogy is perfect, but I think this is what the energy business is going to be looking at in the coming years. Of course, there are a lot more restrictions – as there should be – on distributing something with the necessary safety considerations of electricity. But I think we’ll see lots of experimentation and lots of shifting of emphasis on types of generation and storage and even pricing policies, as regulators react to market conditions. Who knows, in the future it may be in the best interests of a company that owns transmission lines to charge consumers a flat monthly rental instead of a by-the-kilowatt-hour basis.
Very few predicted that in the entertainment industry, but that’s where we are today.
Like they still say in radio land: stay tuned!