KANAGAT: I agree with that. Another more difficult difference is that people get value from many of these other luxury categories by showing them off to others. It is tougher to do that with audio beyond a small circle.
HARLEY: Every few years, someone begins discussing the need for a collective association that acts on behalf of the entire industry. There’s been lots of talk but no action.
KANAGAT: The industry would probably benefit from a broadbased association, à la the CEA [Consumer Electronics Association] of the high end. It’s very, very tough to pull off. Any such effort needs a high degree of industry participation to maximize shared resources and avoid the “free-rider” problem, which is companies that benefit without paying. However this introduces the problem of too many individual agendas at work. Or you could create another type of organization with relatively high barriers to entry—say, the top twenty companies—and have a seal of membership that allows them to promote that fact in the market. You’d have to market the idea aggressively in the mainstream media.
GIOLAS: Dave Wilson and I have thought of a group very much like what Atul outlines. There would need to be a credentialing procedure that involves business longevity, service record, and congruency of point-of-origin of manufacture.
KANAGAT: There are analogies from other industries that could suggest the protocols of what it takes to achieve the credentials to belong to this organization. And then you invest the money to establish the brand of that credentialing, and then market that credentialed brand.
GIOLAS: The problem has been with those types of organizations is that people fear elitism, which the organization is going to be accused of. But by definition you must exclude certain groups from membership. Again, you create the idea of aspiring to something, rather than lowering the common denominator and letting everyone in. They could say “Sony cares about music. Shouldn’t we include them?” It misses the point and dilutes the impact of the exercise.
KANAGAT: I have a hypothesis that I believe would be borne out if I had access to the same level of market data that I’m used to working with in other industries. If we did a demographic analysis of high-end customers, we would probably find that more of our product goes into upgrades—people who are buying for the fifth, sixth, twentieth time, to improve the performance of their systems. We’d also find that more of our product increasingly goes to people who are in their 50s and older. That’s a concern because the great retail experiences are few and far between now, and the younger music lovers don’t have a chance to discover us. But young people today consume more music per capita than anybody in the history of man.
MENACKER: Because of the iPod.
KANAGAT: They’re getting fewer and fewer opportunities, if any, to experience the magic of music when it is reproduced properly. If we don’t introduce new blood, if you don’t keep the flow of customers coming, we can only keep selling to the same people and upgrading them. That is a short-sighted business model.
MENACKER: The cool thing about the Internet and the iPod is that the variety and quantity of music have never been greater, and it’s never been easier to distribute. The younger generation’s involvement in music is even greater than when we were kids. We have an audience, but need to figure out how to get to them.
GIOLAS:We see that as an opportunity. The key, of course, is to meet that potential customer where he is, but not by lowering your common denominator. Create a situation where he aspires to be where you are. In order for him to aspire to where you are, you can’t disdain where he is.
KANAGAT: In the ’70s, one of my partners at McKinsey wrote a
book on technology and how it evolves. He invented something he called the technology S-curve. Imagine a chart with two axes, with the horizontal axis being the investment of time and money, and the vertical axis being performance. You start by going through a period of time when incremental spending and incremental time do little to really drive performance; then there is a phase during which dramatic performance improvements are achieved in a short period with very little incremental investment. And then the curve flattens out and you have to spend a lot of time and money to get meaningful performance improvements. I have often successfully applied the S-curve to industries or to price/value equations. If we apply it to the phenomenon of the iPod in price/value terms, the iPod is delivering what most people consider good quality sound at extremely low prices compared to high-end audio. It means that the tail of the S-curve is flattening out just below the main body. To try to sell high-end products for significantly more money is tough because of what you’re competing against. You have to have a business system that demonstrates the value of your products to young people accustomed to the price/value proposition of the iPod and a pair of headphones. We’ll never reach young people unless we can demonstrate the value of what we have to offer.