The music industry has been revolutionised by technological advances. Tim Grant reflects on whether insurers can learn from how this transformation has been driven.
With Christmas almost here, many of us are no doubt busy buying CDs and downloads for friends and family. With that in mind, I began to wonder whether the revolution in the music industry held any relevance for the insurance sector and started to see certain parallels between the two industries.
Technology has completely transformed the music business. CDs were one of the first products to successfully migrate to online distribution at the turn of the millennium. New entrants such as Amazon, Play and CD Wow built business models around the new environment, unencumbered by legacy operations. Operating on much lower margins than traditional competitors, they often undercut high street outlets — such as HMV, WH Smith, Zavvi and Virgin — by as much as 30%.
Price was not the only compelling aspect. The nature of the product was perfect for 'remote' purchase, not needing a tactile assessment by prospective buyers and ideal for effective and efficient postal distribution. Customers could control the purchase, in terms of time and place, rather than having to visit a store within restricted opening hours.
The new world
With no legacy operations or systems, the new players could build their operations around the new world. They harnessed the power of technology to optimise the customer experience, their own logistical distribution capability and also deliver highly effective CRM systems to maximise additional sales and repeat business.
Meanwhile, the traditional players struggled to respond to this disruptive innovation. They were distracted and constrained by their existing business models, slow to build their own e-commerce solutions and, when these eventually launched, they met with limited success.
But this new model was destined to be blown apart by Apple, with its combination of the Ipod and Itunes. Rather than looking to innovate either the product or service, Apple innovated the customer —providing them with an entirely new way of purchasing, storing and listening to music. The results were extraordinary — not just for Apple but for the record industry as a whole.
In terms of distribution, there are striking similarities here with the evolution of insurance — most notably personal lines but also, increasingly, micro-SME. Organisations like Direct Line and then Simply Business launched revolutionary propositions that fundamentally changed the customer experience, and had such resonance with consumers that the impact on traditional players was substantial.
Again, the constraints of existing business models and legacy systems created challenges when it came to responding to this disruptive innovation. Just like the music industry, a second wave occurred in personal lines with the advent of aggregators and, again, their impact on the market has been nothing short of phenomenal.
However, insurance is yet to really follow the music business in another area. Itunes didn't just revolutionise how music was bought, but also the way products were structured and, therefore, what was bought. Rather than purchase a whole album, for around £8, suddenly a consumer could strip the package down and buy individual tracks, creating their own albums and playlists based on their unique requirements.
In micro-SME insurance, covers remain packaged together, meaning the customer often buys insurance they don't need. I strongly believe a great opportunity exists to deliver a solution that will resonate with customers, who are increasingly purchasing other products and services in this way — and the lower processing costs associated with e-trading means minimum premiums are less of an issue.
Traditional lines blurring
The new world music business has seen traditional lines between manufacturing and distribution blurring, with recording artists less dependent on record companies. We've seen Radiohead release their album In Rainbows as a digital download and even inviting buyers to choose their own purchase price. Perhaps this could be the next step in the soft insurance market!
The former head of Warner Music recently advocated the selling of music albums for £1. Whether this happens remains to be seen, but CDs are now widely available for around £6 — less than 50% of their price before the events described above, undoubtedly great value for consumers. Perhaps the landscape for insurance pricing has also permanently changed?
Faced with falling revenues, recording artists now seek to generate revenue from other sources, such as tours and merchandising. Stars like Beyoncé, Mariah Carey and Lady Gaga have gone further, creating brands that can be extended in many ways, including perfume and fashion. Music videos are also an important revenue stream, despite being made available for free on sites like Youtube.
Telephone — the Beyoncé and Lady Gaga collaboration — is not only notable for its salacious content but also for extensive and obtrusive product placement, with other brands happy to pay in order for their products to be associated with what they view as iconic brands. Paradoxically, the stars' core business is more important for fuelling their brands than generating revenue.
Again, there are parallels with our own industry where non-insurance revenue is becoming an increasingly important income stream, with associated products and services available in conjunction with the core product. Insurance is effectively the vehicle to connect to the consumer. Stretching this analogy a little further, a second-hand car is obviously much more valuable if it contains a suitcase full of diamonds.
In my view, distributors of insurance will increasingly seek to load their vehicles with 'diamonds' and hope their consumers will purchase them. The alternative and arguably more threatening scenario is that non-insurance businesses with strong brands and highly developed customer propositions add insurance diamonds to their vehicles, delivering 'game-changing' solutions.
The world in which we operate is transforming at an ever increasing rate and the most successful insurance businesses of the future will be those that look beyond their own environment and understand how other industries are driving this transformation with radically enhanced customer propositions and business models.
Tim Grant is head of e-business at Dual Corporate Risks
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