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The Music Industry as Counter-Example to the Technological Explanation for Shakeouts

May 21st, 2010

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While papers such as Klepper (2002) and many others argue that technological innovations lead to shakeouts, Scherer (1965), Mansfield (1968, 1983), and Mueller (1967) suggest that market concentration and large firm size are only weakly associated with innovation. Alexander (1994) shows one case, the music industry, in which technological changes actually resulted in a de-concentration of firms (by spurring new entry).

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Evidence

The history of music industry concentration and the chronology of events provide general evidence against technology always being the direct cause of shakeouts. At the beginning of the industry’s life (1890-1900), there were three major firms producing the vast majority of audio products: Victor, Columbia, and Edison. This included both the machines—cylinder and record players—and the actual cylinders and records. Patents on these machines were a major barrier to entry, but major innovations from 1900-1910 and the expiration of important patents in 1914 resulted in industry deconcentration. Early record production required live-action recording to produce each record, requiring either multiple record writers present during a performance or multiple performances. From 1914 to 1919, the number of firms manufacturing records and record players grew on average by 44 percent annually. Demand was stimulated as a result of a new variety and quantity of available products on the market, and the period was characterized by heavy innovation in the music, particularly by small producers. However, from 1919 to 1925, the number of producers declined at an average annual rate of 14. 4 percent. Larger firms were able to capitalize on the small producers’ innovations, resulting in imitation as well as several horizontal mergers. The onset of the Great Depression and World War II finalized the reconcentration of the music industry. Prior to 1948, Columbia, Decca, RCA Victor, and Capitol were responsible for three-fourths of record sales in America.

Following the war, a new innovation reshaped the industry: magnetic tape recordings. Previously, records were produced in a very tedious and unforgiving fashion. Errors in the performance for a recording would require the artists to execute the piece perfectly—start to finish—in order for the recording to be successful, but magnetic tape

allowed a particular section with an error to be spliced out and replaced by a re-recorded part. Magnetic tape machines were also much cheaper. By reducing the amount of studio time required and also lowering the costs of starting up a recording business, magnetic tape technology was followed by an increase in the number of companies producing LP (long-play) records from eleven to two thousand between 1949 and 1954 (Gelatt 1954).

By 1956 independent firms held around 52 percent of the music recording industry’s total market share, increasing to the industry’s peak in 1962, at which time independent firms accounted for 75 percent. Afterward, major firms began to reacquire market share, primarily through horizontal mergers, and the number of firms in the industry began to shrink.

Analysis

This prompts us to seek an alternative explanation to technological changes for the causes of the most recent extended music industry shakeout (1962-). Several technological improvements turned out to be exogenous (allowing universal adaptation) rather than endogenous (proprietary and thus concentration-inducing). The nature of the technologies Alexander cites tended to be scale-reducing, thus reducing barriers to entry. Developments in musical technology over the past 50 years have been consistently scale-reducing, though the trend for a large portion of that period has been toward consolidation. Magnetic tape and compact disc players became commercial and low-cost home appliances, and their respective means of creation grew as common (tape recorders, CD-burners, etc. Computer-based music recording and playback has become more widespread. Still, the number of firms has been decreasing.

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