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

May 21st, 2010 Comments off

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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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The Music Industry as Counter-Example to the Technological Explanation for Shakeouts (Part 2)

May 21st, 2010 Comments off

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Currently, the music market is dominated by six major firms: Time/Warner, Sony/CBS, Thorn/EMI, Philips-Polygram/PMG, Bertelsmann Music Group/BMG, and Matsushita/MCA.

One important factor stands above all other explanations for this consolidation: distribution. While prior to 1962 there were several strong and independent music distributors who provided an alternative to the major firms’ distribution networks, major firms began making significant buyouts in the 60s onward, creating a dominant market tendency toward the horizontal integration of distribution. Many independent distributors went bankrupt, and this tendency grew even more exaggerated in the 1980s. The six major firms mentioned above presently constitute almost the entirety of the industry’s market share at the distributor level.

In light of this evidence, one revised hypothesis is that technology can play a role in market concentration in as much as it augments scale economies. Technological innovations such as widespread personal computers with sound processing and recording capabilities, as well as advanced software for manipulating recordings, have reduced the necessary scale to begin producing consumable music recordings to anyone with or without talent, with just a $300 personal computer, a $30 microphone, and some small degree of sound engineering skills. The internet has also drastically reduced the scale required for significant levels of distribution, with peer-to-peer sharing networks, internet-based record stores, and social networking pages like MySpace. com.

On the other side of the story, some non-technological things may account for firm “lock-in” or other phenomena that lead to high industry concentration. Distribution strategy is one possible example of this, but it is likely that the dominance of particular firms that allowed them to construct their distribution networks shares a cause with their distribution strategies. Music is a very unique kind of product. Each new “product” (a song or album) also happens to be distinctly associated with a set of individuals. The quality of the music itself is controlled from a non-technological (in the physical sense) set of innovations relating to meter, pitch, tone, content, or overall theme. Some major firms may have the musical brainpower to “get it”- a group of experts, who manage bands and affect the musical product, that ultimately represents a stock of knowledge the firm has about stimulating and satisfying demand for music. Furthermore, labels fortunate enough to enlist legendary bands, perhaps by only good fortune, gain a long-lasting advantage, both from their experiences with a popular band (more concerts, albums, events, merchandising, etc. as well as from the profits, which attract more expertise, which attracts and creates better bands, etc. There appear to be many opportunities for self-reinforcement in the industry. Whatever is the case, the technology-based shakeout story lacks explanatory power in music.

Source:

Alexander, Peter. New Technology and Market Structure:

Evidence from the Music Recording Industry. Journal of Cultural Economics, Volume 18, 113-123, 1994.

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