STRUCTURAL

CHANGE IN THE DISTRIBUTION SECTOR OF THE MUSIC RECORDING

INDUSTRY: CHANGES IN PRODUCTION & CONSUMPTION PATTERNS

The music recording industry involves itself with manufacturing, marketing and
distributing music. The industry has experienced some dramatic shocks that will ultimately
transform its structure. This essay will look at one of the on-going structural changes in the
music recording industry in the distribution sector - focussing on the new digital music
industry. This essay will for the sake of brevity and clarity, provide for a brief description of the
current structure of the music recording industry in the US. This essay records the on-going
transformation of the music recording industry from a collusive oligopoly market structure to a
more competitive market structure owing to an easing of previously existent barriers to entry in
the distribution sector. This essay puts forth the view that a structural change in the music
distribution sector has not only changed the supply-side market structure of the industry but
also the demand equation by making music a differentiated product.

The music recording industry is an oligopoly with a competitive fringe. The industry
consists of four large international firms (Majors) and thousands of smaller independent
producers. The Majors (Vivendi Universal, Sony-BMG Group, Time Warner Inc., and EMI Group)
have gained dominance via horizontal mergers over the years, control over physical distribution
networks, and influence over the content of radio airplay they collectively account for 82% of
domestic music industry sales (Alexander 2009, p.189). The Majors are also vertically integrated
into music publishing, production, manufacture, and distribution. The Majors enjoyed dominance
in both the production and distribution of music.

This market structure was in part the result of economies of scale at the distribution
stage in the value chain. The function of distributors is to make products available to retailers
who then sell to final consumers. The physical distribution of music in the music recording
industry has significant scale economies, characterised by high entry barriers and dominated by
the vertically integrated Majors. Supplying a large number of wholesalers and retailers requires
the setting-up of a huge distribution network, the source of substantial fixed costs that only the
majors can afford.

The above market structure had been relatively stable till the early 1990s, until it was
challenged by the appearance of digital technology, particularly the emblematic MP3. The
possibility of dematerialising music from CDs and cassettes to compressed digital files has led to
the development of peer-to-peer music sharing networks and free downloading of digital music
files. After the early days of Napster.com, Bit-Torrent and MP3.com, which guided the
distribution of digital products illegally, there has been a clear shift towards industry-sanctioned,
legal, online digital distribution platforms like Spotify and iTunes (as opposed to purchasing CDs
and other physical containers of music).


Users flocked to Spotify, which connects to Facebook to enable easy music sharing, in
2011. Their basic free service got many users hooked, and many of them upgraded to paid
subscription services. Consumers now choose to pay a monthly fee (about the price of a single
album) for a library of thousands of their favourite albums, which they can easily share with
friends. Also, artists now earn much of the money that was previously earned by the Majors
(Clemens et al. 2002, p.27). This is as a result of their adoption of self-production (through tools
like LogicPro) and self-distribution through digital platforms.
The order in which a fan will interact with an artist is Hear-Like-Buy. In 1970s, the
major firms in the music recording industry recognized they might use payola as a barrier and
instrument for raising rivals costs, the rivals being small fringe firms or new entrants (Alexander
2009, p.195). Services like Spotify that have a basic free service (which includes product
advertisements between songs) have changed this by allowing users to listen to music before
buying. Unlike the radio stations that benefitted from payola and played only certain artists,
these services are usually indiscriminate and promote product diversity, consequently aiding
fringe firms. Also, studies have been conducted on college students, who are considered to be
most likely to engage in illegal file sharing. The results show that the ratio of actual loss if
revenue due to an illegally downloaded file is not on-to-one (Arias et al. pp.126).

The potential structural importance of the transition to digital technology is compelling,
since digital distribution diminishes a significant barrier to entry The costs of distribution
should decline dramatically, as physical distribution at a national or international level has
significant scale features. A competitive digital delivery system would reduce substantially the
minimum efficient scale of distribution, and likely stimulate a highly competitive producer
market (Alexander 1994a, p.122). Digital technology offers new opportunities for promotion.
So, for example, consumer-to-consumer promotion, much less developed than classic media
promotion in the current organization of the recorded music industry, but also much cheaper,
could become dominant for online music.

The Majors can be said to be in some trouble, which will get worse without some serious
innovation by the interested parties. Sales in the US the biggest market fell by 29% between
1999 and 2007. In early 2009, CD sales continued to decline and digital sales started to plateau.
This industry is currently considered to be in the mature stage of its life cycle and is on its way
into the decline phase of its life cycle. The total revenue the recorded music industry has declined
from $18bn in 2000 to $8.4bn in 2009. Given the broad empirical evidence that peer-to-peer file
sharing systems are sustainable and becoming more sophisticated, it is likely that the Majors will
continue to face significant difficulties in the distribution of their products (Alexander 2012,
p.160).

The decrease in CD sales and corresponding rapid increase in digital music file
purchases demonstrate that consumers "prefer more convenient formats, that they resist having
the songs they want being tied to songs they do not want, and that they want the prices they are
charged to reflect the much lower costs of production and distribution which new technologies
make possible (Tyler 2013, p. 2149).
The reasons for this change could also be that there is a split in the consumer market for
music. It could be attributed to a preference for penalties to paying a price for buying the
music; as well as a preference for buying singles as opposed to an album of songs. This would
mean that available music both vertically and horizontally differentiated products. The intuition
is that while the product is one and the same, the costs consumers put getting the product for
free with the risk of penalties is less than the price for paying for the music leading to a
horizontal differentiation. One can use the Hotelling Model to see that one end we have the costs
attributed to penalisation and on the other the actual costs of purchasing music, consumers are
now divided in accordance to the costs that they place on either end of the spectrum higher.

Alternatively, it could mean that a single that consumers like is a high quality product,
while an album consisting of some songs consumers like and some that they do not is a low
quality product. We know that an album is more expensive than a single, making the low quality
product more expensive. Logically, consumers will purchase the high quality product, which is
less expensive making music is this case, a vertically differentiated product.

Digital musics only distribution channel is the Internet. Majors should shift focus from
the distribution sectors and consider opportunities to advertise and attract customers online,
and explore the creation of strategic alliances.

WORD COUNT: 1197 words
BIBLIOGRAPHY:

Alexander, P. J. (1994a). New Technology and Market Structure: Evidence from The Music
Recording Industry. Journal of Cultural Economics, 18, 113-123

Alexander, P. J. (1994b). Entry Barriers, Release Behavior, and Multi-Product Firms in the Music
Recording Industry. Review of Industrial Organization, 9, 85-98

Alexander, P. J. (2002). Peer-to-Peer File Sharing: The Case of the Music Recording Industry.
Review of Industrial Organization, 20(3), 151-161.

Alexander, P. J. (2009). The Music Recording Industry. In James Brock (Ed.), The Structure of
American Industry (pp. 183-204). Long Grove, Illinois: Waveland Press, Inc.


Arias, J. J., & Ellis, C. (2013). The Decreasing Excludability of Digital Music: Implications for
Copyright Law. American Economist, 58(2), 124-133.

Clemons, E. K., Gu, B. & Karl Reiner, L. (2002). Newly Vulnerable Markets in an Age of Pure
Information Products: An Analysis of Online Music and Online News. Journal of Management
Information Systems, 19(3), 17-41.

Moreau, F. (2013). The Disruptive Nature of Digitization: The Case of the Recorded Music
Industry. International Journal of Arts Management, 15(2), 18-31.

Tyler, N. S. (2013). Music Piracy and Diminishing Revenues: How Compulsory Licensing for
Interactive Webcasters Can Lead the Recording Industry Back to Prominence. University of
Pennsylvania Law Review, 161(7), 2101-2150