Kevin Laws (by way of Tim Oren’s Due Diligence) raises some very interesting issues regarding the music industry, and questions of monopoly and profitability.

I disagree with Kevin’s take on the matter; Here’s my counter argument:

The music industry is not a Monopoly — but it is an Oligopoly. The five major labels control the vast majority of musical acts and capture over 90% of the consumers money spent on recorded music.

Nor are artists monopolists: Consider the 90% number mentioned above: How far down the artist roster will you have to go to reach that 90% of consumer dollars spent on recorded music, or concert appearances or both? We know the Rolling Stones do big touring and bring in a lot of dough; So does Paul McCartney. But if you go down the list of total dollars spent on the musical entertainment, you wont reach the 90% level until you have included 100s of artists. Hence, no monopoly.

Kevin also wonders why music companies aren’t wildly profitable? There are several reasons:

First, as mentioned above, they are not monopolies; They are a loose cabal of price fixing companies who recently came to learn a very basic law of economics: Increased prices = decreased demand. Shockingly, its taken them about 5 years to figure this out.

Secondly, broaden the sector where the industry competes from the narrow music to the broader category of entertainment. Suddenly, music has a serious fight on its hands for each and every discretionary consumer dollar. Music is battling against cable and satellite and film and tv, against internet and print, against video games — both local playstations, and massive multiplayer games over the net. Sports are another form of live entertainment taking a hefty chunk of consumers time and money. The gambling industry takes their piece also.

Demand is quite elastic for their product; Their products are not like cigarettes or gasoline or heroin; Raise the price or lower the quality or both, and Voila! Sales tank.

All these reasons help explain why Music aint all that profitable — and thats before we even begin to analyze how effective management is at the 5 big labels; I suspect we would find that most of the companies in the industry are not particularly well run or efficiently managed. They lack innovative ideas or creative responses to challenges. They have been slow to adapt to new technologies. They do not respect their clients. They have not shown they understand artists.

Lastly, the music industry is married to a film industry model. Film production involves a large budget, limited output of production; Studios release a relatively small number of films and hope for a few big movies each year. The big labels base their marketing on long-term stars who release multimillion-copy blockbusters. One album that sells 10 million copies is more lucrative than 10 that sell 1 million. They certainly arent prepared for a 500 bands selling 20,000 copies each, yet thats where the music itself wants to go . . .

Here’s a rundown of 2002’s Top 10 live acts, according to Pollstar:

1. Paul McCartney, $103.3 million
2. The Rolling Stones, $87.9 million
3. Cher, $73.6 million
4. Billy Joel/Elton John, $65.5 million
5. Dave Matthews Band, $60.1 million
6. Bruce Springsteen & the E Street Band, $42.6 million
7. Aerosmith, $41.4 million
8. Creed, $39.2 million
9. Neil Diamond, $36.5 million
10. The Eagles, $35.4 million

Music Industry Structure: Why Madonna Never Complains
Due Diligence, Guest blogger Kevin Laws

Concert Cash: Forget CD Sales the Real Money for Hot Acts Is in Concert Tours
By Peter Kafka, Forbes.com

Hit Charade: The Music Industry’s Self-Inflicted Wounds
by Mark Jenkins, Slate.

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  1. Rob commented on Sep 30

    First, as mentioned above, they are not monopolies; They are a loose cabal of price fixing companies who recently came to learn a very basic law of economics: Increased prices = decreased demand. Shockingly, its taken them about 5 years to figure this out.

    That’s hilarious! You are right though, music industry execs seem to know almost nothing about business sometimes.

  2. Kevin Laws commented on Sep 30

    Very interesting response. I’ll have to think through some of the points you make.

    By way of quick response, the industry is characterized by monopolistic competition — competition for your time & cash among a number of highly differentiated products. To the degree that the products are not interchangeable for you, it will not actually be that price sensitive. Where they are very price sensitive is in new artists — people you haven’t heard of or have barely heard of and might sample if they aren’t too expensive.

    While the point about oligopoly is true, the term for what they wield is still their monopoly power. I didn’t want to get into new distinctions in the piece since it was aimed at non-economists. Six (now 5) is still quite a bit of competition for top acts. Since they do not collude on those negotiations, they end up losing their shirts in the bidding.

    As for the artists themselves, they are highly differentiated. While they do not have a monopoly over the music industry as a whole, each artist does wield quite a bit of monopoly power. Consider, for example, the market for Rolling Stones music among Rolling Stones fans. This is not an insignificant market — hundreds of millions of dollars. The market is defined by the weakness of potential substitutes — Rolling Stones fans aren’t going to buy Britney if she’s $1 or $2 cheaper. Thus the demand curve is highly inelastic within that market.

    Thus “monopolistic competition” for the music industry as a whole — competition on substitutes of varying elasticity. The top of the industry wields great monpoly power within their reasonbly large markets because of the lack of substitutes. On the other hand, the market for “Kevin Laws Music” is quite elastic because I have not yet developed a fan base (nor am I likely to with my talent). So there is quite a bit of competition between the new artists for your $, and you might try them if they were cheap enough.

    Which brings me back to the point of my piece — the labels & distributors actually control that through limitation of selection. They DO charge less for new artists. However, they ensure that the channels will carry THEIR new artists since the stores know that those artists will be supported in the media through large investment, and they are tied to the store’s ability to make good money on larger artists. That’s why indie labels have a much harder time getting in to stores.

    Thus they are only able to exercise their control through wielding the monopoly power of the established artists. Without that, they would be subject to full competition from anybody with a CD burner.

    There are forces changing all of that, but I’ll leave those for another day. Good post!

    — Kevin

  3. meta-roj blog commented on Oct 1

    new music business models

    i’m a couple days behind, and have a lot to say on these subjects, but i don’t have the time for my traditional-length rant, so this will be just a couple quick hits today, despite the rich body of new…

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