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The supply chain from creator to consumer goes through several vertical levels of intermediaries including agents, publishers, wholesalers and retailers. In each level, where the market is characterised by the presence of a small number of powerful actors, we would expect that these intermediaries would use their power to extract some of the moneys handed over by the consumer in return for the creative product. The more gets taken out as this money journeys from consumer to artist, the less is available to remunerate the artistic expressions. As money is often believed to be the main incentive to create, this presents a problem, which the powerful intermediaries may lobby to be solved through enabling the extraction of more money from the consumer.
Digitalisation has fundamentally changed how music is delivered to, and consumed by consumers. The emergence of new internet-based services have also expanded the ways in which music can be produced. It was therefore worthwhile trying to assess what effects digitalisation have had on the music industry and in particular on the ability of new creative voices to be heard and on the consumer experience.
Before digitalisation, the vertical structure of the market for recorded music could roughly be described as a large number of creators supplying new music to record labels and publishers. This segment is characterised by a small number of large firms. These funded, produced, and distributed the resulting recorded music, sold to consumers through a fragmented retail sector. One, but only one, vertical level (record labels and publishers) appeared to hold significant power. This level quite naturally acted as a significant gatekeeper.
To identify changes resulting from digitalisation, we need data. Identifying relevant, consistent and readily available data turned out to be surprisingly hard. The changes brought on by digitalisation have been numerous. At the retail level, digitalisation has moved from selling CDs to selling downloads, to streaming as the key means for delivering music to consumers. Both with downloads and streaming, the retail sector has become considerably more concentrated than in the analogue world.
An interesting development prompted by digitalisation is that those creating music can make use of new internet services to produce and even retail their own music. With the right project management skills they can potentially bypass the traditional channels of record labels, publishers and collecting societies. Such an outside option may potentially enable creators to obtain improved terms with the traditional intermediaries. Interestingly, despite the emergence of intermediaries tosupport more niche production, the structure of the record label segment has not changed significantly; the market shares, in particular of digital music, of the top three largest record labels have remained more or less constant. How much this is due to the complexities in the way which the revenue generated from the rights are distributed, is hard to assess. However, complexity creates increasing returns to scale.
The big changes in market structure are more empowered creators and a considerably more concentrated retail sector. Available data does not enable us to do much more than speculate on the effects of these changes on creators and consumers. While creators may be able to create more music and to have more freedom, this does not necessarily translate into increased remuneration. For consumers, the effects may be more choice but at a cost, either monetary or in terms of attention. With an ever-expanding repertoire, consumers require new ways of navigating through this “long tail” of options. This explains the growing consumer interest in services which identify the content they are likely to want to access without the need for them to look for it.
Assessing the longer term effects on the industry is challenging. Can creators really bypass traditional intermediaries? This depends on a number of so far under-researched issues, including any possible reforms to copyright laws, the creation of an open source database of music, and the future structure and behaviour of the collective management organisations. One possible reform is a reset through which copyrights are taken back to the basic premises of protecting moral rights and offering adequate incentives for talented individuals to engage in creative endeavours. Reforms aimed at benefitting new and less established creators as well as consumers would come at a cost to the established intermediaries and the established artists. Given the lobbying strength of these different interest groups, such reforms do not seem likely.
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