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The Future of the Music Industry

s200_ian.strachanIn our Interview with Dr. Ian Strachan, Assistant Professor of Economics at Nichols College we take a view at the future of the music industry from an academic viewpoint. Dr. Strachan is a teacher and researcher focused on entrepreneurship in the music industry among other things. Ian, you wrote your dissertation on: “THE CREATIVE DESTRUCTION OF THE “WINNER-TAKE-ALL” SOCIETY? PROPERTY RIGHTS AND THE ECONOMICS OF THE LONG TAIL IN THE MUSIC INDUSTRY”

What were your research questions, hypothesis and the findings?

In the early 2000s, as the digital revolution was destroying old business models in the recorded music industry in such a dramatic way with MP3s and file sharing, there seemed to be a new economic reality emerging for music creators… Music and a lot of other creative content became free and much easier to share and distribute. Who would this new situation benefit? Independent or established artists?

It was clear that there were winners and losers. Certainly many in the establishment fought pretty hard in a vain attempt to protect their revenue streams from physical album sales. For example, Metallica vs. Napster was a pretty visible battle. But many other artists embraced file sharing, such as Radiohead.

My perspective is that I think artists and content creators should get paid for the hard work they put in. I hate the thought of my favorite artists waiting tables and struggling to make ends meet while I enjoy their albums for free any time I want. However, if a poor, indebted college student torrents a bunch of creative content which he or she couldn’t afford anyway, should lawyers really be knocking down their door to make a legal example of them? This ethical and economic stuff is being slowly sorted out as the music industry continues to evolve. Different artists look at it differently. But some of the recent pushes for intellectual property rights protection we have seen have been quite scary! For example look at SOPA, PIPA, the takedown of Megaupload, etc.

But beyond all the thorny property rights protection stuff, the technological change in itself leads us to an interesting paradox. On the one hand, it seems logical that independent and innovative new artists should now have some advantage and potential to break into the industry and find success without major record label marketing. On the other hand if the Katy Perrys and U2s of the world – the established superstars — harness the new digital technology, they can potentially be on every continent at once drowning out the little guys.

So any new outcomes in terms of what was popular would be driven by technology. It could benefit indie artists but it could also benefit superstars.

I find that the superstars are benefiting AND more indie artists are breaking in at the same time and competing against each other. The middle class of artists is shrinking. If this sounds somewhat familiar, it’s because that is what is happening in the overall economy: a rise in inequality.

Please explain to our readers not familiar with the economic and online terminology what creative destruction, a “winner take all” structure and the long tail is.

Creative destruction in this case describes the sweeping technology change that made the old way of doing business – marketing physical recorded music – obsolete. MP3s meant that consumers could get and share music for free. But in the wake of the destruction, we expect a new model to rise from the ashes that benefits both artists and their fans. That’s the creative part.

Winner-take-all describes a handful of individuals grabbing most of the pie while the rest starve. We observe this in a lot of industries, and it’s not necessarily negative, but it is pretty crazy in the music industry. Pop superstars get a huge piece of the sales pie relative to less-known artists and groups. That tends to have a homogenizing effect on our culture. If it’s bad enough it discourages people from being creative and taking risks.

But then enabled by new technology, we observe things like the satellite radio, Pandora and Spotify models that are picking up speed that actually provide that diversity, personalization and variety that is lacking. This is the long tail: larger supply, variety and MORE CHOICE. Because digital shelf space is so cheap, Netflix and Amazon and iTunes can all offer more variety and hopefully fans get more of what they want.

An example of a power law graph showing popularity ranking. To the right (yellow) is the long tail; to the left (green) are the few that dominate. In this example, the areas of both regions are equal.

When you stack a list of artists from most popular to least popular, a small handful would get a big piece of the sales pie and a much larger number would get a tiny bit of the pie. This larger number of less popular artists who get that tiny bit are the long tail of the sales distribution.

This is about inequality and the sustainability of that inequality. Is this new technology increasing inequality or decreasing it? Is the playing field being leveled, providing new opportunities, or are well-known established artists just becoming that much more popular?

What were the most important factors for the past music industry structure and what changed

with the new digital and online economics?

In the past record labels had more distributional and marketing power. I believe that situation often constrained innovation and creativity because the economic interests of big companies came first. This is a pattern that has been repeated over and over. Technology change wipes out the old way of doing business and something new emerges. At the turn of the last century, selling sheet music was the only game in town. With the rise of radio in the 1920s, the broadcasting industry gained prominence over the publishing and phonographic businesses. The phonographic industry later gained importance again in the 1950s. Along with it came the Rock ‘n’ Roll Revolution.

The industry has undergone dramatic shifts over the past decade because of advances in digital technology. This Digital Revolution is still unfolding and the aesthetic style or styles which take precedence will be enabled by this technology, particularly computer software. With the new digital and online economy, supply and variety have increased. There is no one standing between artists and their listeners. Fans are accessing music more quickly and easily and artists have more creative freedom. But there is a lot more choice out there and so sometimes there can be too much clutter.

Do you believe that today independent artists have a better chance of succeeding than in the pre-internet era?

I do think the chances are better nowadays for indie artists and I think that they have more creative freedom as well. Decentralized and user-driven digital marketing channels provide more opportunities for you to get your stuff out there and form a unique personal relationship with fans and then leverage those network externalities. The “middleman” is going away which eliminates the layers of noise in between consumers and producers. Third parties are becoming less relevant. This pattern is occurring in the video game world as well. Just look at some of the stuff that Gabe Newell and others are doing with Steam and Valve. Users create their own value and their own economies…

In your opinion what will be the biggest leverage points for indie musicians & small label success in the future?

From a creative perspective: be true to yourself. The constraints on the creative process are very much loosened and will continue that trend.

From an economic perspective, invest in making your art top quality and find the right mix of free content and physical stuff that fans will be willing to pay for. By that I mean that each artist or group will need to “play that edge” between putting stuff out there for free and then safeguarding certain other content once they reach a certain threshold of popularity. That threshold will be different for everyone.

s200_ian.strachan thesisFree music serves as marketing and networking… putting yourself out there. But if you want to get paid for your hard work, there are cases in which you would want to create artificial bottlenecks between content creator and consumers to try and monetize what you are doing. This is like creating “artificial” shelf-space scarcity in a digital world where there is no scarcity.

The reason why the recorded music industry took a nosedive is because the price of recorded music went to zero because scarcity became obsolete in the digital world of MP3s. To get that scarcity and revenue stream back, you need to find ways to distribute digital content which fans can and want to chip in for.

Will economies of scale still play a major role in music promotion and distribution?

To a certain extent, the bigger you get the more efficient you can be. That still applies. The bigger the network, the bigger the potential for word of mouth marketing. Digital technology is democratizing in the sense that it levels the playing field. But at the same time, there is more competition and diversity. The digital choices can potentially be overwhelming for fans if they don’t have a personal connection with it.

Though the recorded music industry is becoming democratized and decentralized and artists are taking their music directly to consumers, it does not necessarily follow that intermediaries such as copyright collectives are going to become irrelevant. Collecting societies, digital aggregators, and to a certain extent record labels, will still play an important role because these intermediaries are able to apply unique economies of scale. The current situation of online streaming leads to a huge number of micro payments and granular transactions. These transactions originate from a wide range of diverse online platforms, such as YouTube, iTunes, and Rhapsody, and they accrue many diverse artists. This justifies the existence of collecting societies and copyright collectives which collect and distribute royalty payments to their members. Copyright collectives can find solutions to coordination problems, bring more artists into cooperation, and decrease transactions costs between rights holders and end users.

In the light of computer-algorithm-fueled recommendations and the ubiquity of hugely important platforms like iTunes and Amazon, there is still something to be said for the personal and small scale simplicity of decades past. LP records are a small portion of the industry but sales are growing. Physical analog vinyl records and word-of-mouth recommendations of local music often have more value for certain people. This is a reaction to what is missing in the pop music industry. There is sort of an indie artist or ‘punk’ ethos here. Certain elements of our culture have more value when they are less known or scarce. Have you ever stopped liking a band after it ‘went pop’ and ‘sold out’?

With digital music we have an exponentially decreasing cost curve in distribution and communication. But physical analog music still retains its value among audiophiles. Live shows still retain huge value because they are non-replicable collective experiences.

Isn’t the democratization of music production leading to some form of hyper competition even in the smallest of niches?

Yes, that’s right. We can observe that saturation occurring in the data as the middle class shrinks and the “long tail” gets longer and thinner.

The superstar model stills seems to work well, are superstars taking away “market share” from other musicians or is there still space available for those using differentiation and some form of changed value proposition?

Yes, it seems to me that, relative to the past few decades, we now have superstars on steroids to a certain extent and then a huge number of indie artists in the long tail who are competing for a smaller and smaller piece of the pie. I interpret the shrinking of the middle class of artists to be not such a good thing.

However, among the superstars, my guess is that charting careers will be shorter and shorter relative to past decades. On the pop charts, we do see many more collaborations nowadays between superstar artists which may be a marketing adaptation to help extend charting careers. For example, 2005 is unique in that there are a large number of artist linkages and collaborations featuring multiple charting artists. These predominantly are of the hip-hop genre — although this is also a cross-genre phenomenon. Some examples include: “Kanye West ft. Adam Levine of Maroon 5”, “Lil Jon & The East Side Boyz ft. Ying Yang Twins”, “Lil Jon ft. E-40 & Sean Paul of YoungBloodZ”, “Lil Scrappy ft. Sean Paul of the YoungBloodZ & E-40”, and “B.o.B. ft. Rivers Cuomo of Weezer”. Team up and rise to the top.

Is there a possible blue ocean strategy for musicians, can innovation and changed value propositions work for musicians or is the marketing power & diversification of the big labels the most important success factor for artists?

I like what artists like Jack White have done recently. He releases a few songs for free to garner some demand – like a ‘taste’ of the new album – and then releases an LP second and then after some time the entire digital album will come out. This is “playing that edge” between offering free stuff and revenue-generating content like I referred to above.

The big labels – especially those that have been slow to evolve — have lost quite a bit of relevancy recently. Popular artists are more and more doing 360* contracts where different forms of revenue are shared differently among the agents or signing with concert promoters like Live Nation and avoiding the record label all together.

How in your view will the subscription based model and its different revenue share arrangements for artists and labels change the future music industry economy? (Assuming bundling & subscriptions will take over as a mass trend as seems to be the case right now)

As far as artists and labels go, the evolution now is toward 360* contracts where labels and bands share the revenue differently than before because they are making money in different ways than before.

Many fans feel reciprocity towards the artists and bands they love and they will pay. Bundling is the likely best response to the “freeness” of digital music nowadays. This is the case as long as the willingness to pay for the bundled good or content access — an album or a music subscription service — is less variable than the willingness to pay for the unbundled parts – cherry picking the individual tracks. The incremental cost of digital music has become insignificant, so the task for the suppliers is to maximize revenue given that consumer willingness to pay differs for different tracks or individual components. But… for subscription based models to be successful they need to be more convenient for computer-savvy people than Pirate Bay or BitTorrent.

 Thank You Dr. Strachan for your time.

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