How Will the Music Industry Weather the Globalization Storm?
First Monday


How Will the Music Industry Weather the Globalization Storm?

Special Issue Update

This paper is included in the First Monday Special Issue: Music and the Internet, published in July 2005. Special Issue editor David Beer asked authors to submit additional comments regarding their articles. Additional author comments appear in italics and brackets in the Abstract.

Abstract
The music industry is [still] in a genuine maelstrom. Globalization is affecting this industry more than many other industries and it is primarily induced by developments in Information Technology. The foremost avenue for change is through the institution providing the foundation of the industry - copyright, which [may] be largely disabled. The oddly global and local structure of the music industry [,premised on copyrights, might] be undergoing some fundamental changes. The roles of music publishers and record companies especially [may be] about to alter. In an institutional economic analysis, I will analyze the present situation in this industry, where Information Technology impacts on this system, and how in general the industry is likely to change. [The original article was featured in the May of 2000 issue of First Monday - much has changed since then, but much of my original text still seems to have some validity. What may have changed, however, are the likely prospects for this industry, especially for incumbent firms.]

Contents

Introduction
The GloCal Music Industry
Copyrights: A Ceremonial Institution?
A Future Music Industry
Concluding Remarks

Introduction

Technological developments create an economic environment for traditional players in the music industry that is highly uncertain. Information technology and the Internet allow musicians to offer their music directly to their 'customers,' and it creates opportunities for new intermediaries to enter the market and offer a mix of new and already known services. It also allows people to buy music conveniently and cheaply, in digital or physical form. Such developments pose a threat to existing intermediaries in this industry such as music publishers, record companies, and retail outlets [1]. One of the main reasons for the threat to be real and worrying is that the existence of what might be called the constitutive institution of copyrights on which this industry, as it is presently configured, is founded is called into question by current developments in information technology. Copyrights, in their present form, require the relative impermeability of geographical boundaries. However, where the use of IT is increasing rapidly, such as in the case of music, geographical boundaries start to dissolve [OECD, 1999; Cairncross, 1997], and with it the current basis for the institution of copyrights.

According to Vogel [2] "[R]ecorded music readily pervades virtually every culture and every level of society. As such, it may be considered as the most fundamental of the entertainment businesses." [3] Besides cultural effects, this industry has important economic effects. With a share of around 50 percent, pop music is the most important kind of music at this moment. [4] Table 1 presents some direct indications for the economic significance of pop music. It is unfortunate, of course, that these data do not present value added but sales instead. In addition to these direct effects, there are important indirect economic effects of pop music. [5] The institution of copyrights has been created in order to capture part of these indirect economic effects, since copyright is claimed to benefit creative artists. Copyright has become an important constitutive institution for the music industry. In fact, present structure of the industry cannot be understood without consideration of copyright.

Currently technological developments and a liberal, free market ideology are working together to create a global economic sphere. In this paper I will concentrate on the effects of developments in information and communication technology (ICT) on the music industry. Studies in technology dynamics indicate that social actors can and often do steer technological developments, or mediate its effects [6]. One important arena where parties try to mediate or minimize the effects of ICT on the music industry is the World International Property Organization or WIPO in Geneva. Vested interests represented in WIPO, and lobbying at the EU, in the U.S. Congress, and the World Trade Organization (WTO) try to ensure that the system of copyrights - that is of fundamental importance for the way in which the industry is presently structured - will not alter profoundly. In terms of the 'speculative economics' argued for by DeLong and Froomkin [7] most recently and others, these attempts can be interpreted as efforts to maintain excludability and rivalry in the consumption of music products. Negotiations about the exact form and scope that copyrights should have for the Internet will directly affect the distribution of income between different parties in the music industry [8].

Table 1: Some Economics of Pop Music, 1996
NetherlandsUnited StatesUnited Kingdom
Revenues recordables, gross (US$)a660,100,00012,297,700,0002,709,800,000
Total sales, recordables (pieces)a38,000,0001,044,800,000234,500,000
Sales recordables, per capita (US$)a42.646.346.4
Copyrights and neighboring rights (US$)b311,480,0001,080,400,000382,960,000
Concerts (Dutch guilders)c550,000,000n.a.n.a.
Sources: a. IFPI, 1997; b. Figures pertain to 1995. Source: NMPA, 1997; c. Source: Rutten, 1997; estimate.

In this paper I analyze the effects of the existence of copyrights for the present and future music industry. I will argue that transactions involving music (as well as, for that matter, other kinds of digital information) on the Internet are best exempted from copyright. Since the institution of copyright primarily has [9] ceremonial features and is mainly instrumental in creating substantial profits for intermediaries such as record companies and music publishers, this will not in itself be a deplorable development. My assumption is that a market for industrially produced and distributed music will continue to exist, whatever happens, and so the question arises what the music industry will look like in the near future. Before concluding, therefore, I will venture some thoughts on the way in which the music business might change. My analysis will be institutionalist, a theoretical approach which is thought to be best suited in understanding the changes that the music industry is going through as well as its changing relation to society in general [10].

The GloCal Music Industry

Figure 1 presents the current structure or value chain of the music market [11]. This illustration explains simply how music moves a creative artist to its final destination, a consumer. Musicians typically come with a sample of their music to a music publisher or an artist & repertoire (A&R) manager of a record company. If this initial 'gate keeper' find the music promising, negotiations start [12]. A contract is signed with a music publisher. Recording is undertaken and then a copies of the recording are pressed and promoted to both retailers and the media. After recording, a marketing plan is drafted for diverse audiences, not just the ultimate consumer.

Only a small proportion of all samples submitted to 'gatekeepers' will result in commercial recordings. This filtering is a characteristic of many other entertainment industries as well [13]. Financial means and industry contacts are used by music publishers and record companies to attract attention to new releases and create demand. Gates (intermediaries at critical 'control points' that select and validate information passing through them) that need to be passed before an audience is reached include the media (radio, television, music press), retail business, and organizations that control schedules and venues for live performances. These are gates to different, though related audiences. How exactly the different audiences of music are related depends on the kind of music involved, as well as on the social and historical developments that have led a particular 'system of provision' of music to emerge [14]. Here, I will focus on the position of music publishers and record companies as part of the music industry, leaving a fuller description and analysis of this industry to others [15].

At present, as Table 2 shows, a few record companies dominate national music markets as well as the global marketplace [16]. Legally, national branches tend to be relatively independent of the central organization, however, because national markets are separated from each other to a large degree. Organizationally, however, the national branches follow the directives from the centers quite closely. The present system of copyrights, with its geographical base, is the most important reason for the hybrid local-and-global structure of the music industry. Geographic distinctions between markets for music products are both the basis for, and reinforced by, the system of copyrights, as will be seen.

Copyrights give authors [17] or their heirs a right to the fruits of their creative endeavors for as long as they live and for a specified, but not internationally harmonized, time after death. Copyrights are a license to copy a work in exchange for a fee or royalty. Copying music to recordable media such as a LP or a CD is almost ubiquitously protected by copyrights, as is playing it in the media [18]. Without a system of copyrights, the argument goes, individuals would not be encouraged to produce certain unique and/or creative works to the benefit of society [19]. To make sure creative work is forthcoming, for a limited period of time the monetary gains accruing from the use of such work by others, should be appropriable to the author. A system of copyrights serves the public good, in this analysis, and promotes the efficient allocation of resources [20] - copyrights are thought to be an undeniably instrumental institution.

Table 2: Market Share of the Five Major Record Companies (% of sales), 1995
United StatesJapanGermanyUnited KingdomFranceNetherlandsGlobal
EMI - (Thorn)10142222131516
Warner - (Time Warner)227131113814
BMG - (Bertelsmann)128159111314
Polygram - (Philips)13132322322313
Sony14181213251413
Total30.519.08.26.56.01.870a
Total ($M)12.1027.5523.2702.5722.392.717
Country's global rank (#)123458
Sources: Music & Copyright, 1996; Music Business International, 1996; IFPI, 1996. Notes: Record companies are listed along with their parent organization. After 1995 turbulent developments altered the configuration of the music industry; unfortunately changes these could not be included in this table. Horizontal addition indicates record companies' share (%) in the world market; vertical addition the global share (%) of a national market; a. Share (%) of the five major record companies in the global market for recordables.

While Anglo-Saxon and continental European copyright traditions differ in many respects, they have a basic economic consideration in common [21]. They differ in assuming that the economics of copyrights is the core element of copyright, or is at the periphery. As Rushton (1998) and Laing (1993) argue, the continental European tradition is heir to a Kantian line of thought where the author is nigh reified [22]. Hence, the author is explicitly given a moral right in his creation: no alterations are allowed without the express permission of the author. These moral rights are not generally allowed in the United States and the United Kingdom; jurisprudence has to be resorted to. In practice, therefore, the differences between the Anglo-Saxon and the continental traditions is not as large as sometimes imagined [23]. While the economic aspects of copyrights may be - and often are as a part of the agreement between the author and a record company and/or music publisher [24] - sold or licensed away by the author to a third party, the moral rights in the continental European tradition are undetachable from the author. Another indication of the different traditions is the ministry where copyrights (as well as patents and trademarks) are governed. In Germany it is the Justice Department; in France the Ministry of Culture; in the U.K. Department of Trade and Industry; in Japan Ministry of International Trade and Industry; and, in the U.S. the Library of Congress [25].

Copyrights are a means of establishing the boundaries between who is allowed to use a particular good and under which conditions, and who is not allowed to use it. Copyrights on information goods exchanged on the Internet exclude potential consumers from getting unconditional access to a product. Developments in ICT seem to take away the grounds for these boundaries. Burke (1996) has shown how technological developments in the past gave rise to changes in copyright. Now, similar discussions are under way. It would now seem that a crossroads has been reached, as online music revenues are expected to increase from $179 million in 1998 to $2,800 million in 2002 [26], or eight percent of the total industry revenues according to Jupiter, an online consultant [27]. Incremental changes to save the present system of copyrights - and thereby avoid fundamental changes to the structure of the music industry - may no longer do.

Copyrights: A Ceremonial Institution?

Landes and Posner (1989) and Towse (1998) argue that copyrights serve a public purpose in that they ensure an efficient allocation of resources [28]. Without copyrights to protect intellectual property the production of creative and authentic works would be below the level that would maximize social welfare. Copyrights provide a financial incentive to creative people by ensuring that they receive an income for products that they have created. Copyrights, in other (institutionalist) words, are thought to be an instrumental institution.

Table 3: Deduction (Administration) Rates Collecting Societies (%), 1996
United States (Harry Fox; ASCAP; BMI)Japana (JASRAC)Germany (GEMA)United Kingdom (MCPS; PRS)France (SACEM)Netherlands (BUMA; STEMRA)
Mechanical4.0-5.217.26.55.7
Performance15.8/18.4a-23.314.325.818.6
Totaln.a.12.53.3n.a.16.48.8
Sources: MBI, August 1997; Notes: In case one organization is mentioned, this will collect both mechanical and performing rights. Where two organizations are mentioned, the first collects mechanical, and the second collects performance rights. Collecting societies in the U.S. and the U.K. (not all of which are mentioned here) are private organizations that may compete with one another and do not produce joint annual reports. Figures are provided by the collecting societies themselves, each of which may calculate differently. The total flow of income to a collecting society may include streams of income apart from royalties, such as earnings from bank interest; a. 1995.

These views may well be true in the abstract world of neoclassical economics, but the 'real' world presents a different picture. In the course of this paper, I will present data that indicates that the present system of copyright does not create an environment where a vast number of creative individuals earn an income thanks to financial incentives. Instead, copyright as it exists provides substantial flows of income to administrative organizations with no creative function. Table 3 shows that collecting societies routinely charge high fees for sweeping up amounts of money due because of copyrights, which in turn they subsequently distribute [29]. Although collecting societies save individual transaction costs, overall transaction costs of this system are substantial. The societies mentioned here are, nota bene, among the more efficient ones in Western countries because they are under pressure from authors, record companies, and competing societies; other collecting societies' fees are actually higher [30].

Organizations, such as music publishers, simply earn vast amounts of money. They are entitled to these sums on the basis of their agreements with artists where a portion of copyrights are licensed to them (see Table 4). What is the function of music publishers? It is not always entirely clear. In some cases, it means bringing an author in contact with a record company and otherwise promote a given product. In compensation, the music publisher may receive 33 to 50 percent of the royalties on every mechanically produced carrier of music (CD, record). Promotion of an author's work is also a task of the record company, for which the company is often compensated as well by being assigned part of the copyrights. As such it is not surprising to see that major record companies are also big music publishing firms [compare Tables 2 and 4]. The profitability of music publishers is much higher, although more volatile as well, than of record companies [31]. The combined record company/music publisher thus recoups a substantial proportion of its costs from the royalties it receives. Indeed, from all of British PRS distributions, only 32.5 percent of total royalty paid to this society for mechanical rights is due to artists or session musicians [32]. In contrast to the picture for record companies, however, there are more and relatively larger independent music publishers than there are record companies.

Table 4: Major Music Publishers by Gross Revenues and Rank, 1997 ($M)
EMI (#1)Warner-Chappell (#2)BMG (#3)Sony (#4)Polygram (#5)
550475275200180
Source: Music & Copyright, 11 February 11 1998

Even Towse (1998) - who analyzes the only existing source of information [33] - acknowledges that authors' incomes due to copyrights are mostly negligible. The distribution of funds by collecting societies to authors is extremely skewed. Some authors earn vast amounts of money thanks to copyright, but 90 percent of PRS authors in the U.K. earned less than £1000 in 1993 [34]. The median individual payment over the period 1989-1995 from British PRS due to performing rights is £450, which is an average of £75 per annum [35]. Towse (1999) shows that Sweden and Denmark are no different from the U.K. There is no reason to assume that these figures will be different for other collecting societies. Superstars in the music business, who now mainly benefit from the existence of the current system of copyright in addition to having other ample sources for income, would probably have sufficient bargaining power to ensure that they would continue to generate income without the existing form of copyright protection.

A final argument in support of my claim that copyright has overwhelmingly ceremonial features is that they give rise to collusive behavior and rent-seeking. Klaes' (1997) game theoretic analysis has proven that because of the existence of copyrights, the incentives to players in the music industry for implicit or explicit agreements on, for instance, price setting are strong. Towse (1998) noticed that there is strong tendency for firms in the media industries to vertically integrate. In addition, she found examples of open collusion [36].

While the intended effects of copyright are to create a flow of income for creative artists in order to encourage creative activities, the real effects are different. In reality, copyright essentially creates an environment where record companies and music publishers make large profits. An examination of the Standard & Poor's stock price indices for the entertainment industries shows that they are much higher than S&P's 500 stock composite index, for the 1980-1996 period [37].

The institution of copyright in the music industry is largely a ceremonial one. In the past, copyright generated income to cover the costs for record companies and music publishers to select and distribute music. Under the present circumstances, thanks to technology, these costs are decreasing rapidly. Hence, the ceremonial features of copyright are becoming even more pronounced. In the institutional economics literature, ceremonial institutions are characterized as those that prevent developments from taking a turn to the benefit of all [38]. These institutions should be removed or appropriately changed, if and when possible.

What may happen to the music industry with the growth of the Internet as a distribution mechanism for music in a digital as well as in a physical form? The following section provides a possible scenario for future developments. Due to unpredictability of technologies and their utilization, these predictions are necessarily general in nature.

A Future Music Industry

Much has been said about the effects of technologies on the economy as well as on society. Optimists and pessimists alike tend to believe that this new technologies will replace current existing information technologies. Some predict as a result that we will end up with the perfect market, a prospect that abhors some and delights others. As I have argued elsewhere [39], the emerging 'Internet market' will not be a perfect economic market where intermediaries disappear altogether because producers and consumers will be directly involved with each other [40]. While musicians and consumers may contact each other directly without recourse to a third party, this is not likely to become the dominant means of interaction. There is a fundamental problem in Internet-mediated commerce in selecting and qualifying information, a problem that neither the consumer nor the producer (artist, musician) can best resolve. Nor will profit margins necessarily dwindle. Rather than rehearsing this argument, I will develop a scenario for the future of the music industry as it will possibly be affected by developments in information technology where the music business becomes an Internet market. As argued earlier, the Internet market for music will be one where copyrights do not exist in our current way of understanding them. Without copyright, the role of intermediaries will change as well as the basic cost of music to consumers, the sources of income for artists, and the future variety of new music. The extent of change in the music industry thanks to new technologies may in turn alter other industries [41].

Producing, reproducing, and distributing music is rapidly becoming cheaper, making it possible for many small and independent record companies to enter the market. Organizations that mediate between consumers and producers (authors, musicians) need to adapt to these changes. If intermediaries such as the record companies respond slowly to technologically induced changes, they may not be able to maintain their present hold on the market [42]. Of course, intermediaries will continue to exist on Internet-based music markets. If those companies that currently dominate the industry do not allow newly forming Internet-based businesses to establish reputations and financial strength as intermediaries, they will probably maintain their position well into the future [43].

Internet markets are wrought with information problems. To gain financially from the Internet, a new organization simply has to becomes a reliable source for information providing information that can be trusted. Existing firms with a strong financial base have an advantage in this respect [44]. Their brand names are known and they have a financial position that allows them to establish themselves on the Internet. But, as I will argue in a moment, it is likely to be an advantage that will not last as long as it used to [45].

Volatility in demand for music products will increase as it becomes easier and cheaper for new firms and authors to enter the market. Financial and organizational barriers to entering the Internet market are already quite low. With the growth of new forms of consumption, the advantages of reputation for some of the older firms is already thinning. Virtual communities are alread proving to be a dynamic source of information about new music, compared to the "old" marketing programs. Creating and fostering these communities has become an important strategy for firms to succeed in Internet markets [46].

Because members of virtual communities have such diverse backgrounds, these communities overall will be more knowledgeable about new and marginal developments. Dissatisfaction with an established music distributor may grow rapidly, particularly if alternatives are readily available and information about these alternatives moves quickly within a given community and is dispersed quickly to other virtual communities. In terms suggested by Hirschman (1970), consumers of music have more opportunities to raise collectively their 'voice', while their threat to 'exit' a commercial relation with an intermediary on an Internet market is more powerful. Thus, even though those firms that now play a dominant role in this industry may be able to hold their own, the leeway for adopting policies that may be considered antagonistic economically or otherwise is likely to be curbed. It thus remains to be seen whether the advantage of having an established reputation as a record company will persist or not. Other advantages - in terms of organization, distribution, and economies in production -have diminished, too. In an analysis along the lines of Teece (1986), the parties that innovate may be, when demand is fluctuating strongly, more likely to benefit from their creative efforts. In this environment, product innovations precede process innovations, giving the firm who is first to introduce a new product, and is able to draw the market's attention to it, a considerable head start.

It is, therefore, likely that intermediaries will continue be active in the music industry; see Figure 2. Furthermore, it is likely that historical intermediaries will continue to remain important. Record companies and music publishers have been able to adapt to changes in their economic and technological environments in the past, thanks to their finanical strength and collective reputations. The broken line in Figure 2 indicates that different intermediaries, new and old, will increasingly competing with one another. For example,Rolling Stone magazine is already taking on the role of record companies by selecting and distributing music. Competition from outside the value chain - as it has emerged over the past - is also likely.

These changes will force traditional intermediaries to establish more flexible links with independents, which are known to be closer to new developments in the market [47]. If the Internet is free of copyright control, the kind of links that used to exist - to prevent price or other forms of competition to reduce new entrants or smaller parties from entering the market - will not likely hold for much longer. The pressures from arbitrage will be far stronger than they were on the 'physical' music market. Independents should be able to introduce new artists or genres of music, and if they are able by strategically position themselves in the market, they may thus uproot the incumbent leaders [48]. Even an established genre of music or work of an artist, under control of or contract with a major record company, may be offered at a reduced price by an intermediary on the Internet that is legally based in what might be called an 'Internet free port'. Arbitrage of the latter kind, now illegal because it is breaching copyright directives, is a real possibility [49]. One single provider of music in an Internet free port may have substantial effects on the global market.

Record companies will continue to be in a position to make large profits as they have made in the past [50], but the basis of their profits may evaporate fast. New forms of music will emerge quickly and it is difficult to control such developments. One means of control is to foster and tie in with newly forming virtual communities focused on certain styles of music or single bands. Music that once would only attract a minor audience might now develop a much broader and diverse audience [51].

Whether or not less well-known authors will be discouraged from creative activities if the Internet is exempted from copyright, is an open question. The 'price effect' is slightly negative (decreased income from royalties as a source of income disappear or at least sharply decrease), but the 'income effect' may well offset this by far. If music consumption is and remains to be a social phenomenon [52], technologies allow communities of music fans to form in defiance of geographical boundaries. In effect, these communities will aggregate demand to such an extent that niches will be created to economically sustain many previously unknown kinds of music or artists [53]. Information about what once were called 'local artists' is now much more readily available on a global basis. Sales in authenticated recordables [54] and opportunities for performing will multiply thanks to a broader informed audience, providing additional sources of income for musicians. As musicians 'collect' audiences across geographical boundaries, they will improve their bargaining positions with traditional record companies for a share of revenues from the sales of recordables. Lowered barriers to entry into the market for record companies and music publishers will probably increase the bargaining power of authors too. In any case, creative individuals are seldom known to be stopped from pursuing their objectives by an absence of monetary returns [55].

The consumption of music will continue to be a social phenomena, but certainly the social organization of consumption is changing in particular ways. Consumers of music are becoming less dependent on music magazines, radio and television programs, and live performances to learn about recent developments in music. Traditional media may be controlled to a larger extent by existing parties in the music industry, rather than newly emerging ones. While many that use more established physical media do not like to be manipulated (too much), they now have many easier and cheaper ways of finding, and even creating, alternative sources of information about music thanks to new technologies. As a result, information diffuses much more quickly. More authors and musicians will thus have a chance of reaching a threshold where they can actually make a living from making music. As a result, diversity in music may increase significantly, especially as perceived by the average music consumer, rather than decrease. For these reasons, more superstars may emerge [56].

Although retrieving audio and video from the Internet will become increasingly easy, many will continue to be interested in buying authentic physical products such as CDs. The new, virtual economy will not substitute entirely for the 'physical' economy; the historical record certainly proves that no new technology ever completely substitutes entirely for an old [57]. As long as traditional record companies are able to supply physical goods with authentic appeal, sales will not dwindle because digital music will not completely substitute traditional forms. Sales of traditional media via the Internet may even grow, providing a means for traditional sources to maintain their positions and reputations in the 'virtual' world.

Concluding Remarks

The Internet will change markets for information products, of which the market for music is one leading example. In this paper I examined the effects of technological developments on the music industry. I argued that an important element for this industry - the current system of copyrights based on geographical boundaries, an institution which distributes income within the industry - will lose much of its rationale. As a result, the music industry will change dramatically. Attempts to maintain or strengthen excludability and rivalry created by copyrights on music products is both undesirable and infeasible.

The current system of copyrights is largely ceremonial, benefiting non-creative intermediaries handsomely, Changes in the way in which this industry works will be welcomed by both consumers and musicians. Emerging Internet markets will not be devoid of intermediary organizations to filter and qualify information for consumers, however. In addition, Internet markets will not completely substitute for the well-known material markets. In fact, a mutually reinforcing interaction between the two is more likely. Record companies and other intermediaries in the music industry will therefore continue to exist. There is a fundamental role to play for 'gatekeepers'.

The Internet market for music will be more strongly contested and certainly will be more volatile. New kinds of music may emerge rapidly, forcing record companies to organize themselves in a more flexible fashion. Existing intermediaries have several advantages, in terms of reputations for quality and financial clout. Reputation will help some to continue to dominate the music market as some of it moves to the Internet. Reputation and financial strength will diminish over time, however, in this new and uncertain environment. Incumbents may see their positions slip in the future, although they have shown to be highly resilient in the past. Music variety will likely increase in the future, as will the number of musicians elevated to a 'superstar' status. Musicians may indeed see their financial situations improve in the future, with greater sales and publicity thanks to new technologies. Finally, consumers are likely to pay lower prices for both physical and digital music products and in return enjoy a richer variety of music.

About the Author

Wilfred Dolfsma is assistant professor at Delft University of Technology, in the Department for Economics of Innovation. The author has studied economics and philosophy and has a Ph.D in economics from Erasmus University in Rotterdam.
E-mail: w.a.dolfsma@tbm.tudelft.nl

Notes

1. The Economist, 1998. "The Music Industry - A Note of Fear," (October 31), pp. 77-78, The Economist, 1999. "The Big Five Hit the Web," (May 8), pp. 71-72; Wired, 1999; Jackson; 1999.

2. Vogel, 1998; p. 132.

3. Of all cultural forms of expression, music, for instance, has been most fiercely censored, see The Economist, 1998. "Hold that Tune - Banned Music," (November 28), p. 110.

4. Depending on one's definition of pop music. See IFPI, 1997.

5. Surprisingly perhaps, since it exerts a relatively large influence in cultural and social terms, the music industry is small in economic terms relative to GDP. Rutten (1997), e.g., values it at 1.5% of Dutch GDP. However, music was, for instance, the UK's third largest net exporter; see Kretschmer et al., 1999.

6. Rip and Kemp, 1998.

7. DeLong and Froomkin, 2000. "Speculative Microeconomics for Tomorrow's Economy," First Monday, volume 5, number 2 (February), at firstmonday.org/issues/issue5_2/delong/

8. The ability of major multinational companies to resist changes to the institution of copyright, or even to change it in ways that suits their interests is best shown by the Disney Company. Disney, the largest media company by some measure (Music & Copyright, 11 September 1996), saw one of its important sources of revenue, the image of Mickey Mouse which is protected under copyright law, threatened. The period in which this image would be protected was about to lapse, whereupon it fall into 'public domain'. The Disney Company managed to extend the period for which legal protection would be given, thus in effect altering copyright law. These negotiations, especially those related to the shape and scope of copyright on the Internet, have implications for the distribution of income and future economic opportunities between countries and regions of the world. Gómez Uranga (1998) discussed the effects on the distribution of income between countries due to developments of ICT, while Dolfsma (1999) undertook a similar analysis for the distribution of economic benefits between firms and consumers (Dolfsma, 1999b). Both show that - contrary to popular belief that ICT and the Internet will benefit all - some parties are more likely to gain than others. As Zook (1998) has shown,the location of Web sites is geographically concentrated, centering in the United States, especially in Los Angeles and New York.

9. In an Ayresian meaning of the term; see Ayres, 1944.

10. Breen, 1995.

11. For origins of the words 'glocalization' and 'glocal,' as well as a discussion of the present use in the fields of sociology and cultural studies, see among others Robertson, 1995.

12. See, among others, Crane, 1992 and Peterson, 1990 on the notion of gatekeepers, where Peterson focuses particularly on the music industry.

13. Hirsch, 1972.

14. The system of provision approach is developed by Fine and Leopold, 1993. It's main message is that production and consumption need to be studied in conjunction.

15. E.g., Shuker, 1994; Vogel, 1998.

16. Over past few years, developments in the music industry seem to have accelerated. 1996, however is the most recent year for which a full picture can be presented.

17. By 'author' I mean the creator of authentic, unique works such as music, texts, films, software programs, public performances, maps, and plastic art works.

18. In addition, many countries also subscribe to the view that life performances by people other than the creative artist ("covers") need to be included in the complex system of copyrights. In recent years some countries have also started to protect the playing of music in public spaces such as bars, restaurants, or malls. For both of these forms of copying (in a legal meaning of the term) royalties should be paid to the creative artist and his representatives. Here, I concentrate on the two forms of copyrights mentioned in the main body of the text. See Towse, 1999 for an extensive and clear discussion of the different forms of copyrights, as well as how these are put into practice for a number of European countries.

19. Landes and Posner 1989, p.332.

20. Ibid., pp. 325-326.

21. This common ground has been the minimal basis for international agreements such as the Berne and Rome conventions [c.f. Laing, 1993; Rushton, 1998]. For the full text of the Berne Convention, see http://www.wipo.org/eng/iplex/wo_ber0_.htm

22. Adoption by different countries of the several international intellectual property rights conventions has been slow; see Burke, 1996. Frith (1996, pp. 23-24) relates the difficulties in establishing the practice of acting in accordance with copyrights once signed by a country (in his case, the U.K.).

23. Alberdingk Thijm, 1998.

24. Kretschmer et al., 1999 report that the five major firms in the music industry hold the rights to 80 per cent of global music sales. The author extends the copyright to these firms in exchange for production and/or marketing his work.

25. See Andersen and Howells, 1998. In the U.S. patents and trademarks are administered by the U.S. Department of Commerce.

26. See Music & Copyright (27 August 1997) for a prediction. Note that predictions about the volume of electronic commerce vary notoriously, partly because they are made on the basis of arbitrary assumptions. They impress people and organizations involved in copyright matters and give them a sense of urgency that in turn leads them to consider radical alternativers. Past growth rates in sales and profits of online retailers in music are impressive, particularly those of the largest outlet, CDnow (Music & Copyright, 1 January 1998).

27. Quoted in Wired, 1999. Online sales of physical CDs would account for most of this.

28. Copyrights is a catchall for rights that, most importantly, include performance rights, mechanical rights, and neighboring rights. Copyrights, neighboring rights and other related rights are purportedly introduced and enforced to ensure that creative artists benefit from the use of their creations. If and how such rights are included in laws, and how the practical administration is organized, differs among countries. In 1995, net royalty percentages were circa 9% of the published price to dealers in continental Europe; this figure was 6.75% in Latin America. In the U.S., 6.60 cents per work (or 1.25 cents per minute) is due. Worldwide, reported royalties due to copyrights amounted to $6.2 billion (NMPA, 1997).

29. Collecting societies license new works, monitor and collect revenues, distribute royalties and make contracts with other collecting societies, mostly abroad.

30. In recent years record companies have tried to make so-called 'central licensing' deals in Europe whereby one collecting society has a monopoly on collecting and distributing copyright dues in Europe for the authors of a record company. The deals undercut the system based on national collecting societies, which are legally sanctioned to have a monopoly because they are believed to serve the public good. Central licensing deals have been called off under pressure from collecting socieites that did not or could not strike such deals, as well as from the collecting societies' interest organization Biem (see MBI, December 1997). In the U.S., Germany, and the U.K. it is illegal for some of these collecting societies to have a monopoly. In addition, in the U.S., these organizations are private, for-profit organizations.

31. Music & Copyright, 11 February 1998.

32. See Towse, 1997. "Named artists" received 20 percentage points, while "session musicians" who play in the studio during the recording, received 12.5 percentage points.

33. Towse examines data in the British Monopolies and Mergers Commission's 1996 report on performing rights and its 1994 report on the music industry. As you can imagine, these reports are supportive of current system of copyright.

34. See Towse, 1997, p. 42. According to her calculations, as much as 31 percent of PRS authors received under £25.

35. Towse, 1999.

36. Although both European countries and the United States show these same tendencies, their strength, and therefore the effects they have, are smaller in the U.S. Since the American market for music is much larger than any single European market, and the costs to be made to bring a song to the market show considerable economies of scale, small changes in a record company's market share may have severe consequences in European countries.

37. Vogel, 1998, p. 317. This was before the relation between past profit performance of a firm and market capitalization at the stock exchange became unstuck.

38. For a much more elaborated discussion of the theory of instrumental and ceremonial valuation, and how that discussion relates to the theory of institutional change, see, among others, Bush (1987), Edgren (1996), Neale (1987), and Waller (1982).

39. Dolfsma, 1998.

40. See also Hawkins et al., 1999.

41. The Economist, 1997. "Electronic Commerce - The Search for the Perfect Market," (May 10), p. 10 ff.

42. Burnett, 1993.

43. There are relatively few sites that collect a majority of all of the 'hits' on the Internet; see Huberman et al., 1998. It doesn't seem likely that this 'chart' will show a considerable degree of persistence. It seems likely that many of the sites that now draw a lot of attention will continue to do so in the future.

44. OECD, 1999.

45. Op.cit.

46. According to a recent study by the OECD, op.cit.

47. Some observers of the music industry, such as Breen (1995), see an overall commercialization of music, as exemplified by the takeover of one of the bigger independent record companies, Virgin. While I am sympathetic to his argument, I believe that independents will continue to play an important role in the industry, and not completely become extinct.

48. Cf. Mansell, 1997.

49. The availability of free software, such as that based on the MP3 standard that allows one to quickly transfer high-quality audio and video data in combination with relatively cheap electronic devices to print compact discs, may lead to a decline in the sales of physical CDs from traditional sources.

50. Mansell, 1997.

51. Mitchell (1997) and Stahl (1997) discuss the ways in which music from New Zealand gained an audience in the United States and Canada because of discussions on mailing lists such as NZPOP.

52. Dolfsma, 1999.

53. One example of the effects of social dynamics is the movie The Blair Witch Project, a low-budget movie produced independently by a small number of young directors using cheap, new technology. According to The Economist ("Horrors of Youth" (14 August 1999), p. 43) it "could end up being the most profitable film ever produced." The Internet has also allowed musicians such as Public Enemy to reach a large audience without depending on a major record company. It has permitted singers such as David Bowie to return to full media attention by announcing that he would produce a song that is composed interactively by all of those who visit an appropriate Web site.

54. Being for many what might be called symbolic goods, recordables have a role in creating identities (c.f. Frith, 1983). For that reason, if ostensibly authenticated by an artist, there will be a demand for recordables other than those fabricated by individuals or firms not related to the creative artist. Those who want to buy authenticated recordables will not mind paying a higher price; their price elasticity is low.

55. It would be impossible to discuss here the entire matter of a 'surplus' of artists.

56. See Adler (1985) and Rosen (1981) on the economics of superstars, and Dolfsma (1997) for a critical discussion of this literature in its context.

57. The case of the telephone is well documented; see, e.g., Fischer, 1992. It did not substitute for other forms of communication, nor did it increase the extent to which people worked away from their usual working environment such as the home.

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Editorial history

Paper received 13 March 2000; accepted 18 April 2000.


Contents Index

Copyright ©2000, First Monday

How Will the Music Industry Weather the Globalization Storm? by Wilfred Dolfsma
First Monday, volume 5, number 5 (May 2000),
URL: http://firstmonday.org/issues/issue5_5/dolfsma/index.html





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