ECONOMICS OF MUSIC CHART TOPPERS: Growing concentration and less variety of songs
23 Mar 2016
The music industry is becoming more and more concentrated on a few ''superstar'' songs, which in turn get far more of the advertising budget. That is the main message of research by Joanna Syrda, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016. Her study predicts that:
''As the market becomes more concentrated, fewer songs will be released, and the distribution of their market shares will be increasingly skewed. Looking at iTunes sales, the share of songs that sold one copy (27% in 2009) and fewer than 100 copies (93% in 2009) is increasing.''
Success in the entertainment industry is extremely rare. Despite the huge and growing number of songs that are recorded, very few even become known to the general public and even fewer become hits. Over time, this skew has become even stronger – the size of the market has been growing, but fewer songs make it to the Top 100 each year.
Most explanations look at the consumers who buy, suggesting that superstars are the result of people listening to whomever their friends are listening to. This study looks instead at the producers, particularly how they choose to advertise. People generally do not buy songs they have never heard of, but the first million spent on advertising is not as effective as the second million – so producers have to make choices on how and where to spend it.
Firms in the entertainment industry typically focus their advertising budgets narrowly and this research finds that the skew in sales is directly linked to the skew in advertising. For example, Warner Bros. spent a third of their promotional costs from 2007 to 2011 on only 10% of their films, which in turn gave them 40% of their revenue.
In entertainment markets such as the music industry, despite a growing influx of new songs, success is extremely rare. Very few songs become known to the general public and among these even fewer dominate the market.
This is referred to as skewed distribution of market shares, where a large share of industry sales and profits is appropriated by a small number of products, a feature of many, if not all, entertainment industries.
Thus far, explanations for this phenomenon have focused on the consumer side, suggesting that ''superstar'' products arise due to network effects, social learning and herd behaviour. In a nutshell, holding everything else equal, consumers learn about songs from the choices of others and enjoy music as a collective experience.
Interestingly, over time the distribution of song market shares has been constantly becoming more skewed as fewer songs win a larger share of the market. This is despite the fact that the size of the market for music in the period 1959-1999 has grown considerably and could potentially support more, not fewer, products. Instead, the variety in the industry declined.
Based on the Billboard Chart data, fewer and fewer songs appear in the Top 100 annually, and their chart performance distribution is increasingly skewed towards the top. All of this suggests that unless consumer preferences towards music have changed between 1959 and 1999, the demand focused theories fail to capture market dynamics fully.
This study looks at the supply side and investigates whether the behaviour of firms or in this case record labels could possibly lead to this result. In a theoretical framework, the author assumes away price competition as in these markets prices do not vary (for example, cinema tickets) or vary within a narrow margin.
The author sets up a model in which multiproduct firms compete with one another by deciding how many songs to release and how to allocate advertising and promotional spending across these products. Consumers observe the product quality with sufficient noise to proxy for heterogeneous preferences, the returns to advertising are decreasing and every released song is supported by some promotional spending as consumers cannot buy songs they have never heard of.
This model does a very good job of explaining not only the US recorded music market dynamics in the twentieth century but captures exactly what is happening right now. Namely the skewed market shares distribution is driven by skewed advertising allocation across songs that firms simply find profit-maximising.
The market share differences between songs released by the same label due to quality or market appeal difference are exponentially magnified by firm''s advertising allocation. In other words the differences in song success are greater than they would be simply due to quality differential.
Such a resource allocation is consistent with anecdotal evidence from the entertainment industries. For example, at Warner Bros, the top 10% of films produced from 2007 to 2011 accounted for a third of promotional costs and more than 40% of revenues.
On an industry level, the prediction is that as a market becomes more concentrated, fewer songs will be released and the distribution of their market shares will be increasingly skewed. This contradicts Chris Anderson''s Long Tail hypothesis and so do the data. Looking at iTunes sales data the share of songs that sold one copy (27% in 2009) and fewer than 100 copies (93% in 2009) is constantly increasing.
The empirical and theoretical takeaway is that as markets become more concentrated, we will see less variety and highly skewed outcomes. These effects tend to outweigh the opposite impact of market size growth and online provision of music.
Economics of Music Chart Toppers: Market Size, Market Concentration and Product Variety - Joanna Syrda, University of Bath