Oligopoly

Monday, September 29, 2003 | 10:56 PM

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


Sources:
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.

Monday, September 29, 2003 | 10:56 PM | Permalink | Comments (2) | TrackBack (1)
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Comments

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.

Posted by: Rob | Sep 30, 2003 7:45:22 AM

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