The Economist laments the death of the music industry as we know it:
the results from 2007 confirm what EMI’s focus group showed: that the record industry’s main product, the CD, which in 2006 accounted for over 80% of total global sales, is rapidly fading away. In America, according to Nielsen SoundScan, the volume of physical albums sold dropped by 19% in 2007 from the year before… More worryingly for the industry, the growth of digital downloads appears to be slowing.
So perhaps it’s time for the industry to develop a new business model, but what are its options? Well this is a great example of a two-sided market. Record companies serve not just the consumer, but also the artists. However, the complication in pricing is that there are strategic complementarities between the two sides of the market: when there are better artists the value of the company rises and increases the profit that they can make from consumers. This is why record companies pay artists and charge consumers. By attracting the best artists with subsidies they can then charge more to consumers.
The competing goal is for companies to have large networks of consumers in order to attract good artists through the promise of good publicity. The easy availability of music on the internet has made consumers far more price sensitive and reduced the attractiveness of the recording companies to artists. The companies have made music available on the internet, but have yet to really change their pricing model to reflect the increased consumer price elasticity.
One option would be to decrease the subsidy paid to artists and also decrease the price charged to consumers. Shifting the burden of paying for the company’s platform towards artists would increase the consumer base, but risks driving away musicians. Unfortunately for the companies, the artists with readily available alternative means of distribution are those who already have a high profile and add the most value to the label (eg Radiohead). Reducing their wages may decrease the value of the label more than it increases the consumer base. However, those groups that have released online have typically not done so for the greater profits, but rather as a political statement. If music were very cheap for consumers then paying a record label to release your album and garnering the increased publicity may be well worth your while. Releasing cheaply on the net would also make less of a political statement if music were very cheap for consumers and is unlikely to reach a broad market unless you’re already a star.
It may also be, as The Economist points out, that labels need to horizontally integrate and promote their artists through tour events and other appearances. Since there is no substitute for live performances, demand is far less elastic in this area. That would allow the label to subsidise the artists in the recording side of the industry to some extent by taking a cut of the ticket revenues.
While not an easy problem by any means, it is clear that the changes in the availability of substitute means of obtaining recordings have changed the music industry forever. Perhaps record companies as we know them won’t be around for much longer and entirely new platforms for sustaining the music industry will soon arise.