UNCERTAINTY AND DECISION MAKING

After meeting the break-even point (when enough units have been sold to pay the first copy costs of recording, distribution, and promotion), a release accumulates profits at a stunning pace. Because recordings seldom reach the break-even point—Vogel (1998) estimated 1 in 10 breaks even—and yet sales of those that do become almost pure profit—the burden of financially unsuccessful albums is carried by the few that are successful. One Thriller (91 weeks on the chart, 37 weeks at number 1, more than 26 million copies sold by May 2002) can carry a vast quantity of unsuccessful recordings. The problem lies in recognizing the difference between the next Thriller and the next failure. In 1999, only 88 recordings—three tenths of 1% of all CDs is- sued—accounted for 25% of all record sales (Mann, 2000).

Like all manufacturers of cultural products, the recording industry faces high levels of uncertainty (cf. DiMaggio & Hirsch, 1976; Hirsch, 1972). All businesses require routine measures for prediction, planning, and control. For the recording industry, these measures are complicated by the require- ments of mass manufacturing and distribution to audiences with ephem- eral tastes. The recording industry’s structure, therefore, is characterized by attempts to isolate and control sources of uncertainty. For example, those parts of the business that deal with creative activities or the public are orga- nizationally isolated from those that require predictability and control (Pe- terson & Berger, 1971). The following section reviews additional decision- making procedures that are designed to reduce uncertainties.

Contracts and Independent Personnel

Structured contracts comprise one strategy for managing uncertainty. Rather than supporting a staff to engage in highly uncertain activities, such

11. ECONOMICS OF THE RECORDING INDUSTRY

as recording hit records, companies can contract with people who present themselves as specialists in these areas. These contracts may be structured so that the professional’s performance is evaluated routinely, with rewards tied to specific performance criteria, and the company has the option of re- newing or cancelling the contract (see Peterson & Berger, 1971). This structure has been the standard for artist contracts since rock and roll was popularized in the mid-1950s. In the more stable industrial environment preceding 1955, performers were routinely signed to a label for 5 years (Gillett, 1983). Since then, a series of five renewable 1-year contracts has become the norm (Fink, 1996; Weissman, 1990). Of course, the record company, not the artist, holds the renewal option.

In the late-1960s, contracts for independent producers, studios, and engineers became more commonplace—in part because record companies were responding to artists’ demands for greater creative control. Since then, they have become the industry norm. None of the Big Five presently main- tains a staff of producers and engineers (outside of classical music), although some still have company-owned studios. On the other hand, the reputation of an independent record company often is built on the sound of its producers, staff, and studios. In the 1980s independent promoters became fairly common, although no major company gave up its own promotion staff due its importance. According to more than one exposé, the primary purpose of the independent promoter system was to obtain ser- vices that were too shady, or even outright criminal, for a major corporation to ask of its own staff (Dannen, 1990; Knoedelseder, 1994). These practices have been in the news again, including Congressional testimony, in 2002.

Track Records and Star Systems

Another response to uncertainty of demand is to rely on track records and reputations. The recording industry’s star system promotes celebrity because known performers are considered a safe investment. Bruce Springsteen, for example, remains a valuable commodity even as his style changes and sales fluctuate. Britney Spears is sold as a personality, which is

a product with more predictable and controllable audience demand than the various songs on her CDs. Similarly, other personnel in the industry fre- quently are judged by their past performance and reputation rather than their current work. From the executives who decide which artists to sign to the producers who control the recording process, those personnel who have a reputation for producing hits inevitably will be called on for their ex- pertise—at least until their first failure. Thus, decisions are more often based on the track records of the people involved than the merits of the pro- ject, which are more difficult to evaluate.

However, as record companies are absorbed into conglomerates, they are under increased pressure to act as efficient profit sources for their multi-

ROTHENBUHLER AND McCOURT

national parent companies and face growing quarter-to-quarter account- ability while enduring staff cutbacks. Consequently, beginning in the mid-1990s, record companies boosted short-term profits by emphasizing rapid turnover of new artists. Increased marketing and promotional costs resulted in signing fewer artists, taking fewer risks on new artists, and a greater unwillingness to sustain careers (Miller, 1997). EMI’s release of the superstar Mariah Carey in 2002 after one poorly selling soundtrack album and film was a clear example. If a recording fails to generate excitement, re- sources are shifted to other projects, and the music industry increasingly emphasizes blockbusters that can be cross-promoted in other media.

Preselection Systems and Surrogate Consumers

The music industry’s products must pass through a series of stages. Songs must be recorded and published, recordings must be selected for release, the quantity of releases must be decided, a promotional budget and strategy must be developed, retail stores must stock the releases, and radio sta- tions and cable networks must select releases for airplay. This sequence functions as a preselection system: The items ultimately offered to consumers are those selected as the most likely to succeed at each preceding stage of the process (Hirsch, 1969; Ryan & Peterson, 1982). Negus (2000) pointed out that record company decision makers are more than mere gatekeepers who approve or reject completed products. Label executives, who comprise a powerful elite in the recording industry, participate in the creative decisions that shape recordings. Musicians, writers, producers, and engineers strive to produce successful recordings in light of the recent successes (Ryan & Peterson, 1982). However, each stage of the process is carried out by players with different positions, interests, and criteria for decision making. Songwriters want to be published, musicians want to be recorded, producers want their contracts renewed, executives want work produced on time and under budget, promoters want to devote their time to successful endeavors, radio programmers want recordings that fit their formats, and retailers want promotable recordings. Creating a hit recording requires the active participation of all of these players. The situation is further complicated by the fact that more products are being considered at each stage than can possibly be used. The few products that emerge at the end of the process are those that pass through filters at each stage. The preselection system of the recording industry, therefore, is very conservative.

Overproduction and Differential Promotion

Overproduction and differential promotion are business strategies in which more products are produced than can possibly succeed in the mar-

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ketplace, and promotional efforts are differentially assigned to minimize risk (Hirsch, 1972). These strategies result from the fact that the biggest investments are in promotion and distribution, which fall late in the decision-making chain (star performers may receive large recording budgets, but they ordinarily command even larger promotion budgets). Until decisions are made about substantial promotional investments, companies make smaller investments in a large number of products. This gambit pro- vides the system with a large number of products in development at any given time. The bulk of promotional budgets then can be earmarked for products with the greatest likelihood of becoming hits, whereas the remain- der are released with little or no promotion.

Because promotion budgets are the best predictors of potential hits, the preceding strategies provide a safe way to allocate the largest percentage of the total investment in a product. Only a limited number of recordings can succeed at one time; however, the record companies consistently engage in overproduction. This seemingly contradictory business practice allows record companies to cover their bets, because a major hit might emerge unex- pectedly. Record companies therefore can assign the largest promotional budgets to those records predicted to be successful, and then reassign promotional money and efforts to records that begin to show promise on their own. In the latter case, promotion is used to increase the rate of return on a hit by increasing total sales, rather than creating a hit from scratch.

UNCERTAINTY AND DECISION MAKING