OVERVIEW OF THE INDUSTRY

The recording industry may be the most pervasive, and therefore funda- mental, of the entertainment industries (Vogel, 1998). Although the industry has witnessed cycles of rapid growth and relative decline throughout its history, these cycles rest on a foundation of steadily rising fortunes. A sales boom in the early-1920s peaked later in the decade, and the Great Depres- sion nearly eliminated the industry altogether, but recording sales grew steadily in the 1940s (Ennis, 1992; Sanjek, 1988; Sanjek & Sanjek, 1991). Rev- enues (adjusted for inflation) leveled and declined in the early-1950s, but the advent of the rock and roll market in 1955 sent sales surging for nearly

15 years (Sanjek, 1988). Sales were flat from 1978 to 1982 (see Fig. 11.1), and much of the industry’s growth in the mid-1980s and early-1990s was due to inflation; in constant dollars , it was not able to return to its 1978 sales levels until 1992. Figure 11.2 displays annual shipments in units (cassettes, sin-

($Millions) Value

FIG. 11.1. Value of domestic music industry shipments by year, in millions of dollars. Adapted from Recording Industry Association of America (1982, 1997, 2002).

FIG. 11.2. Domestic music industry unit shipments by year, in millions. Adapted from Recording Industry Association of America (1982, 1997, 2002).

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gles, LPs, etc.) since 1973, when the Recording Industry Association of America (RIAA) began reporting these figures. Because measuring unit, rather than dollar, sales eliminates the influence of price hikes and inflation, the 1978 peak appears less precipitous than the dollar figures imply. The recording industry suffered another slump in the mid-1990s as catalog sales reached saturation and the novelty of CDs wore off. Attempts at recycling catalogs through new but inferior delivery systems (Digital Compact Cas- sette and Minidisc) were unsuccessful, and more entertainment alterna- tives, such as video games and the Internet, vied for consumer dollars.

Yet sales rose dramatically again in the late-1990s. Worldwide sales of recorded music reached approximately $34 billion in 2001, with U.S. consumers spending $114 billion on 733 million records, cassettes, compact discs (CDs), and music videos (see www.ifpi.com and www.riaa.com for latest figures). However, these figures represent a downturn from 1999, when U.S. consumers spent just over $13 billion on 870 million units. RIAA, an industry lobbying and trade group, blamed the recent downturn on unautho- rized copying of CDs and sharing of music files online, whereas others cited high-retail CD prices, a lack of “superstar” releases in 2001, and re- duced pressing of CD singles. Recent advances in online delivery of music have greatly unsettled the recording industry, which finds itself on the fore- front of issues regarding technology and intellectual property that will sig- nificantly impact other media industries (Jones, 2000, 2002).

The cultural and economic significance of the recording industry is un- derscored by comparing it to other media. Table 11.1, for example, shows consumer expenditures in dollars and hours for nine media from 1985 to 2000. The time devoted to recorded music grew steadily from 1985, exceed- ing every medium but television. However, this figure leveled off after 1995, as the popularity of home video games grew and Internet use increased. Consumer spending on recorded music also grew steadily, only leveling off in the late-1990s (the trifold increase in consumer spending on television stemmed from the popularity of satellite TV and rising cable prices). Today music competes with interactive electronic entertainment for audiences, and the sounds, sights, and attention demands of video games and Internet surfing may provide a greater cultural unifier among teenagers than popular music (a trend exacerbated by the recording industry’s niche marketing practices). Despite these challenges, recordings re- main an important part of the matrix of global economics and culture.

Key Contingencies

Manufacturing and Distribution. The recording industry revolves around the manufacture and distribution of products such as records, tapes, and CDs . The infrastructure surrounding these products includes

TABLE 11.1

U.S. Consumer Media Expenditures

(Hours Per Person) 1985 1990 1995 a 1996 b 1997 1998 1999 2000 2001 Television c 1530

1551 1588 1640 1661 Recorded Music

120 121 111 109 Home video d 15 42 49 34 33 36 39 46 56 Box Office

12 12 12 12 13 13 13 13 13 Video Games e 22 25 36 43 61 75 78

Consumer 5 8 26 54 82 106 106 Internet

(Dollars Per Person) 1985 1990 1995 a 1996 b 1997 1998 1999 2000 2001 Television c 42.4 87.9 125.1 140.4 154.8 167.4 181.7 194.6 210.6 Recorded Music

25.1 36.6 56.9 57.5 55.5 61.7 65.1 62.8 60.6 Daily

45.4 47.6 52.0 52.9 52.9 53.4 53.8 53.4 54.1 Newspapers

Magazines 29.8 33.1 38.3 45.4 46.4 46.5 46.2 44.9 43.6 Books

43.3 63.9 70.9 81.0 80.5 84.2 89.0 87.3 86.1 Home video d 15.2 56.4 79.9 87.1 87.0 92.6 97.3 102.5 109.6 Box Office

21.4 24.4 25.4 27.1 28.9 31.3 33.1 33.4 39.8 Video Games

10.5 11.5 16.5 18.5 24.5 25.9 28.0 Consumer

8.5 13.2 20.9 27.6 41.8 50.6 62.1 Internet

a Does not correspond to earlier data series as a result of data collection and methodology changes. b Does not correspond to 1995 data in certain media segments as a result of new information on consumer behavior. c Includes broadcast television and cable and satellite television. d Playback of prerecorded units only.

Sources. Veronis Suhler Stevenson Communications Industry Forecast, 1991, 1997, 2001, and 2002 editions. Copyright Veronis Suhler.

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manufacturing plants, warehouses, shipping, wholesale distributors, independent and chain retailers, and artists, producers, and other personnel. To that end, each of the “Big Five” record companies—Universal, Sony, EMI, Warners, and BMG—maintains its own manufacturing facilities and oper- ates a wholesale distribution system. The demands of manufacturing have shaped the recording industry from its inception, when the ease of repro- ducing, handling, and storing Berliner’s disks gave them key advantages over Edison’s cylinders, although the latter offered superior fidelity. Simi- larly, although digital reproduction has been widely criticized as inferior to analog recording, the CD-manufacturing process is more reliable and has lower labor costs than that of vinyl records. CDs themselves are smaller and lighter than records, which reduces shipping costs. Production efficiency, however, is not the only issue. High CD costs vis-à-vis vinyl records stemmed in part from an initial scarcity of manufacturing plants, but as CD plants proliferated, the per-unit costs of CD manufacturing dropped below those of records (although retail CD prices continued to climb).

Music. Record companies do not “create” music; instead, they obtain music from contractually bound songwriters and musicians, who (in theory) benefit from the company’s distribution and promotional services. These contracts take a variety of forms. “Name” artists typically work under multiyear contracts in which the record company retains ownership of the recordings and compensates the artist through royalties on sales of their recordings—at rates ranging from 7% to 15% or even 20%, contingent on the artist’s status (Fink, 1996; Hull, 1998; Weissman, 1990). In contrast, stu- dio musicians are payed union scale for their work and retain no future financial or legal interest in the recording.

Historically, many recording artists relinquished all rights and royalties in exchange for lump-sum payments up front. Although this arrangement is today widely disparaged as unethical, contracts still favor record companies. Multiyear contracts typically consist of a series of 1-year contracts in which the record company holds the right of renewal. Funds to cover the costs of recording, promotional videos, and other services are advanced to the artist and charged against future royalties. Thus, the artist will not earn royalties from sales of a recording until enough copies have been sold to recoup these costs. Moreover, when a recording fails to recoup its initial in- vestment, that recording’s debt will be applied to any follow-up recordings the artist makes while under contract. A suit pending in California, circa. 2002, argues that this arrangement allows record companies to unfairly control the careers of artists by prolonging periods between releases and holding artists liable for albums they fail to deliver (Ordonez, 2001).

Although contracts stipulate royalties as a percentage of the income from recording sales, songwriters can earn additional royalties from pub-

11. ECONOMICS OF THE RECORDING INDUSTRY

lishing. These royalties stem from “mechanical rights,” based on physical manifestations of the song in a CD, LP, cassette, or sheet music; and “performance rights,” based on performances of a song on a record and CD, or on radio, on television, on jukeboxes, in concerts, and in advertisements. Any- one who uses a song for purposes of profit must pay royalties to publishing organizations such as ASCAP and BMI, who then distribute royalties to songwriters. Consequently, songwriters may make more money from their efforts than performers. Indeed, songwriting and publishing fees have been central to the more enduring forms of music industry subterfuge since the 1920s. Over the years, many producers, executives, and prominent disc jockeys have taken songwriting credits in return for helping to make a hit (Eliot, 1993).

Recording. Before the development of magnetic tape in the 1940s, music was recorded by costly and complicated disc-cutting machines in studios owned and staffed by the major record companies. The accessibility and economies enabled by tape recording led to a boom in recording activ- ity; Kealy (1979) estimated that the number of record companies in the United States increased from 11 to nearly 200 within the 5 years following its introduction. More recently, the proliferation of digital recording tech- nologies has enabled musicians to produce highly sophisticated recordings independently of record companies and costly studios (Jones, 1992). The techno movement, for example, is rooted in amateur musicians creating music on computers, and digital cut and paste techniques have become mainstream, as exemplified in Beck’s Grammy Award-winning Odelay and U2’s Pop.

Consumption. The final category of recording industry contingencies is based on three key issues. The first concerns hardware. Whatever the format, from cylinders to CDs, recording sales are dependent on consumers owning the necessary playback equipment. The “war of the speeds” between RCA’s 45 and Columbia’s LP in the late-1940s was an early contest over hardware compatibility, although in this case each was able to carve itself a niche in the home electronics market . The success of the CD, which raised record company profits by lowering distribution costs while provid- ing new opportunities to recycle catalogs, was by no means foreor- dained—its most direct predecessor, the video laser disc, was effectively stillborn on the consumer market, and subsequent audio formats have had little success. Anticopying legislation torpedoed Digital Audio Tape (DAT) for the home market in the 1980s, and formats like Digital Compact Cas- sette and Minidisc failed to achieve producer expectations because they lacked a substantial value-added component for consumers. Currently SuperAudio-CD and DVD-Audio are vying to be the next major audio me-

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dium, yet each format is backed by different equipment manufacturers and has received only moderate support from record companies. Whatever their success, audio formats are now largely intended to become obsolete, so that the electronics industry can sell new hardware and the recording industry can squeeze new profits from repackaging of its catalogue. The Ea- gles’ Greatest Hits, for example (currently listed as the largest selling album ever), was first released on LP in 1976, has been released in myriad formats, and has now sold more than 27 million copies.

Second, each audio technology has a reciprocal relationship with consumer musical culture. Before the record boom of the early-1920s, the music business drew revenues from ticket sales for live performances and sales of musical instruments and sheet music; piano sales in the United States increased dramatically from 1870 and peaked in 1909 (Roell, 1989). Amateur musicianship was promoted as morally uplifting, and the early phonograph industry similarly touted phonographs as “good for the children” and a means to bring the world’s greatest musicians, composers, and performances “into the home” (e.g., Thompson, 1995; Welch & Burt, 1994). The development of the radio industry later helped cement habits of listening to, rather than playing, music in the home. Today, computer software pro- grams that allow users to “remix” existing recordings or create new ones have replaced instruments in many homes. Finally, the recording industry is highly vulnerable to changes in audience interests. Taste is not “fixed;” it is plastic and highly subjective. People become weary of formulas, render- ing formulas useless. Musical genres continuously proliferate and evolve in ways that are anything but well-defined, a process compounded by in- creasing hybridization of music in the global marketplace.

Capitalizing on the Structure

Music promotion dates to 19th-century “song pluggers” hired by publishing companies, who sought to get songs played by vaudeville, theater, and touring orchestras in hopes of building sheet music sales. As competition for this lucrative exposure increased, promotion became a bigger, and more necessary, part of the music industry. By the 1890s, music publishers were complaining that the necessary expense of song plugging was cutting into profits (Sanjek & Sanjek, 1991). Radio further accelerated the promotional process by enabling a few orchestras in prominent network time slots to have immediate national impact on sales of sheet music and recordings (Ennis, 1992; MacDougald, 1941). Since the mid-1960s, promotion has been the single largest expense in the music industry (Hirsch, 1972; see also Dannen, 1990; Haring, 1996). Indeed, it is so integral that we may consider it as one of the industry’s products. Record companies manufacture hits, po- sitions on music charts, and popularity as much as they do recordings; hype

11. ECONOMICS OF THE RECORDING INDUSTRY

is as important to the industry as music (Harron, 1988). The importance of promotion has at times led promoters to bribe radio gatekeepers (i.e., DJs and programming directors) to play their songs, a practice the music industry terms payola. Although Congressional hearings in the late-1950s at- tempted to position payola as the product of rock and roll and suggest that it had been effectively eliminated, neither claim was true. Payola emerged with the sheet music industry in the 1880s and continues to the present (see Boehlert, 2002; Dannen, 1990; Ennis, 1992; Segrave, 1994).

CHARACTERISTICS OF INDUSTRY STRUCTURE Oligopoly

The recording industry earns the bulk of its profits from recordings at the top of the popular music charts, where the most significant expenses and logisti- cal factors are national promotion and distribution. Both of these areas ex- hibit a clear record of oligopolistic control throughout the industry’s history. Figure 11.3, based on data from Peterson and Berger (1975), Rothenbuhler and Dimmick (1982), and Lopes (1992), indicates control by a very few corporations, except for the period from 1956 to 1970. At the same time, the nature of this control has changed from year to year as key firms rise and decline, and on occasion the dominant firms lose control of key aspects of the industry. Although the eight largest record companies controlled nearly all of the weekly top-10 hits in the early-1950s, and the pop music charts were rela- tively stable and homogeneous (Peterson & Berger, 1975), the rhythm and blues charts were bubbling with new artists promoted by independent labels (Gillett, 1983; Shaw, 1974). The majors initially failed to generate rock and roll hits, and an unusually diverse group of labels, artists, and genres dominated the charts throughout the late 1950s.

Both Peterson and Berger (1975) and Rothenbuhler and Dimmick (1982) indicated a negative correlation between the concentration of industrial control and the diversity of music on the charts: The higher the degree of concentration, the lesser the variety of songs, the slower the turnover on the charts, and the fewer the number of new artists. Although the correlation is not uniformly consistent, years with greater diversity tend to feature higher overall sales. Lopes (1992) and Burnett (1992) argued that a different pat- tern of oligopolization emerged in the late-1980s. Although six (and later five) record companies dominated the distribution of popular music, they operated through a multilayered system of ownership or interest in a number of subsidiary labels. Although the industry returned to or even ex- ceeded historically high levels of concentration of control, musical diversity did not seem to suffer commensurately. The major firms maintained centralized financial control while allowing their subsidiary and

FIG. 11.3. Percentage of the weekly and annual “Hot 100” charts controlled by the top four and top eight firms by year. Adapted from Peterson and Berger (1975), Rothenbuhler and Dimmick (1982), and Lopes (1992).

contracted labels to enjoy relative autonomy in making musical decisions, thus allowing for diverse product lines. The success of this strategy—main- taining music diversity and oligopolistic control simultaneously—is sub- ject to debate. Recent research (Peterson & Berger, 1996) continues to illuminate the complex interrelationship of industrial structure and musical diversity. For example, the 1996 Telecommunications Act led to massive consolidation within the radio industry, a primary outlet for music promotion. While decision making became more centralized as radio chains grew, which added another strong influence on the standardization of music (Ahlkvist & Fisher, 2000), radio formats became increasingly diverse (although station playlists grew more circumscribed).

Vertical Integration

The major record companies have always been vertically integrated to some extent, each owning publishing divisions, recording facilities, manufacturing plants, distribution operations, and promotional arms. In recent decades most of the majors have established record clubs for mail-order retailing, and some have invested in record store chains. Occasionally record companies have had stakes in, or have been owned by, corporations involved in the manufacture of musical instruments and audio equipment (e.g., CBS records owned Fender for several years, and, more recently, Sony purchased CBS records). Major record companies also have been owned by film studios (e.g., MGM, Warner Brothers) or developed corporate ties to the production of films, enabling increased opportunities for cross-promotion. Record companies also have had financial ties to talent and entertainment booking agen- cies, aiding in the supply and control of creative personnel.

Vertical integration has been one of the key forces in the major record companies’ maintenance of their oligopoly status (Peterson & Berger, 1975). By controlling each step in the link between the performer and the audience, vertically integrated companies achieve four distinct advantages over their competitors. First, they increase the number of potential revenue sources. A record label that also owns a publishing company can retain the rights to its recordings and transform copyright fees from a cost to a source of income. Second, such companies can economize their use of various resources by centralizing administrative functions such as management and accounting. Third, such companies can coordinate and control their use of resources, manipulating schedules in order to maximize the performance of their offerings as a whole. Finally, through their control over the com- plete chain of the production process, vertically integrated companies can inhibit, or profit from, competitors’ access to these goods and services. For example, a company such as Warners profits not only from the music of its subsidiary labels, but also from any label that contracts with Warners for

11. ECONOMICS OF THE RECORDING INDUSTRY

231

distribution—while denying others access to its distribution and promotion machinery.

Paradoxically, vertical integration has occasionally maintained the inde- pendence of smaller companies, as exemplified by Motown Records in the 1960s. Motown’s artists recorded songs written by Motown staff writers and published by Motown’s publishing company. Their performances were backed by Motown staff musicians and recorded in Motown’s studios by staff engineers. They were signed to Motown’s artist management staff and worked through Motown’s booking agency. As long as the company could keep producing hit recordings, this system produced spectacular re- sults. By the mid-1970s, however, the hits began to dry up, and Motown was purchased by MCA in 1988.

Conglomeration

Ties between the film and recording industries date from the advent of sound film. However, in recent years record companies increasingly have been absorbed by multinational corporations that do business across media and, in some cases (as with Universal), outside the media as well. Warner Records, through its status as a subsidiary of AOL Time Warner, is linked to cable television, the film industry, book and magazine publishing, and other media-oriented endeavors. Parent companies like Sony, Philips, and Matsushita, moreover, link record labels to other media and the home electronics market.

In addition to enabling the Big Five to vertically integrate their operations, conglomeration allows recorded music to be incorporated into the revenue streams of their parent companies. Recordings provide immediate cash flow to media conglomerates and compensate for losses on films and other properties. Record company catalogs also can generate money for decades through reissues, compilations, and licensing. Film soundtracks provide a particularly important means to promote new artists and catalog holdings. As these practices indicate, conglomerates may aggressively pur- sue cross-media ties to exploit the profit potential of their properties—which underscores the importance of retaining intellectual property rights through the ownership of recordings. By placing a mix of established stars and new artists from the company’s roster on the soundtrack of a film, producing music videos that feature stars from the film, promoting film and recording stars on television talk shows and featuring them in magazines (all owned by the corporate parent), and selling licensed T-shirts and souvenirs in the lobbies of both movie theaters and concert venues (and, later, selling the right to use the recording to advertisers and issuing compilations) the parent corporation gains maximum exposure for their properties at minimum cost, squeezing profit from every possible use. As Frith (1988) stated:

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In the music industry itself, a song—the basic musical property—repre- sents “a bundle of rights”; income from the song comes from the exploita- tion of those rights, and what happened in the 1980’s was that some of these (the “secondary rights” [i.e., licensing and copyright fees from other users]) became more profitable, others (the “primary rights” [i.e., selling your own records]) less so. (p. 105)

Conglomeration can also link electronics and recorded music—echoing the early decades of the 20th century, when phonograph manufacturers also produced and distributed records in order to spur sales (Kennedy, 1994; Welch & Burt, 1994). This linkage becomes particularly important as hardware divisions seek new consumer audio formats, since access to record company catalogs can provide the new format with a potential advan- tage over rival formats. Under situations of conglomeration, the hardware (equipment) and software (recording) divisions of a company can become not only interdependent, but strategically linked. For example, American record companies blocked the importation of DAT recorders for nearly a decade, arguing that the ability of DAT to make perfect copies of CDs would affect the sales of CDs. Despite a Congressional Office of Technology Assessment study that revealed the erroneous and self-serving nature of the record companies’ arguments, their lobbying was successful—in part because the record companies were American and the importers of DAT were Japanese at a time of great economic nationalism.

The ensuing legislation, the Audio Home Recording Act of 1992, autho- rized consumers to make copies of digital music for personal, noncommer- cial use, yet prohibited serial copies. Therefore, digital recorders for the home market must incorporate Serial Copy Management System (SCMS) technology, which allows a single digital copy to be made from a digital source, but a binary code inserted into the copy makes second-generation digital copies impossible. The 1992 Act also implemented a tax on digital recorders and recording media, the revenues of which went mainly to record companies. Given the fact that audio hardware manufacturers like Sony now own record companies, they essentially pay themselves a tax.

Conglomeration and vertical integration both contribute to the effects of corporate cultures. Negus (1999) documented how corporate identity shapes decisions about artists’ contracts, marketing and promotion strate- gies, and investments in different musical genres, with extensive and often unintended effects on industry and culture. For example, AOL Time Warner, whose holdings include magazines, cable, and Internet businesses, and whose Warner label historically has been one of the largest distributors in the record business, has tended in recent years to emphasize distribution and hardware. Music decisions, then, are delegated to others as software and content concerns. Consequently, one must be wary of overgeneralizing the benefits of corporate synergy. Divisions may often work at cross-pur-

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poses, as witnessed by developments with digital music delivery, which pitted content, distribution, and consumer electronics divisions against each other in philosophical and pragmatic terms. The Wall Street Journal used the example of AOL Time Warner: “To Time Warner executives producing music, the Web makes stealing pirated copies of their products far too easy. AOL, on the other hand, has grown up in a Web culture that favors the free dissemination of everything from music to movies” (Peers & Wing- field, 2000, p. B-1). Hardware divisions see a huge demand for portable music devices that download digital song files, which would require that record divisions put their catalogs on line, yet record divisions demand that portable devices and computers be prevented from playing music down- loaded from the Internet without their approval.

Vivendi/Universal most clearly embodied the conglomerate faith in big media. After expanding into wireless communication systems, Vivendi (a French water treatment company) bought Universal’s parent company, Seagram’s, for $34 billion in 2000. Yet in early July 2002, Jean-Marie Messier, Vivendi’s CEO, resigned with public admissions that the strategy had not paid off as planned. The company’s productivity had not supported its stock prices and his resignation initiated a round of public discussion of whether the conglomerate experiment had come to an end (Lohr, 2002). The marriage of AOL and Time Warner was similarly rocky, sending the company’s stock prices into a dive within a year of the merger.

Economies of Scale

Although the advantages of conglomeration to a large extent depend on a corporation’s particular configuration, conglomeration and oligopoly both afford significant economies of scale. From recording to distribution to promotion, operating at high-volume offers clear advantages. The bulk of costs involved in producing and distributing a CD are fixed (although royalty rates, recording costs, and promotion budgets are “fixed” arbitrarily through negotiations or corporate policies). These first-copy costs must be spread across each unit sold, regardless of whether a given CD sells one or one million copies. As a result, selling more copies lowers the percentage of the fixed costs for each CD or tape while raising the profit margin for each unit. Put simply, the more copies that are sold, the more profits that are made on each copy.

Although economies of scale are found wherever fixed costs exist, they become most important in situations where fixed costs account for the bulk of business costs, such as the manufacture of recordings. Consider, for example, the difference between producing recordings and athletic shoes. In both cases, first copy costs include royalty rates. Recordings and shoes also involve research and development, design, production, and promotion.

11. ECONOMICS OF THE RECORDING INDUSTRY

Both cases also feature labor and other marginal costs: blank media and packaging for recordings; leather, rubber, and thread for athletic shoes.

However, the ratio of fixed costs to marginal costs is far higher in recordings than athletic shoes. According to Vogel’s (1998) estimate, the marginal costs for manufacturing a single CD are roughly $.60 per disc. Assuming a wholesale rate of $8, roughly 93% of the record label’s revenue from the sale of a CD is directed at covering first copy costs. The consequences of this figure are twofold: First, the high rate will lead to a quick payoff of those fixed costs; and second, once enough copies of the CD have been sold to cover the fixed costs, 93% of the company’s revenue from each subsequent disc sold will be profit. Hence, at the breakeven point (known only to company policymakers), the marginal rate of return (i.e., profit per unit) goes up in a single huge step, whereas the overall rate of profit goes up exponentially. Nike should be so fortunate.

Barriers to Entry

In theory the recording industry has few barriers to entry. Songwriters and performers are in oversupply, and recording technology has never been more inexpensive or accessible. Indications are that in recent years more musicians and small studios may be producing more recordings for local and regional distribution than ever before (Robinson, Buck, & Cuthbert, 1991; Slobin, 1993; Theberge, 1997). In classical, jazz, and audiophile music markets, specialized labels that market through the Internet and mail-order catalogs are common.

The big money in the recording industry, of course, is found in national and international popular music markets. Access to these markets, and opportunities to sell copies of a CD in the multiple millions, depends on both sizable amounts of capital and control of a sprawling distribution and promotion system. These factors present a huge barrier to entry. Distribution is so important that the traditional distinction between “majors” and “independents” is based on whether a company owns its own distribution system. The majors can control their own distribution, whereas independents have to contract with other companies (usually the majors themselves ) for that service. This arrangement requires independent companies to share their profits with the distributor, as well as surrender some control of their own products.

The importance of the national and international markets, and the diffi- culty of entering them successfully, have been heightened by the growing nationalization and then internationalization of popular music since the late-1950’s. At that time, radio formats in the United States varied between regions, and records often became national hits after gathering attention through local breakouts (Marsh, 1993, provided a case study). Radio for-

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mats became more nationally standardized in the 1970s, and today are nearly identical from city to city (Barnes, 1988; Fornatale & Mills, 1980; Rothenbuhler, 1985; Rothenbuhler & McCourt, 1992; 2002). National cable services such as MTV and VH-1 also are instrumental in making hits. At the same time, national record store chains, with coordinated inventories, have come to dominate retailing. In response to these trends, the Big Five have coordinated their own distribution and promotion efforts to work the whole nation as a single market. Thus the combination of vertical integration, economies of scale, and the sheer size of the distribution and promotional machinery necessary to create hit recordings has created insurmountable barriers to entry in the national and international markets for recordings. The result is the oligopolistic control of those markets by five major corporate conglomerates.

OVERVIEW OF THE INDUSTRY