Music and Economics: Thinking Music as an Industry

by Didem ÖZÇAKIR

When we think about music, we are inclined to think of it as a form of art. In reality, music is something that we consume, and what we listen to is determined by the dynamics of the free market. Open your favorite playlist and think: Would you be able to find these songs if they were not properly advertised or would they give the same taste if they were not recorded using the latest technology? What is being recorded is determined by the wishes of the people- or the demand in the market. Created to protect artistic production and originality, copyright laws also have a great deal of importance in the industry, as they are the main reason why the entertainment sector exists and is profitable. The latest technology also transformed the industry during the previous two decades. In this article, we will look at how the entertainment sector exhibits the characteristics stated in microeconomics.

The music sector can be thought of as an example of an oligopolistic market. In such markets, there are a limited number of producers, you can easily name all of the companies that make 90 percent of the market. The others who want to enter the market to obtain some profits are faced with entry barriers. Think of the smartphone industry- there are only a few firms that produce smartphones (Apple, Samsung, Sony, Xiaomi) and if you want to start producing smartphones you will face high costs and patent-protected technology, which work as entry barriers. These entry barriers are the only things that make obtaining profit possible, if they had not existed it would be easy for a new firm to enter the market for profits. Every new firm would increase the supply of goods, decreasing the prices. The prices would fall until to the point where the cost of production is equal to the price, since every price level above this point means profits, attracting further entries to the market. Entry barriers slow down the rate of new entries, so the prices do not fall in the market.

The music industry is no different, either the online music streaming services or the recording companies are very limited in number. Spotify, Apple Music, Amazon Music, Deezer, Pandora, they constitute a significant percentage of the online music market. The case of YouTube is a bit different, but it also contributes to this. Before online music piracy saw its peak, 5 companies dominated 90 percent of the industry. When we look at the entry barriers, we are faced with copyright laws, which make the existence of the industry possible as we know it today. Copyright laws gave the distribution rights of a recording to only one firm, making producing physical copies of the recording illegal for other distributors. Even if you had bought a CD, copying and distributing it at a large scale was not legally possible. Firms were able to sell CDs, tapes, and pieces of vinyl at much higher prices than their cost since distribution rights were limited only to them. This possibility of very large profits meant there would be more investment for discovering new talents, advertising them, and distributing their recordings.

Using the YouTube views, radio plays and many more indicators, recording companies makes a great deal of market research to understand which kind of music is liked. If a song or an artist is well-liked, more artists like their style find resources for their advertisement and recording. As we know it, not everybody listens to the same music. To meet the different demands of the customers recording companies invest in very different styles at the same time, that’s why we had a surge of both hip hop and grunge throughout the 90s. The reason why people were listening to disco in the 70s is not only due to artistic concerns, it is also because artists within the genre of disco were receiving more resources and attention from the recording companies. Your favorite playlist exists not only due to its artistic value, but mainly because it was seen profitable to record the songs and advertise the artists in it. 

If the music industry was not profitable, different voices would not be able to find enough resources for recording and advertisement. As the capital in the hands of the firms and the possibility of profits would be much lower, even if they could exist, recording companies would only advertise and record what is really popular at that time. Arctic Monkeys, The Strokes, or many more indie acts of the 2000s would not be able to find resources for recording during the pop surge, while most of the money was going to Britney Spears and later Lady Gaga. Eventually, we can understand that it is the copyright laws that create profits, and it is the profits that create diversity in music.

After the middle of the 90s, the whole picture started to change with the digitalization of music consumption. I was born in 2001, and I never bought a single CD, tape or vinyl to listen to music, yet I still have an archive of 5 thousand songs. Although all my playlists are on Spotify, I know that most of my friends are illegally downloading music to create their digital archives. This underlines the two most important concepts that digitalization of music brought into the industry: piracy and the near-death experience of physical music consumption. In the span of our lifetime physical music consumption was replaced by digital consumption. Selling CDs and tapes were much more profitable than digital copies. Besides, thanks to the popularizing internet, pirate music platforms like Napster and technologies like torrent, people were not buying legal digital copies. This behavior is understandable, thinking that the first legal alternatives like the iTunes store were offering a single track at prices like 2 dollars, while the same track was available for free at another site. After seeing its peak in 2000, the industry’s revenues started to fall steadily. To adapt and create a legal alternative, YouTube advertisements and online music streaming services became a part of our lives. Due to their user-friendliness and very low prices, legal alternatives started to become more and more popular for consuming digital music. Although it is still damaged and could not reach its pre-2000 levels, this adaptability saved the music sector.


We can also see how the classic oligopolistic model changed as a result. As of 2003, 5 music companies constituted 90 percent of the industry. However, this phenomenon changed, as of 2015, the market share for the industry was as following:


Digital music means recording, advertising, and especially distributing can be achieved at much lower costs. This means independent labels-like the Asthmatic Kitty Records or Sufjan Stevens- are starting to have more chance for reaching out to the audiences. Still, there have been several court cases that suggested that the merging of the industry giants was still decreasing the competition and making it harder for independent labels to reach out to different radios and audiences. The courts generally ruled that the merging was not against the competition laws and was necessary as a response to music piracy's damage to the firms.

I believe it is necessary to think of music as an industry that is trying to have profits like all the other sectors. In this way, we can question some acts' artistic value and think if they are popular due to their talent or due to their profitability. We will soon realize that popularity by itself never shows talent and quality, rather it reflects profitability. Besides, in this way, we can see that economics is not a boring and theoretical discipline that belongs to course books, but it creates the fundamentals of our everyday life, even for the music that we listen to. (1) (2)

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