I. INTRODUCTION The recording industry has, over the last quarter of a century, become a major entertainment medium. With annual sales of over three billion dollars, only the television industry dominates in economic terms. Indeed, retail sales have been steadily increasing from less than 200 million dollars in 1950. Even in constant dollars, after accounting for inflation, real annual expenditures have risen about 600 percent since that time. Adding to the recording business importance is its status as a major input to the broadcast media. That is, radio stations depend on recorded music for the major proportion of their programming. Surely, the continuing dominance of television as a supplier of variety entertainment has meant that radio relies on music formats to attract audiences. Thus, the rapid growth in popularity and sales of recordings can be directly linked to the ability of radio to survive in the increasingly competitive media marketplace. One observes a 400 percent rise in nominal AM radio revenues since 1950. Even more dramatically, independent FM radio stations have experienced phenomenal growth recently. This growth is correlated with the development of technologies capable of transmitting the high fidelity sound of recordings. What follows is an initial effort to describe and analyze the economics of the recording industry. Section II begins by describing, in general terms, the economic characteristics of the recording industry Further, the implications for market structure and performance will be considered. product. In addition, the markets are described, with special emphasis on the links among participants. ww 2 Section III is a brief summary of data relating to the recording industry. Measures of concentration and historical trends will be described. Finally, Section IV serves to identify and analyze some of the major economic issues pertaining to the recording industry. Specifically, the impact of the proposed expansion of performance rights on the radio industry will be considered as well as the effect on recording artists. The last section of the paper will also discuss issues involving the changing nature of distribution and trends in concentration. Of course, this paper is not intended to be a definitive study. Its scope and depth have been constrained by the paucity of previous research as well as by limited resources. However, to the extent that we have identified the interesting issues and, though not having resolved them, suggested directions for further research, we hope that we have been successful. II. THE NATURE OF THE RECORDING INDUSTRY PRODUCT 3 Public Good Characteristics and Economic Implications The economic characteristics of recording industry products have strongly influenced the structure of markets organized for the creation, reproduction, and distribution of output. Of primary importance are the "public good" elements imbedded in a recording. By definition, the nature of a public good is such that the consumption of that good by one individual does not preclude consumption by additional consumers. Alternatively, one can say that the marginal cost associated with an additional consumer is zero. To illustrate this notion, imagine that the content of a musical piece has been created. That composition can be studied, interpreted, arranged, performed, recorded, and listened to repeatedly (i.e., consumed) without diminishing or altering the nature of the original conception. Surely, the fact that Beethoven's Fifth has been enjoyed by millions in the past will hardly impair the appreciation of others in the future. Even when the creative content becomes embodied in a physical product, a recording maintains certain elements of the public good. Thus, pressing an additional record has no impact on the content of the original. Also, when played over the airwaves, an individual household is impervious to the size of the radio audience. These public good elements have important ramifications for market structure and organization. Most importantly, property rights are difficult to define and protect. Once an idea is expressed in the form of lyrics, a composition, or an interpretation, exclusion of others is virtually impossible. A physical recording only partially numerous consumers. artists may have little incentive to produce public goods. Of course, without adequate compensation the supply of creative content will be at suboptimal levels. The existence and enforcement of copyright laws are meant to be partial solutions to the above problems. For example, the 1976 Copyright Act assigns property rights to authors and composers for periods of about 75 years. These include both mechanical and performance rights. A songwriter, for example, will give a publisher license to reproduce a composition. Once photorecords of this composition have been distributed to the public with the authorization of the copyright owner, any other individual can record and distribute versions of the work. However, a mechanical royalty fee of about 2¢ per copy is required with compensation equally split by the composer and publisher. In addition, performance royalties are required whenever a composition is publicly aired. Thus, publishers and composers are remunerated for the performance of the copyrighted material on, for example, radio and television. Of course, it would be impossible for individual copyright owners to monitor all media programming or negotiate fees without inordinate expense. To circumvent this difficulty, performance rights groups have been organized for the purpose of licensing enterprises and collecting fees. The two principle agencies, the American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music Inc., (BMI) are membership |