8 Radio exposure appears to be the most effective means of promoting the artists and recording company's product. Studies indicate 3 that over 60 percent of all record customers are influenced by radio play. This exposure is so valuable to record companies that they supply disks to radio stations free of charge. However, the sheer volume of new releases, 7000 and 4000 new singles and LP's respectively in 1976, results in a significant oversupply. There is fierce competition to get on the playlists of big radio stations in major markets. a record can expect to be aired over a dozen times during a broadcast day with a concomitant rise in record sales. Station program directors construct playlists on the basis of several criteria. These include the frequency of listener requests, national action on charts Recent surveys indicate that radio audiences engage in frequent "station-hopping." Thus, it is essential that only the most popular recordings be aired. This has resulted in the contraction of playlists to include as few as 12 to 20 current hits. It is becoming increasingly difficult to obtain the desired air play and record companies have had to rely more heavily on alternative means of promotion. For example, T.V. advertising and exposure through discotheques are becoming more prominent as marketing strategies. The dominance of such automated programming has several economic implications for the recording industry. First, it is now more difficult for unproven talent to get exposure. Also, effective promotion becomes 9 more important, the probability of success for a given release decreases, and the magnitude of the infrequent successes will rise. These factors would appear to favor the larger firms vis-a-vis the smaller companies. Finally, the increase in exposure for the few most popular hits may not really be desirable from the recording companies' point of view. That is, too much exposure may achieve a saturation point beyond which consumers tire of particular recordings and their sales decline. After a recording product has been created and promoted, it becomes necessary to manufacture copies and distribute them to retail outlets. Previous discussion suggests that large firms enjoy a comparative advantage in completing these tasks. Thus we find a few large recording firms, called majors, with self-contained manufacturing and distribution systems. Frequently, the integration is even more complete with corporate interests in retail outlets. Section IV will consider the distribution network in greater detail. For now, it suffices to briefly mention the outlets available to independent labels too small to own their own manufacturing or distribution companies. First, there exist several independent companies which handle a variety of record labels and thus achieve economies of large scale distribution. Other middlemen, called rack jobbers, serve record departments of large retail stores. Also, record clubs, as we will see, play an extremely important role in the distribution network. Finally, the major companies often contract to manufacture and/or distribute the products of competing independent labels. Given the importance of promotion and timely distribution of record products, this arrangement raises some interesting issues. We turn to these in Section IV. III. DATA DESCRIBING THE RECORDING AND RADIO INDUSTRIES 10 The following tables are intended to provide data which describe certain elements of the recording industry. Unfortunately, publicly available data are usually not disaggregated to the degree necessary to conclude a great deal about the trends and current status of the industry. In addition, the sources which would supply data for more recent years are not yet available (for example the 1977 Census of Manufacturers). However, the data available do suggest a number of interesting tendencies in the industry. Table One describes the trends in and composition of the number of recordings manufactured in the United States since the post-depression years. From 1939 through the Middle fifties, the industry seemed to be in decline. Since that time, growth has been steady, the impetus coming from new technologies (the development of 45 and 33 RPM disks), the triumph of "rock-and-roll," and, most recently, "progressive rock." Between 1963 and 1973 the number of recordings manufactured nearly tripled. This trend has continued in recent years. Table Two indicates the relative importance of retail sales and other distribution mechanisms for 1971 and 1976. Over the five year period, the relative importance of albums when compared with singles has risen. In addition, record club sales have suffered decreases in market shares. For example record clubs sold 12 million fewer records and tapes in 1976 than in 1971. The total share for record clubs has gone from twelve to nine percent. Sales via mail order outlets have remained relatively steady. of tapes. Finally, the data illustrate the rising role 11 The percentage shares of various categories of retail outlets are presented for the periods 1964 to 1976 in Table Three. Although the data are not as reliable for earlier years, they clearly suggest some rather persistent trends. Currently, large department or discount stores have a combined market share of about 72% of retail sales. At the same time, the role of "mom and pop" variety and drugstores, and supermarkets has dramatically fallen. Also evident is the rising business of record stores which cater exclusively to albums, tapes and related products. The share of these outlets has risen from practically zero to about 16 percent. The content distribution of recordings for 1975 is displayed in Table Four. Recordings classified as contemporary, that is popular, rock, and soul music, have sales totalling 61 percent of all retail business. Classical music has a mere five percent market share, while the percentages for "country and western" and "middle of the road music" are 12 and 11 percent respectively. A financial profile indicating representative production costs and profit margins for a typical album are presented in Table Five. In 1975, the retail sale price was typically $6.98, although outlets often offered discounts. The wholesale price to the outlet was approximately $3.80, one dollar of which represented profit. The average manufacturing cost per album was about $2.80, including artist royalties which averaged about a dollar. Recording expenses, publisher payments, manufacturing costs, and promotion expenses comprise the bulk of the remaining $1.80 as indicated. 12 Table Six outlines the growth in annual sales of the U.S. recording industry since 1950. In both nominal and real (1972 dollars) growth has been steady. The real rise from 1955 to 1960 was particularly impressive, amounting to nearly 100 percent. Since 1975, increases have continued, with retail sales easily exceeding three billion dollars. A measure of concentration is presented in Table Seven. Census of Manufacturers data indicate that the percentage of sales controlled by the largest record manufacturers has been steadily decreasing. For example, the four largest manufacturers enjoyed market shares of nearly 80 percent in 1947. This combined share fell to 48 percent twentyfive years later. The trends are similar for the 8, 20 and 50 largest firms. In 1972, for example, a full 15 percent of sales were made by firms smaller than the largest fifty. This suggests that, at least from the manufacturing perspective, concentration is not an important issue. Of course, this ignores potential sources of concentration at different stages of the marketing chain, an aspect which we will return to later. In addition, recent evidence indicates that the trend away from concentration may actually be reversing. Finally, the last three tables supply data related to the radio industry. Table Eight documents the growth in the number of AM and AM/FM radio stations submitting required data to the FCC. From 1946 through 1976, broadcasting revenues have risen steadily as has the number of stations. The vast increase in broadcast stations might well affect the intensity of promotional effort necessary to guarantee the success of a record. However, Table Nine suggests that much of the growth in the radio industry has resulted from the development |