Continuing from last week's article;
Consider the challenges of promoting a new song on radio. By the 1950s, radio had become one of the major channels available to record companies for the promotion of their music. But the marketplace was very crowded. By the 1990s, according to one estimate, the major record labels were releasing approximately 135 singles and 96 albums per week, but radio stations were adding only three or four new songs to their playlists per week.
Companies therefore had to resort to all sorts of tactics to get their songs on the air. Often this meant promising radio stations access to the major label's established stars – in the form of concert tickets, backstage passes, and on-air interviews – in exchange for agreeing to play songs from labels' new artists.
The major record companies also practiced payola, the illegal practice of informally providing kickbacks to disc jockeys and stations that played certain songs. In the 1990s and the early 2000s, for example, the labels often paid independent promoters thousands of dollars to ensure through a variety of creative promotional schemes, that the labels' new songs made it onto radio stations' playlists.
Typically, the major labels focused their efforts on the 200-300 stations around the country, known as "reporting stations," that sent their playlists weekly to Broadcast Data Systems, which then used the playlists to determine what records would make it onto the "charts." In 2003, Michael Bracey, the co-founder and chairman of the Future Music Coalition, memorably summed up the way things worked: "Getting your song on the radio more often is not about your local fan base or the quality of your music. It's about what resources you are able to muster to put the machinery in place that can get your song pushed through.
Promotion is useless without distribution, however. For labels to make money, consumers have to be able to find and buy the music they have heard through promotional channels. And in the pre-internet, pre-digital era, retail shelf space was very limited. Most neighborhood records stores carried only small inventories, perhaps no more than 3,000 or 5,000 albums. Even the largest of the superstores of the 1990s – glorious multistory spaces with whole soundproof rooms devoted to various genres – stocked only 5,000 to 15,000 albums.
As with radio, the majors therefore resorted to promising benefits in exchange for attention. To convince store managers to take a risk on devoting scarce shelf space to new music, the labels leveraged their stable of star artists, by offering access to in-store interviews, advance copies of albums, free merchandise, and more. And to make sure everybody noticed their "blockbuster" artists, the labels paid for special high-visibility placement for their releases in retail stores.
On the downstream side of the market, then, because of their size, power, and financial clout, the major labels were able to exercise tight control over both promotion and distribution. They owned the musicians and the music; they made the records, tapes, and CDs; and they dictated terms to radio stations and retail stores, which pretty much just had to go along.
All of this, in turn, helped the majors maintain upstream control over artists, who had few options other than a big label deal for getting their songs onto the necessary promotion and distribution channels, and who generally couldn't afford the costs, or incur the risks, of producing, manufacturing, and distributing their music on their own.
At the beginning of this chapter we asked why the same small set of companies has dominated the music industry for most of the twentieth century. The answer is twofold. First, the economic characteristics of the industry favored large firms that were able to incur the costs and risks of producing content, and were able to use their scale to maintain tight control over upstream artists and downstream processes for promotion and distribution. Second, until the very end of the century, no technological changes threatened the scale advantages enjoyed by the major labels.
Similar patterns emerged in the movie and book industries. At the end of the twentieth century, six major movie studios (Disney, Fox, NBC Universal, Paramount, Sony, and Warner Brothers) controlled more than 80 percent of the market for movies, and six major publishing houses (Random House, Penguin, HarperCollins, Simon & Schuster, Hachette, and Macmillan) controlled almost half of the trade publishing market in the United States.
As with music, these publishers and studios controlled the scarce financial and technological resources necessary to create content ("People like watching shit blow up," one studio executive said, "and blowing up shit costs a lot of money") and they controlled the scarce promotion and distribution resources on the downstream side of the market. None of the technological advances that came in the twentieth century weakened these scale advantages.
By the 1990s this model was so firmly established in the creative industries, and so consistently profitable, that it seemed almost to be a law of nature – which is why, even two decades later, the executive who visited our class at Carnegie Mellon could so confidently declare that the internet didn't pose a threat to his company's powerful place in the market. We think his confidence is misplaced, and in following articles we will explain why. But before we do so, we will take up something that should be understood first: the economic characteristics of creative content itself, and how these characteristics drive pricing and marketing strategies that are fundamental to the entertainment industries' business models.
