Artist-Entrepreneurship

An exploratory analysis of entrepreneurship by musicians in the music industry

First Draft

Cite:Peltz, P. (2006). Artist-Entrepreneurship. An exploratory analysis of entrepreneurship by musicians in the music industry. Paper presented at the 14th International Conference on Cultural Economics (ACEI), Vienna, Austria. Contact:Philipp Peltzp hil@philipppeltz.comPhD StudentVienna University of Economics and Business Administration

Abstract

For years, the music industry has been forced to respond to various technological and

aesthetic innovations from both inside and outside the industry. Naturally, technological

invention had a significant impact on how the production companies produced and distributed

music. Today, a comparable development is taking place in the context of the current switch

from compact discs to digitally compressed formats such as mp3 or acc. This paper examines

entrepreneurship of artists in the digital music industry. It analyses the impact of

technological developments on the entry barriers for artist-entrepreneurs. As a result the

combination of lowering entry barriers and the specific characteristics of artist-entrepreneurs

may lead to a democratisation of art-production and therefore a counter-movement to the

mass media.

Introduction

“The benefits for today’s artists of keeping control over their musical output outweigh those of being

signed to a label.”

Terry McBride (business insider)1

This paper examines an emerging trend in the field of entrepreneurship of artists in the music

industry. The traditional strategy of artists has been to secure a “record deal” with a record

label. This was due to the fact that record labels, in particular the major labels, achieved large

economies of scale in manufacturing, distribution, marketing and finance costs over time

(Burke 2003). Apart from these economies of scale factors, reputation depicted another

advantage of incumbent record companies to nascent entrepreneurs. According to Shapiro and

Varian (1999) it could serve as a quality signal to potential buyers which are confronted with

the information paradox. These conditions can be described as barriers to entry for potential

new entrants and therefore led to a high market concentration (currently 4 major firms

dominate 70% of the market, IFPI 2006)2. Alexander (1994) analysed the impact of

technological changes to entry barriers in the music industry. He argued that lowering entry

barriers led to two phases of relatively low market concentration in the second half of the

1920s and 1950s, compared to the periods before and after. Smaller firms, the so-called

independents, entered the market as costs of production, promotion and distribution decreased

(e.g. the shift from sensitive and breakable shellac discs to more robust vinyl records). In this

paper I will advance an argument similar to Alexander’s, that is the lowering of entry barriers

in the wake of technological changes. The difference here is that the potential new entrants

are not new record labels but the artists themselves. This makes it somewhat different as an

artist-entrepreneur is not a record-label in its typical sense but rather an individual or a group

of people who take control over all stages of the value-creation chain. On the one hand this

entrepreneurial behaviour can be observed by artists who are already signed to a record label

or would have the opportunity to get signed by a label. On the other hand an entirely new

group of entrepreneurs are now able to enter the scene due to the diffusion of broadband

internet access, digitalisation and file-compression-technologies.

1 Terry McBride is one of the three founding owners of Canada's Largest Independent Record Label, Nettwerk Productions.2 IFPI (International Federation of Phonogram and Videogram Producers) http://www.ifpi.com

In section 1 I will give a brief overview of cultural entrepreneurship literature and introduce

the term “artist-entrepreneurship”. In section 2 I will identify the main barriers to entry in the

music industry and evaluate the impact of digitalization and the internet on these barriers.

Section 3 will provide a conclusion and future research suggestions.3

I Artist-Entrepreneurship

In cultural economics entrepreneurship is often associated with the term “cultural

entrepreneurship”. Ellmeier (2003) defines “cultural entrepreneurialism” as something

including all-round artistic and commercial/business qualifications, long working-hours and

fierce competition from bigger companies. Poettschacher calls it “creative microbusiness” and

describes the actors as “’business outlaws’, trying creatively – and often desperately – to

make something out of nothing” (2005, p. 177). Howkins identifies the creative entrepreneur

as somebody who “use(s) creativity to unlock the wealth that lies within” (2002, p. 129).

Another more precisely definition comes from Henry et al. (2004) who make a distinction

between the intrinsic and extrinsic motivation of an “art-entrepreneur”. Thereby the intrinsic

motivation characterises the internal desire of the art-entrepreneur to create something and a

personal sense of challenge. The extrinsic part is contextual and business-driven. This

description shows the two main characteristics which are combined in the artist-entrepreneur.

Such a separation is akin to Schumpeter’s distinction between “inventor” and “entrepreneur”.

According to Schumpeter the inventor is the one who produces ideas and the entrepreneur is

the one “who gets things done” (Schumpeter, 1942). The latter can be assigned to the field of

creative industries with the words “art must meet commerce”. De Bruin (2005) combines

these findings and describes entrepreneurship in the creative sector as: “The process of adding

value to creative inputs/creativity. […] This value-adding process might not only entail

combining creative inputs with humdrum inputs, but could also involve an ‘entrepreneurial

value chain’.” (p. 144).

This brief overview helped us to get a better understanding of the idea of entrepreneurship in

the field of cultural industries. In the following I will frame these findings for our specific

purpose – artist-entrepreneurship in the music industry – by addressing the questions below:

3 Given that extentive literature on the value-creation chain of the music industry is already available (see for example: Peitz and Waelbroeck, 2005; Tschmuck, 2006), I will not discuss this topic in greater detail in this paper.

(a) Why call it “artist-entrepreneurship” and not “new firm start-up”?

(b) What role plays risk-taking as a necessary requirement?

(c) Is artist-entrepreneurship restricted to the commercial successful sector?

(d) What roles play creativity and innovation?

Ref. (a): It is conceivable to analyse the behaviour of artist-entrepreneurs from a transaction

cost theory analogous to Williamson’s “Theory of the Firm” (1975). Foss and Klein (2004)

studied how the entrepreneurship theory and the theory of the firm can be integrated and

argued that these two concepts could be linked proximately (see also Barzel, 1987). They

suggested that a person becomes an entrepreneur rather than an employee if his/her service is

hard to measure. This is particularly the case in the area of cultural goods and if music is

considered to be a persons’ service. As a consequence, interest conflicts in the form of moral

hazard4 between the inventor (here the music-composer) and the entrepreneur (here the record

label) could occur. This view is in-line with Schumpeter’s argument, cited by Casson (1982).

He argued that the “entrepreneur believes he is right, while everyone else is wrong. Thus the

essence of entrepreneurship is being different – being different because one has a different

perception of the situation.” (p. 14). According to the Principle-Agent theory vertical

integration could obtain theses problems (see for example Picot, 2002). Therefore basically an

artist has an incentive to integrate vertically along the value chain. This integration can be

described as artist-entrepreneurship.

Thus, in principle the core meaning of the terms “entrepreneur” and “new firm” are somewhat

similar. The reason for not calling it “new firm” is that a new firm, which would be called a

record-label start-up in the music-recording industry, usually exploits resources of others. In

our case the “firm” exploits its own resources and therefore it is more appropriate to describe

it as “artist-entrepreneurship”. Nevertheless, artist-entrepreneurship is not restricted to

individuals. Communities, networks and multi-level entrepreneurship are important features.

However they will not be discussed in this paper because these aspects need an in-depth extra

section in another paper. 4 Burke (2003) has described how moral hazard can occur empirically in cases where the artist signs to a label but where the label does not commercialise the artist by under spending on production, video or marketing costs.This lack of commercialisation could stem from the fact that the artist may divert sales of another artist signed at the same label (often called business-stealing effects or cannibalisation); another reason could be that a talented artist poses a risk for one label if he/she signs to a competitive label and then possibly causes multiplier effects for the rival. To avoid that labels sometimes lock-in artists without commercialising them. This practice may be compared to the logic of “sleeping patents” as developed by Gilbert and Nebery (1982).

Ref. (b): The acceptance of risk of failure is often cited as an important trait of entrepreneurs

(Hisrich and Peters 1998). In the case of the music industry the financial risk stems from

insecurity regarding the demand for the product. Major record companies report that less than

15 percent of all record releases will make back their costs and far fewer return profit.

Traditionally record labels overtake a share of this risk by paying the artist an advance. This is

a fixed advance payment which will be charged against future cash flows. Whether the label

pays an advance or not depends on the bargaining power of the artist. The more popular

he/she is or the more potential or danger (if he signs to a competitive label) the label estimates

the higher the advance payment will be. As far as the artist-entrepreneur is concerned one has

to differentiate two scenarios. In the first scenario, the artist-entrepreneur has a concrete offer

which he nonetheless refuses to accept, and he therefore bears the opportunity costs (in the

form of lost advance payments). In the second scenario, the artist-entrepreneur does not have

an offer from a record label. Consequently he also does not have to bear any opportunity

costs. Apart from the opportunity costs the artist-entrepreneur also bears the initial costs of

enterprising. As I will argue in section III that these costs decrease in the wake of the internet

and the digitalisation, the amount of risk an artist-entrepreneur has to overtake also decreases.

Thus one can not say in general that an artist-entrepreneur is a risk taker. The magnitude of

artists which do not have a record deal or the offer of a deal may enterprise because of rather

push factors than pull factors due to the fact they do not have attractive alternatives.

Ref. (c): Davidsson (2004) excludes non-market activities like not-for-profit endeavours from

the term entrepreneurship. In the field of the arts I contend that such a strict delineation exists.

Burke (1995), Menger (2001) or Towse (2002) report that the majority of musicians, as artists

in general, typically work for several employers on temporary, short-term engagements for

little if any money. Furthermore, due to the complex and widely ramified value-creation chain

in the music industry commercially unsuccessful artists on first sight could generate economic

and social sustainable effects in the long-run perspective. This could be described as success

latency. The band “Velvet Underground”, for example, the musician Colin McRae or the

author John Kenedy Toole who received the Purlitzer-Price after his suicide, could be

mentioned as artists who were not too successful at the beginning of their career but caused

significant attention, inspiration and therefore business through their work in the long-run. It

is therefore inappropriate to consider commercially successful artists only.

Another important point is, that profit in terms of money, does not seem to be the cruel

motivational factor in the artistic field. Fame, critical praise, self-satisfaction and self-

realisation constitute important non-pecuniary income for artists. Cowen and Tabarrock

(1999) modelled an artist labour supply function which illustrates the trade-off between

pecuniary incentives and non-pecuniary incentives. The more pleasant an artists’ own art-

work is, the fewer wages he is willing to accept and vice versa. The fact that artists offer their

music for free on so called mp3-portals5 supports these findings. They produce, promote and

distribute music for free. In this context comments, compliments and guestbook-entries are

equivalent to applause in live performances. The border-line between leisure and work in the

field of creative works is often fluid.

Another argument arises if we characterise this strategy as a two phase game. In the first

phase the artist tries to get as many listeners and fans as he can get by giving away his songs

for free. The consumers will talk about it and spread the music and the artist’s name via word-

to-mouth and community networking. Rosen (1998) pointed out that the value of music for

consumers depends not only on the inherent attribute of music (namely the joy of

consumption). Furthermore he noted that music serves as a communication media where

people get in touch with each others. Therefore a consumer tends to buy music to the extent of

the popularity of this piece, because the higher the popularity of the music is, the more likely

it is for the consumer to get in touch with like-minded people. Furthermore, the popularity of

a song could serve as a measure of quality of this product due to the fact that music is an

“experience good” and therefore only appraisable by consumption. Thus after getting the

songs widely known in the first period, he/she may skim the willingness to pay of his/her fans

by selling the music in the second phase.

However, it should be made clear that in order to be able to study artist-entrepreneurship we

have to understand who the basis of upcoming artists is and how they work. It would be

inappropriate to study only successful artist-entrepreneurs.

5 Mp3-portals are internet portals or communities where musicians can upload and present their artistic works. Customers then may download the songs mostly for free and post comments and feedback. Mp3.de for example lists 25.000 artists who provide music for free. They also could sell their music to a self-defined price. Other examples are (www.fm4.at/soundpark; www.crispetunes.com; www.myownmusic.de)

Ref. (d): “Creativity” and “innovation” are two essential terms in the exploration of both the

creative industries and in entrepreneurship literature (also called “creative” vs. “humdrum

inputs” Caves, 2000 or “cultural content” vs. “industrial-scale production” Towse, 2003).

While creativity is described as the generation of new ideas (the Schumpetrian “inventor”)

innovation can be understood as the exploitation of these ideas (the Schumpetrian

“innovator”). In the field of music, the content creation is therefore the composition or

songwriting and innovation is the commercialisation of these songs. Wilson and Strokes

(2005) studied how managing creativity and innovation creates challenges for a cultural

entrepreneur. They found that it is important to differentiate between managing creativity and

innovation. Furthermore, they argue that for a successful cultural entrepreneur both issues

have to be considered effectively and appropriately. The nature of both issues can be very

different and this is exactly what constitutes the challenge for successful cultural

entrepreneurship.

Analysing the definition of the terms creativity and innovation in greater depth, two problems

arise: First, is every new song a creative invention? A formal perspective would confirm this

assertion, at least if it does not infringe upon copyright laws of existing songs. But from an

aesthetical view many musical experts would probably disagree to regard a new Britney

Spears song or a new release by Celine Dion as creative or inventive as Björk’s latest record

“Medulla” or Rosin Murphy’s “Ruby Blue”. Due to the problematic definition of what

creativity is and what not, I persist by the judicial definition made above.6

Second, how does one define the term “commercialised” in this context? While in the bricks-

and-mortar music industry one could say that as soon as a song is released by a label or on a

record it is commercialised. Therefore in the digital world a song would be commercialised as

soon as it is published, e.g uploaded to the internet. However, this definition makes it

problematical for the digital age. As I will describe in the next section in principle, everybody

can upload a song and make it available to millions of people; but this does not mean,

however, that the song is somehow successful.

In this respect our artist-entrepreneur indeed fulfils the requirements of being creative and

innovative in the tradition of entrepreneurship literature. But in the context of the creative

industries it gives no conclusion about the success or economic relevancy. While this may

6 For an in-depth analysis of creativity and innovation in the music industry see Tschmuck (2006).

contradict Schumpeter’s understanding of the entrepreneur (who in his view is successful), I

would argue that given that financial success only reflects a smaller part of the image in the

field of the arts, the scope of the term “entrepreneur” for the creative field should be extended

and modified accordingly. Future research should examine the interactions between the terms

creativity, innovation and success.

II. Entry Barriers in the music industry

As I just defined what constitutes an artist-entrepreneur, now the focus is on the barriers

which may deter an artist-entrepreneur from enterprising.

Economic scholars differentiate between different concepts of barriers to entry. Bain (1954)

developed the first thorough study of barriers to entry. His “limit-price” approach defines the

“condition of entry” by:

“The extent to which, in the long run, established firms can elevate their selling price above the

minimal average costs of production and distribution […] without inducing potential entrants to enter

the industry” (Bain, 1968, p. 252).

As reasons for the ability of incumbents to elevate prices above minimal average costs he

mentioned economies of scale, product differentiation and absolute cost advantages. Kniep

(2005) noted a weakness of Bain’s theory arguing that he uses comparative statistics

measuring the coherence of profits and entries but does not explain the reasons for these

advantages. Another popular approach stems from Stigler (1956) who defines:

“A barrier of entry is a cost of producing (at some or every rate of output) which must be borne by a

firm, which seeks to enter an industry but is not borne by firms already in the industry (Stigler, 1968,

p. 67). And furthermore: “’Free’ entry, in our language, is entry of firms suffering no cost

differentials relative to existing firms” (Stigler, 1968, p. 70).

In contrast to of Bain, he does not consider economies of scales, product differentiation and

capital constraints as barriers to entry. Kniep (2005) mentioned that despite the fact that

Stigler fails to give a concrete answer to the question “what then is a barrier to entry?”, one

can derive the scarcity of inputs and the risk premiere of capital costs by new firms as barriers

to entry. While Bain’s approach is useful to explain industry structures, Stigler’s approach is

more often adopted for competition policy. Following Lewis et al. (2005) both concepts

assume some level of stability over time which is not given in the music industry these days.

Thus we may have to use another strategic management orientated approach such as the one

of Porter (1979, 1999). He identified six main entry barriers that include economies of scale,

capital requirements, cost disadvantages independent from size, access to distribution

channels and government policy (p. 138-139). Adopting the above-mentioned concepts to the

music industry I can identify five main entry barriers: government policy, talent, production

costs, access to distribution channels and promotion & marketing. In the following I will

attempt to evaluate the impact of the digitalization and the internet on these barriers.

(a) Government policy

There are no administrative restrictions (i.e. education or licenses) for artists to enter the

market. More interesting is the aspect of legal restrictions in terms of copyright laws. Indeed,

since file-sharing became popular in the late 1990s, the question of whether to strengthen or

weaken of copyright laws has been hotly debated (see Ku, 2002). Copyright law assures every

author exclusive rights. These rights represent a bargain between the author and the public in

which the author grants the public access to his creation in exchange of rewards (Ku, 2002; p.

267). When an artist signs to a label he/she usually sells some rights to the label respectively

the publisher (most record labels have integrated publishing companies). Therefore it is

possible that different interests concern the strictness of copyrights. For example some bands

support strong copyright protection and its enforcement (i.e. Metallica, Peter Gabriel, Missy

Elliot)7 while others do not and sympathise with file-sharing users (i.e. The Smashing

Pumpkins, Public Enemy, Beasty Boys)8. If the copyright is partly or completely sold to a

record label a conflict of interests could accrue due to the fact that most labels are opposed to

weak copyright protection.9 This conflict was not this evident before the emergence of the

internet, because providing public access to the work was relatively costly and therefore

rather infrequent (Ku, 2002). Digitalization, however, minimized costs of copying music files

to approximately zero (see Ref 3) and therefore everybody may become a potential

“publisher” without investing money.10 As a consequence, copyright law was strengthened to

protect the owner of the rights. It is obvious that keeping the control over the copyrights of

music also became an important supporting factor for artists to enterprise.

7 http://www.pro-music.org/artistsspeak/printed.htm [April, 21. 2006]8 http://news.com.com/2100-1023-248176.html [April, 22. 2006]9 The representation of the recording industry (IFPI) coordinates big anti-piracy initiatives to enforce copyright laws. http://www.ifpi.com [April 23 2006]10 Alexander (2002) showed why p2p- file sharing participants do not just free-ride. They share music, which could be understood as an act of publishing (which of course is illegal under prevailing case law), without getting a direct reward but having opportunity costs in terms of risk of charged (see also Molteni and Ordanini, 2002).

In line with the views of those artists who supported a modification of strict copyright

protection the industry developed an alternative concept that handles copyrights more

flexible. The so called “creative commons”11 is a guideline, which enables copyright holders

to grant some of their rights to the public, while retaining others through a variety of licensing

and contract schemes (it is called: “some rights reserved” instead of the traditional “all rights

reserved”) (see Seadle, 2005). Artists (but also writers or every creator of intellectual content)

may use this concept to allow a quicker diffusion of their music among consumers.

Another indirect impact of the internet-induced modification of the copyright is of a financial

type. The back-catalogue of labels, that is old songs and classics, are an important source of

cash flows for record companies which improve their access to capital due to a decreasing risk

premium. Therefore the stronger and in particular longer copyrights are the better established

record companies have access to capital. This advantage for incumbents can be seen as a

barrier to entry for new entrants.

To sum up, digitalization and the internet affected the strength of copyright laws towards a

stricter handling which could qualify as a heightening of entry barriers. On the other hand the

enforcement of copyrights in the digital world has become more difficult. Therefore

alternative concepts were developed which makes it more flexible especially for unsigned

artists to handle their music. Due to this increased flexibility I conclude that the barriers in

terms of copyrights decreased in the wake of new technologies.

(b) Talent

In the first stage of music production, namely the creation of the master tape, creativity or

talent is the scarcely input factor. Even if the quality or quantity of that factor is hard to

measure it is one of the biggest barriers for newcomer musicians in the bricks-and-mortar

music industry. Labels try to judge the artist’s talent by listening to samples and demos of

their work. If labels see commercial potential, they offer the artist a record deal. If not, which

is very often the case, the artist is rejected.

Apart from the problem of subjective evaluation of music by managers there is the problem of

coordinating the exchange of information. It is conceivable that artists who have the potential

to sign a record deal (and this potential may also be recognised by the label) miss out on a

11 http://www.creativecommons.com

contract because of information asymmetry and transaction costs. The transaction costs, for

example, would be very high if every band would send demos to every label and every label

would listen to every demo. Thus the selection process could easily be inefficient. This barrier

can be described as an information asymmetry between labels and artists and may easily lead

to adverse selection problems.12

It is logical that in the entrepreneurial scenario this barrier of talent does not exist. Today, an

artist could be on the same market as established superstars even if he/she has no talent at all.

If the quality filter served traditionally by labels is bypassed, who then will adopt this filter

function and who will pay for this service? Implications could be far ranging in particular on

consumer behaviour and the market coordinating mechanisms. Further research regarding

these aspects is required.

(c) Production

The costs of production can be divided into the fixed costs concerning all expenses to produce

the first copy, the so called master tape, and variable costs which occur by duplicating the

master tape. The domain of audio-recording is a highly technological process and therefore

linked to technological changes. A significant development regarding fixed costs in music

productions was the shift from specialized recording machines to consumer computers. This

reduced costs because software was able to replace mixing consoles, effect processors and

recording machines. In addition p2p file-sharing communities enabled music-producers to get

a free (even if illegal) copy of so-called cracked software13. As producing music almost

developed into a mass-phenomenon which can be observed by recording software entering the

software-sales-hit lists, audio-recording equipment in general became cheaper. Sperlich

(2004) found that differences in production costs exist with regard to specific genres.

Electronic music is cheaper to produce than rock music or orchestral music. This is due to the

fact that it continues to be difficult to simulate some instruments by software, guitars or

vocals in particular. For these instruments a recording room and more equipment is necessary.

Usually economic models about product differentiation assume that a better product will

12 Adverse selection appears if a record contract applicant is not able to present his music in an appropriate way to the label or the label did not screen the artist properly. Thus the label rejects the artist/applicant even if he/she maybe had enough commercial potential. This phenomenon can be observed frequently in the music business. Prominent example include the Everly Brothers world hit “Bye, bye love” which was rejected over thirty times and "Change My Mind" from The Oak Ridge Boys which was rejected more than seventy times before becoming a hit single. (Burke 2003)13 A “cracked software” is an illegal version of that software which is distributed by hacker-communities mostlyfree of charge. There are rumours that some software companies, in particular smaller ones, tolerate these illegalversions because thereby the software will be wide spread and may generate positive network externalities.

naturally involve the use of more resources than an inferior good (Hay and Morris, 1991).

However, there is little evidence that this is the case regarding production resources in the

music industry. Various examples exist where artists recorded successful records by using

simple low cost equipment.14

Apart from the costs of creating the first copy in the bricks-and-mortar music industry the

physical storage media has to be duplicated. Regarding CDs and Vinyls high economies of

scale for the duplicating-process can be realised. For example pressing 50.000 copies costs

about 70 Euro-Cent a copy. In comparison 500 copies cost between two to three Euros per

copy. The same logic applies to the booklet and packaging. In addition to these pressing costs

there is the risk of the so-called shelf warmers. That means a producer has to estimate the

amount of CDs to be pressed and sold. If the estimated amount of records will not be sold

within a specific time-period the wholesaler/ retailer can send it back to the producer without

paying for it. Thus, the unsold CDs are sunk costs and have to be quashed.

Turning towards the digital scenario the duplication of a master tape equals zero. Software to

encode and compress audio files is freely available on the internet and the duplication of a file

costs nothing. Therefore the costs advantages of economies of scale diminished and the risk to

estimate the amount of pressing for future sales is also irrelevant.

To sum up, in a digital recording environment music producers have large cost cutting effects.

Fixed costs decrease in the wake of cheaper production resources. However, it should be

mentioned that these direct cost cutting effects may have an impact on costs in the long run. If

standard audio recording techniques are cheap and therefore available and used by the

majority of producers, new processes will be invented which facilitate producers to stand out

from the crowd. For example, high definition formats, multi-channel recording techniques or

vintage recording techniques can be mentioned as such strategies. Producing could thus

become more expensive in the long run again. Marginal costs in the digital world almost

diminished due to digitalisation. Nonetheless, it is imaginable as well that new forms and

designs to differentiate one competitor from the others could lead to an indirect increase of

costs over time.

14 For example DJ Shadow a music producer, often cited as a leading creator of trip-hop music, produced his firstbreakthrough record by dint of just one sampler (electronic musical instrument, cost[http://www.solesides.com/winblad/shadowkeyboard1097.html]. Further examples see Alexander, 1994.

(e) Distribution

At 34 per cent of the total CD price the distribution costs are one of the biggest shares of total

costs in the traditional recording industry (Peitz and Waelbroeck, 2005). On the one hand the

costs arise as a result of capital-intense logistic of delivering the physical storage media to

retailers, lease- and personnel costs. Furthermore bricks-and-mortar shops only have a limited

capacity of shelf-space. As a result a competition for the best presentation areas accrues with

consequences on prices and bargaining power. Since most major labels have integrated

distribution divisions it is difficult for independent labels to get access to the distribution

channels due to a lack of bargaining power. In addition a world-wide distribution was even

more cost-intense.

The first change induced by the digital economy was the emergence of mail-order services

(e.g. Amazon) where specific transactions were supported or substituted by the internet (e.g.

ordering- or payment-processes). Thereby small labels or solo-artists could offer their

products via websites bypassing wholesalers and retailers. The next step was the digitalization

of the final product and therefore the substitution of physical delivering. The precondition for

a digital distribution is the diffusion of broadband internet which evolved strongly over the

last years (over 1 billion internet users worldwide according to internetworldstats.com, 2006).

The second precondition is the possibility to digitalise the final product. I have already

mentioned the fact of digitalising music-recordings above. While digital audio-files are

relatively large (approximately 50 MB for 4 minutes CD-quality) the invention of audio

compression formats like the mp3-format (approximately 3.7 MB for 4 minutes Stereo CD-

quality) bolstered the digital distribution of music enormously. Another supporting fact is that

the Frauenhofer- and equivalent compression-codes are freely available and easy to use.

These cost cutting effects may create large potentials for new business opportunities. It is thus

surprising that it was Apple Computers, a business outsider in music recording distribution,

which exploited these potentials in terms of a corporate entrepreneurship. Meanwhile Apple i-

tunes became the market leader with 70% market share for digital music distribution.15 In

addition, dozens of digital distributors and firms that offer services to set up an own digital

online-shop emerged. The interesting point is that these distributors are not subdivisions of

record companies. They can be compared with independent distributors and therefore it is

possible for every music producer to get into these channels. CD-Baby, one of these new

15 http://www.ifpi.com/site-content/library/digital-music-report-2006.pdf

independent distribution firms, for example offers every music producer to register his/her

songs in 58 digital music stores (e.g. Apple i-tunes, Napster, Emusic, MSN Music) for 35

Dollar. That means that every newcomer can be just one mouse-click away from stars like

Madonna or Robby Williams. Regarding costs CD-Baby keeps 9% from the merchant’s sales

price for this service. Therefore these days’ music-entrepreneurs simply convert their music

into a digital format and put it online or engage one of the above mentioned distributing

service companies. In doing so, theoretically over 1 billion internet-users could be potential

customers 24/7 with low installation (fixed) costs, a comfortable service to prelisting the

music (to avoid the information paradox) and almost zero marginal costs of distribution.

In summary, digital distribution provides significant potential for artist-entrepreneurs and

lowered the barriers to entry in distribution. First, cost cutting effects are obvious; second,

world-wide distribution becomes easier. Restraints could be seen in a lack of acceptance of

digital distributions by consumers. Even if in 2005 digital downloads count for just 6 per cent

of global music sales, the growth rate from 2004 to 2005 of 300 per cent indicates that digital

downloads may play the dominant role in the future.16

(d) Promotion and Marketing17

In markets where a big quantity of suppliers court for the narrow attention of potential

customers the promotion and marketing (in the following P&M) channels demonstrate big

market power. Every year approximately 36.000 new releases hustle for the consumers

meagrely buying behaviour of approximately 1.5 sound recordings a year.18 Due to the fact

that music is an experience good potential consumers have to be informed over the

characteristics of the good (Shapiro and Varian, 1999). In the case of the traditional music

industry that information function was covered by radio stations, music television, magazines

and live performances. One could observe how the gate-keepers of broadcasting media

executed their market power and overtook the big record labels in the 1920s (Tschmuck

2006). The importance of the mass media channels also appears as “payola” became popular

in the 1950s. Payola was the practise of record companies paying money for the broadcast of

records on the radio. Payola was prohibited by federal legislation in the US in the 1960s (see

Bhattacharjee et al., 2002). Regarding the importance of these channels 75% of US CD-

16 http://www.ifpi.com [May 23, 2006]17 In the day-to-day business, record labels distinguish between marketing which is purchased advertising and promotion which is positioning the music in the media, for example via product placement. See Hoff and Mahlmann (2004). 18 IFPI (2004): http://www.ifpi.de

customers were influenced in their decision to buy CDs by the traditional radio.19 Due to the

fact that traditional radio stations are financed through advertising the radio programming

rather aims to address the mainstream than experimenting with new artists. Thus radio

stations prefer playing established and reputable artists. For newcomers without a label which

serves as reputation it is almost impossible to get air-time at the big FM radio stations. The

same logic applies to music television.

The biggest changes for these main promotion cannels which came along with the internet

are: an infinite number of audio-visual, world wide covering promotion channels for every

niche taste and second interactivity, which enables direct communication between artists and

fans. Kluth (2006) describes it as a new-media era where instead of a few large capital-rich

media companies produce content for the audience, it will be small firms and individuals

which create media in every kind. He compares it with the media revolution of 1445 where

Gutenberg heralded the information age called Renaissance by inventing the “movable

type”.20

An implication for our purpose is the emergence of internet radio stations which break down

geographic boundaries and lower barriers for audio broadcasting. According to Edison Media

Research, in 2005 approximately 52 million people listened to an internet radio station in the

Unites States on a monthly basis. The weekly audience has increased over 50% in 2005. For

example Shoutcast.com, a free internet radio streaming system, lists more than 11.000 radio

stations. The difference to the traditional radio stations is that set-up costs and running costs

are much lower than for traditional radio stations. As a consequence, internet radio stations

are not this dependent on high audience ratings and can play more unknown alternative music

which would not be played on the traditional radio stations. In reverse the music-entrepreneur

has a better chance to find a station which eventually will play his/her music.

Another big topic which became popular in 2004 is the so-called “podcasting”.21 It is a

method of distributing multi-media files over the internet for playback on mobile devices and

personal computers. Podcasting also represents a shift from mass broadcasting to on–demand

personalized media. Its growth has been dramatic as the number of Podcasts hosted by just

19 according to Edison Media Research20 The Gutenberg press with its wooden and later metal movable type printing brought down the price of printed materials and made such materials available for the masses.21 “Podcasting” is a compound word that combines two words: “iPod” and “broadcasting”. http://firstmonday.org/issues/issue10_9/crofts/ [March, 18th 2006]

one source of Podcasts (feedburner.com) increased from approximately 212 Podcasts in

November 2004 to 13.782 Podcasts in August 2005.22

Third, the internet enables and supports one-to-one marketing and interactivity in form of

artist-websites, community portals, blogs, newsletters and mailing lists. For example,

Myspace.com - a community which was built for connecting bands and fans directly - now

counts more than 80 million users, 65 million unique visitors a month and 184 minutes per

month online.23 Every artist can upload songs and artist-information. Every user and potential

fan can communicate directly with his/her favourite band and other community members for

dating, exchange opinions and recommend bands and music. Even if the portal is relatively

new there are some examples about how powerful these new promotion instruments can be.

Famous examples of these new promotion possibilities and their efficiency are the bands

“Arctic Monkeys” or “Clap Your Hands Say Yeah”. The following quote gets it to the point:

“[…] grassroots communication channels like MySpace and P2P file trading networks

worked better than the major-label hype machine. The Arctic Monkeys became hugely

popular because they wrote good songs, made them available to their fans for free, and

encouraged them to share the MP3s with their friends. Their first single "Whatever People

Say I Am, That's What I'm Not," hit number one on the UK charts, selling 360,000 copies in

the first week and has been the fastest-selling independent debut in UK-History.24

In this context music seems to get back to one of its original roles, namely as a form of

communication. Music is a lifestyle product and is used by many consumers to show their

general lifestyle and/or their political attitude or their current mood. In the bricks-and-mortar

music industry these features cannot be exploited efficiently. Visiting a CD-Store has little

lifestyle or communication aspects. But entering a specific online-community of a particular

artist and chatting and communicating with like-minded people could easily devise this

lifestyle and communication aspect.

To sum up, first digitalisation and the internet open new promotion channels. Due to the

increase in numbers of promotion-channels it is less difficult for an artist-entrepreneur to get

into a channel. Nevertheless, the more channels exist the smaller the specific audience of one

channel will be. On the one hand this lowers the share of listeners who may occasionally be

22 ibidem23 Financial Times, London (UK), May 30, 2006, pg 23.24 http://blog.wired.com/monkeybites/index.blog?entry_id=1438139 [March, 13th 2006]

informed about new music. On the other hand the fit between the content and the target group

improves. Therefore the internet and the digitalization lowered the barriers for artist-

entrepreneurs to get access to promotion channels. It is not clear, however, if this simplified

access also leads to more cost-efficient promotion strategies.

III Conclusion

This paper attempted to shed light on the nature of artist-entrepreneurship by evaluating entry

barriers in the music recording industry and their modifications by the internet and the

digitalization. First, I attempted to close a research gap regarding the specific definition of an

artist-entrepreneur which has not been yet defined precisely. My conclusion is that even if the

term “artist-entrepreneur” fits into the framework of entrepreneurship research, some

important features have to be considered.

First, as prospects for secure employment are naturally rare in artistic fields, entrepreneurship

in this context is more often caused by push-factors rather than pull-factors. Anyhow we

should not call it, in the phraseology of Foreman-Peck (1985): the ‘chaff’ of existing

incumbents rather than the ‘seedcorn’ of future business. This is due to the fact that pecuniary

rewards play only a minor role for artist-entrepreneurship. It is not that business entrepreneurs

are not intrinsically motivated, but the degree of intrinsic-motivation regarding artist-

entrepreneurs is comparatively high. As consequence, judging the success of artist-

entrepreneurship by pecuniary measurements makes little sense, because the artist-

entrepreneur does not enter the market due to potential profits and he/she either does not exit

the market due to a lack of profits. They will offer their products and services in any case. In

this context one also has to reconsider copyright laws as an incentive for art production.

Considering these findings isolated is nothing special or new, because leisure work and

ambitious hobby activities have been present at all time in history. But the big shift for the

relevance of such activities is the combination of artist-entrepreneurship with very low

barriers to enter the market. In section II I identified the main barriers to entry in the music

industry and evaluated the impact of the digitalisation and the internet on these barriers. I

contend that the barriers decreased enormously in the wake of the new technologies.

Production equipment gets cheaper, access to distribution channels is no more a barrier and

new promotion techniques enable artists to reach their potential customers without large

investments. As a result, an artist-entrepreneur can participate in the same market and

therefore competes with established record companies and superstars without the support of a

record label.

The term artist-entrepreneurship thus gets a complete new meaning. The presented case of

artist-entrepreneurship in the music-industry could be seen as representative for similar

phenomena. Comparable patterns could also be found in the open source movement,

participatory media or file-sharing communities. What these developments all have in

common is that the driving forces are “prosumers”, people who are consumers and producers

at the same time who want to (high intrinsic motivation), and now are able to (due to the

lowering entry barriers) offer products and services mostly for free competing with

established media companies. In the “old economy” the entry barriers served as filters which

regulated the market supply and also served as quality signals. Eliminating these filters leads

to a complete new challenge for incumbent firms, consumers and the government. This

democratization of intellectual property creation may also be seen as a counter-movement to

the mass media and the lost of individuality, which was criticised by Adorno and Horkheimer

(1944).

I believe that in the present and future net economy, instead of creating content as the main

objective, the efficient and appropriate distribution of content may play the decisive role.

Reputation, individual search services and rethinking of consumer behaviour may be

important threads which ought to be studied in future research.

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