Saturday, July 20, 2013

Rockonomics: Long tail economy or disappearing middle class?

Success is hard to judge ahead of time, and definitely not guaranteed.

These are the words of Princeton economist Alan B. Krueger who is also Chairman of President Obama's Council of Economic Advisers and who recently delivered this speech, using the troubles of the music industry in a time of digital disintermediation as an analogy for the disappearing middle class in the U.S.

The music business has traditionally been what is called a hit-driven business, an industry in which a few players make a lot, as in really a lot, and most of the rest make a little, and are then removed, either by the gatekeepers, or by themselves, from the system. The entertainment industry is one of the most notorious of the hit-driven businesses, with success rates for movie studios, music labels, and book publishers being in the low single digits. In other words, failure rates of 90% and higher are the norm. But, when something hits, it hits not just big, but big enough to make up for the losses of the rest of the roster.

These industries are also sometimes referred to as a 'winner takes all' markets, though if you want to get picky about semantics they're really 'winner takes most' markets. The illustration below provides a basic visual of how the economics of most sectors of the entertainment industry function.

In the conventional industry structure odds were high, but the gargantuan payouts that happened maybe 5% or so of the time made the economics work. The blue portion on the left in the drawing above represents the small percentage of artists who sold enough of their work to maintain a relationship with their publisher -- this could be a record/music label, a publisher of physical books, or a movie studio. Approximately half of the blue section represents artists that are profitable. The other half of the blue curve represents artists that are breaking even, and the section in yellow represents the 80 or so percent that fail to find a big enough audience with which to justify their participation in a mass market structure such as the music, film, and book industries of the latter part of the 20th century.

If, as an artist working within the industrial structure of major labels or publishers, you found yourself in the section of the curve that was blue, but just in, you were almost in the yellow, this generally meant that a significant sales bump notwithstanding, you were probably about to get dropped. The cost of carrying something that wasn't moving significant amounts was simply not feasible in the model in which the mass market, the mass audience, and mass marketing were the holy trinity of operating.

Then, at the dawn of the 21st century along came Chris Anderson and his theory of the long tail, made famous in an article he wrote for Wired Magazine in 2004 and later by a book of the same name. "Forget squeezing millions from a few megahits at the top of the charts", said Anderson. "The future of entertainment is in the millions of niche markets at the shallow end of the bitstream." Anderson's point was that in the digital marketplace the yellow part of the curve in our handy diagram above was not a no man's land, but in fact, a deep treasure trove which could efficiently serve a diverse and diversified public. Concepts such as shelf space and incremental marketing costs were rendered almost irrelevant in the digital world, paving the way for that long, yellow tail we see in the illustration. Lots of choice, lots of genres, and creations that don't necessarily need to satisfy the tastes of the masses in order to be economically viable.

What a switch this way of thinking was. Just a few years earlier if you were relegated to the yellow portion of the diagram's curve you had few options for remaining in the game. As cultural and media theorist John Hartley put it, "...the long tail felt like powerlessness." And the reason it felt that way was because of the lack of connectedness between people in the yellow part of the diagram. The people in the blue curve were the mass audience, generally well-served by the mechanisms of mainstream industry, but the people in the yellow part of the curve, with their niche or non-mainstream tastes, were very limited in their ability to tell others about their discoveries, to find others that shared their interests, or to communicate directly with the cultural producers. And so, that which was unpopular remained unpopular, and that which was popular tended to get more popular.

Now, to return to the man responsible for the opening quote of this blog post, economist Alan Krueger. He takes a distinctly non-Andersonian view of both the music industry and the U.S. economy. A few weeks ago Krueger delivered a speech at the Rock & Roll Hall of Fame that used the fate of the music industry over the past dozen years to explain the erosion of America's middle class. And yes, it is true that in the case of the music industry we have seen the evaporation of half of its value as a result of the onset of the digital era of music. This is due to the fact that it became possible to freely exchange audio files online, the basic unit of consumption changed from the album to the single, and streaming on-demand music services such as Pandora, Spotify, and Grooveshark put every piece of music we could ever want at our fingertips, either for free, or for a nominal monthly fee.

But it is also true that we now have the category of working- musician-you-probably-haven't-heard-of, new revenue streams for artists big and small, and access to marketing techniques that require neither big dollars nor big teams.

For his recent talk, entitled “Rock and Roll, Economics, and Rebuilding the Middle Class", Krueger updated the music industry revenue data underlying his pioneering work in rockonomics. These papers, first published in 2004 and 2005, showed, systematically, how the rich get richer in the music industry, which he suggests is also happening in the U.S. economy in general. So much for the American dream, whether in life in general or rock and roll aspirations. Krueger uses concert revenues as his data set, and demonstrates how the top 1% pocketed over 50% of concert revenues in 2003, versus the top 1% claiming approximately half that amount 20 years earlier.

Krueger's rationale for using the concert business to illustrate ongoing problems with the U.S. economy:

The music industry is a microcosm of what is happening in the U.S. economy at large. We are increasingly becoming a “winner-take-all economy,” a phenomenon that the music industry has long experienced. Over recent decades, technological change, globalization and an erosion of the institutions and practices that support shared prosperity in the U.S. have put the middle class under increasing stress. The lucky and the talented – and it is often hard to tell the difference – have been doing better and better, while the vast majority has struggled to keep up.

I shared the link to Krueger's paper with my colleague Aaron, a fellow digital media researcher. He came back to me with some very thoughtful observations. I'm including Aaron's comments here, with his permission. He wrote:

"Curious as to why the music industry was chosen as a microcosm of the U.S. economy and not others? Do the same principles apply in other industries? The luck / talent combo is really key. If you believe that financial success is mostly the latter, why shouldn't we be a winner take all economy? After all, it's only fair to reward those with talent who work hard. But I think research shows that the luck factor is stronger than most people think. You're lucky where you're born, who raises you, what opportunities you have, etc. Even CEOs don't really matter that much in terms of firm performance.So, as you know, many, many amazing musicians don't know how to take advantage of digital technologies / reach an audience. It's not as simple as putting your music online - you need skill as an artist, skill as a brand manager, and also a lot of luck that you find the right people and vice-versa... right, right?

So how do we think about the likes of YouTube and Facebook as gatekeepers? Do their algorithms (YouTube recommended videos / EdgeRank, for example) help musicians get lucky by giving them exposure; or do they just help already popular musicians get more popular?

I think in the music industry, just as in the U.S. economy, there is the perception that those who 'make it' do so strictly out of talent / desire / hard work - when really there are all sorts of underlying forces (driven by influences from algorithms, peer communities, broadcast media, etc) that when serendipitously aligned correctly, improve your chances of success."
What do you think? I would love to hear any comments or theories you have on the topic; are long tails translating to viable niche markets for you? Or have the lowered barriers to entry done little more than created a logjam at the supply end of things? As politicians like to say, are you better or worse off than you were four years ago, or in this case 10-ish years ago. I have reason to believe that at least some of you reading this blog either currently are, or have been, in the creative industries, so your firsthand experiences would be a valuable addition to the discussion.