Music and Economics by George Ziemann -- July 15, 2008 Peter Gabriel recently discussed the trend of people embracing music with depressing lyrics, providing the perfect opportunity to examine a paper from 1995 that accurately predicted the current state of the music industry, including the lack of creativity. This is a research report by Wade Erickson (who is currently involved with MuSyNetwork), for a college class in "Organization-Environment Interaction." This sounds like "crowd control" to me. It is not. I didn't get past the title page and I'm already feeling stupid. Fortunately, Page 2 has an "Abstract," which clears everything up. ABSTRACT The primary elements of evolution theory such as: dissipative-structures; field theory; structural stability; non-linear and logistic growth; and catastrophe theory are discussed briefly. First, the application of these elements as the pertain to the recording industry structure in America are discussed. Second, an analysis of the recording industry and comparison to the Kondratiev economic theory is presented. An investigation of possible changes in the structure that could occur concerning the Kondratiev interface IV/V are then presented. As we can see, your average musician (my target audience) will probably be reaching for the bong already because he doesn't have a fucking clue what any of that means, his head already hurts and there are 38 more pages to go. Relax, it's not all that hard to read.	Related Content Wade Erickson's Research Paper (pdf)
The Problem "The majors and lobbying institutions for the majors have always looked at new technological advances with apprehension... This reluctance to new ideas by the music industry structure, is the primary problem and could drastically hurt the industry if we do see a decline in record sales. Although this reluctance to new ideas is extremely common in all large socio-technical structures, the industry must align itself with more flexible management and operational methods. If they don't, smaller flexible operations will take over and change the structure of power much to the loss of the Big Six." Well, the Big Six are down to four, "reluctance to new ideas" has turned into a psychotic phobia, sales are down and dropping like a rock. Erickson nailed it in 1995. He also offers some interesting observations about the state of the music industry in 1995. The consolidation of the Big Six (Sony, Warner, BMG, MCA, Capitol-EMI, Polygram) had led to increased difficulty breaking into the business. Filters were in place to protect the decision makers from being overwhelmed. Labels were slow to accept new genres. The villian of the day was Mtv, which had just recently "killed the concert market because fans just had to flip on the TV to see the face of their favorite artist, versus playing $25 per ticket to see them." 1995 Industry Structure The structure of the 1995 music industry is defined by seven segments -- record companies; artists; record stores; promotional support; radio stations/video stations; production support and artist support. Record Companies -- "The hub of the industry, primarily because they can conduct much of the other entities functions, except Radio stations/Video stations due to legal limitations." In 2008, Disney currently owns Hollywood Records, The Disney Channel and Disney Radio. The legal limitations seem to have disappeared. "All the functions required to develop, record, promote and sell a record requires a lot of time and capital, thus only the major record labels can support staffs required to do these functions internally. When sales are good, the major record companies tend to constrict and do most of the production and promotions internally. When sales are low, the majors tend lay off staff and look for outside independent companies that seem to have the market niche in the function and hire them." Artists -- "Hired/contracted persons by the record company that perform the music which is captured on a recording, mass produced and sold to the public." "Depending on their talent, they can write the material, develop and arrange and even record the material. In some cases the artist even develops and produce the music video that will help in the promotion on their recorded product. The artists image, the character that is portrayed to the buying audience, is almost as important as the artist musical talent." Record stores -- Yeah, they were still around in 1995. "Outlet stores (the big record store chains) constitute about 70% of the sales; other stores such as Kmart and Target constitute about 20% of sales; and mail order about 10%." Promotional Support -- "Service companies that are hired by a record company to market and pressure radio stations and video stations to play their material." This was also called payola, and has purportedly been eliminated temporarily. Radio Stations/Video Stations -- "The primary source of exposure for the artist and their recorded material. The radio stations play the artist's material, which is basically advertisement for the artist." Then came Clear Channel. Currently, the RIAA is arguing that radio has no promotional value and radio should be paying them royalties for the privilege of playing their music. Production support -- "Service companies that develop and record the master copy of the artists recorded material for mass copying. This effort entails: occasionally writing the material; securing the recording studio and studio musicians if needed; actually recording the artists performance; final mixing of the material and mastering the recorded material." Artist support -- "Individuals and companies that manage the artists affairs for a portion of the artists income. Managers, agents, accountants and entertainment lawyers fall under this category. They are involved from the beginning in marketing the artist to various record companies, negotiating the contract with the record company, and then managing the career of the artist so the artist can concentrate on their talent." Digital Recording "In the 1980's it was common for an established group to spend $700,000 to $1M to record an album. Now the same recording for $150,000, in half the time and better quality." Home studios "costing as little as $30,000 can now record digitally." For a mere $20,000, you can have MIDI capabilities. "This was largely a savings for the artists because the development costs for all albums come out of the artist's earnings, making the artist financially responsible for production costs. This allowed more artists to be able to compete, quality-wise in the industry." DESCRIPTION OF THE (1995) ENVIRONMENT "America is consumed with music, in almost every aspect of life. Music is played on the phone when people put you on hold. Stores, elevators, and businesses in general almost always have music playing in the background. Almost all commercials involve music to get the message across. An attitude toward purchasing music has never been better in the history of the music business. People have even turned their computers into music machines with sound boards and CD players. Thus, it won't be long before people will be able to try out music on the internet. "Music industry wide there seems to be a saturation of ideas, from a creative standpoint. Small pockets of creativity are apparent, but widespread creativity is not being seen. No Mick Jaggars or Paul McCartneys are banging down the doors. A good high school band is hard to find. In the 1970s, everyone that could play any kind of instrument was getting a band together for a variety show or talent contest. It's hard to even find live bands playing music in most cities across the country, which means that there is not much young talent developing themselves. "The electronic industry growth has drastically reshaped the way music is generated and performed in the 1990s. Although the music industry is a very small portion of the computer industry purchasing population, computer companies like Macintosh have supported an incredible amount of investment and product development for the music industry."

Here Comes the Science The central theme of the paper involves Kondratiev Cycles, which are like simplified economic graphs, which can also be used to illustrate Led Zeppelin's "Good Times, Bad Times." Each full cycles consists of four parts. Recovery -- the lower half of the upward trend. Prosperity -- The upper half of the upward trend Recession -- The upper half of the downward trend Depression -- The lower half of the downward trend.

The next important part is a table of "Macropsychological Features of Economics Cycles" that relates the effects of the various portions of the cycles to things you can relate to.   Prosperity Recession Depression Recovery Perception of Immediate Threat lowest rising falling from maximum falling Perception of opportunity narrowing very constrained and selective broadening broad Creativity Oscillating with local high, then falling lowest rising to maximum sustained high Problem-solving falling lowest rising to maximum sustained high Learning falling lowest rising high Anxiety lowest mounting to a maximum decreasing from a maximum low Risk taking falling lowest highest high Motivation, morale and job satisfaction falling highest falling lowest Alienation rising highest falling lowest Values cosmopolitan highest conservative economic (parochial) politicomilitary conflict and cooperation (progressive) Not having the benefit of any college courses in economics, this still seems to make a lot of sense to me. Erickson's stated assessment of the likely outcome was decidedly on the mark for all the right reasons. It's been a few months since he sent me a copy of the report. I found it fascinating, discussed it a bit with Erickson via e-mail, and wanted to write about it. But the more I looked at it, the more it bugged me. What got in the way was that, like all good economics students, Erickson had converted all the RIAA data to adjust for inflation, Additionally, he uses a math approach that averages the year to year growth into percentage change. This completely lost me because my brain rejects the whole "adjust for inflation" concept. By this theory, a reasonable price for a CD today should be about $33 and a single speed CD burner ought to cost about a quarter-million dollars. It was about the fifth or sixth time that I looked at it before the obvious smacked me in the head. While it is not difficult to see why he thought that the 90s were indicating decline in musical creativity, 1995 sales were at record levels. The year 2000 was the pinnacle of the music business. It was also the point where we suddenly changed to values that can be called "highest conservative," another indicator that the peak should be there. The country had a balanced budget. On the chart of Kondratiev Cycles, it's shown as rock bottom. Erickson arrived at the correct conclusion, despite the fact that his chart shows the exact opposite. I think he simply overlooked the significance of 1987. On October 19, 1987, the Dow lost 22.6 percent of its value. $500 billion evaporated in the largest one day stock market crash in history, known as Black Monday. Add this as a depression marker and suddenly everything makes sense again, except for that annoying "inflation-adjusted" thing. The underlying principle Erickson relied on is rock-solid. The revised chart actually reinforces all of the commentary he provides. From a musical perspective, this would put the rock bottom point just after the post-disco "urban cowboy" phase, with rap, hip-hop, pop and metal being the new genres which sent the industry to new heights. We've even got a politico-military event on the recovery phase (first Gulf War), which is the only time it benefits the economy. World War II worked much the same way. Notice that each peak is preceded by a war which interrupted prosperity -- the War of 1812, Civil War, World War I, Vietnam. It is probably more accurate to place the peak at 2001.