Title: The Determinants of Profits in the Recorded Music Sector
Author: Juan D. Montoro-Pons, Departament D’Economia Aplicada, Universitat de
València.
Email: Juan.D.Montoro@uv.es
Goals:
While many empirical studies on recorded music have analyzed consumers and
their motivations, fewer have a focus on the supply side of the market. From an
empirical standpoint this is a relevant issue as one could link supply behavior to
some industry traits such as the creativity and innovation in the sector and the
adherence of firms to specific business models to mention two. One reason for that
could be that data are scarce and scattered, and those that are available (available
public information about record labels is usually restricted to the officially filed
and audited accounts) are only weakly linked to the relevant questions about the
recorded music industry. However it can be argued that a combination of
quantitative and qualitative analysis can be useful for a better understanding of the
sector.
The goal of this paper is to identify the determinants of returns in the recorded
music industry and link them to managerial and structural characteristics of the
industry. In so doing a relative measure of profitability is explained in terms of
observed covariates. Nevertheless, the nature of the dataset also allows us to
include non-observed effects at the firm and country level.
This research analyzes the performance of 467 record labels in 8 European
countries for which data were widely available (Austria, Belgium, France, Italy,
Norway, Spain, Sweden and UK) over a period of 10 years (2003-2012).
Research questions
Four main research with respect to profits are put forward.
H1. The extent of country level effects on profits. The performance of the recorded
music sector can be affected by several features that are domestic by their nature.
These could be traits such as the share of domestic repertoire, its variety and
innovativeness, the country legal framework and the enforcement of property
rights, and economic conditions to mention some. While the work does not aim at
singling out the specifies of such country effects, it does aim at measuring its
relative relevance, specifically compared to between and within firms total profits
variability.
H2. Effect on profits of the two-tier (majors/independents) structure of the
recording industry. This specific arrangement is not only about the size of the
firms but also (and most important) about the innovation and assumption of risks
of each actor within it. It has been argued that innovations takes place at the
independents level and once these catch on they are exploited by majors that have
the financial and managerial resources to market them in a profitable way. If this
were the case a greater risk (and hence variability of profits) could be observed for
independents. Moreover a premium in performance for majors could point out to
the profitable exploitation of innovations by these firms taking place in the sector.
H3. Impact of the size of the firms in the market. The two-tier structure has a
correlate on size with most majors being significantly larger than independents.
However to reduce size to a major/independents dummy variable would be
misleading. While most independent firms are small and medium-sized
enterprises there are big differences between them as measured by the value of
total assets in their balance sheets. Hence a precise estimation of the effect of total
assets on performance will help to understand the role of size and whether the
consolidation led by the majors in the past is rooted on sound grounds.
H4. Degree of persistence of abnormal profits (or losses). These have been related
to barriers to entry (to exit) in the sector. As an alternative to the between
industries analysis, time persistence can help to understand the inertia in profits
and hence the degree of competition within a sector.
Methodology:
Given the clustered structure of the data, the assumption of independence between
observations is violated, hence the need to account for the structure in the data
(observations nested into firms nested into countries). To this end a three levels
random effects model is used as the baseline econometric specification that links
returns to the control variables.
Data were obtained from Amadeus, a database compiled by Bureau van Dijk of
comparable financial information for public and private companies across Europe.
For this paper data were gathered (based on its availability) for record labels in
eight European countries (Austria, Belgium, France, Italy, Norway, Spain, Sweden
and the UK) representing 34% of the recorded music business in the European
region, as reported by IFPI.
Preliminary results:
1) There is a strong firm effect, i.e. most of the variance of profits is due to
specific features of the firm or firm-level specific resources. These could
account for specific business models, creativity and innovativeness, a
catalogue of established artists among other.
2) Contrary to intuition (and yet being a preliminary results) country effects
seem not to play a strong role in the performance of record labels.
3) Major record labels show an advantage in performance that should be
further investigated.
4) Size matters but in a nonlinear fashion: the performance of a record label
cannot be indefinitely increased by increasing its size.
Conclusions:
The structure of the recorded music industry (composed of an oligopoly plus a
competitive segment) and the role of innovation on the performance of record
labels has been tested using a econometric framework. Based on these, the main
conclusion is expected to be linked to the success or failure of specific business
models in the industry. A detailed inspection of firm-level effects combined with
a qualitative analysis is to be undertaken as a next step in this research.
Keywords: phonographic industry, return on total assets, multilevel model, firm
performance
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