Artist-Entrepreneurship

An exploratory analysis of entrepreneurship by musicians in the music industry

First Draft
Philipp Peltz
philipp.peltz@wu-wien.ac.at
PhD Student
Vienna University of Economics and
Business Administration
Abstract
For years, the music industry has been forced to respond to various technological and
aesthetical 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 taing place in the conte!t of the current switch
from compact discs to digitally compressed formats such as mp" or acc. This paper e!amines
entrepreneurship of artists in the digital music industry. #t analyses the impact of
technological developments on the entry barriers for artist-entrepreneurs. $s a result the
combination of lowering entry barriers and the specific characteristics of artist-entrepreneurs
may lead to a democratisation of art-production and therefore a counter-movement to the
mass media.
Introduction
The benefits for todays artists of keepin contro! over their musica! output out"eih those of bein
sined to a !abe!#$ Terry %cBride &business insider'
(
This paper e!amines 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 ma'or labels, achieved large
economies of scale in manufacturing, distribution, mareting and finance costs over time
(
Terry )c*ride is one of the three founding owners of +anada,s -argest #ndependent .ecord -abel, Nettwer
Productions.
/*ure 011"2. $part from these economies of scale factors, reputation depicted another
advantage of incumbent record companies to nascent entrepreneurs. $ccording to 3hapiro and
4arian /(5552 it could serve as a 6uality signal to potential buyers which are confronted with
the information parado!. These conditions can be described as barriers to entry for potential
new entrants and therefore led to a high maret concentration /currently 7 ma'or firms
dominate 819 of the maret, #FP# 011:2
0
. $le!ander /(5572 analysed the impact of
technological changes to entry barriers in the music industry. ;e argued that lowering entry
barriers led to two phases of relatively low maret concentration in the second half of the
(501s and (5<1s, compared to the periods before and after. 3maller firms, the so-called
independents, entered the maret as costs of production, promotion and distribution decreased
/e.g. the shift from sensitive and breaable shellac discs to more robust vinyl records2. #n this
paper # will advance an argument similar to $le!ander=s, that is the lowering of entry barriers
in the wae of technological changes. The difference here is that the potential new entrants
are not new record labels but the artists themselves. This maes 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 tae control over all stages of the value-creation chain. >n 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. >n 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.

#n section ( # will give a brief overview of cultural entrepreneurship literature and introduce
the term %artist-entrepreneurship&. #n section 0 # will identify the main barriers to entry in the
music industry and evaluate the impact of digitalization and the internet on these barriers.
3ection " will provide a conclusion and future research suggestions.
"
I Artist-Entrepreneurship
#n cultural economics entrepreneurship is often associated with the term %cultural
entrepreneurship&. ?llmeier /011"2 defines %cultural entrepreneurialism& as something
including all-round artistic and commercial@business 6ualifications, long woring-hours and
0
#FP# /#nternational Federation of Phonogram and 4ideogram Producers2 httpA@@www.ifpi.com
"
Biven that e!tentive literature on the value-creation chain of the music industry is already available /see for
e!ampleA Peitz and Caelbroec, 011<D Tschmuc, 011:2, # will not discuss this topic in greater detail in this
paper.
fierce competition from bigger companies. Poettschacher calls it %creative microbusiness& and
describes the actors as %=business outlaws=, trying creatively E and often desperately E to
mae something out of nothing& /011<, p. (882. ;owins identifies the creative entrepreneur
as somebody who %use/s2 creativity to unloc the wealth that lies within& /0110, p. (052.
$nother more precisely definition comes from ;enry et al. /01172 who mae a distinction
between the intrinsic and e!trinsic 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 e!trinsic part is conte!tual and business-driven. This
description shows the two main characteristics which are combined in the artist-entrepreneur.
3uch a separation is ain to 3chumpeter=s distinction between %inventor& and %entrepreneur&.
$ccording to 3chumpeter the inventor is the one who produces ideas and the entrepreneur is
the one %who gets things done& /3chumpeter, (5702. The latter can be assigned to the field of
creative industries with the words %art must meet commerce&. Fe *ruin /011<2 combines
these findings and describes entrepreneurship in the creative sector asA %The process of adding
value to creative inputs@creativity. GHI This value-adding process might not only entail
combining creative inputs with humdrum inputs, but could also involve an Jentrepreneurial
value chain=.& /p. (772.
This brief overview helped us to get a better understanding of the idea of entrepreneurship in
the field of cultural industries. #n the following # will frame these findings for our specific
purpose E artist-entrepreneurship in the music industry E by addressing the 6uestions belowA
/a2 Chy call it %artist-entrepreneurship& and not %new firm start-up&K
/b2 Chat role plays ris-taing as a necessary re6uirementK
/c2 #s artist-entrepreneurship restricted to the commercial successful sectorK
/d2 Chat roles play creativity and innovationK
Ref. (a): #t is conceivable to analyse the behaviour of artist-entrepreneurs from a transaction
cost theory analogous to Cilliamson=s %Theory of the Firm& /(58<2. Foss and Llein /01172
studied how the entrepreneurship theory and the theory of the firm can be integrated and
argued that these two concepts could be lined pro!imately /see also *arzel, (5M82. 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. $s a conse6uence, interest conflicts in the form of moral
hazard
7
between the inventor /here the music-composer2 and the entrepreneur /here the record
label2 could occur. This view is in-line with 3chumpeter=s argument, cited by +asson /(5M02.
;e argued that the %entrepreneur believes he is right, while everyone else is wrong. Thus the
essence of entrepreneurship is being different E being different because one has a different
perception of the situation.& /p. (72. $ccording to the Principle-$gent theory vertical
integration could obtain theses problems /see for e!ample Picot, 01102. 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 e!ploits resources of others. #n
our case the %firm& e!ploits its own resources and therefore it is more appropriate to describe
it as %artist-entrepreneurship&. Nevertheless, artist-entrepreneurship is not restricted to
individuals. +ommunities, networs and multi-level entrepreneurship are important features.
;owever they will not be discussed in this paper because these aspects need an in-depth e!tra
section in another paper.
Ref. (b): The acceptance of ris of failure is often cited as an important trait of entrepreneurs
/;isrich and Peters (55M2. #n the case of the music industry the financial ris stems from
insecurity regarding the demand for the product. )a'or record companies report that less than
(< percent of all record releases will mae bac their costs and far fewer return profit.
Traditionally record labels overtae a share of this ris by paying the artist an advance. This is
a fi!ed advance payment which will be charged against future cash flows. Chether 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 label2 the label estimates
the higher the advance payment will be. $s far as the artist-entrepreneur is concerned one has
to differentiate two scenarios. #n 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 payments2. #n the second scenario, the artist-entrepreneur does not have
7
*ure /011"2 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 mareting costs.
This lac 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 cannibalisation2D another reason could be that a talented
artist poses a ris 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 loc-in artists without commercialising them. This practice may be
compared to the logic of %sleeping patents& as developed by Bilbert and Nebery /(5M02.
an offer from a record label. +onse6uently he also does not have to bear any opportunity
costs. $part from the opportunity costs the artist-entrepreneur also bears the initial costs of
enterprising. $s # will argue in section ### that these costs decrease in the wae of the internet
and the digitalisation, the amount of ris an artist-entrepreneur has to overtae also decreases.
Thus one can not say in general that an artist-entrepreneur is a ris taer. 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): Favidsson /01172 e!cludes non-maret activities lie not-for-profit endeavours from
the term entrepreneurship. #n the field of the arts # contend that such a strict delineation e!ists.
*ure /(55<2, )enger /011(2 or Towse /01102 report that the ma'ority of musicians, as artists
in general, typically wor for several employers on temporary, short-term engagements for
little if any money. Furthermore, due to the comple! 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 %4elvet Nnderground&, for e!ample, the musician +olin )c.ae or the
author Oohn Lenedy 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 wor in the long-run. #t
is therefore inappropriate to consider commercially successful artists only.
$nother 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. +owen and Tabarroc
/(5552 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-
wor is, the fewer wages he is willing to accept and vice versa. The fact that artists offer their
music for free on so called mp"-portals
<
supports these findings. They produce, promote and
distribute music for free. #n this conte!t comments, compliments and guestboo-entries are
e6uivalent to applause in live performances. The border-line between leisure and wor in the
field of creative wors is often fluid.
<
)p"-portals are internet portals or communities where musicians can upload and present their artistic wors.
+ustomers then may download the songs mostly for free and post comments and feedbac. )p".de for e!ample
lists 0<.111 artists who provide music for free. They also could sell their music to a self-defined price. >ther
e!amples are /www.fm7.at@soundparD www.crispetunes.comD www.myownmusic.de2
$nother argument arises if we characterise this strategy as a two phase game. #n 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 tal about it and spread the music and the artist=s name via word-
to-mouth and community networing. .osen /(55M2 pointed out that the value of music for
consumers depends not only on the inherent attribute of music /namely the 'oy of
consumption2. 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 e!tent of
the popularity of this piece, because the higher the popularity of the music is, the more liely
it is for the consumer to get in touch with lie-minded people. Furthermore, the popularity of
a song could serve as a measure of 6uality of this product due to the fact that music is an
%e!perience good& and therefore only appraisable by consumption. Thus after getting the
songs widely nown in the first period, he@she may sim the willingness to pay of his@her fans
by selling the music in the second phase.
;owever, 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 wor. #t would be
inappropriate to study only successful artist-entrepreneurs.

Ref. (d): +reativity& and %innovation& are two essential terms in the e!ploration of both the
creative industries and in entrepreneurship literature /also called %creative& vs. %humdrum
inputs& +aves, 0111 or %cultural content& vs. %industrial-scale production& Towse, 011"2.
Chile creativity is described as the generation of new ideas /the 3chumpetrian %inventor&2
innovation can be understood as the e!ploitation of these ideas /the 3chumpetrian
%innovator&2. #n the field of music, the content creation is therefore the composition or
songwriting and innovation is the commercialisation of these songs. Cilson and 3troes
/011<2 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 e!actly what constitutes the challenge for successful cultural
entrepreneurship.

$nalysing the definition of the terms creativity and innovation in greater depth, two problems
ariseA First, is every new song a creative inventionK $ formal perspective would confirm this
assertion, at least if it does not infringe upon copyright laws of e!isting songs. *ut from an
aesthetical view many musical e!perts would probably disagree to regard a new *ritney
3pears song or a new release by +eline Fion as creative or inventive as *'Pr=s latest record
%)edulla& or .osin )urphy=s %.uby *lue&. Fue to the problematic definition of what
creativity is and what not, # persist by the 'udicial definition made above.
:


3econd, how does one define the term %commercialised& in this conte!tK Chile in the brics-
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. ;owever, this definition maes it
problematical for the digital age. $s # will describe in the ne!t section in principle, everybody
can upload a song and mae it available to millions of peopleD but this does not mean,
however, that the song is somehow successful.
#n this respect our artist-entrepreneur indeed fulfils the re6uirements of being creative and
innovative in the tradition of entrepreneurship literature. *ut in the conte!t of the creative
industries it gives no conclusion about the success or economic relevancy. Chile this may
contradict 3chumpeter=s understanding of the entrepreneur /who in his view is successful2, #
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 e!tended
and modified accordingly. Future research should e!amine the interactions between the terms
creativity, innovation and success.
II. Entry !arriers in the music industry
$s # 'ust defined what constitutes an artist-entrepreneur, now the focus is on the barriers
which may deter an artist-entrepreneur from enterprising.
?conomic scholars differentiate between different concepts of barriers to entry. *ain /(5<72
developed the first thorough study of barriers to entry. ;is %limit-price& approach defines the
%condition of entry& byA
:
For an in-depth analysis of creativity and innovation in the music industry see Tschmuc /011:2.
The e)tent to "hich* in the !on run* estab!ished firms can e!evate their se!!in price above the
minima! averae costs of production and distribution +,- "ithout inducin potentia! entrants to enter
the industry$ &Bain* (./0* p# 121'#
$s reasons for the ability of incumbents to elevate prices above minimal average costs he
mentioned economies of scale, product differentiation and absolute cost advantages. Lniep
/011<2 noted a weaness of *ain=s theory arguing that he uses comparative statistics
measuring the coherence of profits and entries but does not e!plain the reasons for these
advantages. $nother popular approach stems from 3tigler /(5<:2 who definesA
A barrier of entry is a cost of producin &at some or every rate of output' "hich must be borne by a
firm* "hich seeks to enter an industry but is not borne by firms a!ready in the industry &Sti!er* (./0*
p# /3'# $nd furthermoreA 4ree entry* in our !anuae* is entry of firms sufferin no cost
differentia!s re!ative to e)istin firms$ &Sti!er* (./0* p# 35'#
#n contrast to of *ain, he does not consider economies of scales, product differentiation and
capital constraints as barriers to entry. Lniep /011<2 mentioned that despite the fact that
3tigler fails to give a concrete answer to the 6uestion %what then is a barrier to entryK&, one
can derive the scarcity of inputs and the ris premiere of capital costs by new firms as barriers
to entry. Chile *ain=s approach is useful to e!plain industry structures, 3tigler=s approach is
more often adopted for competition policy. Following -ewis et al. /011<2 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 /(585, (5552. ;e identified si! main entry barriers that include economies of scale,
capital re6uirements, cost disadvantages independent from size, access to distribution
channels and government policy /p. ("M-("52. $dopting the above-mentioned concepts to the
music industry # can identify five main entry barriersA government policy, talent, production
costs, access to distribution channels and promotion Q mareting. #n the following # will
attempt to evaluate the impact of the digitalization and the internet on these barriers.
(a) "o#ernment policy
There are no administrative restrictions /i.e. education or licenses2 for artists to enter the
maret. )ore interesting is the aspect of legal restrictions in terms of copyright laws. #ndeed,
since file-sharing became popular in the late (551s, the 6uestion of whether to strengthen or
weaen of copyright laws has been hotly debated /see Lu, 01102. +opyright law assures every
author e!clusive rights. These rights represent a bargain between the author and the public in
which the author grants the public access to his creation in e!change of rewards /Lu, 0110D p.
0:82. Chen an artist signs to a label he@she usually sells some rights to the label respectively
the publisher /most record labels have integrated publishing companies2. Therefore it is
possible that different interests concern the strictness of copyrights. For e!ample some bands
support strong copyright protection and its enforcement /i.e. )etallica, Peter Babriel, )issy
?lliot2
8
while others do not and sympathise with file-sharing users /i.e. The 3mashing
Pumpins, Public ?nemy, *easty *oys2
M
. #f 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
wea copyright protection.
5
This conflict was not this evident before the emergence of the
internet, because providing public access to the wor was relatively costly and therefore
rather infre6uent /Lu, 01102. Figitalization, however, minimized costs of copying music files
to appro!imately zero /see .ef "2 and therefore everybody may become a potential
%publisher& without investing money.
(1
$s a conse6uence, copyright law was strengthened to
protect the owner of the rights. #t is obvious that eeping the control over the copyrights of
music also became an important supporting factor for artists to enterprise.
#n 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
fle!ible. The so called %creative commons&
((
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 calledA %some rights reserved& instead of the traditional %all rights
reserved&2 /see 3eadle, 011<2. $rtists /but also writers or every creator of intellectual content2
may use this concept to allow a 6uicer diffusion of their music among consumers.
$nother indirect impact of the internet-induced modification of the copyright is of a financial
type. The bac-catalogue of labels, that is old songs and classics, are an important source of
cash flows for record companies which improve their access to capital due to a decreasing ris
premium. Therefore the stronger and in particular longer copyrights are the better established
record companies have access to capital. This advantage for incumbents can be seen as a
barrier to entry for new entrants.
8
httpA@@www.pro-music.org@artistsspea@printed.htm G$pril, 0(. 011:I
M
httpA@@news.com.com@0(11-(10"-07M(8:.html G$pril, 00. 011:I
5
The representation of the recording industry /#FP#2 coordinates big anti-piracy initiatives to enforce copyright
laws. httpA@@www.ifpi.com G$pril 0" 011:I
(1
$le!ander /01102 showed why p0p- file sharing participants do not 'ust free-ride. They share music, which
could be understood as an act of publishing /which of course is illegal under prevailing case law2, without
getting a direct reward but having opportunity costs in terms of ris of charged /see also )olteni and >rdanini,
01102.
((
httpA@@www.creativecommons.com
To sum up, digitalization and the internet affected the strength of copyright laws towards a
stricter handling which could 6ualify as a heightening of entry barriers. >n the other hand the
enforcement of copyrights in the digital world has become more difficult. Therefore
alternative concepts were developed which maes it more fle!ible especially for unsigned
artists to handle their music. Fue to this increased fle!ibility # conclude that the barriers in
terms of copyrights decreased in the wae of new technologies.
(b) $alent
#n the first stage of music production, namely the creation of the master tape, creativity or
talent is the scarcely input factor. ?ven if the 6uality or 6uantity of that factor is hard to
measure it is one of the biggest barriers for newcomer musicians in the brics-and-mortar
music industry. -abels try to 'udge the artist=s talent by listening to samples and demos of
their wor. #f labels see commercial potential, they offer the artist a record deal. #f not, which
is very often the case, the artist is re'ected.

$part from the problem of sub'ective evaluation of music by managers there is the problem of
coordinating the e!change of information. #t is conceivable that artists who have the potential
to sign a record deal /and this potential may also be recognised by the label2 miss out on a
contract because of information asymmetry and transaction costs. The transaction costs, for
e!ample, 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.
(0

#t is logical that in the entrepreneurial scenario this barrier of talent does not e!ist. Today, an
artist could be on the same maret as established superstars even if he@she has no talent at all.
#f the 6uality filter served traditionally by labels is bypassed, who then will adopt this filter
function and who will pay for this serviceK #mplications could be far ranging in particular on
consumer behaviour and the maret coordinating mechanisms. Further research regarding
these aspects is re6uired.
(0
$dverse 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 re'ects the artist@applicant even if he@she
maybe had enough commercial potential. This phenomenon can be observed fre6uently in the music business.
Prominent e!ample include the ?verly *rothers world hit %*ye, bye love& which was re'ected over thirty times
and R+hange )y )indR from The >a .idge *oys which was re'ected more than seventy times before
becoming a hit single. /*ure 011"2
(c) %roduction
The costs of production can be divided into the fi!ed costs concerning all e!penses 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
lined to technological changes. $ significant development regarding fi!ed costs in music
productions was the shift from specialized recording machines to consumer computers. This
reduced costs because software was able to replace mi!ing consoles, effect processors and
recording machines. #n addition p0p file-sharing communities enabled music-producers to get
a free /even if illegal2 copy of so-called craced software
("
. $s producing music almost
developed into a mass-phenomenon which can be observed by recording software entering the
software-sales-hit lists, audio-recording e6uipment in general became cheaper. 3perlich
/01172 found that differences in production costs e!ist with regard to specific genres.
?lectronic music is cheaper to produce than roc 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 e6uipment is necessary.
Nsually economic models about product differentiation assume that a better product will
naturally involve the use of more resources than an inferior good /;ay and )orris, (55(2.
;owever, there is little evidence that this is the case regarding production resources in the
music industry. 4arious e!amples e!ist where artists recorded successful records by using
simple low cost e6uipment.
(7

$part from the costs of creating the first copy in the brics-and-mortar music industry the
physical storage media has to be duplicated. .egarding +Fs and 4inyls high economies of
scale for the duplicating-process can be realised. For e!ample pressing <1.111 copies costs
about 81 ?uro-+ent a copy. #n comparison <11 copies cost between two to three ?uros per
copy. The same logic applies to the boolet and pacaging. #n addition to these pressing costs
there is the ris of the so-called shelf warmers. That means a producer has to estimate the
amount of +Fs to be pressed and sold. #f the estimated amount of records will not be sold
within a specific time-period the wholesaler@ retailer can send it bac to the producer without
paying for it. Thus, the unsold +Fs are sun costs and have to be 6uashed.
("
$ %craced software& is an illegal version of that software which is distributed by hacer-communities mostly
free of charge. There are rumours that some software companies, in particular smaller ones, tolerate these illegal
versions because thereby the software will be wide spread and may generate positive networ e!ternalities.
(7
For e!ample FO 3hadow a music producer, often cited as a leading creator of trip-hop music, produced his first
breathrough record by dint of 'ust one sampler /electronic musical instrument, cost
GhttpA@@www.solesides.com@winblad@shadoweyboard(158.htmlI. Further e!amples see $le!ander, (557.
Turning towards the digital scenario the duplication of a master tape e6uals zero. 3oftware 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 ris 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.
Fi!ed costs decrease in the wae of cheaper production resources. ;owever, it should be
mentioned that these direct cost cutting effects may have an impact on costs in the long run. #f
standard audio recording techni6ues are cheap and therefore available and used by the
ma'ority of producers, new processes will be invented which facilitate producers to stand out
from the crowd. For e!ample, high definition formats, multi-channel recording techni6ues or
vintage recording techni6ues can be mentioned as such strategies. Producing could thus
become more e!pensive in the long run again. )arginal 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.
(e) Distribution
$t "7 per cent of the total +F price the distribution costs are one of the biggest shares of total
costs in the traditional recording industry /Peitz and Caelbroec, 011<2. >n 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 brics-and-mortar shops only have a limited
capacity of shelf-space. $s a result a competition for the best presentation areas accrues with
conse6uences on prices and bargaining power. 3ince most ma'or labels have integrated
distribution divisions it is difficult for independent labels to get access to the distribution
channels due to a lac of bargaining power. #n 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. $mazon2 where specific transactions were supported or substituted by the internet /e.g.
ordering- or payment-processes2. Thereby small labels or solo-artists could offer their
products via websites bypassing wholesalers and retailers. The ne!t 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 ( billion internet users worldwide according to internetworldstats.com, 011:2.
The second precondition is the possibility to digitalise the final product. # have already
mentioned the fact of digitalising music-recordings above. Chile digital audio-files are
relatively large /appro!imately <1 )* for 7 minutes +F-6uality2 the invention of audio
compression formats lie the mp"-format /appro!imately ".8 )* for 7 minutes 3tereo +F-
6uality2 bolstered the digital distribution of music enormously. $nother supporting fact is that
the Frauenhofer- and e6uivalent compression-codes are freely available and easy to use.
These cost cutting effects may create large potentials for new business opportunities. #t is thus
surprising that it was $pple +omputers, a business outsider in music recording distribution,
which e!ploited these potentials in terms of a corporate entrepreneurship. )eanwhile $pple i-
tunes became the maret leader with 819 maret share for digital music distribution.
(<
#n
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. +F-*aby, one of these new
independent distribution firms, for e!ample offers every music producer to register his@her
songs in <M digital music stores /e.g. $pple i-tunes, Napster, ?music, )3N )usic2 for "<
Follar. That means that every newcomer can be 'ust one mouse-clic away from stars lie
)adonna or .obby Cilliams. .egarding costs +F-*aby eeps 59 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. #n doing so, theoretically over ( billion internet-users could be potential
customers 07@8 with low installation /fi!ed2 costs, a comfortable service to prelisting the
music /to avoid the information parado!2 and almost zero marginal costs of distribution.
#n summary, digital distribution provides significant potential for artist-entrepreneurs and
lowered the barriers to entry in distribution. First, cost cutting effects are obviousD second,
world-wide distribution becomes easier. .estraints could be seen in a lac of acceptance of
digital distributions by consumers. ?ven if in 011< digital downloads count for 'ust : per cent
of global music sales, the growth rate from 0117 to 011< of "11 per cent indicates that digital
downloads may play the dominant role in the future.
(:
(<
httpA@@www.ifpi.com@site-content@library@digital-music-report-011:.pdf
(:
httpA@@www.ifpi.com G)ay 0", 011:I
(d) %romotion and &ar'etin(
)*
#n marets where a big 6uantity of suppliers court for the narrow attention of potential
customers the promotion and mareting /in the following PQ)2 channels demonstrate big
maret power. ?very year appro!imately ":.111 new releases hustle for the consumers
meagrely buying behaviour of appro!imately (.< sound recordings a year.
(M
Fue to the fact
that music is an e!perience good potential consumers have to be informed over the
characteristics of the good /3hapiro and 4arian, (5552. #n the case of the traditional music
industry that information function was covered by radio stations, music television, magazines
and live performances. >ne could observe how the gate-eepers of broadcasting media
e!ecuted their maret power and overtoo the big record labels in the (501s /Tschmuc
011:2. The importance of the mass media channels also appears as %payola& became popular
in the (5<1s. 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 N3 in the (5:1s /see
*hattachar'ee et al., 01102. .egarding the importance of these channels 8<9 of N3 +F-
customers were influenced in their decision to buy +Fs by the traditional radio.
(5
Fue to the
fact that traditional radio stations are financed through advertising the radio programming
rather aims to address the mainstream than e!perimenting 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 F) radio stations. The
same logic applies to music television.
The biggest changes for these main promotion cannels which came along with the internet
areA 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. Lluth /011:2 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 ind. ;e compares it with the media revolution of (77< where
Butenberg heralded the information age called .enaissance by inventing the %movable
type&.
01
(8
#n the day-to-day business, record labels distinguish between mareting which is purchased advertising and
promotion which is positioning the music in the media, for e!ample via product placement. 3ee ;off and
)ahlmann /01172.
(M
#FP# /01172A httpA@@www.ifpi.de
(5
according to ?dison )edia .esearch
01
The Butenberg 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.
$n implication for our purpose is the emergence of internet radio stations which brea down
geographic boundaries and lower barriers for audio broadcasting. $ccording to ?dison )edia
.esearch, in 011< appro!imately <0 million people listened to an internet radio station in the
Nnites 3tates on a monthly basis. The weely audience has increased over <19 in 011<. For
e!ample 3houtcast.com, a free internet radio streaming system, lists more than ((.111 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. $s a conse6uence, internet radio stations
are not this dependent on high audience ratings and can play more unnown alternative music
which would not be played on the traditional radio stations. #n reverse the music-entrepreneur
has a better chance to find a station which eventually will play his@her music.
$nother big topic which became popular in 0117 is the so-called %podcasting&.
0(
#t is a
method of distributing multi-media files over the internet for playbac on mobile devices and
personal computers. Podcasting also represents a shift from mass broadcasting to onEdemand
personalized media. #ts growth has been dramatic as the number of Podcasts hosted by 'ust
one source of Podcasts /feedburner.com2 increased from appro!imately 0(0 Podcasts in
November 0117 to (".8M0 Podcasts in $ugust 011<.
00

Third, the internet enables and supports one-to-one mareting and interactivity in form of
artist-websites, community portals, blogs, newsletters and mailing lists. For e!ample,
)yspace.com - a community which was built for connecting bands and fans directly - now
counts more than M1 million users, :< million uni6ue visitors a month and (M7 minutes per
month online.
0"
?very artist can upload songs and artist-information. ?very user and potential
fan can communicate directly with his@her favourite band and other community members for
dating, e!change opinions and recommend bands and music. ?ven if the portal is relatively
new there are some e!amples about how powerful these new promotion instruments can be.
Famous e!amples of these new promotion possibilities and their efficiency are the bands
%$rctic )oneys& or %+lap Sour ;ands 3ay Seah&. The following 6uote gets it to the pointA
+,- rassroots communication channe!s !ike %ySpace and P1P fi!e tradin net"orks
"orked better than the ma6or7!abe! hype machine# The Arctic %onkeys became hue!y
popu!ar because they "rote ood sons* made them avai!ab!e to their fans for free* and
0(
%Podcasting& is a compound word that combines two wordsA %iPod& and %broadcasting&.
httpA@@firstmonday.org@issues@issue(1T5@crofts@ G)arch, (M
th
011:I
00
ibidem
0"
Financial Times, -ondon /NL2, )ay "1, 011:, pg 0".
encouraed them to share the %P8s "ith their friends# Their first sin!e 9:hatever Peop!e
Say ; Am* That<s :hat ;<m =ot*9 hit number one on the U> charts* se!!in 8/5*555 copies in
the first "eek and has been the fastest7se!!in independent debut in U>7?istory#
07
#n this conte!t music seems to get bac to one of its original roles, namely as a form of
communication. )usic is a lifestyle product and is used by many consumers to show their
general lifestyle and@or their political attitude or their current mood. #n the brics-and-mortar
music industry these features cannot be e!ploited efficiently. 4isiting a +F-3tore has little
lifestyle or communication aspects. *ut entering a specific online-community of a particular
artist and chatting and communicating with lie-minded people could easily devise this
lifestyle and communication aspect.
To sum up, first digitalisation and the internet open new promotion channels. Fue 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 e!ist the smaller the specific audience of one
channel will be. >n the one hand this lowers the share of listeners who may occasionally be
informed about new music. >n 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. #t is not clear, however, if this simplified
access also leads to more cost-efficient promotion strategies.
III +onclusion
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, # attempted to close a research gap regarding the specific definition of an
artist-entrepreneur which has not been yet defined precisely. )y conclusion is that even if the
term %artist-entrepreneur& fits into the framewor of entrepreneurship research, some
important features have to be considered.
07
httpA@@blog.wired.com@moneybites@inde!.blogKentryTidU(7"M("5 G)arch, ("
th
011:I
First, as prospects for secure employment are naturally rare in artistic fields, entrepreneurship
in this conte!t is more often caused by push-factors rather than pull-factors. $nyhow we
should not call it, in the phraseology of Foreman-Pec /(5M<2A the Jchaff= of e!isting
incumbents rather than the Jseedcorn= of future business. This is due to the fact that pecuniary
rewards play only a minor role for artist-entrepreneurship. #t is not that business entrepreneurs
are not intrinsically motivated, but the degree of intrinsic-motivation regarding artist-
entrepreneurs is comparatively high. $s conse6uence, 'udging the success of artist-
entrepreneurship by pecuniary measurements maes little sense, because the artist-
entrepreneur does not enter the maret due to potential profits and he@she either does not e!it
the maret due to a lac of profits. They will offer their products and services in any case. #n
this conte!t one also has to reconsider copyright laws as an incentive for art production.
+onsidering these findings isolated is nothing special or new, because leisure wor and
ambitious hobby activities have been present at all time in history. *ut the big shift for the
relevance of such activities is the combination of artist-entrepreneurship with very low
barriers to enter the maret. #n section ## # identified the main barriers to entry in the music
industry and evaluated the impact of the digitalisation and the internet on these barriers. #
contend that the barriers decreased enormously in the wae of the new technologies.
Production e6uipment gets cheaper, access to distribution channels is no more a barrier and
new promotion techni6ues enable artists to reach their potential customers without large
investments. $s a result, an artist-entrepreneur can participate in the same maret 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. +omparable patterns could also be found in the open source movement,
participatory media or file-sharing communities. Chat 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 motivation2, and now are able to /due to the
lowering entry barriers2 offer products and services mostly for free competing with
established media companies. #n the %old economy& the entry barriers served as filters which
regulated the maret supply and also served as 6uality signals. ?liminating 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 $dorno and ;orheimer
/(5772.
# believe that in the present and future net economy, instead of creating content as the main
ob'ective, the efficient and appropriate distribution of content may play the decisive role.
.eputation, individual search services and rethining of consumer behaviour may be
important threads which ought to be studied in future research.
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