Defining Artist-Entrepreneurship – Chapter 2 of my thesis ‘Artist-Entrepreneurship In The Music Industry’

The chapter introduces the term artist-entrepreneurship and develops the framework of the thesis. First, it identifies the recording industry and its underlying business model in order to contextualise artist-entrepreneurship. This part is kept short as the rationale of the recording industry has been well researched (Burke, 2003; Caves, 2000; Frith, 2004; Hull, 2004; Negus, 1997; Tschmuck, 2012; Wikström, 2010; Williamson & Cloonan, 2007). The author then introduces and defines artist-entrepreneurship in the digital recording industry in a Western cultural context with the help of entrepreneurship scholars. 

Pardon me but I am too lazy to convert each in-text reference into a clickable link. Please see my complete bibliography for all references. It’s a separate blog post called Bibliography.

THE RECORDING INDUSTRY

The recording industry is one branch of what Williamson and Cloonan (2007) term the “music industries”. The authors criticise the singular usage “music industry” because it implies homogeneity. Instead, the sector is in reality a set of “disparate industries with some common interests” (Williamson & Cloonan, 2007, p. 3). The core function of the recording industry is the production, distribution and promotion of sound recordings (Hull, 2004; Wikström, 2010).

The business model of the recording sector is built on the concept of copyrights. Copyright law gives creators of original works temporal, exclusive and tradable rights over their works (Simpson & Munro, 2012). Due to the fact that musical works can be exploited in various ways, copyright laws specify a bundle of rights, each serving a specific purpose, and each often controlled by a different entity. The bundle includes the exclusive right to reproduce the work (e.g. in sheet music, on records, synchronising it in films, television programs, advertisements and other media); to publish the work (e.g. supplying copies of it to the public); to communicate the work to the public (e.g. live concerts, radio broadcast, or Internet broadcast); make an adaption of the work (e.g. arrangements, parodies, remixes)(Simpson & Munro, 2012, p. 143).

An important distinction in the complex exploitation of musical works is the differentiation between the right in the composition and the right in the recorded performance of a composition. Composers obtain the copyright in their composition as soon as it is put in any “material form” (Simpson & Munro, 2012, p. 145).  After composers created a new work and put it in any material form (e.g. on paper in form of sheet music or record it on a sound carrier) they can dispose of their bundle of rights. For example, in a typical scenario, composers assign their rights in the composition to publishers that promote those compositions to third parties such as record companies that are in need of new songs. The record company pays a royalty (mechanical royalty) from every copy of the sound recording to the publisher (who passes through a share of the royalty to the composer depending on the contractual agreements negotiated between the composer and the publisher). In addition to mechanical royalties, composers also receive performance royalties paid by commercial music users that play songs in public (either off a sound recording such as in radio broadcasting or playing background music in retail shops or in form of live concerts, for example). Due to the fact that the collection of both types of royalties entails high transaction costs in form of tracking down and administering the various uses of musical works, specialised collecting societies emerged which optimized this process and carry out the collection on behalf of the rights holder (provided that the rights holder registers with a collecting society).  

In addition to the right in the composition, copyright law recognizes the right in the recording of a performance of a composition (also referred to as the master right). The master right enables its owner to exploit the sound recordings in the various forms (for example, selling records, mp3s or broadcasting the performances to the public). Commercial users of the sound recording have to pay license fees to the master right owner (in addition to the mechanical royalties paid to composers/publishers). Similar to the collection of composer royalties, the collection of license fees on behalf of the master right owner is carried out by a specialized collecting society.  Figure two illustrates the payment flows between the rights’ holders, music users and collecting societies. 

Figure 1: Payment flows between rights’ holders, music users and collecting societies based on Cumberland (2012).

Most recording contracts specify that the entity that is financing the production of the master recording owns the copyright in the master recording (Simpson & Munro, 2012). Traditionally, record labels financed the music production and consequently obtained the copyright in the master.  In this regard, Simpson and Seeger (1994) state: “Record labels are very reluctant to relinquish copyright ownership because the masters are the only tangible asset which survives the end of a recording contract” (p. 277). While it is possible for artists to negotiate ownership of the master right, practically it is reserved to very successful artists with a strong track record and, thus, bargaining position. If artists manage to retain ownership of the master right, in the physical recording industry, they were still dependent on record labels for the manufacturing, distribution and promotion of their records. For that purpose, artists or small independent labels that control the master right entered into so-called “pressing and distribution deals” (P&D Deals) or “master license deals” with major labels in which they outsourced the manufacturing and distribution (Simpson & Munro, 2012).  

Due to the different types of rights, the various forms of music usage involved and the complex value-creation-chain in which multiple inputs and outputs have to be administered and managed, the recording industry exhibits a wide variety of contractual scenarios. For the purpose of defining artist-entrepreneurship, one can simplify the underlying core principle in the following way: The main assets in the recording industry are the copyright in the master and the copyright in the composition. From this it follows that the players in the market aim to obtain ownership and control over those two assets. The entity with the strongest bargaining position will be able to obtain control. This has typically been the record label. In particular, major labels and their integrated publishing divisions attained a strong market position due to their control of the production, promotion and distribution networks. Artists, on the other hand, particularly new or lesser known artists, had relatively weak bargaining positions in the market due to their limited alternatives to disseminate their works and, as Chapter Three will demonstrate, their strong desire to make and communicate music. As a consequence, record labels were able to obtained control over copyrights at favorable terms and conditions, which have been frequently criticized by commentators and artists. For instance, country legend Merle Haggard who said in an interview: 

Fans don’t realize it, but when they purchase a CD, the artist gets almost none of the money. The company makes us pay for the session and the promotion and the advertising, and they keep the record when we’re done. They own it forever. That’s what they call a ‘fair’ industry-standard contract […] Not only do they cheat you on the way in, they rob you on the way out”. (Philips, 2001a) 

Such rather populist statements shaped the poor public image of an exploitative recording industry. The author will revisit this issue, and the related art-versus-commerce debate, in Chapter Five and Nine. In the history of the recording industry, the power balance between the major actors within the network has changed several times in cyclical patterns (Tschmuck, 2012). The dominant market position of large firms was challenged when the paradigmatic framework was disrupted by technological, legal and social changes. As a consequence, periods of dominating market power of a few large firms and high industry concentration alternated with periods of decreasing market power and low industry concentration in which smaller firms and new market entries gained power. For example, during the rock’n roll revolution in the 1950s, the dominant major labels lost large shares of their market power to upcoming smaller independent labels that were able to cope with the changing business environment better than their established counterparts (Peterson, 1990; Tschmuck, 2012). As a response to decreasing market shares of the majors, they developed strategies that made them less vulnerable to external changes. They formed complex networks of semiautonomous business units and joint ventures with indie labels. In this context, Negus (1992) argues that in contrast to “a binary opposition between indies and majors”, one should see the structure as a “web of major and minor companies” within which majors are “split into semiautonomous working groups and label divisions, and minor companies connect these by complex patterns of ownership, investment, licensing, formal and informal and sometimes deliberately obscured relationships” (p. 18). This network configuration has been considered relatively stable, as it has not been affected substantially by subsequent technological innovations such as the cassette or compact disc (Burnett, 2002; Lopes, 1992). Also, the network was able to pick up new musical trends such as punk, rap or electronic dance music (EDM) rapidly, and successfully marketed a diverse range of music. These developments made some authors argue that the above-mentioned cyclical model was broken (Burnett, 2002; Hellman, 1983; Lopes, 1992). 

However, with the emergence of the digital revolution as a radical outside innovation, the cyclical pattern seems to re-emerge. At the beginning of the digital revolution, major record labels ignored and then opposed the new digital paradigm. As a result, they lost significant control over key factors of their business model (Tschmuck, 2012). First, they lost control over global distribution networks to new players from outside the industry such as Apple, Amazon or Soundcloud (see Chapter 4.2). Second, they lost market power due to decreasing costs of music production making artists less dependent on large upfront investments (see Chapter 4.1). Third, new promotion platforms that enable direct-to-fan and niche marketing techniques question the efficiency of traditional large-scale marketing campaigns (see Chapter 4.3). Fourth, large-scale piracy threatens the marketability of their main asset in terms of copyrights (see Chapter 3.2). After the initial recalcitrant attitude towards the new developments, the majors began to develop strategies to regain market power. For example, some major labels entered into collaborations with digital distributors such as Spotify (see Chapter 4.2). Another example is the concept of 360-degree record deals as a response to declining revenues from recorded music (Karubian, 2008; Day 2011). Thereby, labels tap into as many other revenue streams as possible, such as live performances, merchandising or sponsoring deals. These arrangements have become more and more common in the mainstream and partly independent record label scene (Leeds, 2007). Former CEO of Warner Music Group Edgar Bronfman Jr. stated in an interview: “We’re not going to continue to sign artists for recorded music revenue only” (Fox News, 2007). In this context, Fox News (2007) reported, “Warner Music Group conceded on Thursday that it is no longer a viable record company. Forget about ‘em. They are now Warner Miscellaneous Group”. 

Considering these historical developments, artist-entrepreneurship is not a surprising event. The emergence of artist-entrepreneurship follows the cyclical pattern mentioned before, in which new market entries exploit changing conditions in the paradigmatic framework of an industry. Ultimately these developments potentially lead to a process of creative destruction, which is at the core of the dynamics of capitalistic systems and the concepts of entrepreneurship as will be explored in the next section.

ENTREPRENEURSHIP

Artist-entrepreneurship is a sub-category of entrepreneurship. Hence, the question is: Does the concept of entrepreneurship entail specific characteristics that describe appropriately the phenomenon under investigation? While there is a substantial body of literature about the concept of entrepreneurship, no concise and universally accepted definition of entrepreneurship has emerged (Bygrave & Zacharakis, 2009; Gartner, 1990; Hausmann, 2010; Shane & Venkataraman, 2000; Shane & Venkataraman, 2007). In this context, Gartner (1990) writes: “Behind this concern [for a lack of definition of entrepreneurship] is the worry that entrepreneurship has become a label of convenience with little inherent meaning” (p. 15). And further: “Is entrepreneurship just a buzzword, or does it have particular characteristics that can be identified and studied?” (p. 16)

According to Shane and Venkataraman (2000), two different views prevail: One focuses on the personal traits and characteristics of the entrepreneur (the “traits approach”). The other approach concentrates on what the entrepreneur does (the “behavioural approach”). Gartner (1989) argues in his article “’Who is an entrepreneur?’ is the wrong question” that trait approaches have not been very fruitful and instead recommends the behavioural approach for future entrepreneurial research. However, as a direct response Carland, Carland, and Hoy (1988) claim in their article “’Who is an entrepreneur?’ is a question worth asking” that both approaches are important, and contribute to a better overall understanding of entrepreneurship. The present research follows the latter view and considers both, the traits of the artist-entrepreneurs in terms of their incentive structure (see Chapter Three) as well as their behaviour in terms of their practices (see Part B), as important areas to study. 

A starting point for understanding the concept of entrepreneurship is a look at its very early usage. The term entrepreneurship comes from the French and means literally “to do something” or “to undertake”. The first academic usage can be found in the work of Irish-French economist Richard Cantillon (1755). In his “Essay on Economic Theory”, Cantillon differentiates between fixed-income wage earners and so-called entrepreneurs that earn unpredictable income by investing under conditions of uncertainty. A farmer, for instance, pays a predefined amount of money for the land and invests time and money in employing this land to produce goods such as grain, hay or wine. The costs of the farmer are fixed costs while his profits are uncertain and largely dependent on various factors like weather conditions, changing taste of demand or intensity of competition. As a consequence Cantillon (1755) states: “All this [the external factors] causes so much uncertainty among these entrepreneurs that every day one sees some of them go bankrupt” (p. 74).

Already in this description, one finds specific conditions and features that are identifiable characteristics of entrepreneurship in subsequent works. First, Cantillon describes the outcome of the entrepreneur’s endeavour as uncertain and dependent on various exogenous factors. Further, the entrepreneur invests his or her own time and money and therefore bears the risk of failure. Both concepts—risk-taking and uncertainty—are well-acknowledged features of modern entrepreneurship theory (Acs & Audretsch, 2005; Gifford 2010; Kihlstrom & Laffont, 1979). Gifford (2010) names risk and uncertainty as necessary preconditions for entrepreneurship: “The entrepreneur functions in the economic environment only if the environment is uncertain” (p. 10). In Hausmann’s (2010) definition of entrepreneurship one can find additional criteria. She describes entrepreneurship

as the process of identifying, evaluating and pursuing market opportunities and assembling the resources necessary for success. The end result of this process is the creation of a new entity, formed under conditions of risk and uncertainty that is competitive and successful in the long term. (p. 18) 

Besides the condition of risk and uncertainty, she mentions that the outcome of the entrepreneurial process has to entail the “creation of a new entity” that is “competitive and successful in the long run”. These two themes also appear in slight variation in other definitions such as Kao (1993) who defines entrepreneurship as “the process of doing something new and something different for the purpose of creating wealth for the individual and adding value to society” (p. 69). Kao addresses an important aspect relevant for this present study. As will be discussed in a later chapter, creative activities generate value not only for society but also for individuals in various forms. The just mentioned definitions point towards the important concepts of “innovation”, “creativity” and “creating value” in the entrepreneurship context, and thus, will be added to the criteria list for further investigation.

The notion of entrepreneurship also occurs in the creative sector. It is often associated with the term cultural entrepreneurship, creative entrepreneurship or art entrepreneurship. Rather provocatively, Poettschacher (2005) describes creative entrepreneurs as “’business outlaws’, trying creatively—and often desperately—to make something out of nothing” (p. 177). Howkins (2002) labels the creative entrepreneur as somebody who “use(s) creativity to unlock the wealth that lies within” (p. 129). De Bruin (2005) describes entrepreneurship in the creative sector as: “The process of adding value to creative inputs/creativity” (p. 144). Another definition comes from Ellmeier (2003) who defines “cultural entrepreneurialism” as including all-round artistic and commercial/ business qualifications, long working-hours and fierce competition from bigger companies. An interesting proposition comes from CinnÈide and Henry (2007) who make a distinction between the intrinsic and extrinsic motivation of the “art-entrepreneur”. Intrinsic motivation is the internal desire of the art-entrepreneur to create something and involves a personal sense of challenge. The extrinsic part is contextual and business-driven. This double role of the artist-entrepreneur is an important feature of the incentive structure of the artist-entrepreneur that will be covered in detail in Chapter Three. 

The review of entrepreneurship research demonstrates that even though there is no single universally accepted definition, there are several widely accepted criteria which appear in most definitions of the term. The author argues that if these conditions can be found to a sufficient extent in the object of investigation, it justifies the usage of the term artist-entrepreneurship. These conditions are: Artist-entrepreneurs act under (1) risk and uncertainty, and (2) create value through (3) creativity and (4) innovation.  

(1) Acting under risk and uncertainty

Entrepreneurship is characterised by the condition that individuals act under risk and uncertainty. It is well acknowledged that the cultural industries exhibit a high degree of uncertainty (Caves, 2000; Landes & Posner, 1989; Towse, 2003). Uncertainty in the recording industry mainly stems from two factors: first, uncertainty regarding the demand for music due to invisible and rapidly changing consumer preferences. Second, uncertainty regarding the stability of business models due to a highly dynamic marketplace with frequent disruptions in the technological, social and legal framework. 

The risk for suppliers comes in the form of high and sunk fixed costs into the production and marketing of sound recordings with volatile outcome. It is well recognized that there is no recipe for guaranteed success in the recording industry (Caves, 2000; Hesmondhalgh, 2007; Negus, 1992). The demand for new music is uncertain. Some songs become great successes even to the surprise of the artist and the label, while others become great failures despite the fact that they have been selected by a team of A&R managers , produced by professionals, and are intensely promoted by all the means available to record companies. The reason is that too many factors influence success or failure. Watts and Hasker (2006) explain the challenges:Experts fail to predict hits not because they are uninformed or incompetent but because hits are driven by complex networks of social influences that render accurate prediction of specific outcomes impossible […] The key is to understand that the outsize performance of hits is not driven solely, or perhaps even primarily, by intrinsic attributes such as sound, plot, style, or even star power. Rather, new research shows much of the success of entertainment products derives from social influence—the effect that consumers have on one another’s decisions. So in addition to anticipating which features individual consumers might find desirable, executives should adopt strategies that take social influence into account. (p. 25)Due to the difficulties of anticipating market acceptance of final products, record labels typically employ a business model similar to the one of venture capitalists. Thereby, the label invests in a number of artists of whom one eventually becomes a great enough success compensating for the other commercial failures. David Byrne (2012) describes the traditional business model of the music business as follows: 

That was the record business before the collapse—the few massively successful acts were supporting the many who weren’t exactly failures. So in effect, Robert Palmer’s sales funded the Pogues, and Madonna’s income funded Randy Newman’s idiosyncratic records. (p. 223)

Byrne’s observation is supported by several other sources. Official reports by major record labels state that only about ten per cent of all record releases yield a profit (Philips, 2001b; IFPI, 2010).The other main factor that contributes to the high degree of uncertainty can be found on the industry level. As outlined above, technological innovations have disrupted the recording industry several times in its history. The transition phase from the physical music industry to the digital music industry creates an environment of uncertainty regarding business models. Since the turn of the millennium, the music industries have experienced a high level of turbulence, manifesting in multiple market entries, exits, mergers and acquisitions as well as reorganisations of established business models (Handke, 2006; Tschmuck, 2012). As challenging as these conditions are for incumbents, for new entrants such an environment provides a fertile ground for entrepreneurship. New companies have experimented with different business models. Some have prevailed (i.e. iTunes, Amazon), some have been bought (i.e. Napster, mp3.com) and others have failed (i.e. musicnet, musicplay). 

Artist-entrepreneurs face both types of uncertainty—uncertainty regarding the demand for music and uncertainty regarding their business model. In fact, the degree of risk for artist-entrepreneurs is higher compared to the risk of artists signed to record labels. This is due to two reasons: First, record labels typically employ several measures to minimise risk such as organising focus groups to test a song’s appeal before investing significantly in marketing; they diversify risk by investing in multiple acts at the same time; they try to influence consumer preference through cost-intensive and persuasive advertisement campaigns; they aim to control distribution channels in order to occupy important retail channels and (virtual) shelf space. 

Second, signed artists share the risk with the record label and publisher, while artist-entrepreneurs bear the majority of their own risk. As outlined above, the web of contractual relationships between artists, publishers, record companies, distributors, producers, managers and others diversifies the risk between the parties involved. The main risk bearer is the record label that acts as a specialised venture capitalist investing and coordinating inputs into the production and marketing of artists. In this context, the record label is an equity investor obtaining shares in the core asset of the venture—copyrights in the composition and the sound recording (assuming the record label has an integrated publishing division that obtains shares in the copyrights of the composer). Hence, the label takes over large parts of the venture’s risk. In an interview, Richard Griffith compares the business of publishing with horse betting (Rennie, 2013). A publisher can enter the race in different stages. For example, if bettors place their bets prior to the start of the race, it is a relatively risky investment because the entire race is still ahead and many unforeseen things can happen. The high risk, however, is reflected in the potential high return on the initial investment. In contrast, if the race is almost over, betting on the winning horse is a much safer investment. The lower risk, however, warrants a lower return. To apply Griffith’s racing analogy to the music industries, a publisher can invest (respectively place a high-risk bet) in unknown new artists or take the safer and lower risk path with established stars. Additionally, the record label can mitigate the risk through specific contractual terms and conditions. For example, paying a high non-recoupable advance in a short-term contract demonstrates a strong sign of the investor in the commercial potential of the artist. In this case, the label overtakes large parts of the risk. On the other hand, a small recoupable advance and a long contract term demonstrate reservations of the label with regards to the evaluated probability of the venture’s success.  In accordance with the definition of entrepreneurship, the entrepreneur overtakes a significant share of the risk. Hence, retaining ownership of the bundle of rights stemming from copyright laws is an essential criterion that defines the artist-entrepreneurship phenomenon.

(2) Creating value

In addition to carrying risk, entrepreneurship involves the creation of value. Value is a multifaceted concept that receives particular interest in the cultural industries.  In this context, value is commonly differentiated into market value and total social value (Klamer, 1996; Throsby, 2001). Starting with the less problematic concept, market value in the recording industry represents total sales volume of sound recordings.  Put simply, if a record is sold, market value is generated. According to the International Federation of the Phonographic Industry (IFPI), in 2012 the market value of global sound recordings was $16.5 billion (Mulligan, 2013). Do artist-entrepreneurs generate market value? Anderson (2004) popularised the notion of the “Long Tail” in the business context suggesting that small-scale suppliers can generate significant market value. Anderson describes how diminishing storage and distribution costs create a business environment where it is profitable to sell a very small number of specialised products to a wide range of people with diversified taste preferences. His work advanced previous research on the online sales company Amazon (Brynjolfsson, Hu, & Smith, 2006; Brynjolfsson, Hu, & Smith, 2003; Brynjolfsson & Smith, 2000). Accordingly, Amazon earned 30–40% of their total revenue from book sales from titles in the Long Tail which had a popularity rank above 100,000.  The Long Tail is constituted of those books that could not have been sold through traditional channels because the per-title-costs for shelf space and administration would have been too costly for bricks-and-mortar retailers (Brynjolfsson et al., 2003). The same principle is applicable to music distribution.

Figure 2: The Long Tail (Anderson, 2004).

As shown in Figure 2, Anderson found that a typical bricks-and-mortar music retailer (in this case Wal-Mart) carries approximately 39,000 different titles. In contrast, the online music retailer Rhapsody offers almost 20 times as many with 735,000 different titles (Anderson, 2004). This data comes from an analysis in 2004. Since then, the Long Tail has expanded drastically. For example, the iTunes Music Store currently offers more than 28 million titles (Oppenheimer, 2012). Indie music consultant and musician Bob Baker describes the Long Tail as, “the story of how products that were once considered fringe, underground or independent now collectively make up a market that rivals the bestsellers and blockbusters” (Anderson, 2005). Anderson explains the underlying mechanics by referring to the principles of the digital economy. The possibility to digitise information goods like music, movies or books drastically decreases storage and distribution costs. In the previous non-digital economy a bookseller needed to calculate shelf rents. Therefore, one item needed to be sold a specific number of times if it was to be worth carrying. If a particular book sells only one copy per year, and the rent for the shelf space is higher than the revenue earned, it is simply not worth stocking that book. Since the publication of Anderson’s book, the numbers regarding the size and shape of the Long Tail have been contested (Elberse, 2008; Orlowski, 2008). Elberse (2008) found that 10% of all songs available on Rhapsody in 2008 accounted for 78% of total plays. Hence, the shape of the Long Tail seems to be much thinner and longer than suggested by Anderson. The head of the distribution curve, representing hits and stars, seems to remain thick and short, indicating that most people still consume predominately popular songs. However, the findings about consumption patterns cannot explain the fact that the Long Tail has expanded drastically over the last years. For example, the iTunes Music Store currently offers more than 28 million titles (Oppenheimer, 2012). The fact that iTunes is able to carry 28 million songs because of nearly unlimited virtual shelf-space, and the fact that most people continue to consume hits, do not explain why there are 28 million songs. This is where artist-entrepreneurship comes into play. Anticipating the results of Chapter Six, in which the author performs an estimation of the scope of artist-entrepreneurship, artist-entrepreneurs are a substantial contributor to the Long Tail, not only in terms of musical output but also in terms of market value. 

In contrast to market value, total social value entails additional value components not captured by markets. Many cultural economists point towards a gap between market value and total social value in the cultural industries (Frey & Goette, 1999; Klamer, 1996; Liebowitz et al. 2006; Throsby, 2001, 2008a). The rift between both value concepts has been explained as follows: On the one hand, market imperfections such as lacking price discrimination,  substantial transaction costs  and incomplete information  can cause market value distortions contributing to the difference between market value and total social value. These market imperfections are not specific to cultural goods but arguably well pronounced. Despite these general market imperfections, the market for cultural goods and specifically the market for digital sound recordings, exhibits additional features posing challenges for markets to capture their value.First, as will be elaborated on in Chapter Two, artists derive non-pecuniary compensation from their artistic activities.  Those supply side benefits of artists influence the artists’ wages and ultimately the prices of goods and services they provide. It is well-known that artists on average receive substantially lower incomes compared to workers with equivalent qualifications (with the exceptions of superstars, see Chapter 3.1). Withers (1985), for instance, estimated the differences between earnings of artists and their potential earnings in the best alternative occupation depending on the candidate’s training and experience. According to the study, artists in Australia in 1981/82 earned approximately 42 per cent below the amount what they could have expected in other occupations considering their work-related and personal characteristics. This difference can be interpreted as an “artist’s subsidy” or “pecuniary income foregone” partly representing the “joy of the artistic life” (Withers, 1985, p. 290).
Second, music as a cultural good, and recorded music in form of digital downloads or streams in particular, exhibits characteristics of a public good. Perfect public goods are non-rivalrous and non-excludable. (Non-)Rivalrous refers to the extent the consumption of a good or service interferes with the consumption of that same good or service by another person. Examples of such goods are air, sunlight or streetlight. Many people can consume those goods without compromising the consumption of someone else. In contrast, a screwdriver is rivalrous because one individual’s usage interferes with another’s (Cornes & Sandler, 1996).  In contrast to rivalry, excludability is not an inherent property of the good itself but depends on legal or technical frameworks. Excludability describes the degree to which people can be excluded from consumption. For example, a house can be made excludable by prohibiting its usage through enforcement of legal rights, or technically by installing a lock. National defense, on the other hand, is an example for a non-excludable service, as it is (almost) impossible to exclude a single person, living in the corresponding country, from national defense services. Markets for public goods experience a specific type of market failure in form of the free-rider problem. Thereby, a rational individual tends to refuse paying (respectively pays too little compared to the benefits he or she receives) for a good if he or she can benefit from the good anyway. As a result, a lack of funds for the production and dissemination of such goods occurs, eventually resulting in an undersupply. Copyrights are the attempt to turn public goods into private goods by assigning property rights (see Chapter 3.2). However, copyright works are difficult to exclude and have at least some characteristics of non-rivalry. Hence, copyright works are often referred to as quasi-public goods (Gorden & Bone, 1998). The benefits of music as quasi-public goods come in many forms: First, creative works provide a fertile ground for new creative ideas. For instance, from a purely commercial standpoint, the band Velvet Underground experienced little success during its active time. Their debut album The Velvet Underground and Nico released in 1967 peaked at number 171 on Billboard magazine’s top 200 chart and their subsequent album White Leg/White Heat peaked at number 200 in 1968 (Malanga, 1983). Despite the chart ratings, the band had a profound impact on other bands and popular culture. As Brian Eno states, “I think everyone who bought one of those 30,000 copies [of the album The Velvet Underground & Nico] started a band! So I console myself thinking that some things generate their rewards in a second-hand way” (Unterberger, 2009, p. 137). Those rewards are positive externalities that have not been captured by the market. As will be elaborated upon in the next chapter about creativity, artist-entrepreneurship creates value in form of an augmentation of the pool of accessible creative works in the domain of the recording industry that potentially inspires new creative ventures.The capacity of creative works to trigger other creative works in the same sector (for example, a music artist is inspired by a song she hears on the Internet) also extends to other sectors. Throsby’s (2008a) concentric circles model is based on the idea that “cultural industries create economic value via flow-through effects to innovation processes in other industries via diffusion of creative ideas, skills transfers and movement from creative labor from the core” (Throsby, 2012, p. 9).

Figure 4: Concentric Circle Model of the Cultural Industries (Throsby, 2012).

As illustrated in Figure 4, the model suggests that ideas and skills diffuse from the core of the cultural industries into wider circles. For example, a song might inspire a film, as in the case of the movie Yellow Submarine, originally written by Lee Minoff who received tapes of unreleased material from the Beatles. One of them was the eponymous song written by Lennon and McCartney that inspired Minoff to write the screenplay for the movie (Minoff, 1997). Other examples involve novels such as Alice in Wonderland or Harry Potter that not only triggered the production of several feature films but also the development of other products such as computer games, mobile applications or merchandising. In addition to the notion that ideas disseminate from the core into wider circles, skills acquired in the core segment can be used in other areas. For example, a trained painter might work as a game designer in a later stage of her career. Hence, creative skills acquired in the core of the cultural industries can benefit related industries increasing economic value in an indirect way.  

Third, Throsby (2003) points out that cultural goods generate a specific type of value he refers to as “cultural value”. Throsby identifies aesthetic spiritual, social, historical, symbolic and authenticity as components that carry value. A component is “multi-dimensional, unstable, contested, lacks a common unit of account, and may contain elements that cannot be easily expressed according to any quantitative or qualitative scale” (p. 280). The underlying idea is that cultural goods benefit society that is not quantifiable using the value components discussed previously. Cultural value comes in various forms such as: a sense of pride or satisfaction of living in a society recognised for its cultural achievements; a tool that helps people to “understand and interpret their country and its culture (Throsby, 2003, p. 15). Further, “the arts have an educational function to preserve artistic heritage to future generations” and cultural goods “reflect and affirm or challenge society and as such are a crucial element in a healthy democracy” (Throsby, 2003, p. 15). Cultural value implies that even if people do not consume cultural goods directly, many appreciate their mere existence and potential availability. 

Due to the fact that markets largely fail to display total social value of cultural goods, economists developed alternative methods attempting to measure non-market value, such as contingent valuation methods (CVM), hedonic methods or choice modelling (Frey, 2008; Throsby & Withers, 1985). For example, in 1983, Throsby and Withers (1985) asked 825 random Australians how much they were willing to pay (in form of taxes) to support the arts. The authors found that the aggregated willingness-to-pay for the benefits of the arts surpassed the tax-price of cultural subsidy at that time. While Throsby (2003) acknowledges the usefulness of CVM and the fact that they are able to capture parts of non-market value components, he questions whether they can reveal the total value of cultural goods. One problem of direct survey methods in this regard, is that in order to express an estimation of the benefits of cultural goods, respondents have to be fully informed and be able to put the perceived value into numbers, which is difficult. In addition, cultural goods are experiential, meaning people often have to develop a taste for them, which takes time and education. Hence, demand is cumulative and dynamically unstable. Those problems led to Throsby’s (2003) conclusion that “even a state-of-the-art CVM study will tend systematically to undervalue a cultural good to the extent that there exist significant positive elements in the good’s value that are incapable of expression as individual WTP [willingness-to-pay]” (Throsby, 2003, p. 280).
Considering the discussed value concepts, artist-entrepreneurship creates value in various forms: First, in form of market value as will be empirically estimated in Chapter Six. Second, artist-entrepreneurs create social value through augmenting the pool of creative works that potentially inspires other creative endeavours, not only the music domain but also in other domains. Third, artist-entrepreneurs generate procedural utility for themselves in form of non-pecuniary rewards as will be elaborated in Chapter Three. Fourth, artist-entrepreneurship contributes cultural value as outlined above. 

The conclusion that artist-entrepreneurship creates value is partly based on the assumption that more creative goods are always better. Although Chapter Nine more fully discusses the implications of artist-entrepreneurship, it is prudent to briefly address the topic here as it relates to the context of value creation. Intuitively one might be more concerned about an undersupply of creative goods than an oversupply.  If consumers have differentiated tastes, fewer available products seem to yield a less desirable outcome than more available products because consumers can choose from more variants and thus have a better likelihood to match their taste preferences. Economic theory, however, suggests specific situations where too many goods can reduce social welfare.  The mechanics behind the occurrence of such situations are based on the idea that greater product variety comes at the price of repeated fixed costs of suppliers. For example, assume a market only has one music producer providing one song. In this case it is understandable that the benefits for consumers of one additional supplier entering the market offering a different song likely outweigh the total costs of the new supplier. At some point, however, when markets exhibit an extensive variety of songs, every new song might not be as beneficial anymore (e.g. the marginal utility of product variants decreases). This is especially the case if producers position new products closely to existing ones.  Additionally, “diversity of supply” (how many different products are available) and “diversity of demand” (how difficult or easy is it for consumers to find those new product variants) are not equal (Stirling, 1998). In particular search costs in the case of experience goods where consumers have to invest time into consumption before they can evaluate quality, can be exhaustive. In combination with high fixed costs of suppliers, too many producers might yield a suboptimal market outcome. In such situations the costs of new products are higher than the utility consumers derive from increased product variety. Additionally, theories of monopolistic competition and product differentiation suggest that unregulated markets tend to move into socially undesirable situations where suppliers produce too many goods (Dixit & Stiglitz, 1977; Lancaster, 1975; Ranaivoson, 2005). One reason put forward is that suppliers tend to produce (too many) products not only to meet consumer preferences (a desirable motive) but also to occupy “product space” in order to thwart new potential entries. Another factor contributing to oversupply is that new entries do not have to worry about eroding their own revenues of other products through business stealing effects while incumbents (such as established major record labels with significant catalogues) moderate their release policy in order to avoid cannibalisation of their own revenues (Mankiw & Whinston, 1986). Further, the perceived benefits of stardom, although unachievable by most, can bias an individual’s capability to assess his or her risk appropriately (see Chapter 3.3). As a result artists might invest too much into their artistic careers in relation to their chances of success. Finally, Caves (2000) argues that in order to minimise the risk in uncertain markets, suppliers tend to produce (too) many products to distribute risk over a large number of units. This practice can contribute to a socially inefficient product diversity level. 

It should be noted that the above-mentioned arguments are based on static welfare models that focus only on direct benefits of product diversity for consumers (in terms of increased preference matches) but do not incorporate other benefits in terms of positive externalities such as providing cultural value or creative spill-over effects. Considering the multiple dimensions of total social value in combination with the fact that those value components are problematic to measure, conclusions regarding an optimal diversity level require a more focused analysis on that subject than this thesis can provide. Different types of values are commonly linked to the concepts of creativity and innovation. For example, Throsby (2003) states that “creative artists in fact supply a dual market—a physical market for the good, which determines its economic price, and a market for ideas, which determines the good’s cultural price” (p. 281). This suggests that the process of creativity generates new ideas that provide cultural value and the concept of innovations produces new goods that generate economic value. The following section examines concepts of creativity and innovation in more depth.

(3) The role of creativity

Creativity, as concerned with the process of bringing novelty into being, is a frequently identified characteristic of entrepreneurial ventures. Innovation is similarly common and will be discussed below. The out-dated Romantic understanding of creativity as an unexplainable mystical process in which a muse inspires a genius to create something out of nothing has been superseded. Contemporary research emphasises the systemic, multi-faceted nature of creativity (Csikszentmihalyi, 1997; Hennessey & Amabile, 2010; McIntyre, 2008b, 2012; Sternberg, 1999). A diverse field of scholars explore the concept through diverse approaches, each emphasising a slightly different aspect. Such a fragmented field of research calls for a reconceptualisation of creativity in the form of a confluence of existing approaches into one integrated theory. McIntyre (2012) follows this approach by coupling the systemic model of Csikszentmihalyi (1999, 2006) with Bourdieu’s (1977, 1990, 1993, 1996) work on cultural production. The model moves away from an individualistic view of creativity proposing that the individual is embedded in a sociocultural system and creativity emerges from the “interplay between the spheres of an individual’s habitus, the field they operate in and the accumulated knowledge that exists in the field of works that makes practice possible” (McIntyre, 2012, p. 76).

Figure 5: The Systems Model of Creativity (Csikszentmihalyi, 1999, p. 315)

Referring to Figure Five, the individual can be described in terms of nature, nurture and access. Nature refers to biological predispositions (inherited mental and physical features). Nurture refers to the acquisition of education, personal experiences and accumulated skills and knowledge through engaging with an accessible domain. The domain is referred to as “the structures of knowledge that the individual can access” (McIntyre, 2008a, p. 42). For example, in the case of a record producer, the domain consists of all available works, production techniques, aesthetic codes and other practices within the domain of recorded music. In order to obtain the knowledge about the domain, the individual develops his practice over time by being immersed and inculcated. This “feel for the game” is what Bourdieu calls the habitus (Bourdieu, 1993, p. 5). Hence, the habitus enables the individual to make decisions in a somehow intuitive manner “that is not always calculated and that is not simply a question of conscious obedience to rules” (Johnson, cited in Bourdieu, 1993, p. 5). These decisions, however, are not independent and are influenced by the third structural component—the field. Csikszentmihalyi (1988) suggests that the field is constituted by “all those who can affect the structure of a domain” (Csikszentmihalyi, 1988, p. 330). Sawyer (2012) understands the field as “a complex network of experts with varying expertise, status, and power” (p. 216). McIntyre (2011) states, “in the case of contemporary Western popular music, this field can be seen to consist of musician’s peers, members of the recording and publishing arm of the industry” (p. 47). The field functions to recognize and validate new ideas as creative and “worth preserving” (Csikszentmihalyi, 1988, p. 325).  However, the field should not be misinterpreted as exclusively constraining in terms of a gatekeeper function. Instead, as Negus (1996) emphasises, “cultural intermediaries do not work as gatekeepers who filter products according to organisational conventions, but as mediators” (p. 62f). The field acts as a constrainer and an enabler through provision of funds, expertise and professional networks. Agents compete for power within the field, an activity that can be expressed in terms of Bourdieu’s notions of economic, social and cultural capital. Economic capital, as the term indicates, can be immediately and directly converted into money and may be institutionalized in the forms of property rights. Cultural capital is described as a form of knowledge about works and practices in the domain and social capital represents valuable connections and relationships agents dispose of (Bourdieu, 1986). For example, in the domain of the recording industry, A&R managers are part of the field. As such, they exert control over a budget (economic capital) that they invest into new artists. They have cultural capital in form of special knowledge concerning the relevant genre but also knowledge about what might appeal to a specific target group and how to position a new release in the market. A&R managers have also social capital generated through relationships to producers, studio musicians, sound engineers, promoters and other service providers within the music industries that represent valuable assets for the producing and marketing of recorded music. The greater an agent’s total capital, the more power and influence they hold. In summary, creativity emerges from the Systems Model of Creativity through the interplay of the individual finding new combinations of accessible information in the domain. The results are then curated and mediated by the field and, once past the field, are added to the domain. The system exhibits circular causality as well as feedback loops. Accordingly, it does not have a start or end point, whereas the domain influences the individual, the individual influences the field, the field influences the domain and vice versa. 

The application of the Systems Model of Creativity to a study of artist-entrepreneurship raises questions regarding the function and composition of the field. According to the Systems Model, creativity is not an inherent feature of a good or service but an ascribed property. The field determines whether or not something is creative. Under the traditional recording industry model many songs have never been recorded professionally nor released. Songs and demos might have been sent to A&R managers, promoters and producers but were often rejected for reasons including a perceived lack of creative potential and/or marketability, a lack of financial resources, or strategic decisions such as contracting artists for the purpose of making them unavailable for competitors (see also Chapter 5.2). Songs that have not passed the field are considered, according to Csikszentmihalyi (2006), as “original, but they would not have had an impact on the culture, and thus would have failed to be creative” (p. 11). Following this definition, a new song that has not passed the field is considered as original and a new song that has passed the field is considered as creative.  

In the traditional recording industry, it is conceivable and consistent with the Systems Model of Creativity to call rejected works (and those never submitted) culturally irrelevant because they have had a very limited impact on the culture due to the fact that they have not been available to the wider public.  If cultural goods are not available to the wider public, they cannot unfold their value inducing effects. However, when artists bypass intermediaries and market music directly to consumers, what constitutes the field and who validates creativity? 

Some authors acknowledge that the field not only encompasses experts and professional intermediaries but also the audience and even the producing artists (Sawyer 2012, McIntyre 2011). Sawyer (2012) writes: “The ultimate test for a creative work is whether or not it’s accepted by a broad audience’ (p. 126f). McIntyre (2011) points out that “the audience for contemporary Western popular music is a significant constituent part of this field” (p. 48). He continues, that artists “may be included in the field as they are also capable of recognizing the validity of domain reorganisation” (p. 48). Following these suggestions, the field consists of intermediaries, the audience and the artist. The power balance between these entities determines what is considered as creative and culturally relevant. In the traditional system intermediaries commonly possessed the most power and, hence, mainly decided what is considered as creative. As will be explored in more depth in the course of this present research, phenomena such as crowdfunding, remix competitions or fan blogs are indicators that fans (in this context, sometimes referred to as “prosumers”, a portmanteau of producers and consumers, see Kotler, 1986) play a much larger and more direct role in recognizing and mediating creativity than in the traditional recording industry. Hence, the power balance between agents within the field seems to shift from professional intermediaries to consumers and artists. However, the question what is considered creative and culturally relevant remains vague. Is it culturally relevant if 10, 1,000, 10,000 people or only the artist consumes a new song? Is the act of consumption enough or does it need further evaluation that qualifies for the label “culturally relevant”?

Considering the previous section about the various types of values generated by creative activities, this thesis argues that creative works are culturally relevant if they modify the domain. The domain consists of accessible works in the field of interest, here the market for sound recordings. Hence, the decisive criterion that defines creativity is that works have to be accessible to other artists and individuals in the field. This accessibility forms the basis for culturally relevant effects. Here lies one of the most decisive points of difference from the traditional paradigm where accessibility of new works had to be enabled by intermediaries such as record labels.  In the artist-entrepreneurship scenario artists enable accessibility. This is an important point that goes to the foundations of artist-entrepreneurship and its implications. The quality or lack of quality of an artist-entrepreneur’s songwriting and production does not change the fact that the works are available in the domain. In the bricks-and-mortar industry, artists frequently cite obscure and commercially unsuccessful records discovered in small local record stores or garage sales as inspirational sources. Applied to the digital age, the accessibility of those inspirational sources expanded drastically. A song can measure as musically and technically inferior by all manners of (contestable) quality criteria, but it might have just one aspect—a pattern or lyrical phrase—that sparks the creative urge in the listener. In order to grasp these inspirational effects it is crucial to set the bound for the definition of artist-entrepreneurship at the bottom end. From this point on, one might differentiate between different types of artist-entrepreneurship along criteria such as commercial success, view/listener counts or expert reviews. 

(4) The role of innovation

Similar to creativity, research on innovation has moved towards a systemic understanding. Analogous to the out-dated, now in the academic community widely neglected, Romantic idea that creativity flows from the divine-inspired individual to the outside world, innovations do not flow one-directionally “from the laboratory benches of universities to the commercial sector” (Joseph, 1994, p. 51). Instead, Phillimore (1999), for example, describes innovation as a “complex non-linear process involving feedback loops and the creation of synergies through a diverse range of information networks” (p. 673). Some authors propose that the perceived divide between both concepts is primarily attributable to the fact that innovation and creativity are used by different communities employing a range of etymologies, definitions and discourses (McIntyre, 2011; Nemiro, 2007). The term innovation is often used in economics and business contexts whilst creativity is favoured in the field of the humanities and the cultural sector. Nemiro (2007), for example, suggests that innovation and creativity “may be more closely related than their apparent separation may imply” (p. 14). McIntyre (2011) contributes to the discussion stating, “it is possible to suggest we may in fact be looking at exactly the same phenomenon”, which is “bringing novelty into being” (p. 11f). 

While there are apparent similarities between innovation and creativity from a broad perspective, a distinction between both concepts in specific areas is still common. A widespread view in economics and business management literature is that creativity is concerned with the generation of new ideas, and innovation is the successful implementation of new ideas (Duxbury, 2012; Hennessey & Amabile, 2010; Oldham & Cummings, 1996; Woodman, Sawyer, & Griffin, 1993). As Hennessey and Amabile (2010), for example, state: “These authors [West, Sacramento, & Fay, 2005], like most in the field, see creativity as the generation of new and useful ideas, with innovation being the implementation of creative ideas” (p. 585). Mumford (2011) demonstrates this concept with the help of an example: “A research design may be viewed as creative, but the production of the research to implement this design and produce a journal article is a process of innovation” (p. 5). 

The differentiation between idea generation and idea implementation has also been applied to the creative industries. Handke (2004) argues that in the creative industries, where bringing novelty into being is at the core, “innovation […] and creativity should be carefully distinguished not least to allow investigation of their interplay” (p. 13). Thereby, “(content) creativity” is specifically concerned with the creation of cultural works in order to distinguish it from innovations in intermediary functions, also referred to as humdrum inputs (Caves, 2000). The criterion to separate both stages is 

the first fixation of the original informational content in its final form. In the record or film industry that would be the master copy. […] The humdrum aspect can be understood to encompass the entire range of administrative, organisational and material tasks entailed in the reproduction and dissemination of existing media content. (Handke, 2010, p. 281)

The delineation between content creation and humdrum innovations might require refinement. The content creation stage in the recording industry involves several processes such as song writing, recording, mixing and mastering. In order to evaluate the overall impact of an external variable on the content creation stage it seems useful to differentiate between those processes because each process might be affected differently, possibly conversely. Hence, in Chapter Four the author analyses the impact of the digital revolution on each stage of the value-creation-chain separately in order to evaluate the overall effect. Another challenge in the digital recording industry is that the differentiation between content creation and content marketing can get indistinct. As will be shown in Chapter Four, collaborative approaches in which artists involve fans into the song writing and production processes blur the line between content creation and content marketing. More recently, the recording industry has been described as an “experience economy” pointing towards the understanding that consumer utility is not only generated through the consumption of sound recordings but also through additional features. For example, giving customers music sharing possibilities, opportunities to be involved in the process in form of interactive production and marketing campaigns such as remix or production competitions (see Chapter 3.6.3 and Chapter Four)(Tschmuck, Pearce, & Campbell, 2013). It is problematic to claim that creativity is involved only at the content creation stage. Some commentators go as far as to claim that particular artists are more known for their creative marketing strategies than their creative content. For example Stiegler (2011) argues that in the context of Radiohead’s albums In Rainbows (2005) and The King of Limbs (2009), the band has become more known for their creative marketing strategies than their creative content.   
The literature points to a continuing debate regarding the exact definition and demarcation of creativity and innovation. For the purpose of this thesis, creativity and innovation are constructed as follows: 

Figure 6: Creativity and innovation in the recording industry.

As Figure Five illustrates, the Systems Model of Creativity—where new ideas emerge from the interplay between the individual, the field and the domain—provides the foundation. The Systems Model of Creativity creates new ideas not only in the content creation stage but also in other areas such as promotion, distribution, the organisational setup or the political framework. Innovations occur within the domain as the result of successful implementations of new creative ideas. Within the domain, different types and intensity levels of innovations occur. The categorisation of innovations follows recommendations of Brooks (1982) and Tschmuck (2012) and will be presented briefly in the following.The intensity level of innovations is classified into radical and incremental innovations. While incremental innovations build upon existing products or procedures, radical innovations disrupt established paradigms and offer ground-breaking new solutions to a problem (Freeman & Perez, 1988; Mansfield, 1968).

Technological innovations are subcategorised into process and product innovations (Utterback & Abernathy, 1975). Process innovations concern new ways of production, delivery or marketing. For example, multi-track recording and digital distribution are considered radical process innovations as they largely disrupted and replaced established processes. In contrast, the 24-bit recording method would be considered as an incremental process innovation as it improves but does not revolutionise the established method. Product innovations come in form of new products or services such as the compact disc and the mp3 format (radical product innovations) or the double-sided vinyl record (incremental product innovation). Aesthetic innovations are phenomena where new aesthetic codes are established (Tschmuck 2012). For example, the emergence of Jazz at the beginning of the 20th century or rock’n roll in the 1950s have been described as radical aesthetic innovations because “they were part of a larger structural break in the development of the music industry and required completely new conditions of production” (Tschmuck 2012, p. 183).

Hip hop, punk rock and disco, on the other hand, are considered incremental aesthetic innovations, as they did not have a profound influence on the paradigm of the music industry (ibid.). Organisational innovations are new organisational setups in the form of variations of the contractual network between the main agents in the recording industry. Examples for variations of the contractual network are 360-degree record deals, Madonna’s decision to sign with concert promoter Live Nation Inc., or artist-entrepreneurship. Market innovations occur in form of new markets such as those for Internet radio promotion, digital music online stores or virtual instruments. Political innovations are changes in the political framework such as copyright policies, art subsidies or Creative Commons (see below for details about Creative Commons). 

Are artist-entrepreneurs innovative? First, artist-entrepreneurship is an organisational innovation triggered by the overarching paradigm change in the wake of the digital revolution in the record industry. Tschmuck (2006) argues that the digital revolution disrupted the paradigmatic frame within which the system of production, distribution, and reception operates. Especially, the routinized relationships between individual elements of action are broken up, which frees up space for new possibilities of interaction. (p. 218) Artist-entrepreneurship is one of those new “possibilities of interaction”.

As outlined in Chapter 2.1, the key organisational feature of the recording industry in the 20th century has been the configuration with the record label (often with an integrated publishing division) as the central agent that acquires the bundle of copyrights in order to produce and market sound recordings. There have been variations of the network such as the previously mentioned 360-degree record deal. Additional examples stem from the symbiotic relationship between majors and indies during the 1970s and 1980s. More recent practices have seen concert promoters contract established recording artists such as Madonna or Robbie Williams. These variations are incremental innovations that improve on an existing model. The record label (or an equivalent powerful institution) acts as the central agent that finances and coordinates the main parts of the value-creation-chain on the basis of acquired copyrights. Artist-entrepreneurship disrupts this key feature and puts the artist at the centre. 

Second, as outlined above, innovations are embedded in a systemic model feeding and being fed by other types of innovations. In this regard, the new organisational setup in form of artist-entrepreneurship is facilitated by broader paradigm changes. Yet artist-entrepreneurship also triggers other types of innovation. Due to the peculiar organisational setup that moves the incentive structure of the artist into the centre (as opposed to the incentive structure of the record label), new distribution and promotion practices emerged aligned to the needs of the artists. As a consequence, artist-entrepreneurs have developed alternative pricing and investment strategies that suit their model of utility maximisation rather than solely profit maximisation (see Chapter Seven). Also, artist-entrepreneurship provokes the emergence of new markets providing services and products for artist-entrepreneurs. Companies such as CD Baby, Topspin Media, Nimbit or Bandcamp as well as business models such as micro-outsourcing or remix competitions arose in the wake of the rise of artist-entrepreneurship (see Chapter 3.6). Furthermore, the need for affordable and easy-to-use music production, promotion and distribution tools facilitated the emergence of the market for such tools. Another example for an accompanying innovation is the modification of the legal framework such as the development of the Creative Commons licences (CC-licenses). The CC-licenses have been designed as a response to the need of suppliers who want to distribute their products under alternative, more flexible legal systems to facilitate derivative works and fast dissemination through less restrictive sharing options (see Chapter 4.2). The question whether artist-entrepreneurship provokes an aesthetical innovation will be addressed in Chapter Nine. 

DEFINITION OF ARTIST-ENTREPRENEURSHIP

Following the exploratory approach of Part A, the purposes of this chapter is to contextualise and define an observed phenomenon. The phenomenon of interest is a situation where a significant number of artists produce, distribute and promote music on the global market for digital sound recordings in a new organizational setup. The notion of entrepreneurship emerged to describe situations where individuals or firms create value under the condition of uncertainty through the process of creativity and innovation. This situation describes the artist-entrepreneurship phenomenon in the digital recording industry quite accurately. Thereby, artist-entrepreneurs discover new opportunities (low-cost production, distribution and marketing methods), employ new ways (circumventing traditional intermediaries) to create value (market value and cultural value) under the condition of risk and uncertainty (retaining ownership of copyrights and investing own resources into their ventures). Accordingly, four criteria define artist-entrepreneurship in the digital recording industry. With particular regard to criteria two to four, artist-entrepreneurship is defined qualitatively on a continuum along these categories: 

Artist-entrepreneurs

  1. produce original sound recordings
  2. make recordings available on the global market for sound recordings
  3. inform people about the existence of their works
  4. retain ownership of their bundle of copyrights.

Regarding the first point, artist-entrepreneurs create original works, produce sound recordings of those works and consequently attract copyright protection. As outlined earlier, the quality of music (technical and non-technical) is irrelevant for the definition of artist-entrepreneurship. 

The second criterion concerns the availability of sound recordings produced by artist-entrepreneurs. Again, the decisive feature is that sound recordings are made available to the greater public on the same market as established market players. As Chapter Four will demonstrate, entry barriers into global distribution networks decreased. As a consequence, artist-entrepreneurs market their products through the same distribution channels as established players. As the next section will explain, this large-scale availability of content stands in stark contrast to similar concepts such as “Do-It-Yourself practices” or the “self-employed sole trader musician” in the music industry before the digital revolution. 

The third criterion concerns promotion activities. As Chapter 4.3 will examine, in principle, large-scale promotion channels are available to artist-entrepreneurs. This contrasts against the traditional music industry in which artists had very limited opportunities to promote their works to a larger audience. However, as will be explored later, the competition for scarce consumer attention drives promotion costs. This might give established players advantages over artist-entrepreneurs as they have better access to capital and dispose over existent promotion networks. Nevertheless, the efficiency and reach of the Internet as a global information system offers promotion techniques such as viral marketing or direct-to-fan marketing methods enabling individual artists to inform potential customers more cost-effective compared to the old paradigm.

Fourth, artist-entrepreneurs retain ownership of their bundle of copyrights and consequently bear the risk of failure. That does not mean that artist-entrepreneurs carry out all tasks necessary to produce, distribute and promote music as well as coordinate and administer all tasks involved. Artist-entrepreneurs can hire agents such as sound engineers, managers, distributors, promoters or agencies that administer and collect royalties on their behalf. As mentioned earlier, the need for such service providers drives the emergence of new markets. Many new businesses open up offering all sorts of services formerly performed by record labels or publishing companies. As an example, the company CD Baby (cdbaby.com) recently launched a service offering a complete copyright administration and collection package that carries out all tasks from registering songs with collecting societies to collecting the wide range of different royalties from various music users for a one time fee of $39/$99 per song/album (CD Baby Pro, 2013). Another example is the company Onsist (onsist.com) that offers anti-piracy services such as tracking down illegal sites and organising the take down of illegal download and streaming links. Such companies potentially involved in the artist-entrepreneur’s endeavour are either lenders of capital or contracted service providers that bear only a small part of the risk but not the same amount as equity investors. Hence, the decisive factor is not who carries out those functions but who bears the risk of investing in the venture of producing and publishing music. 

It has been put forward that due to economies of scale, large companies that produce, distribute and control several artists and administer and control the bundle of copyrights of several artists are more efficient in coordinating the various inputs needed than small firms or individual artists (Caves, 2000; Day, 2011). However, the efficiency criterion addresses the profit maximising paradigm of a firm. As will be stressed throughout this present thesis, the incentive structure lies at the core of the artist-entrepreneurship phenomenon. Artist-entrepreneurs might be less efficient and commercially successful with regards to monetary success but might generate more utility for the artist, and, depending on the individual incentive structure of the artist, take preference over the model in which the artist is more successful and productive through signing with a record label. Artist-entrepreneurship is a sustainable business model as soon as the total benefits (monetary and non-monetary) outweigh the total costs including the risk. Anticipating the empirical results and considering the significant scope of this phenomenon, the artist-entrepreneurship strategy seems to be sustainable. The competition between record labels and artist-entrepreneurs has to be evaluated considering the differing underlying incentive structures. 

It should be noted that risk transfer in the recording industry occurs along a continuum. As mentioned earlier, it is not that by signing a record deal artists give up all the risk to the label. Instead it depends on the individual contract, which again depends on the individual bargaining position of the label in relation to the artist. A new artist with a low bargaining position will not be offered the same recording contract than an established artist.  The parties involved in the nexus of contracts between artists, labels, publishers, musicians and others, bear different amounts of risk depending on the specific terms and conditions of the corresponding contract. Therefore, in the context of artist-entrepreneurship, the criterion of overtaking risk occurs along a continuum. Byrne (2012) describes this spectrum in terms of six different business relationships between artists and record labels. “At the one hand of the spectrum is the 360°, or equity deal, where every aspect of an artist’s career is handled by producers, promoters, marketing people, lawyers, accountants, and managers” (Byrne, 2012, p. 230). At the other end of the spectrum is a model Byrne refers to as “self-distribution”. Here, according to Byrne, “the music is self-written, self-played, self-produced, self-promoted, and self-marketed” (p. 249). In between those two extremes, Byrne defines four intermediate models. First, the “standard royalty deal” in which the record label manages the manufacturing, distribution, press, and promotion but does not participate in revenues from live shows, merchandising and endorsements. Second, the “license deal” that is similar to the standard royalty deal with the difference that the artist retains ownership of the master recording and instead licenses the right to exploit the master recording for a limited time period to the record label. Third, the “profit-share deal”, described as a 50/50 shared ownership model, where “everything is shared” between the label and the artist (Byrne, 2012, p. 247). The last model is labeled the “manufacturing and distribution deal” or alternatively the “production and distribution deal”. In this model, the artist finances everything except the distribution and manufacturing, which is done by the label. Byrne admits that there can be many more forms of contractual relationships between artists and record labels than the six modes outlined above. This thesis does not subdivide artist-entrepreneurship into subcategories but condenses the various forms into two principles. On the one hand, the traditional artist model in which the artist signs a standard recording and publishing contract that involves a transfer of the rights in his or her work; on the other hand, the artist-entrepreneur who does not sign any contract that involves a copyright transfer. Corner cases in between those scenarios have to be investigated individually. The core principle that differentiates artist-entrepreneurship in the digital recording industry from the traditional model is the fact that the artist-entrepreneur carries the majority of the risk involved in the endeavour. 

Demarcation of artist-entrepreneurship to similar concepts

The status of artist entrepreneurship is recognised if all four criteria, as outlined in the previous section, are met. Further, as will be discussed in the following, it is recognised as distinct from similar phenomena such as indie artists, Do-It-Yourself (DIY) practices and small business owners or working musicians. The term indie (independent) artist in its literal meaning—being independent of the major label dominated recording industry—would suit the phenomenon of artist-entrepreneurship quite well. Due to its history and practical usage, however, it is misleading and inappropriate. The term indie artist is associated with artists signed to independent record labels. As mentioned in the introduction, independent record labels emerged during the 1950s in the US in the wake of the rock’n’roll revolution.  Peterson (1990) analysed and explained the emergence of indie labels as follows:

In the early 1950s, the music industry was blind to the large and growing unsatisfied demand for greater variety in music and deaf to the efforts of musicians that might have satisfied the demand. The music industry was financially as well as aesthetically committed to the big-band-crooner style of popular music of the time, and, because of its oligopolistic control of the production, distribution, and marketing of new music, was able to thwart the marketing of alternative styles smaller so-called independent labels discovered the unsatisfied demand for more musical variety and marketed the new music. (p. 113)

Soon after the independents achieved considerable success the majors developed strategies to participate in the new market segment. The majors either bought successful indie labels or integrated them into what is referred to as an “open system” (Garofalo, 1986; Gray, 1988; Lopes, 1992). Thereby, the majors contracted independent producers and incorporated semi-autonomous label divisions within their mother companies. These so-called independent labels were in fact dependent on the majors’ control of large-scale manufacturing, distribution and exposure channels (Lopes, 1992). The notion of “independent” changed from an industrial organisational feature to an aesthetic catchword for marketing purposes. Additionally, even if indie labels became more independent from major networks in the wake of the major labels’ loss of control over large parts of the value-creation chain during the digital revolution, the indie artist is still a signed artist. That means, he or she went through the A&R selection process and surrendered copyrights (in whole or part) to the label. This stands in contrast to the defining criterion number four developed above. 

The DIY aesthetic has been present in the music industries for a long time. The prime example for the DIY culture in the music context is the garage band and punk movement in the late 1960s and early 1970s before punk and its various subgenres were incorporated into the mainstream (Hesmondhalgh, 2008). The initial punk movement had two driving forces—a musical one and a political one (Reynolds, 2006). The musically driven factor was based on the idea that anybody who wished to form a band could and should do so. It was a counter-movement to the general trend in pop music at this time, a trend characterised by high levels of technical ability of the musicians, polished productions and spectacular stage shows (Bennett, 2001). Punk was the exact opposite, aptly exemplified in an illustration published by the English fanzine Sideburns showing a picture of three chords, captioned: “This is a chord, this is another, this is a third. Now form a band” (Savage, 2002). As David Byrne, founding member of Talking Heads described it, “Punk wasn’t a musical style, or at least it shouldn’t have been … It was more a kind of do it yourself—‘anyone can do it’ attitude. If you can only play two notes on the guitar you can figure out a way to make a song out of that” (Byrne cited in the BBC TV series Dancing in the Streets, 1995). Not only was punk simple and aesthetically stripped down, but it was also technically low grade. The DIY approach was driven by a lack of access to sophisticated music production facilities, distribution networks and promotion channels. Productions were simple and often accomplished with cheap home tape recorders or portable four-track recording machines (Laing, 1985). The protagonists made a virtue out of necessity and declared the rough and raw sound as the intentioned trademark sound. However, initially this was not a conscious preference for a rough sound as opposed to a polished fine-tuned industry sound. Rather, it was the only option independent artists had at this time without integrating into the established structure of the recording industry. The same applies to distribution and promotion practices: Many musicians rarely had access to large distribution and promotion channels (see Chapter Four). Before it was coopted by the major labels, punk was predominantly distributed through independent labels, localised record shops and promoted via fanzines, flyers and mouth-to-mouth practices (Triggs, 2006). The other driver of the punk and DIY movement was political. Punk represented a counter-movement against the establishment. A substantial body of literature addresses the complex and widely ramified sociological aspects of the punk movement in great detail (see for (Dale, 2009; Hesmondhalgh, 2008; Laing, 1985; Reynolds, 2006; Savage, 2002). Broadly summarised, punk and subsequent subgenres were analysed in terms of their politics, belief systems, fashions and life-styles. Punk-related ideologies often involved anti-authoritarianism, non-conformity, nihilism, anarchism and socialism.

Comparing artist-entrepreneurship to the characteristics of the DIY movement in its most prominent context reveals some important differences. First, artist-entrepreneurship occurs in a wide range of different genres without following a specific sound aesthetic. Second, artist-entrepreneurship is not primarily politically driven and nor is it a subculture entailing a common belief-system, fashion or life-style. Third, artist-entrepreneurship is not driven by a lack of access to high-quality production, distribution and promotion tools. On the contrary, it is driven by a newfound accessibility to these tools.However, DIY practices in a broader sense have been present in other genres and contexts than the punk movement. Taking the DIY notion out of its frequently associated context, in its core principle it seems to describes a similar phenomenon as entrepreneurship, that is: doing things on your own. Artists used to developed strategies to pursue their goals in scenarios where they could not secure a lucrative record deal before the digital revolution. These strategies came in forms of the self-employed musician, the small business owner, the sole trader or what is sometimes referred to as the “working musician”. The working musician has been present during all periods of the music industry and arguably has been one of the most common forms in which musicians have worked and earned money. While no precise definition of the working musician is available, the term is commonly associated with musicians that make a living income with a range of musical activities such as performing live, playing in cover bands, performing on weddings and corporate events as well as teaching music (Parker, 2013; Wages, 2013). Some artists also started their own record labels, so-called vanity labels, specifically founded to release the artist’s own music as opposed to label foundations that aim to sign other artists. 

According to Carland et al. (1984), many researchers fail to differentiate between small business ventures and entrepreneurship.  The authors define small business ventures as “any business that is independently owned and operated, not dominant in its field, and does not engage in any new marketing or innovative practices” (Carland et al., 1984, p. 358). A typical example would be a manager-owned plumbing business, restaurant or clothes shop. Carland et al. (1984) argue further that “the critical factor […] to distinguish entrepreneurs from non-entrepreneurial managers and, in particular, small business owners is innovation” (p. 357). For example, during the rock’n’ roll revolution in the 50s and 60s, the foundations of record labels such as Sun, Aristocrat/Chess or Atlantic Records clearly qualify for innovation and entrepreneurship (Tschmuck, 2012). Within the social, legal and economic framework of the recording industry at that time, the foundation of those labels initiated a reorganization of the industry structure, brought up aesthetical innovations and changed the paradigm how the recording industry worked (Peterson, 1990; Tschmuck, 2012). The entrepreneur is seen as an agent of change who causes creative destruction through the introduction of new goods or methods of production, who opens new markets and causes a reorganisation of the industry structure (Schumpeter, 1934). Hence, not every new label founder or self-employed musician who does things on his or her own is an entrepreneur. Self-marketing practices in the bricks-and-mortar recording industry were not competitive to the worldwide distribution and promotion networks of the established industry. They did not challenge the established structure and had no significant impact on the framework in which music was produced and released. Technological advances such as affordable four track tape recording machines in the early 1970s or CD writers in the late 1980s, clearly depicted improvements for self-marketing artists. However, those technologies represent incremental enhancements and not radical innovations that disrupted the industry structure. Hence, for artists that aimed to disseminate their works as much as possible, self-marketing strategies outside of the physical recording industry were primarily second-best solutions. In contrast, in the artist-entrepreneurship scenario, many artists do not perceive artist-entrepreneurship as a second-best solution (see Chapter Five). 

Summary

In summary, the quality and scope of artist-entrepreneurship in the digital recording industry sets it apart from former self-marketing practices. The overall impact of self-marketing practices on the record industry prior to the digital revolution is not comparable to the impact of artist-entrepreneurship on the paradigmatic framework of the digital recording industry. If the changes in the wake of the emergence of radio broadcasting in the 1920s and the boom of the independent labels in the wake of the rock’n’roll revolution in the 1950s are considered as paradigm changes, artist-entrepreneurship in the wake of the digital revolution must be considered a paradigm change as well. Artist-entrepreneurship does not only incrementally improve on the situation of artists but radically alters a core principle — the dependency of artists on record labels. 

Dr. Phil

Academic turned artist. PhD in media & communications with a focus on cultural economics. Composer, producer, sound engineer (SAE), DJ. @pinzandpelz, @liifeofficial, @medklangmusik, @skizzofranick

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