Back in time (I)

Don’t bet your future on one roll of the dice/ Better remember lightning never strikes twice

Huey Lewis and the News, “Back in Time”

Not long ago, a leader in one of the entertainment industries delivered a talk to our class. He provided us with valuable perspective on the nature of his business and the challenges it faces today, but at a certain point he said something that gave us pause. We were discussing the rise of the internet and its effect on his industry, and someone asked if the internet might threaten the market power of the small group of “majors” that had ruled the business for decades. Our guest speaker dismissed the question. “The original players in this industry have been around for the last 100 years,” he said, “and there’s a reason for that.”

We found that remark understandable but profoundly revealing. It was understandable for the simple reason that it was true, and we had heard other executives express nearly identical sentiments about their own industries. But we found it revealing because it didn’t acknowledge something else that was true: that the technological changes at work in the creative industries today are fundamentally different from those that came before them. These changes threaten the established structure in the entertainment industries, and leaders of those industries must understand these changes and engage with them if they want their businesses to continue to thrive.

Before considering how things have changed, let’s explore the market realities behind the statement the industry leader made in our class.

Why is it that in the entertainment industries so much power is concentrated in the hands of so few companies? What are the economic characteristics that allow large labels, studios, and publishers to dominate their smaller rivals? And why have these characteristics persisted despite regular and major changes in the technologies for creating, promoting, and distributing entertainment?

For variety’s sake, because we discussed the motion-picture industry in previous articles, we’ll focus on the music industry in this series of articles, with the understanding that each of the creative industries experienced a similar evolution. Our motivation here is fundamental. To understand how technology may disrupt the creative industries in the twenty-first century, we need to understand how those industries evolved in the twentieth century.

Until the late 1800s, the music industry was primarily the music-publishing industry. Sheet music, copyrighted and printed and distributed in the fashion of books, was what you bought if you liked a song and wanted to hear it at home. You got  your music in a store or at a concession stand, played it on the piano in your parlor, and Presto! – you had a home entertainment system. New York, especially the district of Manhattan known as Tin Pan Alley, became the hub of the sheet-music business.

By the end of the nineteenth century, thanks to the growth of the middle class, sales of sheet music were booming. In 1892, one song alone, Charles K. Harris’ “After the Ball,” sold 2 million copies. To meet the growing demand, music publishers signed up writers who could produce catchy, easy-to-play songs with broad popular appeal. The path ahead seemed clear.

Change was brewing, however. Back in 1877, while tinkering with improvements to the telegraph, the young inventor Thomas Edison had created a device that could record, store, and play back sound. It consisted of a mouth horn, a diaphragm, a stylus, and a cylinder wrapped in tin foil, and its operation was simple: To record your voice, you spoke into the horn while turning the cylinder with a hand crank. The sound of your voice made the diaphragm vibrate, which in turn caused the stylus to imprint indentations in the foil and began rotating the cylinder.

The movements of the stylus along the indentations in the foil caused the diaphragm to vibrate and make sound, which the horn amplified. Faintly, and a little eerily, your voice would re-emerge from the horn, as though overheard through a wall. Edison patented the idea immediately, using the name “phonograph.” But as is so often the case with new technologies, he didn’t fully recognize its potential. The quality of his recordings was poor, and they had to be produced individually, and thus his phonograph was little more than a novelty item: the electric light.

But others continued to play with the idea. In 1885, a patent was issued for a competing device called the “graphophone,” which used wax cylinders rather than tin foil to make the recordings. This drew Edison back into the game, and in 1888 he devised what he called an “improved phonograph,” which also used wax cylinders.

Not long afterward, a wealthy businessman bought the rights to both devices and formed the North American Phonograph Company. His business plan was to sell the devices as dictation machines for use in offices. That plan failed, and soon the North American Phonograph Company faced bankruptcy. Smelling opportunity, Edison bought back the rights to the phonograph, and eventually a way was found to make money from such machines by installing then in coin-operated “jukeboxes” for use in the amusement parlors.