Back in time (II)

In 1889, both Edison and a new jukebox producer called the Columbia Phonograph Company began to sell music recorded on wax cylinders, and the music-recording industry was born. But change was brewing again. That same year, a different kind of recording device known as the “gramophone,” appeared on the market. Invented by Emile Berliner and patented in 1887, it recorded sound by means of a vibrating stylus, just as the phonograph and the graphophone did. Instead of cylinders, however, it used flat, easily copied discs, or “records.”

Berliner produced his first records in 1889, for a toy store. In the mid 1890s it began to offer gramophones and records to the general public, in direct competition with the phonographs and cylinders produced by Edison and Columbia. Because records could be mass produced and stored more easily than cylinders, they had distinct advantages in that competition, and it soon became clear that they would become the industry standard. A high-stakes legal battle ensued, Columbia arguing that Berliner had infringed on its patents with his gramophone. In 1901, a judge ruled that both companies would be allowed to make records, a ruling that was deemed a victory for Berliner. To commemorate that victory, Berliner and others formed the Victor Talking Machine Company.

Victor and Columbia soon came to dominate the industry. Edison misguidedly stuck with cylinders. Eventually he made the switch, even developing a recording technique that produced records with considerably higher fidelity than those of his competitors. But consumers had already committed to a technology that was cheaper and good enough for their needs. This is a scenario that has played out time and again in the entertainment industries. The companies that have captured new markets often have done so by sensing opportunities early and moving in with “good enough” technologies that they have improved after, not before, locking consumers into their platform.

In the first two decades of the twentieth century, Victor and Columbia recognized that recordings, not the machines that played them, were their primary product. Adjusting accordingly, they positioned themselves in the middle of the market, which they recognized would give them maximum control and profit. On one side, they began hiring recording artists, which gave them upstream power over the music they were recording; on the other, they retained control of manufacturing, distribution, and promotion, which gave them downstream power over the sale of their music. Tin Pan Alley retained the job of managing copyrights for composers and lyricists.

Thanks to this strategy, recording royalties soon became a major moneymaker in the music industry. Victor alone saw record sales reach 18.6 million in 1915, and one estimate puts worldwide record sales earlier that decade at about 50 million copies. In 1920, with World War I in the past, almost 150 million records were sold in the United States. The path ahead seemed clear – until 1923, when broadcast radio emerged. Record sales then dipped for a few years, at one point threatening the survival of Columbia, but electric recording and playback emerged during the same period, and their vastly superior sound quality soon helped sales bounce back. By 1929, “gramophone fever” had struck, and the record business was booming.

Then came the Depression. Recording sales in the United States took a precipitous dive between 1929 and 1933, falling from 150 million to 10 million. Sales of sheet music plummeted too, never to recover their importance in the revenue stream. To survive, companies merged, which brought about a wave of consolidations that transformed the industry into a genuine oligopoly. That transformation is described succinctly in a 2000 Harvard Business School case study titled “BMG Entertainment”:

Edison went out of business. And the Radio Corporation of America (RCA), which had prospered as a result of radio’s popularity, acquired Victor. In 1931, rivals Columbia, Parlophone and the Gramophone merged to become Electric and Musical Industies (EMI), based in England. The American operations of EMI passed into the hands of CBS, another radio network. The companies that emerged from consolidation – RCA/Victor, EMI, and CBS Records – led the music industry in the following decades. Indeed, they formed the core of three of the five major music companies that dominated the industry in 1999.

New recording companies, most notably Decca, emerged in the 1930s and the 1940s. But the industry remained under the tight control of a powerful few. “Between 1946 and 1952,” the aforementioned case study reports, “the six largest companies produces 158 of the 163 records which achieved ‘gold-record’ status, and RCA/Victor and Decca represented 67 percent of Billboard’s Top Pop Records chart.”