The growth of the global recording industry represents a post-World War II (1939-1945) phenomenon. Despite the inventions of the radio and the phonograph, record sales remained relatively low in the first half of the twentieth century. It was not until 1948, when Columbia Records introduced the 12-inch vinylite long-playing (LP) record onto the market in the United States, that the industry enjoyed its first significant stimulus to growth. The emergence of new low-cost recording equipment followed in the 1950s and allowed many independent record labels, known as indies, to compete with the major record labels, or majors, namely, Columbia, RCA, and Decca. This provided an opportunity for a greater variety of artists to release music and increased demand as consumers exploited the wider choice of music available.
The 1960s was a creative decade in which many of the old formulas and structures changed. Hi-fi stereo recordings were first introduced, and the development of tape formats that would eventually transform the industry picked up pace in the mid-1960s with the appearance of four-track and eight-track tapes. The eight-track achieved a dominant position over the four-track until the cassette tape, introduced by the Philips Company in 1963, eventually took over in the 1970s. Cassette tapes were smaller, more convenient, reasonably cheap to produce, and, in combination with the development of accompanying compatible software, transformed the production and consumption of music.
Growth of the industry continued until the recession of the early 1980s when the demand for music fell. Many in the industry at this time believed that the availability of home cassette recorders was responsible for much of the loss in sales and there were attempts to tax blank recording cassette tapes. Yet, some analysts suggest that the decline was predominantly related to the poor quality of the recordings, inferior software, the global recession, and a shortage of creative work.
The downturn only proved temporary, however, and a period of high growth followed, largely due to recording improvements and the expanded use of digital formats, such as the compact disc (CD). Because of the low cost of production and strong market demand for high-quality recordings, record companies focused on low-risk opportunities for profit. This took the form of issuing CDs of back catalogues and compilations of works by established artists. At the same time, the development and growth of global satellite television channels catering to music lovers only, such as MTV, also contributed to an increased demand for music.
By the late 1990s, a culture of "free" music was emerging as use of the Internet expanded. In 1999, Shawn Fanning, then an eighteen-year-old student at Northeastern University in Boston, created a computer program called Napster that allowed Internet users to search for songs in MP3 format ("near" CD-quality sound) on the hard drives of other users, and then download this music to their own hard drives at no cost. However, within only a few months of its existence, Napster was sued by the Recording Industry Association of America on behalf of the major record labels for copyright infringement. Napster lost the case, and in July 2001 was forced to shut down.
By 2004 global sales of physical recorded music (audio and video) were estimated to be $33.6 billion, representing a fall of 10 percent in real terms since 1999. Total global unit sales in 2004 were 2.8 billion, 77 percent of which were accounted for by sales of CDs. In the same year, the United Kingdom had the world’s highest per capita sales of recorded music in both volume and value terms, at 3.2 units and $58.20 respectively. The figures for the United States were 2.8 and $41.50 respectively. However, the recording industry also helps drive a much broader music sector, from subscription radio stations to mobile ringtone sales, that was estimated to be worth more than $100 billion globally in 2005. Music has an economic importance that extends well beyond the scope of record sales.
In terms of its organization, the recording industry has a highly concentrated, oligopolistic structure dominated by four majors: Sony-BMG, EMI, Universal, and Warner. In 2004 these four companies enjoyed a combined global market share of 75 percent. The remainder was accounted for by numerous indies whose continued presence reflects two factors: (1) an ability to expand markets and specialize in market niches; and (2) a reliance upon the majors to bring their music to market. One consequence of this symbiotic relationship between the majors and indies has been the reduction of potential competition. However, digital technologies and the Internet are reducing costs and barriers to entry and represent an opportunity for the indies to loosen the majors’ stranglehold on the distribution of music.
As noted earlier, the growth of Internet technology that allows consumers to download music without paying the producers represents a major challenge to the recording industry. In theory, the main concern is that the activity may reduce legitimate demand for albums as potential consumers turn to pirated versions, though it can be argued that illegal downloading may stimulate legitimate demand. For example, online "sampling" of individual songs may increase demand for full album recordings.
Most empirical work by economists on this issue suggests that the negative effects of online piracy outweigh the positive effects, that is, piracy is associated with a fall in legitimate music sales. However, history shows that technology has been responsible for the growth of the mass consumption of music and has allowed today’s superstars to earn huge sums of money compared to musicians of two hundred years ago. Like the invention of recording tape and the compact disc, therefore, the Internet is likely to ultimately result in an increase in demand for music once new business models are in place. Indeed, the success of Apple’s iTunes music store has demonstrated that consumers are willing to pay for music downloads from the Internet. Industries that do not innovate in a market economy, or ineffectively compete with producers of other similar products, will decline, a rule that applies to the recording industry.
