The process for creating and monetising music can be unconventional too. Most artistic creations require high upfront expenditure, with a significant outlay of costs before any revenues can be recovered. If, for any reason these ventures are not completed the invested capital cannot be recovered.
A further difficulty the musicians face is that success can be very hard to predict, meaning that the optimal level of investment is impossible to calculate and can lead to many big hits off-setting a long tail of misses. Finally, revenues are somewhat constrained by external factors including the price a retailer is willing to pay for a CD, and what they are willing to sell it on for.
Similarly, the necessity to have a crowd of people in the same place at the same time (often paying the same price) in order to profit from a live event. Below see FIVE economic problems every artist will
Uncontrollable Costs: “Dependency on other sectors “
A number of costs experienced by the arts are dependent on other media or retail sectors and outside the scope of the creative industries. For example, the cost of advertising a CD on television did not fall because the music industry was struggling to sell CDs. The consequence of this is that reduced music sales reduce the money available for TV advertising, and so less advertising takes place. This reduced consumer attention further depresses sales, which means that there is less money available to advertise on television, which in turn accentuates the decline in trade.
Unknown Revenue: “Making money in unproven markets”
The same could be said of online advertising funded music in the current climate. The intrinsic value of music did not fall because the advertising market fell, but the revenue that can be generated from streaming a single track will fall, hindering the development of nascent services offering legal, licensed music to consumers, dampening growth in legal music consumption.
Fixed Revenue: “With high fixed costs you need to shift volume”
In situations where high fixed costs exist, the cost of producing the first unit (album) is huge, but the average cost of producing two units is much smaller. The average cost per unit falls the more units are produced, meaning the profitability of each additional sale grows. Having stated clearly that there are large upfront costs and that it is important to sell large volumes of a product in order to break even it is not surprising that the music industry has always been very much a hit centered business.
Supply and Demand: “Two forces, moving in different directions”
There has been a massive increase in the supply of music to consumers. However, this increasing supply of music might have made it more difficult for emerging bands to gain traction as that classic trade-off whereby ‘a wealth of information gives rise to a poverty of attention’ kicks in. Furthermore, the average transaction value for both online and offline consumption continues to decline, meaning that scale matters even more than ever. All of which is leading to an interesting anomaly, as ‘noise’ in the market has increased. The investment needed to stand out from that ‘noise’, therefore becomes more costly as a result, yet point values have decreased which makes the return on that investment even riskier.
Sunk Costs: “Allocating resources in a slow growth sector”
Sunk costs are costs which cannot be recovered if a venture fails. If you buy a car and you don’t like it, you can sell it at a lower price. A further concern is that this increasingly short run approach to art as a product will lead to ‘artistic deficit’ whereby artistic expression is squeezed out by a need to cut cost.By means of example, there will be fewer bands in a financial position to use an orchestra on a recording and as such the final recording is poorer for it. In the same way, bedroom music can suffer from the absence of a professional sound engineer or producer leading to a band not fulfilling their artistic and creative potential.