The digitization of the music business goes back to the market introduction of the CD by Philips and Sony in 1982. However, the CD was considered as a record format with a larger music storage capacity. Despite the very different production technology, the CD did not disrupt the recorded music industry's value-added network. The rapid growth of high-speed internet connections and the widespread use of MP3 data compression technology triggered the spread of P2P file-sharing networks and the emergence of the digital music business. In a “war against piracy”, the major record companies and music industry bodies around the world sued file-sharing and file-hosting providers and – after some setbacks – eventually succeeded.

However, the emergence of fully licensed and therefore legal digital music services also made file sharing less attractive. Since Apple launched its iTunes music download store in 2003, the digital music market has evolved. As already highlighted in Chapter 5, digital music sales outperform physical sales in most of the national recorded music markets. However, global digital download sales – single track and album sales – peaked in 2012, whereas streaming revenue is further growing at a high rate. Thus, the question arises whether music streaming consumption is cannibalizing download and CD sales.

With the advent of music streaming, music consumption has shifted from an ownership-based to an access-based business model. This implies also a negative effect – a “cannibalization effect” – of music streaming on recorded music sales. The issue of cannibalization was addressed before the US Copyright Royalty Judges when the US-based music streaming service Pandora lobbied for lower licensing fees it has to pay to copyright holders by presenting a commissioned study by Stephen McBride (2014). The study claimed that plays of an album track on Pandora increase its sales by an average of 2.31 per cent. The study also compared tracks from albums/songs released from major music companies with those from independents. A positive promotional effect of 2.82 per cent was measured for new music from major record companies.

If we buy into the Forbes’ “Celebrity 100” (the world's 100 highest-paid celebrities), almost a third are musicians. Rap superstar Kayne West is second behind reality star Kylie Jenner with annual earnings of $170 million – mainly from his Yeezy sneakers’ deal with Adidas – followed by Elton John (14th), Ariana Grande (17th) and the Jonas Brothers (20th). Whereas Forbes compiles all revenue streams, Billboard's “Money Makers List” focuses on music-related revenues. The Rolling Stones rank first with annual earnings of $65 million from touring, recorded music sales, streaming and publishing. Ariana Grande follows with $44.2 million, just ahead of Elton John and the Jonas Brothers with $43.3 million and $40.8 million, respectively.

Billboard's “Money Makers List” highlights that almost all artists with extraordinarily high earnings were on tour in 2019 and that at least three quarters of the music-related revenue derives from the concert business. The two exceptions are Post Malone, who is a music streaming superstar and the British rock band Queen still selling CDs especially with the success of the Academy Award-winning biopic Bohemian Rhapsody. In most cases, touring accounts for more than 90 per cent of total earnings. If we ignore the case of Queen, revenues from recorded music sales are modest compared to touring income. In the case of high-charting Rolling Stones, for example, their earnings from selling CDs and music downloads amounts to just 2.6 per cent of their total income. Their streaming income is only slightly more relevant at 3.1 per cent. Musicians with a younger fanbase, such as Ariana Grande and Post Malone, do earn a considerable income also from music streaming, but they are still a minority.

Superstar theories

The Forbes and Billboard lists do not reflect the economic reality of professional musicians. The rankings represent an extremely small segment of the artistic labour market – the superstar business. According to Rosen (1981: 845), superstars “earn enormous amounts of money and dominate the activities in which they engage”.

Music industry, music economy, music business

If you google the term “music industry” the following Wikipedia entry tops the search list:

This definition is a list of music industry actors. However, this listing does not tell us anything about the processes and structures of the music industry. The Oxford Music Online entry provides a more general and process-oriented definition of the music industry: “The music industry consists of a network involving the production, distribution, dissemination and consumption of music in a variety of forms, as well as the promotion of live music performances” (Tschmuck 2014).

In combining both definitions we can identify three closely linked sectors of the music industry: (1) the phonographic/recording industry, (2) music publishing, and (3) the live music sector. Some definitions, however, speak about music industries instead of a single music industry, since music recording, music publishing and organizing live music follows different production, distribution and consumption logics. Yet, recording, publishing and the concert business are closely linked. A recorded music company usually unites a recording and music publishing branch, since the former relies on the copyrights of the latter. The concert business is not just the most important revenue source for musicians, but it also helps to sell recorded music. Economic studies prove that the recorded music and the concert markets are complementary goods.

Sound recording functions

Unlike music publishing, the recording industry was severely hit by digitization. According to the International Federation of the Phonographic Industry (IFPI), the global sound recording market decreased by 46.6 per cent from 1998 to 2014, but since recovered due to the music streaming boom in the following years. The record companies, however, had to adjust their business model to the emerging digital music environment and redefined the functions of the sound recording business: artist and repertoire (A&R), production, and marketing.

The A&R function

Talent scouting and the acquisition of repertoire is the main function of a recording company. No record company can afford to rely solely on a back catalogue of master recordings, and must invest in new talent and new repertoire. The A&R person embodies this function in a record company. The traditional role and romantic image of a person scouting for talent in small music venues has changed in the course of digitization. Social media such as Facebook and YouTube have become important means to discover new talent, such that desktop research and data mining have supplemented and even substituted to some extent the daily visit to clubs, concerts and festivals.

New actors have also appeared on the A&R scene. Instead of sourcing and developing acts over several years, record companies, especially the record majors, have started to outsource the A&R function by contracting freelance A&Rs or purchasing master recordings from music producers and A&R teams. Another possibility to avoid the risk of A&R failures is to acquire successful indie record labels and their artists’ rosters (see Klembas 2013: 256– 7). Non-traditional A&R platforms have also emerged in the past few years, such as television casting shows – X Factor and Pop Idol – which outsource the process of finding new talent to the audience. Whereas casting shows have a long tradition in the music business, the concept of crowdsourced A&R has become a new practice in the digital age.

Crowdsourced A&R usually includes a crowdfunding campaign on special platforms that enable the collection of money for any music projects, but also fulfil traditional A&R functions. ArtistShare, since 2001, has been a pioneer of music crowdfunding.

Music publishing functions

When the music publishers dominated the music industry at the end of the nineteenth century, their main aim was to sell sheet music. As mentioned in Chapter 1, “After the Ball” became the first million seller in 1893 and others followed. Today, however, sheet music sales are just a side business for music publishers. The main function of a music publisher in the digital age is the acquisition and exploitation of copyrights.

Copyright acquisition

The traditional way of obtaining copyrights is to contract a songwriter for a specific song (individual song contract) or for a specific period of time to compose and/or write songs (exclusive songwriter's contract). In an individual song contract, a songwriter assigns all the copyrights of a single song to a publisher in return for a non-returnable advance that is fully cross-collateralized with any royalties earned by the songwriter as long as the production cost is not recouped. Several hundreds of dollars or euros are the usual advances for a single song contract (see Hull et al. 2011: 122– 3). In an exclusive contract, a songwriter agrees to exclusively compose and/or write music for a publisher for a certain period. Such a contract lasts usually a year, but longer contracts – up to seven years – are possible should the publisher wish to develop an artist (developmental deals), especially when the publisher expects the songwriter to become a recording artist. Thus, singer/songwriter Alanis Morissette was initially signed for seven years by MCA Music Publishing before her album debut in 1995 (ibid.: 121). During the contract period the songwriter receives a weekly or monthly advance that is fully deductible from any royalties received from record sales, sheet music sales, synchronization fees, etc. (see Brabec & Brabec 2004: 13). In both cases the copyrights can be exploited by the publisher as long as the author is alive and for the period of 70 years after her/his death.

The traditional model of copyright acquisition is typical for small music publishers. Larger companies usually purchase smaller song catalogues from successful songwriters and music producers who run their own publishing companies.

In November 2019, my publisher informed me that my book The Economics of Music had become prescribed reading on a number of music management courses and suggested a second edition. I readily accepted the offer and agreed to update and revise the book chiefly because the ongoing process of digitization had caused profound changes in the music business since 2017 when the first edition was published. The publisher's request came just before a mutated SARS virus was transferred from animals to humans in the Chinese province of Wuhan triggering the worst global pandemic in a hundred years.

Although the long-term effects on the music industry of the pandemicrelated social distancing and lockdown measures taken by governments in all parts of the world cannot be determined yet, it is clear that the cancellation of live music events and the closure of music venues around the globe won't be without significant consequences for the actors in the music industry. I therefore faced the challenge of analysing the impact of the pandemic on sectors of the music industry and its main players on the basis of the limited amount of data available.

Hence, I have conducted a kind of action research evaluating the continuous flow of news of concert cancellations and postponements as well as financial support measures for the music economy from governmental bodies and other institutions to avert disaster, especially for the economically significant live music sector. It might be the task of a third edition in several years time to assess the full impact of the Covid-19 pandemic on the music ecosystem.

Currently, I am sitting here in Vienna in the country's third period of lockdown hoping that a vaccine will set us on the road to reopening restaurants, bars and cafes and for live music once again to be enjoyed by thousands of fans without fear of contracting a microscopic virus.

The justifications for a music copyright

As we have seen, music has public good characteristics. Without any restrictions, music would be in the public domain and could be used without permission at zero cost. Thus, there is no incentive to produce music for economic ends. The introduction of property rights, therefore, allows composers and authors to control their intellectual property. According to Landes and Posner (2003: 12– 16), the possession of an intellectual property right “enables people to reap where they have sown” (Landes & Posner 2003: 13). The benefit from appropriating the returns from intellectual property has to be compared with the incurring cost. The cost of property rights are manifold. Landes and Posner (2003: 16– 21) identify (1) the cost of transferring intellectual property rights; (2) the cost of obtaining such rights; and (3) the cost of protection. From an economic point of view, the introduction of an intellectual property rights regime makes sense if its benefits exceed the cost involved.

The most important intellectual property rights in the field of music are copyrights. There are two different sets of justifications for a copyright of musical works: moral justifications and justifications based on non-alienable exploitation rights. The first important moral justification of copyright is that a composer and author has the right to the fruits of her/his works. The second set of justifications for a copyright of musical works is the Kantian assumption that a work is an extension of a person's personality. And the third moral justification is that it fulfils a society's obligation to creators for their contributions to increase welfare (see O’Hagan 1998: 78– 9). The moral justifications, especially the Kantian argument, play an important role in continental Europe copyright legislations. The three most common moral rights that are granted in European copyright laws – according to O’Hagan (1998: 84) – are (1) the right to be identified as the creator of a work that protects against plagiarism (paternity right); (2) the right to be protected against alterations to one's work (integrity right); and (3) the right to publish a work, but also to prohibit the publication of one's work (publication right).

Key concepts

When it comes to discussion of demand for just about any product or service, there is a general misunderstanding both in the media and among the general public of what this concept really is. We often read and hear statements such as “demand for air travel remains strong” or “tourism demand increased by five per cent as compared to the same month last year”. These statements are typically based on some numbers from the data. These numbers, however, do not necessarily represent demand or changes in demand. Rather, what we observe from the data are outcomes of the interplay of forces of demand, supply (the concept of supply is even more misused) and competition – all the forces I will be discussing in more detail in the subsequent chapters. As a matter of fact, an increase in the number of, say, airline passengers, could result from changes in the underlying demand relationship, changes in supply (e.g., new entry on the market, liberalization, or fierce competition), or changes in both demand and supply. The truth is that with so many moving parts in the market system economists themselves are often able to say only with a limited degree of certainty whether the resulting change in quantity and price is the outcome of a change in demand. Yet, pointing to changes in market demand as the underlying reason for whatever is observed in the data is a useful and easy to understand shortcut.

So, let us use this shortcut. Figure 1.1 presents the evolution of global passenger air travel over the last 40+ years, ending just before the Covid-19 pandemic (according to figures reported by the World Bank). We can see that while fewer than 0.5 billion people made a trip by air in 1975; the corresponding number in 2019 was nearly 4.4 billion. This represents a nearly nine-fold increase in demand for air travel. Over the same period, the world's population had nearly doubled, increasing by over 97 per cent. The global inflation adjusted GDP is estimated to have quintupled over the same period.

To visualize the effect of the Covid-19 pandemic on the airline industry, Figure 1.2 compares the number of seats offered on flights (both domestic and international) from select countries over the period from February 2020 to January 2021.

What are airports?

This may seem a silly question, but only at first glance. Most people think about airports as the place where their flight begins and ends, something similar to but a bit more complex than train stations or bus terminals. Airports do occupy a prominent place in the modern world: they put cities on the map, define communities (think about Atlanta without a Delta hub), are a source of fascination (next time you are near an airport, observe people just spending time watching the airplanes take off and land), pride, and sometimes frustration (as discussed in chapters on congestion, delays, air and noise pollution). But what are they for an economist?

From the point of view of economics, the key question with respect to airports is whether they are infrastructure objects or firms. As a matter of fact, this question is answered differently in different parts of the world, as far as the aeronautical side of the airports’ operations is concerned. In the United States, airports are indeed considered simply a vital part of the aviation infrastructure. Private sector participation in airport infrastructure is therefore limited, airports are owned and managed by local authorities, and they are not allowed to make a profit on their aeronautical operations and discriminate in their pricing among aeronautical users. In contrast to this, many airports in Europe and Australia are fully or partly privatized. A significant number of airports in Europe, and all airports in Australia are allowed to set their aeronautical charges as they see fit. In the UK, for example, only Heathrow's and Gatwick's aeronautical charges are currently subject to regulation. In Australia, airports’ charges are not regulated, but are subject to monitoring under the threat of re-regulation in case airports are found to be taking advantage of their market position.

Airports’ revenue comes from both aeronautical and non-aeronautical activities. Aeronautical revenue comes from airlines and other users of the respective infrastructure (such as general aviation) in the form of take-off and landing charges. Those charges themselves normally include weight-based and passenger-based components.

Key concepts: applied economics of costs

The concept of costs in the airline industry is most often mentioned in the press in light of the distinction between “low-cost” and “non-low-cost” or “full service” carriers (LCCs versus FSCs). What is often implied in these discussions is that low-cost carriers tend to offer cheaper tickets as compared to the full service airlines (a contention I will revisit in this chapter), while offering fewer amenities to their passengers. Indeed, if we look at conventional cost metrics, such as cost per available seat mile (CASM), which is calculated by simply dividing the airline's total cost of operation over a certain period by available seat miles or the product of number of seats offered and the number of miles flown, we will see that there appears to be a gap between carriers referred to as LCCs and those known as FSCs. For instance, in 2019 a leading LCC on the US market, Southwest Airlines, boasted CASM of 12.23 cents; the same measure for American Airlines was 17.16 cents, while for Delta Air Lines it was equal to 16.16 cents (see Table 2.1 for further figures). However, can we draw a line in this measure to say that all airlines with CASM below a certain threshold are low-cost carriers, whereas carriers with higher values are FSCs? Or, do airlines’ costs depend at least in part on the carriers’ business strategies and may therefore not always be directly comparable?

The key economics concepts that relate to costs and which are relevant to understanding what is behind these differences in CASM across airlines are as follows. First, we can generally divide the operating costs into those that do not depend on the output level (so-called fixed costs) and those that vary as the output changes (known in economics as variable costs). Second, costs can grow as fast as, faster than, or slower than the output (this concept is known as economies of scale). Finally, firms can and do invest in provision of higher product quality, inevitably resulting in higher costs of operation. Such investments are done by airlines to attract price-insensitive business travellers, and increase their revenues.

Defining and measuring markets

Before we move on to discussing competition on the airline markets, it is necessary to define what we mean by the notions of “market” and “market structure”. This is not as straightforward as it may initially seem. Of course, the easiest way to define an airline market is through two endpoints on a passenger's journey. We can then talk about, for instance, a London–New York market or a Paris–Rome market. We can further see which airlines fly between the two cities and call them competitors on a given market. If we find that only one airline flies between the two cities, then we could call such a route a monopoly. On the other hand, if there are five carriers providing a non-stop service (as is the case between London and New York), we can call this route competitive. Seems simple enough.

However, as we start thinking about this issue further, questions emerge. Are flights between Heathrow and JFK the same as between Gatwick and Newark? Will the airline offering five flights a day view its competitor offering five services a week on the same route seriously? What if you have a choice of both a non-stop flight and a number of one-stop journeys, involving longer total trip time – are these services “true” competitors to each other? Are flights to Dusseldorf on the same market as services to Cologne Bonn Airport? After all, a train trip between Dusseldorf airport and Cologne only takes about 40 minutes, so if you travel to the city of Cologne, you can choose to fly into either of the two airports. What about the city-pairs where travel is possible by either plane or train (such as London and Paris) – do you treat Eurostar services separately from the airlines that fly between the two cities? These are the kinds of questions the market players, analysts, and policy-makers address on a daily basis.

Economists call the exercise of identifying the relevant competitors (that is, figuring out who is and, equally importantly, who is not competing with a given service) “defining the market boundaries”. The key concept used in this exercise is called substitutability.

Managing airport capacity

This part of the book deals with what economists call externalities, defined as benefits or costs of trade incurred by someone who does not take part in this trade. Air pollution is a familiar textbook example of this. Someone living next to a factory, someone who does not work at the said factory, nor buys the products produced there (nor benefits from it in any other way) is still affected by air/water/soil pollution that this factory generates. The cost to that person can be real and tangible, taking the form of adverse health effects, or otherwise reduced quality of life. This is a problem because in a free market the factory owner does not take this pollution into account when making its production decisions. The factory owner makes decisions based on costs, and costs to the third parties are not costs to the factory owner. However, they are costs to the society as a whole. As a result, the factory's output ends up being higher than the socially optimal level. Some sectors in the economy produce external effects that are positive: education, for example, produces better citizens, reducing crime rates.

Congestion represents another kind of negative externality. At the basic level, congestion arises when adding a car to the traffic or a flight to the airport schedule slows down everyone else using the road or the airport. This creates real and tangible costs for other users (in the form of lost time, increased fuel consumption, etc.), which is not taken into account by the user making the decision to use the facility (road or airport).

Airport congestion has become an important policy issue. A study (NEXTOR 2010) suggested that a 10 per cent reduction in airline delays in the United States would raise net welfare in the US economy by almost $17.6 billion, while a 30 per cent drop in the number of delayed flights would result in a $38.5 billion increase in welfare. While just before the pandemic relatively few airports operated at or sometimes above capacity, the share of travellers affected by this issue was significant. Congested airports are typically large hubs handling a large share of passengers in the system. Also, airlines’ hub-and-spoke networks mean that congested airports form bottlenecks in the global network.

Airlines are safe, but this does not come cheap

Statistically, commercial passenger aviation is the safest mode of transport. You probably have heard or read this statement before. The data from the United States gives the number of fatalities per billion passenger miles in commercial passenger aviation as 0.038, which is about 240 times lower than the same measure for trips by personal car. Note, however, that general aviation (essentially, civilian non-commercial flights) is several times less safe than private car travel: the number of fatalities per billion passenger miles in general aviation is at least 1,000 times that for commercial passenger aviation.

Moreover, aviation safety has been improving over time. The number of commercial civil aviation fatalities per year currently stands at less than half of what we saw in the 1980s – a remarkable achievement considering the substantial growth in air travel over the same period. Moreover, all of the top ten years with the fewest numbers of commercial aviation fatalities per total passengers flown have occurred in the twenty-first century, and all of the top five in the previous decade. In terms of the total commercial civil aviation fatalities, eight of the top ten years with the fewest number of people killed in air crashes happened in this century as well – only 1984 and 1999 were the two years from the previous century that made it on to this list. The 1970s was the worst time for flying in this respect – six of the top-ten deadliest years in aviation history are from that decade.

Safety performance, however, is not evenly spread either around the world or across airlines. According to IATA, accident rates are much lower in Europe, North America, China and North Asia than in Africa, the Middle East, South America, and the Commonwealth of Independent States (which includes Russia, Belarus, Azerbaijan, Armenia, and the post-Soviet Central Asian states). Larger carriers are on average safer than smaller airlines. IATA also notes that its member airlines exhibit higher safety compared to those carriers that are not members. And, the higher accident rates in some of the regions can be explained by non-IATA member airlines; if we focused only on IATA members, we would see much more uniform accident rates across the world.

Key points and issues

Air navigation services (ANS) is a crucial aviation infrastructure industry. Like most such industries, it has properties of a natural monopoly, making it a good candidate for economic regulation. However, there are additional factors that make air navigation, perhaps, a more complicated and less efficient industry than it needs to be. Some institutional changes aimed at bringing in market discipline and hopefully to increase the industry's efficiency are slowly taking place. Also, ANS is perhaps an aviation sector with significant potential for the commercial introduction of a radically new technology, which can substantially increase effective capacity of the aviation system. However, introduction of new technologies and institutional changes to the air navigation service providers (ANSPs) often clash with interests of unionized labour in the industry. This problem is especially acute in some European countries, for example, in 2016 alone French air traffic controllers went on strike at least 14 times.

We can delineate three distinct segments in the ANS industry, which correspond to different stages of the flight. These are “en route control”, “approach control” and “terminal” (also known as “aerodrome control”) services. These services are provided by air traffic centres, approach control centres, and control towers, respectively (at the majority of airports, both approach and terminal control services are provided from the control towers). While all segments of this industry have characteristics of natural monopolies, some limited competition for the right to operate these services has been introduced in a few countries in the terminal control segment (tower services). Here providers can bid for contracts to provide air navigation services at the airports’ towers, with the hope that the most efficient firm will get the contract by being able to bid lower prices than its competitors. Of course, services provided must meet the set safety standards, but this problem is typically addressed by having an independent safety regulator, responsible for certification of air traffic controllers and providers.

We can examine a number of key policy issues in the ANS sector. First is the issue of the optimal size of service providers – especially relevant for en route and approach control services.