The Dynamic Interplay Between Recorded Music and Live Concerts
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Dominik Papies & Harald J. van Heerde The Dynamic Interplay Between Recorded Music and Live Concerts: The Role of Piracy, Unbundling, and Artist Characteristics The business model for musicians relies on selling recorded music and selling concert tickets. Traditionally, demand for one format (e.g., concerts) would stimulate demand for the other format (e.g., recorded music) and vice versa, leading to an upward demand spiral. However, the market for recorded music is under pressure due to piracy and the unbundling of albums, which also entail threats for the traditional demand spiral. Despite the fundamental importance of recorded music and live concerts for the multibillion-dollar music industry, no prior research has studied their dynamic interplay. This study fills this void by developing new theory on how piracy, unbundling, artist fame, and music quality affect dynamic cross-format elasticities between record demand and concert demand. The theory is tested with a unique data set covering weekly concert and recorded music revenues for close to 400 artists across more than six years in the world’s third-largest music market, Germany. The cross-format elasticity of record on concert revenue is much stronger than the reverse elasticity of concert on record revenue. The results show the key role of piracy, unbundling, and artist characteristics on these cross-format elasticities, which have implications for the business model of the music industry. Keywords: music, record sales, concerts, piracy, unbundling Online Supplement: http://dx.doi.org/10.1509/jm.14.0473 he market for entertainment goods (e.g., music, movies, music in one format would stimulate demand for this artist in the video games) has seen remarkable growth in the past other format, leading to an upward demand spiral. For exam- Tyears, with global revenue approaching $2 trillion in ple, an upcoming artist could give concerts, which would lead 2015 (Eliashberg et al. 2016). Accordingly, entertainment to more albums sold, which would then lead to a greater goods have attracted considerable academic attention in mar- attendance at future concerts, and so on. keting (e.g., Eliashberg et al. 2016; Saboo, Kumar, and Ramani Technological developments, however, challenge many 2016). One key business in the entertainment sector is the music traditional business models (Eliashberg et al. 2016; Shugan industry, with global revenues from recorded music alone worth 2004). The advent of technology changes the way consumers $16.5 billion in 2012 (International Federation of the Phono- consider, purchase, and consume entertainment goods in general graphic Industry 2013). The music industry is an example of an and music in particular. A key development is file sharing, or entertainment good with two major consumption formats: live piracy, which is the process by which “individuals who do not concerts and recorded music (singles and albums, in either own and have not purchased a particular song or movie can physical or digital form). Traditionally, demand for an artist’s nevertheless obtain that song or movie from unknown third parties” (Liebowitz 2006, p. 4). Piracy represents a major threat to recorded music sales, leading to strong decline in revenues (e.g., Browne 2012; Liebowitz 2016). Dominik Papies is Professor of Marketing, University of T¨ubingen (e-mail: Another key development is unbundling, wherein firms can [email protected]). Harald J. van Heerde is Research “offer individual products that were previously only (or pri- Professor of Marketing and MSA Charitable Trust Chair in Marketing, ” Massey University; and Extramural Fellow, CentER, Tilburg University marily) sold as part of bundles (Elberse 2010, p. 107). The (e-mail: [email protected]). This research was supported by the unbundling of music allows consumers to cherry-pick their German Research Foundation (Grant PA 1975/1-1) and the Marketing favorite songs rather than buy the entire album, with possibly Science Institute (MSI Research Grant 4-1770). The authors thank Ralf van adverse effects on demand for recorded music (Elberse 2010). der Lans, Marnik Dekimpe, and seminar participants at the Marketing Whereas recorded music is under threat, the market for Dynamics Conference at Tilburg University and the Cologne-Hamburg Marketing Camp for valuable feedback. Rajkumar Venkatesan served as live concert performances has seen remarkable growth area editor for this article. (Krueger 2005), and many artists have been able to sub- stitute lost revenues from record sales with revenues from © 2017, American Marketing Association Journal of Marketing ISSN: 0022-2429 (print) Vol. 81 (July 2017), 67–87 1547-7185 (electronic)67 DOI: 10.1509/jm.14.0473 live performances.1 Two examples illustrate the growing attending a concert would lead to a record purchase, but that importance of concerts. For a concert by Led Zeppelin now, consumers can download the music for free through file with a venue capacity of 18,000, millions of fans entered a sharing. This development would imply that the link between ballot (at more than V180 per ticket; Cheal 2007). In 2007, concert ticket demand and record demand becomes weaker, that Madonna left her music label (Warner) to join Live Nation, a is, cross-buying is inhibited by piracy. We also hypothesize that company that was known as a concert agency (Waddell this link could be weakened by unbundling, which allows 2007). Industry statistics mirror these examples. Artists in consumers to buy just those tracks they enjoyed the most at the the U.S. music industry earned $4 billion in revenue through concert. concerts and sold 100 million tickets in 2007 (Courty and We expect that the cross-buying effects are moderated not Pagliero 2011). In the United Kingdom, revenues from live only by the external environment represented by technological performances exceeded revenues from recorded music for change but also by characteristics of the artist’s music itself. the first time in 2008 (Michaels 2009). These trends suggest We distinguish between the quality of the artist’s music, which that the live experience of music (vs. the consumption of reflects consumers’ quality assessment and satisfaction with the recorded music) has become increasingly important for artist’s current offering, and the artist’s fame, which reflects past many consumers. Artists have capitalized on this trend as billboard successes. We develop and test new theory on how well. Traditionally, artists such as Madonna or U2 have cross-format buying is moderated by music quality and artist gone on world tours to promote their albums, triggering fame. We expect that music quality enhances cross-buying in cross-buying from concert tickets to records. With concerts both directions (from records to concerts and vice versa) but becoming an increasingly important source of income, the that fame especially increases the cross-buy from records to cross-buying behavior from records to concert tickets concerts. may be more relevant (Seabrook 2009). This new focus is We test the hypotheses using a unique weekly panel data illustrated pointedly by the artist Prince, who made albums set. It covers close to 400 of the best-selling artists in Germany, available for free to enhance concert ticket sales (Paine the third-largest music market worldwide (International Fed- 2010). eration of the Phonographic Industry 2013), across more than Despite the fundamental importance of recorded music and six years, for a total of 118,000 artist-week observations. The live concerts for the multibillion-dollar music industry, no prior data cover the period 2004–2010, representing a turbulent time research has studied the interrelationship of these revenue in the music industry given the threat of piracy and the rise of sources. The objective of this article is to shed new light on unbundling. The data set includes a comprehensive list of dynamic cross-format effects: how demand for one format (e.g., concert activities, assembled from PollstarPro and other sources. concerts) is affected by demand for the other format (e.g., On the basis of these data, we estimate an econometric model records). We study the strength of these effects, their symmetry that assesses how the dynamic cross-format elasticities between versus asymmetry, and their moderating factors. We estimate record revenue and concert ticket revenue are moderated by cross-format elasticities that capture how much demand for one technological developments and artist characteristics. The format (e.g., concerts) is affected by a 1% change in demand for econometric model enables us to capture the main and inter- the other format (e.g., records). The main research questions are active effects of marketing activities (new products, advertising, the following: and airplay, i.e., tracks played on TV and radio) on both for- ’ ’ • How strong are the dynamic cross-format elasticities between mats revenues. The model also captures the artist sdecisionto record demand and concert demand and vice versa? give a concert, accounts for unobserved demand shocks as well • How are these cross-format elasticities changing due to as endogeneity in advertising and airplay, and allows for error technological developments? correlations between concert and record revenue. • How are the cross-format elasticities moderated by artist We contribute to the literature by providing evidence for a characteristics? self-enforcing spiral of “success breeds success”: if an artist becomes more successful on the record market, this will A fundamental technological development in society in enhance this artist’s concert revenue, which in turn enhances general is the digitization of information. In the music industry, record revenue. However, the spiral is highly asymmetric, this has led to digital music files that can be transferred via the with a much stronger effect of record demand on concert Internet. This opened key opportunities to develop new business demand than the other way around. In line with our theorizing, models because it meant that albums could be unbundled and we identify technological developments and artist character- the tracks could be sold separately.