The Impact Of Digitization on Product Innovation in the Recorded Music Industry

Digital music market has been around for more than a decade now. In spite of increasing digital sales, the overall revenues earned yearly are declining. The biggest concern with the digitization of music industry has been the ease in illegal copying of music files. For several years file-sharing platforms have been held accountable for the falling revenues of the industry. Extending that logic, if labels/artists do not receive an income from their work, file-sharing should then also discourage new artists to then enter the market, as well as lead to a decrease in the creation of new works (product innovation). One other discussion is the democratization of the music market with digitization. Because digitization also reduces entry barriers and creates a level playing field, the adoption of a digital market to buy and sell music should ideally lead to a dispersion of market power. A contestable market should be witnessed, with new music works and new artists competing for larger market shares. Using data acquired from weekly Billboard Hot 100 chart, this empirical research makes a comparison of two periods in time, and demonstrates the effect of the digital retail market as well as the illegal copying of music files on the creation of new works and the inclusion of new artists into the market. Based on the analysis, a general downward trend is witnessed in the music market in terms of creation and innovation. Results from this research indicate that illegal copying does not affect the supply of new works and new artists entering the music market. Furthermore, digital market may not be conducive for newcomers to compete freely, indicating the presence of a superstar economy in the music industry. With digital retailers gaining in terms of revenue, the discussion points towards a mere transfer of market power from the major labels to the new digital intermediaries.