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Creative Destruction: How Super Star Musicians Make Money

Jun 14, 2013 • Businesses, Demand, Supply, and Markets, Economic History, Economic Thinkers, Households, Innovation, Labor, Macroeconomic Measurement • 442 Views    No Comments

As the old music business cycle unfolded, top performers got a substantial cash advance to make an album, they toured for several months or maybe a year and then MTV promoted their videos. At that point, they took a break before starting all over again.

No more.

At the Rock and Roll Hall of Fame, Alan Krueger, the (departing) Chair of the President’s Council of Economic Advisers, described the changes in the music industry. When he started talking about how it had become more of a super star business, I wondered where the money came from. And that took me to creative destruction.

But first, you can see the super star phenomenon:

Music Business Revenue

In addition to concerts, the top artists can earn hundreds of thousands of dollars from T-shirt and merchandise sales and movie and TV licensing. At the other extreme, iTunes, subscription services, YouTube ads, internet radio and CDs, provide much less income.

Here are some probable breakdowns for iTunes and subscription services like Spotify from the end of 2011:

From Rolling Stone Magazine, 2011.

From Rolling Stone Magazine, 2011.

From Rolling Stone Magazine, 2011.

From Rolling Stone Magazine, 2011.

Dr. Krueger used his super star data to comment on unequal income distribution in the US economy.

Less debatable, is how Joseph Schumpeter’s creative destruction has transformed an industry. Moving from LP records to cassettes, to CDs and now online streaming, changes in the music industry have transformed labor.

Or, as we explained in a past post

Joseph Schumpeter characterized the unsettling process through which innovations replace established technology as creative destruction. The computer replaced typewriters. The auto eliminated the need for buggy whips. In the music industry, because of CDs, 78 and 45 rpm records became obsolete. And now, led by 13 to 35 year olds, internet based listening represents more than half of all music listening. For those of us who are older than 35, AM/FM radio is still #1 with a 41% slice of the listening pie.

As a result, industry super stars have looked beyond the record companies and the internet to earn revenue.

Sources of Revenue

Sources of Music Industry Revenue

From digitalmusicnews.com

Sources and Resources: Almost all of my information and the 2 graphics are from Rolling Stone articles here, here and here. Ideally complementing the music industry story with the bigger economic pictures, the Krueger talk is here.

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