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Barriers of Entry in the Record Industry Are Low

A highlight from the British 1994 report on recorded music by the Ministry of Mergers and Competition:

  • Barriers to entry in the record industry are low. A number of independents have entered the market successfully over the last ten years. A number of artists signed to independent labels have featured in the singles and album charts. The Top 40 singles charts gained 540 new entrants in the year ending September 1993, 84 of which were from independents. The Top 40 album charts gained 272 new entries over the same period, 42 of which were from independents.
  • A small independent record company has few sunk costs since recording, manufacturing, distribution and marketing can all be contracted out to independent third parties. Many costs have come down in recent years. For example, recording equipment of reasonable quality can be purchased for a few hundred pounds, allowing initial recording to be done away from the studio. At the smallest end of the market a recording can be made in a home studio.
  • The combination of rapidly changing consumer tastes and a pool of artistic talent in the UK provides opportunities for independents. Independents can compete against the majors in the signing of new artists in a number of ways. An independent may concentrate on a particular type of music and be better placed than a major to spot new talent and make contact with an artist. Artists may be more attracted to an independent that has a good reputation in their type of music than to a major (ie they might be perceived as having more `street cred’).
  • There appears to be a pool of people with experience of the record business who are willing to set up record companies, for example ex-artists, producers, artists’ managers or ex-employees of the majors. The reputation of these people may be sufficient to attract new artists.
  • The independents often develop links with the majors. For example, if a new artist is successful but the independent cannot market the artist overseas, the independent may come to an arrangement with a major under which the artist’s recordings are licensed to the major, the artist is signed by the major, or the major takes some financial interest in the independent. Whatever the particular arrangements, there are likely to be benefits for both parties. The majors are interested in sharing in the A&R successes of the independents, while for their part the independents gain funds for further A&R. The risks to the artist of signing with an independent are reduced if this exit route is available.
  • The option of outright sale to a major is also open to an independent. The major may be attracted by the existing artist roster, the back catalogue, the personnel or the name of the label. The possibility of a profitable exit from the market is an incentive for a new entrant

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