INTERNET AND INDUSTRY STRUCTURE OF THE CREATIVE ECONOMY

The cultural sector is characterized by extensive product differentiation, albeit with a small minority of hits accounting for the bulk of the market. Over recent years, a number of articles have discussed the effect of digitization on concentration in the cultural indus­tries.

7.5.1 Superstar Theory⁴

Rosen (1981) observed that the labor markets for talented individuals tend to bring up a small minority of high-earning superstars. He argued that disproportionate earnings for superstars occur where small differences in talent have an amplified effect on demand, and where technologies allow superstars to reach a large audience. This theory has been well established and adopted in cultural economics (Adler, 1985; Chung and Cox, 1994; Cox et al., 1995; Caves, 2000).

Besides differences in talent, bandwagon effects may explain concentration of sales on particular creators (Leibenstein, 1950), as consumers follow each other to reduce the risk of purchasing inferior products. There may also be network externalities as consumers value more popular works because the shared experience becomes the subject of desirable social interaction.

According to superstar theory, stars will come to dominate more of the market where digital distribution and retailing enables the most outstanding creators to supply a greater number of consumers. The result would be an even more highly skewed distribu­tion of attention and earnings in favor of a few superstars, and perhaps reduced diversity of creative works supplied.

7.5.2 The Long Tail Hypothesis

By contrast, the long tail hypothesis (Brynjolfsson et al., 2003; Anderson, 2004) pre­dicts that niche products will account for an increasing share of sales with the diffusion of digital ICT.

There is some empirical evidence consistent with the long tail hypothesis from markets for cultural products such as books, movies and recorded music (Brynjolfsson et al., 2003, 2006; Anderson, 2004; Moreau and Peltier, 2004; Elberse and Oberholzer, 2007; Benhamou and Peltier, 2007). Online retailers tend to offer a much greater number of different titles than traditional retailers, and the share of top hits in total sales tends to be lower online than offline. Some studies suggest that the overall market share of niche products has increased significantly with the diffusion of digital ICT. This point could be exaggerated, however. Despite some fragmentation, sales for cultural products are still highly concentrated on a small proportion of them. Furthermore, measuring changes in sales concentration is tricky: there is no clear boundary between the long tail and the top end of the market. Should one count the top ten titles as the ‘hits’ or the top 1000, for example? Different aspects of the distribution may be affected differently, say some mid-range versus the far end of the tail. It also remains to be seen to what extent the long tail consists of back catalogue or of new works, or how works from different types of suppliers are affected.

Superstar (winner-take-all) theory and the long tail are often discussed in the analysis of other markets but a substantial number of examples are drawn from markets for cul­tural products. Many academic works seem to be forthcoming on the long tail and other aspects of the impact of digitization on concentration in the creative economy.

7.5.3 Market Power

Another interesting aspect is the effect of digitization on competition in the cultural sector. Pivotal parts of many creative industries are organized in narrow oligopolies. A number of studies illustrate that e-commerce is associated with greater competition (Brynjolfsson and Smith, 2000; Brynjolfsson et al., 2011). The same factors that drive the long-tail effect could be associated with greater contestability and inter-firm competition. This could adversely affect growth of major incumbent firms relative to fringe suppliers and newcomers. It could also strengthen creators in their relationship with more concen­trated intermediary firms such as record companies and literary publishers.

E-commerce seems to play an ambiguous role. On the one hand, online retailing plat­forms make it possible for more fringe suppliers to extend the size of the market they can serve. The alternative outlet of e-commerce may also diminish the market power of major incumbents in the traditional market. On the other hand, digital retailing of many cul­tural products is even more concentrated than offline distribution and retailing has ever been. The effect of digitization on competition in the cultural industries should become an important topic in the future.

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