Threat of Entry

Economies of Scale

An industry has economies of scale when a larger firm is able to recognize cost advantages over a smaller firm due to its size. The increased popularity of the internet has caused the economies of scale for the music industry to be moderately low. Independent artists and record labels can now offer their products online at very low cost, and in doing so skip several steps in the traditional value chain. Even though hard-copy CDs still account for the majority of industry sales, the significant shift towards digital downloading in the past several years has eliminate this "economies of scale" advantage. Overall, the moderately low level of economies of scale in the music industry leads to lower revenues and profits. Read this article about the music industry's shift towards digital downloading, and how it is hurting the "Big Four" incumbents firms.

Cost Advantages Independent of Scale

The dominant, “Big Four” record companies are able to realize cost advantages independent of scale because of the learning curve effect. These firms have gained the knowledge and built a network of resources and expertise that allows them to be increasingly competitive in the industry. Independent labels don’t have access to the same resources nor have they gained the same level of experience. This is especially unfavorable when trying to navigate a changing music industry with declining sales. The “Big Four” also have more consumer knowledge and larger amounts of capital, which allows them to better market their artists. Due to this learning curve effect, costs for industry incumbents will decrease while profits will increase.

Although the learning curve makes entry into an industry more difficult, low product differentiation, and moderate economies of scales, eliminates any barrier the learning curve provides. Therefore, the threat of entry for the music industry is high. The diagram above to the right summarizes my analysis of the threat of entry on the music industry.

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