The polarising effect of blockbuster economics

When markets become dominated by a few big names, fears grow for medium-sized players.

by Paul Simpson
Last Updated: 28 Aug 2019

Ed Sheeran is in two one per cent clubs. The first is that elite group of millionaires and billionaires that, Credit Suisse estimates, controls 46 per cent of the world’s wealth.

The second is the top one per cent of musicians who, Princeton University economist Alan Krueger has calculated, took home 60 per cent of all concert ticket revenues in 2017. That’s more than double the 26 per cent the top acts earned in 1982. Comparable figures for 2018 are not yet available but three tours – by Ed Sheeran, Taylor Swift and Beyoncé – collectively grossed around $1bn. 

Krueger, who died in March before his research was published, called this phenomenon "rockonomics", writing: "The middle has dropped out of music, as more consumers gravitate to a smaller number of superstars."

The polarisation among music acts is even more pronounced because they typically generate 75 per cent of their income from concert tours, compared with around 30 per cent in the 1980s and 1990s. A Billboard analysis of U2’s income for the first half of 2018 found that they made $52.2m from touring and just $1.1m from music sales. 

Avengers: Endgame shows the same gravitational pull is transforming the movie industry. On its opening weekend in April, the Marvel blockbuster accounted for 89 per cent of cinema tickets sold in the US. It was one of five Disney pictures in that week’s list of 10 highest grossing films. 

That trend is mirrored in European football. Last season, reigning champions won the leagues in Italy (Juventus for the eighth time in a row), Scotland (Celtic also for the eighth consecutive time), Germany (Bayern for the seventh successive time), France (back-to-back titles for Paris Saint-Germain, champions six times in the past seven seasons) and Spain (back-to-back titles also for Barcelona, champions four times in the past five years).

Even in England, where the title race went to the last game, runners-up Liverpool were 25 points ahead of Chelsea, the largest margin between second and third since the Premier League was formed in 1992.

The value of winning

Does such disparate data constitute a trend? In 2017, Sir Ian Cheshire, then the chairman of Debenhams, told me: "There is a superscale effect with technology. The value of winning is going up. Companies that are first or second in their market will thrive, those that are third or fourth will find life increasingly awkward." Subsequent events at Debenhams have – largely, I believe, through no fault of his own – proved Cheshire’s point.

Google "squeezed middle" and it is clear that his concern is shared in many other industries. The term is most often applied to the middle class in developed economies but fears over the shrinking prospects for mid-sized businesses have been expressed in such diverse sectors as the legal profession, fund management, commercial real estate and the art market.

This polarisation was not foreseen by the digerati, who proclaimed that the internet would democratise markets, encourage diversity of choice and create what Chris Anderson, the former editor of WIRED, described as "the long tail".

Because the internet removed physical constraints on the display and variety of goods, Anderson argued, it would make it profitable for companies to sell niche products and meet untapped demand. He also argued that the internet would change the demand curve because consumers would value niche products that suited their particular interests more than mass-market products. Anderson predicted that "fickle consumers" would "scatter to the winds as markets fragment into countless niches".

Meticulous research into sales of music and films – online and offline – by Anita Elberse for Harvard Business Review challenged Anderson’s theory. To cite one example, her analysis of a music subscription service offering more than a million tracks found that, in one three-month period, the top 10 per cent of titles accounted for 78 per cent of all plays and the top one per cent for 32 per cent of all plays. The tail might be long, Elberse concluded, but it was extremely flat, so companies would be unwise to bet strategically on it. 

Elberse’s research was published in 2008. If anything, the accelerated growth of Amazon, Apple, Google and Facebook suggests that winning has become even more important since. The long tail now seems less persuasive than the theory of blockbuster economics, expounded by Robert Frank and Philip Cook.

In their book The Winner-Take-All Society (1995), they argue that "broad, fast communication and easy replication create dynamics whereby popular products become disproportionately profitable for suppliers, and customers become even likelier to converge in their tastes and buying habits." 

Sheeran’s 2017 album, Divide, suggests Frank and Cook are on to something. Warner Music said the release was largely responsible for a 58 per cent surge in its streaming revenues. There is no definitive right and wrong here – it’s not as if Anderson is arguing the Earth is flat – but Elberse is right to suggest that managerial decisions should not be "grounded in romantic notions of the impact of technology but based on empirical evidence of what is actually taking place."

Image credit: Flickr


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