Scaling peaks

In his last book, economist Alan Krueger tells us what creates a superstar in any given field

Published 4 years ago on Jul 13, 2019 5 minutes Read

With the music industry as a guide, economists have developed a time-tested model of superstars that has repercussions for the wider economy. As I explain in Chapter 4, two essential features of a market are necessary for a sector to be dominated by a small number of stars. First, there must be scale economies, meaning that someone can apply his or her talents to a large audience with little additional cost per audience member. Second, the players need to be imperfect substitutes, meaning that their work is differentiated and unique. Both elements are present in music. Every successful singer, band, and orchestra has a unique sound. And recorded music can reach billions of listeners at little additional cost once a recording is made. By contrast, in medicine, for example, some surgeons are much better than others, but they are limited by the number of, say, hip replacements they can perform in a day. The top surgeons do well, but they do not do nearly as well compared to lesser surgeons as top musicians do compared to every other recording artist.

The importance of scalability in producing superstars in a given field was first highlighted by the great economist Alfred Marshall some 125 years ago. Marshall's work highlighted the career of Elizabeth Billington, a leading opera singer of her day. Ironically, he used a musician as an example of a profession that was limited by the scale of the market. Long before the creation of digital recordings, microphones, and music videos, Marshall pointed out that Mrs. Billington was highly constrained in reaching a large audience because the "number of persons who could be reached by a human voice is strictly limited." Today, digital technology enables artists to reach an unlimited audience at virtually zero incremental cost, which in turn has led to the enormous success of a select few superstars.

This ability to create superstars in music is amplified by another feature, one that increasingly applies to other industries: the popularity of a song or artist grows geometrically rather than linearly. This is often called a power law. The popularity of the top performer is a multiple of the second-most-popular performer, which in turn is a multiple of the third-most-popular performer, and so on. Scientists have documented power laws in all kinds of outcomes, from the frequency of use of various words to the size of cities and the number of hurricanes in a year

Networks help to create power laws. Popularity ricochets through networks of friends and acquaintances, creating power law relationships where a small number of performers garner almost all the attention. In the music industry, this can be seen in the extremely skewed distributions of concert income, music downloads, Shazam requests, Facebook and Twitter followers, and artists' merchandise sales. In his bestselling book The Long Tail, Chris Anderson, then a Wired editor, predicted that the Internet will lead to greater opportunity for those in what he called the long tail of sales, because smaller producers will be able to find niche markets. This has yet to materialize in the music business. Instead, the middle has dropped out of music, as more consumers gravitate to a smaller number of superstars.

Over the past thirty years, the share of concert revenue taken home by the top 1 percent of performers has more than doubled, from 26 percent in 1982 to 60 percent today. The top 5 percent take home 85 percent of all concert revenues. The same pattern holds for recorded music. The long tail remains long and lonely; all of the action is in the head of the tail.

This is an extreme version of what has happened to the U.S. income distribution as a whole. The top 1 percent of families doubled their share of income from 1979 to 2017. In 1979, the top 1 percent took home 10 percent of national income; in 2017 they took home 22 percent. By this measure, incomes in the U.S. economy today are almost as skewed as they were in the rock and roll industry when Bruce Springsteen cut "Born in the U.S.A."

One reason the entire economy has veered toward a superstar, winner-take-all affair is the rise of digital technology. Successful entrepreneurs can turn apps and digital technology into fortunes worth billions of dollars. Five of the six wealthiest Americans (Bill Gates, Mark Zuckerberg, Larry Ellison, Michael Bloomberg, and Jeff Bezos) — whose combined wealth equals nearly that of half of the world's population — made their fortunes because of digital technology. Digital technology is scalable. One day soon the top surgeons may be able to operate on a great many more patients due to improvements in digital technology.

This technological revolution has brought many other profound economic and social changes, all of which are readily apparent in the music industry. Small, often imperceptible differences in quality separate the best from the rest. As a result, luck matters for success more than ever. Releasing the right record at the right moment matters critically for success or failure. The same is true in the economy writ large. Bill Gates might have been Bill What's his-name if Gary Kildall and Digital Research had agreed to the terms IBM first offered them for developing the operating system for the new personal computer in 1980, before turning to Bill Gates's fledgling company. 

Success is hard to judge ahead of time, and in no way guaranteed, even for the best performers. Consumer tastes are fickle, and herd behavior often takes over when an artist begins to become popular. One-hit wonders are common in the music industry because a great deal of luck goes into achieving a hit song, and, like lightning, luck rarely strikes more than once. Even the industry experts, with much at stake, have difficulty picking winners. In Chapter 5, I chronicle how good luck and bad luck play outsized roles in the rock and roll industry, much as in life in general.



This is an extract from Alan Krueger's Rockonomics published by Currency