Essay | Title: Breaking down entry barriers to the creative industries. | Author: Vera de Jong | Date: November 2011 Introduction It is a widely shared view that newcomers contribute to the economic growth of an industry, mostly because these newcomers stimulate innovation and job supply (Audretsch & Acs, 1994). Also, in the auspices of creative industry policies, an emerging amount of policy documents assume that newcomers are enriching the creative eco-­‐system and therefore focus on investments in the support of creative start-­‐ups (Topteam Creatieve Industrie, 2011). However, more than forty percent of the annual turnover of the creative industries is made by a very small amount of large incumbents, which are mostly organized in oligopolies. This is because a small number of large incumbents, which are established firms with relative power, have long established infrastructures for research and development, while on the other hand smaller companies do not have access to similar paths to sustainability and growth (HKU, 2010). This illustrates that newcomers to the creative industries may have to fight barriers like the industry structure or advantages of incumbents to enter the creative industries. This essay tries to provide an overview on the main barriers of entry for newcomers in the creative industries, as well as opportunities for newcomers to overcome these barriers. Main questions and theories The main question that will be used to discuss the entry barriers for newcomers in the creative industries is: Which are the barriers of entry for newcomers in the creative industries and how can newcomers overcome these barriers? Because this question consists of two parts, this essay will also be divided in two parts. The first part tries to provide an overview on the entry barriers for newcomers in the creative industries. This overview will be based on the five different features of the creative industries that according to Hoskins, McFadyen and Finn (2004) cause entry barriers to newcomers. Hoskins et al.’s theory on these five features will be supplemented by general industry theories theory from Porter (1980a; 1980b) and theories from the cultural and creative industries by Caves (2000), Towse (2010) and Handke (2010). The second part tries to provide an overview on the opportunities for newcomers to overcome the entry barriers. The opportunities are divided in two components: external interference and business opportunities. This part also refers to theories from both general industry theories and specific creative industry theories. Definitions Barriers of entry In industry organization theories, barriers of entry are mentioned as “impediments to entry by newcomers” (Hoskins et al., 2004, p. 148). Porter (1980b) provides another view on this definition by arguing that barriers of entry are “features of an industry that give incumbents inherent advantages over potential entrants” (Porter, 1980b, p.33). Creative industries According to Caves (2000), a well known economist who is specialized in the field of industrial organization (Towse, 2010), the creative industries are “supplying goods and services that we broadly associate with cultural, artistic or simply entertainment value. They include book and magazine publishing, the visual arts (painting, sculpture), the performing arts (theatre, opera, concerts, dance), sound recordings, cinema and TV films, even fashion and toys and games” (Caves, 2000, p. 1). Towse (2010) points out that this list bundles together the high and low art arts. Analysis -­‐ Barriers of entry for newcomers in creative industries In chapter seven of Media Economics, Hoskins et al. (2004) mention five features of the media industries that may cause barriers to entry for newcomers. These features are; industry structure, cost conditions, competition by large incumbent firms, copyright and government public. Below, each feature will be analyzed by the use of complementary theories on general industries by Porter (1980a; 1980b) and theories on the creative industries of mainly Caves (2000), Handke (2010) and Towse (2010). Industry structure The industry structure may act as a barrier of entry for newcomers to the creative industries as the industry structure determines the degree of competition opportunities (Porter, 1980b). By referring to the Theory of the Firm, which is based on general industry theories, Hoskins et al. (2004) distinguish four types of industry structures: perfect competition, monopolistic competition, oligopoly and monopoly. Each of these industry structures has its own level of entry barriers. According to Caves (2000), monopolistic competition, oligopolies and monopolies are the most common industry structures in the creative industries as these are more likely to be found in the cultural sector than in the economy at large (Caves, 2000). The only industry structure that is virtually absent in the creative industries is perfect competition. Perfect competition is the most competitive industry structure that can be identified if a great number of firms produce identical, homogenous products and if one general industry price is set by the forces of supply and demand (Hoskins et al., 2004). As cultural goods are in general heterogeneous goods (Towse, 2010), the perfect competition industry structure is not likely to occur in the cultural industries. Monopolistic competition takes place among many firms that produce differentiated, heterogeneous products (Hoskins et al., 2004). These many firms differentiate their products by bringing new products to the market, which are related to their core-­‐product (Porter, 1980a). Therefore the firms in a monopolistic competition need to enjoy some brand loyalty (Hoskins et al., 2004). Another characteristic of firms that reside in a monopolistic competition market structure is that they are able to set their own prices. The proximity of substitutes however limits the prices may be requested (Hoskins et al., 2004). According to Caves (2000), monopolistic competitions in the creative industries apply to products such as books and films; each book or film is different, but consumers can easily substitute films or books of the same genre (Caves, 2000). According to Hoskins, there exist no entry barriers to enter either a perfect competition or a monopolistic competition industry structure. This means that the entry of new firms might be hazardous for the long-­‐term profits of the incumbents (Hoskins et al., 2004). In the creative industries, many barriers to entry are organized in narrow oligopolies (HKU, 2010). This is confirmed by Towse (2012) who addresses an “observed concentration of ownership of control” (Towse, 2012, p.172) within the creative industries. Oligopolies are, like monopolist competitions, characterized by the use of differentiated products, but oligopolies are centered on a small amount of large firms, which is caused by high entry barriers (Hoskins et al., 2004). Oligopolies contain many barriers to entry. These barriers permit the possibility that economic profits can be earned in the long run as well in the short run (Hoskins et al., 2004). These barriers are in great part due to exclusive agreements with distributers (HKU, 2010). Oligopolies in the creative industries are represented within for example the record industries, where just a few large record companies are dominating the market by benefitting from their exclusive deals with distributers (Caves, 2000). According to Caves, a drawback of oligopoly firms in the creative industries might be that they are often successful promoters, but not well in performing the “picker” function. This means that these firms are not good at selecting upcoming artists. Therefore they either drive on success of established artists, or invest in subsidiary labels operated by successful pickers (Caves, 2000). A monopoly market structure is dominated by one single seller. Also, there exist no rival firms that are producing close substitutes to the products of this single seller (Hoskins et al, 2004). Towse (2010) notices a breakdown of two different perspectives of economists on the concept of monopolies. The first group of economists regards the existence of a monopoly as a market failure and a chief violation to the perfect competition. This view stems from the neoclassical ideal of the competitive market, in which the determination of prices, outputs and income distributions are set through freedom of supply and demand (Towse, 2010). The view of the second group of economists is based on theories of Schumpeter (1942) on creative destruction. Schumpeter argued that big firms with the capital and resources to invest in research and development drive growth and innovation. “Their innovations may provide them with a monopoly until imitators enter the market and compete away their advantage and this process takes place in waves of innovativeness – hence creative destruction. It is creative because innovative, and destructive because technological progress sweeps away firms that do not innovate or whose technologies are obsolete” (Towse, 2010, p. 388). In addition, Caves (2000) mentions that monopolies have the power of price discrimination. “By contrast to the competitive price, a monopoly seller who is the sole supplier in a market may be able to sell the same good or service at different prices in order to increase revenue of profit” (Caves, 2000, p.58). Price discrimination is widely used by monopoly sellers in the creative industries, for example by museums who charge different prices for senior citizens or young people, even though they get the same entrance ticket as full paying visitors do (Caves, 2000). Hoskins et al. (2004) confirm that monopolistic market structures contain many barriers to enter. These barriers protect the monopoly position and permit the possibility of economic profits in the long run (Hoskins et al., 2004). Cost conditions Certain cost conditions may act as barriers to entry for newcomers in the creative industries. Hoskins et al. (2004), Porter (1980b), and Caves (2000) all describe various implications of economies of scale, economies of scope and fixed costs on cost conditions of newcomers. Economies of scale are characterized by large firms who enjoy advantages of large-­‐scale production. The expansion of the firm will lead to lower average total costs (Towse, 2010). Economies of scale contain several implications for the cost conditions and barriers to entry for newcomers. Large economies of scale ensure that newcomers to the creative industry have very a difficult task to quickly achieve the high output and sales necessary to have any chance of competing effectively with the large incumbent firms (Hoskins et al., 2004) as newcomers are less contestable by the difficulty of financing large-­‐scale production processes and large sales promotions campaigns (Caves, 2000). Economies of scope are characterized by multiproduct firms which are aiming for savings that may be gained by producing two or more distinct goods, when the cost of doing so is less than that of producing each separately (Goshal, 1987). Economies of scope in the creative industries sometimes involve vertical integration. In this case, one firm is not only involved in production, but also involves in distribution and exhibition. These economies of scope enjoyed by multiproduct firms may deter entry for newcomers in the creative industries. Hollywood studio’s dominant position in distribution for example, makes it difficult for new firms to compete (Caves, 2000; Hoskins et al., 2004; Towse, 2010). Also, the rate of fixed costs deserves to be mentioned in this part of the essay because the rate of fixed costs also contains implications for the cost conditions and thus creates barriers to entry for newcomers (Hoskins et al., 2004). For the creative industries, fixed costs can be pervasive because most cultural goods require a costly investment in creative effort. As Caves argues: “the costs for a film negative is the same, whether it is seen by a thousand or a million people” (Caves, 2000, 223). Also, the production of some creative products requires people with highly specialized skills and knowledge to work together temporarily. This production process can be very costly and creates barriers to entry for new producers (Turok, 2003). Turoks’ view is in line with the Caves’ view on the impact of fixed costs to the quality of the cultural good. As Caves argues, the creative’s good quality in the eyes of a consumer can be increased by enlarging the fixed costs spend on it (Caves, 2000). The rate of fixed costs gets often increased due to the very high failure rate of the production of cultural products. Producing cultural products is often very risky because of the uncertain reception by consumers (Towse, 2010). Advantages of large incumbent firms over newcomers As Hoskins et al. (2004) describes, large incumbents have significant advantages over newcomers in the cultural industries. In this part of this essay, the following advantages of incumbent firms will be elaborated: the large learning curve, reputation, the control of scarce resources and the absence of set-­‐up costs. Incumbents that have achieved a large learning curve have an advantage that pose a barrier to newcomers (Hoskins et al., 2004). Porter (1980b) speaks of the classic learning curve in the case that workers become more efficient. He expands this term to ‘experience curve’ by adding certain kinds of technological change like the specializing of equipment and processes. Also changes in product design techniques and operations control make manufacturing easier (Porter, 1980b). Incumbent firms that have obtained this experience curve enjoy costs advantages, as unit costs tend to decline as firms gains more cumulative experience in production (Porter, 1980b). The production of complex creative goods requires the collaboration of several parties (Caves, 2000). Also, “enforcement of contracts in the creative industries depends heavily on the power of repeated interactions among parties who value their reputations for cooperative behavior” (Caves, 2000, p. 67). Thus, newcomers who have not had repeated interactions, may not have obtained such reputations yet. This might constrain them at producing complex creative goods. Also, the control of scarce resources by incumbent firms forms an advantage for the incumbent firms, as they may deny newcomers access to these scarce resources (Hoskins et al., 2004). Finally, Hoskins et al. (2004) argue that the need of newcomers to cover set-­‐up costs form an advantage for the incumbent firms. Large incumbent firms do not have a need for set-­‐up costs like newcomers do, since they already purchased the required capital equipment, developed and launched products, a brand name and established the R&D facility needed to be competitive. Newcomers should first invest time and money to do so (Hoskins et al., 2004). Copyright In the creative industries, copyright law is very important as it serves as a base for establishing rights that intrinsically belong to the creators (Caves, 2000). Barriers to entry may occur because products are protected by intellectual property law like copyrights (Caves, 2000; Hoskins et al., 2004; Towse, 2010). In the creative industries there exist major intermediary rights holders that dilute the contestability of markets, which may disadvantage newcomers. However, in economic literature on copyright, there seems to be a tendency to ignore concerns on the dominating power of these major intermediary right holders (Handke, 2010). Government policies and institutional lock-­‐ins Government policies are generating substantial entry barriers to industries, as a government can consciously or unconsciously limit or even preclude entry into industries, using control mechanisms as licensing requirements at for example broadcasting industries. “In most countries, governments consider intervention necessary in cultural industries to further cultural goals. Regulation is thus directly aimed at affecting conduct and performance. Such intervention is most persuasive in television and film but often extents to music recording, book publication, and magazines” (Hoskins et al., 2004, p. 149-­‐150). Also, entry barriers for newcomers might be created by the subsidizing of incumbents (Porter, 1980b). Not only governments, but also institutions related to the creative industries may cause entry barriers to newcomers. One example is the restriction on Parisian haute couturiers to produce ready-­‐
to-­‐wear couture, according to the guidelines of the Syndicate Chamber of Parisian Couture, which was funded in 1911. As a consequence of this restriction, French couturiers entered the ready-­‐to-­‐
wear market much later than designers outside Paris. According to Wenting and Frenken (2011) the attempts by the institution of Syndicate can be understood as a case of institutional lock-­‐in, where firms with an unconditional interest in a particular line of business try to raise entry barriers for a new line of business to protect the values and exclusivity of their business line (Wenting & Frenken, 2011). Analysis – Opportunities for newcomers to breakdown entry barriers to the creative industries As the barriers for newcomers to enter the creative industries are elaborated in the first part of this essay, this second part will discuss opportunities for newcomers to overcome these barriers. Theories from different disciplines show a variety of opportunities for newcomers to overcome aforementioned barriers. These opportunities are divided into two parts: external interference and business opportunities. External interference As mentioned in the fist part of this essay, government public policies can be deployed to create barriers of entry for newcomers. However, it is also possible for the government to support newcomers by subsidizing those newcomers. Subsidizing of newcomers often occurs in the high-­‐end art world (Towse, 2010). In the creative industries however, direct subsidizing does not often occur. An exception is made in France, where a specific social security system for the performing arts and the film industry exists, called the ‘intermittency status’. This system compensates for unemployment periods of artists and technicians who have worked a minimum of 507 hours a year. The system aims to help artists to stay free to build their careers” (Benhamou, 2003) As Benhamou argues, these systems can be viewed as supporting the artists, which will help artists to overcome entry barriers. But, social security systems for artist can also have as perverse effect, which may lead to moral hazard incidences like oversupply and overuse of the system (Benhamou, 2003) what again rises barriers of entry for these artists. As said before, newcomers in the creative industries do not often receive direct subsidies. They do however often receive indirect incentives. In the Netherlands, the government for example finances the construction of ‘creative centers of entrepreneurship’, which provide entrepreneurial advise to creative newcomers and the funding of ‘supportive events and platforms’, which will increase presentation possibilities of creative newcomers (Topteam Creatieve Industrie, 2011). Business opportunities Without depending on external interference, newcomers may also create business opportunities themselves, by making strategic decisions on their position in the market structure and by being innovative. Newcomers may develop strategies around their own strengths and the industry weaknesses (Porter, 1980b). In an oligopoly industry structure, newcomers may for example make use of flexible specialization by fulfilling niche markets that large incumbent firms are unable to serve due to their large-­‐scale production processes. In the last two decades, many newcomers entered the film industries by the use of flexible specialization, which lead to lots of, small-­‐scale distribution and festivals, which in return attracted novice filmmakers and new talent (Caves, 2000). Also, according to Audretsch and Acs (1994), new-­‐firm startups may compensate for their inherent size and experience disadvantages through innovative activity. Longer existing companies might be slower to adapt to new technologies as they rely on previous success and are more bureaucratic (Hoskins et al., 2004). Thus, established firms that fail to adapt and innovate will lose market share to new firms that exploit emerging technologies (Handke, 2010). Finally, newcomers are able to enjoy advantages from their location choice. Newcomers can for example benefit from the collective image, shared use of resources and differentiated rental prices of cultural clusters (Hitters & Richards, 2002). Conclusion As it is a wide shared view that newcomers contribute to the economic growth of an industry, this essay may prove to be useful by identifying barriers for newcomers to the creative industries and the opportunities for newcomers to overcome those barriers. The industry structure of the creative industries poses major barriers for newcomers, as the creative industries are often structured by narrow oligopolies and monopolies. These oligopolies are often involved in exclusive agreements with distributers and monopolies often have the power of price discrimination, which causes unequal competition chances for newcomers. Also cost conditions in the creative industries like the common high fixed costs and low variable costs, the commitment to copyright and governmental policies prove to cause entry barriers for newcomers. As the barriers for newcomers to enter the creative industries are elaborated in the first part of this essay, the second part discussed opportunities for newcomers to overcome these barriers. These opportunities may arise from external interference like direct or indirect subsidies to newcomers. Without depending on external interference, newcomers may also create business opportunities themselves, by making strategic decisions on their position in the market structure and by being innovative. To be able to act independently, newcomers may best take matters into their own hands by quickly adapt to new technologies and by a constant search for new innovative concepts and niche markets to fulfill. This essay may prove to be useful for newcomers to the break down of entry barriers to the creative industries. The limitation of this essay lies however in a lack of discussion on the necessity for newcomers to overcome these barriers. It is widely accepted that newcomers contribute to the economic growth of an industry, but do newcomers always need to be stimulated? And, is it possible for an industry to contain too many newcomers? Further research on these questions is requested to define how this theory on entry barriers can be applied properly. References Audretsch, D.B. & Acs, Z.J. (1994). New-­‐Firm Startups, Technology, and Macroeconomic Fluctuations, Small Business Economics 6(6), pp. 439-­‐449. Audretsch, D.B. & Fritsch M. (2003). Linking Entrepreneurship to Growth: The case of West Germany. Industry and Innovation 10(1), pp. 65–73. Benhamou, F. (2003). Artists’ labour markets. In Towse (ed.) A Handbook of Cultural Economics. Cheltenham: Edward Elgar. Caves, R. (2000). Creative Industries: Contracts between arts and commerce. Cambridge: Harvard University Press. Caves, R. & Porter M.E. (1977). From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition, The Quarterly Journal of Economics 91(2), pp. 241-­‐262. Goshal, S. (1987). Global strategy: an organizing framework, Strategic Management Journal, 8(5), pp. 425-­‐440. Handke, C.W. (2010). The Creative Destruction of Copyright: Innovation in the Record Industry and Digital Copying, Thesis to obtain the degree of Doctor from the Erasmus University Rotterdam. Hitters, E. & Richards, G. (2002). The Creation and Management of Cultural Clusters, Creativity and Innovation Management 11(4), pp. 234-­‐247. HKU (2010). The entrepreneurial dimension of the Cultural and Creative Industries, Utrecht: Hogeschool voor de Kunsten Utrecht. Hoskins, C., McFadyen, S. & Finn, A. (2004). Media Economics. London: Sage. Porter, M.E., (1980a). Competitive Strategy. The Free Press, New York. Porter M.E. (1980b). Industry Structure & Competitive Strategy: Keys to Profitability, Financial Analist Journal 36(4), pp. 30-­‐41. Topteam Creatieve Industrie (2011). Creatieve industrie in topvorm: Advies Topteam Creatieve Industrie. Retrieved from Ministry of Economic Affairs, Agriculture and Innovation website: http://www.rijksoverheid.nl/bestanden/documenten-­‐en-­‐
publicaties/rapporten/2011/06/17/creatieve-­‐industrie-­‐in-­‐topvorm/rapport-­‐topsector-­‐
creatieve-­‐industrie.pdf Towse, R. (2010). A textbook of cultural economics, New York: Cambridge University Press. Turok, I. (2003). Cities, Clusters and Creative Industries: The Case of Film and Television in Scotland, European Planning Studies 11(5), pp. 549-­‐565. Wenting, R. & Frenken, K. (2011). Firm Entry and Institutional Lock-­‐in: An Organizational Ecology Analysis of the Global Fashion Design Industry, Industrial and Corporate Change 20(4), pp. 1031–1048.