Digital Technology and the Allocation of Ownership in the Music Industry

This paper analyses the innovation process of music goods from an organisational point of view and the effects of digital technology on the allocation of property rights. We apply the property rights theory framework introduced by Grossman-Hart-Moore (GHM) to the music industry and study the contractual relationship between artists who create music and labels who promote and distribute it. In the spirit of GHM, different types of ownership structures are analysed. The result confirms the current allocation of property rights as it suggests that music labels, whose role in the production process is indispensable due to their promotion and distribution knowledge, should own the copyright. However as digital technology advances further, alternative ways to promote and distribute music develop - labels become less indispensable. We find scenarios where the incumbent ownership structure ceases to be optimal. Moreover, we discuss new organisational structures of the music industry. We introduce a mentor, an alternative intermediary to the label and analyse its effect on the optimal allocation of ownership. Our main result is that label ownership becomes less likely.