The interconnected industry system

The study of the industry dynamics in the cultural and creative domain has adopted the framework of industry system or organisational field. Both concepts highlight, on the one hand, the interconnectedness of collaborating firms whose inputs are required to produce the final offering for

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the consumer and, on the other hand, the effect that competing firms producing similar outputs have on each other. The industry system concept was introduced by Hirsch (1972a) whose emphasis has been on the sequence through which new ideas and products are filtered by the gatekeepers before they reach the consumer. The interest is on the power plays between the organisations and the techniques that are used. For Hirsch (1972a) the industry system of cultural industry is characterised by the use of contact men, overproduction and differential promotion as well as gatekeepers.

The organisational field concept applied to the cultural domain comes from Anand and Peterson (2000), whose interest is in how common focus and practices among firms producing similar outputs come into being. In cultural industries the mechanisms that shape the organisational fields include chart rankings (Anand and Peterson 2000) and award ceremonies (Anand and Watson 2004). Thus the industry system concept takes a vertical view of cultural production whereas the organisational field view looks at it more horizontally. The studies on the structure of and interactions in the cultural and creative industries are scattered somewhat widely and do not always have a clear link with each other. Relevant studies and their findings are summarised next.

Miège (1987) differentiates between five logics or structures by which cultural products are created.

The first one is labelled ―editorial production of cultural commodities‖ and includes the production of books, records and films. These are produced as a catalogue where the bestsellers offset the losses sustained on other products. Authors and performers are rewarded via royalties and this makes a few artists wealthy while the rest live hand-to-mouth. Small independent firms are dependent on the majors. The second logic is that of flow production of broadcasting where programming must be uninterrupted and therefore produced in a conveyor belt manner. Products that follow this logic include television and radio. The third logic is that of the production of written information which includes the national and local press. The fourth logic is the production of live entertainment which includes theatre, ballet and opera. Finally the fifth logic is that of the production of electronic information. This includes the production of management systems software, educational software and video games, for example. Miège (1987) argues that the modes governing their production have not become fixed, but are drifting towards editorial logic. Now, 20 years after Miège‘s, proposition it appears to have been correct. Game development resembles the production of films, records and books with hits and misses and royalty-based compensation.

Peterson and Anand (2004) differentiate between three possible structures of creative industries.

There may be (1) many small competing firms, (2) a few vertically integrated oligarchic firms or (3) ―a more open system of oligarchy composed of niche-market-targeted divisions plus many small specialty service and market development firms where the former produce the most lucrative products and the latter produce the most innovative‖. They state that the first structure is competitive and turbulent and nurtures innovation. The second one is stable and produces unimaginative products. In the third option competitiveness is managed by oligopolistic control and this structure produces diversity without innovation. It appears that large firms have a tendency to produce mainstream products whereas smaller firms are more specialised. Hsu (2006b) found that films that represent multiple genres attract a larger audience but are less satisfying to them. Single genre films have smaller but more satisfied audiences. There is thus a trade-off between audience

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size and product value. Mezias and Mezias (2000) call for more research on the relationship between firm size, strategic specialisation and innovation within the creative and cultural industries.

The question of how firms make sense of industry structure and wider environment has been tackled in some studies on the music and film industries. In the early film industry the short films that were shown in nickelodeons were commodities that were sold in quantity. As consumers began to lose interest and foreign competitors entered the US market the film production firms formed into two cartels, the Motion Picture Patents Company and the Motion Picture Distributing and Sales Company. Thus firms aimed at controlling the environment by disabling the production of alternatives for the consumer. As these cartels made exclusive deals with cinemas, independent producers found it hard to reach the market. In addition the cartels were dedicated to showing short films whereas the independents were experimenting with longer feature films. This led them to search for alternative outlets in road shows. This eventually turned films into unique products instead of a commodity sold by the length. It also induced the vertical consolidation which left the market controlled by six integrated producer-distributors. (Mezias and Kuperman 2001) Concerning more recent developments Wikström‘s (2006) study on music industry decision-makers and their perceptions on changes in the media environment shows that music firms in general have responded defensively. They have remained focused on the physical product even though revenue through other media outlets has grown in importance.

In creative and cultural industries an important method of understanding competition is following charts and awards. Anand and Peterson (2000) studied the change in the method of compiling music album rankings from gathering weekly sales information from a sample of stores to recording each cash register transaction in most US stores. This took place in 1991, when Billboard Charts became based on the SoundScan method. Anand and Peterson (2000) conclude that such a change in the information about the market fundamentally altered the managers‘ sense-making and affected the behaviour of the record companies. They learned that albums sell best right after release and adjusted promotion timing accordingly. Certain music types, such as country and rap, also proved to be far more popular than the previous chart compilation methodology had indicated. The new chart system was also seen as more reliable and less prone to corruption through false sales reports and purposeful sampling of the reporting record stores. Furthermore, Anand and Peterson (2000) found that the more accurate and current data of the market encouraged fragmentation thereof and created opportunities for those who were able to utilize emerging niches. SoundScan altered the field information regime and that in turn altered the shape of the music market. However, in addition to the objective chart data decision-makers rely on subjective experience. Sorenson and Waguespack (2006) found that distributors allocate more resources, such as better launch dates and more promotion, to films with whose makers they have a prior relationship. At the end, as the effects of these favourable decisions are controlled, these films perform worse at the box office. In another paper Anand and Watson (2004) studied the role of award ceremonies in the evolution of the music market. They found that awards, such as the Grammies, distribute prestige among the industry participants, attract collective attention to the industry, offer a medium to resolve conflicts on the legitimacy of the participants and tighten horizontal linkages within the industry. Thus the award ceremonies help to define the industry and also affect the behaviour of the participants.

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Studies on the games industry structure and dynamics have concentrated on the competition among console manufacturers. Game products have been included only as a factor that influences hardware sales. Thus the complementarity of hardware and software is acknowledged, but not symmetrically.

Complementary software offerings have an effect on hardware sales but not vice versa. Many studies analyse competition between consoles as an object of network effects. For example, Schilling (2003) found that within the game console market the network effects can be divided into three different kinds of components: technological functionality, size of the installed base and the availability of complementary goods. Schilling (2003) also points out that the consumers‘ decision- making is affected by both the actual and the perceived situation with these three factors as well as future developments that are expected. Entrants are usually disadvantaged in this kind of competition. Shankar and Bauys (2003), on the other hand, found that the largest installed base does not necessarily lead to winning the market. Their study on the Sega and Nintendo 16-bit devices showed that these two products had asymmetric network effects because prices and advertising had differing influences on their abilities to gain market share. Initially the Sega device had a larger installed base but Nintendo was able to win in the end. Furthermore, Clements and Ohashi (2005) found that in the beginning of a new console generation hardware prices determine purchases more strongly than the availability and quality of games. Later on, however, console prices become less important and the role of complementary software in determining purchases becomes more influential. Gallagher and Park (2002) also analysed the importance of complementary software.

They conclude that complementary products must be offered first and installed base built second.

The only study so far to look at the situation from the game developers‘ perspective is that by Venkatraman and Lee (2004). They studied the factors affecting the game developers‘ choice of platform and found that developers prefer platforms (1) that are not crowded by other developers, (2) that still work with many developers, (3) that are dominant in the market and (4) that are new.

The logic is that while attractive games can induce sales for a console the installed base in any case limits the number of game copies that can be sold. Thus developers want their games to be on a console that has a wide installed base, that has a limited number of competing game titles available and that will still be on the market for a significant time period as obsolete hardware makes complementary games obsolete as well.

The idea of organisational fields holds that common focus and practices arise in firms producing similar outputs in the cultural and creative industries. This is important, as such common focus and practices may correspond to the idea of dominant design or dominant business model. Furthermore, the dominance of certain products becomes visible in charts and awards. Industry structure has an effect on the level of innovation offered in products. However, consumer demand for innovation may also have an effect on industry structure. In the past cartels have been outcompeted by innovative independents. Thus the analysis of industry dynamics in the cultural and creative domain should take into account inherent product characteristics and value, consumer preferences, production processes and industry structure. Cultural and creative products have both stylistic and technological characteristics. These form two interdependent spheres and innovation in each has an effect on industry dynamics. Concerning games industry dynamics it appears that console manufacturing is a mature industry. However, much less in known about the dynamics of game

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development which forms the side of the industry that fits more comfortably under the creative and cultural labels. Does maturity in hardware induce maturity in software? Or does hardware standardisation allow growth in diversity in software?