The making of a music multinational: PolyGram's international businesses, 1945-1998

Business History Review

Volumn 80, Issue 1, 2006, Pages 81-123

  Bakker, Gerben ^a,b  

^a UNIVERSITY OF ESSEX   (United Kingdom)

^b Advanced Institute of Management Research London   (United Kingdom)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 33745394134     PISSN: 00076805     EISSN: None     Source Type: Journal    
DOI: 10.1017/s0007680500080995     Document Type: Review

References (243)

1. The strategy and structure of rights-based multinationals will be assessed in detail in the final section.
2. Geoffrey Jones, "The Gramophone Company: An Anglo-American Multinational, 1898-1931," Business History Review 59 (Spring 1985): 76-100.
3. Examples of the former are: Roland Gelatt, The Fabulous Phonograph, 1877-1977 (New York, 1954, 2nd ed., 1977);
4. Oliver Read and Walter L. Welch, From Tin Foil to Stereo: Evolution of the Phonograph (Indianapolis, 1959, 2nd ed. 1976);
5. Pekka Gronow and Ilpo Saunio, An International History of the Recording Industry (London, 1998);
6. Michael Chanan, Repeated Takes: A Short History of Recording and its Effects on Music (London, 1994).
7. Examples of the latter are: Peter Martland, Since Records Began: EMI (London, 1997);
8. John Collins, The Story of Chess Records (London, 1998);
9. Michael Brian Kelly, Liberty Records: A History of the Recording Company and its Stars (Jefferson, N.C., 1992).
10. The work done so far is Jones, "The Gramophone Company";
11. Donald J. Mabry, "The Rise and Fall of Ace Records: A Case Study in the Independent Record Business," Business History Review 63 (Fall 1990): 411-50;
12. Peter Martland, "A Business History of the Gramophone Company, 1890-1918" (PhD. diss., Cambridge University, 1992).
13. In the form of R&D and tacit knowledge about production processes. See, for example, Peter J. Buckley and Mark Casson, The Future of the Multinational Enterprise (Basingstoke, 2nd ed., 1991);
14. Alan M. Rugman, Inside the Multinationals: The Economics of Internal Markets (London, 1981);
15. D. J. Teece, "Towards an Economic Theory of the Multi-product Firm," Journal of Economic Behavior and Organization 3 (March 1982): 39-63;
16. and "Transaction Cost Economics and the Multinational Enterprise," Journal of Economic Behavior and Organization 7 (Mar. 1986): 21-45.
17. John Button, Technology and Market Structure: Theory and History (Cambridge, Mass., 1998).
18. The role of knowledge in the expansion of music multinationals is somewhat similar to that observed by Lopes for the Internationalization of the alcoholic beverages industry after 1945, where knowledge took the form of specific marketing knowledge and the possession and trading of unique brands. See Teresa da Suva Lopes, "Brands and the Evolution of Multinationals in Alcoholic Beverages," Business History 44 (July 2002): 1-30.
19. The prominence of non-U.S. corporations is a feature that, again, shows similarities to the evolution of the alcoholic drinks industry after 1945. Lopes, "Brands."
20. Throughout its history, PolyGram had various names (see Table 1).
21. J. Blanken, De Ontwikkeling van de N.V. Philips Gloeilampenfabrieken tot Elektro-technisch Concern, 1922-1934: Geschiedenis van Philips Electronics N.V. III (Leiden, 1992).
22. 4 As156, p. 20.
23. This may be somewhat related to dynamic capabilities, which Teece and Pisano characterize as the "ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments." David J. Teece and Gary Pisano, "Dynamic Capabilities and Strategic Management," Strategic Management Journal 18 (August 1997): 516.
24. See also "Introduction," in Giovanni Dosi, Richard R. Nelson, and Sidney G. Winter, eds., The Nature and Dynamics of Organizational Capabilities (Oxford, 2000), 1-24, esp. 6;
25. and Richard R. Nelson and Sidney G. Winter, An Evolutionary Theory of Economic Change (Cambridge, Mass., 1982).
26. On the relation between resources/capabilities and transaction costs see S. R. H. Jones, "Transaction Costs and the Theory of the Firm: The Scope and Limitations of the New Institutional Approach," Business History 39 (Jan. 1997): 9-25.
27. Dave Harker, One for the Money: Politics and Popular Song (London, 1980), 223-27. Nominal market size, in current dollars and pounds, has been deflated using the consumer price index for both countries. The percentages mentioned have been rounded from 5.9, 10.1, and 8.8 percent, respectively.
28. Richard A. Peterson and David G. Berger, "Cycles in Symbol Production: The Case of Popular Music," American Sociological Review 40 (Apr. 1975): 158-73, esp. 164-65.
29. Richard A. Peterson and David G. Berger, "Cycles in Symbol Production: The Case of Popular Music," American Sociological Review 40 (1975): 158-73, Ibid.
30. U.S. Bureau of the Census, U.S. Census of Manufacturers (Washington, B.C., 1947, 1972).
31. Undoubtedly, political factors also played a role. In the interwar years, sharp ideological differences and declining artistic freedom inhibited music's international transferability, while after the war the Western countries had become more aligned politically and ideologically.
32. The idea of rents is important for understanding the evolution and structure of music multinationals; it will be discussed briefly below.
33. In economic terms, the distribution system became more asset-specific, i.e., it became so specialized toward the music distributed through it that it could hardly be used for any other purposes, and would fetch a low price if sold to a nonindustry buyer. Even so, the value of the music-copyright assets was increased because of the specialized knowledge within the distribution organization, and these music/copyright assets would have substantially lower value to a firm that did not own a distribution system. On asset specificity, see Oliver E. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (New York, 1985).
34. Steve Chapple and Reebee Garofalo, Rock 'n' Roll is Here to Pay: The History and Politics of the Music Industry (Chicago, 1977), 191.
35. For a case study on A&R, music publishing, and the capture of rents by smaller Dutch companies, see also Charles Carroll, Joeri M. Mol, and Nachoem M. Wijnberg, "Value Chain Envy: Explaining New Entry and Vertical Integration in Popular Music," Journal of Management Studies 42 (Mar. 2005): 251-76.
36. A general overview of record marketing/distribution is Geoffrey P. Hull, The Recording Industry (New York, 2nd ed., 2004), 169-205.
37. Transfer pricing involves locating activities in tax-efficient production countries and setting internal international prices in such a way as to incur most taxable income in the countries with the lowest corporate taxes. PolyGram, for example, would take into account the locations of its record and CD manufacturers and music-publishing vehicles in Germany, France, and the United States. The prices charged in the various destination countries would take into account their tax and tariff rates.
38. Similarities exist with alcoholic-beverage firms. Teresa Lopez, "Brands," has shown that as marketing knowledge of these companies accumulated over time, the acquisition of brands gained increasing strategic relevance. A major difference was that brands needed national registration, advertising, and maintenance. Unlike music, they did not have a preexisting inherent value for markets where they were not yet established.
39. General industry sales data can be obtained externally, but this is no substitute for detailed, disaggregated internal sales data and qualitative judgment about consumer tastes, which were important because the industry was constantly launching new products. Given the short product life cycle of music, obtaining information through the market could take too long and make the data obsolete. Gerben Bakker makes this point for the film industry in "Building Knowledge about the Consumer: The Emergence of Market Research in the Motion Picture Industry," Business History 45 (Jan. 2003): 101-27;
40. and "Stars and Stories: How Films Became Branded Products," Enterprise and Society 2 (Sept. 2001): 461-502.
41. Richard E. Caves, Multinational Enterprise and Economic Analysis (Cambridge, 1996).
42. See also Richard E. Caves, Creative Industries: Contracts between Art and Commerce (Cambridge, Mass., 2000). Assuming in-company compensation systems brought part of the marginal revenues generated by the label's extra effort back to the label.
43. See the introduction to this article.
44. It ranged from a minimum of 20.4 to a maximum of 25.1 percent, with an average of 22.2 percent. Calculated from Monopolies and Mergers Commission, The Supply of Recorded Music (London, Her Majesty's Stationery Office, Cm 2599, 1994), 167-73.
45. Cf. the R&D/sales ratios in Sutton, Technology and Market Structure.
46. Overviews of A&R management are Hull, Recording, 123-48;
47. and Antoine Hennion, Les Professionnels du Disque: Une Sociologie des Variétés (Paris, 1981).
48. Friedrich Trautwein, "Merger Motives and Merger Prescriptives," Strategic Management Journal 11 (May-June 1990): 283-95, underlines the crucial importance of private information in acquisitions.
49. See also Edith Penrose, The Theory of the Growth of the Firm (Oxford, 1959), 153-96.
50. See also the remarks above about the label's ability to capture rents and the alignment of incentives.
51. An overview of music publishing is found in Hull, Recording, 69-96.
52. On international flows of royalty payments, see Martin Kretschmer, Charles Baden-Fuller, George Michael Klimis, and Roger Wallis, "Enforcement and Appropriation of Music Intellectual Property Rights in Global Markets," in Globalization of Services: Some Implications For Theory and Practice, eds. Yair Aharoni and Lilach Nachum (London, 2000), 163-96.
53. Hull, Recording, 75.
54. Since, in the music industry, copyright owners always are in a strong position (because they have the monopoly on the particular copyright), this situation does not apply to the modern music industry.
55. On asset specificity, see Williamson, Economic Institutions.
56. See, for example, Anita M. McGahan, "The Incentive not to Invest: Capacity Commitments in the Compact Disc Introduction," Research on Technological Innovation, Management and Policy 5 (1993): 177-97.
57. Anita M. McGahan, "The Incentive not to Invest: Capacity Commitments in the Compact Disc Introduction," Research on Technological Innovation, Management and Policy 5 (1993): 177-97. Ibid.
58. Anita M. McGahan, "The Incentive not to Invest: Capacity Commitments in the Compact Disc Introduction," Research on Technological Innovation, Management and Policy 5 (1993): 177-97. Ibid.
59. Geoffrey Jones, The Evolution of International Business: An Introduction (London, 1996), 68-99, who introduces the term "resource multinationals."
60. Even the "local assets" were important because they helped PolyGram's distribution network reach minimum efficient scale, and the labels linked to these creative assets gave it valuable local marketing information.
61. John Sedgwick and Mike Pokorny, "The Risk Environment of Film Making: Warner Brothers in the Inter-War Years," Explorations in Economic History 35 (Apr. 1998): 196-220, argue that within the film industry production costs are most meaningful when considered as portfolios rather than as individual films.
62. This point is further elaborated in Gerben Bakker, "The Decline and Fall of the European Film Industry: Sunk Costs, Market Size, and Market Structure, 1890-1927," Economic History Review 58 (May 2005): 311-52. Sunk costs are costs that must be incurred to enter an industry, are incurred once, and cannot be recovered when one exits an industry. Examples of sunk costs are outlays on advertising and R&D.
63. Jones, "Gramophone," 93-97;
64. Gelatt, Phonograph, 257.
65. Martland, EMI.
66. In 1917, the German assets of the Gramophone Company were seized by the German government and sold to local interests. See Martland, EMI.
67. Sophie Fetthauer, Deutsche Grammophon: Geschichte eines Schallplattenunternehmens im "dritten Reich" (Hamburg, 2000).
68. Sophie Fetthauer, Deutsche Grammophon: Geschichte eines Schallplattenunternehmens im "dritten Reich" (2000) Ibid.
69. From 1938 onward; see Table 2. In 1931 American Columbia had been sold by its British owners to Grigsby-Grunow, a U.S. manufacturer of radios and refrigerators. In 1933 the latter went bankrupt and Columbia was bought by the American Record Corporation, an industry consolidator. Gelart, Phonograph, 255;
70. Chanan, Repeated Takes, 66.
71. Jenny Davenport, "Lewis, Sir Edward Roberts (1900-1980)," in Dictionary of Business Biography: A Biographical Dictionary of Business Leaders Active in Britain in the Period 1860-1980, eds. David J. Jeremy and Christine Shaw (London, 1985), 757-60.
72. Transcript interview (hereafter TI) K. K. Daan with H. W. van Zoelen, 29 Dec. 1965, PA/D/DsZ1.3/As145;
73. A. Goudeket, "Rapport naar aanleiding van een investigation, uitge-voerd bij de Hollandsche Decca Distributie [Decca Dutch Supplies] N.V. te Amsterdam," 13 Dec. 1941, PA/D/DsZ1.4As34.
74. Details of this transaction, carried out in secret in the German-occupied Netherlands, can be found in Gerben Bakker, "The Making of a Music Multinational: The International Strategy of PolyGram, 1945-1999," AFM Working Papers 12 (Department of Accounting, Finance and Management, University of Essex, 2003): 38-39.
75. What follows strongly draws on Blanken, Philips, 199-202, 265-69, 330, 337-48;
76. and Kroniek K.K. Daan, PA/D, 2.
77. Blanken, Philips. Philips' concerns originated from asset specificity: the value of hardware depended on availability of attractive software. Software makers could appropriate most of the value, because they were more concentrated than hardware manufacturers and could protect their assets by copyright.
78. Williamson, Institutions.
79. "Uittreksel uit notulen van de vergadering van de Concern Orco d.d. 23-9-1947," PA/D/DsC1A532.
80. "Heads of agreement. N.V. Philips' Gloeilampenfabrieken of Willemstad, Curaçao and Decca Record Company Ltd. of London, 6-12-1945," PA/D/DsBa11As106b; "Bespreking met Mr Lewis, Decca Company London, 19-12-1945," PA/D/DsBa11As108a; "Reisbericht J.M. Ledeboer van bezoek aan Decca London, 26, 27, 28-2-1947, 12-2 verslagdatum 14-3-1947," PA/D/DsZ1.3As17; "Verslag van de directie-bespreking op 13 december 1961 te Baarn," PA/DS11320.
81. On "stepping stones," see Birger Wernerfelt, "A Resource-Based View of the Firm," Strategic Management Journal 5 (Apr.-June 1984): 171-80.
82. On combining complementary activities/capabilities, see G. B. Richardson, "The Organisation of Industry," Economic Journal 82 (Sept. 1972): 883-96.
83. TI K. K. Daan with Th. W. Kreek, undated, PA/D/DsZ1.3As147; XI K. K. Daan with J. Binsma, 20 Feb. 1968, PA/D/DsG.3As639; TI K. K. Daan with Th. K. P. Van Dongen, undated, PA/D/DsZ1.3As150.
84. Philips had adopted a multidivisional model in 1946, organizing its businesses in product divisions. I. J. Blanken, Een Industriële Wereldfederatie: Geschiedenis van Philips Electronics N.V. Deel 5 (Zaltbommel, 2003), 15.
85. TI K. K. Daan with J. M. Ledeboer, undated, PA/D/DsZ1.3As148.
86. For a detailed account see Bakker, "International Strategy," 16-17.
87. Because of large initial losses, the average profit margin between 1950 and 1962 was only 0.6 percent, with a low of -13.3 percent in 1951 and a high of 6.4 percent in 1957- Annex to "H.I.G. Muziek. 10 jaar ontwikkeling," 1963, PA/D/DsG2As631Annex. On Philips and PPI between 1950 and 1962 see also: Blanken, Wereldfederatie, 68-79.
88. Blanken, Wereldfederatie, Ibid., 446.
89. Blanken, Wereldfederatie, Ibid., 67-68.
90. Blanken, Wereldfederatie, Ibid., 67-117.
91. The articles in Geoffrey Jones, ed., Coalitions and Collaboration in International Business (Aldershot, 1993), give a good overview of international alliances.
92. Blanken, Wereldfederatie, 168-69.
93. Deutsche Grammophon's share of the German market was 23.4 percent in 1933, and the output of its Hannover plant was 5.8 million discs in 1939. Wilfried Feldenldrchen, Siemens, 1918-1945 (Columbus, Ohio, 1999), 632.
94. This view emerges from the Daan interview transcripts; see also "Visit to German grammophone record factories between June I2th-25th 1947," PA/D/DsZ1.8As142. Fetthauer's book, however, which runs up to late 1945, does not mention Philips or Hollandsche Decca, so any contacts were probably after late 1945. Fetthauer, Deutsche, 174-202.
95. Unlike Telefunken, Siemens had little interests in consumer electronics. Therefore, the alliance left Philips free to operate in the area of consumer products. Blanken, Wereldfiederatie, 169.
96. "Heads of Agreement zwischen N.V. Philips' Phonografische Industrie, Baarn, Alldelphi Verwaltung GmbH., Hamburg, einerseits, und Deutsche Grammophon GmbH. Hannover, andererseits," PA/D/DsBa11.2As56, 1954.
97. Philips' managers noted that even when classical recordings did not result in an immediate profit, they still increased Philips' prestige and reputation, because the Philips trademark was prominently printed on the records. "Brief minutes of the "Manager's Meeting' held in Baarn on Saturday, April 23rd 1955, during the General Meeting 1955," PA/Ds15730.
98. Wilfried Feldenldrchen, Siemens: Von der Werkstatt zum Weltunternehmen (Munich, 2nd ed., 2003), 376-77.
99. Wilfried Feldenldrchen, Siemens: Von der Werkstatt zum Weltunternehmen Ibid., 320.
100. Wilfried Feldenldrchen, Siemens: Von der Werkstatt zum Weltunternehmen Ibid., 399.
101. "Uittreksel uit het supplement Algemeen Resultaten Overzicht Hoofdindustriegroep Muziek mei 1953 t/m april 1954," PA/Ds10355; letter from J. H. M. Kuijpers, Secretariaat NV Philips' Gloeilampenfabrieken, Eindhoven to K. K. Daan, 13 May 1966, PA/D/Ba11.2As65. See also CBS, Annual Reports: 1956, 39-47; 1959, 43-49 PA/D/Ds10355, pp. 43-49.
102. "Blanken, Industriële Wereldfederatie, 305-29.
103. Letter from C. J. Smit to J. A. C. Spoel and A. W. Kranenberg, 12 Mar. 1956, PA/Ds15724.
104. "Uittreksel uit de notulen van de vergadering van de Concern Orco, d.d. 23-9-1947," PA/D/DsC1As32; PA Kroniek Daan, entry 3 Apr. 1946; Philips is filing patents on long-playing technology.
105. Gelatt, Phonograph;
106. Erik Gruijthuijsen and Peter Junge, De Revolutie van Jan Timmer (Naarden, 1992), 26-27.
107. Information kindly provided by Peter Martland, who is writing a history of the company; see also Henri Baudet, Een Vertrouwde Wereld: 100 Jam Innovatie in Nederland (Amsterdam, 1986).
108. Teece and Pisano, "Dynamic Capabilities."
109. Cf. Sumantra Ghoshal and Christopher A. Bartlett, Managing across Borders: The Transnational Solution (London, 2nd ed., 1998).
110. The Philips subsidiaries also formed an intelligence network. Local Philips managers often wrote detailed reports to PolyGram about local market conditions, many of which have been preserved in the PolyGram Archives. Bakker, "International Strategy," 15-18.
111. P. R. Dijksterhuis and E. B. W. Schuitema, "Opzet H.I.G. Muziek. Aan de leden van de Raad van Bestuur," 5 Apr. 1950, PA/D/DsG.2As99.
112. See also Marcel Metze, Kortsluiting: Hoe Philips zijn Talenten Verspilde (Nijmegen, 1991). Teece argues that foreign governance costs decline sharply with the number of subsidiaries of a multinational in a country, suggesting that Poly-Gram benefited from Philips already having international subsidiaries. Teece, "Multinational."
113. Robert Burnett, The Global Juke Box (London, 1996).
114. TI K. K. Daan with Dhr. Van der Wal, 22 Feb. 1968, PA/D.
115. Blanken, Wereldfederatie, 116-17.
116. Blanken, Wereldfederatie, Ibid., 343.
117. Feldenkirchen, Siemen, 376-77.
118. On European entry attempts, see the essays in Geoffrey Jones and Lina Galvez-Munoz, eds., Foreign Multinationals in the U.S.: Management and Performance (London, 2002),
119. esp. Mira Wilkins, "An Overview of Foreign Companies in the United States, 1945-2000," 18-49.
120. This was related not only to market size, but possibly also to the immigrant cultures and the strength of its largely unstratified popular culture: less of a class system and cultural elite existed to control entry into the cultural avenues and to divert talent away from popular culture. Pierre Bourdieu, La Distinction: Critique Sociale du Jugement (Paris, 1979).
121. Philips' overall policy towards the United States changed in the early 19605. Since the war, the North American Philips Corporation had carried out a large number of acquisitions, using savvy financial engineering that made great use of fiscal loss-compensation laws and losses from several targets. From the early 19605 onward, Philips wanted to have more control over NAPC policy and increase the cohesion with the rest of Philips. Frits Philips only allowed new takeovers when they strengthened Philips' existing market position. Blanken, Wereldfederatie, 331-32.
122. This was $9.3 million in 2000 dollars. Before the Mercury takeover, PPI also explored a potential link-up with DOT Records and its owner, the Hollywood studio Paramount (which had bought DOT for two million dollars [10 million in 2000 dollars] in 1957), but nothing came of it. "Gegevens over DOT Records," 12 Apr. 1960, PA/Ds11320.
123. The system consisted of eleven branches across the United States owned by Mercury and seventeen independent distributors for areas Mercury's branches did not cover. Algin Braddy King, "The Marketing of Phonograph Records in the United States" (Ph.D. diss., Department of Business Organization, Ohio State University, 1966), 157.
124. Peterson and Berger, "Symbol Production," 162, note that Mercury, formed in 1947, was the only independent producer-distributor that managed to garner a significant market share between 1948 and 1955 and was "reputed to have used the channels of organized crime to market its product and force its records on juke box operators."
125. 3/AS638).
126. PolyGram Krant 2 (June 1976), PA.
127. Blanken, Wereldfederatie, 116-17.
128. Blanken, Wereldfederatie, 116-17. Ibid.
129. Dr. W. J. Eisses, "Punten voor toespraak hr. Solleveld tot genootschap van jonge academici in Eindhoven op 21 mei, 16.00 uur," 27 Apr. 1970, PA/Ds64l.
130. An advantage of national repertoire was also that it could not suffer from parallel imports. Jean-Paul Grollé, "Stille na de CD," FEM (20 Mar. 1993): 19-21.
131. "Oprichting Polytel Film NV," press release, 22 Oct. 1969, PA/Ds8712As18;
132. Jaarrapporten 1976 (PA/Ds7780), 1978/1979 (PA/Ds8701);
133. "Polytel International. A Group of Companies to Serve the Needs of Film and Television," brochure, PA/Ds8701;
134. "Film-TV legt accent op co-produkties," PolyGram Krant 6 (Jan. 1980): 12.
135. Burnett, Juke. Warner Music was owned by the film studio. Columbia, paradoxically, was spun off by Columbia Pictures in the 19705.
136. For a somewhat resource-based overview of theory on mergers, see John Kay, Foundations of Corporate Success: How Business Strategies Add Value (Oxford, 1993), 144-59.
137. R. Serge Denisoff and William D. Romanowski, Risky Business: Rock in Film (New Brunswick, 1991), 208, 224, 254.
138. "Temggang Wereldmuziekmarkt treft ook Polygram," Polygram Krant 6 (Sept. 1980): 1-4;
139. Gruijthuijsen, Timmer;
140. Fredric Dannen, Hitmen: Power Brokers and Fast Money inside the Music Business (New York, 1990, 2nd ed. 1991), 172-76; PolyGram Jaarrapport 1978/1979, PA/Ds8701.
141. As reported in Rolling Stone, 13 Nov. 1980, p. 23,
142. and quoted in Denisoff: Risky Business, 249.
143. Denisoff: Risky Business, 249.
144. Dannen, Hitmen, 161-81, esp. 170, 177;
145. PolyGram Jaarrapport 1978/1979, annex Casablanca, PA/Ds8701;
146. Denisoff, Risky Business, 250-51.
147. Furthermore, the success of a label could invite lawsuits by artists and other joint label owners to renegotiate and get a larger slice of the pie. On ownership versus control, see also Geoffrey Jones, "Control, Performance and Knowledge Transfers in Large Multinationals: Unilever in the United States, 1945-1980," Business History Review 76 (Fall 2002): 435-78. For a long period Unilever owned U.S. subsidiaries, but hardly controlled them.
148. This was $2.9 million in 2000 dollars. It was a controlling interest of 80 percent; owner-manager-entrepreneur Eddie Barclay retained the rest.
149. The U.S. music multinationals have apparently solved their relatively weak capabilities in developing national repertoire through mergers with their European counterparts, bringing them closer to a rights-based model with a federated structure of A&R. In 1999, MCA merged with PolyGram, in 2003, BMG with Columbia/Sony Music. A merger of EMI with Warner Music in 2000 was blocked by antitrust authorities, though renewed attempts could surface in the future.
150. Peterson and Berger, "Symbol Production," 169-70, discuss the increasing product differentiation and emergence of subsidiary labels during the 1960s and early 1970s.
151. Alfred D. Chandler Jr., in The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977), discusses the role of product differentiation in General Motor's strategy to unseat Ford as market leader, yielding insight into the role of product differentiation in industry dynamics.
152. Paul D. Lopes, "Innovation and Diversity in the Popular Music Industry, 1969 to 1990," American Sociological Review 57 (Feb. 1992): 56-71;
153. T. J. Dowd, "Diversificazione Musicale e Mercato Discografico negli Stati Uniti, 1955-1990," Rassegna Italiana di Sociological 41 (Apr.-June 2000): 223-63.
154. Some older, nonquantitative sociological works include Richard A. Peterson and David G. Berger, "Entrepreneurship in Organizations: Evidence from the Popular Music Industry," Administrative Science Quarterly 16 (Mar. 1971): 97-106;
155. Paul M. Hirsch, "Organizational Effectiveness and the Institutional Environment," Administrative Science Quarterly 20 (Sept. 1975): 327-44.
156. For a cultural studies perspective, see Keith Negus, Music Genres and Corporate Cultures (New York, 1999).
157. It increased from 1.7 to 3.7 labels per record company. See Lopes, "Innovation."
158. The term "federal" or "federation" has been used before to characterize the emerging structure of record distribution. See, for example, Marc Huygens, Coevolution of Capabilities and Competition: A Study of the Music Industry (Rotterdam, 1999): 126-29;
159. C. Baden-Fuller, M. Huygens, F. van den Bosch and H. Volberda, "Co-evolution of Firm Capabilities and Industry Competition: Investigating the Music Industry, 1877-1997," Organization Studies 22 (July 2001): 971-1011. The term also has interesting parallels in Philips' self-image as that of "a democratic, industrial world federation" (see below).
160. See the section on the structure of the postwar music industry above. Likewise, the advent of television had increased audiovisual distribution capacity, thus further differentiating motion pictures and radio to target specific and narrower (especially younger) audience segments, while the television networks focused on the lowest common denominator.
161. Hull, Recording, 90.
162. On the M-form, see, for example, Chandler, Visible Hand.
163. For a detailed case study, see David J. Arnold, "PolyGram Classics," Harvard Business School Case 9-598-074 (19 Nov. 1997).
164. On PolyGram's corporate culture, see also Negus, Music Genres, 67-68.
165. See also the examples of Motown and Go!Discs, below.
166. Unlike patents, copyrights had a long life span, could not be circumvented, and could not be made obsolete by competitors. The value varied substantially over time, but unlike patents, many copyrights retained an important residual value.
167. On the role of self-organization, see Dosi, Nelson, and Winter, "Introduction."
168. This connects to Herbert Simon's ideas on the importance of R&D in giving a firm the capabilities and people to interpret the changing business environment. Herbert A. Simon, "Strategy and Organizational Evolution," Strategic Management Journal 14 (Feb. 1993): 131-42.
169. Again, this connects to Trautwein's point about private information ("Mergers").
170. On location-specific advantages and the multinational enterprise, see Alan M. Rugman and Alain Verbeke, "Location, Competitiveness, and the Multinational Enterprise," in Oxford Handbook of International Business, eds. Alan M. Rugman and Thomas L. Brewer (Oxford, 2001), 150-80.
171. On location as part of brand image, see, for example, David Merrett and Greg Whitwell, "The Empire Strikes Back: Marketing Australian Beer and Wine in the United Kingdom"; and Mira Wilkins, "When and Why Brand Names in Food and Drink?," both in Adding Value: Brands and Marketing in Food and Drink, eds. Geoffrey Jones and Nicholas Morgan (London, 1994), 162-90 and 15-40.
172. See also Lopes, "Brands."
173. Alfred D. Chandler Jr., Strategy and Structure: Chapters in the History of the American Industrial Enterprise (Cambridge, Mass., 1962).
174. See, for example, the Island case, discussed below.
175. Trautwein, "Mergers," underlined the importance of private information.
176. Penrose, Theory, and Chandler, Strategy, observe that the growth of firms is often driven by a desire to put slack resources to productive use. PolyGram's U.S. distribution organization could be considered such a slack resource.
177. The phenomenon that marginal revenues largely equal marginal profits in industries with high sunk costs, such as advertising- and R&D-intensive industries, is further explored in Bakker, "The Decline and Fall of the European Film Industry." On sunk costs, see note 43.
178. Louis Galambos and Jeffrey L. Sturchio, "Pharmaceutical Firms and the Transition to Biotechnology: A Study in Strategic Innovation," Business History Review 72 (Summer 1998): 250-78, esp. 252.
179. Their analysis of the pharmaceutical industry's transformation by biotech companies suggests interesting similarities to the evolution of the music industry. The authors note the initial failure of large pharmaceutical companies to invest in biotechnology. This led to the emergence of many small firms. Soon the large multinationals corrected their mistake by teaming up with the biotech companies. The authors even estimate the lost revenue to the large corporations. The current article's findings for the music industry suggest otherwise: the extra biotech revenue would probably not have been realized by Big Pharma on its own. The pharmaceutical multinationals needed the new federated R&D-structure to generate biotech innovations as much as the music multinationals needed the labels to generate music after 1960. Like music multinationals, large pharmaceutical companies have strong capabilities in development, testing, manufacturing, marketing, and distribution of drugs, while the basic research and innovation are increasingly being done by the "labels," i.e., the biotech companies. The federated structure was able to make space for creative-entrepreneurial decision makers at relatively low levels, while preserving the advantage of being part of a larger company. Drawing organizational parallels between the music and pharmaceutical industry is not new. See, for example, Hirsch, "Effectiveness."
180. Iain Cockburn and Rebecca Henderson, "The Economics of Drug Discovery" in Pharmaceutical Innovation: Revolutionizing Human Health, eds. Ralph Landau, Basil Achilladelis, and Alexander Scriabine (Philadelphia, 1999), 308-30, esp. 320-24.
181. Iain Cockburn and Rebecca Henderson, "The Economics of Drug Discovery" in Pharmaceutical Innovation: Revolutionizing Human Health, 1999, 308-30, Ibid.
182. Blanken, Wereldfederatie, 316.
183. Blanken, Wereldfederatie, Ibid., 15-22.
184. Blanken, Wereldfederatie, Ibid., 300-303, 441.
185. Another Dutch (Dutch-English) multinational, Unilever, seems to have undergone somewhat similar problems with responding to European integration. Geoffrey Jones and Peter Miskell, "European Integration and Corporate Restructuring: The Strategy of Unilever, c.1957-c.199o," Economic History Review 58 (Feb. 2005): 113-39.
186. On PolyGram's self-image as a federation of distinct, diverse entities, see also Negus, Music Genres, 67-68.
187. Huygens, Coevolution, 124.
188. Davenport, "Lewis."
189. Davenport, "Lewis.", Ibid. The initial £5.5 million could rise to £15.5 million, depending on Decca's performance after takeover. The Decca acquisition was not unlike the takeover of the Columbia Graphophone Company of the United States by its former British subsidiary half a century earlier, in 1925.
190. Davenport, "Lewis.", Ibid.
191. Focus on Siemens (Sept.-Oct. 1979): 26-29.
192. It also paid 180 million German marks in dividends to Philips and Siemens between 1962 and 1980. Only in 1980 and 1981 did PolyGram get substantial capital injections from its parents, no million and 75 million German marks, respectively. Feldenkirchen, Weltunternehmen, 426.
193. "Disco Dutchman," Forbes, 5 Feb. 1979, 100;
194. "PolyGram Tops Charts in Year of 'Disco Fever'," Greenwich Time, 9 Aug. 1979;
195. Kathryn Harris, "PolyGram: That's Entertainment-Conglomeratized, " and "U.S. Business Practices Baffle Dutch Trader: PolyGram's Chief Enjoys Country, not Custom Regulations," New York Times, 30 Sept. 1979.
196. In the Netherlands Solleveld also attracted media attention, as for example, in "Peetvader van de Platenindustrie: Platenbons Coen Solleveld: 'Publiek bepaalt succes'," Elseviers Magazine 8 (Dec. 1979): 153-55.
197. Gruijthuijsen, Timmer, 17.
198. Dannen, Hitmen, 161-81;
199. Jaarrapport 1978/1979, annex RSO, PA/Ds8701.
200. Dannen, Hitmen, 176.
201. Dannen, Hitmen, Ibid., 175.
202. The music market was also destabilized by high inflation, copyright infringements by criminal organizations, and possibly by home taping of recorded music, although the effect of the latter on music sales-whether positive or negative-is unclear and is still being debated.
203. Feldenkirchen, Weltunternehmen, 361, 399.
204. Gruijthuijsen, Timmer, 17-28. Later, Timmer would head the Consumer Electronics Division and then Philips as a whole. As CEO he radically restructured Philips, as he had done at PolyGram.
205. Gruijthuijsen, Timmer, Ibid., 22;
206. Dannen, Hitmen, 252-57, 262. The merger attempt was fascinating, given that both companies pioneered the decentralized multidivisional A&R model and Warner was traditionally also enthusiastic about new formats.
207. Gruijthuijsen, Timmer, 17-28.
208. PolyGram was jokingly called "CBS East." Ironically, PolyGram was returning the favor to CBS, which bought away several key people from PPI when it set up its own European distribution network in the early 19605. TI K. K. Daan with Van der Wal [sic], 22 Feb. 1968, PA/D/DsZ1.3As637.
209. The share of national repertoire in individual markets was considerable and could sometimes be between 40 percent and 60 percent (in Europe it was 40 percent, on average); Hull, Recording, 10. Increased distribution capacity and decreasing recording costs contributed to a higher supply of national repertoire.
210. As a member of national music industry associations, PolyGram threatened prosecution for violation of antitrust laws if any boycott of the CD was discussed or even mentioned during industry meetings. Gruijthuijsen, Timmer, 26.
211. Arnold, "PolyGram Classics."
212. PolyGram Annual Reports.
213. Or an 18.5 percent annual increase in real market value between 1987 and 1998, if PolyGram's valuation for the aborted 1987IPO is taken into account (see Table 4).
214. Arnold, "PolyGram Classics," 2.
215. Jon Gander and Alison Rieple, "Bertelsmann Music Group Entertainment (BMGE) and Bertelsmann AG," in The Strategic Management of Organisations, ed. Adrian Haberberg and Alison Rieple (New York, 2001), 721-36.
216. Burnett, Juke;
217. Jon Gander and Alison Rieple, "The World-Wide Recorded Music Industry," in The Strategic Management of Organisations, eds. Adrian Haberberg and Alison Rieple (New York, 2001), 692-720. For a long time PolyGram had done MCA's international distribution.
218. Gander and Rieple, "World-Wide."
219. On the business history of consumer electronics see Alfred D. Chandler Jr., Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Industries (New York, 2001).
220. PolyGram, Annual Report, 1990, 15.
221. Keith Negus, Producing Pop: Culture and Conflict in the Popular Music Industry (London, 1992), 18.
222. This international repertoire network is discussed as an example of international knowledge management in Yves L. Doz, Jose Santos, and Peter J. Williamson, From Global to Metanational: How Companies Win in the Knowledge Economy (Boston, 2001).
223. Huygens, Coevolution.
224. Huygens, Coevolution, Ibid., 162.
225. Burnett, Juke, 53.
226. Huygens, Convolution, 214-15, 218.
227. Entries "Motown Record Company L. P." and "PolyGram" in International Directory of Company Histories, ed. Thomas Derdak (Chicago, 1988).
228. Entries "Motown Record Company L. P." and "PolyGram" in International Directory of Company Histories, 1988, Ibid.
229. An important factor in both attempts was Philips' and Siemens' desire to facilitate the introduction of new audiovisual standards.
230. This shows some similarities to the situation in the interwar European film industry, when often smaller, partially independent, flexibly specialized production companies fed differentiated films crafted to local and regional tastes to large distributors. See, for example, Gerben Bakker, "Selling French Films on Foreign Markets: The International Strategy of a Medium-Sized Film Company," Enterprise and Society 5 (Mar. 2004): 45-76.
231. The exact amount was $10.4 billion, in 1998 dollars.
232. "Distinctive strengths" here refers to the phrase "distinctive capabilities" that was introduced by Kay, in Foundations of Corporate Success, to refer to the unique strengths and characteristics of organizations compared to their competitors. Kay argues that a firm's history is an essential factor that shapes its distinctive capabilities.
233. Wernerfelt, "Resource-Based."
234. One does not contradict the other, of course, as many small local companies could have been overtaken by more multinationals. Soon after there were six rights-based multinationals, they were reduced to four again, when PolyGram merged with MCA and Sony Music with BMG.
235. The rights-based multinational shows some connections to Buckley and Casson's Future of the Multinational Enterprise, p. 35, which characterizes the multinational as "an international intelligence system for the acquisition and collation of basic knowledge relevant for R&D, and for the exploitation of the commercially applicable knowledge generated by R&D."
236. As quoted in Alan M. Rugman and Alain Verbeke, "Extending the Theory of the Multinational Enterprise: Internalization and Strategic Management Perspectives," Journal of International Business Studies 34 (March 2003): 125-37; 126.
237. See also Simon, "Strategy and Organizational Evolution." Four major factors differentiating rights-based multinationals from multinationals in other R&D-intensive industries are the temporary monopoly that the right gives on the final product; the constant launch of portfolios of risky innovations within a specific format (with a strongly leftward skewed distribution of revenues over the product life cycle); the high fixed and sunk costs, making marginal revenues largely equal marginal profits; and, finally, the necessity to have distribution subsidiaries in all major markets, rather than exports or licensing.
238. On sunk costs and the nature of R&D outlays, see Sutton, Technology and Market Structure. On sunk costs, see also note 43, above.
239. See Caves, Creative Industries. The supply of each individual right was fixed and monopolized, after creation, by way of intellectual property-right law and the nature of information.
240. See Buckley and Casson, Multinational Enterprise, which notes the effect of the increase in demand for technology-intensive products in general on the evolution of multinationals.
241. One could not indefinitely add new researchers and technological trajectories (acts, A&R managers, and genres or styles, in the case of music) to a unit without encountering sharply decreasing returns. Henderson and Cockburn, "Economics of Drug Discovery."
242. See also Simon, "Strategy and Organizational Evolution."
243. Stan Lees, Global Acquisitions: Strategic Integration and the Human Factor (Basingstoke, 2003), 40. See also the discussion by Galambos and Sturchio in "Pharmaceutical Firms," n131.