How has digitalisation changed the economics of the creative industries?

Digital technologies have had a profound effect on the production and consumption of creative goods and services – from archives to video games. They have also challenged how economists analyse the creative industries and beyond, with the growing importance of platforms and network effects.

The creative industries – which include music, film, television, video games, museums, architecture, publishing, design and advertising – are regarded as one of the success stories of the UK economy.

They contributed £115.9 billion to the economy in 2023 (in gross value added) and employed 2.3 million people (Department for Business and Trade).

They are growing faster and are viewed as more innovative than the economy as a whole (Creative Industries Policy and Evidence Centre, 2022). This is not just the case in the UK: the United Nations also promotes the creative economy as a source of growth and innovation worldwide (United Nations Economist Network).

What is so significant about digitalisation in the creative industries?

One of the major sources of innovation in the creative industries is the adoption of digital technologies.

Some products – such as film, recorded music and video games – are ‘born digital’ and so they can be distributed without additional investment. A wide range of other items – from museum pieces (such as the British Museum’s collection) to live performances (for example, National Theatre Live) – has to be digitalised prior to online distribution, which is an expensive process.

Digitalisation of the contents of art galleries and museums has enabled home viewing; narrowcasts of live theatrical and operatic performances are shown at local cinemas; digital books can be read or listened to more or less anywhere; and music, old and new, is available at the touch of a button.

These developments have led to the prominence of platforms in the creative industries, such as Spotify for music and Netflix for film. Such platforms have dramatically altered traditional means of accessing creative products and the ways in which they are supplied.

They have also led to adaptations in the way that these industries are studied and analysed – namely by platform economics and network effects – to deal with the new features of the digital economy.

A wider issue that is more difficult to incorporate into the analysis is that digitalisation has created an economy of digital plenty. This sits in contrast to the world of economics from Adam Smith, which has been about dealing with relative scarcity.

In the digital economy, bundles of goods have become vast, consisting of millions of titles both recently created and from back catalogues. These aggregations are no longer in the hands of the ‘original’ industry but are managed by the platforms. This has led to various problems, one being the low royalties paid to performers for streamed recordings (Towse, 2020).

Many items are free to consumers, as creators and performers flood the internet with their output. Consumers are overwhelmed by the huge range of available goods and information about them.

Opportunity cost – the missed benefits or profits from choosing one option over another – has lost its former meaning and implications, except when it comes to consumer attention.

Digitalisation has brought into question how producers of these intangible goods can be regulated to comply with competition policy, as well as for other purposes, such as the protection of privacy or of minors, and so on.

What is platform economics and what are network effects?

Platforms such as Spotify and Netflix are distributors of goods that are mostly produced by other enterprises. In the course of that activity, they generate side effects, known as ‘network effects’ along with the collection of users’ data, which is one of the most significant novelties of the economics of platforms.

Network effects are positive benefits to both sellers and buyers of goods and services, as well as to users of online services like email and social media sites. For example, as more people use email, they benefit from each other’s presence on the service; or the greater the number of customers a supplier can reach on a social media platform, the more advertisers will be attracted to the site. These benefits are captured by platforms, enabling them to grow exponentially and dominate markets.

The digital creative industries also experience massive increasing returns to scale (‘scalability’) at almost no additional (marginal) cost. In ‘traditional’ industries, costs rise as production processes become overloaded, causing prices of the goods to rise and demand to fall. These market forces limit the expansion of the size of the enterprise.

With digital output, those forces do not work, enabling ever-larger platforms to develop. The resulting competition issues of ever-larger dominant platforms producing intangible output are challenging for competition authorities.

Regulators such as the Competition and Markets Authority (CMA) in the UK have been traditionally geared up to regulating enterprises producing tangible goods and services (OECD, 2018; Tirole, 2017).

Platforms have helped to deliver an unprecedented explosion of new content in books, music, films and so forth (Aguilar et al, 2023). They have also reduced the search costs for new products and creators for the industry.

While this has increased consumer welfare by offering greater choice and easy availability, often for free, it has changed the existing outlets for established professional creators and performers. It has also led to excessive choice for consumers who need guidance through the thicket of newly available works.

What are two- and multi-sided markets?

Changes to economic organisation in the creative industries have also emerged as a result of increased digitalisation, in particular relating to two- or multi-sided markets for online platforms.

A long-established two-sided market in the creative industries is commercial radio and television broadcasting, which is financed by advertisements and delivered for free. The broadcaster is the platform. The consumer tolerates the ads (a negative effect) to ‘pay’ for free access to programmes. Advertisers buy slots according to the putative audience, thus financing the service.

A similar model is ad-financed ‘free’ streamed music, such as non-premium accounts on Spotify. Newspapers are also two-sided platforms with consumers and advertisers paying separately for the good.

‘A multi-sided platform is an intermediary that facilitates direct interactions between distinct groups of users, and which exhibits network effects, across or within, those groups of users’ (Bacache-Beauvallet and Bourreau, 2020).

Within group (direct) network effects are present when each side benefits from the number of users on the other side of the market – this is the email example discussed above. Cross-group (indirect) effects occur when benefits depend on other groups joining the platform. Dating apps are an example.

Platforms facilitate the use of price discrimination. A classic example is a dating club (to which more men than women are apparently attracted), so women are offered lower prices than men (price differentiation in favour of women) as an incentive to attract them.

The same applies to video game console entrepreneurs in the games industry. They need to appeal to both game developers and players, so the platform adopts pricing and other strategies to keep multiple sides engaged, thereby capturing the benefits across the various participants.

What are the effects on business models and pricing?

The term ‘business model’ has become widely adopted in research on platform economics. In many cases, it is used to mean pricing policy. But in the oligopolistic world of platforms (where industries are dominated by a small number of firms), non-price competition and other strategies, such as offering recommendations and reviews, are widely used.

Pricing policy varies according to the type of platform. In the two-sided market example, consumers can get the good for free but, to avoid ads, they can pay a subscription fee.

In Norway, for example, of the 88% of the population that streamed music in 2018, 50% had a paid subscription (Towse, 2020). Worldwide, 40% of Spotify’s users are premium subscribers (What’s the Big Data, 2024).

Subscriptions to large, bundled repertoires of song, book and film titles for home consumption through streaming have become the norm. Historically, subscriptions were used for financing the production of many creative goods, such as maps, books and engravings, as well as those providing a package, as with Assembly Rooms (Jain, 2020).

How is consumer behaviour affected?

These innovations have vastly increased access for much wider audiences, in both numerical and financial terms.

At the same time, they have led to ‘information overload’ and even confusion in consumer choice, leading to what has come to be called the ‘attention economy’. That term was coined by the prescient economics Nobel laureate Herbert Simon, who famously stated that ‘a wealth of information creates a poverty of attention’ (Blaug, 1998).

Several remedies to information overload have emerged based on data supplied to sellers, deliberately or inadvertently, by consumers.

Ratings, reviews and recommendations (some genuine, others less so) are used by platforms to retain customers. Cultural goods have always been subject to information problems about quality, not least because of their novel content. They are experience goods, requiring cultural capital in order to make an informed purchase decision.

Ratings, reviews and recommendations are used by platforms as a means of non-price competition, to push digital sales. One consequence is that cultural diversity has been diminished (Belleflamme and Peitz, 2020).

What is the effect of digitalisation on creativity?

Platforms such as YouTube have affected creativity by enabling huge quantities of ‘amateur’ digital products (titles) to be made available, often for free, along with digitalised back catalogue material. Others, such as the London Symphony Orchestra, stream only professional performances online.

These platforms have also replaced the established gatekeeping roles of publishers of all kinds of creative goods through their ability to source new talent easily (Bacache-Beauvallet and Bourreau, 2020).

Despite initial enthusiasm that the internet would enable creators to avoid traditional gatekeeping and earn money without the intervention of intermediaries like book publishers and record labels, few have apparently succeeded in doing so.

Indeed, the evidence suggests that professionals such as authors and journalists have suffered reduced incomes (Thomas et al, 2022). Streamed music has also led to reduced royalty payments to performers and songwriters (CMA, 2022).

It could therefore be argued that platforms have had a deleterious effect on creativity and creators.

Copyright law, which seeks to protect creators and enable them to earn from their work, has had to be revised to take account of digitalisation. But royalty rates are nevertheless determined by the market (CREATe, 2021).

Piracy (through websites such as Napster) developed as a serious problem for copyright holders in the early days of streaming of music and film, threatening earnings in those industries.

Enforcement was difficult as unlawful use was widespread. The development of legal platforms with subscriptions for large bundles of titles has reduced piracy, at least in developed countries. In the United States, it is argued that creative industries – for example, music – have returned to profitability (Aguilar et al, 2023).

Further, while digitalisation has greatly influenced markets for creative goods, it has not had such an impact on the initial process of creativity. The same, perhaps even more, human capital is required for that.

Creators of various art forms have to manage their own production and even marketing on digital platforms, a topic that is currently under-researched. It is also the case that the expanding creative industries, notably video games, offer opportunities for many types of creators, such as artists and composers. Films have become more opulent in order to attract cinemagoers.

Digitalisation also brings potentially catastrophic threats to cultural bodies and businesses. The recent cyber attack on the British Library is a notable example of the costs of such an event, especially at such a significant national cultural institution (British Library).

Another looming question is the impact that artificial intelligence (AI) will have in these markets (World Economic Forum, 2024). AI is involved in all aspects of creative production, assembling and using data to forecast demand and minimise risk (Farchy and Denis, 2020).

The strikes by screenwriters and actors in Hollywood last year demonstrate concerns around the threat that AI can pose to livelihoods and integrity. Indeed, the strike was called in part due to concerns around the use of AI to write scripts or to recreate performances or digital likenesses.

How has digitalisation changed creative industries?

Digitalisation has changed the way that creators have to work and engage with intermediaries, how the products of creative industries are marketed, priced, sold and consumed. All these changes raise questions about the finances of the creative industries and how governments should regulate platforms.