Does unbundling facilitate experimentation and the discovery of new talent?

Chang, S (2018) Does unbundling facilitate experimentation and the discovery of new talent? [Conference proceeding]

Abstract

This study examines an underexplored type of innovation - the discovery of new resources - in creative industries of the digitalization era. Digitalization has engendered a fundamental unbundling of creative goods. In the music industry, for instance, digitalization has enabled music to be purchased as both individual songs (i.e., a single) and a bundle of songs (i.e., an album). I explore whether unbundling facilitates firms' experimentation and the discovery of new artists. For this purpose, I study a model of unbundling and the discovery of new talent and test its empirical implications in the music industry. To identify a causal effect of unbundling on the discovery of new talent, I utilize iTunes' staggered market entries into 29 countries based on a novel dataset from multiple large-scale music databases, including Spotify APIs. Consistent with the theoretical predictions, I find that as unbundling lowers the cost of experimenting with new artists, single-producing firms have 27.25% higher proportion of new artists than album-only-producing firms. In contrast, as information on artist talent from a one-shot unbundled experimentation is less accurate than that from albums, single-producing firms make 29.75% more omission errors. Overall, the results suggest that the positive effect from the decreased cost of experimentation outweighs the negative effect from the loss of information quality on talent. Thus, single-producing firms discover more popular artists than album-only-producing firms. These results highlight the trade-off between breadth-oriented experimentation (experimenting with more new alternatives) and depth-oriented experimentation (collecting more accurate information on fewer alternatives) and suggest that digitalization may facilitate firms' breadth-oriented experimentation and the discovery of new talent.