Industry Profiles: Musical Instruments

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Industry Profiles: Musical Instruments

Overview

At one time, the ability to play a musical instrument was considered an essential part of a person's basic education. During the latter half of the twentieth century, however, electronic equipment such as music recording and playback devices made learning an instrument less of a necessity, allowing people to enjoy music at any time without learning to play it. Nevertheless, many people in the United States still play musical instruments. In the mid-1990s, there were more than 62 million musicians in the country. According to the U.S. Census Bureau musical instrument manufacturers shipped about $1.7 billion worth of product in 2000, following a period of steady growth in the latter part of the 1990s.

As part of the personal consumer durables category, musical instrument purchases depend greatly on consumer confidence. Such purchases are made with disposable personal income. In addition, in times of recession spending for school bands and orchestras, personal music lessons, and high-end instruments is cut. With the country's economic prosperity in the mid- to late 1990s, musical instrument sales shot up well above their levels of the early 1990s. Despite strong performance through 2000, the weak economic conditions and rising unemployment levels that developed during 2001 are likely to have affected the industry. Internationally, the United States continued to play a significant role in the global musical instrument industry as one of the world's leading importers and exporters.

History of the Industry

The musical instrument industry began in earnest during the Renaissance, a period of intense musical activity in Europe that dated from approximately 1450 to 1600. Musical compositions intended for keyboard instruments and consorts—small groups of instruments such as recorders and violins—were created during this time, spurring the manufacture of those instruments. The rise of opera in Italy during the early seventeenth century further boosted the demand for musical instruments.

The Baroque period of the mid-seventeenth century featured the regular use of the ensemble, which became the foundation of the modern orchestra. In the mid-1700s orchestras of the era expanded to include clarinets and trombones. The piano was accepted by composers during this time as well.

The 1830s marked a period of experimentation with musical instruments. Improvements were made to a variety of instruments, including the trumpet, flute, and piano, which continued to grow in popularity. The tuba and saxophone were introduced around this time and became established as legitimate and popular instruments.

By the mid-nineteenth century, instrumental music had become a key aspect of American and European society. Pianos, in particular, were highly valued, and the instrument became a centerpiece of family life in many households. A key factor in the popularity of the piano was the development of the portable grand piano in 1800, an instrument that was the precursor of the upright piano. This innovation provided middle-income citizens with the opportunity to purchase affordable pianos.

Player pianos—mechanically operated pianos that use a perforated paper roll to trigger the piano keys—became popular for a time as well. By 1918 it was estimated that more than 800,000 player pianos were in operation in the eastern United States. By the early 1920s player pianos accounted for more than half of all piano sales in the United States. The emergence of radios and phonographs, however, doomed the player piano market.

As the twentieth century unfolded, mass-production technology was introduced that dramatically increased the number of musical instruments available on the market. Inferior products inevitably appeared as well, but the industry recognized that many customers demanded a certain level of quality in their purchases.

Since the 1950s, which featured the introduction of the television to households around the world, the musical instruments industry depended on the continued vitality of the market despite the emergence of an ever-increasing number of recreational alternatives. The allure of other entertainment options loomed as a continuing concern for industry manufacturers in the mid-1990s. The drop in consumer spending on musical instruments resulted from a number of factors including increased consumer interest in other leisure products and activities. Products such as computer equipment and other audio-visual products began to capture consumer interest in the 1980s. In addition, computer games, movie rentals, and cable television now occupy more consumer recreational time and some industry analysts argue that more of today's consumers prefer spectator, rather than participant, amusements.

Significant Events Affecting the Industry

The electronic revolution had a great effect on the musical instrument industry. Between 1981 and 1986 the price of an acoustic piano doubled because of increasing labor costs. However, electronic keyboard instrument sales jumped 40 percent between 1985 and 1986. In fact, Americans bought twice as many keyboards in 1986 (206 million) as in 1985 and more than four times as many as in 1984. Sales of synthesizers jumped from 220,000 in 1985 to 350,000 in 1986. All that was driven by the increased power and flexibility of computer-assisted music production and a drop in the price of such electronic equipment. Electronic keyboard sales remained strong in the mid-1990s as well.

Computerized music software also revolutionized the musical instrument industry. These programs do everything from teach beginners the basics of music to allow the music savvy to create and record intricate compositions. Coupled with electronic keyboards and other musical instruments, music software gives users added power and capabilities. Although the computer-assisted music industry did not get underway until the 1990s, it promises to be a significant trend in the musical instrument industry's future, since it expands the possibilities of those who already play musical instruments and can encourage others to take up musical instruments.

Key Competitors

At the beginning of the twentieth century, the U.S. musical instrument industry was dominated by a few big names like Baldwin, Steinway, Aeolian, American, Kimball, Wurlitzer, Steger, and Kohler. By the early 2000s, after a century of reorganization, merger, takeover, and bankruptcies, many of these once-famous names had disappeared. And while Baldwin continued to dominate the piano segment, it lost part of its control of the musical instrument industry to Steinway in the mid-1990s.

Baldwin Piano and Organ Co. of Loveland, Ohio survived dropping sales and rising interest rates by getting into the finance business: it bought and sold loan agreements on its pianos and organs. The company was established in 1862 by Dwight Hamilton Baldwin, a retail dealer of pianos and organs in Cincinnati. Its later success resulted from the takeover of many small piano manufacturers and the development of a consignment-based dealership contract arrangement. The system, actually begun by the W.W. Kimball Co. of Chicago, put pianos in showrooms across the country without major investments from the dealer and made pianos available to consumers on monthly payment terms. By the late 1930s, innovative marketing and quality products had established Baldwin as the industry leader. By the early 1980s, the piano business was a mere 3 percent of the holding company's $3 billion operations. When parent company Baldwin-United went bankrupt in 1983, it spun off its piano interests in a management-led leveraged buyout. Faced with intense foreign competition, heavy debt and a shrinking customer base, Baldwin struggled to achieve consistent profitability in the 1990s and early 2000s. CEO Karen Hendricks attempted to guide the company to profitable growth in the late 1990s. However, by 2001 Baldwin's sales fell more than 30 percent to $86 million, and the company's loss totaled about $10 million. In 2001 the company filed for bankruptcy protection and was purchased by Gibson Guitar Corp.

Founded before the turn of the twentieth century, for most of its history Selmer Co. concentrated primarily on wind instruments—clarinets, trumpets, and saxophones—as well as violins. Leveraged buyouts in 1988 and 1993 put the company in private hands. In 1994 the company acquired Steinway Musical Properties Inc. for $101.5 million. Steinway had also built a reputation as a maker of quality instruments. Established in 1853 in New York, the firm eschewed price competition, instead cultivating a top-quality image via international endorsements by concert pianists, sponsorship of national concert tours, and with award-winning national advertising campaigns. In 1983 it became Steinway Musical Properties Inc. and in 1985 it spun off the subsidiary, Steinway Inc. of New York. Steinway enjoyed a resurgence in the 1990s and early 2000s, with revenues increasing from $90.0 million in 1993 to $352.6 million in 2001, when the company earned profits of $11.3 million. At that time, it was operating under the name Steinway Musical Instruments Inc.

Leaders of the guitar segment of the industry included Fender Musical Instruments Corp. and Gibson Guitar Corp. Headquartered in Scottsdale, Arizona, privately held Fender, maker of the famed Stratocaster, was acquired by CBS Inc. in 1981 and taken private in 1985. New management revived the company so much that by the mid-1990s, the company boasted almost 50 percent of the guitar market. In addition to its leadership position in the global marketplace, by the early 2000s Fender had established itself as the top U.S. electric guitar manufacturer, posting sales of $275 million in 2001.

Nashville-based Gibson can be traced to the 1870s, when company namesake Orville Gibson opened a mandolin shop in Kalamazoo, Michigan. Best known for its renowned Les Paul model guitars, Gibson also makes banjos, mandolins, drums, synthesizers, and amplifiers. In 2001 this privately held company's revenues were estimated at about $125 million.

Industry Projections

With an economic recovery in the mid- to late 1990s, the U.S. musical instrument industry experienced a period of moderate growth. Revenues from manufacturer shipments totaled $1.8 billion in 2000, up from $1.3 billion in 1997. Guitars are among the best selling musical instruments in the country, with total retail sales of $923 million in 2000, up more than 21 percent over 1999 levels. Additionally, retail sales of guitars rose almost 10 percent in 1999. While guitars, percussion, and other musical instruments accounted for more than 75 percent of manufacturer revenues in 2000, other leading instrument categories included pianos, accounting for more than $188 million of total revenues, and organs accounting for about $87 million. Worsening economic conditions that developed in 2001 will likely impact the industry's output.

In addition to the economy, growth of the school-age segment of the population affects industry demand, since school-age children make up some of the leading customers for musical instruments. While population trends contributed to the prosperity of the industry during the late 1990s, their impact was expected to be minimal through 2004. Children aged five to 17 were only expected to increase by a factor of two percent during this time period.

Global Presence

The United States remained a world leader for musical instrument trade in the early 2000s. U.S. exports, which amounted to an estimated $340 million in 1999, declined about 10 percent in the late 1990s. This was attributed to various international economic factors, including weak Asian economies. The leading global markets for U.S. manufacturers included Japan, the United Kingdom, Canada, Germany, and Mexico, which together represented more than half of exports. Imports, which amounted to an estimated $1 billion in 1999, also declined in the late 1990s, but only slightly. At that time, about one-third of imports came from Japan, followed by other Asian countries like South Korea, Taiwan, and China. Together with Germany, these nations represented more than 70 percent of imports.

Employment in the Industry

Overall, employment within the musical instrument industry has consistently declined since the 1970s. From 1975 to 1985, industry-wide employment fell from 24,500 to 13,200 people. By 2000, the industry retained only 15,279 employees with just 12,217 production workers. However, the average hourly wage for production employees—who constituted more than two-thirds of the workforce—increased from about $3.25 to $13.07 during the 25-year period. Much of the loss of employment resulted from automation, a switch to materials that were easier to work with, and overseas production.