By 1891, it had become obvious that the future of the cylinder phonograph industry was not to be found in the business office. From the initial allocation of distribution rights by the North American Phonograph Company to 33 local companies, this had dwindled to 19 and none of these companies had made a profit from its operations with business machines.

However, a new direction which ultimately saved the cylinder industry from bankruptcy had, in fact, already been found. At the annual convention of the National Phonographic Association for 1891 it was discovered that as many as a third of all cylinder machines in operation were actually being used purely for entertainment. It is thought that this new field of activity was realized first by one Louis Glass, enterprising regional manager of the Pacific Phonograph Company in San Francisco. It was he who designed and patented an ingenious mechanism which would allow the new talking machine to be used as a coin-operated device at penny arcades reproducing professionally-recorded wax cylinders of musical selections. He is credited with installing the first ever of these coin operated phonographs in the Palais Royale, San Francisco, in November 1889. With four listening tubes and a separate coin slot for each tube, it could earn as much as 20¢ per play.

As Roland Gelatt writes in "The Fabulous Phonograph"

In 1889, the Edison Phonograph Works began producing musical cylinders for use in these new coin slot mechanisms and one of the first catalogues known of musical cylinders (in the early days called Phonograms) was made available the next year by the North American Phonograph Company.

Regional companies drew upon local talent to produce their own amusement recordings for this new industry. The Columbia Phonograph Company, which was the local company licensed by North American to handle the territory of the District of Columbia, also produced a catalogue of cylinders in 1890. This company was extraordinarily lucky to have recording access to the U.S. Marine Band and its enormously talented and popular leader John Philip Sousa. Soon the recordings of this band were in more demand than any other performers' and by providing other local companies with Sousa cylinders, Columbia was able very quickly to reap enormous profits. Other companies followed Columbia's lead: one, the New England Phonograph Company, enjoyed considerable prosperity for several years selling a series of 'Casey' dialect stories recited by Russell Hunting.

A further development of the phonograph industry ensued at this time. As described in A Wonderful Invention, a publication of the Library of Congress in 1977 to celebrate the 100th anniversary of the invention of the phonograph:

"In the June/July 1891 issue of the Phonogram, a periodical devoted to the infant record industry, there was a notice that the Columbia Phonograph Company was offering the public the option of renting or purchasing its machines. This was the beginning of the end of all attempts at confining the talking machine to the role of an elite business Dictograph. Within a year all companies were selling talking machines to anyone who wished them, and the foundation of the present-day commercial record industry was established. From then on each company was pitted against the others in capturing the record market."