Media Economics

Applying Economics to New and Traditional Media

Colin Hoskins, Stuart McFadyen, Adam Finn

• Publisher: SAGE Publications, Inc
• Year: 2004
• Print ISBN: 9780761930969, 9780761930952
• eBook ISBN: 9781506319865
• Edition: 1
• Topic: Languages & Linguistics
• Subtopic: Communication Studies
• Index: Languages & Linguistics

"Hoskins, McFadyen and Finn de-dismalise economics. Their book is clearly written, full of cogent and apposite examples and analyses persuasively what makes media and communications like, and unlike, other economic sectors. From network externality to public good, from experience goods to superstars, from dumping to quotas they lucidly guide the reader through the tangles of the new economy and why it now matters less if maids burn books. Eat your heart out Thomas Carlyle."

-Richard E. Collins, The Open University, U.K.

How does the Internet affect the supply of information-based entertainment and cultural goods? Why do telephone companies have peak and off-peak prices for long-distance calls? Why is broadcasting, but not newspaper publishing, usually regulated and sometimes subsidized? Media Economics: Applying Economics to New and Traditional Media provides a thorough foundation of the microeconomic principles and concepts needed to understand media industries and issues in the converging media environment.

Media Economics differs from ordinary media economic texts by taking a conceptual approach to economic issues. As the book progresses through economic principles, authors Colin Hoskins, Stuart McFadyen, and Adam Finn use cases and examples to demonstrate how these principles can be used to analyze media issues and problems. Media Economics emphasizes economic concepts that have distinct application within media industries, including corporate media strategies and mergers, public policy within media industries, how industry structure and changing technologies affect the conduct and performance of media industries, and why the United States dominates trade in information and entertainment.

Key Features

• Chapter opening vignettes introduce the issues analyzed in each chapter
• Concise definitions of key terms for a clear understanding of basic microeconomic and managerial economic concepts
• Examples from a variety of media industries including those in the United States, Canada, the United Kingdom, and Australia
• A concept-driven approach enabling a longer shelf-life as technologies, structures, and revenues change
• A recognition of the reality of convergence and consolidation in media industries rather than addressing each media outlet individually

Media Economics assumes no prior background in economics and is designed for undergraduate and graduate students studying media economics and media industries. The book is an ideal text for public policy and the media as well as media and society courses with an economic perspective taught in Media Studies, Communication, Business, Journalism, Film Studies, Political Studies, and Economics programs.

1

Introduction and Overview

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1.1 Why Media Economics?

This book sets out the economic principles and concepts needed to understand media industries and issues. Most of the applications are real-world examples drawn from countries such as the United States, Canada, the United Kingdom, and Australia.

Media industries have customarily been defined in terms of a distinct product distributed in a particular way—books, magazines, television, radio, music, film, and video, for instance.

In the new digital economy, the content provided by many of these formerly distinct industries can be distributed via the Internet and read, viewed, or listened to on a personal computer (PC). E-mail can be read on a TV screen, and telephone messages can be routed over the Internet. With convergence, companies such as AOL-Time Warner in the United States and BCE in Canada are vertically integrated, including text, audio, and video content; an Internet portal; and distribution capability through cable or telephone wires. In this new economy, only a broad definition of what comprises media industries makes sense. Hence our applications will be drawn widely from new media, print, television, radio, film and video, video games, music recording, cable TV, and telecommunications.

These are examples of media issues and applications that will be addressed in this book. How is the Internet affecting the supply of information-based entertainment and cultural goods? Why was owning a commercial television broadcasting license, as Lord Thomson of Fleet said, “like having a licence to print your own money” (Oxford Concise Dictionary of Quotations, 1997, p. 332)? Why did knowing that the demand for television advertising is relatively insensitive to changes in the price of advertising spots lead the Peacock Committee to recommend against permitting advertising on the BBC? Why is the benefit of subscribing to a network, such as a telephone network or Internet (e-mail) network, greater the larger the number of subscribers, and what are the implications for corporate strategy? How do economies of scale provide the United States with a competitive advantage in producing television drama and movies? Why are there so many media mergers, such as those between AOL and Time Warner in the United States and BCE’s acquisition of CTV in Canada? How could Paramount claim that a movie bringing in $250 million at the box office was produced at a loss? Why are media industries inherently risky, and what can producers and distributors do to reduce this risk? How can we determine how competitive a given industry (e.g., the newspaper industry) is? How does the structure of a media industry affect its conduct and performance? Why have governments traditionally asked regulators to set the rates for telephone services? Why have many governments recently retreated from regulating long-distance rates? Why have some governments used competitive bidding to award cable television franchises or allocate electromagnetic spectrum frequencies? What has caused the “crisis” in public broadcasting? Why was it “winner takes all” in the VHS versus Betamax battle of VCR standards? Why are the prices for foreign sales of U.S. television programs so low, and does this constitute unfair competition? Why do publishers of academic journals have different subscription prices for institutions (libraries), students, and other individuals? Why do telephone companies have peak and off-peak prices for long-distance calls? Why have movie projectionists suffered big reductions in wages? Why do superstars, such as top movie directors and actors, authors, and pop stars, earn such vast salaries? Why is broadcasting, but not newspaper publishing, usually regulated and sometimes subsidized? Why is trade in television programs and films so controversial? Is protection of media industries justified?

Why study media economics? Many students in media studies, communications, radio and television, journalism, and film studies are exposed to little or no mainstream economics. Indeed, economists are often viewed with mistrust as mercenary folk who know the price of everything and the value of nothing, people who favor cost cutting at the expense of cultural development. An appreciation of the economic forces driving industry and firm behavior is, however, invaluable—not only to a general understanding of the media but to the ability to be effective in a media- or communications-related job, whether in the corporate or public sector.

If you are a student in business, economics, or political science, why should you take media economics rather than a more traditional introduction to economics? Maybe you are already pursuing a career in the media or are seriously thinking of doing so. However, the real reason to take media economics is that during the course, you will learn basic economics, and instead of worrying about widgets and whatsits, you will be able immediately to apply your learning in a dynamic and controversial sector of the economy, with interesting hands-on applications of your new skills.

Our emphasis is quite different from that of the usual media economics text, which provides a bare minimum background in economics by way of brief introductions to economic concepts and the industrial organization framework before undertaking chapter-by-chapter studies of the various media industries using that framework. The industrial organization framework has its place (we devote chapter 7 to it), but there are pitfalls in using it. Much of the industry material, such as a size ranking of the leading firms, is descriptive and soon becomes dated. More fundamentally, the traditional industry-specific perspective is increasingly outmoded, as individual industry segment distinctions are becoming almost meaningless in an era of convergence and digitization. In contrast, this text provides a much broader and deeper understanding of key economic concepts. Our approach provides a superior background for analyzing media industries and issues and functioning effectively in a job in a media company.

1.2 What Is Economics?

Economics is the science that studies how the economy allocates scarce resources, with alternative uses, between unlimited competing wants. But what does this really mean?

The wants reflect the desires by households or individuals acting as consumers. The wants are satisfied by consumer goods (tangible) and services (intangible). Even though most people in the developed world are able to purchase a variety and volume of goods and services undreamed of by our ancestors, very few people are able to consume everything they would like. Wants are a relative concept; there is invariably some neighbor or friend who is able to buy attractive items we would like to be able to afford but cannot.

These unlimited wants can only be provided using resources that are scarce and capable of producing many alternative products. These resources are also called inputs or factors of production. Resources can be placed in one of three categories: land (all natural resources), labor (all human employment designed to produce goods and services), and capital (all man-made aids to production).

Economics is divided into two main strands, microeconomics and macroeconomics, and an applied branch known as managerial economics.

• Microeconomics is concerned with the behavior of individual economic units, notably the firm and the household, and the role of relative prices in affecting behavior.
• Macroeconomics is concerned with economic aggregates, such as the overall level of employment or unemployment, the average price level, and gross national product (GNP).
• Managerial economics is the application of economic concepts, principles, and tools to managerial decisions.

This text deals primarily with microeconomics and managerial economics, as these are most relevant to media issues.

1.3 Problems to Be Solved by Any Economy

Because of scarcity, any economic system has to solve the what, how, and for whom allocation problems.

A.	What goods and services are to be produced, and how many of each? This entails, for example, not only how many television receivers but what mix in terms of, for example, screen size, digital or analogue, flat screen or conventional, stereo or nonstereo, picture-in-picture capability or not, and so on.
B.	How are the goods and services to be produced? Which scarce resources are to be used in their production and in what combination? Should a very capital-intensive or labor-intensive method be used? The answer will vary with the product and even within a product group. The combination of resources appropriate to production of a local television station’s newscast may be quite different from that appropriate for a network newscast. How should an animated film or TV program be made? Should it be made using many graphic artists or should it be largely computer generated? In nonanimated films, should scenery and special effects be done on location or created digitally?
C.	Who is to receive the limited goods and services produced? How are they to be allocated between consumers? Who is going to own and use the television sets, DVD players, or magazines made? Who is going to have an opportunity to watch the movie in the theater or to own a camera cell phone?

1.4 Solving These Allocation Problems Under Different Economic Systems

Under a command economy, such as that in the old Soviet Union, factories are state owned and allocation is made by central planners on the basis of economic forecasts. Planners may issue an edict to state-owned Factory No. 104 to produce 10,000 television receivers per month. Forecasting demand is extremely difficult, especially when economic data tends to be poor and out of date. Perhaps people would like to buy 20,000 or 5,000 television receivers from Factory 104. Perhaps they would indeed like to buy 10,000, but of a different screen size from those being produced. Perhaps they want to buy 10,000 television receivers of the size produced but would prefer to pay more for better quality. Factory 104’s responsibility is to produce 10,000 units per month. Typically there is no incentive to provide an appropriate product range or to maintain the quality of output. The command economy has proved inflexible and unable to provide citizens with a rising standard of living.

In a market economy, allocation results from decisions made by individual households and firms interacting in the product market (where consumer goods and services are bought and sold) and the factor market (where inputs are bought and sold). Households have two roles. They are consumers of goods and services, purchasing them in the product market, and suppliers of labor (and, in some cases, investment financing for capital) through the factor market. Similarly, firms supply consumer goods and services to the product market and buy (hire) labor and other inputs in the factor market. Money flows from households to firms in the product market and from firms to households in the factor market.

In a market economy, the what, how, and for whom allocation problems identified are solved as follows:

A.	What goods and services are to be produced, and how many of each? This is determined by the demand for products at different prices by households (acting as consumers) and willingness of firms to supply products at different prices.
B.	How are the goods and services to be produced? The number and combination of inputs depends on the relative prices of inputs and their productivity; that is, how effectively they contribute to making the product.
C.	Who is to receive the limited goods and services produced? The allocation is made by rationing according to the willingness of households (which includes ability) to pay the price asked.

Economics, in examining how a market economy works, assumes that households and firms make decisions based on their own self-interest. The objective of households is assumed to be utility maximization, utility meaning, in this case, satisfaction. Households allocate their income among consumer goods and services in the manner that maximizes satisfaction, and they choose a line of work that gives the most satisfaction. An important element of the latter will be the level of remuneration, as this will affect the size of the basket of consumer goods and services the household can buy.

The objective of firms is assumed to be profit maximization. Profitability determines what is to be produced, the features of the product, the price at which to sell, the level of output, and the combination of resources to employ.

Households and firms weigh the benefits and costs of alternative choices in terms of utility or profits, respectively. Incremental analysis is important, as these choices are often not of the all-or-nothing variety but of how much or to what degree. For example, a household does not typically make a decision whether or not to buy a movie ticket this year but whether to buy 4 or 5 or 6. Similarly, once a company is established in the magazine business, the decision is more typically whether to produce 60,000 or 65,000 copies of next month’s issue rather than whether to produce at all. Weighing the benefits and costs of relatively small changes is known as incremental or marginal analysis.

Relative prices play a crucial role in allocation decisions. Firms will find it most attractive to allocate resources to production of goods and services where the product price is relatively high and prices of inputs used in production are relatively low. ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• 1. Introduction and Overview
• 2. Demand and Supply
• 3. Markets
• 4. Consumer Behavior
• 5. Production and Cost
• 6. Revenue, Profit, Risk, and Managerial Decisions
• 7. Market Structure, Theory of the Firm, and Industrial Organization
• 8. Perfect Competition and Monopoly
• 9. Monopolistic Competition and Oligopoly
• 10. Pricing and Market Segmentation
• 11. Advertising
• 12. Labor Markets
• 13. Government Intervention
• 14. International Trade
• References
• Index
• About the Authors