Media Economics and Management

Sathya Prakash Elavarthi, Sunitha Chitrapu

• Publisher: Routledge India
• Year: 2021
• ISBN:
  9781000455588
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Industria de medios y comunicaciones

This book offers a comprehensive understanding of key concepts and terms in media economics and management and explains their applications using relevant data. Beginning with a conceptual study of media markets, industry structures, firm behaviour, public policy, production, pricing and consumption choices in media industries, the book uses the framework to present an in-depth examination of the management of four major media industry sectors in India: newspaper publishing, television broadcasting, film and digital media industries. It also deals with two topics relevant across media business sectors: creative industries approaches and copyright issues. The book discusses the economic forces and factors that shape the workings of media industries and institutions in India to highlight trends in a business that is rapidly evolving, highly profitable and marked by regional, linguistic, economic and cultural diversity. This volume is a step towards formalising the emerging field of media economics and management within the discipline of mass communication and journalism as an area of research and education in India.

An accessible guide to the basic principles and concepts of media economics and management, with illustrations from Indian and global media industries, this will be an essential resource for students, researchers and teachers of media and communication studies, media economics and management, political economy andsociology as well as for professionals in media industries.

1
UNDERSTANDING MEDIA PRODUCTS, FIRMS AND MARKETS

DOI: 10.4324/9781003199212-1

Firms are central to understanding markets. Understanding how firms come into existence, the choices they have and the strategies they adopt are important to understanding how industry structures evolve over a period of time. However, one cannot understand the structure of the industry by studying an individual firm alone. Examining the conditions at the collective or industry level reveals certain aspects that cannot be understood by studying individual firms. Additionally, understanding of the nature of media products will also throw light on the existence and behaviour of media firms and industries. This chapter uses a multi-pronged approach to examine the nature of media products and firms to gain an in-depth understanding of media industries and media markets.

Understanding the nature of media products

In the economic sense, a “product” is something that is made available to the consumer through a transaction to satisfy a want or a need. In that broad sense, a newspaper, a radio or television broadcast, a film, a book, a music file or a video game are all examples of media products. Media products have some commonalities and differences with other products in the market. The commonality is that it is a product that is bought and sold like others at a given market price. This quality of media products facilitates the study of media economics, as a sub-discipline of microeconomics. The differences of media products with others are many and have been elaborated by many media economists (Picard, Doyle, Albarran et al.) over the years. These differences are based both on the nature of the media product and the way it is perceived by socio-economic actors in the market. It is the study of these differences and their impacts on producers, consumers, media markets, societies and governments that constitute the study of media economics and management. Some of the important ways of understanding media products and the resulting economic implications are discussed in this chapter.

Public goods

In economics, a public good is defined as one that is non-excludable and nonrivalrous. The nature of a public good is such that no individual can be excluded from its use, and use by one individual does not reduce its availability to others, e.g. national security. In comparison, a private good is rivalrous, in the sense that if one individual consumes it, its value is destroyed for others. Some economists consider media goods as public goods (Wildman, Davies, Picard, Doyle et al.). In such a scenario, should media goods be produced and provided for by the state in the same way it provides for national security and law and order? Media goods are also expected to embody values of free speech and plurality of opinions, and this cannot be ensured by a single producer. In reality, most of the media firms are privately owned, and they exclude non-payers. For a non-excludable and non-rivalrous good such as terrestrial radio or terrestrial broadcasting, the costs of keeping the non-payers from enjoying the good or service is prohibitive. The public good characteristics of media products have implications for financing media operations.

Economics is based on the premise of scarcity. Media economists argue that media output defies the very premise of scarcity. Media inputs suffer different levels of scarcity till the first copy is produced. Once the media product is produced, it does not suffer from scarcity because it is non-rivalrous, i.e., no matter how much a film, song or news story is consumed, it does not get used up completely (Doyle 2002, 10). So, the conventional concept of scarcity does not apply as it would to other private goods, whose value gets diminished on usage. Since consumption by one consumer does not deplete the availability of the product for consumption by others, not making it available to others is considered as welfare loss. For-profit private organisations do not have the incentive to produce public goods because of the free-rider problem. A free-rider problem occurs when consumers enjoy a good or service and do not pay for them, resulting in under-provisioning of resources for production of those goods and services. To circumvent this problem, the creation of public goods like street lighting, law and order and national monuments is often funded by the governments. Broadcast media technologies were non-excludable in their early years, and given their positive externalities, governments considered them as public goods and funded them. In the United States, where ideological opposition to government funding was prevalent, early radio and television broadcasts were funded by advertisers. Over the years, new technologies such as encryption have made exclusion of broadcast products possible. When exclusion is possible, private organisations will try to serve as many fee-paying consumers as possible. Private investments in broadcast technologies increased with the arrival of technologies that increased the degree of excludability and legal provisions such as copyright protection.

Some economists argue that the idea of public goods has to be further refined to make distinctions between pure public goods and marketable public goods. Pure public goods are non-rivalrous and non-excludable, but marketable public goods are non-rival but excludable (Adams and McCormick 1993, 110). They suggest that in the case of marketable public goods, the free-rider problem can be overcome by the new technologies that enable excludability. For media products, rivalness is an intrinsic characteristic, while excludability is external to it. Media content may be non-rival, but the medium by which it is distributed may be a rival good (Gaustad 2010, 250). A newspaper article may be non-rivalrous as it can be shared endlessly, but a printed copy of a newspaper is rivalrous. As the possibilities of building exclusion to greater degrees increase, it becomes difficult to define media goods as public goods in the conventional sense.

Dual product markets

Media products are considered as vehicles for transmission not only for their inherent ideas and experiences, but also for promoting other products by the advertising industry. This instrumental function of media products has significant implications for their packaging and pricing. This also splits the media product market into two interdependent segments: in one segment, media producers produce media goods to get the attention of the audience, and in the second, they trade it as currency with the advertisers. Robert Picard calls the result of this split nature of media products as dual product markets. In economic terms, this makes media products unusual. Media firms create one product but participate in two separate goods and service markets (Picard 1989, 17). This formulation, which had a significant impact on understanding of media markets for quite some time, suggests that media products such as newspapers or TV shows are produced for participation in a content market first and later for participation in the advertising market, with the performance in the first market affecting the performance in the second.

In the content market, media products (newspapers, magazines, books, music or television shows) compete for the attention of the audience. A part of the cost is recovered from the content market in the form of subscription revenues. In the advertising market, media firms compete using the different quantities and qualities of audience attention they have acquired in the content market. (Audience markets will be discussed in detail in Chapter 3.) This market provides media firms with advertising revenues. Media products can choose to operate in both. Sometimes they might participate only in the audience markets in the initial phases of their lifecycle and enter the advertising market in the later stages of their lifecycle. For instance, films are made for audience markets as they face the box office first, and eventually they are broadcast on free-to-air television channels, thereby participating in advertising markets as well. Of course, even at an early stage, films get revenues from theatre advertising and in-film placements, making them participants in advertising markets. While all media products can participate in dual product markets in principle, some may not participate in both for their own strategic reasons. Media firms that focus only on content creation get value for their products by selling them to various packaging firms.

Intangible goods

Media products differ from others in their form and delivery mechanism. All media products involve exchanges of information, ideas and experiences. For instance, a newspaper may give information, opinion or analysis, and a film might provide a certain experience. The primary value of media products is in the ideas and experiences that they provide, which are intangible. This intangible nature of media products is emphasised as an important quality by many media economists. It is argued that this intangible nature provides media products with benefits of scale and scope (Doyle 2002, 13). Economies of scale can be defined as cost advantages that arise with the increased output of a product. As greater quantities of a good are produced, the fixed cost is spread across them, reducing the per unit cost. Economies of scale are present across a range of manufacturing industries involved in assembly line production. In media, scale economies are said to be present in higher propensity due to the intangible nature of the product. Media products are said to enjoy falling marginal costs as the volume of output consumed expands. This happens because the cost of producing an extra unit of a media product is negligible when compared with its first copy cost. For instance, the first copy cost of a film will be very high as it involves costs of casting, production and marketing, but the cost of producing an extra copy falls as thousands of copies are made for theatrical distribution. It has to be noted that scale economies in media products are determined by massive consumption, not by massive production (Arrese 2006, 192). The marginal costs in other media sub-sectors, including publishing, broadcasting and digital media products, are also low, offering them opportunities to reap economies of scale. Apart from economies of scale, media products are also said to enjoy economies of scope. It can be defined as sharing inputs across a range of products to achieve cost efficiencies. When economies of scope are present, it makes sense for a firm to diversify its product range to benefit from lowering of costs by sharing inputs. Media firms can re-combine their inputs and specialist ingredients in many ways, resulting in multi-product production. For instance, Bloomberg specialises in producing financial information, data and analyses. It uses the same information to produce a range of media products across radio, TV, web portals and mobile apps. If all these products are to be produced by different firms, their collective cost will be much higher than the total cost to the combined firm, in this case Bloomberg.

However, economies of scale and scope are not unlimited; at a certain stage, diseconomies do arise. To continue with the example of film, initially the marginal cost of producing an extra unit will fall as the output expands. But, after a certain stage, the marginal costs will equal average costs and producing extra units beyond this point will lead to diseconomies of scale. In theory, recombining ingredients of media products and sharing resources in production seems possible and would lead to economies of scope. In practice, when a diversified firm attempts to integrate operations of its newspaper and TV broadcast simultaneously, it is not easy and involves the costs of coordinating these functions. This will lead to diseconomies of scope after a certain stage. More about economies of scale, scope and diseconomies is discussed in Chapters 2 and 6.

The intangible nature of media products also results in some negative consequences. It is very difficult to forecast demand and make pricing decisions for intangible goods. The peculiarities that intangible goods embody render scores of traditional assessment mechanisms for transactions and pricing inadequate (Arrese 2006, 192). Since media products are intangible, the monetisation process is built around delivery mechanisms, which make media products tangible; in other words, intangible goods need to be embedded in tangible forms to make it available for exclusive consumption. Of late, digital media has resolved this problem to a certain extent but has also increased the problem of piracy.

Bundled goods

The practice of offering several products together as a package for a single price is called bundling. Bundling is accepted as a rational strategy in product markets that enjoy economies of scale and scope and in markets that suffer from high consumer acquisition costs. Since media products are intangible, and since they can be packaged in various combinations, it has become a convention for media companies to offer their products in bundles. And since seeking out listeners, viewers and readers for single products is a risky and expensive business proposition, media companies adopt bundling. A newspaper publisher or a broadcaster packages various components on a daily basis for their readers and viewers. Films, popular music and video games are initially released as single products, but as they mature, they are bundled to realise their residuary value.

The idea of value for a single media product gets extremely complicated in a bundled environment. For instance, a newspaper is a bundle of news, opinions, editorials, cartoons, columns, etc. The market price is for the bundle as a whole and not for the components. The advertising insertions can be based on both the bundle as a whole or on a subset of the bundle. Generally, the individual items in the bundle seem to be less significant in the overall valuation of the media product, but the cost involved in making each of these single items is clear and significant. Some of these individual items are produced by the newspaper firm, while some are procured from others (syndication, freelancing, expert opinions, etc.). A media packaging firm will have definite bundling costs that are not charged directly to the consumer alone, but absorbed by the advertisers as well. These complicated cost and price arrangements have consequences for the performance and profitability of firms in media markets.

The advent of digital information goods with very low marginal costs can make bundling hundreds or even thousands of unrelated goods a profitable strategy (Bakos and Brynjolfsson 1999, 1.614). According to Bakos and Bryn-jolfsson (1999), consumer’s valuation for a collection of goods typically has a probability distribution with a lower price variance per good compared to the valuations for the individual goods. Pricing the bundle optimally is a challenge, and it depends on the size of the bundle, nature and marginal costs of its components and the value perception among consumers. A multiproduct aggregator may achieve higher profits and greater efficiency through bundling strategy than by selling them individually. Bundling seems to confer size-based advantages that are different from scale, scope and network effects. Some of these aspects about bundling will be discussed in Chapter 8 on digital media.

Uncertain markets

Demand uncertainty is endemic to media markets. No media product is similar to the earlier one, and this makes the consumer response difficult to predict. A film by the same creative team might...