Media Economics

Stuart Cunningham, Terry Flew, Adam Swift

• Publisher: Bloomsbury Academic
• Year: 2015
• ISBN:
  9781350306431
• Edition: 1
• Topic: Social Sciences
• Subtopic: Media Studies
• Index: Social Sciences

This core textbook examines the economic paradigms at work in media industries and markets, enabling analysis of the media system as a whole. In addition to succinct accounts of neo-classical and critical political economics, this insightful text offers fresh perspectives for understanding media drawn from two 'heterodox' approaches: institutional economics and evolutionary economics. Applying these paradigms to vital topics and case studies, Stuart Cunningham, Terry Flew and Adam Swift stress the value – and limits – of contending economic approaches in understanding how the media operates today. Succinct and accessible, this text is essential reading for all students of media and communication studies, as well as those from economics, policy studies, business studies and marketing backgrounds with an interest in the media.

1

Media Economics: The Mainstream Approach

The field of media economics has existed in some form since the 1950s, and overviews can be found in Picard (1989), Alexander et al. (2004), Hoskins et al. (2004), Albarran (2002, 2010), Doyle (2006, 2013) and the Journal of Media Economics, which commenced publication in 1988. Media economics has been defined as being ‘concerned with how media operators meet the informational and entertainment wants and needs of audiences, advertisers and society with available resources’ (Picard, 1989, p. 7), and with ‘the study of how media industries use scarce resources to produce content that is distributed among consumers in a society to satisfy various wants and needs’ (Albarran, 2002, p. 5).

While economics has not been as central to the study of the media as communication studies, sociology and cultural studies, it has always had great significance beyond academia. One key reason is that it aims to capture how the media works from the perspective of those who run media businesses and make media policies. Gillian Doyle makes the point that ‘economics, as a discipline, is highly relevant to understanding how media firms and industries operate . . . [because] most of the decisions taken by those who run media organisations are, to a greater or lesser extent, influenced by resource and financial issues’ (Doyle, 2013, p. 1).

Media economics has been based around the mainstream definition of economics as ‘the study of how people and society end up choosing . . . to employ scarce productive resources that could have alternative uses, to produce various commodities and distribute them . . . among various persons and groups in society’ (Samuelson, 1976, p. 3). Following the pioneering analysis of Adam Smith in The Wealth of Nations (Smith 1991 [1776]) of what he termed the ‘invisible hand’, and the benefits to society to be derived from self-interested individual behaviour, economists have tended to prefer market allocation of resources to allocation based upon state planning or custom and tradition, as market relations ‘permit mutually advantageous exchanges and ensure the efficient allocation of resources’ (Stilwell, 2002, p. 147). In his account of Smith’s work in The Worldly Philosophers, Robert Heilbroner summarised the case for the market system in these terms:

Each should do what was to his best monetary advantage. In the market system the lure of gain, not the pull of tradition or the whip of authority, steered the great majority to his (or her) task. And yet, although each was free to go wherever his acquisitive nose directed him, the interplay of one person against another resulted in the necessary tasks of society getting done.

(Heilbroner, 1999, pp. 20–21)

Media economics has drawn upon the neoclassical approach to the study of economics, or what is termed ‘microeconomics’, which involves the study of individual markets, as distinct from macroeconomics that deals with the study of national economies in the context of global trade. Various assumptions underpin the neoclassical approach to the study of media economics, including a focus on the individual as the primary object of analysis; the assumption that individuals engage in rational behaviour in order to maximise their benefits from market transactions; the expectation that markets will reach an optimal price, or an equilibrium point; and the assumption that this equilibrium point will be one that maximises benefits to both producers and consumers as a consequence of engaging in free exchange.

Such assumptions lead to the theory of supply and demand, a cornerstone of conventional microeconomics. This theory assumes that individual consumers are rational in their demand for goods and services which means that, all other things being equal, the lower the price, the more that is demanded. Similarly, the firms who supply such goods and services seek to maximise their profits (revenues minus costs), which means that the higher the price, the more they will supply. This produces what is known as the equilibrium point, where an upward-sloping supply curve and a downward-sloping demand curve meet at a particular price point where the quantity demanded meets the quantity supplied. If the price goes up, demand will fall, and if it goes down, demand will increase. These core concepts of economic theory are discussed in detail in any undergraduate economics textbook (e.g. Stilwell, 2002, pp. 151–54), as well as in the media economics texts noted above.

Markets in action: The case of tablet PCs

The launch of the Apple iPad in March 2010 was one of the most successful new product launches in the history of this highly innovative company. While Apple founder Steve Jobs was not a fan of market research, believing that consumers could not know whether or not they would want a product they had not seen, the company correctly surmised that there was significant consumer demand for a portable computing device that had a screen size similar to that of a personal computer, but the mobility and functionality of a mobile phone. Apple sold over 15 million iPads in the first 12 months of the product’s existence, and while others produced similar products, they could not match the design and functionality of Apple’s product: by the end of 2010, Apple accounted for 75% of the market share for tablet PCs.

In terms of market theory, Apple had created a situation in the new tablet PC market where demand exceeded supply, and consumers were prepared to pay a premium price for the Apple iPad over other tablet PCs. As a result, prices were relatively high for the first generation Apple iPads ($US499–829), and they were a highly profitable product for Apple. There were periods in 2011 where Apple was the world’s largest company as measured by share market value, and at one point its cash reserves were greater than those of the US government.

Neoclassical economic theory predicts that in a situation where one company is earning above-average profits in a market, but there are no barriers to entry for new competitors, there will be entry of new competitors into that market, which will place downward pressure on prices. During 2011, this is indeed what happened, with the launch of the Samsung Galaxy Tab as well as tablet PCs by Acer, Asus, Lenovo, Sony, Toshiba and others. These were invariably cheaper than the Apple iPad: the cost of an entry-level Samsung Galaxy Tab in 2011 was $US299, as compared to $US499 for the Apple iPad 2. But equally importantly, they ran on a common operating system – the Google Android system – that enabled third parties such as apps developers to be able to produce apps that could be used on a wide range of branded tablet PCs, and achieve the economies of scale that existed in producing apps for Apple’s iOS operating system.

By 2012, Apple’s share of the tablet PC market had fallen to 40%, and by 2013 it was 30%. Apple responded to the challenge of Samsung and others by launching the iPad Mini in 2012, which was a smaller version of the iPad that was priced at a level closer to that of its competitors. The market for tablet PCs continued to grow, with Google and Amazon developing their own products, and Microsoft developing a tablet/PC hybrid with the Surface Pro. In 2013, there were at least 195 million tablet PCs sold, as compared to 60 million in 2011, and the market for tablet PCs continues to grow.

The key points illustrated by the market for tablet PCs are:

• With the introduction of the iPad in 2010, Apple created a new market for tablet PCs, where demand consistently exceeded supply, and the iPad was the preferred product. As a result, Apple was able to earn above-average profits.
• This, in turn, promoted its competitors to develop their own tablet PCs, which successfully competed with Apple on both price and product attributes.
• The average price of tablet PCs has fallen as competition has increased, while the range and diversity of types of tablet PC products available has increased.
• Apple has been forced to innovate in response to loss of market share, particularly by developing lower cost versions of its own tablet PC product.

An example of how media economics can approach a media-related question can be seen with debates about whether the media is ‘dumbing down’ the public through an excessive number of light entertainment programmes on TV, which are not seen as contributing to a more culturally and intellectually aware population. A version of this debate has existed for over a century (Bennett, 1982), and economists would not typically try to judge whether or not particular media content is of a high or low ‘quality’, leaving such questions to other disciplines. Economists would, however, relate the choices that media companies make about content to consumer preferences and would typically note that the media content referred to exists because audiences have demonstrated a preference for it: if those preferences change, so too will the content. While the resulting mix of media content may be optimal from the point of view of individual media producers and consumers, it may not be the most socially desirable according to other criteria, such as civic values or the promotion of an engaged citizenry and a vibrant public sphere. This would be seen as an instance of what economists term market failure, which refers to ‘the failure of the market to advance socially desirable goals other than efficiency, e.g. preserving democracy and social cohesion’ (Doyle, 2013, p. 92). If governments and policy-makers perceive a problem in a market-driven media environment, there are ways in which they can use public funding to ensure that other forms of media content is made available. Government funding of noncommercial public service broadcasting has historically been looked to as a means of addressing such instances of market failure – although this constitutes only one reason for supporting public service broadcasting, as Chapter 5 shows.

Neoclassical economics emerged in the 1870s, and became dominant – albeit with a range of dissenting voices around it – in the 20th century. Philosophers have observed that the rise of neoclassicism was associated with an uncoupling of economics as a discipline from fields such as history, politics and social philosophy, as well as a downplaying of the relevance of social structure or ethical questions. In contrast to the classical economics of Adam Smith, David Ricardo and John Stuart Mill, the neoclassical approach to economic questions was increasingly based around methodological individualism, rational choice theory and quantitative methods (Reiss, 2013). Reflective of a wider ‘tendency for the social sciences to mimic the natural sciences’, William Jackson has observed that ‘neoclassical theory . . . squeezed out any inkling of culture’ and that ‘economics was the social science least receptive to cultural thought’ (Jackson, 2009, p. 44).

As the media clearly have a cultural dimension, this does render applications of neoclassical economic methods to the media problematic. Even those who apply conventional economic tools to the study of media and culture nonetheless recognise its problems and limitations. The cultural economist David Throsby has critiqued the ‘intellectual imperialism’ of neoclassical economics, observing that ‘neoclassical economics is in fact quite restrictive in its assumptions . . . [and] its supremacy can be challenged if a broader view of the discourse of economics is taken’ (Throsby, 2001, p. 2).

Alan Albarran (2010, pp. 20–21) distinguishes between three theoretical traditions in media economics. The first is the neoclassical approach, which involves the application of standard tools of microeconomics to media industries and markets. A second approach is what Albarran terms an applied approach, that combines elements of conventional economics with business management theories, such as theories of corporate strategy and organisational behaviour, and which is typically oriented towards advising media managers or government policy-makers. Examples of such an applied approach can be found in Albarran et al. (2006), Küng-Shankelman et al. (2008) and Picard (2011a), as well as in the International Journal of Media Management. Finally, there is the critical political economy tradition, which has drawn upon influences that have included Marxist political economy, critical institutionalism and British cultural studies, and which largely positions itself as being in opposition to the mainstream media economics tradition (Wasko, 2004; Golding and Murdock, 2005; Mosco, 2009; Hardy, 2014). The critical political economy approach will be discussed in Chapter 2.

Features of media economics

In order to capture key elements of media economics, we will identify seven core elements of media generally, and identify ways the mainstream approach deals with them:

1. The heterogeneous nature of media products;
2. Dual media markets;
3. Media industries that tend towards concentration of ownership and oligopolistic markets;
4. The structure–conduct–performance (SCP) approach to understanding media firm behaviour;
5. Social drivers of media consumer behaviour;
6. Contracts and media creative producers; and
7. Government policies towards media from the perspective of competition policy, public goods and externalities.

Heterogeneous media products

One of the recurring issues in media economics is the inability to speak of a single, homogeneous media product. Doyle (2013, p. 12) has observed that it is ‘difficult to define what constitutes a unit of media content’. With a newspaper or magazine, for example, the overall package is the unit that is purchased, rather than individual articles or sections. By contrast, for radio and television, it is the individual programme that is the meaningful unit, rather than the station or network providing it. These lines do become blurred: subscription television is premised upon a preparedness to pay for bundles of channels, while the migration of print media online has meant that it is individual articles that are increasingly consumed rather than the whole publication.

This lack of clarity surrounding the unit of media content makes it difficult to determine the price of different media, since there are highly variable interpretations of what is being consumed. The content that is being priced is also typically platform-specific: books and newspapers are both forms of the written word, for instance, but they are quite different platforms for media content. The use of the generic term ‘content’ to describe media products can obscure important distinctions between media types. The content may be primarily focused upon providing information (e.g. news, documentary) or entertainment (e.g. comedy, drama, talent or game show). It may also be considered to have the attributes of a cultural good, being ‘appreciated for the ways in which [it enriches] our cultural environment’ (Doyle, 2013, p. 13), or it may be considered ‘low culture’ or ‘mere’ popular entertainment (noting that definitions of ‘high’ and ‘low’ culture are always contestable). Finally, media content can take the form of a discrete product (e.g. a feature film or a DVD), or it may be a service or platform through which content is accessed. In the case of digital media forms such as Facebook and Twitter, it is the platform itself that is the service accessed by consumers, and the content consists of what individuals choose to put on the platform or how they communicate with one another through it.

Dual media markets

The lack of clarity surrounding the price of media arising from the difficulties in defining the media product are reinforced by media markets often taking the form of dual markets, where many media industries operate simultaneously in the consumer market and the advertising market. Media firms are seeking to market their content to consumers through a variety of delivery platforms, for which consumers may pay money directly, give their free time or choose to subscribe to the content service provider (newspaper, TV station, website etc.). But these media firms are also participating in the advertising market, whereby they sell space or time to purchasers of advertising, which include corporations, small businesses, government agencies, political parties, non-government organisations and individual sellers (as with classified advertising).

In the case of advertiser-financed media, media firms ‘create one product but participate in two separate good and service markets . . . and that performance in each market affects performance in the other’ (Picard, 1989, p. 17). Commercial media firms therefore ‘sell access to audiences to advertisers’ (Picard, 1989, p. 18) as a key part of their business. Not all media participate in the advertising market: publicly funded media organisations are often required not to carry commercial advertising, and many media industries, such as the book industry, are based exclusively upon direct sales to consumers. But for those who do, the two markets are integrally linked: evidence of attracting large audiences or readerships enables media businesses to charge higher rates for advertising, and the ability to attract advertising becomes a significant – perhaps the most significant – driver of decisions related to media content.

Concentrated media industries

In contrast to the potentially boundless nature of media products, there has typically been a clearer definition of what constitute media industries. A characteristic listing of media industries would make reference to newspapers and magazines, other print and publishing industries (e.g. book publishing), film, radio, television, advertising and music. It is highly unusual for a media industry to approximate the conditions for perfect competition. More typically, media industries have significant concentration of ownership, and market structures are characterised by a spectrum of market structures between perfect competition and pure monopoly, including oligopoly (few sellers, limited or no price competition) and monopolistic competition (more sellers than oligopoly, and a mix of product and price competition) (Table 1.1).

In their assessment of the degree of competition in US media markets in the mid-1990s, Albarran and Dimmick (1996) found no media industry to be perfectly competitive. They identified the book, magazine, newspaper and radio industries as being characterised by monopolistic competition, and the television (broadcast and cable), film and music recording industries as oligopolistic. In more recent times, the market for websites has approximated perfect competition, as no single pro...