Understanding Media Economics

Gillian Doyle

• Publisher: SAGE Publications Ltd
• Year: 2013
• ISBN:
  9781446291344
• Edition: 2
• Topic: Sozialwissenschaften
• Subtopic: Medienwissenschaften

"Expertly synthesizes economic theory and contemporary cases to both explain the structure of the contemporary media industry and shed insight on the significant challenges and controversies confronting the sector."
- Lucy Küng, Oxford University and Jonkoping University "A wide-ranging, accessible introduction to media economics and their application to a broad range of media topics from advertising and business models to copyright, audience demand and public policy."
- Chris Bilton, University of Warwick "An excellent textbook on media economics, which takes into account the full complexity of the subject matter in the context of structural, technological and creative transformations that characterise digital media."
- Milan Todorovic, London Metropolitan University With the rapidly evolving digital media landscape, this second and completely revised edition of Understanding Media Economics moves beyond a sector-specific approach to media analysis, and instead focuses on the issues and imperatives that are now central to how economic forces impact on the media industries.

Exploring themes such as innovation, digital multi-platform developments, the emerging importance of networks, branding and segmentation of market demand, strategies of risk-spreading, maximizing value within content, intermediation and rights management, corporate expansion and advertising, this book addresses and explains the key pressing questions and issues that are transforming contemporary media industries and markets.

Gillian Doyle makes the economics of the media fascinating, compelling and easy to understand. This is essential reading for students of media economics, media management, media policy and courses across the cultural and creative industries.

1

Introduction

The study of communications and of media has traditionally been dominated by non-economic disciplines. Analysis of dominant representations in the media, for example, provides a means of understanding the societies in which we live and our value systems. But economics is also a valuable subject area for media scholars. Most of the decisions taken by those who run media organizations are, to a greater or lesser extent, influenced by resource and financial issues. So economics, as a discipline, is highly relevant to understanding how media firms and industries operate.

This book provides an introduction to some of the main economic concepts and issues affecting the media. It is designed for readers who are not specialists in economics but who want to acquire the tools needed to unravel some of the more interesting economic features and pressing industrial policy questions surrounding media firms and markets. No prior knowledge of economics is assumed.

The first three chapters explain a number of broad and fundamental concepts relevant to the study of economics as it affects the media. This opening chapter introduces you to firms and markets and examines the distinctive economic characteristics of media. Chapter 2 examines the organization of media industries and how firms are adjusting to the immense changes brought on by digitization and convergence. Chapter 3 focuses on the relationship between the distinctive economic characteristics of media, changing market conditions and the corporate strategies that are commonly deployed by media firms.

These initial chapters are followed by six others, each of which explores dimensions of supplying media that are of special importance to understanding the economics of media, e.g. consumer behaviour and market demand, networks and network effects, content production and risk-spreading strategies, copyright and the role of advertising in two-sided media markets. These six chapters establish a framework within which, for each theme, two or three of the main economic concepts or questions that are commonly associated with or best exemplified by that topic may be examined more closely. So, the structure of the book enables a series of economic themes and questions relevant to the media to be gradually and progressively opened up and explored. The final chapter of the book examines the increasingly important role media economics can play in informing public policy questions.

After studying this opening chapter, you should be able to:

• identify the kinds of questions that media economics seeks to address;
• explain what a firm is and its motivations;
• describe the different types of competitive market structures which exist;
• understand what is special about the economics of the media;
• identify and explain some of the key economic characteristics of the media.

WHAT IS MEDIA ECONOMICS ABOUT?

Media economics seeks to combine the study of economics with the study of media. It is concerned with the changing economic forces that direct and constrain the choices of managers, practitioners and other decision-makers across the media. The economic concepts and issues introduced in the course of this book provide a basis for developing your understanding of the way in which media businesses operate and are managed.

Some attempts have been made to formalize a definition of media economics. Economics has been described as ‘the study of how people make choices to cope with scarcity’ (Parkin, Powell and Matthews, 2008: 4). Scarcity is a familiar concept for most, and we are all economists to the extent that we have to decide how to make the best of our limited incomes or resources. According to Robert Picard, media economics ‘is concerned with how media operators meet the informational and entertainment wants and needs of audiences, advertisers and society with available resources’ (1989: 7). It is about applying economic theory ‘to explain the workings of media industries and firms’ (Picard, 2006: 15). Albarran likewise describes media economics as involving the application of economic ideas and principles to study ‘macroeconomic and microeconomic aspects of mass media companies and industries’ (2004: 291).

Media economics, then, is concerned with a range of issues including international trade, business strategy, segmentation, risk-spreading, exploitation of rights, pricing policies, evolution of advertising markets, competition and industrial concentration as they affect the media firms and industries. These themes are explored in the chapters of this book. The predominant focus is ‘microeconomic’ (i.e. to do with specific individual markets or firms), but some of the questions addressed also have a macroeconomic dimension.

MACROECONOMICS AND MICROECONOMICS

The distinction between macro-and microeconomics is about whether that which is being studied involves either large groups and broad economic aggregates or small well-defined groups and individual firms and sectors. Macroeconomics is concerned with very broad economic aggregates and averages, such as total output, total employment, national income, the general price level and the rate of growth of the economy as a whole. These sorts of aggregates are arrived at by summing up the activities carried out in all individual markets and by summarizing the collective behaviour of all individuals.

One of the most commonly used measures of a nation’s overall level of economic activity is called its gross domestic product (GDP). A country’s GDP represents the sum of the value of all goods and services produced within the economy over a particular period, usually a year. Media goods and services represent a small but growing proportion of total economic activity in developed countries and in the UK, for example, they account for some 3–5 per cent of GDP. Many sectors of the media (e.g. television production, publishing) count as ‘creative’ industries which are regarded as especially important in driving growth in the wider economy (Andari et al., 2007).

In the UK, the long-term trend in GDP since the Second World War has generally been upwards and this, in turn, has facilitated a substantial increase in living standards. Within this overall growth trend, a second feature of movements in GDP has been short-term fluctuations around the trend. Rather than growing at a steady and consistent pace, economies tend to move in a series of irregular up and down ‘business cycles’ which are characterized by five phases: growth, peak, recession, trough and recovery.

The overall performance of the economy has important implications for the business performance and prospects of firms in all sectors, including media. Indeed, the fortunes of most media firms are highly sensitive to the ups and downs of the economy as a whole. As will be discussed below, many media firms rely on advertising as a primary source of income. Despite recent divergences, analysis of long-term trends in advertising suggest a strong association between the performance of the economy as a whole and levels of advertising activity. Revenues for media firms from direct expenditure by consumers are also clearly dependent on broader economic aggregates such as levels of disposable income and consumer confidence.

In theory, public policies towards the economy (monetary, fiscal etc.), and policies to promote or restrain growth or social welfare may have an affect on the economic environment in which media firms and industries operate. For example, government control over the supply of money and over interest rates provides a means of influencing levels of investment and economic activity in general (Baumol and Blinder, 2011). However, it may be argued that the power of state authorities to exert such influence is waning. ‘Globalization’ means that it is increasingly difficult for open economies to predicate monetary and other economic policies on domestic considerations alone.

Whereas macroeconomics is about forces that affect the economy as a whole, microeconomics is concerned with the analysis of individual markets, products and firms. An economy is a mechanism that determines ‘what, how and for whom goods and services get produced’ (Parkin, Powell and Matthews, 2008: 6). These decisions are taken by three types of economic actors – consumers, firms and governments – and are co-ordinated in what are called ‘markets’. Economics relies on certain assumptions about how these actors make their choices.

Each consumer, for example, is seen as having unlimited wants and limited resources. It is assumed that all consumers seek to maximize their total ‘utility’ or satisfaction. ‘Marginal’ utility represents the change in satisfaction resulting from consuming a little more or a little less of a given product. The law of diminishing marginal utility suggests that the more of a given product that an individual consumes, the less satisfaction they will derive from successive units of the product. The example used by Lipsey and Chrystal to illustrate this principle shows that, everything else being equal, the more films a consumer attends each month, the more satisfaction they get. However, the marginal utility of each additional film per month is less than that of the previous one – i.e. marginal utility declines as quantity consumed rises (1995: 128–9).

THE FIRM IN ECONOMIC THEORY

In economics, production is an activity that involves conversion of resources or inputs (e.g. raw materials, ideas, knowledge) into outputs (goods and services). ‘Firms’ are establishments where production is carried out and industries consist of a number of firms producing a commodity for the same market. The concept of a media firm spans a variety of different types of business organizations; from the online fanzine publisher to the vast television corporation, and from single proprietorship to major transnational stock exchange listed companies. What all media firms have in common is that they are involved somehow in producing, packaging or distributing media content.

All media firms are not, however, commercial organizations. Most countries have a state-owned broadcasting entity which takes the form of a public corporation and which is dedicated to ‘public service’ television and radio broadcasting. Many public service broadcasters (PSBs) rely on public funding (e.g. grants) but some depend, in part or in whole, on revenues derived from commercial activities such as sale of airtime to advertisers. Even when they compete for revenues from commercial sources, PSBs are usually distinguished from commercial firms by the fact that their primary goal is to provide a universally available public broadcasting service rather than to make profits.

By contrast, it is assumed that a commercial firm’s every decision is taken in order to maximize its profits. The assumption that all firms seek to maximize profits is central to the neoclassical theory of the firm. It allows economists to predict the behaviour of firms by studying the effect that each of the choices available to it would have on its profits.

However, there are two commonly cited criticisms of the traditional theory of the firm, and both are relevant to media. The first suggests that it is too crude and simplistic to assume that businesses are motivated purely by pursuit of profits. The case for profit maximization on the part of business owners is thought to be self-evident but, in fact, some are undoubtedly motivated by alternative goals. These range from straightforward philanthropy to the desire for specific benefits associated with owning certain types of businesses. An alternative motivation – especially in the case of media firms – might well be the pursuit of public and political influence.

A second criticism is that the theory assumes that all firms will behave in the same way, irrespective of their size and organizational structure. In reality, a firm’s institutional structure may have an important bearing on its priorities. Rupert Murdoch’s involvement in the running of News Corporation shows how some media firms are closely managed by their owners. The dominant form of industrial organization these days is the public limited company (or plc) under which, more typically, the day-to-day running of the firm is carried out not by the owners (or shareholders) but by managers.

When ownership and control of an organization are separate, its managers may decide to pursue goals other than maximising profits and returns to shareholders. This conflict of interest is referred to as a type of ‘principal–agent’ problem. The managers appointed to run a media firm (agents) may not always act in the manner desired by shareholders (principals) but might, instead, have their own agendas to pursue. When the agent’s goal is allowed to predominate then pursuit of profits may be superceded by, for example, a desire to maximize sales revenue or the firm’s growth.

There are good grounds for questioning how well the broad assumptions of conventional economic theory apply in practice to the behaviour of media firms. Even so, to the extent that economic actors (firms and households) make their decisions in a ‘rational’ manner and in pursuit of what are assumed to be their own individual goals (of, respectively, profit and utility maximization), there is clearly an important role for government to play in creating a regulatory environment within which these individual goals are not achieved at the expense of societal welfare (Owers, Carveth and Alexander, 2002: 17). The issue of supplying violent media content provides an example of an economic activity that maximizes the goal attainment of individual economic units (i.e. it contributes to the success and profitability of film and television programme-makers) but, arguably, may detract from overall social welfare (ibid.).

A firm’s profits are the difference between its revenues and costs. Costs in economic theory refer to all ‘opportunity costs’, a concept that involves recognizing whatever benefit must be foregone or sacrificed when choosing to use a resource in one particular way rather than another. The opportunity cost of the inputs used to produce something is the value of the goods and services that otherwise could have obtained from those same inputs if they were put to their next-best alternative use (Allen et al., 2005: 326). So, as well as assigning costs to purchased or hired inputs, an ‘imputed’ cost must also be calculated for and assigned to any factors of production owned by the firm, especially the firm’s own capital.

The concept of opportunity cost is important in economics. Our resources can be used in many different ways to produce different outcomes but, essentially, they are finite. All of the land, labour and capital that is available to us will be relatively more efficient in some activities rather than others. Opportunity cost is inevitable and requires firms to make trade-offs. The most productive outcome will be achieved when every worker, piece of land and item of capital equipment is allocated to the task that suits it best (i.e. the one that results in the most productive outcome).

For example, if we want more new and inventive media-related software apps and fewer computer games, we might switch some of the creative, marketing and administrative personnel and the computing and IT expertise and equipment, etc. involved in producing computer games into publishing apps instead. However, because game inventors may be less good at creating apps than dedicated apps inventors, the quantity of marketable apps produced is likely to increase by a relatively small amount while the quantity of computer games produced falls considerably. Similarly, app inventors can be reassigned to the task of producing online computer games but, because they are not as good at this activity as the people who currently make games, there will be an opportunity cost in terms of lost output. The opportunity cost of switching resources from computer games to app creation (or from apps to games) can be calculated as the number of games that must be given up in order to produce more apps (or vice versa).

In order to maximize profits, firms need to decide which overall rate of output would be most profitable (e.g. whether to produce 100,000 or 200,000 copies of a periodical). To do so, they need to know exactly what costs and revenues might be associated with different levels of output. The so-called ‘production function’ describes the relationship between input costs and different levels of output. Changes in relative factor prices (of labour, capital equipment, etc.) will cause a replacement of factors that have become relatively more expensive by cheaper ones. For example, the introduction of computing and desktop publishing technologies in the 1980s and 1990s reduced capital equipment costs and allowed a reduction in costly labour inputs associated with production such as typesetting etc., thus enabling a reorganization within print publishing industries. Another example of factor substitution, this time in the audiovisual sector, was the switch towards production of animated movies in response to a period a ‘escalating salaries’ among movie stars in the early twenty-first century (Hoskins, McFayden and Finn, 2004: 92).

‘Marginal product’ is the change in total product (or the total amount produced by the firm) that results from adding a little bit more or a little less of a variable input to a fixed input. The law of diminishing returns suggests that if extra quantities of a variable factor (e.g. freelance technicians) are applied to a given quantity of a fixed factor (e.g. plant and equipment), the marginal and average product of the variable factor will eventually decrease. Hoskins, McFayden and Finn offer the example of a small company that produces DVDs (the ‘output’) using a machine designed to be operated by three people (whose labour represents the ‘input’). Productivity increases as the number of people operating the machine increases from one to three. Thereafter, however, the onset of diminishing returns occurs because, as more personnel are added and the use of production equipment has to be shared, the efficiency and productivity of each machine operator begins to reduce (2004: 87).

However, contrary to what is implied by the law of diminishing returns, many media firms tend to enjoy increasing rather than diminishing marginal returns as their output (or, rather, consumption of it) increases. The explanation for increasing returns to scale in the media industry lies in the nature of the product and how it is consumed. The value of media content lies not in the paper that it is printed on or the ink or videotape that conveys its text or images but in the meanings, messages or stories that it has to offer – its intellectual property. This is an intangible and costs virtual...