Entertainment and Media: Markets and Economics

1. Entertainment and Media: Markets and Economics Professor William Greene

2. 1/53 Entertainment and Media: Markets and Economics Business Models for Online Entertainment

3. 2/53 The Market • Copyrighted material • Entertainment products: Music, movies, books, news/sports/weather, videos, … • Uses of music: Performances, downloads, themes and backgrounds, advertisements, as components in videos, …

4. 3/53 Elements of the Business Model • Generating Revenue: • Selling Commodities: Amazon • Selling or Creating Experiences: Copyrighted material, largely the advertising based providers • Claimants to the Revenue • Variable inputs (labor, etc.) • Capitalists • Copyright owners

5. 4/53 Major Challenges for Providers of Digital Entertainment • Delivery - Bandwidth • Valuation • Pricing and Revenue Generation • Compensating Copyright Owners (purchasing content)

6. 5/53 Valuation

7. 6/53 Employing a well known theorem: $240M/0.016 = $15.0B www.msnbc.com/id/21458486/

8. 7/53 http://www.techcrunch.com/2006/10/09/google-has-acquired-youtube/

9. 8/53 http://money.cnn.com/2008/02/01/technology/microsoft_yahoo/index.htm?cnn=yes

10. 9/53 Yahoo Valuation • Yahoo! 2004 Gross Revenue: 3.6 billion • Yahoo! 2004 Net Income: 0.84 billion • Microsoft Price: $45B • If Yahoo! is essentially the same company in 2008, we’d expect ($7B/$3.6B)$0.84B = 1.63B profit per year. $45B offer = 27.6 times earnings! But, in first quarter 2008:

11. 10/53 Nobody knows…

12. 11/53 A Market for Entertainment Consumers Creators Transaction Costs

13. 12/53 The Intermediaries ASCAP BMI SESAC Sound Exchange EMI BMG Warner Universal Viacom Etc… Consumers Creators Yahoo AOL Real YouTube Facebook and so on … Music composers, authors and publishers can license directly as well as through ASCAP or BMI. Plus the Market for the Actual Services of the Intermediaries

14. 13/53 Music Videos Produced and owned by the record labels: EMI, Universal, Sony (BMG), Warner Once free: Distributed free as advertising to VH1 and MTV Free no more – millions in royalties paid by users.

15. Music Video Distribution • YouTube and Universal to Create a Hub for Music • By MIGUEL HELFT • Published: April 9, 2009 (New York Times) • SAN FRANCISCO — YouTube, the most popular online video site, and Universal Music Group, the world’s largest music company, said on Thursday that they would create an online hub for music videos and related content, called Vevo. (Not yet… as of 10/31/09)

16. 14/53 Three Crucial Features of the Market for Digital Entertainment Marginal Cost Equals Zero Marginal Cost Equals Zero Marginal Cost Equals Zero

17. 15/53 A Necessary Distinction for All Digital Entertainment • Performance: Obtain (purchase) the experience (once) • Download: Obtain (purchase) the ability to produce the experience (more than once) • “A Download (of music) is not a performance.” (Judge William Connor, U.S. vs. ASCAP, April 25, 2007)Note: Even though a performance takes place during the download.

18. 16/53 Elements of Price: Hedonic Pricing • Stream = Performance? • Download • Tethered • Untethered • Some pieces (in a class) are more “valuable” than others. • More recent music • Current movies • Commercial TV clips vs. someone making faces at their dog or slipping on a banana peel • Customizable internet radio stations vs. “internet radio”

19. 17/53 Pricing Models • Commodity Pricing Model – The Demander Pays • Marginal pricing (iTunes) • Per play - True marginal pricing (Internet radio) • (Intermediate) Subscription Model • Advertising Model – Someone Else Pays • Free internet radio stations (AOL, Yahoo!) • The price discrimination problem

20. 18/53 Business Models

21. 19/53 Monetizing YouTube

22. 20/53

23. Hulu.com

24. 21/53 How Does Hulu Make Money? Company: Founded in March 2007, Hulu is co-owned by NBC Universal, News Corp. and Providence Equity Partners. It is operated independently by a dedicated management team with offices in Los Angeles, New York, Chicago and Beijing. Content: Hulu brings together a large selection of videos from more than 130 content providers, including FOX, NBC Universal, MGM, Sony Pictures Television, Warner Bros. and more. Users can choose from more than 1000 current primetime TV hits. Business Model: Hulu is free and legal through an advertising supported model. Videos are available for unlimited streaming; watch favorite shows and clips over and over, for free. Videos contain fewer ads than on TV. Advertisements appear during normal commercial breaks. Hulu acquires the rights to distribute its videos, making them available to users legally Advertising: Hulu gives advertisers an opportunity to associate their brands with premium online video content, connect with highly engaged consumers and extend their reach beyond Hulu.com to Hulu's distribution network. Additionally, Hulu offers and is committed to the continued development of innovative, new advertising experiences.

25. Hulu Change of Heart? http://mashable.com/2009/09/18/hulu-subscription-service/

26. Not a Rumor (9/15/10)

27. Hulu (Re)Distribution

28. 22/53 Valuing “The Right” http://mashable.com/2007/03/13/viacom-youtube/

29. 23/53 Viacom Lawsuit • Real lawsuit for damages? • Gambit for establishing bargaining position? • Warner Music – YouTube, 2005, revenue sharing arrangement. • A share of the ad revenues • Warner “channels” set up on YouTube. • Does YouTube have a business model?

30. 6/23/10

31. 24/53 Pricing Entertainment Music should be free …

32. 25/53 Pricing Entertainment Music should be free … at the margin!

33. 26/53 Commodity Pricing Exceeds MC Priced as “downloads” Experience is reproducible. Technology is restricted (to iPods, computer, etc.) A Highly Successful Business Model

34. 27/53 A La Carte Pricing

35. 28/53 Excessive Transaction Costs: Pay Per Play

36. SUBSCRIPTION MODEL Blanket License, zero marginal charge

37. 30/53 Real.com Rhapsody Subscription Service, with Price Discrimination

38. 31/53 Commodity pricing • CRB and Internet radio • Disconnect between listener and payer of the royalty • A bad model

39. 32/53 Advertising Models How does a website that receives revenue only from ads differ from traditional print media?From the seller’s point of view, it doesn’t.

40. 33/53 Essentially a Newspaper

41. 34/53 Economic Features of the Advertising Model • Consumer of the experience pays zero at the margin • Advertisers pay to place ads between the consumer and the experience • Or, are the advertisers the consumers? • How does the advertising space obtain value? • Essential separation of the demander (consumer) and the supplier (copyright holder).

42. Back Sourced Music: CBS

43. Two Advertising Based Royalty Models 40/53

45. 41/53

46. 45/53 Ultimate End Run: The AOL Widget Resides on the desktop. No ads, no ad revenue. No ad revenue, no royalties. Keeps the AOL name on the desktop.

47. 46/53 Price Discrimination • Pay different royalties based on the consumer’s value of the experience • Advertisers do not pay differential rates on this basis • Consumers have no idea this is going on. They pay zero. It is meaningless. • Infinite variety of ways to game the system • Essentially unworkable

48. Nondiscriminatory Advertising Model

49. 47/53 Business Model: Ad Revenue • Websites resemble print media. Use traditional views of advertising • Websites differ from print in several respects that allow finer distinctions in pricing advertisements. • Allows old fashioned price discrimination • Allows spreading risk and pricing uncertainty in advertising effectiveness with different kinds of ads (banner, click through, affiliate)

50. 48/53 Business Model: RoyaltiesConclusions and Implications • The newspaper analogy falls apart: Reproduction is profitable for the consumers, on a grand scale. Not for newspapers. • MC=0 is still the problem. • Answer: Revenue for creators must be extracted at the bottom line, not at the margin. The model has worked for terrestrial media for 50 years. • The model used by Warner and YouTube