Entertainment and Media: Markets and Economics

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

2. Media Market • Consumers purchase content and the services of providers: Subscription model • Advertisers purchase the attention of consumers and the services of providers who bundle the advertisements with content that consumers want to consume (and are willing to tolerate the ads to do so): Advertising model

3. The Market for Advertising Vogel, table 7.1, p. 294

4. Entertainment and Media: Markets and Economics Television

5. Broadcast TV - Issues • The chain of ‘value’ • Vertical integration • Value creation • Sources of competition • Regulation • Still relevant? Still relevant.

6. The Production Stages • Production • Studios • Sports • Composers (Matt Groenig, Julie Kavner, Marge Simpson) • Distribution • Networks: ABC, CBS, NBC, WB, Fox, UPN • Integration: (Disney/ABC), (Viacom/CBS), (GE/NBC/Comcast), (AOL-TW/WB/Viacom/UPN) (News Corp/Fox), • Exhibition • Local affiliates: O&O • Independents (100+ markets, Spanish, etc.)

7. What Do the Networks Do? • Assemble Content • Scheduling • Lower transaction costs between producers/advertisers and audiences • Sell bulk advertising time

8. Vertical Relationships • Networks and Affiliates • Networks buy time for programs from affiliates • Affiliates sell advertising time – local and national • Independent stations vs. Owned and Operated. Which is better? Vertical integration issue.

9. Sources of Competition • Within Industry • Other networks • Other content – home shopping, Discovery • Brand loyalty(?) • Without the Industry • Cable • Other forms of entertainment • Other sources of news/information (internet)

10. Entertainment and Media: Markets and Economics “Cable”

11. Cable • Contrast to Broadcast • Industry Structure and Players • Pricing and Products • Regulation Issues • Is the distinction still (or less) meaningful? (MSNBC, CNN)

12. Cable vs. Broadcast: Two Revenue (Business) Models

13. TiVo is a major threat.

14. Tivo converts the broadcast model to the cable model One major concern of the media is the fact that advertisements in television programs can be bypassed by using a TiVo DVR. The media industry is highly dependent on sponsorship via advertisements and will lose revenue if viewers adopt TiVo-like systems in large numbers. Knowing this, some countries have taken protectionist measures especially when the media is already struggling due to poor viewing figures. The government of Singapore has banned TiVo, citing the potential adverse impact on the local media industry if TiVo usage were to increase. The government is, however, facing difficulty regulating the use of TiVo in Singapore as individuals are bringing in the sets from overseas. TiVo has created a number of ad solutions intended to reach the viewer that fast forwards through ads. This has not been an issue in Australia where the exclusive rights to TiVo are held by Hybrid Television Services, owned by the Seven Media Group and TVNZ. Seven Media Group is one of Australia's largest free-to-air broadcasters as Seven Network, and as part of the local market adaptations to TiVo prior to launch, ad-skipping was disabled. Users can still fast forward through ads.

16. AEREO: Cloud DVR • New York City now, 100+ cities later • Retransmission to cloud based DVR • Do the networks own the signal once they broadcast it? http://techcrunch.com/2012/03/12/aereo-countersues-broadcasters/

17. AEREO

18. http://techcrunch.com/2012/03/12/aereo-countersues-broadcasters/http://techcrunch.com/2012/03/12/aereo-countersues-broadcasters/

19. What Business Model? Sale Price = $1.65 Billion

20. YouTube advertising has evolved (Ketchup ads are not very effective on YouTube)

21. Targeted Advertising

23. The Product • Local: News, Sports, Documentary • Regional: Sports, News • National: • Fee based - premium • HBO (“Game Change”), Showtime, Adult entertainment • Basic – Fees and advertising • ESPN, MTV, AMC, Discovery, HGTV, HSN • VOD – somewhat limited; evolving

24. Providers (Million Subscribers) Strong local concentration (e.g., Cablevision on Long Island) (Gross numbers are misleading.)

25. Entertainment and Media: Markets and Economics Regulation of Television

26. Regulation: Why? • “Cloaked in a public interest” • Congestion in the common resources (frequencies) • Public good aspects (Howard Stern) • Maintaining competition • Outside guidance for technological advance: HDTV • FTC regulation of advertising • Industry regulation: NAB

27. Regulation of Cable: Why? • Local franchises and public utilities • Telecommunications Decency Act Bono; Wardrobe malfunction, MIA hand malfunction • Consumer Protection Act • Rate Regulation

28. Economic Issues in TV • Creative Goods Characteristics • Implications for TV Programming • Valuations in Prime Time • The Emergence of Cable

29. Federal Regulation • Fin-Syn rules: 1971 – 1995: Networks could not own programs. • Post 1995, vertical integration (Disney/ABC) has circumvented • The rule has been abandoned • Why would we have this rule? • Netflix – House of Cards. A new model entirely.

30. Entertainment and Media: Markets and Economics Elements of Television Production

31. Valuing a Prime Time Show • Made for TV Movie: Small production • Sitcom or serial (CSI), larger infrastructure • How to value the “product?”

32. Nobody Knows • Valuation is unknown until the good is consumed by the final consumer • Valuation is different for every consumer • Past success is uninformative for future performance – the Leno primetime show • Nobody knows (in advance)

33. Cost Structures for Production • Sunk costs • All costs are sunk in advance • All costs must be incurred before an informative test of acceptance is possible • Do focus groups work? • Fixed Costs • Marginal costs are zero • Pricing implies finding the reservation price • How are reservation prices determined? • TV show sold to a network – value of the advertising. Where does the value of the advertising come from? • Music license sold to a TV station or a website. Where does the valuation come from?

34. Contracts • Serial or sitcom: • Script  pilot  contract • Short term: talent has less incentive to invest in ways to increase the value of the project • Long term: Longer success increases bargaining strength of the talent – they will appropriate the rent. (E.g., the cast of Friends)

35. Entertainment and Media: Markets and Economics Explaining Why There Are So Many “Reality Shows” on Television

36. Implications for a TV Show • Environment in which it will “air” • Infinite variety • Heterogeneous tastes • Market size and composition varies by time of day • Quality is a fixed cost – endogenous: will vary by the anticipated size of the audience • Costs are all sunk in advance

37. Emergence of Cable: Impact on Networks • ABC, CBS, NBC  UPN (until 2006), WB, Fox,… more competition • Many smaller cable channels • Economic advantage: subscribers and advertisers • Shrinking market for major networks • What is the natural response?

38. Endogenous Fixed Cost of Quality • Shrinking market  lower expected return to investment in “quality” • Cable channels increase their investment in quality: The Sopranos, 6 Feet Under, Sex in the City, Boardwalk Empire, Game of Thrones • Reality shows cost roughly 1/3 as much as major drama: Compare • CSI, sitcoms vs. Survivor • The natural response to the shrinking market

39. Entertainment and Media: Markets and Economics End Class 6 – Part 1