Cost Structure of Content

1. Cost Structure of Content S. Masiclat ICC 606 | Applied Research in Content Management Fall 2012

2. Basic Definition: Cost Structure • The expenses that a firm must take into account when manufacturing a product or providing a service. • Types of cost structures include transaction costs, sunk costs, marginal costs and fixed costs. • Those costs are distributed through the system of production and distribution. • The Cost Structure must be measured against the Revenue Structure to get a complete picture of content value.

4. Basic Definition: Transaction costs • The costs associated with participating in a market, and supporting buying and selling. • Examples of transaction costs: • Administering low-fee payouts from rights pools (ASCAP) • Subscription management and fulfillment • Accounting associated with fee collections • Bringing these operations in-house creates a cost-center, but being the first to create such a payment management system and then selling it to other media companies makes it a profit center. (billing & devices)

5. Transaction Costs in Media • “ In single content sales systems, for example, the cost of making transactions takes up the bulk of the price. In the sale of mobile telephone ringtones, for example, the composer, arranger, and performer get only about 20% of the price. For digital song downloads everyone associated with the content--songwriter, arranger performers, and record company--receive less than half. This occurs because merchant and financial transaction costs are very high. The cost for using a credit card adds 5 to 7 percent to merchant costs and the expense for bank processing of each transaction is a minimum of about 25 cents. Even electronic fund transfers between bank accounts incurs about 30 cents in transaction costs.” • Robert G. Picard, The Media Business

6. Basic Definition: Sunk costs • Costs associated with your business that have been incurred, and cannot be recovered. • Best Example: Research & Development • Sunk costs are the source of a particular dilemma and a strong fallacy: • Dilemma; Choosing between continuing a project of uncertain prospects already involving considerable sunk costs, or discontinuing the project. • Given a choice between the certain loss of the sunk costs when stopping the project versus possible (even if unlikely) long-term profitability from continuing, policy makers tend to favour uncertain success over certain loss.

7. The sunk costs problem • Many people have strong misgivings about "wasting" resources. This is “loss aversion” has it’s roots in perception of sunk costs. • The standard example involves a non-refundable movie ticket. Many people would feel obliged to go to the movie despite not really wanting to because doing otherwise would be wasting the ticket price; they feel they’ve passed the point of no return. • Economists would label this behavior irrational because it misallocates resources (opportunity cost of doing something more fun) by predicating action on information that is irrelevant to the decision being made (money spent on a movie ticket).

8. Basic Definition: Fixed costs • The cost of producing one unit of a good. • “The costs of doing business.” • Salaries • Infrastructure (like factories and parking lots) • Operations (heating and lighting the factory, plowing the lot) • Insurance • Equipment • Government licenses and regulatory compliance

9. http://www.wisegeek.com/what-is-a-cost-structure.htm • When attempting to create a reasonable picture of the cost structure associated with the production of any type of good or service, the first step is to understand each individual step that occurs. This begins with the development of the idea for the product, the acquisition of raw materials, and the creation of production facilities that are used to create the end product. At the same time, a cost structure will address all labor costs associated with each step. This will include not only the expense of wages and salaries, but also ancillary benefits offered to employees, such as vacation, retirement, and health benefits. Essentially, any expense that is incurred to ensure all the necessary components for production are in place will be part of the cost structure.

10. Basic Definition: Marginal costs • The cost of producing one additional unit of a good. • For electronic media, marginal costs are essentially zero. • With a marginal cost of zero, a business must account for opportunity costs of innovative operations such as content individuation. If a business incurs zero cost for a marginal increase, then every customer they forgo is lost revenue—a massive opportunity cost for doing nothing. Media businesses forgo customers by not offering individuation of content, not making content widely available, not making content granular for re-packaging or bundling through partner or third-party distributors.

11. The Outsourcing Imperative • Media businesses are production intensive, and very early in their evolution, outsourcing became the predominant tactic for cost control. Corporate media power resides almost solely in distribution. • Hollywood • Newspapers • Publishers • Game Developers

12. Discussion: Cost Structure and CMS Value • Opportunity cost of no CMS No data thrown off by transactions means no infrastructure for capturing customers, and no valuable business insight for B2B.

13. Discussion: Cost-recovery opportunities • What partner service(s) can be converted from a cost center to a profit center?

14. Cost Structure Case Study1: Social Media • How to monetize : • Facebook presence • Tweets • E-media mentions What is the cost of “being social” and what mechanisms are in place to recover those costs? Is there an opportunity cost to not being present in a social media network? Is there a model that helps us make decisions about social media costs?

15. Nobody understands social media • Approximtely1,000,000,000 are on facebook • A tweeted link’s half life degrades on an NBD curve.* • My klout score is 34! S(g)=∑ didj (I,j) [e]

16. Cost Structure Case Study2: Advance Publications • Revenues are dropping • Incentive-structure is print-centric • Fixed costs are rising • Newsprint • Salaries/benefits • Operating costs

17. Recommended Reading • The Media Business, Robert G. Picard themediabusiness.blogspot.com • Six Degrees; The Science of a Connected Age