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Entertainment and Media: Markets and Economics. Professor William Greene. Entertainment and Media: Markets and Economics. Market Outcomes. Setting a Price – How To?. Car Amazon.com – Econometric Analysis Restaurant – A Meal Software Vendor – Online Distribution

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setting a price how to
Setting a Price – How To?
  • Car
  • Amazon.com – Econometric Analysis
  • Restaurant – A Meal
  • Software Vendor – Online Distribution
  • Royalty Holder – Price for an advertiser who uses your jingle or tune
  • Major League Baseball – How much for a license to use the statistics. (Players Union: How was the $50M price for the rights to their celebrity set?)
agenda
Agenda
  • Market Outcomes – Market Power
  • Setting a Price
    • Monopoly
    • Monopsony
  • Economic Rent and Capitalization
  • Profits and Losses
  • The Reserve Clause
  • Equilibrium and Disequilibrium
monopoly equilibrium
Monopoly Equilibrium

= Deadweight loss

Price, MR, MC

= Consumer surplus

Demand

= Producer surplus

P

MC

MR

monopolistic competition
Monopolistic Competition
  • Model for publishing
  • Distinct monopoly

power, indistinct

rates of return.

  • Rents are dissipated

at earlier stages

in the production

chain.

  • Applications: Books, manyconsumer products,…

Average total cost

This monopoly profit disappears.

Marginal cost

MR Demand

sources of monopoly profits
Sources of Monopoly Profits
  • Sources of monopoly
    • Rockefeller’s oil empire
    • Google, Microsoft
    • Supply based vs. demand based.
  • Where do the economic profits reside?
    • The music industry
    • The movie business
    • E-books publishing
    • Broadcasting
raymond syufy corners the movie market
Raymond Syufy Corners the Movie Market
  • Raymond Syufy buys out the competition in the Las Vegas first run theater market 1982-1984.
  • 1990 Antitrust sues for monopolization
  • Government case is denied
    • Free entry
    • No suppression of competition
    • Syufy had no power to raise movie prices
e books and e readers
e-Books and e-Readers
  • “Shared monopoly” at the publishers level (with Apple): Agency Model
  • Monopoly on e-readers: Amazon’s price model.

The answer has to do with how Amazon went about building its e-book monopoly in the first place — namely, by setting a price that was lower than what Amazon was paying publishers for the book. What looked to consumers like a great bargain at $9.99 a book looked to others in the industry suspiciously like predatory pricing, or selling below cost today in order to gain a monopoly and raise prices in the future.

What is wrong with this argument? (And with the Syufy case.)

“Pick Your Monopoly: Apple or Amazon,” Steven Pearlstein, Washington Post, 3/11/2012

monopoly in the reader market
Monopoly in the Reader Market

So which is better: a market in which Amazon uses low prices to maintain its e-book monopoly and drive brick-and-mortar bookstores out of business, or one in which the major book publishers, in tacit collusion with Apple, break Amazon’s monopoly and raise prices?

For the moment, the government has come down on the side of lower prices. Under threat that they will be taken to court for conspiring to fix the price of e-books, the book publishers are trying to work out a settlement with Justice Department’s antitrust division.

winner take all
Winner Take All

One thing that makes it different is that it is happening in a high-tech sector that, by its nature, is prone to winner-take-all competitions. We saw that with IBM in the 1960s, Microsoft in the 1990s and more recently with Google and Facebook. Because of the “network” quality of such industries, customers prefer to do business with the firm that has the most customers. Moreover, once you decide to do business with one company, the cost and hassle involved in shifting to a competitor is sufficiently high that customers tend to be “locked in” to their original choice.

Antitrust regulators have come to believe that, in such industries, restrictive contracts between firms and their customers, or between suppliers and distributors, may not be as benign as free-market economists and judges once believed. Fiona Scott Morton, chief economist at the Justice Department’s antitrust division, recently dubbed them as “contracts that reference rivals” and warned companies that such provisions would now be viewed with heightened suspicion.

monopoly market segments
Monopoly Market Segments
  • Monopoly in the EMT Economy
    • Publishing - eBooks
    • Movies
    • Newspapers
    • Television
    • Professional Sports
    • Casino Gambling
  • Rent seeking activity in multistage markets

Where are the “pockets” of market power, if any, in the production chains of these markets?

monopsony
Monopsony

Movie stars, shortstops, late night talk show hosts, perky morning news personalities

Marginal expense on players

Supply of players

Value

Marginal value of players

Wage

The source of the Yankees’ $190M payroll – A-Rod  Jeter, Giambi, etc.

Number hired

monopsony applications
Monopsony Applications
  • Major League Baseball – A Strategy for Using Monopsony Power
    • Cartel – enjoyed supreme court approval
    • Reserve clause’s demise (Curt Flood, Catfish Hunter, Andy Messersmith)
  • Movie Studios and the Star System
    • Illegal cartel
    • Largely became obsolete and irrelevant
  • Fashion Models (Ford, etc.) … whoops! Who knew the antitrust laws applied to us too?
bargaining situations and market power
Bargaining Situations and Market Power

The bilateral monopoly

Downward sloping demand from the seller’s viewpoint (monopolist – the star)

The bargaining range

Upward sloping supply from buyer’s viewpoint (monopsonist – the studio)

Ps

Pb

?

The outcome depends on the bargaining strength of the two parties.

bilateral monopoly
Bilateral Monopoly
  • Competition for economic rent
  • Baseball
    • Arbitration
    • Free agency
  • Movies
    • Stars as free lancer
    • Stars taking equity stakes in movies
  • Music: (ASCAP/BMI) v.

(AOL/Yahoo/Real)

doug glanville s economic rent
Doug Glanville’s Economic Rent

“One superagent took the time to explain why I should ask for three times the market rate for my signing bonus. He made the compelling argument that since I would be forgoing the use of an Ivy League engineering degree, the team that chose me should compensate me for my lost wages. He made it clear that the sum of this compensation and a little extra should make up my total bonus.” (“Doubleday and Darwin,” by Doug Glanville, NYT, 7/5/2008)

economic rent
Economic Rent

Market value in excess of the value of the next best alternative (opportunity value)

Resource Activity Foregone Economic Rent

sources of economic rent
Sources of Economic Rent
  • Natural endowment
  • Creation of something of value to a market + property right (ownership)
  • Positioning and market disequilibrium
  • Creation (or exploitation) of a market failure (apartment brokers in New York)
valuation capitalization of the stream of economic rents
Valuation – Capitalization of the Stream of Economic Rents
  • Stream of benefits
  • Discounted present value

years 

  • Equivalence of stream and DPV
  • Valuation: A share of stock

Benefits in year t

(1 + r) t

slide25

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

slide26

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

baseball values 2008 2009
Baseball Values 2008 2009

http://www.forbes.com/lists/2009/33/baseball-values-09_The-Business-Of-Baseball_Value.html

http://www.forbes.com/lists/2008/33/biz_baseball08_The-Business-Of-Baseball_Rank.html

realized market valuation
Realized Market Valuation

http://www.nytimes.com/2010/08/06/sports/baseball/06rangers.html

applications of valuation
Applications of Valuation
  • The dot com gold rush
    • Bubble?
    • Option value under uncertainty
    • Capitalized values of future profits
  • TV sports broadcasting
  • Valuing a movie
  • Baseball
    • Valuing the team
    • Rodriguez ($254m), Ramirez ($180m), Jeter ($189m)
  • Valuing a painting, a violin – how do these differ?
capturing economic rent
Capturing Economic Rent
  • Market processes
  • Freelance market
  • Agents (What do agents do?)
    • Sports
    • Literature
    • Performers
  • Vertical integration
    • The reserve clause
    • The studio/star system
profits
Profits…
  • Gross Revenue Minus Total Cost
  • Cost includes the cost of capital
  • Ambiguities in the allocation of cost
  • Ambiguities in the resolution of claims to the net
  • Contractual arrangements
profits and losses
Profits and Losses

Simple Cases: Electronic Commerce

Average Total Cost

Amazon

Average Variable Cost

EToys

Average Fixed Cost

Amazon: P > AVC, P < ATC for a few years

EToys: P < AVC (RIP, April 6, 2001)

profits in multiple output processes
Profits in Multiple Output Processes
  • Allocation of revenues to activities
  • Multiple revenue sources (outputs)
  • Allocation of costs to activities
  • Fixed costs in multiple output firms

A Miami Fish Story

accounting issues
Accounting Issues
  • Complications in the Miami Fish Story
    • The source of franchise value
    • Tracing revenue to activity
    • Activity based costing
    • Economic profits
    • What if the stadium has other uses? (Britney)
  • Arizona Diamondbacks?
  • Other applications?
profits in multistage processes
Profits in Multistage Processes
  • Allocation of net revenues to activities
  • Revenue stream arrives at the end of the chain
  • Allocation of revenue streams to activities in the chain – essentially transfer pricing
  • Net vs. gross in Hollywood
profits in the movies
Profits in the Movies

Sharing rules: Some participants (usually actors, e.g., Tom (Gump) Hanks) and directors get a % of gross distribution revenue.

Gross

Box Office

Production

Distribution

Exhibition

There is no net!

30-50%

Net

there is no net
There is No Net
  • Forrest Gump (1994) (Paramount Pictures)
    • US Box Office $330M
    • Foreign Box Office $350M Total, About $830M
    • Soundtracks, etc. $150M
    • Net profit -$ 62M (!) A disappearing act?
    • U.S. Box  50% to Exhibitors (Theaters)
    • Paramount Receives Approx $191M
      • Distribution “Fee” = 32% $ 62M
      • Distribution Cost $ 67M (Advt., Prints, Screening, etc.)
      • Advt. Overhead $ 7M (10% of Distribution Cost)
      • Production “Negative” Cost $112M
          • (Tom Hanks, Robert Zemekis, $20M (8% of GROSS, each)
          • Studio Overhead $15M
          • Interest on Negative Costs $ 6M
    • Net Profits from the Project -$62M
    • Winston Groom, Author 19% of NET = 0
    • Eric Roth, Screenwriter 19% of NET = 0
  • Coming to America (1988) – The Art Buchwald Case
slide46

Mona Lisa Smile

Will this movie ever ‘make money?’

bennifer gigli
(Bennifer) Gigli

Weeknd Gross % Change Theaters Average Gross-to-Date Week #

Aug 1–3 $3,753,518 2,215 $1,694 $3,753,518 1

Aug 8–10 $ 678,640 -81.9% 2,215 $ 306 $4,432,158 2

Aug 15–17 $ 18,702 -97.2% 2,142 $ 256 $4,450,860 3

Overall… $5,600,000 (apx)

(That’s all folks…..)

Costs? Bennifer $25,000,000

Other $29,000,000

Promotion $22,000,000

Distribution ?

Did this film ‘make money?’ Can it?

no theory explains delgo
No Theory Explains Delgo

Delgo is a 2008computer-animatedfantasy film. The film was produced by Fathom Studios, a division of Macquarium Intelligent Communications, which began development of the project in 1999.

Delgo grossed just $694,782 in theatres against an estimated budget of $40 million, according to box office tracking site boxofficemojo.com. The film was released independently with a large screen count (over 2100 screens).

garrison v warner bros 1995
Garrison v. Warner Bros (1995)
  • Who was Jim Garrison?
  • “On the trail of the Assassins (of JFK. Oliver Stone et al.)
  • Class action on behalf of “talent”
  • Defendant: Every movie studio plus various unnamed coconspirators.
  • “There is no net”
  • See www.courttv.com/legaldocs/business/garrison.html
entertainment and media markets and economics50

Entertainment and Media: Markets and Economics

Sources of economic rent (profits) in entertainment industries