Entertainment and Media: Markets and Economics

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

2. Entertainment and Media: Markets and Economics Market Outcomes

3. 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?)

4. Agenda • Market Outcomes – Market Power • Setting a Price • Monopoly • Monopsony • Economic Rent and Capitalization • Profits and Losses • The Reserve Clause • Equilibrium and Disequilibrium

5. Monopoly Equilibrium = Deadweight loss Price, MR, MC = Consumer surplus Demand = Producer surplus P MC MR

6. 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

7. 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

8. 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

9. 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

10. 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.

11. 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.

12. Discuss Antitrust case vs. Manhattan theaters

13. 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?

14. 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

15. 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?

16. 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.

17. 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)

18. Entertainment and Media: Markets and Economics Economic Rent

19. 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)

20. Economic Rent Market value in excess of the value of the next best alternative (opportunity value) Resource Activity Foregone Economic Rent

21. 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)

22. Entertainment and Media: Markets and Economics Valuation

23. 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

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

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

26. 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

27. 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

28. Realized Market Valuation http://www.nytimes.com/2010/08/06/sports/baseball/06rangers.html

29. Basketball2009

30. National Football League (2009)

31. MLB vs. NFL (2009)

32. NHL (2009)

33. World Football

34. Baseball 2013

35. 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?

37. Entertainment and Media: Markets and Economics Profit

38. Capturing Economic Rent • Market processes • Freelance market • Agents (What do agents do?) • Sports • Literature • Performers • Vertical integration • The reserve clause • The studio/star system

39. 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

40. 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)

41. 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

42. 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?

43. 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

44. 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

45. 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

46. Mona Lisa Smile Will this movie ever ‘make money?’

47. (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?

48. 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).

49. 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

50. Entertainment and Media: Markets and Economics Sources of economic rent (profits) in entertainment industries