Media Economics Regulation and Competition in Media Industries Steve Wildman Prepared for 6th Seminar Government Restructuring: Governments and Markets.

Media EconomicsRegulation and Competition in Media Industries

Steve WildmanPrepared for 6th Seminar

Government Restructuring: Governments and Markets

Harvard University

June 25, 2009

Wildman Media Economics 2

Outline

I. Taxonomy of media policy issuesII. Key characteristics of media products

and marketsIII. Competition in media marketsIV. Access issues and policiesV. Contributions to politics and societyVI. The challenge of the internet and

other new media technologies


Media Policy Taxonomy• Economic efficiency

– Static (simple surplus maximization)– Dynamic

• Investment incentives (content, infrastructure, software-based services)

• Transitions to new standards, as with digital television

• Media as elements of political and social systems– Role in democratic process– Contributions to culture, community, diversity,

collective identity


Economics of Media Firms and Industries

• Content has properties of a durable public good– Non-rival in consumption– Means can sell same content in multiple channels

and in multiple markets and repeatedly over time • E.g., windowing of films and TV programs• E.g., near simultaneous distribution of TV programs and

music in traditional channels and on the internet

– However, excludability in consumption increasingly difficult to enforce


Content Investments

• Returns to investments in content accumulate from sales to many individuals in many different venues

• This means that for any media product, the profit maximizing content investment, and thus quality and audience appeal, increase with the size of the potential audience


Market Consequences of Non-Rival Consumption

• More expensive media products produced for larger markets• One-way trade flows and umbrella structures• Media products from more commercialized media markets have

an advantage in international trade• Differential access to distribution outlets has second order

effects on competition among content suppliers– Economies of scale effects

– Optimal quality effects

• Firms must consider financial trade-offs from releases in different channels and markets


Variety-Quality Tradeoffs

• As increase number of media products, suppliers differentiate their products to appeal to finer gradations of consumer preferences– Applies to both competition and monopoly

• As increase number of media products, suppliers respond by producing less expensive media products


Two-Sided Markets

• Most (though not all) media products are supported at least in part by advertising

• Ad-supported media supply services in two markets– Market for content supplied to consumers– Market providing advertisers access to

media consumers/audiences


Interdependent demands for content and ad space/time

• Embedded advertising affects value of content to consumers – Direct effects are negative for broadcast media and

positive to neutral effects for print media– Indirect effects (product quality and content

selection) could be positive or negative

• Size and composition of audience determine magnitude of sales of ad time or space to advertisers

• Profit maximizing strategies recognize these demand-side links


Example of consumer price for a print product

DsMRs

MCs

# subscribers

Ad$s

MCs-Ad$s

$

Ps-only

Ps+ad$

MCs =marg cost per subscriberAd$s =ad revenue per subscriberPs-only=subscription price if no adsPs+ad$=subscription price with ads


Demand interdependence for a broadcast program of fixed quality

$

# Viewers

Dv(a1)Dv(a2)

Dv(ai)= market demand for program with ai units of ad time

a2>a1

Demand curve shifts inward as sell more ad time.


Firm optimization with interdependent demands

• Print media must internalize positive spillovers between ad and reader markets– Advertising and subscriber prices both lower– Sales of both products higher

• Broadcast media must internalize negative spillovers from the ad market to the viewer market– For pure broadcast media, viewers’ dislike of ads

reduces audience size and amount of ad time sold– For pay services, subscription prices fall if

advertising is included


Competition when media have ad support

• Possible downward spirals and exit of firms in print media if don’t have strong differentiation– Due to both direct and indirect benefits of more

advertising– Any factor causing loss of subscribers or advertisers

may produce same effect

• Broadcast markets may under or oversupply differentiated content and may under or oversupply advertising– Depends on value to viewers of differentiation,

nuisance value of advertising, and the benefits to advertisers of reaching viewers


Revenue implications of reader to advertiser demand link for a

newspaper

• 3 MR components for lowering subscription price1. Increased revenue due to additional sales at the

new, but lower price.2.Reduced revenue due to the lower price received

on subscription sales that would have occurred at the higher initial price

3.Extra payments from advertisers (holding number of ad pages constant) who can be charged a higher price for access to a larger audience


Lowering the Price of a NewspaperSubscriptionprice

# subscribers

Ds(QA1)

PS1

QS1

PS2

QS2

2

1

# ad pages

DA(QS1)

DA(QS2)

3

Price ofad space

QA1

PA1

PA2

Subscribers’demand curvegiven # ad pages

Advertisers’demand curvegiven # subs

MR=area of 1 + area of 3 - area of 2


Marginal revenue from increasing number of pages of advertising

• 3 MR components1. Increased revenue due to additional sales at the

new, but lower price for ad space.

2.Reduced revenue due to the lower price received on ad space that would have been sold at the higher initial price

3.Extra payments from subscribers (holding number of subscribers constant) who can be charged a higher price for a paper with more pages of ads


Lowering price of NP ad spacePrice ofad space

# ad pages

DA(QS1)

PA1

QA1

PA2

QA2

2

1

# subscribers

DS(QA1)

DS(QA2)

3

Subscriptionprice

QS1

PS1

PS2

Demand curve forNP ad space given# of subscribers

Subscriber’sdemand curvegiven # ad pages

MR=area of 1 + area of 3 - area of 2


Competition in Broadcast Markets

• 3 distinct waves of economic studies1. Models with discontinuous consumer program

preferences and fixed ad revenue per viewer starting with Steiner (1952)

2. Models with continuous preferences and fixed ad rev/viewer starting with Spence & Owen (1977)

3. More recent models with fully-specified advertising markets & viewers dislike ads (E.g., Andersen & Coate (2005))

• Many of Steiner findings still hold for more recent models


Basic Steiner Model

• Broadcasters supported by advertising• Viewers divided into finite number of groups

according to preferred program type• All programs of a given type are perfect substitutes• Each viewer generates fixed amount of advertising

revenue• All programs cost the same

• Broadcasters offer program types that generate largest audiences for their stations


Steiner results

• With competition the most popular types of programs are offered by the most broadcasters (and wastefully duplicated)

• Programs supplied do not reflect intensity of viewers’ preferences

• Types of programs appealing to larger audiences are oversupplied

• Monopoly avoids wasteful duplication


Example of Competitive Steiner Market

110 viewers prefer dramas, 50 viewers prefer comedies, a program costs $20, and advertisers pay $1/viewer

# Stations # w/ dramas # w/ comedies1 1 0

2 2 0

3 2 1

4 3 1

5 4 1


Spence & Owen

• Ad-supported Competitive TV industry– oversupplies program types that are close

substitutes– Undersupplies program types with intense

demands and small audiences

• Charging viewers for programs partially corrects these biases

• Monopoly limits excess supply of close substitutes


Most recent models

• Added features – advertising a nuisance to viewers– Per viewer demand for ad time is

downward sloping– A broadcaster loses viewers to competitor

as it sells more ad time– Advertiser surplus included as part of

welfare analysis.


Current understanding of TV competition

• With ad support only – Programs that are close substitutes are likely to be oversupplied – Advertising more likely undersupplied if programs close substitutes– Advertising is undersupplied if nuisance cost is low and

oversupplied if it is high– So restrictions on amount of ad time may increase or reduce total

surplus

• With ad and pay support– Amount of ad time falls & is undersupplied if charge viewers for

content– # programs increases if charge viewers– So price controls could increase or reduce viewer welfare (E.g., U.S

experience after 92 Cable Act)


Limitations of most recent work

• Fixed program costs and quality• Only 2 broadcasters (as with almost all recent

TV market models)• Spatial model of differentiated viewer demand

not fully general• No competition among multichannel services• Ignores access issues related to distribution

platforms


Distribution platforms

• New distribution systems that add channels to those available over the air are typically used for multichannel services– E.g. cable TV, satellite TV, telco IPTV services

• Channel capacity in these platforms is finite and the possibility that platform owners will favor co-owned networks over broadcasters and independent networks has become a matter of policy interest


Economic incentives to discriminate

• Positive– Save transaction costs– Eliminate double marginalization– Investment risk reduction for new networks

• Negative– Weaken competing cable networks by denying

access to audience– Capture advertising clients from broadcast

networks


Evidence

• Empirical studies of vertically-integrated U.S. cable systems suggest– System operators favor co-owned

networks, but not by a lot– Subscribers may benefit from more

networks overall


Policy responses to access issues

• Must carry (or must pay) for broadcast stations in U.S.

• Regulated access prices (Bel, Calzada, & Insa, 2007)– Similar to Ramsey-optimal pricing of access to telecom

network facilities– Competitive network suppliers pay access fees that cover

the direct cost of supplying access plus the opportunity cost of viewer and advertiser payments the platform would have earned on its own content at Ramsey-optimal prices

• MVPD competition– Outcome sensitive to laws governing access to programs– Effects on program quality not clear


Denying competitors access to programming

• Vertically-integrated cable operators may unfairly disadvantage competing cable or satellite operators by denying access to popular co-owned networks.– Logic similar to anticompetitive bundling models of Whinston

(1990), Carlton and Waldman (2002), and Aron and Wildman (1999), where tying denies economies of scale to entrant

• U.S. Cable Act of 1992 mandates access to co-owned networks of vertically integrated cable operators– Comparisons with other countries (e.g., Korea) suggests this

may be important to viable competition


Dynamic efficiency concerns (briefly)

• Incentives to invest in new infrastructure often used as argument for allowing facilities owners greater control over access to new facilities– E.g., net neutrality debate– Digital must carry for cable systems in U.S.

• Transitions to new standards– For digital broadcasting, fragmented ownership

and indirect network effects a strong argument for government coordination


Policy concerns with media’s role in

political and social systems 1. Contribution to politically informed citizenry2. Generation and transmission of artistic and

cultural values 3. Contribution to sense of community and

cultural identity

Economists have contributed to study of all but # 3


Transmission of artistic and cultural values

• Quotas and other restrictions on imported media products often justified on grounds of:– cultural preservation (e.g., European and Canadian TV foreign

program restrictions for television; Korean film quotas)– Cultural imperialism– Anticompetitive practices of content suppliers from primary

media exporting countries • Economists’ work has focused primarily on international

trade in content goods– Anticompetitive practices not needed to explain unbalanced

trade flows– Weak form of cultural imperialism makes sense, but works in

both directions


Role of media in politics and society

• Economists have contributed to this debate in the past, but recently has become a hot research topic

• Big research questions– Are media biased? (And does it matter?) – Do media affect political outcomes?– Are the needs of local communities and/or minority

populations adequately served and does ownership structure matter?


Effect on political outcomes

• Growing empirical literature suggests that media do have an effect on voting– Fox news effect (DellaVigna & Kaplin)– Increased circulation of New York Times in other

cities reduces circulation for local papers and reduces voting in local elections (George & Waldfogel)

– Presence of Hispanic media in U.S. cities increases Hispanic voter turnout (Oberholzer-Gee & Waldfogel)


Local ownership and service to local community

• Oberholze-Gee & Waldfogel paper suggests ethnically diverse ownership may be beneficial, although connection between ownership and ethnic orientation is debated.

• Related debate is over whether ownership concentration and/or distant owners reduce media coverage of local affairs

• Limited empirical literature is inconclusive, but suggests a small negative effect, if any, on amount of local TV news


Web-based media and policy for the emergent future

• With growing broadband penetration and increasing download speeds we are seeing a proliferation of online video services– Many are ancillary to traditional television services

• E.g., network programs available on the web, websites for network programs

– Others, like YouTube, FaceBook, and Wikipedia,are native to the web.

• To some extent, ancillary services are giving traditional video providers features of web-native services such as constant availability of content and access to older content.

– Raises question of whether web-native services are the harbinger of television’s future


Critical cost tradeoffs

• Media services in general are characterized by tradeoffs associated with costs of storage, content, and bandwidth

• For traditional video services:– Single channel services can save on content costs

by storing programs and repeating them more frequently

– Multichannel services must add channels to increase viewers’ options at any given time, as illustrated with next slide


Program Suppliers

Cable System Head End

TV & Set-top Box

Viewer

Programs

Programs

Program viewedProgram request

Structure of Cable TV Service


Contrast with IPTV

• Content resident on system video server

• Single broadband channel connects each viewer to video server

• Expanding viewer choices involves tradeoffs in storage capacity and frequency of new content acquisition


Program Suppliers

System Video Storage Facility

PC or TV w/Broadband Link

Viewer

Programs

Requested Program


Relayed request

IPTV (SDV) Service Structure


Critical Difference

• With traditional MVPD service, must add channels to increase simultaneous options available to viewers

• With IPTV service, expand server capacity to increase simultaneous options available to viewers.

• Several hundred videos on YouTube are testimony to the low cost of storage


Implications for nature of video services

• Potentially massively more content– More unique programs– Older programs retained longer (maybe forever)

• With no channels to fill, scheduling (and traditional networks, PVRs, and prime time as we know it) may become irrelevant

• Old programs would be a competitive constraint on the supply of new programs– Diehard fans could always find what they want– To young viewers old programs are fresh


Compare with “true” internet TV• With “true” internet TV all video servers are web-

based and accessed through home broadband connections

• Web-resident video services are growing rapidly• Raises questions about television regulations that

target owners of local video distribution facilities– E.g., content requirements for local broadcasters– E.g., must carry obligations for cable systems

• Raises questions about incentives of cable and telco broadband ISPs to increase capacity and reliability of their broadband services sufficiently to make web-based video services competitive with their own– Similar to but distinct from net neutrality debate


Program Suppliers

Cable/Telco Head End

PC or TV with Broadband Link

Viewer

Requested Program


Relayed request

The Situation TodayCable/IPTV Service with Broadband Bypass

System VideoStorage Facility

IndependentWeb Servers


Program Suppliers

System Video Storage Facility


Viewer

Requested Program


Relayed request

A Likely Future




Program Suppliers

Web-based Programming Services


Viewer

Requested Program


Relayed request

A Possible Future


Program syndication arrangements for web-based services

• For web-resident services traditional geographic exclusivity arrangements mean little

• Simultaneous supply of common content to multiple content aggregators is observed (e.g., RSS services)

• Economic logic suggests syndicators will distribute content to web programming services catering to distinct sets of viewers with partially overlapping, preferred content sets


Guns

Glamour

Green’scustomers’ preference oval

Red’sCustomers'preferenceoval

Blue’scustomers’preferenceoval

S3

U

U

U

S2

S2

S2

Red, Blue & Green Movie Services for 3 Distinct Viewer Types

U=content unique to a service; S2=content shared by 2 services; S3=content shared by 3 services


Media policy for a web-based future

• Access to limited broadcast, cable, or satellite channels no longer a concern

• Control of licenses to broadcast facilities no longer a vehicle for political/policy influence on content

• Biases or discrimination in control of bit streams from different sources will be a policy concern

• Domination of key segments by a few web-based content suppliers may be a concern due to– Network effects– Search advantages of large aggregations of content– Strong social component to new media services– Examples: YouTube, Google, FaceBook

Media Economics Regulation and Competition in Media Industries Steve Wildman Prepared for 6th Seminar Government Restructuring: Governments and Markets.

Documents

broadcast media

media markets iv

commercialized media

expensive media products

media consumersaudiences

new media technologies

media economics regulation

media supply services