Entertainment and Media: Markets and Economics

1. Entertainment and Media: Markets and Economics Television

2. The Product • Local: News, Weather, Sports, Documentary • Regional: Sports, News • National: News, Sports, Entertainment

3. Delivery • What (slightly meaningful distinction) • “Over the air” – “broadcast” • “Cable” (Can use foul language, advertise liquor) • Internet (Anything goes) • How • Subscription • Cable TV • Internet TV & On Demand – “House of Cards” • Fee based - premium • HBO (“Game Change”), Showtime, Adult entertainment • Basic – Fees and advertising • ESPN, MTV, AMC, Discovery, HGTV, HSN

4. Agenda • Broadcast TV • Markets and Issues • Programs • Cable TV • Business Models • Regulation • Sports Broadcasting • TV Everywhere

5. Entertainment and Media: Markets and Economics Broadcast Television

6. What Do the Networks Do? • ABC, NBC, CBS, FOX, CW • Assemble Content • Scheduling • Lower transaction costs between producers/advertisers and audiences • Sell bulk advertising time

7. The Production Stages • Production • Studios • Sports • Composers (Matt Groenig, Julie Kavner, Marge Simpson) • Distribution • Networks: ABC, CBS, NBC, Fox, CW • 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.)

8. Vertical Relationships • Networks and Affiliates • Networks buy time for programs from affiliates • Affiliates sell advertising time – local and national • Networks save transaction costs by buying advertising time for national advertisers • 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 • Is there any brand loyalty to networks? • Outside the Industry • Cable • Internet based. (Distinction is less meaningful.) • Other forms of entertainment • Other sources of news/information

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

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

12. 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 – e.g., the Leno primetime show • Nobody knows (in advance)

13. 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 of delivery 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?

14. Entertainment and Media: Markets and Economics Sports Broadcasting

15. Barriers to Entry • ESPN monopoly • Fox Sports, NBC Sports, CBS, Turner • Barriers to Entry: Huge incumbent firmsNews Corp, Comcast-Universal, CBS Corp, Time Warner • Economies of scale motivate joint ventures such as Olympics, NFL, March Madness

16. Distinctive Features Shape the Market • Time value of content – Perishability • Derived demand for social capital • Live production resists technological change in delivery. Live TV production Model • Long term contracts produce a barrier to entry. Why do long term contracts exist? E.g., NCAA sports

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

18. Implications for a TV Show Environment in which it will “air” • Infinite variety of preferences by consumers • 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

19. 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

20. 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 is to invest in lower quality, less expensive shows.

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

22. Cable • Contrast to Broadcast: Old style cable operators buy and resell content. • Industry Structure and Players • Disney, Comcast-Universal, Viacom • News Corp, Turner, Scripps • Pricing model: Mixture of ads and subscription • Regulation Issues • Is the distinction still (or less) meaningful? (MSNBC, CNN)

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

24. Broadcast vs. Cable and Internet:Two Revenue (Business) Models TiVo is a major threat to broadcasters. Time shift of programming alters the value of advertising Bypassing advertising alters the value of programming

25. 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 TiVo. 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.

26. Entertainment and Media: Markets and Economics TV Everywhere

27. TV Everywhere

28. TV Everywhere • Ad values change as competition expands • Technology change – mobile distribution (tablets, smart phones) produces competition for delivery mode. • Demise of both broadcast and cable networks • Major providers: YouTube, Hulu, Netflix, Apple

30. Demographics of Cord Cutting: Aug. 2013 Bushwick, S and D. Krenn: Nielsen Custom Survey of Zero TV Households

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

32. Regulation: Why? • “Cloaked in a public interest” • Congestion in the common resources • Broadcast frequencies • Technological change has made this less important • Public good aspects • Maintaining competition • Outside guidance for technological advance: HDTV • FTC regulation of advertising • Industry regulation: NAB

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