Entertainment and Media: Markets and Economics

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

2. Professor William Greene Department of Economics KMC, Rm. 7-90 212.998.0876 people.stern.nyu.edu/wgreene wgreene@stern.nyu.edu people.stern.nyu.edu/wgreene/entertainmentandmedia/course.htm Find link on Sternclasses

3. http://people.stern.nyu.edu/wgreene/entertainmentandmedia/course.htmhttp://people.stern.nyu.edu/wgreene/entertainmentandmedia/course.htm

4. Course Objective Broad microeconomics based understanding of the economic forces that shape the entertainment and media industries

5. Why “Entertainment Industry Economics?” • There Are Unique Aspects of the Market • Creative talent in production – the creator has a personal interest in the product. • Pricing decisions – many opportunities for strategic pricing. • Zero marginal cost, production vs. replication/distribution. • Relationship between buyer and seller – artists and fans. • Market complementarities shape market structures – winner take all markets. • Demand aspects are unlike conventional commodity markets. • There Are Some Commonalities that Allow Conventional Economic Analyses • Production concepts – the nature of production and supply, technological change. • Market dynamics – market structure, market power, market outcomes. • Demand concepts – elasticity, consumer surplus, pricing.

6. Segments of The Entertainment and Media Market • Movies • Television (Broadcast, Cable) and Radio • Theater • Publishing (Print, Electronic, Music) • Music • Sports • Art • Gambling • Electronic Games (Internet) • Amusement and Theme Parks • Hobbies • Etc.

7. Course Agenda 1: The Demand for Experience Goods 2: Supply. Production, Costs, Markets, Vertical Integration 3: Contracts, Boundaries of the Firms, Conglomerates,Digital Entertainment Business Models 4: Intellectual Property: Laws, Movies, Books, Music 5: Markets: Sports, Art, Gambling, Theater, Publishing, etc. 6: TV, Radio, Print Media, Others

8. Analyzing The Experience Economy • Examine the entertainment and media business with conventional economic tools • Demand: Nature and Source • Supply: Characteristics of Production and Distribution • Costs and Profits • Pricing: How prices are determined • “Value” • Market Outcomes: Structure, Prices, etc. • Note interesting special characteristics of the experience industry • Features of the demand • Aspects of supply and production

9. Entertainment and Media: Markets and Economics Long Run Trends: Who We Are

10. Why do we work?

12. Long Run Trend: Hours Worked US 1850-1956 Hours worked stops falling; hours spent on recreation (not working) stops rising.

13. Economic fluctuations have much greater impact on manufacturing than on services. Recent trend in hours worked (weekly, average), 1965-2009

14. International Comparison, Hours WorkedAmericans generally work more hours than others.

15. Spending on recreation is growing in absolute terms Per capita, real spending on recreation and recreation services.

16. The long run trend in recreation expenditure as a proportion of real income is growing Recreation as a % of Disposable Income

17. The form of recreation spending is changing Service Component of Recreation Expenditures Service = Movies, Sports, … (passive) 1959-2009

18. Adding It Up • Household income is not rising very much • Time spent working is steady or falling slightly • Time spent on recreation is no longer rising • Budget allocated to: • entertainment, health care are rising • food and clothing are falling • Growing entertainment market is driven by • budget reallocation • changes in preferences. • changing technologies and falling prices • Demand in the recreational segment of the economy is rising faster than overall output.

19. Entertainment and Media: Markets and Economics Consumer Theory

20. Consumers allocate their budget to maximize their well being • A standard model for consumer behavior • Utility maximization over choices subject to resource constraints: • Income and Prices • Time

21. Time Is the Ultimate Binding Constraint • Consumers: Maximize Utility (Consumption, Leisure) • Constraints that limit the amounts they can consume • Available INCOME = Savings + Wage*Labor • PRICES • Pcons = Goods Prices • Pleisure = Wage Rate = opportunity cost of leisure • Available TIME = Labor + Consumption + Leisure • At least for the short term, the wage (ability to earn) is fixed • Tradeoff: To consume more, we must work more, leaving less time for leisure. • The fixed amount of time is ultimately the binding constraint

22. Implications of the Theory for Changes Over Time • As Wage rises, leisure becomes more expensive. • As Income rises, leisure becomes more desirable. • Net effect over time if real wages and incomes rise? • Higher incomes generally lead to greater demand for leisure – leisure is a normal good • Higher wages make leisure more expensive – consumers desire greater consumption rather than leisure. Hours worked are not falling very much any more. • Not clear which way the result will go • Per capita income in the U.S. is not rising much at all. • Demand for entertainment seems to be rising – cultural shifts.

23. Allocating the Consumer’s Budget • Consumer Budgets • Housing • Transportation • Food • Clothing • Medical and Physical Upkeep • Recreation (and other stuff) • Allocation Based On • Relative prices • Income • Culturally influenced preferences.

24. The household budget. (2014 looks like 2010. Not much change in broad allocation.) Food $ 6373 Housing $16895 Clothing $ 1725 Transportation $ 7658 Health Care $ 3126 Entertainment $ 2693 Insurance $ 5471 Everything Else $ 5127 http://www.creditloan.com/infographics/how-the-average-consumer-spends-their-paycheck/

25. Consumer Spending by Income Class Category Avg Top Income $ 51G $127G Food 6.1% 7.1% Health care 4.2% 2.8% Entertain. 4.0% 3.6% Clothing 3.3% 2.6% Education 1.5% 1.7% Housing About 31% Transportation “ 16% Other “ 35% The figures suggest consumers reallocate spending as incomes change. Careful! This shows a difference between consumers, not the change in behavior of a particular consumer. It is only suggestive.

26. Market for Experience Goods

27. E&M Is a Large “Industry” • Total Economy $15,000b • Entertainment and Media 6.4% • Health Care 19.0% • Recreation of all kinds $ 725b • (Games, sports, clubs, …) • Print Media $ 110b (Books, magazines, newspapers,…) • Movies in theaters $ 12b • (2011, current $, all figures approximate)

28. Aspects of the Demand for Recreation • Trends in Consumption • A Standard Microeconomic Model for Demand • Problems Applying the Model to Experience Goods • Implicit prices and time constraints • Derived demands and social capital • Rational addiction • Interdependent demands, fads and herding • Winner take all markets

29. HUMDRUM vs. EXPERIENCE GOODMarket for a conventional commodityWhy does one buy a toaster or a wrench? • Functionality of the product • Utilitarian nature of demand • ‘Experience’ (even aesthetics generally secondary or irrelevant)

30. Ordinary Economics Apply to the Market for Toasters • Costs of production • Variable vs. fixed costs • Cost characteristics • Economies of scale • Economies of scope • Technological change • Profit • Firms in markets: market power and brand identity, etc.

31. Familiar Market Outcomes in Commodity Markets • Market power • Monopoly • Competition • Branding • Market segmentation

32. The Demand for Experience Goods is Unlike Familiar Commodity Markets • What is the good? • Two qualities that differ between experience and “humdrum” goods • Intangible nature of the good • External effects of consumption • Motivation for consumption • Aspects of demand • Implications for markets

33. Motivation for Purchase?

34. Experience Humdrum Goods Goods • How do these markets differ? • What do they have in common?

35. Goods: The Coolest Computer Ever Made Why did it fail the market test?

36. ? Did it fail because it looked like a toaster?

37. Market Leader Also cool. Why did it pass the market test?

38. Even More Cool What differentiates this cool appliance from the coolest computer ever made?

39. iPhone as Fashion Statement New York Times, April 2, 2012, page B1.

40. Most Cool

41. Shared Experience =Common Experience

42. Also a Shared Experience Different from a book? How so – from the consumers viewpoint? Same as a book? How so – from the economist’s viewpoint?

43. Shared Simultaneous and Coincident Experience The Antichrist [T]he art film has been ghettoized as audiences have fragmented into niche markets. The very notion of what a movie audience is has changed: how do you arouse a public when many are no longer watching movies publicly, but sitting at home in front of their entertainment centers? It's a powerful feeling to share an audience's collective gasp, such as the one elicited by a startling suicide in Michael Haneke's Cache’.That can't be duplicated in solitude. But increasingly rare is the breakthrough movie, such as a Blue Velvet or a Brokeback Mountain, that reaches a mass audience. These days we get our culture jolts in daily, bite-size portions on YouTube or Facebook, a kind of viral fast-food diet of scandal, easily digested and quickly forgotten. [David Ansen, Newsweek, 10/26/09, p. 48]

44. Shared Experience? Not quite a theater experience. Definitely in great demand.

45. Coffee as an Experience?

46. Shared Experience (?)

47. Experience? Trump pushed to make the new shuttle a luxury service… The Shuttle’s core passengers chose it for its convenience, not its costly luxury features. Trump Shuttle never turned a profit.

48. Form vs. FunctionExperience vs. Commodity

49. Entertainment and Media: Markets and Economics What differentiates the demand for experience goods from the demand for humdrum goods?