Media Economics Regulation and Competition in Media Industries

1. Media EconomicsRegulation and Competition in Media Industries Steve Wildman Prepared for 6th Seminar Government Restructuring: Governments and Markets Harvard University June 25, 2009

2. Outline • Taxonomy of media policy issues • Key characteristics of media products and markets • Competition in media markets • Access issues and policies • Contributions to politics and society • The challenge of the internet and other new media technologies Media Economics

3. 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 Media Economics

4. 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 Media Economics

5. 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 Media Economics

6. 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 Media Economics

7. 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 Media Economics

8. 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 Media Economics

9. 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 Media Economics

10. Example of consumer price for a print product $ MCs =marg cost per subscriber Ad$s =ad revenue per subscriber Ps-only=subscription price if no ads Ps+ad$=subscription price with ads Ps-only Ps+ad$ MCs Ad$s MCs-Ad$s MRs Ds # subscribers Media Economics

11. Demand interdependence for a broadcast program of fixed quality $ Dv(ai)= market demand for program with ai units of ad time a2>a1 Demand curve shifts inward as sell more ad time. Dv(a2) Dv(a1) # Viewers Media Economics

12. 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 Media Economics

13. 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 Media Economics

14. Revenue implications of reader to advertiser demand link for a newspaper • 3 MR components for lowering subscription price • Increased revenue due to additional sales at the new, but lower price. • Reduced revenue due to the lower price received on subscription sales that would have occurred at the higher initial price • Extra payments from advertisers (holding number of ad pages constant) who can be charged a higher price for access to a larger audience Media Economics

15. Lowering the Price of a Newspaper Subscription price Price of ad space Advertisers’ demand curve given # subs Subscribers’ demand curve given # ad pages PA2 PS1 3 2 PA1 DA(QS2) PS2 1 Ds(QA1) DA(QS1) QS1 QS2 QA1 # subscribers # ad pages MR=area of 1 + area of 3 - area of 2 Media Economics

16. Marginal revenue from increasing number of pages of advertising • 3 MR components • Increased revenue due to additional sales at the new, but lower price for ad space. • Reduced revenue due to the lower price received on ad space that would have been sold at the higher initial price • Extra payments from subscribers (holding number of subscribers constant) who can be charged a higher price for a paper with more pages of ads Media Economics

17. Lowering price of NP ad space Price of ad space Subscription price Subscriber’s demand curve given # ad pages Demand curve for NP ad space given # of subscribers PS2 PA1 3 2 PS1 DS(QA2) PA2 1 DA(QS1) DS(QA1) QA1 QA2 QS1 # subscribers # ad pages MR=area of 1 + area of 3 - area of 2 Media Economics

18. Competition in Broadcast Markets • 3 distinct waves of economic studies • Models with discontinuous consumer program preferences and fixed ad revenue per viewer starting with Steiner (1952) • Models with continuous preferences and fixed ad rev/viewer starting with Spence & Owen (1977) • 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 Media Economics

19. 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 Media Economics

20. 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 Media Economics

21. Example of Competitive Steiner Market 110 viewers prefer dramas, 50 viewers prefer comedies, a program costs $20, and advertisers pay $1/viewer Media Economics

22. 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 Media Economics

23. 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. Media Economics

24. 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) Media Economics

25. 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 Media Economics

26. 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 Media Economics

27. 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 Media Economics

28. 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 Media Economics

29. 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 Media Economics

30. 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 Media Economics

31. 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 Media Economics

32. Policy concerns with media’s role in political and social systems • Contribution to politically informed citizenry • Generation and transmission of artistic and cultural values • Contribution to sense of community and cultural identity Economists have contributed to study of all but # 3 Media Economics

33. 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 Media Economics

34. 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? Media Economics

35. 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) Media Economics

36. 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 Media Economics

37. 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 Media Economics

38. 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 Media Economics

39. Structure of Cable TV Service Program Suppliers Programs Cable System Head End Programs TV & Set-top Box Program request Program viewed Viewer Media Economics

40. 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 Media Economics

41. IPTV (SDV) Service Structure Program Suppliers Programs System Video Storage Facility Relayed request Requested Program PC or TV w/Broadband Link Program request Program viewed Viewer Media Economics

42. 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 Media Economics

43. 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 Media Economics

44. 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 Media Economics

45. The Situation Today Cable/IPTV Service with Broadband Bypass Program Suppliers Independent Web Servers System Video Storage Facility Cable/Telco Head End Relayed request Requested Program PC or TV with Broadband Link Program request Program viewed Viewer Media Economics

46. A Likely Future Program Suppliers Independent Web Servers Independent Web Servers System Video Storage Facility Relayed request Requested Program PC or TV with Broadband Link Program request Program viewed Viewer Media Economics

47. A Possible Future Program Suppliers Web-based Programming Services Relayed request Requested Program PC or TV with Broadband Link Program request Program viewed Viewer Media Economics

48. 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 Media Economics

49. Red, Blue & Green Movie Services for 3 Distinct Viewer Types Guns Red’s Customers' preference oval U S2 Green’s customers’ preference oval S2 S3 U S2 U Blue’s customers’ preference oval Glamour U=content unique to a service; S2=content shared by 2 services; S3=content shared by 3 services Media Economics

50. 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