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Chapter 14 - The SAGE Handbook of Media Studies PDF
Chapter 14 - The SAGE Handbook of Media Studies PDF
MEDIA ECONOMICS
Alan B. Albarran
edia economics is a field of study that has experienced considerable growth and development over the past 40 years. Miller and Gandy (1991) identified 351 articles published between 1965 and 1988 in several key journals (the Journal of Broadcasting and Electronic Media, Journalism and Mass Communication Quarterly, and the Journal of Communication) that focused on some economic aspect of communication (p. 663). Media economics involves the application of economic theories, concepts, and principles to study the macroeconomic and microeconomic aspects of mass media companies and industries. Concomitant with the increasing consolidation and concentration across the media industries, media economics emerged as an important area of study for academicians, policymakers, and industry analysts. Media economics literature encompasses a variety of methodological approaches involving both qualitative and quantitative methods and statistical analysis, as well as studies using financial, historical, and policy-driven data. This chapter focuses on the topic of media economics by organizing itself around four separate sections. The first section examines the historical development of the field of media economics, tracing its roots to the founding of economics. The second section centers on theoretical and methodological dimensions of media economics. The third section addresses concepts important to the study of media economics. The fourth and final section reviews contemporary issues confronting media economics scholars. Illustrations will be drawn from the United States.
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classical period of political economy. The work of these authors centered on the interplay of economic forces, the cost of production, and the operation of markets. The classical school was eventually challenged by two new philosophies: marginalist economics and Marxism. Classical scholars believed price was determined by the costs of production, whereas marginalist economists equated prices with the level of demand, and in Marxism, price was controlled by the ruling class. The marginalists contributed the basic analytic tools of demand and supply, consumer utility, and the use of mathematics as analytical toolsall forerunners to the development of microeconomics. Marginalists also demonstrated that given a free market economy, the factors of production (land, labor, and capital) were important in understanding the economic system. The marginalists viewed value in a more rigorous manner than the classical school. The Marxist school, built on the writings of Karl Marx (1926), identified labor as the source of all production. Marx rejected the market system that allowed the capitalists, the owners of the factories and necessary machinery, to exploit the working class and deny them a fair share of the goods produced. Marx predicted the fall of capitalism, as the disenfranchised labor class would ultimately rebel, overthrow the capitalists, and seize the means of production. At the beginning of the 20th century, institutions of higher learning began to embrace the field, and the modern label of economics was used to represent courses of study in both America and Europe. At the same time, the focus of economic research was shifting from a classical approach to neoclassical economics. Neoclassical economics differed in its use of both analytical tools and mathematics (primarily differential calculus) to understand market behavior and price determination (Ekelund & Hrbert, 1990). Another important contribution of neoclassical economics was its refined interest in demand theory, as much of classical economics tended to focus only on production and supply. Many of
Media Economics 293 the principles developed in neoclassical economics became the basis for the broader area of microeconomics. The writings of William Stanley Jevons (1957), Carl Menger (1950), and Leon Walras (1954), along with the seminal contributions of Alfred Marshall (1961), helped fuel the growth of economics as a field during the neoclassical period. Marshall, perhaps one of the most prolific economic scholars, influenced numerous other graduate students during his tenure at Cambridge, forming the Marshallian approach to the study of economics. Marshall refined many aspects of economic theory and also made advances in the study of industry supply, consumer surplus, elasticity of demand, and resource allocation (Ekelund & Hrbert, 1990). The 20th century also saw the field of economics move in other directions. Previously, market structure was theorized to represent monopoly, duopoly, or perfectly competitive markets. Edward H. Chamberlin (1950) theorized a new form of market structure, labeled as monopolistic competition. Monopolistic competition centered on the role of product differentiation, which offered application to a number of different markets. Both more traditional and general in its analysis as compared to Chamberlains, Joan Robinsons (1969) theory of imperfect competition offered two important contributions: (a) analysis of monopoly and price discrimination and (b) the market for labor. The study of welfare economics (Pigou, 1932), or how economics can be used to promote better social policy, also came of age during the neoclassical period. Significant changes in 20th-century economic thought were realized with the development of macroeconomics. Here the focus shifted to aggregate economics, which encompasses the gamut of monetary and market principles. Macroeconomics became a catalyst for fiscal policy decisions in both Western Europe and the United States during the 1950s and 1960s. John Maynard Keynes, a student of Alfred Marshall and the founder of Keynesian economics, became the focal point for the development of macroeconomics. Keyness writings were numerous, but his most influential work was The General Theory of Employment, Interest, and Money (Keynes, 1936). Keyness arguments would provide the pivotal rationale for the use of government spending and taxing to stabilize the economy. Keynes argued that government would spend and decrease taxes when private spending was insufficient and threatened a recession; conversely, government would reduce spending and increase taxes when private spending was too great and threatened inflation. Keyness work, focusing on the factors that determine the total spending process, remains at the core of modern macroeconomic analysis. Other scholars who helped refine macroeconomics as an area of study and economic thought (Ekelund & Hrbert, 1990) included Irving Fisher (money, prices, and statistical analysis), Knut Wicksell (public choice), A. C. Pigou (welfare economics), and Milton Friedman (economic policy and consumption). Today, macroeconomics is concerned with a number of topics, including economic growth, employment, aggregate production and consumption, inflation, and political economy (Albarran, 2002). Additional areas of study that coincided with this time period included the field of international economics, better methods of applied economics, and the adoption of more powerful analytical and statistical tools in econometrics. Economic theories and economic thought are constantly changing and evolving. By the end of the 1960s, growing inflation and changes in productivity began to push economic thought in new directions. Monetarist theories reemphasized the importance of growth in the money supply as a determinant of inflation. Rationale expectations anticipate government intervention in the economy, arguing that the markets ability to anticipate government policy actions limits their effectiveness. Finally, supply-side economics revisited a chief concern of the classical
industrial organization model, developed by Scherer (1980), which in turn drew on the contributions of Bain (1968) and other neoclassical economists. The model offers a systematic means of analyzing many abstract concepts encountered in the study of a specific market. Scherers explication of the market structure-conduct-performance (SCP) model as a tool for analysis has been widely used in the study of media markets and industries (Wirth & Bloch, 1995). In its simplest form, the industrial organizational model posits that if the structure of the market is known, it allows explanation of the likely conduct and performance among firms. Each of the three areas (SCP) can be further defined by considering specific variables associated with each part of the model. For example, in terms of market structure, the variables used for analysis include the number of sellers/buyers in the market, product differentiation, barriers to entry, cost structures, and the degree of vertical integration (Albarran, 2002). Gomery (1989) details the utility of the industrial organization model for media economics scholarship, echoed by Busterna (1988), Litman (1988), and Wirth and Bloch (1995). Several scholars have focused on just one part of the model, such as market structure (Wirth & Wollert, 1984), conduct (Picard, 1988b), or performance (Albarran & Porco, 1990; Litman & Bridges, 1986).
THE THEORY OF THE FIRM Efforts to explicate a better understanding of market structure led to the development of the theory of the firm (Litman, 1988). The theory of the firm is an expansion of the industrial organization model, with the goal of gaining a better understanding of four common types of market structure: monopoly, oligopoly, monopolistic competition, and perfect competition. The appeal of this approach lies in its simplicity and parsimonious nature. However, the defining of a market structure has
MEDIA CONCENTRATION Another area of theoretical development relates to media concentration. In the United States, antitrust laws are designed to promote competition and limit concentration, making this an important area of inquiry for both public and social policy. Media concentration is usually examined in one of two ways. Researchers gather existing data on firm/industry revenues to measure the degree of concentration by applying different methodological tools (e.g., concentration ratios, indices, or the Lorenz curve [see Albarran, 2002]), or researchers track concentration of ownership among the media industries (see Bagdikian, 2000; Compaine & Gomery, 2001; Howard, 1998). Regardless of the methods used, research documents increasing consolidation across all areas that make up the media industries, with many industries reaching highly concentrated status, indicating that the industry is dominated by a handful of firms (see Albarran, 2002; Albarran & Dimmick, 1996).
METHODOLOGIES USED IN MEDIA ECONOMICS RESEARCH Media economics research is very eclectic in the sense that many different types of method are used to answer research questions and investigate hypotheses. However, much of the literature employs one of four methods: trend studies, financial analysis, econometrics, and case studies. Trend studies compare and contrast data over a time series. In assessing media concentration, for example, scholars typically study concentration indices over time to gauge the impact of different policy decisions or other actions on media ownership. Most trend studies use annual data as the unit of analysis. Trend studies are useful due to their descriptive nature and ease of presentation, and they aid in analyzing the performance of media companies and industries. Representative trend studies include Dimmick and McDonalds (2001) look at network radio, Grecos (1999) examination of book publishing mergers, and Lewiss (1995) study of changes in newspaper pricing and subscription costs. Financial analysis is another common methodological tool used in media economics research. Financial analysis can take many different forms and use different types of data. The most common data include information derived from financial statements and the use of various types of financial ratios.
MACROECONOMIC THEORIES There is a much more limited body of literature that involves macroeconomic analysis in the field of media economics. For example, some scholars have offered
Media Economics 297 For example, in the United States, all publicly traded companies operating must file various types of financial documents regularly with the Securities and Exchange Commission. Individual companies also distribute annual reports to their shareholders that contain a number of financial statements and other data. The Internet is an important source of financial data for researchers, easing the ability to collect and analyze data. Financial analysis is much harder to conduct on privately held companies, which are not required to disclose any financial information, and with companies domiciled outside the United States, where accounting practices and currency exchange rates vary. Econometrics involves the use of statistical and mathematical models to verify and develop economic research questions, hypotheses, and theory. Econometrics has been more prevalent in the general economic literature because most media economics researchers coming from communication or journalism backgrounds lack the mathematical knowledge to pursue econometric modeling. Studies by Kennert and Uri (2001) and Miller (1997) represent research involving econometric analysis. Case studies represent another useful method in media economics research. Case studies are popular because they allow a researcher to embrace different types of data as well as different methods. Case studies in media economics research tend to be very targeted and focused examinations. Representative case studies include McDowell and Sutherlands (2000) analysis of branding, Nyes (2000) review of litigation in music publishing, and Gershon and Egens (1999) case study involving retransmission consent in the cable television industry. Methods used in media economics research are not confined to these. Others can be found as noted above, such as policy analysis of regulatory policy and action on media markets and industries. Historical research is also found, although with less frequency (e.g., Dimmick & McDonald, 2001; Wolfe & Kapoor, 1996).
REGULATION Regulatory actions can always affect competitive market forces, and media industries are no exception. During the 1980s and 1990s, U.S. media industries benefited from a combination of deregulatory actions as well as liberalization of former policies. During the 8 years of the Reagan administration, the FCC took on a marketplace approach to regulation. Ownership limits were increased, and burdensome rules regarding program requirements and public interest standards were either removed or relaxed. The 1996 Telecommunications Act, the most significant U.S. communications regulation passed since 1934, sought to
Media Economics 299 companies the opportunity to acquire broadcast stations and cable systems within the markets they serve, leading to the development of multi-media-based companies offering content and advertising across multiple mediums. with the desire to reach global audiences, so consumer tastes and preferences are critical in understanding audience needs and wants. In addition, U.S. media users are changing. Census data clearly track the transition of the United States to a multicultural society. This has led to pressures from groups such as the National Advancement for the Association of Colored People (NAACP) to present network television programming that better reflects the actual makeup of society. In addition to becoming a nation of color, Americans are living longer and desire more content geared toward the needs of a mature audience. Aging baby boomers will demand more content devoted to issues related to retirement, health, travel, and leisure. Some cable networks were already beginning to address this market, but more will follow suit. Audiences have an insatiable appetite for media-related content and services. As people live longer and obtain more discretionary income, spending on media will likely rise. These shifts in audience composition and makeup will present new pressures on media firms to develop content that will appeal to these unique and differing audiences. Having reviewed these four macro-level forces, we now turn to some of the key concepts found in the study of media economics: media products, the dual-product marketplace, branding, competition, economics of scale and scope, mergers and acquisitions, and labor.
GLOBALIZATION With many American media markets heavily saturated, the global marketplace has become even more important in generating revenues for media firms and industries. Media products are often created with global audiences in mind, which is why so much content contains sex and violencetwo topics that are easily understood across cultures. Globalization of media content began with motion pictures and magazines but then expanded into other arenas, including television programming, VHS and DVD sales and rentals, and sound recordings. The United States has been the primary exporter of content, but the rise of international media conglomerates such as News Corporation, Vivendi Universal, Sony, and Bertelsmann demonstrated that a global oligopoly of media companies was increasingly dominating the marketplace for information and entertainment goods and services. Globalization presents a challenge for media economics researchers, as accounting practices and regulatory structures differ from country to country. There are few reliable sources of global financial data related to media. Nevertheless, it is critical that scholars recognize that media companies compete and operate in a global as well as domestic marketplace for audience share and advertiser revenues.
Standard Concepts
MEDIA PRODUCTS
SOCIOCULTURAL DEVELOPMENTS Changes in demography and other aspects of society also affect the media industries and, ultimately, media economics. As noted, media content is often created
Media content, in the form of television programs, movies, sound and video recordings, and print (e.g., books, magazines, newspapers), represents some of the products supplied by media firms. Media products can be broadly classified into categories of information (news-related content)
COMPETITION The dual-product marketplace operates at the distribution and exhibition levels once products are actually created. Prior to this, there are many competitive processes at work. For example, competition exists for ideas by writers that can be turned in to successful scripts for television programs and films. Securing experienced photographers, producers, directors, and editors for the production process involves competition, as well as the demand for the best available talent. An interesting aspect of studying media competition is the fact that, throughout the history of the media, no new media have completely displaced older forms of media (Dimmick & Rothenbuhler, 1984). Typically, some type of evolution or repositioning takes place, but traditional media learn to coexist and survive with newer media forms.
DUAL-PRODUCT MARKETPLACE Many media industries function in a dual-product marketplace. That is, media firms produce or supply information and entertainment products that are consumed or demanded by audiences and, in most cases, advertisers. The dual-product marketplace is a unique characteristic of the media industries, allowing for separate transactions and potential revenue streams from both audiences and advertisers. Media firms try to strategically position their content so as to maximize potential revenues. The number one priority of media executives and managers is to generate positive cash flow (revenues less expenses, depreciation, taxes, and interest) to increase the value of their firm.
ECONOMIES OF SCALE AND SCOPE BRANDING This is another key concept in media economics. Media companies use branding as a way to build awareness and identity connected with content products. Most audiences and advertisers recognize brands, and larger media companies have invested billions of dollars to develop and acquire different brands. Viacom is a multidivisional media company with a large cadre of recognizable brands, including MTV, Nickelodeon, Paramount, Blockbuster, CBS/UPN, Infinity, and King World. AOL Economies of scale and scope refer to the cost efficiencies realized by the operation of media firms in different venues. Economies of scale are realized when the average cost declines as multiple units of a product are produced. For example, the fixed and variable costs to produce a single newspaper would be very high, but the cost per newspaper drops dramatically as multiple papers are printed. Likewise, as radio stations have consolidated, there is no longer need for multiple offices and administrative and engineering staff.
Media Economics 301 Economies of scope allow multidivisional conglomerates to realize cost-efficiencies across horizontal media markets. Viacom has the ability to produce a motion picture via its Paramount Studios, air that movie on its pay channel Showtime, reap additional revenues from rentals via Blockbuster, and cross-promote the film through other owned programming and publishing outlets. representing media workers to avoid strikes and labor disruptions. Technology continually changes the labor market for media firms, evidenced by the influx of computing systems used for many different applications. Media companies either invest in the development of personnel skilled in these new areas, or they may choose to outsource these responsibilities to firms specializing in specific applications. Labor markets are affected by consolidation, which typically creates a loss of some repetitive jobs, as well as general labor trends.
MERGERS AND ACQUISITIONS The composition of the media industries has undergone considerable change due to mergers and acquisitions across many market sectors. Mergers and acquisition activity surged during the 1980s and 1990s due to a number of macroeconomic processes, including relaxation of ownership provisions, low interest rates available for financing, strong business performance, and technological convergence (see Ozanich & Wirth, 1998). As policymakers continued to relax ownership limits and more mergers took place, public interest watchdog groups became ever more concerned, fearing the growing consolidation of media would lead to constriction of news and information sources needed to nourish democracy.
LABOR Media industries depend on talented technical, creative, and managerial personnel to function effectively. Personnel represent the greatest single expense for any organization. In the media industries, trade, craft, and technical workers are considered below-the-line employees, whereas producers, writers, directors, talent, and management are considered above-the-line employees (see Shanks, 1977). Labor unions are common across many U.S. media industries. Various guilds and craft unions negotiate minimum pay grades for everything from scripts to directing. A common management responsibility is negotiating contract renewals, with unions Media economics research has primarily drawn on microeconomic concepts and principles, with a heavy reliance on the industrial organization model. Although this emphasis clarifies the relationship of various concepts in microeconomic analysis, it limits the development of the field. As a result, other economic theories, which have possible application to the mass media industries, have been ignored, especially those found in macroeconomics (Chambers, 1998; Lacy & Niebauer, 1995). For example, understanding the global consolidation of many media markets is an area that would be strengthened using macroeconomic approaches. The impact of global consolidation on general patterns of
DELINEATING THE MARKET AND DEFINING MARKET STRUCTURE A second issue involves better definition of what constitutes a market and expanding our understanding of market structure. Media economics research must grapple with the evolving definition of what constitutes a media market, a critical issue given the convergence under way across the media industries. Markets can no longer be defined cleanly. In reality, media companies tend to supply products in many different markets, in competition with other providers. Yet the tendency among policymakers and researchers is to still treat markets under traditional labels, such as television, newspapers, or motion pictures. This approach fails to recognize the realities of the media marketplace and can lead to inaccurate assumptions over which firms dominate a particular market. One answer to this dilemma may be to consider the functions of a firm rather than focusing on the final product. If we begin to think of Viacom as a company with multiple brands engaged in content creation and distribution, it perhaps offers a clearer
BETTER METHODS OF ANALYSIS Improvements in theory development and redefining of the media market and market structure must be realized in
Media Economics 303 conjunction with enhancements in methods. In particular, one area deserves attention: measures used to assess competition and concentration. Measures to assess competition and concentration have primarily relied on one of two available tools: concentration ratios and the Herfindahl-Hirschman Index (HHI) (Albarran, 2002). Concentration ratios provide a parsimonious way to measure concentration, using either the top four firms or the top eight firms in a market. Basically, if the top four firms control more than 50% of the market revenue, or if the top eight firms control more than 75% of the revenue, the market is considered highly concentrated. Although the measure is useful, it fails to address inequality of market shares. For example, using the four-firm ratio, one could encounter one firm dominating the market with 45% of the revenues, with the other three firms holding a combined 5%. In such a case, one might conclude the market was concentrated, but this would fail to offer a complete picture. The HHI index seeks to be much more rigorous. The HHI squares the market share for each entity and then generates a total number for all the firms. Herein, however, lies a key problem. Researchers must have data on every firm in a market to calculate the index. Often, researchers lack access to data from all the firms, especially from privately held companies. Furthermore, calculating the index can be unwieldy. More problematic for both measures is that they are designed only to measure concentration within a market segment. There are no generally accepted measures available to assess concentration across markets (see Albarran & Dimmick, 1996), yet this is an area of key concern. AOL Time-Warner, Disney, Viacom, and other media giants may have limited market share within individual market segments, but no tools exist to measure their combined influence across markets. With multiproduct firms engaged simultaneously in many media markets, developing measures to assess withinindustry concentration and competition are badly needed.
Conclusions
Media economics provides a means to understand the activities and functions of media companies as economic institutions. Only by understanding individual media companies as business entities can one fully appreciate their conduct within society. An understanding of media economics strengthens our understanding of the role and function of mass media in society. At a theoretical level, media economics complements existing mass communication theory by adding important dimensions regarding the structure, conduct, and performance of media firms and industries; the interplay of economics, policy, and regulation; and audience behaviors and preferences. As a field of scholarship, media economics research offers important contributions to media studies. Media economics research faces many challenges as it attempts to analyze and evaluate the complex and changing world in which the mass media industries operate.
Note
1. Research in media economics was spurred by a number of early volumes, including the following: Economic Aspects of Television Regulation (Noll, Peck, & McGowan, 1973); Television Economics (Owen, Beebe, & Manning, 1974); Economics and Freedom of Expression: Media Structure and the First Amendment (Owen, 1975); Beyond AgendaSetting: Information Subsidies and Public Policy (Gandy, 1982); Who Owns the Media? Concentration and Ownership in Mass Communications Industry (Compaine, 1985b); and Press Concentration and Monopoly: New Perspectives on Newspaper Ownership and Operation (Picard, Winter, McCombs, & Lacy, 1988). Later volumes concentrated on broader coverage of the field, including Media Economics: Concepts and Issues (Picard, 1989); Media Economics: Theory and Practice (Alexander, Owers, & Carveth, 1993); Media
References
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