There is a basic premise on which the laws of economics are based – scarcity. Media output seems to defy that basic premise since a film, song or a news story, however much consumed, does not get used up.
Media industries as referred to by the father of Media Economics Robert G. Picard operates in a ‘dual product’ market. They generate two commodities, first, content (television programmes, newspaper copy, magazine articles, etc.) and, second, audiences. The media can sell the entertainment or news content that listeners, viewers or readers ‘consume’. Also, the audiences that have been attracted by this content can be packaged, priced and sold to advertisers. Advertising revenue is a primary source of income for commercial television and radio broadcasters as well as for newspapers and many magazines.
Media content is generally classified as ‘cultural’ good. Feature films, television broadcasts, books and music are not merely commercial products but also act as agents which influence our cultural environment. Media goods’ value is in the information or messages they convey rather than in the material carrier of that information (radio spectrum, CD, etc.) and since messages and meanings are intangible, the media content is not ‘consumable’ in the purest sense of this term. Because the value of media content is generally to do with attributes that are immaterial, it does not get used up or destroyed in the act of consumption. If one person watches a television broadcast, it doesn’t diminish someone else’s opportunity of viewing it. Because it is not used up as it is consumed, the same content can be supplied over and over again to additional consumers. One of the key features of media goods is that of being ‘public goods’ since the the act of consumption by one individual does not reduce their supply to others.
Economies of scale are said to exist in the Media Industry as the marginal costs (the cost of providing an extra unit of a good) are lower than average costs.
Economies of scope (economies achieved through multi- product production) are common in media because the nature of media output is such that it is possible for a product created for one market to be reformatted and sold through another.
Whenever Economies of scale and economies of scope are present, diversification will be an economically efficient strategy because ‘the total cost of the diversified firm is low compared with a group of single-product firms producing the same output.’ (Moschandreas)
Vertical Supply Chain for Media
The media industry is about supplying content to consumers with an aim to make intellectual property, package it and maximise revenues by selling it as many times as is feasible to the widest possible audience.
All the three stages in the vertical supply chain for media are interdependent or interrelated with no stage being more important to another. The performance of every firm is dependent on the equal functioning of these three stages. Therefore if one of the stage is strongly controlled by any rival firm then other competing firms will be put at a considerable disadvantage and consumers are also likely to suffer.
This is the reason why Media firms go for Vertical integration where they attempt to join and own (regulate) two or more stages in the supply process either by investing new resources or by acquiring other firms that are already established in succeeding or preceding stages in the supply chain.
Levels of competition in the media industry are strongly influenced by technological factors or by state regulations to clear which immense allocation of resources is needed and therefore these factors hold back competition. Even-though new technologies and liberalising legislation have done away with some conventional entry barriers, new barriers like ‘gateway monopolist’ and ‘globalization’ have entered. The term ‘gateway monopolist’ is used to describe firms that gain control over some vital stage in the supply chain or ‘gateway’ between the broadcaster and viewer. Also Global competition is fierce competition, and firms need to be fast on the uptake, if they are to survive.
Three major strategies of Media corporate growth –
A horizontal merger occurs when two firms at the same stage in the supply chain or who are engaged in the same activity combine forces. Horizontal expansion is a common strategy in many sectors: it allows firms to expand their market share and, usually, to rationalize resources and gain economies of scale. Companies that do business in the same area can benefit from joining forces in a number of ways, for example by applying common managerial techniques or finding greater opportunities for specialization of labour as the firm gets larger. In the media industry the prevalence of economies of scale makes horizontal expansion a very attractive strategy. Examples- Facebook acquiring WhatsApp and Instagram, Verizon Communications acquiring mass media company AOL, Disney acquires Pixar and Marvel.
Vertical growth involves expanding either forward into succeeding stages or backward into preceding stages in the supply chain. Vertically integrated media firms may have activities that stretch from creation of media output (which brings ownership of copyright) through to distribu- tion or retail of that output in various guises. Vertical expansion generally results in reduced transaction costs for the enlarged firm. Another benefit, which may be of great significance for media players, is that vertical integration gives firms some control over their operating environment and it can help them to avoid losing market access in important upstream or downstream phases. Examples – Warner Bros. creates through Warner Bros. Pictures, distributes through Warner Bros. Distribution, markets and exhibits its media through owned HBO, CNN and Time Magazine.