the fundamental economics of media management 2

The Fundamental

Economics of Media

Management 2.0

Columbia University June 11, 2010 1

Eli M. Noam

Director Columbia Institute for Tele-Information

Professor of Finance and Economics Columbia Business School

Eli M. Noam, Media Environment

• Welcome

• CITI. Past weeks: m-finance;

converged media firms; xxx;

• Thanks

• Daniela

• In Ho, Arian


• In introducing the topic, I’d like

to deal with its fundamnetals.

What got us to here, and where

is it going.

• So I will discuss 12 fundamntal

conomic issues of the media

environment 3


• Economists believe that

fundamental technology defines

fundamental economic

characteristics, which in turn

define industry structure. And

that industry structure defines

behavior and performance of

producers, whether firms or

individuals. 4


• So what are the chief drivers

here?

• I would postulate just two.

• First, technology. That’s easy.

5

Eli M. Noam, Media Environment 66

Technology

Drivers of the

Industrial

Revolution?


• Industrial Revolution: Steam

engine, 1712


What are the

technology drivers of

the Information

Revolution?


• The increased ability to

manipulate sub-atomic particles

(electrons & photons)

• http://www.lactamme.polytechnique.fr/Mosaic/images/SOLE.21.0512.D/image.jpg

• http://serc.carleton.edu/images/usingdata/nasaimages/atom-with-electrons.gif


• With an ability to build such

devices

• http://ocw.mit.edu/NR/rdonlyres/Global/2/275E775C-2819-4606-9104-FC6C854E9877/0/chp_peer_to_peer_1.jpg


www.zultrax.com/Images/about_p2p_handshake.jpg

Followed by stringing

together all devices


But the second

driver is People

12


•But actually, the major

driver is not just

technology, but just as

much people.


Societal Info Production Trends

• 90% of all scientists who ever lived are alive today.

• Also true for MBAs, songwriters, screenwriters, architects, lawyers, engineers, etc.


• In almost any scientific

field, more research

articles written this year

alone than in entire human

history before 1900.


l Chemical Abstracts:l 32 years (1907 to 1938) for 1st million abstracts.

l 1.9 years (1999-2001) 7th millionl 1.01 years (2005)

Source: http://www.postgrad.cheque.uq.edu.au/images/lab%20wet%20chemistry.gif

Information Output


• Every 30 seconds a new book

• Every day 10 new feature films

• Every day, 1500 TV shows

17


“The Dream Factory”

http://www.sustreport.org/images/pix/smokestack.jpg

http://www.scd.ucar.edu/news/03/images/upgrade.jpg

http://www.fsu.edu/~unicomm/he

adlines/images/television.jpg


The creation and selection

of content is the core

business of media firms and

their major added value.



Is Media

Management

Different?

21


• http://www.globalsecurity.org/military/world/russia/images/sevmash-plant1.jpg

http://newsimg.bbc.co.uk/media/images/39399000/jpg/_39399295_becks_203.jpg

Different from Managing a Beer

Brewery? A Submarine

Construction Yard? A Bank?

2323

Two Views on Media

Management in comparison to

Management generally:

• “Different”

• “The Same”

2424

“Media are Different”• Media is supposed to be a very

distinct type of industry

–Based on creativity, “feel”,

intuition,

–Or, driven by news and public

affairs, and not only profit-based

–Instead of being driven by numbers

and analytical models like the

refrigerator or coal industries.

2525

Different?

2626

• Is that true? Is media management so different

that one cannot apply much from the rest of

management science?

• Economists and business researchers are used

to almost every industry considering itself to

be “different.”

–Agriculture, energy, health care, law firms,

biotech, aviation, banking, construction, etc,

etc, etc.

-- All consider themselves to be “different.”

2727

•Yet all businesses have

major commonalities

–Raising funds, select projects,

hire employees, arrange for

inputs, control costs, create

outputs, price them, market

them, account for the results, etc

2828

• Thus, media industries have

many common elements

with other industries, too.

But, it is easy to jump to

the other extreme. That

there is no difference at all.

2929

Same Principles

30

• Technology changes. Economic Laws do not.

Shapiro, Carl. and Varian, Hal R. “The Information Economy.” Information Rules,

Harvard Business School, 1999: 1-18

3131

So the Alternative

View on Media

Management: “The

Same” as all

Management

3232

• That ‘There is no “media management, ” just as there is no “refrigerator industry management” or ‘coal mine management”’

• But this, too, is simplistic.

3333

Yes, basic management

principles apply to all

industries

3434

• But media industries have

some special characteristics

that make media management

different

• We must understand what they

are



The 12 Economic

Properties of

Media

36

Eli M. Noam, Media Environment 37Eli M. Noam, Mobility, 2006 37

Fundamental Economic Characteristics

of MediaA. Supply Side

1. High fixed costs, low marginal costs

2. Convergence of production

3. Divergence in cost trends in value chain

4. Accelerating returns

5. Excess supply

B. Demand Side

6. Network effects

7. Non-normal distribution of demand

C. Markets

8. Price deflation

9. Intangibles

10. Public goods

11. Non-maximizers of profit

12. Government Role

3838

Characteristic #1 of Media

Information:

•Usually extremely high fixed costs and low marginal cost .–Expensive to produce, cheap to reproduce

3939

Expensive to produce, cheap to

reproduce

• Films, TV programs

• Computer software

• Electronic networks

• Newspapers

• Semiconductors

• The trend here is towards increasing fixed cost,

and to still declining marginal costs.

• So this tendency will, if anything, increase.

40

4141

•Q: What are the Business

implications of this economic

property of “high fixed cost

and low marginal cost?”

4242

Business Implications

• Large size and large market share of firms in media, telecom, and internet

• Incentives to acquire large size by M&A, and to be first-mover

• So need for the empire builder skills, the corporate re-organizer skills, the global skills. And for the support industries like investment bankers and lawyers.

• But also incentives to be strong in

a niche market, rather a medium-

sized player in several large

markets.

• And the implications here are

more for specialist skills, for

innovation, rather than for empire

building43

44

4545

Characteristic

#2 of Media and

Information:

Convergence of

Production

4646

1970s Map

Services º

Productsº

Mail, Delivery & Courier services Distribution Broadcast Networks & StationsMailgram, Telex and Electronic Mail Services Cable Networks & Operators

FM Subcarriers Int’l Long Distance & Local Telephone Services

Mobile Svcs

Paging Svcs

Multiplexing Svcs

TelecomTelephone Switching Equip

Transmission Equip

Telephones

Point-of-Sale Dictation Equip Printers Copiers

Typewriters Cash Registers

Office Equipment Blank Magnetic Media Microfilm, Microfiche Paper File Cabinets Business Forms

Mainframes Microcomputers

Terminals Transaction Processors

Computers Transaction Processors Custom Software

Word Processors

Consumer ElectronicsTape Decks & Phonographs Radios & Stereos

TV Sets Cameras

Professional & Consulting SvcsFinancial Svcs News SvcsAdvertising Svcs

Info Vendors

Media &PublishingDirectoriesMovies TV ProgramsRecords & CassettesNewspapersNewslettersMagazines & JournalsBooks

Conduit Contentº

º

Videotex

Teletext

PABXs

46

4747

1980s MapServices º

Products º

Mail, Delivery & Courier services Distribution Broadcast Networks & Stations

Mailgram, Telex and Electronic Mail Services Cable Networks & OperatorsVANs FM Subcarriers

Int’l Long Distance & Local Telephone Services

Mobile Svcs

Paging Svcs

Multiplexing Svcs


Point-of-Sale Dictation Equip Printers Copiers

Typewriters Cash Registers



Terminals OS Transaction Processors


Word Processors Consumer ElectronicsTape Decks & Phonographs Radios & Stereos

TV Sets Cameras

Info VendorsProfessional &Consulting SvcsFinancial Svcs News SvcsAdvertising Svcs


Conduit Contentº

º

Videotex

Teletext

E-mail

PABXs

Modems

Telephones

Videogames

Consoles

47

4848

1990s Map

Services º

Products º

Mail, Delivery & Courier services Distribution Broadcast Networks & Stations

Mailgram, Telex and Electronic Mail Services Cable Networks & OperatorsVANs FM Subcarriers

Int’l Long Distance & Local Telephone Services

Mobile Svcs

Paging Svcs

Multiplexing Svcs


Point-of-Sale Dictation Equip

Typewriters Printers Copiers Cash Registers



Terminals GUI/OS Transaction Processors


Word Processors Consumer ElectronicsTape Decks & Phonographs Radios & Stereos

TV Sets Cameras Electronic PIMs

Auto Dialers Electronic Reference

Info VendorsProfessional &Consulting SvcsFinancial Svcs News SvcsAdvertising SvcsOnline SvcsMail Order Catalogs


Conduit Content º

º

Videotex

Teletext

E-mail

PABXs

Modems

Telephones

Videogames

Consoles

CD-Rom

48

4949

2007 MapServicesº

Products º

DistributionDigital DBSInt’l Long Distance &

Local Telephone Services

TelecomPCS & Digital Cellular

Smart Screen Phones

Office Equipment

GUI & OS Transaction Processors

Computers Virtual RealityPublic Kiosks

Video Servers

CD-Rom

“Information Appliances”

Consumer ElectronicsPim PCs LONs Multimedia Players

Interactive News

Info VendorsInfo on demandVirtual shoppingVirtual concerts,museums

Media &Publishing

Interactive Entertainment & EducationI-MoviesI-TV

Custom PublishingNewspaper, MagazinesBooks

Conduit Contentº

º

ISDN “Fiber to the Home”

“National Data Highway”

Voice & Video

E-mail

Video printer

Video

Conferencing

HDTV

49

50

Managerial Implications

• Greater competitive pressures

• Requires greater rate of

innovation than before, and

greater efficiency.

• More need for top talent

50

• The irony is that as the media

environment becomes wider,

the talent – managerial,

artisitc, technological--will

become narrower– narrower

specialists, with a few

overacrching integrator

managers on top of them.51

• At the same time, the

competitive pressures also put

greater pressure on cost than

before. So need to have better

people, but at lower cost.

52

• This often means younger

people; or compensation

through equity rather than

salary; or performance-based

compensation; or outsourcing

to high-talent, low cost

countries. 53

54

55Eli M. Noam, Mobility, 2006 55

Characteristic #3

of Media and

Information:

Excess Supply


• Production increases

exponentially, while

consumption increases

linearly and slowly.


Constraint: time budget• CAGR of media production: 12%

• CAGR of media time consumption: 1.2% (slow)

• 2,100 hours of media consumption/cap/yr

• New media consumption must be mostly supported by substitution from existing

media in terms of time or full attentionWinners and losers: Industry Structure In The Converging World of Telecommunications, Computing and Entertainment


• Leads to competition for

–“mindshare”

–“attention”

• Has consequences on content

style and on marketing


http://movieposter.com/thumbnails/beyond/tv/simpson.homer.brain.jpg


•“Attention has become a

scarce resource and a

critical attention economy

has emerged.”

•Robert G. Picard. "Environmental and Market Changes Driving Strategic Planning in

Media Firms," in Robert G. Picard (ed.) Strategic Responses to Media Market Changes.

Media Management and Transformation Centre Jönköping International Business

School. JIBS Research Reports No. 2004-2. pp. 1-18


• Compared to 1998, fewer than

half as many of the new products

make it to the bestsellers lists,

reach the top of audience

rankings, or win a platinum disc.

Aris, Annet, “Value-Creating Management of Media Companies”. McKinsey & Company, Inc., 2003


Some implications

• Increase in specialization & customization of media content

• Increase in production & Marketing effort

• Together costs rise per use.

63

Implications of niche content • In news media, the greater self-

selection of the audience leads

to greater specialization of

audience niches.

• And this, in turn, requires more

informed, more specialized

news and information producers

and authors.Eli M. Noam, Mobility, 2006 63

• You can’t have a superficial

story whipped out in an

afternoon to an audience

that knows even less than

the journalist. Now, the

audience is well informed

on that market niche, and

expects value added. Eli M. Noam, Mobility, 2006 64

Eli M. Noam, Mobility, 2006 65

66

Characteristic #4 of

Media : Radically

Divergent Cost

Trends in the Value

Chain66

67

Divergence in Cost

Characteristics

•Distribution and Devices subject to rapidly increasing economies of scale, lead to large firms and market concentration.

–Telcom, cable, IT, CE

68

• But Content Production is

subject to rapidly

decreasing economies of

scale, enabling many small

producers

– video, music, text,

multimedia

69

Productivity in

the Media is

Rising Only

Slowly69

70

There is even a negative impact of general productivity in the

economy on the productivity of creative arts

• Source: Caves, Richard E. Creative Industries: Contracts Between Art and

Commerce. Cambridge: Harvard University Press, 2000 Slide 513Image Citation (Baumol): New York University. Last accessed 2 July 2008 at

http://w4.stern.nyu.edu/berkley/about.cfm?doc_id=1374

Image Citation (Bowen): "The Mellon Foundation Honors its Retiring President." Denison University press

release. Last accessed 2 July 2008 at

http://www.denison.edu/offices/publicaffairs/pressreleases/mellongrant_1-07.html

70

“The Cost Disease”

William J. Baumol and William G. Bowen

*

72

• In the long run people’s real incomes rise because of productivity.

• Raises incomes across the economy

• This means that one must pay low productivity occupations like creatives in media more than before, because they have other job opportunities

• These increases in cost of production, offsetting the cost savings from technical progress

“The Cost Disease”

• Source: Caves, Richard E. Creative Industries: Contracts Between Art and

Commerce. Cambridge: Harvard University Press, 2000 72

73• Source: Caves, Richard E. Creative Industries: Contracts Between Art and

Commerce. Cambridge: Harvard University Press, 2000

• Content, and the performing arts, being labor intensive, become relatively costlier to produce.

- this shows up as lower productivity

73

74

Mananging the Creative Workforce

http://www.spiderfan.org/software/creative/creativity_centre/images/studio.jpg

Industrial Workforce

75

76

Creative Workforce

–Content producers

–Software and R&D technology

providers

(“geeks”)

http://jehm.net/img/photo/20030117/geek.jpg

Creative Class Values• Individuality

•Meritocracy

•Diversity and openness

• Professional quality

• Non-routine

Florida, Richard. The Rise of the Creative Class. Basic Books. 2002

77

78

• Less structured and organized.

• A person more likely to

describe what they do than

who they work for.

• Less identification with

organization

• Pride in qualityNoam, Eli. The Impact of Increase Knowledge on the Business Firm: The Medium is the Company. 1

December 2003. Columbia Institute of Tele-Information. Columbia Business School.

79

Managing Geeks

flashforservergeeks.com/ fsg/ 79

80

• “Pay” is only #4 factor, far below “challenge” and “flexibility”

• “Benefits” are #7

• Above 20%: job atmosphere, casual attire, innovative work, recognition, and contribution to success.

80

*

81

Geek/Leadership Relationship

• As a group, geeks are resistant to leadership, yet may be more in need of it than any other group of employees

• Leaders often find Geek work baffling

• Geeks find leadership and management mysterious

Glen, Paul. “Leading Geeks” Jossey-Bass. 200381

82

Leading Geeks• For the geek leader, power is a lesser tool for moving an organization

• Must motivate followers

Glen, Paul. “Leading Geeks” Jossey-Bass. 2003

http://www.londonstimes.us/toons/cartoons/richdiesslin_geeks.gif

82


84

Demand -Side

Characteristics

8585

Characteristic

#5 of Media and

Information:

Network Effects

8686

• Individual benefits from media is often

interdependent with that of others:

– For Internet: Telecom, the benefits to

users rise with the numbers of others on

the network

• Fax, email, websites

–For Film, TV, Music, popular

Magazines and Books: a major benefit

of media consumption is to share

experiences with one’s peers

8787

• This changes the economics of demand

• The demand increases with size of networks. The more people are on the network, or share the experience, the more people are willing to pay.

– i.e. the larger the quantity demanded, the higher the willingness to pay.

– reverse from normal

P

Q

Demand Curve

8888

• Network effects turn into high

barriers to entry

“The gazillion-dollar question.” Economist, 20 April, 2006.

• Nobody can do a Google as

well as Google does.

• But even Google cant do a

Facebook, or a wikipedia

89

9090

• The influence of social networking

increases the inequality of popularity

• A hit song eventually gains an

overwhelming cumulative advantage

Michael J. Salganik, Peter Sheridan Dodds, Duncan J. Watts. “Experimental Study of Inequality and Unpredictability in an Artificial Cultural

Market.” Science. Washington: Feb 10, 2006.

9191

Implications of Network

Effects

• Size is important

• Market share is important (first-

moves advantage)

• Interconnectivity is important

• Community creation and its

management is important

92

9393

Characteristic #6

of Media and

Information: Non-

Normal

Distribution of

Demand

9494

Riskiness

• 80-20 rule

–80% of all films do not generate

enough audience to become

profitable.

–80% of books

–80% of music

95

A. High Failure Rates

• Music: 80%

• Film: 80%

• TV Series: 80%

• Books: 80%

• Games: 80%http://association.cqu.edu.au/cqusa_new_site/cqusa

%20site/aaflash/Menu/Site/images/academ_fail.gif


Profits

• 90-10 rule

• 90% of all profits by 10% of the products

• 50% of profits by 1-2% of products


• But it’s not simply the small odds that are the problem

• But it’s that the distribution of success is weird

• The statistical distribution of media performance is not normally (“Gaussian”)distributed–Distribution is instead the ‘stable Paretian”

9898

• Zipf’s distribution –

success is extremely

high for a few products,

low for the long tail

Image source: http://planetmath.org/encyclopedia/ZipfsLaw.html

98


• For many media products, the average (of revenues, or of profits) or mean is not the most probable outcome. The average is dominated by rare, extreme outcomes and is quite far above the most probableoutcome.

De Vany and Walls, “Does Hollywood Make Too Many R-Rated Movies? Risk,

Stochastic Dominance, and the Illusion of Expectation” Journal of Business,

July 2002, vol. 73, no. 3


• Thus, traditionally

statistical tools of sampling

and inference must be

modified for use in media.

101

RISK

MANAGEMENT

BECOMES MAJOR

MANAGERIAL

OCCUPATION

102

• Applying the portfolio approach to content production.

– film

– books

– music recordings

– magazine titles

• The portfolio approach of the

major distribution reduces their

cost of capital, and increases

their access to financing. This is

one of the major reasons of

Hollywood success: hign risk

projects at medium risk

financing cost103

104

The goal of diversification is to

reduce the variances of the

portfolio as a whole.

105

• Portfolios eliminate unique

risk and leave the content

company only with market

risks.

106

Project Portfolio Balances–Among project age (life-cycle)

–Among audiences (advertiser considerations)

–Among projects (non-variance, risk factors)

–Among cost (overall budget constraints)

–Among project development stages (avoid bunching)

107107

108108

Market Characteristic

#8 of Media and

Information: Price

Deflation

109109

• In price competition, the price is

dropping towards marginal costs,

which are near-zero, which usually

do not cover total cost.

110Eli M. Noam, Mobility,

2006

110

• The result of price competition with low marginal cost has been: price deflation in information products and services

• Good deal for consumer

• But trouble for suppliers


• It is one of the fundamental economic trends of our time

http://bp.underground.hu/images/20010605.jpg

112112

• The entire competitive part of the

information sector – from music to

newspapers to telecoms to internet to

semiconductors and anything in-between

– has become subject to a gigantic price

deflation in slow motion.

http://images.apple.com/itunes/home/images/06/indextopwin06092004.jpg http://www.whitedeath.com/graphics/newspapers.jpg

113113

1. Volatility of prices

2. Instability in the entire

information sector

This price deflation leads to:

114114

• Therefore, one main strategy for

media managers is to avoid such

price competition.

– through product differentiation

– through price discrimination

– through consumer lock-in

strategies

• Creates need for the skill set

of creative and new-style

marketers

• Of pricing strategists

• Of brand promoters

• Of creators of user

communities115

116



Media and Information:

Presence of Non-

Maximizers of Profit


• Producers get utility from

the creation of the product

• Often hard to distinguish

production from

consumption.

• “Pro-sumers”.


• Economic theory is based on profit maximizers on the production side

• In media production, a key incentive is by creatives to maximize instead peer recognition


• Implication: managers need

to reconcile these two

conflicting goals of their

employees and customers.

• Need to integrate

voluntarist producers with

their different incentives

into their larger

organizational structure.

• Or, need to provide an

organizational sturcture to a

voluntarist organizationEli M. Noam, Mobility, 2006 121


123


Media and

Information: Often a

Public Good

124124

• It is difficult to control the access to information because it is non-physical (non-excludability).

• It is easy to share the product (joint consumption)

• Together, there are the classic economic characteristics of “Public Goods”


Hard to Exclude, Hard to control

access and sharing


Implications:

• Difficult to charge for information

• Difficult to protect property rights


•Media products often given away rather then sold to users. (e.g., in broadcasting, web portals, email services, search engines)

•What non-media industry gives its products away to its users?

Implications: Indirect

Transactions

128128

• Some information therefore is generated publicly (universities etc.)


130


Media and

Information:

Government

Involvement


131

• Implications:

–Government involved in

most aspects of Media &

Communications sector

-strong need to manage

government relations131

132

Telecom Unions Protest

Government Policy

http://sportstoursinternational.co.uk/image/76.jpg132

133133

• High impact of Media companies on politics

and culture is such that they are always

controversial, highly visible, regulated, or

fought over.

• A very ‘public” private medium.

• With strong participation and regulation of

government in broadcasting, cable, satellite,

telecom, mobile, film (subsidies), and IT

development, and many more.

134134

135135

•The question was: Is media management different? •Management in media faces several and substantial differences and characteristics that create different incentives, demands, and constraints from those of industrial productions or of other services.

•This creates needs for differing management approaches and analytical tools.

136136

Media management is different

• Media management requires a

convergence of expertise from

several disciplines:

– technology, finance, economics,

law, psychology, marketing,

international relations, sociology,

politics


• We have identified 12 factors of

the media industry which, in

combination, make its

management different, in some

ways, from management more

generally


Fundamental Economic Characteristics

of MediaA. Supply Side

1. High fixed costs, low marginal costs

2. Convergence of production

3. Divergence in cost trends in value chain

4. Accelerating returns

5. Excess supply

B. Demand Side

6. Network effects

7. Non-normal distribution of demand

C. Markets

8. Price deflation

9. Intangibles

10. Public goods

11. Non-maximizers of profit

12. Government Role

139139

• Information has moved

–From a supplementary factor

–To being the central business input

–and major output of an advanced

economy.

• Where Information was once a scarce

resource. It is now becoming an abundant

resource

http://www.creativeebooks.com.au/images/book.jpg

140E

l

i140

At the dawn of industrialization, Adam Smith, in 1776, in his famous example of the needle factory, anticipated • task specialization

• mass production

• economies of scale

• business concentration

Adam Smith

141E

l

i141

• Today we need to establish analysis, & management principles for the new information economy

http://www.jrbcommunications.com/communication.jpg

142

142

• This new environment of vast

information quantity requires

–INDIVIDUALS capable of

managing the production and

use of the information resource

–ORGANIZATIONS capable

of deploying such individuals

–TOOLS to analyze and operate

143

143

End of Presentation

Thank You

the fundamental economics of media management 2

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