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Economic Foundations for Entertainment,

Media, and Technology

Organization of Firms in E&M Industries

Vertical Integration

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Vertical Integration in Markets

Financial Services Professional Sports Traditional Publishing

Final Consumers

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This one’s not a wrap!

The benefit of integration

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Create Something That Was Not There Before

ORLANDO, Fla. — Pull down your lap bars: Universal Studios, the theme park chain now controlled by Comcast, is rolling out new weapons in its battle against Walt Disney Parks and Resorts — and Disney is fortifying its defenses. Universal’s parks have always languished in the shadow of mouse ears, and that will not change anytime soon. Disney has eight parks in California and Florida that attract over 73 million visitors each year, with summer the busiest season. Universal operates three parks, with annual attendance totaling about 18 million.

But, Universal is starting to look a lot less puny. A $265 million Harry Potter-themed addition to its resort here sent 2010 attendance soaring 30 percent over the year before, draining attention from Walt Disney World in the process. Universal is now racing to replicate the attraction at its parks in California and Japan while expanding the boy wizard’s presence in Orlando. To maintain momentum, Universal — with more Comcast money — is introducing a swarm of offerings.

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Vertical Integration in Entertainment and Media

Vertically integrated firms Viacom, Paramount, Blockbuster CBS, Showtime: Disney and ABC Comcast and NBC/Universal Clear Channel and Live Nation Nokia and Loudeye Microsoft and Nokia (and Loudeye)

What are the gains?

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The Seattle-based online company has admired ComiXology and its reader experience for years, said David Naggar, Amazon vice president of content acquisition and independent publishing. He called ComiXology's panel-to-panel "Guided View" technology "the Rolls-Royce in the space.” "It felt like a really strong ability for us to work together and learn from each other," Naggar said. ComiXology will continue to exist as a wholly owned subsidiary of Amazon based in New York City, says CEO David Steinberger, who co-founded ComiXology in 2007.

Naggar said there is no timeline for consumers on either the Kindle platform or those with the ComiXology app to notice a difference in their reading experiences. "ComiXology is a strong, healthy business," he said. "There are no plans beyond seeing what we can do to help that business grow, and see what are the ways ComiXology can help Kindle, as well."

Digital Comix

Foreclosure

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Cablevision

The Wiz

Clearview Cinemas

(Now Bow Tie Cinema, 2013)

Radio City Enter.

Optimum Online

Rainbow Media

Madison Square Garden

Knicks

Rangers

Liberty

CSC Holdings and Optimum TV: The cable system

Lightpath

Homes

BusinessesFSN Sports

Networks to Comcast, Feb. 2007

The Dolans’ ongoing efforts to buy back the stock of the full company do not relate to this vertical integration. (It does focus its meaning, however.)

Vertical Integration2:C - 10(53) Viacom < Paramount

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Implications of Strongly Multistaged Production:A Motivation for Vertical Integration

Where are the profits created Where are the profits captured? Applications:

Book production Movies Recorded music Television

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Benefits of Vertical Integration

All arise from some market failure

Lower transaction costs: Firm organizational limitations Transactions involving information

Avoidance of government restrictions, taxes, or regulations. Extension of market power (forward or backward) Avoidance of upstream market power Assurance of steady or reliable input supply

Murdoch’s purchase of Manchester United Internalization of market failures

Franchising reduces problems of free riding

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BSkyB News’ View of Manchester United

Murdoch Soccer Deal Sets Up Bigger Play Goals for Media Empire Motivate $1-Billion Purchase of Famed Team MARJORIE MILLER, Times Staff Writer LONDON--There is one reason media mogul Rupert Murdoch would spend $1 billion and change to buy Britain's most revered soccer team--more than three times what he paid for the Los Angeles Dodgers--and it is not just to tweak the noses of Manchester United fans.      Even more than potential profits, owning one of the leading teams in the world's most popular sport gives Murdoch's News Corp. enormous clout with broadcasters worldwide, while guaranteeing that its games never leave the company's flagship satellite service, British Sky Broadcasting, an international cable news and entertainment network that is the dominant pay television source in Britain.

Manchester United was purchased in 2004 by Malcolm Glazier for $1.44 billion.

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Costs of Vertical Integration

Private costs Loss of economies of scale Organizational complexity Assumption of risk

Social costs Creation or extension of market power (1948

Paramount case – forced divestiture of theaters by studios)

Possible cartelization

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Foreclosure by Backward Integration?

Echo NestMusic DataService

Pandora Spotify Rhapsody Beats

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Vertical Integration in E&M Analysis

Where is it observed? What are the benefits / motivation? What are the costs?

Applications Alleged conspiracy of Apple and 5 publishers Cablevision and home delivery of cable generally

End to end production Internet service providers and cable operators

The movie business (at several stages)

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Football HistoryThe Major Player: NFLNational Football League (NFL) 1920, 10 teams, Akron, Ohio American Football League (AFL) 1960, AFL merged with NFL, 1966, one schedule, 1970.

The Competitors and EntrantsWFL: 1974-1975USFL: 1983-1985World League: 1991Arena Football League: 1987 – (a couple incarnations)

XFL: 2001 (RIP) UFL: 2009 - 6 teams, 2012 – 4 teams.

Formative.Attempted sale of 30% interest to NFL failedCeased operation in 2012 with only 5 teams existing

A Football Mini-Case Study The XFL – 4th and Long

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Football LeagueNFL XFL

Labor Pool

NFL Draft

LA CLE

NY CHI

ABC NBC ESPN FOX

Homes

Other inputs

Labor Pool

WWF/NBC

Homes

Is it vertical integration?

Is it a cartel in the labor market?

Why are salaries so low compared to NFL?

What does WWF bring to the party?

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About the XFL: Economics

What was the form of entry? – What was the product? Innovation?

What was the market structure? Production structure? What was the demand? (What market segment)? Was the product priced? How? Why was there no profit? Why did it fail?

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The Real XFL – 2007, 2010, 2012, 2013

2014 – A Texas Minor League: XFLFootball.com, but …

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Professional Football Monopoly Monopoly based on

Economies of scale at several points Barriers to entry Vertical integration, foreclosure

Attempt(s) to enter Strategy Success (or lack of) – Why?

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Concert Production

Live Nation's mission is to maximize the live concert experience. Our core business is producing, marketing and selling live concerts for artists via our global concert pipe. Live Nation is the largest producer of live concerts in the world, annually producing over 16,000 concerts for 1,500 artists in 57 countries. The company sells over 45 million concert tickets a year and expects to drive over 60 million unique visitors to LiveNation.com in 2008. Live Nation is transforming the concert business by expanding its concert platform into ticketing and building the industry's first artist-to-fan vertically integrated concert platform.

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Ticketmaster

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A Merger Made in Heaven?

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Vertically Integrated Live Nation

The Back End Frontline Management: Madonna, Jay-Z,

Nickelback, Miley Cyrus, The Eagles, 200+ others The Venues

Gibson Amphitheater, The House of Blues… The Tickets: Ticketmaster The Secondary Market (Scalpers): Tickets Now The Issue: Is there market power?

British competition authority thinks so – rejected the merger in the UK

http://www.reuters.com/article/industryNews/idUSTRE59F4CO20091016

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Antitrust approval of Live Nation-Ticketmaster mandated that tickets be made available to Anschutz Entertainment Group.

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Vertical Integration in Sports Broadcasting: League Networks?

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What are the relation-ships?

Where is the benefit to integra-tion?

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Alternative Distribution: What does the NFL gain by becoming the network?

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WWE Is Now a Network

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The Paramount Case (1948)

Block booking Forward integration: theaters Backward integration: the “studio

system” (An exercise in monopsony power) The Case

http://www.cobbles.com/simpp_archive/1film_antitrust.htm

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Echoes of Paramount Paramount, 1920s – 1940s The Paramount Case ABC and CBS backward integration into the movie business, 1970s

when the cost of a film for network broadcast rose 800% from 1961-1967. Produced 50% of their own output from 1967-1971. Does this strategy reduce cost? Violated Paramount Violated the FCC’s Fin-Syn rules. (To be revisited later.)

1980s studios reintegration into exhibition: 1986, MCA bought 50% of Cineplex-Odeon. 1987, Columbia bought all of TriStar.

1980’s Time Inc. bought Warner Bros. linking cable networks and studios. Then, Turner Broadcasting.

20th Century Fox acquired built Fox broadcasting. Sony (electronics) acquired Columbia Pictures. (Shades of The Wiz?) IN EACH CASE, IS THERE A CLEAR BENEFIT?

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Nor is this one.

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Comcast Redux, October 2009 Comcast

(Cable & Internet) Regional sports networks E Entertainment

+ NBC Universal (minus Vivendi) Backwards:

Universal pictures Forward:

Telemundo, NBC, MSNBC, CNBC, USA Network Hulu (partly owned by NBC)

Sideways: Universal Theme Parks Horizontal (2014) Time Warner Cable

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Vertical structure in one part of the music business

Performance Rights Organizations

Recording Companies (Labels)

White Label Music Provider

Music Packager

DistributorsPerformance Rights (to Music Choice, “through to the audience”)

Mechanical Rights

Recorded Music

P.R.s

M.R.s

Music

Rights

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Yahoo Integration – More or Less

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Vertical Disintegration: Yahoo Music is no more. Outsourced to CBS.

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Yahoo music is not music; it is about music

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Vertical Disintegration: AOL

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Market Structure Evolves

Millions of songs!

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Music Download – Backward Integration

FRANKFURT, March 25 (Reuters) - German retailer Metro AG has taken a controlling stake in Britain's 24-7 Entertainment, which supplies technology used in music downloads, Metro said on Wednesday. 24-7 managed 93 million downloads in Europe last year. The London based company operates 41 download stores in 13 countries and has licenses with more than 12,000 record labels.

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More Backwards

Integration

Nokia and Loudeye Corp. announced that they have signed an agreement for Nokia to acquire Loudeye for approximately USD 60 million. Loudeye is one of the global leaders of digital music platforms and digital media distribution services. By acquiring Loudeye, Nokia can offer consumers a comprehensive mobile music experience, including devices, applications and the ability to purchase digital music.

The multi-function mobile device will become the preferred medium for enjoying music and Nokia is leading this trend. With music optimized products like the Nokia N91 and other Nokia devices, Nokia sold more than 15 million music enabled devices in the 2nd quarter, making it the world's largest manufacture of digital music players.

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Microsoft owns Nokia … and Loudeye

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Entertainment and Media: Markets and Economics

Coming Soon: A Theater Near You

http://www.marketplace.org/topics/business/movie-theaters-move-beyond-ticket-price

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Coming Soon: A Theater Near You

Studios and Exhibitors The Problem of “Holdup” Incentives of the Two Parties Vertical Integration

Forward by the Studios Backward by the Exhibitors

Bollywood’s Boycott of Major Theater Chains

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Evolution of a Holdup Problem

FX2 -30%What about Bob? +22%Backdraft -28%City Slickers -13%Robin Hood -29%Naked Gun -44%Terminator 2 -35%Hot Shots! -26%

The Mummy Returns -50%Shrek evenPearl Harbor -50%Swordfish -30%Lara Croft -59%Fast and Furious -50%A.I. -52%Cats and Dogs -45%Legally Blonde -46%Jurassic Park III -56%Planet of the Apes-60%

Summer 2001Summer 1991

In ’80s and ‘90s: (1) 15,000 new screens were built – increase to 36,000 by 2000 (2) Nearly all theater chains were in bankruptcy (3) Movie distribution contracts give up to 80% of the first week’s “box office” to studios.

Dropoff in 2nd Week Revenues of the Number one Movie, by Week

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Same Market Results: 10/2009

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A number of movie theater circuits are refusing to put tickets on sale for Iron Man 3 even though its one of this summer’s most anticipated hits when it opens May 3rd. That’s because Disney decided to leverage the film in order to renegotiate the studio’s future terms with the chains beginning with this humongous Marvel blockbuster. I’m told that AMC, one of America’s largest exhibitors, is among those holding out even though the Robert Downey Jr movie opens wide in North America in just 17 days. Some chains were selling advance tickets — and then stopped. Distributors tell me Disney hasn’t negotiated its terms with the movie chains in several years — not even for Summer 2012′s huge tentpole The Avengers — so the studio thinks it’s due for a new overall deal on future Disney titles.

http://www.bloomberg.com/news/2013-04-26/disney-settles-dispute-with-exhibitors-over-iron-man-3-.html

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Solutions to Holdup

Diversify the specific capital: What else can you do with a movie theater?

Vertical integration Theaters and the Paramount case Sony and Leows Theaters

Vertical Integration2:C - 50(53)NationalCinemedia.com Fathom Business Events

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Disappearing DVD Market

Implications of the shorter first run release window

Implications of increased VOD and disappearing DVD market First run release window Best Buy, Wal-Mart Movie theaters

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Bollywood