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M
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, con- cepts, 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 academi- cians, 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 his- torical 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.
MEDIA ECONOMICS
Alan B. Albarran
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♦♦ Economics:
Historical Development
To understand the historical development of the field of media economics, one must first begin with the study of economics itself. The initial literature on economic thinking began to evolve in the time period between 1500 and 1800, with much of the early work occurring in Western Europe (Landreth & Colander, 1989). Mercantilism represents the earliest form of economic thought, originating in the 16th century. Mercantilists equated a nation’s wealth with the accumulation of gold and silver. If nations lacked mines, they could acquire the precious metals via trade and commerce. This led to political intervention in the market via tariffs and subsidies, elevating commercial interests to national policy. Physiocrats, a group of philosophers in 18th-century France, rejected mercantilism in favor of agriculture and called for a pol- icy of laissez-faire, or minimal government intervention in the market. The physiocrats were among the first to view the economy as a constant flow of input and output. Philosopher/scholar Adam Smith is cred- ited with providing one of the first synthe- ses of economic thought with a collection of writings in 1776 commonly referred to as The Wealth of Nations (Smith, 1937). Smith defined land, labor, and capital as the three factors of production and the major contributors to a nation’s wealth. Interest- ingly, Smith referred to the growing disci- pline as political economy, a term used much differently in contemporary economic thought (see Chapter 15, this volume, for a complete discussion of political economy). Along with Smith, David Ricardo’s (1953) theoretical contributions related to land, rent, and capital; Thomas Malthus’s work on population theory; and the later writings of John Stuart Mill (recognized for noting the distinction between allocation of resources, distribution of income, and the theory of value) collectively formed the
classical period of political economy. The work of these authors centered on the inter- play of economic forces, the cost of pro- duction, and the operation of markets. The classical school was eventually chal- lenged 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 rul- ing class. The marginalists contributed the basic analytic tools of demand and supply, consumer utility, and the use of mathematics as analytical tools—all forerunners to the development of microeconomics. Marginal- ists 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 pro- duced. Marx predicted the fall of capital- ism, as the disenfranchised labor class would ultimately rebel, overthrow the cap- italists, 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 & Hérbert, 1990). Another impor- tant 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
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school regarding economic growth as a fundamental prerequisite for improving society’s well-being. Supply-side economics emphasizes the need for incentives to save and invest if a nation’s economy is to pros- per, as well as the danger of canceling out those incentives through high taxation. This review of major historical develop- ments in economic thought illustrates the rich diversity of philosophies and theories found in the field of economics. As the study of economics became more refined, scholars began to investigate many different markets and industries, applying economic concepts and principles to different fields, including media.
♦♦ (^) The Development
of Media Economics
The rise of the mass media paved the way for the study of media economics. Research began to emerge during the 1950s. The media industries provided all of the ele- ments required for studying the economic process. Content providers, offering infor- mation and entertainment, became the sup- pliers, whereas consumers and advertisers formed the demand side of the market. Various regulatory agencies (e.g., Federal Communications Commission [FCC], Federal Trade Commission, and other gov- ernment entities) affected macroeconomic market conditions, and the relationship among suppliers in various industries cre- ated microeconomic market conditions. Many of the early media economists addressed microeconomic concepts. Ray (1951, 1952) examined newspaper competi- tion and concentration, whereas Reddaway (1963) reviewed economic characteristics of newspapers as firms. Steiner’s (1952) classic work on competition in radio involves the application of microeconomic concepts to the radio industry. Early studies of the television industry examined market structure (Levin, 1958), competition with other media (Berlson, 1961), and the
impact on advertising revenues (Tijmstra, 1959–1960). Concentration of ownership has been another topic studied across media indus- tries. Representative studies of media concentration across industries include Albarran and Dimmick (1996), Bagdikian (2000), and Compaine (1985b), along with specific studies of industry concentration in newspapers (Lacy, 1984, 1985; McCombs, 1988; Picard, 1982, 1988a; Rosse, 1980), broadcast television (Bates, 1993; Litman, 1979), motion pictures (Gomery, 1993), and trade books (Greco, 1993). Ownership structure has been examined in regard to management policy in the newspaper industry. Key works include Blankenburg’s (1982, 1983) research on controlling circulation costs and pricing behavior and the impact on financial per- formance (Blankenburg & Ozanich, 1993). Further inquiry into press ownership and competition continues to develop, including the market for online newspapers (see Chyi & Sylvie, 2001; Lacy, Shaver, & St. Cyr, 1996; Lacy & Simon, 1997). Other studies have examined variables such as media competition (Compaine, 1985a; Dimmick & Rothenbuhler, 1984), consumer expenditures and the principle of relative constancy (McCombs, 1972), barriers to entry (Wirth, 1986), demand (Busterna, 1987; Lacy, 1990), and utility (Albarran & Dimmick, 1993; Dimmick, 1993). In 1988, the field of media economics gained further legitimacy by the debut of the Journal of Media Economics ( JME ), established by the first editor of the journal, Robert G. Picard. Initially published twice a year, JME moved to three issues a year by 1991 and quarterly distribution in 1994. The Journal of Media Economics has emerged as the premier journal for the latest research in the field. In addition to articles in scholarly journals, a number of books and edited volumes have contributed to the development of media economics.^1 Our focus now shifts to the theoretical and methodological dimensions of the field.
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♦♦ General Theoretical
and Methodological Issues
Media economics research combines a variety of theoretical and methodological approaches. The following paragraphs in this section detail some of the most widely used theoretical and methodological tools used in the field of media economics.
THEORETICAL FOUNDATIONS
In terms of theoretical development, three areas account for much of the knowl- edge regarding media economics. These areas involve microeconomic theories, macroeconomic theories, and studies related to political economy. Much of the literature base deals with microeconomics, which is particularly suited for media eco- nomics research because it centers on spe- cific industry and market conditions. Macroeconomic studies tend to take a much broader focus, examining such topics as labor and capital markets, as well as pol- icy and regulatory concerns. The literature base involving macroeconomic theories is much smaller than that using micro- economic theories. Political economy of the media also encompasses many areas, emerging as a response to positivist approaches in main- stream economics. The mass media became a natural area of study, drawing scholars from sociology and economics as well as commu- nications (Golding & Murdock, 1997). For discussion of media political economy, con- sult the chapter by Janet Wasko (Chapter 15, this volume). Here we will focus on micro- economic and macroeconomic theories used in the study of media economics.
MICROECONOMIC
THEORIES: INDUSTRIAL
ORGANIZATIONAL MODEL
Among the most widely used frameworks for the study of media economics is the
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. Scherer’s 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 orga- nizational model posits that if the structure of the market is known, it allows explana- tion of the likely conduct and performance among firms. Each of the three areas (SCP) can be further defined by considering spe- cific 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 understand- ing of market structure led to the develop- ment of the theory of the firm (Litman, 1988). The theory of the firm is an expan- sion of the industrial organization model, with the goal of gaining a better under- standing of four common types of market structure: monopoly, oligopoly, monopolis- tic competition, and perfect competition. The appeal of this approach lies in its simplicity and parsimonious nature. How- ever, the defining of a market structure has
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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 sharehold- ers that contain a number of financial state- ments 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 compa- nies, which are not required to disclose any financial information, and with compa- nies domiciled outside the United States, where accounting practices and currency exchange rates vary. Econometrics involves the use of statisti- cal 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 com- munication 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 examina- tions. Representative case studies include McDowell and Sutherland’s (2000) analysis of branding, Nye’s (2000) review of litiga- tion in music publishing, and Gershon and Egen’s (1999) case study involving retransmission consent in the cable televi- sion 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).
♦♦ (^) Forces Driving Media Industry Change
The previous overview of the historical, theoretical, and methodological dimensions of the field of media economics provides a context for examining some of the key concepts important to media economics research. Prior to reviewing specific con- cepts, a review is warranted of the forces driving media industry change. Four external forces continue to drive change across the media industries, leading to evolution of the study of media econom- ics. These four forces consist of technology, regulation, globalization, and sociocultural developments. Each is briefly reviewed in the following paragraphs.
TECHNOLOGY
Because media industries are heavily dependent on technology for the creation, distribution, and exhibition of various forms of media content, changes in technol- ogy affect economic processes between and within the media industries. There are three critical areas where technology has done this. The first is the initial evolution of com- puters. Computing technology improved efficiency among workers in many areas and greatly minimized storage requirements for paperwork as well as increasing oppor- tunities for communication (e-mail) and other software applications. The second technological area, coupled with the rise of computing technology, has involved the transition from analog to digital content. As computers became more power- ful and sophisticated, the ability to convert text and graphics digitally soon led to digital audio and video files. And once content is digitized, it can easily be distributed and
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shared with others. The media industries quickly moved to converting to a digital world, first in print and later in electronic media. The third area of technological impact was and continues to be with the develop- ment of the Internet. First used primarily to exchange textual information, the advent of hypertext language led to the development of the World Wide Web, forever changing the user’s experience with the Internet. Some media companies quickly recognized the power of the Internet, building Web sites to attract consumers and advertisers, whereas other companies floundered in their initial attempts to understand how best to use the new medium. The Internet offers media companies another way to connect audiences and advertisers, as well as a means to build and enhance brand development. By the late 1990s, the ability to stream audio and video files over the Internet was introduced, along with the rise of broadband services in the form of cable modems and digital subscriber lines. Early in the 21st century, wireless access was positioned to be the next major Internet innovation. The Internet also represents major challenges regarding intellectual property and copyrighted content.
REGULATION
Regulatory actions can always affect competitive market forces, and media indus- tries 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 adminis- tration, 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
eliminate competitive barriers in the broadcast, cable, and telecommunication industries. Ownership caps were relaxed yet again, and companies operating in one industry could now compete in others (e.g., cable companies could now offer telephone service, and telephone companies could offer cable-like services). Other rulings passed in 1998 and 1999 to stimulate com- petition in the emerging direct broadcast satellite (DBS) market allowed satellite operators to offer local television signals in addition to their regular lineup of tradi- tional cable and pay networks. These regulatory actions paved the way for increasing consolidation across U.S. media industries. For example, in the radio industry, some 75 different radio compa- nies eventually were merged or acquired into one of two companies: Clear Channel Communications or Infinity (Viacom). In television, Viacom acquired the assets of CBS, King World, UPN, and Black Entertainment Television (BET). America Online merged with Time-Warner, creating the first company combining “old” and “new” media. The French utility company Vivendi, in a span of just 2 years, acquired the media assets of Seagram Universal and the USA Networks to become a global media giant, along with the likes of Disney, News Corporation, and Bertelsmann AG. Court decisions, coupled with regulatory actions, also affect media markets. In early 2002, the U.S. Court of Appeals ruled in favor of separate cases brought forward by AT&T and Viacom regarding government- mandated ownership caps, declaring that the limits imposed by the FCC on cable and television station ownership were arbitrary and capricious. Trends strongly suggest that these decisions may lead to removal of all ownership caps at the national level for many media industries, leading to even more mergers and acquisitions. In a related matter, the FCC is expected to remove old restrictions barring newspapers from own- ing broadcast stations in the same markets in which they operate. If eliminated, the cross-ownership rules would give publishing
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and entertainment (drama, comedy, action, music, games, etc.). Massive consolidation across the media industries has given rise to vertically integrated conglomerates (mean- ing they control many aspects of production, distribution, and exhibition) such as Viacom, AOL Time-Warner, Disney, and News Corporation. Media products such as television programming, feature films, and sound recordings can be repeatedly used and marketed to both audiences and advertisers, forming the “dual-product marketplace.”
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 mar- ketplace 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 con- tent so as to maximize potential revenues. The number one priority of media execu- tives and managers is to generate positive cash flow (revenues less expenses, deprecia- tion, taxes, and interest) to increase the value of their firm.
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 multidivi- sional media company with a large cadre of recognizable brands, including MTV, Nickelodeon, Paramount, Blockbuster, CBS/UPN, Infinity, and King World. AOL
Time-Warner is another branded company, with well-known entities such as AOL, CNN, HBO, Warner Brothers, Netscape, Time, Sports Illustrated, and TBS/TNT. Branding provides not only instant recogni- tion but also the opportunity to be recog- nized in a heavily competitive market environment.
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 photogra- phers, producers, directors, and editors for the production process involves competi- tion, 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.
ECONOMIES OF
SCALE AND SCOPE
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 vari- able costs to produce a single newspaper would be very high, but the cost per news- paper 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.
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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.
MERGERS AND ACQUISITIONS
The composition of the media industries has undergone considerable change due to mergers and acquisitions across many mar- ket sectors. Mergers and acquisition activity surged during the 1980s and 1990s due to a number of macroeconomic processes, including relaxation of ownership provi- sions, low interest rates available for financ- ing, 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 person- nel to function effectively. Personnel repre- sent the greatest single expense for any organization. In the media industries, trade, craft, and technical workers are considered “below-the-line” employees, whereas pro- ducers, writers, directors, talent, and man- agement 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
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 compa- nies either invest in the development of personnel skilled in these new areas, or they may choose to outsource these responsibili- ties to firms specializing in specific appli- cations. Labor markets are affected by consolidation, which typically creates a loss of some repetitive jobs, as well as general labor trends.
♦♦ (^) Contemporary Issues in Media Economics
There are a number of issues scholars need to address in their efforts to further develop this important area of research. This final section considers three issues of particular relevance affecting media economics at the beginning of the 21st century: theory build- ing, defining market structures more pre- cisely, and better methods.
BROADER THEORETICAL
DEVELOPMENT
Media economics research has primarily drawn on microeconomic concepts and prin- ciples, with a heavy reliance on the indus- trial organization model. Although this emphasis clarifies the relationship of vari- ous 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 consol- idation of many media markets is an area that would be strengthened using macroeconomic approaches. The impact of global consolidation on general patterns of
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conjunction with enhancements in methods. In particular, one area deserves attention: measures used to assess competition and concentration. Measures to assess competition and con- centration have primarily relied on one of two available tools: concentration ratios and the Herfindahl-Hirschman Index (HHI) (Albarran, 2002). Concentration ratios pro- vide a parsimonious way to measure con- centration, 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 pri- vately held companies. Furthermore, calcu- lating the index can be unwieldy. More problematic for both measures is that they are designed only to measure con- centration within a market segment. There are no generally accepted measures avail- able 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 indi- vidual 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 within- industry 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 strength- ens our understanding of the role and function of mass media in society. At a theoretical level, media economics comple- ments 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 audi- ence behaviors and preferences. As a field of scholarship, media econom- ics research offers important contributions to media studies. Media economics research faces many challenges as it attempts to ana- lyze and evaluate the complex and changing world in which the mass media industries operate.
♦♦ (^) Note
- 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 Agenda- Setting: 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
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Economics: Understanding Markets, Industries and Concepts (Albarran, 2002); and Global Media Economics: Commercialization, Concen- tration, and Integration of World Media Markets (Albarran & Chan-Olmsted, 1998). Other vol- umes address specific industries such as news- papers (Demers, 1996; Lacy & Simon, 1993) and the evolving video entertainment industry (Owen & Wildman, 1992).
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