Fang Liu & Alan B Albarran. 21st Century Communication: A Reference Handbook. Editor: William F Eadie. Sage Publication. 2009.
Media economics is a field of study used to analyze the firms, industries, and activities of media enterprises, drawing on theories and concepts from economics. The earliest scholarly literature involving media economics began in the 1950s with the newspaper industry; contemporary scholars now address all forms of media, including new media technologies and multimedia. Historically, media economics tended to focus on a particular media industry. However, globalization, regulatory reform, social changes, and technology continually modify approaches to the study of media economics. In the 21st century, media economics must be examined across a broader spectrum of inquiry, as it cuts across numerous areas and levels of activity.
This chapter consists of two sections. The first section describes the field of media economics by examining key approaches and perspectives guiding research, the primary theoretical domains, and methodological approaches. The second section examines issues involved in media ownership, centering on the impact of regulation, consolidation, capital and financing, and new technologies.
The Field of Media Economics
Economics is studied in terms of macroeconomics and microeconomics, and the field of media economics follows suit. Macroeconomics examines the aggregate economic system and is usually studied at a national or global level. Macroeconomics includes topics such as economic indices (interest rates, the supply of money, and employment) and national production and consumption (GDP or GNP). Most of the media economics studies in the macroeconomics tradition are policy and regulatory studies analyzing the impact of specific regulations and policies on media markets and industries. For example, studies investigate topics such as the impact of deregulation of media ownership on concentration of local television markets, the impact of international deregulation on transnational media corporations, and the impact of the Telecommunications Act of 1996 on consolidation of media industries.
Microeconomics examines specific aspects of the economic system, including individual markets, firms, or consumers. Many media economics studies apply a microeconomics approach to examine market structure and firm conduct and behavior. Such research has focused on the structure, conduct, and performance of the agricultural trade journal market; the structure of the cable television market; and an analysis of market competition in the television syndication industry.
A third approach to studying media economics is the critical perspective. This area of study is related to media economics but uses different theoretical domains and methodologies. Today, this field is known as political economy. Initially drawing on a Marxist orientation, contemporary critical scholars in the political economy of the media are concerned about topics such as media hegemony, technological determinism, political power over media enterprises, and the impact on social policy.
Media economics research is dominated by studies involving microeconomic perspectives. There is a much smaller group of literature that follows a macroeconomic perspective, although globalization has been a catalyst for a growing body of macroeconomic research. Both macro and micro perspectives are used in conjunction with a theoretical foundation to examine research questions and hypotheses posed by researchers.
Primary Theoretical Domains in Media Economics
Much of the literature in the field of media economics has traditionally followed neoclassical approaches, which are led by the industrial organization model (the I/O model). The “old” I/O model, or the Bainsian I/O framework of analysis, is based on the assumption that there is a causal link from market structure to firm conduct to firm performance. The structure-conduct-performance paradigm (the SCP paradigm) first proposed by Bain (1968) is the most representative of the old I/O model and is a commonly used analytical framework in media economics studies. Analyzing media industries using the SCP paradigm often involves three factors: market structure, market conduct, and market performance. The majority of the studies of media firms and markets in the old I/O tradition focus on the analysis of market structure, which refers to the number and size distribution of firms in a market.
An important emphasis of the studies in the old I/O tradition had been empirical testing of the SCP hypothesis. These studies focus on the impact of industry structure on industry performance. As a consequence, initial I/O analyses did not pay too much attention to firm conduct. On the contrary, the “new” I/O model developed through the 1980s and the 1990s views the once assumed causal relationship between market structure and performance as a relationship influenced by strategic interaction among firms and thus pays more attention to firm decisions, conduct, and strategic interaction in markets. The new I/O model is especially useful for understanding firm behavior in conditions of oligopoly, where a market is dominated by a small number of sellers offering either homogeneous or heterogeneous products.
Scholars continue to extend the I/O model to media economics research. Some studies look into a single component of the I/O model, market structure, firm conduct, or firm performance. Using the I/O model, researchers examine the changes in the market structure of local broadcast television, radio, and newspaper markets; the structure of the electronic newspaper market; and structure of the multichannel video programming market. Additional studies focus on the structural relationships among market structure, firm conduct, and firm performance. For example, researchers examine the relationship between market structure, conduct, and performance in the newspaper industry and the effect of increased competition on the conduct and performance of local television news departments.
Other theoretical domains are also found in media economics research. Concentration studies look at the levels of concentration among media markets and industries.
Concentration of media is problematic because media markets are not only a marketplace for media products and services but also a marketplace for information and ideas. Concentration of market share refers to the proportion of a particular market controlled by the major players operating in that market. Commonly used measures of concentration of market share include concentration ratios and the Herfindahl-Hirschman Index (the HHI). Researchers employ these measures to evaluate concentration of media markets. For example, concentration ratios and the HHI are used to investigate concentration of the advertising market for agricultural magazines; concentration ratios are used to examine concentration in the U.S. daily newspaper industry at the national and local levels; and the HHI is used to assess concentration in the U.S. book publishing industry from 1989 to 1994. The HHI has also been used to evaluate concentration in local television markets based on measures of audience shares.
Niche theory has been used to study competition among the media industries, especially between traditional media and new media. Niche theory is based on the assumption that a new medium competes with traditional media for audience and advertiser spending. For example, researchers examine the impact of the Internet as a new medium on traditional media in the daily news markets, the competition between cable as a new medium and broadcast media in the advertising market in the 1980s, how cable networks use branding strategies to attract cable system operators and national advertisers, and the survival rates of new magazines.
The principle of relative constancy (the PRC) is another theoretical domain that examines audience and advertiser spending on mass media over time. According to the PRC, a relatively constant proportion of the available wealth of audiences and advertisers is devoted to the mass media. The PRC asserts that introduction of new media cannot increase audience and advertiser spending on mass media. As a result, new media grow by competing with traditional media for audience and advertiser spending or from the growth in the general economy of a nation, which decides the amount of audience and advertiser spending available on the mass media. Researchers found support for the PRC by providing evidence on the constancy in audience spending on mass media over time using a longitudinal approach.
In media economics, one can find demand studies, based on audiences, advertisers, or those desiring to own media properties. Many media companies serve a dual market—offering content to audiences in the consumer market and selling access to audiences in the advertising markets. The majority of media demand studies focus on audience demand for content. Examples of audience-based studies include studies that examine factors determining demand for international films, the impact of audiences’ willingness to pay high subscription prices for business magazines on publishers’ differentiation strategies, the relationship between newspaper price and circulation demand, and factors determining household demand for basic or pay cable television services. In the literature, there are also studies examining advertiser demand and demand for media properties. For example, studies investigate advertiser spending on mass media over the years, the dramatic increase in investment in media industries in the immediate years following the passage of the Telecommunications Act of 1996, and a method of pooling equity for purchasing a portfolio of media properties.
The theories and frameworks reviewed above are among the most commonly used in the field of media economics. In addition, in the media economics literature, one can also find studies that use policy analysis to gauge and analyze regulatory actions, especially the impact of regulation on the structure of media markets and on welfare, and studies that use game theory, information economics, behavioral economics, and transaction cost economics.
Methodological Approaches in Media Economics
There are many methodological approaches used in media economics research, encompassing both quantitative and qualitative applications. Some of the more common methodological approaches found in the literature are detailed in the following paragraphs.
Researchers use trend studies to identify patterns among media firms and industries. Trend studies are used to track things such as advertising expenditures, ownership transactions, financial data, and demand. Trend studies tend to be descriptive in nature and visual in their presentation through the use of charts and graphs. Trend studies have been extensively used by the Federal Communications Commission (FCC). Trend studies conducted by the FCC include the Annual Report on Competition in Video Markets, Cable Industry Prices, Review of the Radio Industry, and others. Scholars use trend studies to investigate changes in media markets and industries over time. Some examples include a trend analysis of the revenues of the U.S. media industries between the 1980s and the 1990s, analysis of the change in consolidation of media industries before and after the passage of the Telecommunications Act of 1996, and a trend analysis of the adoption rate of the VCR among audiences in the early 1990s.
Survey research is a means of gathering information by asking a set of questions to a sample of respondents who represent a population with specific characteristics. Survey research is a relatively cost-effective way to collect a large amount of information. Implementations of survey research methods include mail surveys, telephone surveys, personal interviews, and Internet surveys. Surveys have been employed to investigate a variety of media economics topics, such as news managers’ attitudes toward partnerships between newspapers and television stations; the relationship between corporate newspaper structure, profits, and organizational goals; the influence of owners or advertisers on news correspondents’ news reporting; factors affecting audiences’ willingness to pay for content; factors leading to audiences’ adoption of new media technologies; audiences’ satisfaction with multichannel video programming services; and advertising decision makers’ perception of media effectiveness and substitutability.
Content analysis is a research method for a systematic analysis of content. Content analysis can take on two different forms. One is conceptual analysis, which identifies concepts for examination and then quantifies and tallies their presence, and the other is relational analysis, which identifies concepts present in some given content and further explores the relationships between the concepts identified—strength, sign, and direction of relationships. In media economics, content analyses have mostly been conducted on newspaper and television content. For example, researchers use content analysis to examine the effects of group ownership on daily newspaper content and to investigate the relationship between market size and local television news content.
Intensive interviews are used by researchers to collect information from a small number of respondents who are hard to reach by other means, such as top executives of media firms. Intensive interviews can be structured, semi-structured, or unstructured, and which form to use is decided by factors such as the nature of the study, characteristics of the interviewees, and whether comparative analysis is involved. Semistructured interviews are more often used with media executives in organizational research, because this form gives interviewers more flexibility in deciding the choice of questions and the order of questions during the interview process and also allows comparability across different respondents in data analysis. The application of intensive interviews in media economics research includes interviews with cable system operators to investigate their perception of the competitiveness of the cable television markets, interviews with book wholesalers to study the transformation of the wholesale sector in the U.S. book-publishing industry, and interviews with media professionals to understand the economics of buying and selling audiences in the television advertising market.
Case Study Approach
The case study approach has been widely applied to examine the economics of media firms and industries. In case studies, multiple research methods are used to investigate a phenomenon embedded in its real-life context. In media economics studies, cases or units of analysis can be media firms, industries, markets, advertisers, audiences or others entities, depending on the nature of inquiry. Case studies can be classified into two types by the number of cases included in one case study—single-case studies or multiple-case studies. Although multiple-case studies may be more time-consuming and costly to conduct, this research method has been employed in a number of media economics studies due to its advantages such as providing more compelling evidence and improving the robustness of the study. Examples of single-case studies include the book-publishing industry’s transition to the BookScan system of measuring book sales, the merger of U.S. West and Continental Cablevision Inc., and Nielsen in the TV ratings history from 1984 to 1999. Examples of multiple-case studies include the impact of intra-industry and interindustry competition in the evolution of satellite broadcasting in the United States, Japan, England, and France and the competitive strategies employed by two all-news channels—CNN and BBC—in Asia.
Secondary Data Analysis
In media economics, secondary data refer to data previously collected by individuals or organizations for purposes other than those of a particular media economics research project. There are a variety of secondary data sources on media firms, industries, and markets available to researchers. A number of databases such as Thomson One Banker (Thomson Analytics), Hoover’s Online, and Standard and Poor’s provide comprehensive business and investment information, including industry surveys; corporation records; and key financials, ratios, and growth rates for companies worldwide. Industry-specific directories such as the Cable & Television Factbook, the Broadcasting & Cable Yearbook, and the Editor and Publisher International Year Book provide comprehensive information on specific media industries.
Trade organizations such as the Radio Advertising Bureau (RAB), the Television Bureau of Advertising (TVB), the Interactive Advertising Bureau (IAB), the National Cable & Telecommunications Association (NCTA), the Recording Industry Association of America (RIAA), the Motion Picture Association of America (MPAA), the Satellite Broadcasting and Communications Association (SBCA) of America, the Newspaper Association of America (NAA), and the Magazine Publishers of America (MPA) provide continually updated industry statistics, including annual revenues (e.g., advertising revenues and subscription revenues), audience-size statistics (e.g., ratings, the number of service subscribers, circulations, or box-office sales), and industry trends such as the changes in annual revenue or audience size over the years.
It is usually less expensive to collect secondary data than primary data, and the time required for searching secondary data sources is much less than for collecting primary data. Media economists have taken advantage of a variety of secondary data sources. Examples of secondary data sources used in media economics studies include programming schedules of broadcast television stations, syndication industry reports on programming, the database on corporate transactions complied by the Securities Data Company, data on box-office sales provided by the online movie information service IMDb, the report of the Follow-Up National Survey of Cable Television Rates and Services complied by the U.S. General Accounting Office, and data on mass media expenditures by categories collected by the Central Statistical Office of the United Kingdom.
Issues in Media Ownership
Media ownership is one of the most important areas of media economics, and it has been extensively researched. In this section, issues including media ownership regulation, concentration of media ownership, and capital and financing of media firms are discussed.
Media Ownership Regulation
The goals of media ownership regulation are to promote diversity of ownership, and thus diversity of voices, as well as to prevent concentration of economic power. Many jurisdictions have specific regulations for media ownership rather than leaving it to general competition law, from the concern that these goals may not be adequately addressed by market competition. The U.S. media ownership rules are designed to promote the FCC’s policies of competition, diversity, and localism. The U.S. media ownership rules restrict concentration of media ownership at both local and national levels by setting up ownership caps, either on the total number of media outlets that can be owned in local markets or nationally by a media firm or on the maximum percentage of households that can be reached nationally by a media firm.
When an ownership regulation is relaxed or lifted, it has immediate influence on the status of concentration of media ownership, or media consolidation, which refers to the control of the majority of the media outlets by a small number of media conglomerates. According to an FCC media ownership study released in 2002, there was substantial consolidation across most forms of media, including television, radio, newspaper, cable, and satellite in the 1990s, especially following the passage of the Telecommunications Act of 1996, which relaxed or eliminated some local and national ownership limitations on television, radio, and cable as well as some cross-ownership limitations (Duwadi, Roberts, & Wise, 2007).
Some jurisdictions have a long history of regulating media ownership from an industry-specific approach. This approach is under pressure due to the development in communication technologies and industry expansion across traditional industry boundaries. The media industries have been advocating deregulation of this industry-specific regulatory approach. The trend toward media ownership deregulation is detectable in some countries. For example, the FCC amended the ban on common ownership of a broadcast station and a daily newspaper in the same market in 2007. This amendment would allow a newspaper to own one television station or one radio station in the 20 largest markets in the United States (FCC, 2007, December 17).
Another emerging issue in media ownership regulation is whether and how the Internet should be subject to media ownership regulation. Media conglomerates can expand their success from traditional media to new media such as the Internet. The Internet as a new content distribution platform is dominated by the same group of media conglomerates that dominate traditional media. These media conglomerates have the majority of the traffic on the Internet. However, no regulation on Internet ownership exists yet.
Concentration of Media Ownership
The U.S. media markets are controlled by a number of top media conglomerates, such as Time Warner, Comcast Corp., Walt Disney Co., News Corp., NBC Universal, CBS Corp., Cox Enterprises, Echostar Communications Corp., and Viacom. These media conglomerates have concentrated ownership over the U.S. media—they control more than half of the total U.S. media revenue. As a result, these media conglomerates together have a great impact on what audiences listen to, watch, and read via different media platforms, including radio, television, newspapers, the Internet, and others.
Some media conglomerates are vertically integrated, having control over media outlets at various levels of media products (i.e., production, distribution, packaging, and exhibition). For example, Time Warner, the largest media conglomerate in the world, has operations in various forms of information and entertainment, from magazines, comic books, motion pictures, television, and home entertainment production, cinemas, to broadcasting, and others. There are also horizontally integrated media conglomerates; that is, they have control over more than one media outlet at one single level of media products. Comcast Corporation, for example, operates more than 1,000 cable systems in the United States, providing multichannel video programming services to about 24 million subscribers.
Concentration of media ownership, including vertical integration and horizontal integration, can help media firms improve economic efficiencies. For horizontally integrated media firms, the primary advantage of having concentrated ownership is economies of scale, which refers to the reduction in cost per unit as more units are produced. One of the basic economic characteristics of the media business is high fixed costs and low variable costs. Horizontally integrated media firms such as radio and television groups can achieve economies of scale by spreading fixed costs over a larger number of stations. For vertically integrated media firms, the primary advantage of having concentrated ownership is economies of scope, which exist when the cost of joint production of several products is lower than the total cost of producing each product separately. The benefits for vertically integrated media conglomerates with multiple products in multiple markets include improvement in profitability, reduction in financial risk, and increase in market power.
One of the assumptions of media ownership regulation is that there is a link between the number of different media outlets in a market and the diversity of voices. Increasing concentration of media ownership has raised concerns of the public and the academic community due to the belief that source diversity influences programming diversity. A number of studies show that diversity of the media marketplace has been declining, and concentration of ownership is one of the key factors that led to this decline. According to studies on broadcast radio and television ownership conducted by Free Press in 2006 and 2007, women ownership and minority ownership are at extremely low levels in the broadcast radio and television industries (Turner & Cooper, 2007).
When the marketplace of ideas is controlled by a handful of media conglomerates, localism and public interest may be hindered. Due to the relaxation of media ownership rules at both local and national levels, radio and television station groups and newspaper chains were able to acquire more outlets. In many local markets, there are fewer and fewer locally owned radio and television stations or newspapers. Corporate owners are mostly profit driven, and centralizing operations is one of their common practices for the purpose of cost saving. Therefore, interest in local matters and public interest may not be incorporated in the station group or newspaper chains’ daily operation.
The development in communication technologies made it technologically possible and economically feasible for media conglomerates to establish distribution and production networks across continents. A number of U.S. media conglomerates that dominate the U.S. media markets, along with a few Asian and European media conglomerates such as Sony Corp., Bertelsmann, Vivendi, and Pearson, dominate the global media landscape. These media conglomerates have operations worldwide and distribute their content or provide services to a world audience.
Different countries have different approaches to foreign ownership in media. Some countries encourage foreign ownership for the sake of cultural diversity. The United Kingdom allows foreign companies, especially non-European companies, to invest in media in order to introduce new perspectives to the British media. On the contrary, some countries have passed regulations to limit foreign companies’ equity of media to a minority role and thus to control foreign ownership in media in their countries. For example, the Chinese government only allows foreign companies to provide certain media services via joint ventures with Chinese companies and has passed regulations to restrict foreign companies to minority equity holders.
Capital and Financing of Media Firms
Most media firms need to raise capital to support daily operations, purchase equipment and facilities, and acquire other media properties. The process of raising capital is different for privately owned media firms and publicly traded media firms. Capital can be directly invested in privately owned media firms, whereas capital can only be invested in publicly traded media firms in stock markets. For example, investors cannot invest directly in Hearst Corporation, which is a private company, but can invest in the publicly traded McClatchy Company through share purchase in a stock market. Capital markets play a critical role in media firms’ growth and expansion due to the large amount of capital required for media start-ups and for acquiring media properties. Capital markets are essential for media firms that intend to acquire other media properties. Without capital markets, it would be impossible for media companies to grow.
Media firms use a variety of financial agreements, such as mergers, acquisitions, leveraged buyouts, spin-offs, and others. Media firms employ these financial agreements to improve performance and pursue growth opportunities. Mergers and acquisitions are very commonly used by large media firms seeking growth and expansion. A merger refers to the combination of two companies. In a merger, two companies agree to combine, and the new entity retains all the assets and liabilities of both companies when the transaction is completed. In an acquisition, one company acquires the operating assets of another.
Liberalizing media ownership regulation has removed some of the conventional regulatory barriers for mergers and acquisitions. Since the passage of the Telecommunications Act of 1996, the number of mergers and acquisitions in media industries has increased, and the average value for these transactions has been increasing too. Capital markets make mergers and acquisitions possible for media firms—media firms use capital borrowed from capital markets to acquire other media firms. The influx of capital into the media markets, and therefore a large scale of mergers and acquisitions in media industries, led to the increasing concentration of media ownership.
Characteristics of media markets, such as strong cash flow dynamics, relatively low capital expense, and high growth rate are appealing to investors. Private equity firms showed an increasing interest in media markets and invested in a number of billion-dollar deals involving media firms since the late 1990s. For example, the buyout of Tribune Co. by the private investor Sam Zell, completed in December 2007, was valued at $4.3 billion; the buyout of Thomson Learning Inc. by an investor group, announced in July 2007, was valued at $7.8 billion. Private equity firms eventually sell off their investments. This is one of the factors that contributed to the increase in change of hands of media properties.
The first section of this chapter described the three key approaches to studying media economics, including microeconomics, macroeconomics, and critical perspective. Microeconomics, which examines specific aspects of the economic system, including individual markets, firms, or consumers, is the approach guiding the majority of media economics studies. The SCP paradigm is the most commonly used analytical framework in media economics. The fundamental assumption of this framework is that there is a causal link from market structure to firm conduct to firm performance. Market structure is the focus of most media economics studies in the I/O tradition. Other theoretical domains applied in media economics include concentration studies, niche theory, relative constancy, demand studies, and others.
The majority of media economics studies are empirical research. With different theoretical domains, media researchers use a variety of quantitative and qualitative research methods to examine research questions and hypotheses. Some of the common research methods employed in media economics studies include trend analysis, survey, content analysis, intensive interviews, case study, and secondary data research. Media researchers use these methodological approaches to investigate media firms, industries and markets, audiences, and advertisers.
In the second section, media ownership issues were discussed, including media ownership regulation, concentration of media ownership, and capital and financing of media firms. Media ownership regulation restricts media ownership at both local and national levels to prevent concentration of economic power and to promote diversity of voices. Emerging issues in media ownership regulation include whether or not the industry-specific regulatory approach is still appropriate in the convergence of media industries and whether and how the Internet should be subject to media ownership regulation.
The relaxation of media ownership regulation, combined with development in communication technologies and the increase in investments in media markets, led to more mergers and acquisitions in media industries and thus media consolidation, in the form of horizontal integration or vertical integration. On the one hand, media consolidation can improve the economic efficiencies of media firms due to economies of scale or economies of scope; on the other hand, it can hinder competition, diversity of voices, and localism.