Alan B. Albarran - Sage Publications

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Media economics is a field of study that has experienced considerablegrowth and development over the past 40 years. Miller and

Gandy (1991) identified 351 articles published between 1965 and 1988in several key journals (the Journal of Broadcasting and ElectronicMedia, Journalism and Mass Communication Quarterly, and theJournal of Communication) that focused on “some economic aspect ofcommunication” (p. 663).

Media economics involves the application of economic theories, con-cepts, and principles to study the macroeconomic and microeconomicaspects of mass media companies and industries. Concomitant with theincreasing 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 literatureencompasses a variety of methodological approaches involving bothqualitative and quantitative methods and statistical analysis, as well asstudies using financial, historical, and policy-driven data.

This chapter focuses on the topic of media economics by organizingitself around four separate sections. The first section examines the his-torical development of the field of media economics, tracing its roots tothe founding of economics. The second section centers on theoreticaland methodological dimensions of media economics. The third sectionaddresses concepts important to the study of media economics. Thefourth and final section reviews contemporary issues confronting mediaeconomics scholars. Illustrations will be drawn from the United States.

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♦♦ Economics:Historical Development

To understand the historical developmentof the field of media economics, one mustfirst begin with the study of economicsitself. The initial literature on economicthinking began to evolve in the time periodbetween 1500 and 1800, with much of theearly work occurring in Western Europe(Landreth & Colander, 1989).

Mercantilism represents the earliestform of economic thought, originating inthe 16th century. Mercantilists equated anation’s wealth with the accumulation ofgold and silver. If nations lacked mines,they could acquire the precious metals viatrade and commerce. This led to politicalintervention in the market via tariffs andsubsidies, elevating commercial interests tonational policy.

Physiocrats, a group of philosophers in18th-century France, rejected mercantilismin favor of agriculture and called for a pol-icy of laissez-faire, or minimal governmentintervention in the market. The physiocratswere among the first to view the economyas 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 ofwritings in 1776 commonly referred to asThe Wealth of Nations (Smith, 1937).Smith defined land, labor, and capital as thethree factors of production and the majorcontributors to a nation’s wealth. Interest-ingly, Smith referred to the growing disci-pline as political economy, a term usedmuch differently in contemporary economicthought (see Chapter 15, this volume, for acomplete discussion of political economy).

Along with Smith, David Ricardo’s(1953) theoretical contributions related toland, rent, and capital; Thomas Malthus’swork on population theory; and the laterwritings of John Stuart Mill (recognized fornoting the distinction between allocation ofresources, distribution of income, and thetheory of value) collectively formed the

classical period of political economy. Thework 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: marginalisteconomics and Marxism. Classical scholarsbelieved price was determined by the costs ofproduction, whereas marginalist economistsequated prices with the level of demand, andin Marxism, price was controlled by the rul-ing class. The marginalists contributed thebasic analytic tools of demand and supply,consumer utility, and the use of mathematicsas analytical tools—all forerunners to thedevelopment of microeconomics. Marginal-ists also demonstrated that given a freemarket economy, the factors of production(land, labor, and capital) were importantin understanding the economic system. Themarginalists viewed value in a more rigorousmanner than the classical school.

The Marxist school, built on the writingsof Karl Marx (1926), identified labor as thesource of all production. Marx rejected themarket system that allowed the capitalists,the owners of the factories and necessarymachinery, to exploit the working class anddeny them a fair share of the goods pro-duced. Marx predicted the fall of capital-ism, as the disenfranchised labor classwould ultimately rebel, overthrow the cap-italists, and seize the means of production.

At the beginning of the 20th century,institutions of higher learning began toembrace the field, and the modern label of“economics” was used to represent coursesof study in both America and Europe.At the same time, the focus of economicresearch was shifting from a classicalapproach to neoclassical economics.Neoclassical economics differed in its useof both analytical tools and mathematics(primarily differential calculus) to understandmarket behavior and price determination(Ekelund & Hérbert, 1990). Another impor-tant contribution of neoclassical economicswas its refined interest in demand theory, asmuch of classical economics tended to focusonly on production and supply. Many of


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the principles developed in neoclassicaleconomics became the basis for the broaderarea of microeconomics.

The writings of William Stanley Jevons(1957), Carl Menger (1950), and LeonWalras (1954), along with the seminalcontributions of Alfred Marshall (1961),helped fuel the growth of economics asa field during the neoclassical period.Marshall, perhaps one of the most prolificeconomic scholars, influenced numerousother graduate students during his tenureat Cambridge, forming the Marshallianapproach to the study of economics.Marshall refined many aspects of economictheory and also made advances in the studyof industry supply, consumer surplus, elas-ticity of demand, and resource allocation(Ekelund & Hérbert, 1990).

The 20th century also saw the field ofeconomics move in other directions. Pre-viously, market structure was theorized torepresent monopoly, duopoly, or perfectlycompetitive markets. Edward H. Chamber-lin (1950) theorized a new form of marketstructure, labeled as monopolistic competi-tion. Monopolistic competition centered onthe role of product differentiation, whichoffered application to a number of differentmarkets. Both more traditional and generalin its analysis as compared to Chamberlain’s,Joan Robinson’s (1969) theory of imperfectcompetition offered two important contribu-tions: (a) analysis of monopoly and price dis-crimination and (b) the market for labor.The study of welfare economics (Pigou,1932), or how economics can be used to pro-mote better social policy, also came of ageduring the neoclassical period.

Significant changes in 20th-century eco-nomic thought were realized with the devel-opment of macroeconomics. Here the focusshifted to aggregate economics, whichencompasses the gamut of monetary andmarket principles. Macroeconomics becamea catalyst for fiscal policy decisions in bothWestern Europe and the United States dur-ing the 1950s and 1960s. John MaynardKeynes, a student of Alfred Marshall andthe founder of Keynesian economics,

became the focal point for the developmentof macroeconomics.

Keynes’s writings were numerous, buthis most influential work was The GeneralTheory of Employment, Interest, andMoney (Keynes, 1936). Keynes’s argumentswould provide the pivotal rationale for theuse of government spending and taxingto stabilize the economy. Keynes arguedthat government would spend and decreasetaxes when private spending was insuffi-cient and threatened a recession; conversely,government would reduce spending andincrease taxes when private spending wastoo great and threatened inflation. Keynes’swork, focusing on the factors that deter-mine the total spending process, remains atthe core of modern macroeconomic analysis.

Other scholars who helped refine macro-economics as an area of study and eco-nomic thought (Ekelund & Hérbert, 1990)included Irving Fisher (money, prices, andstatistical analysis), Knut Wicksell (publicchoice), A. C. Pigou (welfare economics),and Milton Friedman (economic policy andconsumption). Today, macroeconomics isconcerned with a number of topics, includ-ing economic growth, employment, aggre-gate production and consumption, inflation,and political economy (Albarran, 2002).Additional areas of study that coincidedwith this time period included the fieldof international economics, better methodsof applied economics, and the adoption ofmore powerful analytical and statisticaltools in econometrics.

Economic theories and economicthought are constantly changing and evolv-ing. By the end of the 1960s, growing infla-tion and changes in productivity began topush economic thought in new directions.Monetarist theories reemphasized the impor-tance of growth in the money supply as adeterminant of inflation. Rationale expecta-tions anticipate government intervention inthe economy, arguing that the market’sability to anticipate government policyactions limits their effectiveness.

Finally, “supply-side” economics revis-ited a chief concern of the classical



school regarding economic growth as afundamental prerequisite for improvingsociety’s well-being. Supply-side economicsemphasizes the need for incentives to saveand invest if a nation’s economy is to pros-per, as well as the danger of canceling outthose incentives through high taxation.

This review of major historical develop-ments in economic thought illustrates therich diversity of philosophies and theoriesfound in the field of economics. As thestudy of economics became more refined,scholars began to investigate many differentmarkets and industries, applying economicconcepts and principles to different fields,including media.

♦♦ The Developmentof Media Economics

The rise of the mass media paved the wayfor the study of media economics. Researchbegan to emerge during the 1950s. Themedia industries provided all of the ele-ments required for studying the economicprocess. Content providers, offering infor-mation and entertainment, became the sup-pliers, whereas consumers and advertisersformed the demand side of the market.Various regulatory agencies (e.g., FederalCommunications Commission [FCC],Federal Trade Commission, and other gov-ernment entities) affected macroeconomicmarket conditions, and the relationshipamong suppliers in various industries cre-ated microeconomic market conditions.

Many of the early media economistsaddressed microeconomic concepts. Ray(1951, 1952) examined newspaper competi-tion and concentration, whereas Reddaway(1963) reviewed economic characteristicsof newspapers as firms. Steiner’s (1952)classic work on competition in radioinvolves the application of microeconomicconcepts to the radio industry. Early studiesof the television industry examined marketstructure (Levin, 1958), competition withother media (Berlson, 1961), and the

impact on advertising revenues (Tijmstra,1959–1960).

Concentration of ownership has beenanother topic studied across media indus-tries. Representative studies of mediaconcentration across industries includeAlbarran and Dimmick (1996), Bagdikian(2000), and Compaine (1985b), along withspecific studies of industry concentration innewspapers (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 examinedin regard to management policy in thenewspaper industry. Key works includeBlankenburg’s (1982, 1983) research oncontrolling circulation costs and pricingbehavior and the impact on financial per-formance (Blankenburg & Ozanich, 1993).Further inquiry into press ownership andcompetition continues to develop, includingthe market for online newspapers (see Chyi &Sylvie, 2001; Lacy, Shaver, & St. Cyr, 1996;Lacy & Simon, 1997).

Other studies have examined variablessuch as media competition (Compaine,1985a; Dimmick & Rothenbuhler, 1984),consumer expenditures and the principleof 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 economicsgained further legitimacy by the debut ofthe Journal of Media Economics (JME),established by the first editor of the journal,Robert G. Picard. Initially published twice ayear, JME moved to three issues a year by1991 and quarterly distribution in 1994.The Journal of Media Economics hasemerged as the premier journal for thelatest research in the field. In addition toarticles in scholarly journals, a number ofbooks and edited volumes have contributedto the development of media economics.1

Our focus now shifts to the theoretical andmethodological dimensions of the field.



♦♦ General Theoreticaland Methodological Issues

Media economics research combines avariety of theoretical and methodologicalapproaches. The following paragraphs inthis section detail some of the most widelyused theoretical and methodological toolsused 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. Theseareas involve microeconomic theories,macroeconomic theories, and studiesrelated to political economy. Much of theliterature 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 amuch broader focus, examining such topicsas labor and capital markets, as well as pol-icy and regulatory concerns. The literaturebase involving macroeconomic theories ismuch smaller than that using micro-economic theories.

Political economy of the media alsoencompasses many areas, emerging as aresponse to positivist approaches in main-stream economics. The mass media became anatural area of study, drawing scholars fromsociology and economics as well as commu-nications (Golding & Murdock, 1997). Fordiscussion 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 usedin the study of media economics.

MICROECONOMICTHEORIES: INDUSTRIALORGANIZATIONAL MODEL

Among the most widely used frameworksfor the study of media economics is the

industrial organization model, developedby Scherer (1980), which in turn drew onthe contributions of Bain (1968) and otherneoclassical economists. The model offers asystematic means of analyzing manyabstract concepts encountered in the studyof a specific market. Scherer’s explication ofthe market structure-conduct-performance(SCP) model as a tool for analysis has beenwidely used in the study of media marketsand industries (Wirth & Bloch, 1995).

In its simplest form, the industrial orga-nizational model posits that if the structureof the market is known, it allows explana-tion of the likely conduct and performanceamong firms. Each of the three areas (SCP)can be further defined by considering spe-cific variables associated with each part ofthe model. For example, in terms of marketstructure, the variables used for analysisinclude the number of sellers/buyers in themarket, product differentiation, barriersto entry, cost structures, and the degree ofvertical integration (Albarran, 2002).

Gomery (1989) details the utility of theindustrial organization model for mediaeconomics scholarship, echoed by Busterna(1988), Litman (1988), and Wirth andBloch (1995). Several scholars have focusedon just one part of the model, such asmarket 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 marketstructure: monopoly, oligopoly, monopolis-tic competition, and perfect competition.

The appeal of this approach lies in itssimplicity and parsimonious nature. How-ever, the defining of a market structure has



become increasingly complicated due toincreasing consolidation across the mediaindustries and technological change. Forexample, the market for television could bethought of as simply the market for broad-cast television or could encompass a muchwider definition to include cable and satel-lite networks, premium and pay-per-viewservices, and VCR/DVD use. Bates (1993)and other scholars (Albarran & Dimmick,1996) suggest that market structure cannotreally be defined clearly using these broadand simplistic labels.

MEDIA CONCENTRATION

Another area of theoretical developmentrelates to media concentration. In theUnited States, antitrust laws are designed topromote competition and limit concentra-tion, making this an important area ofinquiry for both public and social policy.

Media concentration is usually exam-ined in one of two ways. Researchers gatherexisting data on firm/industry revenuesto measure the degree of concentrationby applying different methodological tools(e.g., concentration ratios, indices, or theLorenz curve [see Albarran, 2002]), orresearchers track concentration of ownershipamong the media industries (see Bagdikian,2000; Compaine & Gomery, 2001; Howard,1998). Regardless of the methods used,research documents increasing consolida-tion across all areas that make up the mediaindustries, with many industries reaching“highly concentrated” status, indicatingthat the industry is dominated by a handfulof firms (see Albarran, 2002; Albarran &Dimmick, 1996).

MACROECONOMIC THEORIES

There is a much more limited body ofliterature that involves macroeconomicanalysis in the field of media economics.For example, some scholars have offered

descriptive analysis of labor trends inparticular media industries (Harwood,1989).

Most macroeconomic research is relatedto policy and regulatory analysis, usuallyconducted at a national level of analysis.Policy studies typically attempt to analyzethe impact of specific regulatory actions onexisting markets and industries. Represen-tative studies include Bates and Chambers(1999), Ford and Jackson (2000), andLutzhöft and Machill (1999).

METHODOLOGIES USED INMEDIA ECONOMICS RESEARCH

Media economics research is very eclec-tic in the sense that many different types ofmethod are used to answer research ques-tions and investigate hypotheses. However,much of the literature employs one of fourmethods: trend studies, financial analysis,econometrics, and case studies.

Trend studies compare and contrast dataover a time series. In assessing media con-centration, for example, scholars typicallystudy concentration indices over time togauge the impact of different policy deci-sions or other actions on media ownership.Most trend studies use annual data as theunit of analysis. Trend studies are usefuldue to their descriptive nature and ease ofpresentation, and they aid in analyzing theperformance of media companies andindustries. Representative trend studiesinclude Dimmick and McDonald’s (2001)look at network radio, Greco’s (1999)examination of book publishing mergers,and Lewis’s (1995) study of changes innewspaper pricing and subscription costs.

Financial analysis is another commonmethodological tool used in media econom-ics research. Financial analysis can takemany different forms and use differenttypes of data. The most common datainclude information derived from financialstatements and the use of various types offinancial ratios.



For example, in the United States, allpublicly traded companies operating mustfile various types of financial documentsregularly with the Securities and ExchangeCommission. Individual companies alsodistribute annual reports to their sharehold-ers that contain a number of financial state-ments and other data. The Internet is animportant source of financial data forresearchers, easing the ability to collect andanalyze data. Financial analysis is muchharder to conduct on privately held compa-nies, which are not required to discloseany financial information, and with compa-nies domiciled outside the United States,where accounting practices and currencyexchange rates vary.

Econometrics involves the use of statisti-cal and mathematical models to verify anddevelop economic research questions,hypotheses, and theory. Econometricshas been more prevalent in the generaleconomic literature because most mediaeconomics researchers coming from com-munication or journalism backgrounds lackthe mathematical knowledge to pursueeconometric modeling. Studies by Kennertand Uri (2001) and Miller (1997) representresearch involving econometric analysis.

Case studies represent another usefulmethod in media economics research. Casestudies are popular because they allow aresearcher to embrace different types ofdata as well as different methods. Casestudies in media economics research tend tobe very targeted and focused examina-tions. Representative case studies includeMcDowell and Sutherland’s (2000) analysisof branding, Nye’s (2000) review of litiga-tion in music publishing, and Gershonand Egen’s (1999) case study involvingretransmission consent in the cable televi-sion industry.

Methods used in media economicsresearch are not confined to these. Otherscan be found as noted above, such as policyanalysis of regulatory policy and action onmedia markets and industries. Historicalresearch is also found, although with less

frequency (e.g., Dimmick & McDonald,2001; Wolfe & Kapoor, 1996).

♦♦ Forces DrivingMedia Industry Change

The previous overview of the historical,theoretical, and methodological dimensionsof the field of media economics provides acontext for examining some of the keyconcepts important to media economicsresearch. Prior to reviewing specific con-cepts, a review is warranted of the forcesdriving media industry change.

Four external forces continue to drivechange across the media industries, leadingto evolution of the study of media econom-ics. These four forces consist of technology,regulation, globalization, and socioculturaldevelopments. Each is briefly reviewed inthe following paragraphs.

TECHNOLOGY

Because media industries are heavilydependent on technology for the creation,distribution, and exhibition of variousforms of media content, changes in technol-ogy affect economic processes between andwithin the media industries. There are threecritical areas where technology has donethis. The first is the initial evolution of com-puters. Computing technology improvedefficiency among workers in many areasand greatly minimized storage requirementsfor paperwork as well as increasing oppor-tunities for communication (e-mail) andother software applications.

The second technological area, coupledwith the rise of computing technology, hasinvolved the transition from analog to digitalcontent. As computers became more power-ful and sophisticated, the ability to converttext and graphics digitally soon led to digitalaudio and video files. And once content isdigitized, it can easily be distributed and



shared with others. The media industriesquickly moved to converting to a digitalworld, first in print and later in electronicmedia.

The third area of technological impactwas and continues to be with the develop-ment of the Internet. First used primarily toexchange textual information, the advent ofhypertext language led to the developmentof the World Wide Web, forever changingthe user’s experience with the Internet.Some media companies quickly recognizedthe power of the Internet, building Websites to attract consumers and advertisers,whereas other companies floundered intheir initial attempts to understand howbest to use the new medium. The Internetoffers media companies another way toconnect audiences and advertisers, as wellas a means to build and enhance branddevelopment. By the late 1990s, the abilityto stream audio and video files over theInternet was introduced, along with the riseof broadband services in the form of cablemodems and digital subscriber lines. Earlyin the 21st century, wireless access waspositioned to be the next major Internetinnovation. The Internet also representsmajor challenges regarding intellectualproperty and copyrighted content.

REGULATION

Regulatory actions can always affectcompetitive market forces, and media indus-tries are no exception. During the 1980s and1990s, U.S. media industries benefited froma combination of deregulatory actions aswell as liberalization of former policies.During the 8 years of the Reagan adminis-tration, the FCC took on a marketplaceapproach to regulation. Ownership limitswere increased, and burdensome rulesregarding program requirements and publicinterest standards were either removed orrelaxed.

The 1996 Telecommunications Act, themost significant U.S. communicationsregulation passed since 1934, sought to

eliminate competitive barriers in thebroadcast, cable, and telecommunicationindustries. Ownership caps were relaxedyet again, and companies operating in oneindustry could now compete in others (e.g.,cable companies could now offer telephoneservice, and telephone companies couldoffer cable-like services). Other rulingspassed in 1998 and 1999 to stimulate com-petition in the emerging direct broadcastsatellite (DBS) market allowed satelliteoperators to offer local television signals inaddition to their regular lineup of tradi-tional cable and pay networks.

These regulatory actions paved the wayfor increasing consolidation across U.S.media industries. For example, in the radioindustry, some 75 different radio compa-nies eventually were merged or acquiredinto one of two companies: Clear ChannelCommunications or Infinity (Viacom). Intelevision, Viacom acquired the assets ofCBS, King World, UPN, and BlackEntertainment Television (BET). AmericaOnline merged with Time-Warner, creatingthe first company combining “old” and“new” media. The French utility companyVivendi, in a span of just 2 years, acquiredthe media assets of Seagram Universal andthe USA Networks to become a globalmedia giant, along with the likes of Disney,News Corporation, and Bertelsmann AG.

Court decisions, coupled with regulatoryactions, also affect media markets. In early2002, the U.S. Court of Appeals ruled infavor of separate cases brought forward byAT&T and Viacom regarding government-mandated ownership caps, declaring thatthe limits imposed by the FCC on cable andtelevision station ownership were arbitraryand capricious. Trends strongly suggestthat these decisions may lead to removal ofall ownership caps at the national level formany media industries, leading to evenmore mergers and acquisitions. In a relatedmatter, the FCC is expected to remove oldrestrictions barring newspapers from own-ing broadcast stations in the same marketsin which they operate. If eliminated, thecross-ownership rules would give publishing



companies the opportunity to acquirebroadcast stations and cable systems withinthe markets they serve, leading to the devel-opment of multi-media-based companiesoffering content and advertising acrossmultiple mediums.

GLOBALIZATION

With many American media marketsheavily saturated, the global marketplace hasbecome even more important in generatingrevenues for media firms and industries.Media products are often created with globalaudiences in mind, which is why so muchcontent contains sex and violence—two top-ics that are easily understood across cultures.

Globalization of media content beganwith motion pictures and magazines butthen expanded into other arenas, includingtelevision programming, VHS and DVDsales and rentals, and sound recordings. TheUnited States has been the primary exporterof content, but the rise of internationalmedia conglomerates such as NewsCorporation, Vivendi Universal, Sony, andBertelsmann demonstrated that a global oli-gopoly of media companies was increasinglydominating the marketplace for informationand entertainment goods and services.

Globalization presents a challenge formedia economics researchers, as accountingpractices and regulatory structures differfrom country to country. There are few reli-able sources of global financial data relatedto media. Nevertheless, it is critical thatscholars recognize that media companiescompete and operate in a global as well asdomestic marketplace for audience shareand advertiser revenues.

SOCIOCULTURALDEVELOPMENTS

Changes in demography and otheraspects of society also affect the mediaindustries and, ultimately, media economics.As noted, media content is often created

with the desire to reach global audiences, soconsumer tastes and preferences are criticalin understanding audience needs and wants.

In addition, U.S. media users are chang-ing. Census data clearly track the transitionof the United States to a multiculturalsociety. This has led to pressures fromgroups such as the National Advancementfor the Association of Colored People(NAACP) to present network televisionprogramming that better reflects the actualmakeup of society. In addition to becominga nation of color, Americans are livinglonger and desire more content gearedtoward the needs of a mature audience.Aging baby boomers will demand morecontent devoted to issues related to retire-ment, health, travel, and leisure. Some cablenetworks were already beginning to addressthis market, but more will follow suit.

Audiences have an insatiable appetite formedia-related content and services. Aspeople live longer and obtain more discre-tionary income, spending on media willlikely rise. These shifts in audience compo-sition and makeup will present new pres-sures on media firms to develop contentthat will appeal to these unique and differ-ing audiences.

Having reviewed these four macro-levelforces, we now turn to some of the key con-cepts found in the study of media econom-ics: media products, the dual-productmarketplace, branding, competition, eco-nomics of scale and scope, mergers andacquisitions, and labor.

♦♦ Standard Concepts

MEDIA PRODUCTS

Media content, in the form of televisionprograms, movies, sound and video record-ings, and print (e.g., books, magazines,newspapers), represents some of the prod-ucts supplied by media firms. Mediaproducts can be broadly classified into cate-gories of information (news-related content)



and entertainment (drama, comedy, action,music, games, etc.). Massive consolidationacross the media industries has given rise tovertically integrated conglomerates (mean-ing they control many aspects of production,distribution, and exhibition) such asViacom, AOL Time-Warner, Disney, andNews Corporation. Media products such astelevision programming, feature films, andsound recordings can be repeatedly used andmarketed to both audiences and advertisers,forming the “dual-product marketplace.”

DUAL-PRODUCTMARKETPLACE

Many media industries function in adual-product marketplace. That is, mediafirms produce or supply information andentertainment products that are consumedor demanded by audiences and, in mostcases, advertisers. The dual-product mar-ketplace is a unique characteristic of themedia industries, allowing for separatetransactions and potential revenue streamsfrom both audiences and advertisers. Mediafirms 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 positivecash flow (revenues less expenses, deprecia-tion, taxes, and interest) to increase thevalue of their firm.

BRANDING

This is another key concept in mediaeconomics. Media companies use brandingas a way to build awareness and identityconnected with content products. Mostaudiences and advertisers recognize brands,and larger media companies have investedbillions of dollars to develop and acquiredifferent brands. Viacom is a multidivi-sional media company with a large cadre ofrecognizable 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 marketenvironment.

COMPETITION

The dual-product marketplace operatesat the distribution and exhibition levelsonce products are actually created. Prior tothis, there are many competitive processesat work. For example, competition existsfor ideas by writers that can be turned in tosuccessful scripts for television programsand films. Securing experienced photogra-phers, producers, directors, and editors forthe production process involves competi-tion, as well as the demand for the bestavailable talent. An interesting aspect ofstudying media competition is the fact that,throughout the history of the media, nonew media have completely displaced olderforms of media (Dimmick & Rothenbuhler,1984). Typically, some type of evolution orrepositioning takes place, but traditionalmedia learn to coexist and survive withnewer media forms.

ECONOMIES OFSCALE AND SCOPE

Economies of scale and scope refer to thecost efficiencies realized by the operation ofmedia firms in different venues. Economiesof scale are realized when the average costdeclines as multiple units of a product areproduced. For example, the fixed and vari-able costs to produce a single newspaperwould be very high, but the cost per news-paper drops dramatically as multiple papersare printed. Likewise, as radio stations haveconsolidated, there is no longer need formultiple offices and administrative andengineering staff.



Economies of scope allow multidivisionalconglomerates to realize cost-efficienciesacross horizontal media markets. Viacomhas the ability to produce a motion picturevia its Paramount Studios, air that movie onits pay channel Showtime, reap additionalrevenues from rentals via Blockbuster, andcross-promote the film through other ownedprogramming and publishing outlets.

MERGERS AND ACQUISITIONS

The composition of the media industrieshas undergone considerable change due tomergers and acquisitions across many mar-ket sectors. Mergers and acquisition activitysurged during the 1980s and 1990s dueto a number of macroeconomic processes,including relaxation of ownership provi-sions, low interest rates available for financ-ing, strong business performance, andtechnological convergence (see Ozanich &Wirth, 1998). As policymakers continuedto relax ownership limits and more mergerstook place, public interest watchdog groupsbecame ever more concerned, fearing thegrowing consolidation of media would leadto constriction of news and informationsources needed to nourish democracy.

LABOR

Media industries depend on talentedtechnical, creative, and managerial person-nel to function effectively. Personnel repre-sent the greatest single expense for anyorganization. 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 manyU.S. media industries. Various guilds andcraft unions negotiate minimum pay gradesfor everything from scripts to directing. Acommon management responsibility isnegotiating contract renewals, with unions

representing media workers to avoid strikesand labor disruptions.

Technology continually changes thelabor market for media firms, evidenced bythe influx of computing systems used formany different applications. Media compa-nies either invest in the development ofpersonnel skilled in these new areas, or theymay choose to outsource these responsibili-ties to firms specializing in specific appli-cations. Labor markets are affected byconsolidation, which typically creates a lossof some repetitive jobs, as well as generallabor trends.

♦♦ ContemporaryIssues in Media Economics

There are a number of issues scholars needto address in their efforts to further developthis important area of research. This finalsection considers three issues of particularrelevance affecting media economics at thebeginning of the 21st century: theory build-ing, defining market structures more pre-cisely, and better methods.

BROADER THEORETICALDEVELOPMENT

Media economics research has primarilydrawn on microeconomic concepts and prin-ciples, with a heavy reliance on the indus-trial organization model. Although thisemphasis clarifies the relationship of vari-ous concepts in microeconomic analysis, itlimits the development of the field. As aresult, other economic theories, which havepossible application to the mass mediaindustries, have been ignored, especiallythose found in macroeconomics (Chambers,1998; Lacy & Niebauer, 1995). Forexample, understanding the global consol-idation of many media markets is anarea that would be strengthened usingmacroeconomic approaches. The impact ofglobal consolidation on general patterns of



employment, economic development, andinflation are just three potential topics ofinterest.

In addition to drawing on the breadth ofexisting economic theories, scholars shouldconsider new theoretical inquiries thatcould draw on multiple methods of investi-gation. The interplay of business structures,regulation, technology, and social policyimplications across the media industriesoffers a unique playing field for scholars togenerate new theories and hypotheses. Todo so, researchers must be willing to moveaway from simply describing specific firms’structure and performance to more analyti-cal and investigative analysis.

Theory building is never easy in anyfield, but given the rapid pace of change inthe media industries, no area could benefitmore from fresh ideas and news perspec-tives than media economics.

DELINEATING THE MARKET ANDDEFINING MARKET STRUCTURE

A second issue involves better definitionof what constitutes a market and expandingour understanding of market structure.Media economics research must grapplewith the evolving definition of what consti-tutes a media market, a critical issue giventhe convergence under way across themedia industries. Markets can no longer bedefined cleanly. In reality, media companiestend to supply products in many differentmarkets, in competition with otherproviders. Yet the tendency among policy-makers and researchers is to still treat mar-kets under traditional labels, such astelevision, newspapers, or motion pictures.This approach fails to recognize the realitiesof the media marketplace and can lead toinaccurate assumptions over which firmsdominate a particular market.

One answer to this dilemma may be toconsider the functions of a firm rather thanfocusing on the final product. If we begin tothink of Viacom as a company with multiplebrands engaged in content creation anddistribution, it perhaps offers a clearer

interpretation of what the company wasabout and how it sought to be a leader inmany different markets: network television,program syndication, cable networks, radio,and so on. Likewise, EchoStar was primar-ily a distribution company and the leader indirect-to-home satellite subscriptions, com-peting with the likes of AT&T/Comcast,Cox, and AOL Time-Warner in the marketto capture multichannel households. Con-ceptually, this makes much more sense thanto say AT&T/Comcast was the leading cableoperator and EchoStar the leading satelliteprovider.

Coupled with the need for better under-standing of the market is a need to expandor redefine the theory of the firm. Fordecades, media economists have tried towork within the three categories found inthe mass media: monopoly, oligopoly, andmonopolistic competition (Albarran, 2002).Yet other types of structures are evolving.Duopoly, a market with two primary firms,is becoming more common in media mar-kets. U.S. examples at the beginning of thecentury included the market for newnational digital satellite radio services, XMRadio and Sirius (Albarran & Pitts, 2001),and the market for Internet browsers,involving Microsoft Internet Explorer andNetscape.

But what was truly emerging in manymedia industries was a two-tiered marketstructure, with a limited oligopoly of firms(between three and five) controlling between75% and 90% of the revenue/market shareand a number of smaller firms on the othertier fighting for a small percentage of theremaining market share. Media industriesrepresentative of this type of evolving struc-ture are the motion picture and recordingindustries, television networks, radio, con-sumer book publishing, and magazine pub-lishing (Albarran & Dimmick, 1996).

BETTER METHODS OF ANALYSIS

Improvements in theory developmentand redefining of the media market andmarket structure must be realized in



conjunction with enhancements in methods.In particular, one area deserves attention:measures used to assess competition andconcentration.

Measures to assess competition and con-centration have primarily relied on one oftwo available tools: concentration ratios andthe Herfindahl-Hirschman Index (HHI)(Albarran, 2002). Concentration ratios pro-vide a parsimonious way to measure con-centration, using either the top four firms orthe top eight firms in a market. Basically, ifthe top four firms control more than 50%of the market revenue, or if the top eightfirms control more than 75% of the revenue,the market is considered highly concentrated.Although the measure is useful, it fails toaddress inequality of market shares. Forexample, using the four-firm ratio, one couldencounter one firm dominating the marketwith 45% of the revenues, with the otherthree firms holding a combined 5%. In sucha case, one might conclude the market wasconcentrated, but this would fail to offer acomplete picture.

The HHI index seeks to be much morerigorous. The HHI squares the market sharefor each entity and then generates a totalnumber for all the firms. Herein, however,lies a key problem. Researchers must havedata on every firm in a market to calculatethe index. Often, researchers lack access todata from all the firms, especially from pri-vately held companies. Furthermore, calcu-lating the index can be unwieldy.

More problematic for both measures isthat they are designed only to measure con-centration within a market segment. Thereare no generally accepted measures avail-able to assess concentration across markets(see Albarran & Dimmick, 1996), yet this isan area of key concern. AOL Time-Warner,Disney, Viacom, and other media giantsmay have limited market share within indi-vidual market segments, but no tools existto measure their combined influence acrossmarkets. With multiproduct firms engagedsimultaneously in many media markets,developing measures to assess within-industry concentration and competitionare badly needed.

♦♦ Conclusions

Media economics provides a means tounderstand the activities and functions ofmedia companies as economic institutions.Only by understanding individual mediacompanies as business entities can one fullyappreciate their conduct within society. Anunderstanding of media economics strength-ens our understanding of the role andfunction of mass media in society. At atheoretical level, media economics comple-ments existing mass communication theoryby adding important dimensions regardingthe structure, conduct, and performance ofmedia firms and industries; the interplay ofeconomics, policy, and regulation; and audi-ence behaviors and preferences.

As a field of scholarship, media econom-ics research offers important contributionsto media studies. Media economics researchfaces many challenges as it attempts to ana-lyze and evaluate the complex and changingworld in which the mass media industriesoperate.

♦♦ Note

1. Research in media economics wasspurred by a number of early volumes, includingthe following: Economic Aspects of TelevisionRegulation (Noll, Peck, & McGowan, 1973);Television Economics (Owen, Beebe, &Manning, 1974); Economics and Freedom ofExpression: Media Structure and the FirstAmendment (Owen, 1975); Beyond Agenda-Setting: Information Subsidies and Public Policy(Gandy, 1982); Who Owns the Media?Concentration and Ownership in MassCommunications Industry (Compaine, 1985b);and Press Concentration and Monopoly: NewPerspectives on Newspaper Ownership andOperation (Picard, Winter, McCombs, & Lacy,1988). Later volumes concentrated on broadercoverage of the field, including MediaEconomics: Concepts and Issues (Picard, 1989);Media Economics: Theory and Practice(Alexander, Owers, & Carveth, 1993); Media



Economics: Understanding Markets, Industriesand Concepts (Albarran, 2002); and GlobalMedia 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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