The Media and Information Ei tEnvironment · • Is Media Management Different? ... •Macro DifferencesMacro Differences •Micro Differences 53. 22 ... Theories of the Information

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The Media and Information E i tEnvironment

© Eli M. Noam, January 25, 2011 1

Long Version

Start of Lecture

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OUTLINE:THE INFORMATION ENVIRONMENT

I. INTRODUCTION• History• Is Media Management

Different?

IV. 8 ECONOMIC MANAGEMENT TOOLS FOR MEDIADifferent?

II. MACROECONOMICS OF THE INFORMATION ECONOMY• Industrial Revolution• Information Revolution• Drivers of Change

III. MICROECONOMICS OF

FOR MEDIA• Selecting Market Niches• Pricing Licenses• Identifying Competitors’ R&D• Content Diversification• Optimal Incentive

Compensation• Capacity Optimization• Cost Analysis of Distribution

i f i i

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THE NEW MEDIA ECONOMY• Information Society• New Business Models• Economic Properties of Media

• Design of Pricing SystemV. CONCLUSIONS

I IntroductionI. Introduction

Eli M. Noam, Media Environment 1515

3

HR Tech Finance

Accounting of

Performance

Resources:

The Media Value Chain

Performance

Strategy Production

IP Creation

Marketing

Pricing

DistributionValue

Creation:

Environment:Info.

Environment DemandLaw &

Regulation

Task of this Lecture:

• Before we get to the nitty-gritty of information and media firms and how to manage them

• We will look at the big picture--


g pthe information environment and its economic characteristics.

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I 1 HistoryI.1. History


The Big Picture

Eli M. Noam, Media Environment 1919http://www.planet-earth.org/images/bluemarble.jpg

5

Q: What was the ld’ lworld’s largest

private company in h 18 h C ?

2020

the 18th Century?

Thurn und Taxis Postal Firm

•Postal Monopoly in Hapsburg

2121http://www.thurnundtaxis.de/nhtml/marstall_index.html

•Postal Monopoly in Hapsburg territories

• Today, forgotten

6

2222

Q: What was the ld’ lworld’s largest

private company in h 19 h C ?

2323

the 19th Century?

7

Hint: Samuel Morse

2424Source: http://lcweb2.loc.gov/ammem/atthtml/mrshome.html

World’s Largest Company in 19th Century

Western Union: Telegraph

2525

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World’s Largest Company in 19th Century: Western Union

• Monopoly in US• started 1851• started 1851• By 2006:

insignificant in communications; telegraph service ended.

2626(http://www.radiosites.com/)

– owned by First Data Corp. as a fund-transfer operation

What was the world’s largest private companylargest private company through most of the 20th

Century?

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Century?

9

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• AT&T–Built and owned 80%

of all telephones and paccess lines in U.S.

–2005: On the ropes, bought out for a mere $16 billion by SBC

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$16 billion by SBC, which renamed itself AT&T Inc. Theodore Vail

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What was the World’sWhat was the World s largest Media

Company, 1920?

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p y,

Hearst Newspaper Chain

3131http://www.discoversandiego.com/features/anderson/images/column20/hearst.jpg http://www.myvillatoscana.com/hearst-castle.jpg

William Randolph Hearst Hearst Castle

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What was the World’sWhat was the World s largest Media

Company, 1950?

3232

p y,

Radio C ti f

3333http://64.237.101.98/images/eBay_Misc/rca_pics/rca_logo1.JPG http://www.cedmagic.com/mem/whos-who/sarnoff-david.jpg

David SarnoffCorporation of America

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• These giant firms have all disappeared.

• Does this tell us something about media companies, and media markets?

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• Does it tell us something about managing media?

• Are media companies and media industries more subject to greater change, greater volatility?


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• The question we will address here now is:

• Is media (and information) management different?


g– Different from management generally


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I.2. Is MediaI.2. Is Media Management

Different?Eli M. Noam, Media Environment 38

Different?38

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

Different from Managing a Beer Brewery? A Submarine

Construction Yard? A Bank?

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


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Two Views on Media Management in comparison to

Management:

• “Too Different”“J t Th S ”

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• “Just The Same”

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

distinct type of industry–Based on creativity, “feel”, intuition, –Or, driven by news and public

affairs, and not only profit-based

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–Instead of being driven by numbers and analytical models like the refrigerator or coal industries.

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Different?

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Is that true? Is media management so different that one cannot apply much from the rest of

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management science?

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• Economists and business researchers are used to almost every industry considering itself to be “different.”

Agric lt re energ health care la firms– Agriculture, energy, health care, law firms, biotech, aviation, banking, lumber, steel, mining, construction, etc, etc, etc.

-- All consider themselves to be “different.”

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•Yet all businesses have major commonalities–Raising funds, select projects, hire employees, arrange for inputs, control costs, create

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outputs, price them, market them, account for the results, etc

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Same Principles

4646

• Technology changes. Economic Laws do not.

47Shapiro, Carl. and Varian, Hal R. “The Information Economy.” Information Rules, Harvard Business School, 1999: 1-18

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• Thus, media industries have many common elementsmany common elements with other industries, too. But, it is easy to jump to the other extreme That

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the other extreme. That there is no difference at all.

The Alternative View M di M ton Media Management: “The Same” as all

Management

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Management

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

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management• But this, too, is simplistic.

Yes, basic management principles apply to all

industries

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• But media industries have some special characteristics that make media management different

• We must understand what they

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are• They are:

•Macro Differences•Macro Differences•Micro Differences

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The Differences are on 2 Levels• 1 The Environment the “macro• 1. The Environment the macro

economy” of the information society• 2. The fundamental business

characteristics of the media and information industries—the “micro


information industries the micro economy” of the information sector.

• These will be the 2 themes of this section.


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Different?






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II. Macro-Economics ofEconomics of

the Information


Economy

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II.1.The Industrial Revolution

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• Industrial Revolution–starting 1770s in England

• Extension of human physical• Extension of human physical strength–steam engine

production machinery

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–production machinery–railroads, cars, planes

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FromMusclePower

6060http://www.hendersonsredware.com/Scrapbook/carrying%20pottery.jpg

Power

http://www.tpwd.state.tx.us/spdest/findadest/parks/texas_state_railroad/

6161

http://www.co.comal.tx.us/Old%20Photos/Comal/CoPN2001-93C.jpg

http://static.flickr.com/53/113924020_d6f3b7a07a_m.jpg

To Machine Power

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Characteristic: Mass Production

6262http://www.pbase.com/image/26683764 http://www.pbase.com/image/26683765

Characteristic: Rising Living Standards

6363http://www.dover.gov.uk/museum/history/19thcent.asp

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Characteristic: Social Strife

6464

http://etext.lib.virginia.edu/railton/enam312/decades/187507.html

http://us.history.wisc.edu/hist102/photos/assets/photos/1056.jpg

Characteristic: Urbanization

http://www.pbase.com/image/814510

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Now, another Economic Revolution

Th I f ti R l ti• The Information Revolution

6666

cmsu2.cmsu.edu/~alv40250/communication.jpg

–Extension of human mental strength

6767www.spaceandmotion.com/Images/albert-einstein-light-quanta.jpg

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–Devices enhance•memory •logical processing •communication •senses•story-telling•interaction

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• Because brain power is a more fundamental characteristic of h th l thihumans than muscle power, this 2nd Revolution will be even more fundamental than the 1st.

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II 2 TheII.2. The Information R l ti

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Revolution70

Today the informationToday, the information revolution creates similar disruptions

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The Information Revolution Creates:InnovationInnovation

Wealth

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• 50 years ago, the distinguished Canadian economic historian H ld I i t l t dHarold Innis postulated how media technology affects the nature of societies He

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societies. He distinguished “time biased” media vs “space biased” media

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• Time biased media, such as hand-written and oral media, favor a local ,community

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Space Biased Media

• E.g., radio, television, newspapers

• Favors expansion, commercialism, and imperialism

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, p

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Ancient Roman Road: Enabled an Empire

76

http://museums.ncl.ac.uk/archive/arma/welc/groups/leg2a.jpg

Map of French Departements:

Had to beHad to be covered by the

Prefect on h b k i

77

horse-back in a day

http://www.aude-france-property.com/images/france-department-map.jpg

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• And now, fiber networks ,extend economic reach of information

• Mobile Networks: extend

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Mobile Networks: extend geographic reach

Global Fiber Networks

79http://www.ihq.uni-karlsruhe.de/studies/International-Department/ID-OCS/images/Bild2.jpg

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Transition to Information Society

–Information becomes more and more tradable.

–Informization of economy integrates national and regional economies.

8080

Source: Webster, Frank, “Information and the Idea of an Information Society”, Theories of the Information Society, Routledge 2002

Innovation – The fuel of New Economy

• The culture of innovation is a culture of sharing information

81Castells, Manuel. “The information City, The New Economy, and The Network Society.”The Information Society Reader, 2004: 22-37

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Information Revolution Creates “Creative Destruction”

ThreatenedThreatened:Banks & brokersRetailersUniversitiesPublishers

828282

etc.TV Media, Music Companies, Telecom Companies

Source: www.columbia.edu/

Example: TheExample: The University

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y

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The University Challenged

• Involves centrally located yinformation

• Information expensive and scarceS h l t i f ti

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-Scholars come to information-Students come to scholars

•Noam, Eli M. “Electronics and the Dim Future of the University.”Science Magazine 13 October 1995: 247-249.

The University Challenged• But the need for such system is becoming obsolete.- Information is everywhere

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- Scholars are everywhere

85

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The University Challenged• Increasingly, specialized g y, p

scholars interact electronically with other specialists worldwide

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p- Students can be anywhere

•Noam, Eli M. “Electronics and the Dim Future of the University.”Science Magazine 13 October 1995: 247-249.

• Educational Institutions can be electronic-based

• Many second-tier universities could be replaced by commercial firms and

l b l fit

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global non-profits–Perhaps not more effective but much

cheaper.

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Core Advantages of the University

• Not the pure transmission of• Not the pure transmission of information, but:–Mentoring

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–Interaction–Peering

88

• All societal institutions areAll societal institutions are similarly challenged– business

fit

89

– non-profit– government

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Information and Globalization• Improving communications create ‘empire’.• In Europe with improved communication• In Europe, with improved communication,

villages city-states nation-states E.U.• The Romans had excellent roads and could

maintain a huge empire.• Napoleon established the system of

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• Napoleon established the system of administrative “departements” of a size where the prefect could ride across it and still sleep in his own bed at night.

A Brief History of Information

91

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When Did The Accumulation Of

Information

92 92

Begin?

93

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II 3 D i fII.3. Drivers of Change

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II 3 A TechnologyII.3.A. Technology

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What were the TechnologyTechnology

Drivers of the Industrial

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IndustrialRevolution?

• Steam engine, invented in 1712

9797

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What are the technology drivers oftechnology drivers of

the InformationRevolution?

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evo u o ?

In the past, initiated by the printing pressby the printing press

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Today, the major technological driver is: • The increased ability to y

manipulate sub-atomic particles (electrons & photons)

100100

• http://www.lactamme.polytechnique.fr/Mosaic/images/SOLE.21.0512.D/image.jpg• http://serc.carleton.edu/images/usingdata/nasaimages/atom-with-electrons.gif

• Followed by an ability to string y y gthese devices together

101101• http://ocw.mit.edu/NR/rdonlyres/Global/2/275E775C-2819-4606-9104-FC6C854E9877/0/chp_peer_to_peer_1.jpg

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Followed by stringing together all devices and

information sourcesinformation sources

102102

www.zultrax.com/Images/about_p2p_handshake.jpg

Digitalization of all information

103103

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Devices: Electronic Micro-Components

• Processor power costs in 2009 less than 1/100,000,000th than it did in 1971.

104104

• Computer memory (RAM) cost about 1/100,000,000th than in 1971

Source: Penn State University for Global Telecommunications & Consumers

Change follows Moore’s Law

105105Gordon Moore

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Moore’s Law• Components p

, or price , at rate of ~50% CAGR

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• Double every 18 months

Emerging Tech Tools

• Intelligent machine-person interfacesperson interfaces

• bio-electronics• Sensor networks• Machine-to- machine

Biolelectronics (wireless EEG)http://www.imec.be/wwwinter/mediacenter/en/3DStack_2004.shtml

107107

communication• Always-on mobility

Sensor Networkshttp://ds.informatik.rwth-aachen.de/teaching/ws0607/labsn

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Emerging Tech Tools• Machines

understanding • Intelligent screeners• Intelligent screeners• Cognitive Radio on

all bands• Gigabit capacity in

h h

(Ubiquitous Computing)http://eppsnet.com/2005/11/are-people-getting-fatter

108108

the home• Voice and image

recognitionPart of a Semantic Networkhttp://www.tojet.net/articles/236.htm

• We are just at the beginningj g gof this technological change

109109

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Example: Machine to machine communication

• Machines with ability toMachines with ability to understand, observe, and act

• People will be the minor part of information generators

110110

information generators.

Example: IP in Every Device, communicating with each

other• Suitcases will complain to airlines • Front doors will check in with police

departments• Pacemakers will talk to hospitals

111111

Pacemakers will talk to hospitals• Light bulbs will haggle with utilities

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• And now, we are in the midst of a historical move–From the kilobit stage of–From the kilobit stage of individualized communications to

–the megabit stage

112112

the megabit stage –and within the reasonable future to the gigabit stage

113113

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II 3 B PeopleII.3.B. People

114114

• But actually, the major driver is not just jtechnology, but just as much people.

115115

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• The huge increase in information producers.

• Information workforce growth gduring the ‘60s was extraordinary –“silent revolution.” (I. Pool).

• In one decade, the share of labor f ki ith th

116116

force working with paper rather than with muscles went from ¼ to ½.

Information Work Force

US UK Germany Japan1880: 6% 8%1900: 13% 12%1920: 18% 20%1940: 25% 24% 17%1960: 27% 33% 25%1980: 47% 40% 33%

http://www.phoenixhomebuying com/images/search homes

117117

1980: 47% 40% 33%1990: 55% 48% 40%2000: 60% 53% 50%

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ng.com/images/search_homes.jpg

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Information workers

Industryy

Non-Information Services

Agriculture

118118118

• More information workers meant more information product

119119

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Societal Info Production Trends

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

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

120120

architects, lawyers, engineers, etc.

• In almost any scientific field, more researchfield, more research articles written this year alone than in entire human hi b f 1900

121121

history before 1900.

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

Information Output

1.9 years (1999-2001) 7th million1.01 years (2005)

122122

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

Information has become the Main Resource

123123http://www.six6sigma.com/slide4.jpg

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124124

http://www.star75.com/starlight/Information_Banner_80.jpg

• The world’s total production of information per year amounts to about 250 megabytes for each person on earth (equivalent of

125125

200,000 pages of text)

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Newspapers (daily issues) 4,500,000Journals (issues) 700,000Magazines (issues) 1,600,000

Yearly worldwide production of published information 2002

Magazines (issues) 1,600,000Feature Films 4,000TV Shows 550,000Music CDs 90,000DVD-video 5,000

126126Modified and adapted after Lyman Peter and Hal Varian, “How much Information” Journal of Electronic Publishing, December 2000

History of Information Production (Western Cultures)

127127

-1000 -500 0 500 1000 1500 1800 1900 2000Year

BCE AD

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• Every 30 seconds a new booky• Every day 10 new feature

films• Every day 1500 TV shows

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• Every day, 1500 TV shows

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US Department of Commerce:• Information sector accounted for

more than one quarter of realmore than one-quarter of real economic growth in US in 1990s.

• Declining prices in information

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• Declining prices in information sector lowered overall US inflation by 1%/ yr.

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US Department of Commerce:

• In the US, information-communications-technology industries have been growing at double-digit rates since 2004, increasing 13.2 percent in 2007.

“Downturn in Finance and Insurance Restrains Real GDP Growth in 2007.” 29 April 2008. Bureau of Economic Analysis, US Department of Commerce. Last accessed on 14 May 2008 at http://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm.

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Media Sector• Within media one can

distinguish 3 basic types of functions with value chain, with associated industries.

131131

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Content Production

DevicesDistributionPlatforms

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1. Distribution Platforms

www.corbis.com http://web.mit.edu/tylerc/www/twt/twtfiles/paperboy.jpg

133133http://www.compukiss.com/ck/assets/e-mail110.jpg www.zultrax.com/Images/about_p2p_handshake.jpg

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2. Content Producers and Packagers

134134http://www.pbase.com/image/27837897 http://www.masternewmedia.org/illustrations/information_on_a_monitor.jpg

3. Devices

http://www.isharecash.com/G/aprilpromo/items/014.jpgwww.cellphoneinfo.com/

http://www.acceptusmedia.com/retail/Images/GameBox.jpg

135135

www.watch.impress.co.jp/.../ 20030429/apple1.htm

http://www.webmall2000.net/home/images/42FD9954m.jpg

http://english.cas.ac.cn/Eng2003/image/SRA/C/6_1.jpghttp://www.sfrisch.com/images/ib

m_main.jpg

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US Information Industry Sector 2008

• Content Industries $350 bilContent Industries $350 bil• Distribution Industries $570 bil• Device industries $ 200 bil

136136

• Total $1 Trillion

(includes double counting )

– Publishing - $800 billionTelevision $350 billion

Worldwide Revenues of 2008

– Television - $350 billion– Film - $90 billion– Radio - $75 billion– Music - $40 billion

137137

– Video games - $35 billion.

Source: “Beyond the Hype: How New Content and Technology are Redefining the Future of Media“ Accenture

Media and Entertainment, Accenture's Global Content Study 2007, 2007.

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Distribution• Systems that deliver content from producers to

usersD i t d b t k i k t• Dominated by network companies, market power

• Culture: Reliability, long-term, often regulated

138 138

US Revenues (2006, $Bil)Distribution SystemsTelecom Wireline Wireless $140

Slide 363, V.93

Backbones, ISP $100Broadband $ 30Cable MSOs $ 73 Movie Theatres & Video $ 26Book Retailing $ 17

139

gMusic Retailing $ 12Telecom Hardware $ 61TV & Cable N/WSS $ 51

Eli M. Noam, Information Environment

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US Revenues during the mid 2000s, % of total

Distribution SystemsTelecom Wireline Wireless 27.5 %Telecom Wireline Wireless 27.5 %Backbones, ISP 19.6 Broadband 5.9 Cable MSOs 14.3 Movie Theatres & Video 5.1 B k R ili 3 3

140

Book Retailing 3.3Music Retailing 2.4Telecom Hardware 12.0TV & Cable N/WSS 10.0

Eli M. Noam, Media Environment

2. Content Producers and Packagers

141141

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ContentOrganized Information

– EntertainmentEntertainment –News information –Knowledge and Analysis –Software Programs

• Culture: Short term not cost driven

142142

• Culture: Short-term, not cost driven

• Content Industries US Revenues (2006, $Bil)

Music 28Books 40Books 40Newspapers 43Magazines & Journals 41TV & Radio 52Games 6Films & TV Production 37

143

Online Information 15Software 45Website, Portals 30

Total: 347Eli M. Noam, Information Environment

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US Revenues during the mid 2000s, % of total

Content IndustriesMusic 8.3 %B k 11 9Books 11.9 Newspapers 12.8Magazines & Journals 12.2TV & Radio 15.4Games 1.8

144

Films & TV Production 11.0Online Information 4.5Software 13.4Website, Portals 8.9

Eli M. Noam, Media Environment

145145

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Different?






i f i i

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III. MicroeconomicsMicroeconomics

of the New

147

Media Economy

69

• So this is the environment in which media companies operate—the information “macro economy”, the

i f h i f ienvironment of the information society and economy.

148148

• The question arises, what are q ,the implications for the management of companies that are part of this sector?

149149

• How does one manage in this sector effectively?

70

• We now move to the second di i th b i “ idimension, the basic “micro economies” of media and media companies.

• How does management change ith th i t

150

with the macro-environment from old to new?

And today, Collapse of Physical Distance

• The “Death of Distance”• Space, Time, Gravity less important

–Time shifting; place shifting.

151151

71

• Media management traditionally been one of experience and ‘gut’ feeling–Educated guess work

• Book publishers make educated guesses:• Book publishers make educated guesses: guess from experience the number of copies they print; price they set for consumers; the advance they pay to

h

152Eli M. Noam, Mobility, 2006 152

authors.• Film distributors make educated guesses:

guesses marketing budget of films, or about the number of DVDs they produce.

• A lifelong experience in one segment of this overlapping complex is often not enough for the media managers of the future.

• The media companies require also converging managers. This is easy to say but difficult to train. And at the same time the environment keeps

153153

same time, the environment keeps changing—technologically, entrepreneurially, financially, globally.

• What then to do?

72

• Other industries, like banks, automobile makers, or airlines, use a much more scientific approach to management.


• In contrast, management is often unpopular within media companies themselves

• Managers are derided by the “creatives,” who have the prestige and public visibility, as the “bean-counters ” as the “suits” as narrow-

155155

counters, as the suits as narrow-minded accounting clerks, as philistines who are only concerned with the bottom-line.

73

• In no other industry does management have to apologize continuously for being managers, y g g ,for doing what managers do: raise funds, select projects, set budgets, control costs, market products.

156156

• The media themselves generally show negative stereotypes of media managers.–When was the last time you saw in a

film or TV show a media manager shown as a creative, interesting, educated person? As a pioneer, or as a

157157

p p ,contributor to new ways to delight and inform? Usually it is the opposite.

74

• But it’s easy to talk about scientific media management

• And much harder to provide the elements of such an approach.

158158

Start Out by Looking at the Classic Factors of Production

•CapitalCapital•Labor•LandAnd now in the information


And now in the information economy, also:

• Information

75

•The first three are associated ith 3 l it li twith 3 classes—capitalist

workers, land owners. The fourth is associated with what has been called the


what has been called the “new class”, the “creative class.”

• At universities, the typical “media business” course, if it exists, is simply a survey of the various media—the film industry, the print industry, music, radio,TV and now the InternetTV, and now, the Internet.

• A second dimension that sometimes exists at universities is the economics of media policy: originating in the policy debates and reforms of the 80s and 90s


debates and reforms of the 80s and 90s.• A third dimension is to use existing

basic courses – marketing, strategy –and apply them to the media sector.

76

• The first three factors, being around for long, have underlying theories. But the information sector has no economic or social theory that is equivalent to the ones for finance, labor economics, real estate, and spatial studies

• Information--as an input and output-- has no real bod of theor that co ld be sed


no real body of theory that could be used for management analysis and decision making.

• What calls itself “information theory” is not really about mediatheory is not really about media–One type of “information theory”is that of technologists: how to squeeze more bits into a pipeTh h ki d f “i f i


–The other kind of “information theory” is that of economists about risk and uncertainty.

77

• So what is required is a new sub-discipline of media economics and management.


Media Economics• Starting in the 1970s • Begins to create solid theoretical bases• Provides analytical tools and insight on

activities in the media and i ti i t

165

communications environment

Robert G. Picard. Historical trends and patterns in media economics, in Handbook of media management and economics, Lawrence Erlbaum Associates, 2006

78

It requires bringing together several analytical management disciplines

• Micro Economics• Micro-Economics• Financial Economics• Statistics and Operations Research• Behavioral Sciences of sociology and

psychology


psychology• Managerial Accounting• Marketing• Etc.

167167

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Different?






i f i i

168



III.3. The 12 EconomicThe 12 Economic

Properties of


Media169

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Fundamental Economic Characteristics of MediaA. Supply Side

1. High fixed costs, low marginal costs2. Convergence of production3. Divergence in cost trends in value chain3. Divergence in cost trends in value chain4. Accelerating returns5. Excess supplyB. Demand Side6. Network effects7. Non-normal distribution of demandC. Markets

Eli M. Noam, Media Environment 170Eli M. Noam, Mobility, 2006 170

C. Markets8. Price deflation9. Intangibles 10. Public goods11. Non-maximizers of profit12. Government Role

III.3.A. Supply SideSide

Characteristics


81

Characteristic #1 of Media Information:

• Usually extremely high fixed costs and low marginal cost .

Expensive to produce cheap to

172172

–Expensive to produce, cheap to reproduce

Expensive to produce, cheap to reproduce

• Films, TV programs• Computer software• Electronic networks

173173

• Newspapers• Semiconductors

82

High Economies of scale• C(QA + QB) < C(QA) + C(QB) over the relevant range of production

CFC

174174

Q0 1 2 3 4 5

ACMC

High fixed cost, and low (and often declining) marginal cost

• Q: What are the Business Qimplications of this economic property of “high fixed cost and low marginal cost?”

175175

g

83

Business Implications• Large size of firms in media, telecom,

and Internet • Incentives to acquire large size by MSA,

and to be first-mover• Incentives to piracy by competitors• Large consumer surplus

176176

• Incentive to price discriminate among customers

• Competitive prices often unprofitable• Often market failure

177177

84

Characteristic #2 of Media and#2 of Media and

Information: C f

178178

Convergence of Production

1970s Map

ervi

ces

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

FM Subcarriers Int’l Long Distance & Local Telephone Services Mobile Svcs Professional & Consulting Svcs

Se

Produc

Mobile SvcsPaging SvcsMultiplexing Svcs

TelecomTelephone Switching EquipTransmission Equip Telephones

Mainframes Microcomputers Terminals Transaction Processors

Computers Transaction Processors Custom Software

Word Processors

Consumer ElectronicsTape Decks & Phonographs Radios & Stereos

gFinancial Svcs News SvcsAdvertising SvcsInfo Vendors

Media &PublishingDirectoriesMovies TV P

VideotexTeletext

PABXs

179179

cts

Point-of-Sale Dictation Equip Printers CopiersTypewriters Cash Registers

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

Tape Decks & Phonographs Radios & StereosTV Sets Cameras

TV ProgramsRecords & CassettesNewspapersNewslettersMagazines & JournalsBooks

Conduit Content179

85

1980s Maper

vice

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

VANs FM Subcarriers Int’l Long Distance & Local Telephone Services Mobile Svcs

Info VendorsProfessional &Consulting SvcsFinancial Svcs News SvcsAd ti i S

VideotexTeletext

Se

Produc


TelecomTelephone Switching Equip

Mainframes Microcomputers Terminals OS Transaction

Processors


Word Processors Consumer ElectronicsTape Decks & Phonographs Radios & StereosTV Sets Cameras

Advertising Svcs

Media &PublishingDirectoriesMovies TV P

E-mailPABXs

Modems

Telephones

VideogamesConsoles

180180

cts Point-of-Sale Dictation Equip Printers CopiersTypewriters Cash Registers


TV ProgramsRecords & CassettesNewspapersNewslettersMagazines & JournalsBooks

Conduit Content

p

180

1990s Map

rvic

es

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

VANs FM Subcarriers Int’l Long Distance & Local Telephone Services Mobile Svcs

Info VendorsProfessional &Consulting SvcsFinancial Svcs News SvcsAd ti i S

VideotexTeletext

Se

Produc


TelecomTelephone Switching Equip

Mainframes Microcomputers Terminals GUI/OS Transaction

Processors


Word Processors Consumer ElectronicsTape Decks & Phonographs Radios & StereosTV Sets Cameras Electronic PIMs

Advertising SvcsOnline SvcsMail Order Catalogs

Media &PublishingDirectoriesMovies TV ProgramsRecords &

E-mailPABXs

Modems

Telephones

VideogamesConsoles

CD-Rom

181181

cts Point-of-Sale Dictation EquipTypewriters Printers Copiers Cash Registers


Auto Dialers Electronic Reference Records & CassettesNewspapersNewslettersMagazines & JournalsBooks

Conduit Content

p

181

86

2007 Maprv

ices

DistributionDigital DBSInt’l Long Distance &

Local Telephone Services ISDN “Fiber to the Home”

“National Data Highway”

Se

Produc

TelecomPCS & Digital CellularSmart Screen Phones

GUI & OS Transaction Processors

Computers Virtual RealityPublic KiosksVideo ServersCD-Rom

“Information Appliances”

Consumer ElectronicsPim PCs LONs Multimedia Players

Info VendorsInfo on demandVirtual shoppingVirtual concerts,museums

Media &Publishing

National Data Highway

Voice & Video E-mail

Video printer

Video Conferencing

HDTV

182182

cts Office EquipmentPim PCs LONs Multimedia Players

Interactive News Interactive Entertainment & EducationI-MoviesI-TV

Custom PublishingNewspaper, MagazinesBooks

Conduit Content182

183183

87

Characteristic #3 of Media and

Information: Radically Divergent

184

Cost Trends in the Value Chain

184

Divergence in Cost Characteristics

• Distribution and Devices subject to rapidly increasingeconomies of scale, lead to large firms and market

t ti

185

concentration.–Telcom, cable, IT, CE

88

• But Content Production issubject to rapidly decreasingeconomies of scale, enabling many small producers

186

y p– video, music, text, multimedia–Long tail of content

Ray Kurzweil

187187http://www.wired.com/images/article/full/2007/11/kurzweil_250px.jpg

89

Characteristic #4 ofMedia InformationAccelerating ReturnsAccelerating ReturnsInformation is Exponential and

Cumulative.• “you can wise up, but you can’t wise

down.”

188188

• A media product, once created, becomes part of the human stock of information, knowledge, culture

Information Production and Accumulation (Western Cultures)

189189

-1000 -500 0 500 1000 1500 1800 1900 2000Year

BCE AD

90

• A community or organization is getting smarter, even if i di id l t ttiindividuals are not getting smarter.

• This accumulation

190190

Source: www.3dplanet.co...cts/iq/email/email.htm

is accelerating

The Law of Accelerating Returns

• Evolutionary progress acceleratesEvolutionary progress accelerates because methods from previous evolution is used in the next stage

• The “returns” or speed/power of

191191

• The returns or speed/power of the process accelerates over time

Kurzweil, Ray. “The Law of Accelerating Returns.” KurzweilAI.net. March 7, 2001

91

• The rate of technological change i ti l d l iis exponential and accelerating

• And that even this acceleration is itself accelerating

192192

Kurzweil, Ray. “The Law of Accelerating Returns.” KurzweilAI.net. March 7, 2001

193193

92

Characteristic #5 of Media and Information:


Excess Supply

P d ti i• Production increases exponentially, while consumption increases li l d l l


linearly and slowly.

93

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

1.2% (slow)• 2,100 hours of media

consumption/cap/yrN di ti t b tl


• New media consumption must be mostly supported by substitution from existing media in terms of time or full attention

Winners and losers: Industry Structure In The Converging World of Telecommunications, Computing and Entertainment

• Leads to competition for–“mindshare”–“attention”• Has consequences on content

style and on marketing


style and on marketing

94


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

• Economics of Attention – “A wealth of Information creates a poverty of attention” (Herbert Simon)

199

95

•“Attention has become a scarce resource and a critical attention economy has emerged.”


•Robert G. Picard. "Environmental and Market Changes Driving Strategic Planning in Media Firms," in Robert G. Picard (ed.) Strategic Responses to Media Market Changes. Media Management and Transformation Centre Jönköping International Business School. JIBS Research Reports No. 2004-2. pp. 1-18

• Compared to 1998, fewer than half as many of the new products

k it t th b t ll li tmake it to the bestsellers lists, reach the top of audience rankings, or win a platinum disc.

201Eli M. Noam, Mobility, 2006 201Aris, Annet, “Value-Creating Management of Media Companies”. McKinsey & Company, Inc., 2003

96

• Increase in specialization &• Increase in specialization & customization of media content

• Increase in production & Marketing effort


Marketing effort• Together costs rise per use.


97

III.3.B. Demand -Side

204

Characteristics

Characteristic #6 f M di d#6 of Media and

Information:

205205

Network Effects

98

• Individual benefits from media is often interdependent with that of others:– For Internet: Telecom, the benefits to

users rise with the numbers of others onusers rise with the numbers of others on the network• Fax, email, websites

–For Film, TV, Music, popular

206206

p pMagazines and Books: a major benefit of media consumption is to share experiences with one’s peers

• This changes the economics of demand

• The demand increases with size of networks. The more people

th t k h th Demand Curveare on the network, or share the experience, the more people are willing to pay.– i.e. the larger the quantity

demanded, the higher the

PDemand Curve

207207

demanded, the higher the willingness to pay.

– reverse from normalQ

99

Network EffectsUsers create benefits for each other

–networks: # parties connectedp–content: sharing experience

• Producers often benefit from geographic clustering–Hollywood/Bollywood

208208

y y–Madison Ave–New York publishing–Silicon Valley

The total value of a t k t ll

Metcalfe’s Law

network to all users is proportional to the square of the number of users

2

209209

nnnnv −=−⋅= 2)1(

Source: http://www.computer.org/internet/v1/metcalfe9702/w2met01.gif

•Reed’s Law: V=2n

100

• Network effects turn into highNetwork effects turn into high barriers to entry

210210“The gazillion-dollar question.” Economist, 20 April, 2006.

• The influence of social networking increases the inequality of popularityA hit t ll i• A hit song eventually gains an overwhelming cumulative advantage

211211

Michael J. Salganik, Peter Sheridan Dodds, Duncan J. Watts. “Experimental Study of Inequality and Unpredictability in an Artificial Cultural Market.” Science. Washington: Feb 10, 2006.

101

Implications of Network Effects

• Size is importantSize is important• Market share is important (first-

moves advantage)• Interconnectivity is important

212212

Interconnectivity is important

213213

102


Information: Non-Normal

214214

Distribution of Demand

Cumulative Advantage• Preferences are determined by the

amplified choices of the first few consumers

• This means that no matter how good our statistical tools are, it is almost impossible to predict the next big thing

215215

to predict the next big thingMichael J. Salganik, Peter Sheridan Dodds, Duncan J. Watts. “Experimental Study of Inequality and Unpredictability in an Artificial Cultural Market.” Science. Washington:

Feb 10, 2006.

103

Riskiness in “Discrete” Media• 80-20 rule

–80% of all films do not generate80% of all films do not generate enough audience to become profitable.80% of books

216216

–80% of books–80% of music

• “Continuous flow” media are also risky–Most new online sites fail–2/3 of new magazines fail in 1st year.

217

1 year.–Most telecom entrants failed.

104

Profits• 90-10 rule• 90% of all profits by 10% of

the products• 50% of profits by 1-2% of


p yproducts

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

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

• The statistical distribution of media performance is not normally (“Gaussian”)distributed


y ( )– Distribution is instead the ‘stable

Paretian”

105

Actually, the best statistical representation of media content revenue success is the

stable Paretian distributions• The statistical

distribution of media performance is

220220

not normally distributed,

De Vany and Walls, “Does Hollywood Make Too Many R-Rated Movies? Risk, Stochastic Dominance, and the Illusion of Expectation” Journal of Business, July 2002, vol. 73, no. 3

• Zipf’s distribution –success is extremely high for a few productshigh for a few products, low for the long tail

221221

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

221

106

• For many media products, the average (of revenues, or of profits) or mean is not the

t b bl t Thmost probable outcome. The average is dominated by rare, extreme outcomes and is quite far above the most probable

t


outcome.

De Vany and Walls, “Does Hollywood Make Too Many R-Rated Movies? Risk, Stochastic Dominance, and the Illusion of Expectation” Journal of Business, July 2002, vol. 73, no. 3

Th t diti ll• Thus, traditionally statistical tools of sampling and inference must be

difi d f i di


modified for use in media.

107

224224

III.3.C. Market Characteristics

225

108

Market Characteristic #8 of Media and

I f i P iInformation: Price Deflation

226226

• In price competition, the price is d i d i ldropping towards marginal costs, which are near-zero, which usually do not cover total cost.

227227

109

“Information Wants to be Free”• Information has become cheaper for

many a decadey• It is becoming difficult to charge anything

for it. –Music

O li bli h

228228

–Online publishers–Newspaper prices barely cover the cost

of paper and delivery; the content is thrown in for free. http://www.tvtechnology.com/features/Net-soup/f-fb-coverart.jpg

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

• Good deal for consumer

229Eli M. Noam, Mobility, 2006

229

• But trouble for suppliers

110

Dropping Prices• Phone calls

b d id h• bandwidth• Software• Semiconductors• IT devices

230Eli M. Noam, Mobility, 2006

230

M thl STM 1 L P i

U.S. Telecom Prices

Monthly STM-1 Lease Prices

$1,820,000

$925 000$1 000 000$1,200,000$1,400,000$1,600,000$1,800,000$2,000,000

LA-NYC

$8,250$200,000

$100,000 $3,889

$925,000

$0$200,000$400,000$600,000$800,000

$1,000,000

2000 2003 Sep-04

Miami-NYC

Source: Primetrica, Inc. Telegeography 2004

111

Average Monthly Revenue Per Minute for Mobile Telephone in America - Service 1993-2004

$0.44$0.47

$0.43$0 38

$0.45

$0.50

$0.38 $0.37

$0.29

$0.22$0.18

$0.12 $0.11 $0.10 $0 09$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

2006: $0.07 cents

232232

Source: Calculated using Average Local Monthly Bill and Average Minutes of User per Subscriber per Month from Cellular Telecommunications & Internet Association, October 2004.dr

$0.09

$-

$0.05

$0.10

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

• It is one of thethe fundamental economic trends of our


time

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

112

• The entire competitive part of the information sector – from music to newspapers to telecoms to internet to semiconductors and anything in-betweensemiconductors and anything in between – has become subject to a gigantic price deflation in slow motion.

234234http://images.apple.com/itunes/home/images/06/indextopwin06092004.jpg http://www.whitedeath.com/graphics/newspapers.jpg

1. Volatility of prices

This price deflation leads to:

1. Volatility of prices 2. Instability in the entire information sector

235235

113

• Therefore, one main strategy for media managers is to avoid such price competition.p p– through product differentiation– price discrimination– consumer lock-in strategies

236236

– consumer lock-in strategies– industry consolidation

237237

114

Characteristics #9 of Media and Information:

Intangiblesg• Based not on physical

products, but on intangibles

238238

g

http://www.stanco-inc.com/straight-picket-fence.jpg

Intellectual Capital• Information may grow to replace

Land Labor and Capital as theLand, Labor, and Capital as the primary factor of production in our society

239239Dean, Alison, and Kretschmur, Martin. “Can Ideas Be Capital? Factors of Production in

the Postindustrial Economy: A Review and Critique.” Academy of Management Review. 2007, Vol 32, No 2.

115

Characteristics of Intellectual Capital

• Not inherently a scarce resource• Proliferates, rather than depletes,

with use (non-rival Consumption)• Often Enhanced when shared among

240240

organizations (network effects)

Dean, Alison, and Kretschmur, Martin. “Can Ideas Be Capital? Factors of Production in the Postindustrial Economy: A Review and Critique.” Academy of Management Review. 2007, Vol 32, No 2.

Critique:• Art is no longer shielded from

commercialism and consumerism

241241

Adorno, Theodore and Max Horkheimer. “The Culture Industry: Enlightenment as Mass Deception.” Dialectic of Enlightenment. New York: Continuum, 1972-1944

116

•Ideas new information•Ideas—new information and concept, not objects, drive growth

242242•Kelly, Kevin. “The Economics of Ideas.” Wired. June 1996.

Characteristic #10 of Media and Information:

Presence of Non-Maximizers of Profit


Maximizers of Profit

117

• Producers get utility from the creation of the productthe creation of the product

• Often hard to distinguish production from

i


consumption.

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

• On “Utility maximization” on the yconsumption side

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


maximize instead recognition– close to utility maximization than to

profit maximization

118

I li ti d• Implication: managers need to reconcile these two conflicting goals of their

l d t


employees and customers.


Information: Often a P bli G d

247

Public Good

119

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

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

• Together, there are the classic

248248

g ,economic characteristics of “Public Goods”

Hard to Exclude, Hard to control access and sharing


120

Implications:• Difficult to charge for• Difficult to charge for

information• Difficult to protect property

rights


g

• Media products often given away

Implications: Indirect Transactions

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


, g )• What non-media industry gives

its products away to its users?

121

• Some information therefore is d bli l ( i i igenerated publicly (universities

etc.)

252252


122


Characteristic #12 of Media andMedia and

Information: Government

255

InvolvementEli M. Noam, Mobility, 2006 255

123

• Implications:–Government involved in most aspects of Media & Communications sector

256

-strong need to manage government relations

256

• High impact of Media companies on politics and culture is such that they are always controversial, highly visible, regulated, or , g y , g ,fought over.

• A very ‘public” private medium. • With strong participation and regulation of

government in broadcasting cable satellite

257257

government in broadcasting, cable, satellite, telecom, mobile, film (subsidies), and IT development, and many more.

124

258258

Summary:

• We have identified 12 factors of the media industry which, in combination, make its


management different, in some ways, from management more generally

125

Fundamental Economic Characteristics of MediaA. Supply Side

1. High fixed costs, low marginal costs2. Convergence of production3. Divergence in cost trends in value chain3. Divergence in cost trends in value chain4. Accelerating returns5. Excess supplyB. Demand Side6. Network effects7. Non-normal distribution of demandC. Markets


C. Markets8. Price deflation9. Intangibles 10. Public goods11. Non-maximizers of profit12. Government Role

To reduce the numbers we can merge several of these 12 factors, and are left with:

• Strong economies of scale • High uncertainty and instability


instability• Public good characteristics

126

• These characteristics impact every media industry, every

dimedia company, every media activity and every media managerW ill t th


• We will encounter them throughout this course.

263

127



Different?






i f i i

264



IV. Examples ofIV. Examples of Management

265

Tools for Media

128

• So far, we have been abstract and conceptual in our discussion of media management.

• To be a bit more specific, let’s provide some examples for the

l f di


tools of media management which we will cover.

8 Examples for management

tools for media267Eli M. Noam, Mobility, 2006 267

tools for media

129

IV 1 SelectingIV.1. Selecting Market Niches


Market Niches

Selecting Market Niches for content

Cartoon

ABC CBS

$Advertising value of audiences

FoxNick Jr.

269269

0 10 20 30 40 50 60 70 80

Age Cohort

Nickelodeon MTV ESPN

CNN History

130

IV.2. Pricing of

270Noam, Intellectual Asset Management 2005 270

Licenses

Calculating the Value of a Patent License by using Real

Option Pricing Models–(Black-p g (Scholes-Merton)

271Eli M. Noam, Media Finance

271http://www.economist.com/images/20030315/1103OB.jpg

http://www.wlu.ca/images/news_images/998/998_myron-scholes.jpg

http://www.maxwell.syr.edu/maxpages/faculty/cdkao/teaching/ecn505/2002/lec2__6.png

131

IV.3. IdentifyingIdentifying

Competitors’


R&D

Identifying the Velocity of competitors

Patents/Assignee/Year

Ni

Tennessee Gas Pipeline CompanyNo Assignee

2

3

4

5

6

7

273273

19901991

19921993

19941995

19961997

19981999

Carrier Corporation

Donaldson Company, Inc.

Noise Cancellation Technologies, Inc.

AP Parts

Ford Motor Company

Arvin Industries, Inc.

Honda

Nissan

0

1

Source: Aurigin Systems, Inc. 1999

132

IV 4 ContentIV.4. Content Diversification

274Eli M. Noam, Production 274

ive sification

• Applying the financial portfolio approach to content production.

• The goal of diversification is to reduce the variances of h f li h l


the portfolio as a whole.

133


http://www.ifa.com/Media/Images/Illustrations/efficientfrontier.gif

IV.5. Optimal IncentiveIncentive

Compensation of Creative


Creative Employees

134

• Too little incentive reduces motivation• But too much incentive may reward and

punish employees for events outside of their control

• How to analyze this?


279Eli M. Noam, Production 279Nalbantian, Haig R. and Richard A Guzzo, et al, “Play to Your Strengths”, McGraw-Hill, 2004

135

IV.6. Capacity

O i i i280Eli M. Noam, Mobility, 2006 280

Optimization

Typical weekday download traffic profile

281Eli M. Noam, Mobility, 2006 281http://ieeexplore.ieee.org/iel5/69/17490/00806933.pdf?isnumber=17490&arnumber=806933

136

• Too much capacity is expensive• Not enough capacity, and

customers drop out withcustomers drop out with waiting time

• Can determine optimal capacity in engineering terms and in


in engineering terms, and in business terms

IV.7. Cost analysis of

Distribution283Eli M. Noam, Production 283

Distribution

137

Distribution Cost of ContentDistrib/Capita/Second

Th t 460 ¢Film 52 m¢ Broadcast 1.19 m¢ Cable 0.04 m¢

Theater 460 m¢


Cable 0.04 m¢ Internet TV 5 m¢Mobile 150 m¢

IV.8. Design f P i iof Pricing System


System

138

Ramsey Optimal Price Discrimination

286Eli M. Noam, Production 286http://www.aueb.gr/users/courcou/presentations/itc99/img070.GIF

Other Examples• These are examples of tools for media

management• Other examples:

–Optimal mix of financing–Project selection–Conjoint analysis for audience


j ypreferences

–Relation of advertising volume to macro-economy

–Etc etc

139




Different?






i f i i




140

VV. Conclusion

290290

Conclusion

291

141

To Conclude:Media Management has to deal with somewhat different and fundamental characteristicscharacteristics

1. Economies of scale & network effects

2. Especially high risk effects and uncertainty

292292

uncertainty3. Public good characteristics

•The question was: Is media management different?

• Management in media faces several and• Management in media faces several and substantial differences and characteristics that create different incentives, demands, and constraints from those of industrial productions or

f th i

293293

of other services.• This creates needs for differing

management approaches and analytical tools.

142

Media management is different

• Media management requires a convergence of expertise from several disciplines:– technology, finance, economics,

294294

law, psychology, marketing, international relations, sociology, politics

• Information has moved –From a supplementary factor–To being the central business input

d j f d d–and major output of an advanced economy: media products.

• Where Information was once a scarce resource. It is now becoming an abundant

295295

resource

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

143

The Last Few Years: Boom and Bust

296296

• We are going through arguably the most creative period in business history everbusiness history, ever.

• And of the most creative period in technology history, since the industrial revolution

297297

industrial revolution.

144

• More wealth has been created in h i h b fa shorter time than ever before.

–More has been lost than ever before.

298298

At the dawn of industrialization, Adam Smith, in 1776, in his famous example of the needle factory, anticipatedanticipated >task specialization >mass production>economies of scale>business concentration


Adam Smith

145

• Today we need to establish analysis, & management principles for the new i f tiinformation economy


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

• This new environment of vast information quantity requires –INDIVIDUALS capable ofINDIVIDUALS capable of managing the production and use of the information resource ORGANIZATIONS capable


–ORGANIZATIONS capable of deploying such individuals

–TOOLS to analyze and operate

146

• For those interested in this resource - how to produce it, how

di ib i h i hito distribute it, how to use it - this is the most exciting period ever. Good news.

• Bad news: it’s also the period with


• Bad news: it s also the period with the greatest uncertainty.

Remember Thurn und Taxis

Eli M. Noam, Media Environment 303303http://www.thurnundtaxis.de/nhtml/marstall_index.html

147

Remember AT&T

Eli M. Noam, Media Environment 304304http://www.eop.com/AT&T_logo.gif

Remember RCA


148

Remember the Next Targets of Extinction

306306http://www.indcjournal.com/archives/ariaillg2.jpg

• And remember h f ithe Information

Revolution


http://www.pbase.com/image/31328780

149


End of Lecture


Documents

The Media and Information Ei tEnvironment · • Is Media Management Different? ... •Macro DifferencesMacro Differences •Micro Differences 53. 22 ... Theories of the Information