Entertainment and Media: Markets and Economics

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Entertainment and Media Markets and Economics

• Professor William Greene

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Economic Foundations for Entertainment, Media,
and Technology

• Organization of Firms in EM IndustriesVertical
  Integration

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This ones not a wrap!
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Vertical Integration
Creation
Production
Distribution
Retail
CONSUMER
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Vertical Integration in Markets

• Financial Services
  Professional Sports Traditional
  Publishing

Final Consumers
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Vertical Integration in Entertainment and Media

• Paramount, Viacom, Blockbuster
• CBS, Showtime
• Disney and ABC
• AOL and Time Warner(?)
• Clear Channel and Live Nation
• Where are the gains?

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AOL Time Warner

• AOL
• Internet service provider
• Instant messaging
• Time Warner
• Time Warner Cable Time Inc. (Magazines)
• HBO Turner Broadcasting
• The WB Network New Line Cinema
• Warner Music Time Warner Publishing
• Warner Brothers Studio
• Horizontal vs. Vertical Integration

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

Knicks Rangers Liberty
CSC Holdings and Optimum TV The cable system
Optimum Online
Homes
Radio City Enter.
Rainbow Media
Lightpath
Businesses
The Wiz
Madison Square Garden
FSN Sports Networks to Comcast, Feb. 2007
Clearview Cinemas
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Implications of Strongly Multistaged Production

• Where are the profits created
• Where are the profits captured?
• Applications
• Book production
• Movie
• Recorded music
• Television

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Benefits of Vertical Integration

• All arise from some market failure
• Lower transaction costs Firm organizational
  limitations
• Transactions involving information
• Avoidance of government restrictions, taxes, or
  regulations.
• Extension of market power (forward or backward)
• Avoidance of upstream market power
• Assurance of steady or reliable input supply
• Murdochs (alleged) attempt to influence staffing
  decision of a baseball field manager before a
  broadcast
• Murdochs (again) purchase of Manchester United
• Internalization of market failures
• Franchising reduces problems of free riding

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Costs of Vertical Integration

• Private costs
• Loss of economies of scale
• Organizational complexity
• Assumption of risk
• Social costs
• Creation or extension of market power (1948
  Paramount case forced divestiture of theaters
  by studios)
• Possible cartelization

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Vertical Integration in EM

• Analysis
• Where is it observed?
• What are the benefits / motivation?
• What are the costs?
• Applications
• Alleged conspiracy of Apple and 5 publishers
• Cablevision and home delivery of cable generally
• End to end production
• Internet service providers and cable operators
• The movie business (at several stages)

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Vertical Integration
Creation
Production
A Football Case Study
Distribution
Retail
CONSUMER
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A Mini-Case Study The XFL 4th and Long
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Football History
The Major Player NFL
National Football League (NFL) 1920, 10 teams,
Akron, Ohio American Football League (AFL) 1960,
AFL merged with NFL, 1966, one schedule, 1970.

• The Competitors and Entrants
• WFL 1974-1975
• USFL 1983-1985
• World League 1991
• Arena Football League 1987 (a couple
  incarnations)
• XFL 2001 (RIP)
• UFL 2009 - 6 teams, 2011 4 teams.
• Formative.
• Attempted sale of 30 interest to NFL failed

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Football LeagueNFL XFL

Labor Pool
Labor Pool
Other inputs
NFL Draft
WWF/NBC
LA
CLE
NY
CHI
Homes
ABC
NBC
ESPN
FOX
Is it vertical integration? Is it a cartel in the
labor market? Why are salaries so low compared to
NFL? What does WWF bring to the party?
Homes
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About the XFL Marketing

• What was the product?
• What was the innovation? (Was there one?)
• Why did the XFL Fail?

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About the XFL Economics

• What was the form of entry?
• What was the market structure?
• Production structure? (What was the product?)
• What was the demand? (What market segment)?
• Was the product priced? How?
• Why was there no profit?

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Postscript XFL ?? AFL

• Arena Football www.arenafootball.com
• XFL www.XFL-football.com
• The league is gone
• A website is still there
• How do arena football and (the concept of) the
  XFL differ?
• In general
• In their relationship to the NFL

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WWW.XFL-Football.com (Or is it? and only a
smile remained.)
What is this? Where is the word football in
this web page? How does this website survive?
Website Ca. 2005
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Website Ca. 2007
Website Ca. 2007
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Only the smile (brand name) remains.
Not the real XFL
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The Real XFL 2012, 2013
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United Football League Competitive threat to
NCAA?
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Vertical Integration
Creation
Production
Concerts
Distribution
Retail
CONSUMER
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BSkyB News View of Manchester United

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

Manchester United was purchased in 2004 by
Malcolm Glazer for 1.44 billion.
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Concert Production
Live Nation's mission is to maximize the live
concert experience. Our core business is
producing, marketing and selling live concerts
for artists via our global concert pipe. Live
Nation is the largest producer of live concerts
in the world, annually producing over 16,000
concerts for 1,500 artists in 57 countries. The
company sells over 45 million concert tickets a
year and expects to drive over 60 million unique
visitors to LiveNation.com in 2008. Live Nation
is transforming the concert business by expanding
its concert platform into ticketing and building
the industry's first artist-to-fan vertically
integrated concert platform.
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Ticketmaster
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A Merger Made in Heaven?
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Ticketmaster

• The Back End
• Frontline Management Madonna, Jay-Z, Nickelback,
  Miley Cyrus, The Eagles, 200 others
• The Venues
• Gibson Amphitheater, The House of Blues
• The Tickets Ticketmaster
• The Secondary Market (Scalpers) Tickets Now
• The Issue Is there market power?
• British competition authority thinks so
  rejected the merger in the UK

http//www.reuters.com/article/industryNews/idUSTR
E59F4CO20091016
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Antitrust approval of Live Nation-Ticketmaster
mandated that tickets be made available to
Anschutz Entertainment Group.
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Vertical Integration
Creation
Production
Sports Broadcast
Distribution
Retail
CONSUMER
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Vertical Integration in Sports Broadcasting
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Vertical Relationship
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What are the relation-ships? Where is the benefit
to integra-tion?
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Alternative Distribution
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Vertical Integration
Creation
Production
Movie Studios The Paramount Case
Distribution
Retail
CONSUMER
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The Paramount Case (1948)

• Block booking
• Forward integration theaters
• Backward integration the studio system
• (An exercise in monopsony power)
• The Case

http//www.cobbles.com/simpp_archive/1film_antitru
st.htm
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Echoes of Paramount

• Paramount, 1920s 1940s ? The Paramount Case
• ABC and CBS backward integration into the movie
  business, 1970s when the cost of a film for
  network broadcast rose 800 from 1961-1967.
  Produced 50 of their own output from 1967-1971.
• Does this strategy reduce cost?
• Violated Paramount
• Violated the FCCs Fin-Syn rules. (To be
  revisited later.)
• 1980s studios reintegration into exhibition
  1986, MCA bought 50 of Cineplex-Odeon. 1987,
  Columbia bought all of TriStar.
• 1980s Time Inc. bought Warner Bros. linking
  cable networks and studios. Then, Turner
  Broadcasting.
• 20th Century Fox acquired built Fox broadcasting.
• Sony (electronics) acquired Columbia Pictures.
  (Shades of The Wiz?)
• IN EACH CASE, IS THERE A CLEAR BENEFIT?

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Vertical Integration
Creation
Production
Distribution
Visual Entertainment
Retail
CONSUMER
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Disney and Pixar
On January 24, 2006, Pixar entered into an
agreement with The Walt Disney Company to merge
the two companies. The deal was approved by
shareholders of both companies and the merger
became effective on May 5, 2006. Pixar is now a
wholly-owned subsidiary of The Walt Disney
Company.
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This ones not a wrap!
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Comcast Redux, October 2009

• Comcast
• (Cable Internet)
• Regional sports networks
• E Entertainment
• NBC Universal (minus Vivendi)
• Backwards
• Universal pictures
• Forward
• Telemundo, NBC, MSNBC, CNBC, USA Network
• Hulu (partly owned by NBC)
• Sideways Universal Theme Parks

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Vertical Integration
Creation
Production
Distribution
Internet and Cable Radio
Retail
CONSUMER
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Any Case for Integration?Would Comcast want to
acquire Music Choice?
51 channels of wall to wall music. No ads.
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Any Case for Integration? Where?
Performance Rights Organizations
Performance Rights (to Music Choice, through to
the audience)
Distributors
Music Packager
P.R.s
White Label Music Provider
Mechanical Rights
M.R.s
Recorded Music
Music
Recording Companies (Labels)
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Vertical Disintegration
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Vertical Integration
Creation
Production
Distribution
Music Downloads
Retail
CONSUMER
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Music Download Backward Integration
FRANKFURT, March 25 (Reuters) - German retailer
Metro AG has taken a controlling stake in
Britain's 24-7 Entertainment, which supplies
technology used in music downloads, Metro said on
Wednesday. 24-7 managed 93 million downloads in
Europe last year. The London based company
operates 41 download stores n 13 countries and
has licenses with more than 12,000 record labels.
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More Backwards Integration
Nokia and Loudeye Corp. announced that they have
signed an agreement for Nokia to acquire Loudeye
for approximately USD 60 million. Loudeye is one
of the global leaders of digital music platforms
and digital media distribution services. By
acquiring Loudeye, Nokia can offer consumers a
comprehensive mobile music experience, including
devices, applications and the ability to purchase
digital music.The multi-function mobile device
will become the preferred medium for enjoying
music and Nokia is leading this trend. With music
optimized products like the Nokia N91 and other
Nokia devices, Nokia sold more than 15 million
music enabled devices in the 2nd quarter, making
it the world's largest manufacture of digital
music players.
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Vertical Integration
Creation
Production
Distribution
E-Book Publishing
Retail
CONSUMER
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Vertical Structure in Publishing
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Sramana Mitra Tech Author
Enabled by (1) Electronic Distribution
(2) Amazons Marketing
Recommendation System.Authors royalty is 3-4
times the traditional arrangement.Certain
specific genres lend themselves to this new
format.
http//www.sramanamitra.com/2008/10/01/will-entrep
reneur-journeys-kindle-vertical-integration/print/
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Some genres do not lend themselves well to
integrated production and distribution by
Amazon/kindle
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Still Room for Technological Improvement in
e-Books
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What Model Applies?
Agency Model Publisher sets the price Apple
gets 30
E-Book publishers. Is there market power in any
segments in this market? Is there an incentive
for 5 publishers to conspire with Apple to raise
prices? (Hachette, Harper Collins, Macmillan,
Penguin, SimonSchuster What is Amazons best
market strtegy?
Amazons Model Amazon pays ½ cover price,
determines its own price.
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Entertainment and Media Markets and Economics

• Coming Soon A Theater Near You

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Coming Soon A Theater Near You

• Studios and Exhibitors
• The Problem of Holdup
• Incentives of the Two Parties
• Vertical Integration
• Forward by the Studios
• Backward by the Exhibitors
• Bollywoods Boycott of Major Theater Chains

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Evolution of a Holdup Problem
In 80s and 90s (1) 15,000 new screens were
built increase to
36,000 by 2000
(2) Nearly all theater chains were in
bankruptcy (3) Movie
distribution contracts give up to 80
of the first weeks box
office to studios.
Summer 2001
Summer 1991

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

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

Dropoff in 2nd Week Revenues of the Number one
Movie, by Week
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Same Market Results 10/09
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Solutions to Holdup

• Diversify the specific capital
• What else can you do with a movie theater?
• Vertical integration
• Theaters and the Paramount case
• Sony and Leows Theaters

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NationalCinemedia.com Fathom Business Events
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Strategy?

• Time Warner had some ability to foreclose
  studios through control of HBO and Cinemax
• Viacom Paramount looks similar.
• Self supply? Looks like it.
• Disney-ABC
• Warner and Paramount have their own networks
• Disney, Paramount, Warner Bros. supply about 1/3
  of major network prime time programming
• FCC abolished Fin-Syn rules, so networks can own
  the content providers.
• As always Who is this good for?

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Disappearing DVD Market

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

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Bollywood

• Strikehttp//seattletimes.nwsource.com/html/ente
  rtainment/2009195589_apasindiabollywoodboycott.htm
  l

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Entertainment and Media Markets and Economics

• Motivation for, costs and benefits of vertical
  integration