Exam preparation materials

Chapter 6 • Economic Perspective

The female actors who acted in the Black Panther movie as the Dora Milaje including Danai Gurira and Florence Kasumba. They pose with four others in evening gowns at the Premiere of the movie.

Actress Sydelle Noel and fellow cast members attend the premiere of Black Panther, one of Marvel’s top grossing films, at the California Dolby Theatre on January 29, 2018.

Barry King/Alamy Stock Photo

Key Idea: The businesses in the media industries are in strong competition with each other to acquire limited resources, play the high-risk game of attracting audiences, and achieve a maximum profit.

· The Media Game of Economics

o The Players

o The Goal

· Characteristics of the Game

o Nature of Competition

o Complex Interdependency among Players

o Importance of Valuing Resources Well

o Digital Convergence

· Media Industry Strategies

o Maximizing Profits

§ Increasing Revenue

§ Minimizing Expenses

o Constructing Audiences

§ Attracting People to Niche Audiences

§ Conditioning Audiences

o Reducing Risk

· Consumers’ Strategies

o Default Strategy

o Media Literacy Strategy

· Summary

· Further Reading

· Keeping Up to Date

· Exercises

The other day, I was talking to my neighbor, Blaine, who had just graduated from college with a degree in economics. He was telling me how important it was to maximize resources in one’s personal life. “When it comes to the mass media, I try to keep my costs down. That’s why I go to the library and borrow books rather than buy them,” he told me. “I also read newspapers and magazines there for free.”

“What if you want a book that someone else has checked out or what if someone else is reading the newspaper when you want to read it?”

“Then I wait, or I’ll go online to see if I can find a copy to read for free.” He switched the subject, “I also use the library to check out movies and documentaries. Some of them allow users to make copies for free.”

“How many copies have you made?”

“With music, I probably have 10,000 songs in my music library. And I have almost 1,000 videos of movies, documentaries, and podcasts.”

“Doesn’t that take a lot of time to make all those copies and keep organizing your library?”

“Yes, it takes some time, but it’s a hobby.”

“How much time do you spend watching all these videos and podcasts?”

“That’s the beauty of having a large library. I have so many choices that if one doesn’t grab my interest right away, I just try another one until I find one that I like. There are so many bad videos these days that you need a large library to find one that’s any good.”

“And your music? How much time do you spend listening to all that music?”

“Not as much as I would like. There’s just not enough time in the day!” He thought for a minute and added, “Also, after a while, all the new songs sound so derivative of other songs; they all begin to sound alike.”

“Blaine, it sounds to me that you are very careful about not spending much money on the media but you do spend an awful lot of time. And it also seems that you don’t get much in return for this investment of time.”

“How can you say that? I have amassed a huge library of videos and songs.”

“But what’s the point of having acquired all those messages if you don’t enjoy them much? The real payoff is personal enjoyment. It doesn’t seem to me that your huge investment of time has much payoff.”

The economic perspective focuses on resources. When we think of our personal resources, we usually focus on money. Before you read on, take a few minutes to complete Exercise 6.1 to estimate how much money you typically spend on the media.

As a consumer of media messages, it is also important to think of time, which can be an even more valuable resource than money. How much time do you spend with the media? To see if your perception of time with the media is accurate, complete Exercise 6.2.

The mass media are very successful each year at getting us to give them large amounts of our money and time in exchange for our exposures to a wide range of media messages. Now that you have a better idea of how much of your resources you are spending on the media, the material in this chapter might make more sense to you. As you read through the following sections, keep asking yourself: How well am I playing the economic game?

THE MEDIA GAME OF ECONOMICS

We play a game of economics each and every day; we cannot avoid playing. At the end of each day, we have spent our full 24 hours. What have you received back from this expenditure of time? Do you feel you are better off having traded away all that time? Or do you feel that your time has been wasted and that you have received little in exchange for those 24 hours?

The Players

Because we spend so much time with the media, it is important to examine this part of the overall economic game. Within the media part of the game, there are four groups of players: (a) you the consumer, (b) the advertisers, (c) the media companies, and (d) the employees of media companies. Each type of player brings a different set of resources to the game.

We are the consumers, and our resources include not only our money but, even more importantly, our time and our attention. We seek to exchange our money and time for entertainment and information. We as consumers are the largest group, with almost 330 million people in this country and over seven billion people worldwide. We have the greatest amount of resources. If we pulled out of the game entirely, the game would collapse. However, our resources are dispersed over so many people that no one individual feels they have that much power in playing the game. But feeling this way is a mistake because it limits your motivation to exercise control over your economic exchanges. While no one individual has a significant amount of power to change the overall game, each of us has the power to alter the game significantly for ourselves. If we play the game well, we continually increase the value of the entertainment and information we get in return for our time and money. Playing the game well requires that we keep track of our resources as well as our changing needs and that we negotiate better exchanges of resources. If we don’t play the game well, we will make poor economic exchanges and continually get shortchanged on our expenditures of time and money.

The advertisers are a second group of players. Advertisers bring money to the game. They negotiate an exchange of their money for access to audiences they want to target with their ads. Advertisers are very sophisticated in their economic exchanges because they continuously negotiate with the media to get audience access at the lowest cost to them. For example, sellers of tennis rackets want to get their ad messages in front of as many people who play tennis as possible, but they do not want to pay a lot of money to get access to a large audience that might also include toddlers, invalids, and people who hate tennis. Therefore, they look for media vehicles (such as particular sports television shows, internet sites, and magazines) that have constructed an audience of only tennis players and negotiate a good ad price to get access to that smaller niche audience.

The media companies are the third group of players. These businesses bring money, messages, and audiences to the game as they compete in three different markets simultaneously. First, each media business competes in the talent market to try to get the best website designers, writers, journalists, actors, directors, musicians, and so on under contract to them. They try to keep these personnel costs low, but because the top talent is in short supply, their expenses escalate each year. Second, media businesses compete in the audience market; that is, they present the messages produced by their talented employees in such a way to attract the greatest number of people within certain types of audiences. In the media industries of magazines, newspapers, cable, and internet, those companies sell subscriptions, so they want to maximize their revenue by attracting as many subscribers as possible. Media companies also sell messages in the form of books, recordings (music and movies), and theater tickets. And digital media companies grant access to their media platforms in exchange for user time and information about those users. Third, media companies compete in the advertising market. The audiences that media companies have constructed are a valuable resource that advertisers are willing to pay for in order to get access to them.

The media employees comprise the fourth group of players. Employees bring their time, skills, and talent to the game. Their goal is to increase the pay and benefits they receive for each hour worked. In the media, we make a distinction between below-the-line employees and above-the-line employees. Below-the-line employees are typically the crafts and clerical people who apply fairly common skills in the performance of their jobs. These skills can be learned by many people and can be improved with practice. That is, with the proper training and motivation, many people could perform well in most below-the-line jobs, such as a lighting technician, sound boom operator, copy editor, ticket taker, cable installer, secretary, or receptionist. There is a very large number of people who potentially could do these jobs, so the supply (people wanting these jobs) is much larger than the demand (number of these jobs available). Therefore, the payments to the people who perform these jobs is relatively low.

Taylor Swift is seen singing on a stage as she plays an acoustic guitar. A row of lights on the floor of the stage are lit and pointed upward.

Taylor Swift performs onstage during the 2019 MTV Video Music Awards in New Jersey. Her contribution as an above-the-line talent is due not only to her singing talent but also to her ability to draw large audiences with her brand.

Kevin Mazur/Getty Images

The above-the-line employees are the creative types and the entrepreneurs. The key resource that these above-the-line people provide is talent in areas of web design, writing, acting, directing and producing. We typically regard talent as artistic ability, but for the mass media industries, talent is regarded more as the ability to attract large audiences and make them want to return for repeated exposures. Sometimes, the two conceptualizations of talent are the same, but more often, the two are very different. For example, the singing ability of Taylor Swift, Miley Cyrus, and Justin Bieber, although good, cannot alone account for their huge popularity; that is, these recording artists have some inexplicable ability to attract large audiences that cannot be explained solely by the artistic quality of their singing ability. Also, there are many television stars who are not particularly good actors, yet they are in high demand by television producers because these actors can attract large audiences.

Compare & Contrast Below-the-Line Costs and Above-the-Line Costs

Compare: Below-the-line costs and above-the-line costs are the same in the following ways:

· Both are expenses that media companies pay as a necessary cost of doing business in a mass medium industry.

· Both are payments made to individuals to compensate them for their skills and efforts.

Contrast: Below-the-line costs and above-the-line costs are different in the following ways:

· Below-the-line costs are payments to people whose skills are widespread in the general population whereas above-the-line costs are payments to people whose talent is rare and thus in short supply.

· Below-the-line costs are payments to people who require some relatively simple training to do their jobs well whereas above-the-line costs are payments to people whose jobs rely on talent that cannot be trained.

Above-the-line people are paid a lot more than below-the-line people because this kind of talent is in higher demand than the supply provides. For example, many people can sing and play musical instruments well, but very few musicians can attract enough fans who will pay to download their recordings in large numbers. The celebrities who can attract the most attention are paid the most (see Table 6.1).

Table 6.1

Figures in left column represent income in millions of dollars.

Source: Forbes (2019, July 10)

Another elite strata of people in the media industries are the top executives who run the largest media companies (see Table 6.2). It takes an enormous degree of entrepreneurial talent to run a media business successfully in such a risky industry. Notice the figures in the column labeled Ratio, which indicate how many times more these executives are compensated compared to the median pay of their employees. For example, Leslie Moonves is the top executive at CBS, where the median pay for an employee is $116,470. This means that the board of directors at CBS in 2017 thought that Moonves was 595 times as valuable to the company as the average employee.

Table 6.2

Pay figures are in millions of dollars and include total compensation, including base salary and bonuses paid in 2017.

Ratio is the comparison of the executive’s salary to the median pay of employees in that company.

N/A means not applicable. CEO is chief operating officer.

Source: Lang & Lieberman, 2018, May 8

The Goal

For all four types of players, the general goal is to maximize the value of the exchange for themselves. Those who play the game well become net winners; that is, they continually negotiate resource exchanges so well that their payoffs are of greater value than their costs each day. Because the resource exchange game is zero sum, the other players who give up resources more valuable than they receive in return are the net losers.

Determining value is computed in very different ways for different players. For the media businesses and advertisers, value can be computed quantitatively in numbers of dollars. These businesses compare the dollars they have to spend to create messages and attract audiences (expenses) to the dollars that those exposures generate (revenue). When the businesses keep expenses lower than revenues, they generate a profit. The larger the profit they generate each year, the more of a net winner they are.

For consumers, our media costs are relatively easy to track because they are quantitative. Our financial costs are tracked in dollars and our cost of time can be tracked in hours, which then can be translated into dollar amounts. But our payoffs—what we get in return for paying the costs—are very difficult to track quantitatively. Typically we assess these payoffs intuitively; that is, as long as we are feeling some satisfaction with a media exposure, we typically allow ourselves to continue in that exposure instead of asking questions about whether our various media exposures are delivering enough satisfaction to warrant the continuing expenditures of our resources. This lack of questioning keeps us in a default mode in which we follow habits that are likely to deliver less and less satisfaction over time.

CHARACTERISTICS OF THE GAME

To understand more about how the economic game is played with the mass media, you need to understand four characteristics of that game. These characteristics are as follows: the nature of competition, the complex interdependency among players, the importance of valuing resources well, and digital convergence. An understanding of this set of principles will help you comprehend how the negotiation for resources takes place.

Nature of Competition

Economists make a distinction between monopolistic industries and competitive industries. In monopolistic industries, one company controls the market; consumers must buy their products from that one company by paying high prices or go without the product. In contrast, competitive industries have many companies producing the same (or very similar) products; in order to be successful in generating sales, these companies continually improve the quality of their products while keeping their prices low enough to be competitive. Thus, competitive markets are regarded as much more favorable for consumers.

Within the media industries, there are few examples of purely monopolistic or purely competitive markets. Instead, there is a coexisting of the features of the two types, which has been referred to as monopolistic competition—monopolistic because each media industry is typically dominated by a large, powerful company, and competition because each media industry allows for a large number of businesses that compete aggressively for resources. In a monopolistic competitive market, the barriers to entry are relatively low so many companies can enter the market and compete for audiences; however, only a few companies are enormously skilled at continuously making the right economic exchanges so that they are able to attract a relatively large proportion of the audience and advertising revenue. While new companies enter the media market all the time, almost all struggle to stay in business. In order to stay in business, those new companies must identify a niche audience with a need that is not yet met, develop the right kinds of messages to attract those audience members, and condition those audiences for repeat exposures. If these newer companies can continue to satisfy the message needs of their niche audience better than their competitors, they grow more powerful, even to the point of becoming an extremely powerful company themselves, such as Apple, Amazon, Facebook, and Google.

A key characteristic of monopolistic competition is that companies all market very similar products but are able to convince consumers that their products are different. Thus, companies spend a lot of effort in marketing campaigns to convince consumers that the tiny differences are crucially important so that consumers will regard their products as different and superior to the competition’s products (Taylor, 2012). For example, the film industry is dominated by a small number of Hollywood studios. While the action/adventure films that they produce have different titles, actors, settings, and dialogue, they are very similar in many other ways (plot structure, emotions they trigger in the audience, etc.). Likewise, digital games all look different from one another on the surface but the structure of the games themselves as well as the experience of playing them are largely similar across those games.

Complex Interdependency among Players

Some exchanges are relatively simple, such as when two people make an exchange and no one else is affected or concerned with that individual exchange. But often, the negotiation for resources is more complex. There are times when the consequences of a particular resource exchange ripple outward from that exchange to create a cascade of pressures that affect other players in the game. In the media industries, players exist in a state of complex interdependence in which the actions of one player can affect other players in complex ways. For example, let’s say a radio station wants to attract more advertisers, so it cuts the price of its advertising avails by 20% in its highest-rated show. Advertisers want to buy those advertising avails, so demand for those avails increases. The station, which used to air 15 minutes of ads during an hour, decides to air 20 minutes of ads, thus increasing its supply of avails to meet the increasing demand. The station likes this because even though it has cut its income per ad by 20%, it is now selling 33% more avails; thus, the station has increased its total ad revenue. But the audience notices this change and becomes upset that there are so many ads and not nearly as much music. Most of the audience switches channels during the ads and never comes back. The station’s ratings drop dramatically. Then advertisers become unhappy because it is no bargain to get a 20% discount on ads if the audience they expected to reach is almost gone. Advertisers begin feeling they are wasting their money, so they stop buying those ads.

When a person at one media company makes a decision, it can often have an impact on other companies in the same industry and perhaps other media industries. Returning to the radio station example above, when advertisers flocked to the station to get the discounted price for the avail, other radio stations (as well as television stations, newspapers, and local magazines) most likely lost advertising revenue. So, when the revenues of one vehicle dramatically increase in the short term, the revenues of other competing vehicles are affected and usually go down. The same ripple effect can be seen with the expenses of media companies. For example, if several media companies started paying writers more money, then the better writers would be attracted to those better-paying companies, and the other companies would either have to pay more or make do with less-talented writers, which would lower the quality of their shows and result in losing audience size and hence lowering revenue. When something changes in an industry where all the components are tightly linked, that change ripples outward and affects other players.

Another characteristic that contributes to the complexity is that sometimes decision makers are conflicted because they are experiencing cross-purposes. An example of this is when a decision maker might be a member of more than one group, each with a different economic goal. Let’s say you are a journalist who works for a news website, and let’s say that you are also one of the founders and owners of the website business. As an employee, you might want a raise in salary, but this would increase overall personnel expenses and therefore reduce profits, making your investment as a business owner less valuable. On a different scale, let’s say you own some stock in Amazon.com. As a customer of Amazon, you like buying products at a very low price and having them shipped to you for free. But as a stockholder of the company, you worry that the low prices and free shipping are reducing Amazon’s profit; this makes your investment less valuable.

Media businesses compete in different markets. A market is a segment of the audience to which you offer your product or service. Markets differ in size, with the largest market in the United States being the national one. Only a few vehicles (such as huge social networking sites, television network prime-time broadcast programs, USA Today newspaper, and major Hollywood movies) see themselves competing in a national market. More typically, media vehicles each focus on a special niche within the huge national audience. One way of identifying a niche is by geography, such as the case with newspapers, radio stations, and broadcast television stations. Media vehicles in these industries have their own geographical locale, such as a city or a limited region. Another way of identifying a niche is by audience interest, which is common with websites, cable television channels, and magazines. For example, a website about repairing motorcycles appeals to a very different audience than a fan website about Taylor Swift. The History Channel on cable television attracts a different viewer than does Comedy Central.

Ellen DeGeneres on the sets of her talk show with a woman and a girl sitting on the couch beside her. A man in a military uniform with the name tag Villegas is seen on the large screen behind them, smiling.

Many talk shows tend to compete with one another by using similar features. The Ellen DeGeneres Show, for example, promotes the comedic charm and generosity of host Ellen DeGeneres to make the show feel familiar but also stand out among competitors.

AB Forces News Collection/Alamy Stock Photo

Clearly, the economics of the mass media industries are complex. The complexity can be traced to the fact that there are different kinds of players, each with their own needs that are most often in conflict with the needs of other players. As the different types of players are continuously exchanging resources, the consequences of those exchanges are constantly altering the market. The effects of each exchange ripple outward and influence the decisions of other players because all players are interdependent on one another.

Importance of Valuing Resources Well

The key to being successful in negotiations is to value resources accurately. If one player can do this and the second player cannot, the second player is at a real disadvantage. There are two considerations that go into resource valuation, and both of these require considerable skill to do well.

One factor in valuing one’s resources is to consider supply and demand. This factor favors the consumer because media companies supply a great many messages of all kinds constantly, and media companies are always trying to increase demand. Because there is no scarcity of media messages on any conceivable topic, consumers have no motivation to pay more of their resources as a premium for access to scarce messages.

A second factor that is important in valuing resources is making an assessment about how well the resource will achieve a particular goal. This factor favors the media businesses because the businesses are much more aware of their goals and much more involved in developing strategies to achieve those goals. In contrast, audience members often have very fuzzy (or no) goals. Oftentimes, we engage in media exposures simply to kill time, which means we are trying to give away our time resource for free. And when we do have a goal for exposures (i.e., wanting to be entertained), we are typically willing to accept whatever is easily available to satisfy that need rather than developing a strategy to find the messages that would satisfy this goal the best.

The more skill people apply in valuing their resources, the more successful they will be in negotiating. For example, let’s say you find something in your parents’ attic that you think may be valuable. You take it to an antique dealer to sell it. The dealer offers you $60 for it. Should you accept the $60 and sell it to the dealer? If you have no knowledge of antiques and no idea about how rare the piece is, you are operating in the dark. You might think you are savvy and ask for $100, then settle for $80, feeling good that you got the dealer to raise their price by $20. But maybe the piece is worth $1,000. If you don’t have a good operating knowledge about what your resources are worth, you will continually fall into one of two traps. One trap is to overvalue your resources, and other people will avoid making exchanges with you. The other trap is to undervalue your resources, in which case, you make lots of exchanges but you continually are shortchanged. When you have little knowledge of the value of your resources, you can only play the game to lose.

Digital Convergence

Recall from Chapter 5 that digital convergence has eroded the characteristics that previously made the various analog media so different from one another. In order to adapt to the pressures from the rise of the digital media, the analog media have been translating their messages into digital code in order to make it easier to transmit their messages across a wide range of channels.

The digitization of content has also lowered the barriers to entry for entrepreneurs. All of this recently available technology has made it relatively easy for anyone to create content and disseminate it instantly to people all over the world. Now anyone can create a newspaper or magazine by setting up a blog. Anyone can set up a book publishing company by using a very low-cost platform such as Amazon.com. Anyone can create their own music through relatively easy-to-use digital programs such as Garage Band and distribute as much music as they want on YouTube or on their own blogs. Now the distribution problem has shifted away from entrepreneurs trying to get access to existing media channels and much more toward creating messages and platforms that can attract a certain type of user and thus creating new niche audiences.

MEDIA INDUSTRY STRATEGIES

The media industries have developed some general economic strategies over the years that make them successful at playing the economic game and achieving their goals. Three major strategies are illuminated in this section: maximizing profits, constructing audiences, and reducing risk.

Maximizing Profits

Almost all mass media are profit-oriented enterprises. As businesses, they are run to make as large a profit as possible. Remember that profit is the payoff or reward for doing business. Profits increase when companies increase revenue while driving down expenses.

Increasing Revenue

A major strategy employed by media businesses to maximize their overall revenue is to increase the number of revenue streams. Given the way audiences have been fragmenting into smaller and smaller slivers, the level of revenue that can be generated by any one audience has been decreasing. To work around this problem of fragmenting audiences, media businesses have had to develop multiple revenue streams. One way to do this is to try to appeal to more than one audience. Another way to do this is to try to develop several ways to generate money from the same audience. For example, a film studio will develop an action/adventure movie to attract a certain kind of audience to buy tickets at a theater when the movie is first released. Although movie studios typically spend $50 million advertising a film, they know that many films will not earn this much at the box office. So, the studios sell the movie on DVDs and through downloads from internet sites. They also lease the movie to foreign distributors, and this adds another revenue stream. They lease the film to the airlines for showing during flights. They also sell downloads of the music from the film. Often, they try to produce toys, clothing, or other artifacts from the film and sell those to the public. They sometimes hire writers to turn the movie into a book. Or they could hire someone to translate the movie into a comic book format. They also sell product placements in the films. All these revenue streams increase the total revenue and thus give the film a better chance to be profitable. This strategy is not limited to film but applies to all the media industries.

As media companies merge and acquire other media companies, they increase their access to more channels and vehicles. Thus, larger media companies can be more successful with the strategy of increasing the number of revenue streams. As a media company grows, it can more easily market a single message across many channels and thus quickly create multiple revenue streams for that one message. Thus, the revenues increase while costs remain the same, and this translates directly to larger profits.

A view from the rear of an airplane of rows of three seats on the left and three more in the middle and people walking to their seats. A small screen is visible on the back of each seat.

Beyond traditional outlets, media companies look for additional streams of revenue such as licensing their films and television programs for viewing on airplanes.

iStock.com/Wachiwit

Minimizing Expenses

One of the largest expenses across all the media industries is personnel. Recall from earlier in this chapter that I made a distinction between below-the-line and above-the-line employees. Because the talent of above-the-line employees is at a premium, media companies must pay huge sums to hire this talent. To compensate for this increasing cost of talent, companies are pressured to keep the below-the-line costs down. Most of the positions in the media industries are fairly low-level jobs that entail routine assignments that can be done by many different people with little training. These are the secretaries, receptionists, ticket takers, and low-level craftspeople. A bit higher than this are the assistant producers, camera operators, disc jockeys, and the like. Some of these people have special talent and quickly move up to the top of their industry, but most of them do not.

People with a high degree of talent are paid a lot of money because these people are essential for a media company to generate large revenues. To counterbalance the large payments to talent, companies reduce expenses by paying clerical workers as little as possible. Because the supply of potential workers for entry-level positions is so much larger than the demand, media companies can pay near minimum wage and still attract satisfactory below-the-line employees.

The media reduce expenses through economies of scale and economies of scope. Economies of scale exist when marginal costs are lower than average costs—when producing an extra unit of a good decreases as the scale of output expands. Large production runs are good because they spread out the start-up expenses over many units; thus, with each additional unit manufactured, the per-unit cost continues to go down (Doyle, 2002). To illustrate, let’s say you are a magazine publisher and your cost of operation (reporters, editors, salespeople, office staff, rent on the building, depreciation of all your equipment, supplies, phones, other utilities, etc.) is $60,000 per week. This is your fixed cost. If you print only one copy of the magazine each week, you will have to sell it for $60,000 just to cover your fixed costs. If you print two copies, you will have to sell each for $30,000 to cover all your costs; your average fixed cost per copy is cut in half. If you print 60,000 copies, your average fixed cost per copy is only one dollar. Thus, your average fixed costs keep going down as these costs are spread over more and more copies.

However, when you print more copies, the cost of paper, ink, and distribution increases; these are your variable costs because they vary according to how many copies you print. The more copies you print, the more paper and ink you will need, and the price you pay for a roll of paper or a gallon of ink will go down because you can buy these materials in bulk and get big discounts. Although your total cost for ink and paper will go up when printing more copies, your average variable cost for these will go down. This is known as economies of scale. The bigger the scale of your business, the more likely your costs will go down either through the ability to demand greater discounts or because you are able to operate more efficiently beyond a certain point.

The media companies, similar to any other business, want to keep their expenses down, so they will find the point at which the combination of both their average fixed costs and their average variable costs are lowest. Beyond this point, distributing more copies only serves to increase unit costs and thus reduce profit. So, newspapers, magazines, books, and recordings each seek the point where their average total costs (the sum of average fixed costs and average variable costs) are lowest.

With economies of scale, broadcast television, radio, and websites are different from the other media. They have no variable costs, only fixed costs. For example, with broadcast television, there is no cost to the station of adding an additional viewer to the audience. Viewers pay for their own television receivers, and they pay for the electricity to run them. The station has no distribution costs other than the electricity of the broadcast signal, and the power used to broadcast a station’s signal is the same whether 100 or 100,000 sets are tuned in. It is fixed. With no variable costs and with a very high first-copy fixed cost, broadcast television stations keep dropping their average total costs with each additional audience member added. For this reason, the broadcast media (both radio and television) are strongly motivated, more than any other media, to increase the size of their audiences. The same pattern holds to a lesser degree with websites; however, with websites, there are some variable costs. That is, if a website increases its number of users from 1,000 to 10,000, it will need to buy additional servers and pay for the electricity to run them.

Economies of scope also serve to reduce a firm’s expenses per unit. Economies of scope are achieved by distributing the same message through many different channels. Recall the example above about a movie company generating many revenue streams for a single movie. While it is very expensive to produce a Hollywood movie, it is very inexpensive to make the movie available to movie theaters and to users on cable television and video-on-demand streaming services. By increasing the scope of distributing the same message, very little additional costs are incurred, and yet the potential for revenues increasing is great.

Digitization has made economies of scope even more attractive because it creates little cost to retransmit a message in many different channels. Also, digitization allows for compression of greater amounts of data or more layers of content to be packed into a product. Now you can use a video-on-demand service to stream an entire movie: The streaming also gives you access to interviews with the writer, director, and stars; outtakes; the director’s cut; alternative endings; and so on.

Let’s see if you can apply this general information about revenues and expenses to specific media companies by doing Exercise 6.3. To get this information, access a company’s website and see if you can find its annual financial report.

Constructing Audiences

A second strategy that media businesses use to maximize profits is to construct desirable audiences and rent them out to advertisers. A media business builds an audience by recognizing where there is a need for entertainment or information and providing those products and services to satisfy those needs. This can be done generally in one of two ways. A media business can either (a) use a quantity audience strategy (i.e., try to attract as large a general audience as possible) or (b) use a quality audience strategy (i.e., try to attract a certain kind of niche audience).

The dominant mass media in the past have typically used a quantity audience strategy. They tried to present whatever content they felt would attract the greatest number of people without caring much about who they were; they simply sought the greatest number of people they could attract. This is what the commercial television networks have done in the past, especially for their prime-time period (8 to 11 PM each night). During the peak of broadcast television, a prime-time show that generated a rating of 10 was regarded as a failure. Now with audience fragmentation, a prime-time show that generates a rating of 10 is regarded as a hit show.

Attracting People to Niche Audiences

The radio and magazine industries have been very successful for years in attracting a niche audience. Recall from the previous chapter that radio was displaced by television as the dominant medium in the middle of the last century. In order to pull itself out of a decline and adapt, radio switched from a quantitative to a qualitative audience strategy; each radio station developed a certain sound to appeal to one kind of listener. For example, one station used rap music to attract urban youth, whereas another station used golden oldies to attract the aging baby boomers. The audience for each of these stations was relatively small compared to the audience for broadcast television, which was at its peak and used a quantity strategy to try to appeal to everyone. Now television is no longer at a peak and it is trying to adapt by switching to a quality audience strategy.

Relatively small, highly targeted audiences have great value to many advertisers, because special groups of people have special needs. Businesses that are marketing products for a special audience will pay a premium to the media vehicles that attract that special audience. For example, joggers as a group have a special need for information on running practices, equipment, and training techniques. They support several magazines that publish nothing but this type of information. Manufacturers of jogging equipment pay a premium to place ads in these magazines, knowing that the buying of advertising space in these magazines is a very efficient purchase because the ads placed there will reach their most likely customers.

This niche orientation is called long tail marketing, which was introduced in the previous chapter. The market for products of all kinds as well as media messages is now much less concentrated on a few hits and is much more spread out across thousands of alternatives, each of which generates a small amount of sales. Our economy has shifted away from a focus on relatively few hits (mainstream products) and moved toward servicing the needs of thousands of tiny markets forming a long tail. To illustrate, the recording industry used to focus on signing only those musical groups that could produce hit records. The recording industry was interested only in bestsellers, with only those songs on the Billboard Top 100 list having any value. But with the introduction of MP3 players in 2001 and the widespread use of music-sharing platforms on the internet, the recording industry moved much more into long tail marketing and by 2006, there were eight million unique song tracks being sold and shared.

Long tail marketing relies on aggregators, which are internet platforms that bring together buyers and sellers of all kinds of products and services. Anderson (2006) explains that there are five kinds of aggregators: physical goods (Amazon, eBay), digital goods (iTunes), advertising services (Google, Craigslist), information (Google, Wikipedia), and communities/user-created content (Facebook). These aggregators rely on recommendations to direct users to the products and services they are most likely to buy. That is, the aggregators make filtering decisions so that users can have a more efficient buying experience and not have to slog through all the hundreds of thousands of choices that are available on a site.

What makes long tail marketing so successful is the widespread use of technologies that many people can use to create products and messages, the removal of limitations in bottlenecks of distribution, and the limits on product lines in stores. Now everything is available (Anderson, 2006). It is easier than ever to create media messages in many forms (print, musical recordings, video) and make them widely available (blogs, Amazon, iTunes, YouTube, Facebook, etc.)

We are now in the middle of a major retailing shift away from brick-and-mortar stores to web-based stores. Brick-and-mortar stores have limited shelf space and can only offer a small percentage of products, but virtual sites on the internet can offer a much more extensive selection of products.

Conditioning Audiences

Once a mass media business has constructed an audience, it needs to maintain that audience so it can continue to rent it out to advertisers. The mass media businesses are not especially interested in providing a message for a single exposure, as a concert promoter might. The mass media want to stay in business over the long term, and this requires that they maintain their audiences. Therefore, they must condition their audience members so that they develop a habit of exposure.

Reducing Risk

While all businesses face risk, the degree of risk is especially high in the media businesses. For example, 80% of all television series introduced during prime time do not attract an audience large enough for networks to ask for a second season of production (Goldberg, 2018). Also, very few Hollywood films earn enough at the box office to cover their initial production costs, and less than 2% of films released each year in the United States account for 80% of box office returns (Schumpeter, 2011). Look at the assortment of movies displayed in Table 6.3 to see how costly it is to make a Hollywood film. Some of these films make enormous amounts of money, but many do not even cover their production costs.

Table 6.3

Values are in millions of dollars.

Source: Information collected from IMDbPro (2018, June 20)

How do media companies reduce the risk that their messages will fail to attract a large enough audience to recover their initial costs of production? Media businesses have shifted their thinking toward something called the marketing concept. Instead of beginning with messages and then trying to find audiences for those messages, media businesses begin with audience needs and then construct messages to meet those needs. With the marketing concept, managers conduct research to identify particular niche audiences and find out what the unmet needs are for those audiences. Then the media develop messages to meet those previously unmet needs. Beginning with research first and product development second reduces the risk of message failure once the messages are released into the market.

This procedure is used frequently by the media industries. Researchers look at what works and then develop shows that are sequels or spin-offs of successful shows. Also, in the magazine industry, a large conglomerate will do market testing for unmet needs for magazines; once a need is found, the company will develop a magazine to reach that niche audience and then rent those consumers to a particular set of advertisers who need to expose that particular audience to their ad messages. Hollywood is fond of sequels because they reduce risk. In 2016 alone, Hollywood released 20 movies that were sequels, and at the time, 17 of the top 20 grossing movies of all time were sequels (Cheang, 2016). Notice in Table 6.3 that there are many movie series (e.g., Pirates of the Caribbean, Avengers) that earn huge worldwide revenues that more than pay back their production costs. Movie goers like paying for new stories about their favorite characters.

CONSUMERS’ STRATEGIES

We as consumers follow strategies just as the media industries do. However, our strategies are quite different from the profit-maximizing strategies of the mass media. We have two options for strategies. We can follow a default strategy or we can follow a media literacy strategy.

Default Strategy

The default strategy typically runs continuously in our unconscious minds. It guides us to follow our preprogrammed habits because this requires very little effort and delivers familiar satisfactions. If we get on Facebook every morning, we will continue to get on Facebook each morning. If we typically send 20 tweets per day, we will continue sending a similar number of tweets each day. If we like a half-dozen music groups, we follow their new releases and typically ignore the music of other groups and are completely unaware of the music in other genres. We follow these habits because it is easy to continue doing what we have in the past without thinking about it much. These habits were developed in the past when we tried something new and felt it was a pleasant experience, so we continue with these habits without thinking about them much. We rarely search out very different types of messages, either because we are not sure what other messages are out there or we feel that searching out those messages will entail much more effort than it is worth; that is, we will not feel more rewarded by them. Although the messages we currently experience may not be providing us with huge rewards, they have almost no costs to us because they are routine habits. Therefore, when we think about the value of our media exposures, we are likely to focus more on their low cost instead of their lack of delivering a high return. That is, we are likely to feel satisfied with exposures that deliver little payoff as long as they require little investment of effort.

Media Literacy Strategy

People who follow a media literacy strategy are motivated to become better at the economic game. This means they have higher expectations for a return on the resources they expend. They want more than minimal satisfaction from exposures. They think much more about the value of their own resources, and they search for ways to negotiate a better exchange for those resources.

In thinking about how much of your resources you give to the mass media, it is important to make a distinction between direct and indirect support. Think of your direct support as being those financial payments you make directly to a media company. For example, when you subscribe to a website, magazine, or cable television service, you pay a subscription fee to a media company. When you download a movie or recording, you make a payment to a media store. When you buy hardware (e.g., smartphone, laptop computer), you pay money to a store that sells those devices to receive media messages. These are all direct payments because you are involved in an exchange with a media company who gives you access to a media message in exchange for your money.

Think of indirect support of the media as the time you invest when you expose yourself to media messages. Media companies then translate your time into money by selling your time to advertisers. Advertisers then add this expense to the selling price of their products. So, when you buy a heavily advertised product, you are indirectly supporting the media. By paying more for products of all kinds—toothpaste, hamburgers, cereal, and so on—you subsidize the advertising industry, which sends a good deal of this money on to the mass media. Thus, the mass media receive direct support from consumers in the form of payments to mass media organizations as well as indirect support from consumers who buy advertised products.

The media of books, films, and recordings are supported almost entirely by direct costs paid by consumers of those messages. There are a few examples of ads being stuck in books and recordings and displayed before films, but the revenue from these ads is minor compared to direct costs. With magazines, newspapers, cable television, and now the internet, the costs are split between direct (subscriptions) and indirect (advertising). With broadcast television and radio, there is often no direct cost for exposure to a program, but there is a high cost for purchasing the means to receive a program (radios and television sets) in addition to indirect costs in the form of advertising.

The balance between direct and indirect support is shifting from direct to indirect payment. The reason for this is that the costs of hardware (computers, mobile devices, televisions, etc.) are coming down each year while the revenues generated through advertising of all kinds increase each year. This shift also makes consumers believe they are paying less each year for media messages; however, the reality is that consumers are paying more.

Compare & Contrast Direct Support and Indirect Support

Compare: Direct support and indirect support of the media are the same in the following ways:

· Both are ways the general population participate in the economic game to make the mass media industries viable.

· Both are the continual exchanges people make of resources, in which they give up their money and time in exchange for exposures to media messages.

Contrast: Direct support and indirect support of the media are different in the following ways:

· Direct support refers to monetary payments made by people directly to various media companies whereas indirect support refers to monetary payments people make to non-media business entities that in turn pay out to media companies.

· Direct support typically refers to payments for buying access (subscriptions) to media or media products (downloading books, music, videos, etc.) whereas indirect support refers to expenditures that go through advertisers.

Why do some people follow the default strategy exclusively while others also employ the media literacy strategy? The answer lies in the strength of one’s personal locus. People with a weak personal locus will settle for little in the exchanges because it requires too much effort to become a better player in the economic game. In contrast, people with a strong personal locus are driven to become more of a winner at this game. Expending the greater effort required to improve one’s skills and build more elaborate knowledge structures (see Table 6.4) is fun because it pays them back with more interesting experiences.

Table 6.4

SUMMARY

When you add the economic information from this chapter to your knowledge structure about the media, you develop a deeper understanding about how decisions are made. Remember that the media industries are composed of businesses that are run to make as large a profit as they can. Each of the media industries does this well, and each earns a profit much higher than the average of almost all other industries in the United States.

The media businesses play the economic game very well because they follow three strategies. First, they maximize profits by increasing revenue and minimizing expenses. Second, they construct niche audiences and then condition audience members into habits of continual exposures. Third, they reduce their risks by using the marketing concept.

We as consumers have two strategies available to us. One strategy is the default strategy, in which we follow habits conditioned by the media. By following this strategy, we exchange our resources of time and money for a continual state of satisfaction with our habitual exposures; our focus is on keeping our costs low by limiting our exposures to content we have liked in the past and avoiding the risk of trying new content that would require more effort to find and understand. The alternative is to follow a media literacy strategy in which we expend more effort to develop our skills and knowledge structures so that we profit by using the media better to fulfill our own needs for entertainment and information.