Entertainment and Media: Markets and
Economics
Television
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Television
The Product
Local:
 Regional:
 National:

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News, Sports, Documentary
Sports, News
News, Sports, Entertainment
Television
Delivery

What




“Over the air” – “broadcast”
Cable
Internet
How

Subscription

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
Fee based - premium


HBO (“Game Change”), Showtime, Adult entertainment
Basic – Fees and advertising

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Cable TV
Internet TV – “House of Cards”
ESPN, MTV, AMC, Discovery, HGTV, HSN
Television
Agenda

Broadcast TV



Markets and Issues
Programs
Cable TV


Business Models
Regulation
Sports Broadcasting
 TV Everywhere

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Television
Entertainment and Media: Markets and
Economics
Broadcast
Television
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Television
What Do the Networks Do?
ABC, NBC, CBS, FOX, CW
 Assemble Content
 Scheduling
 Lower transaction costs between
producers/advertisers and audiences
 Sell bulk advertising time

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Television
The Production Stages

Production
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Distribution
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
Studios
Sports
Composers (Matt Groenig, Julie Kavner, Marge Simpson)
Networks: ABC, CBS, NBC, Fox, CW
Integration: (Disney/ABC), (Viacom/CBS), (GE/NBC/Comcast),
(AOL-TW/WB/Viacom/UPN) (News Corp/Fox),
Exhibition


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Local affiliates: O&O
Independents (100+ markets, Spanish, etc.)
Television
Vertical Relationships

Networks and Affiliates




Networks buy time for programs from affiliates
Affiliates sell advertising time – local and national
Networks save transaction costs by buying
advertising time for national advertisers
Independent stations vs. Owned and Operated.
Which is better? Vertical integration issue.
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Television
Sources of Competition

Within Industry


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
Outside the Industry

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Other networks
Other content – home shopping, Discovery
Is there any brand loyalty to networks?
Cable
Internet based. (Distinction is less meaningful.)
Other forms of entertainment
Other sources of news/information
Television
Entertainment and
Media: Markets and
Economics
Elements of
Television
Production
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Television
Valuing a Prime Time Show

Made for TV Movie: Small production

Sitcom or serial (CSI), larger infrastructure

How to value the “product?”
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Television
Nobody Knows

Valuation is unknown until the good is
consumed by the final consumer

Valuation is different for every consumer

Past success is uninformative for future
performance – e.g., the Leno primetime
show

Nobody knows (in advance)
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Television
Cost Structures for Production

Sunk costs
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
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Fixed Costs

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All costs are sunk in advance
All costs must be incurred before an informative
test of acceptance is possible
Do focus groups work?
Marginal costs of delivery are zero
Pricing implies finding the reservation price
How are reservation prices determined?
 TV show sold to a network – value of the
advertising. Where does the value of the
advertising come from?
 Music license sold to a TV station or a website.
Where does the valuation come from?
Television
Entertainment and
Media: Markets and
Economics
Sports
Broadcasting
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Television
Barriers to Entry
ESPN
 Fox Sports, NBC Sports, CBS, Turner
 Barriers to Entry: Huge incumbent firms
News Corp, Comcast-Universal, CBS Corp,
Time Warner
 Economies of scale motivate joint ventures such
as Olympics, NFL, March Madness

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Television
Distinctive Features Shape the Market

Time value of content – Perishability

Derived demand for social capital

Live production resists technological change in delivery.
Live TV production Model

Long term contracts produce a barrier to entry. Why do
long term contracts exist?
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Television
Entertainment and
Media: Markets and
Economics
Explaining Why There
Are So Many “Reality
Shows” on Television
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Television
Implications for a TV Show
Environment in which it will “air”




Infinite variety of preferences by consumers
Market size and composition varies by time of day
Quality is a fixed cost – endogenous: will vary by the
anticipated size of the audience
Costs are all sunk in advance
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Television
Emergence of Cable: Impact on Networks
ABC, CBS, NBC  UPN (until 2006),
WB, Fox,… more competition
 Many smaller cable channels



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Economic advantage: subscribers and
advertisers
Shrinking market for major networks
Television
Endogenous Fixed Cost of Quality



Shrinking market  lower expected return to
investment in “quality”
Cable channels increase their investment in
quality: The Sopranos, 6 Feet Under, Sex in the
City, Boardwalk Empire, Game of Thrones
Reality shows cost roughly 1/3 as much as
major drama: Compare


CSI, sitcoms vs. Survivor
The natural response to the shrinking market is
to invest in lower quality, less expensive shows.
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Television
Entertainment and
Media: Markets and
Economics
“Cable”
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Television
Cable
Contrast to Broadcast: Old style cable operators
buy and resell content.
 Industry Structure and Players



Disney,
Comcast-Universal, Viacom
News Corp, Turner,
Scripps
Pricing model: Mixture of ads and subscription
 Regulation Issues
 Is the distinction still (or less) meaningful?
(MSNBC, CNN)

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Television
Providers (Million Subscribers)
Strong local
concentration
(e.g.,
Cablevision on
Long Island)
(Gross
numbers are
misleading.)
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Television
Broadcast vs. Cable and Internet:
Two Revenue (Business) Models
Signal
Revenue
Technology
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Broadcast
Cable
“Public”
“Private”
Advertising
Subscribers (some
advertising)
Static
Rapid change
Television
TiVo is a major threat to broadcasters.
Time shift of programming alters the
value of advertising
Bypassing advertising alters the value
of programming
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Television
Tivo converts the broadcast
model to the cable model
One major concern of the media is the fact that advertisements in television
programs can be bypassed by using a TiVo DVR. The media industry is highly dependent
on sponsorship via advertisements and will lose revenue if viewers adopt TiVo-like
systems in large numbers. Knowing this, some countries have taken protectionist
measures especially when the media is already struggling due to poor viewing figures.
The government of Singapore has banned TiVo, citing the potential adverse impact on the
local media industry if TiVo usage were to increase. The government is, however, facing
difficulty regulating the use of TiVo in Singapore as individuals are bringing in the sets
from overseas. TiVo has created a number of ad solutions intended to reach the viewer
that fast forwards through ads.
This has not been an issue in Australia where the exclusive rights to TiVo are
held by Hybrid Television Services, owned by the Seven Media Group and TVNZ. Seven
Media Group is one of Australia's largest free-to-air broadcasters as Seven Network, and
as part of the local market adaptations to TiVo prior to launch, ad-skipping was disabled.
Users can still fast forward through ads.
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Television
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Television
Yes we can!
Last Saturday was a big day for Aereo, the best buddy of cable cord-cutters and mortal enemy of the
big broadcast networks. The company's founder, Chet Kanojia, was in Austin, Texas, at the big, loud,
and impossibly hip venue that is the SXSW conference, to announce his company's expansion to
Austin. It's the 13th on the map of cities whose residents can dump big cable in exchange for access to
broadcast television for just $8 per month. Meanwhile, that morning his company was forced to yank
its service away from customers in Denver, Colorado, and Salt Lake City, Utah, after a US District Court
injunction against it was upheld by a federal appeals court.
For better or worse, the legal roller coaster will end sometime after April 22, when the US Supreme
Court takes up the question of whether it is legal for Aereo to provide its customers with Internet access
to 20 hours of broadcast network television for $8 per month.
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Television
What Business Model?
Sale Price = $1.65 Billion
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Television
YouTube advertising has evolved
(Ketchup ads are not very effective on YouTube)
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Television
Targeted Advertising
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Television
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Television
Modern Pricing: How much
does it cost to have HBO?
Modern Pricing: How much
does it cost to have HBO GO?
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Television
Triple play.
Bundling and
price
discrimination
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Television
Just Cable TV.
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Television
Entertainment and
Media: Markets and
Economics
TV
Everywhere
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Television
TV Everywhere
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Television
TV Everywhere

Ad values change as competition expands

Technology change – mobile distribution
(tablets, smart phones) produces competition
for delivery mode.

Demise of both broadcast and cable networks

Major providers: YouTube, Hulu, Netflix
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Television
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Television
Demographics of Cord Cutting: Aug. 2013
Bushwick, S and D. Krenn: Nielsen Custom Survey of Zero TV Households
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Television
Entertainment and
Media: Markets and
Economics
Regulation
of Television
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Television
Regulation: Why?


“Cloaked in a public interest”
Congestion in the common resources







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Broadcast frequencies
Technological change has made this less important
Public good aspects (Howard Stern)
Maintaining competition
Outside guidance for technological advance: HDTV
FTC regulation of advertising
Industry regulation: NAB
Television
Federal Regulation: Fin-Syn Era
Fin-Syn rules: 1971 – 1995: Networks
could not own programs.
 Post 1995, vertical integration
(Disney/ABC) has circumvented
 The rule has been abandoned
 Why would we have this rule?

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Television
Regulation of Cable: Why?
Local franchises and public utilities
 Telecommunications Decency Act
Bono;
Wardrobe malfunction,
MIA hand malfunction
 Consumer Protection Act
 Rate Regulation

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Television