Does the technological ‘revolution’ change the basic rules of media economics?
Words: 3,253
Introduction
Since Victorian times, the word revolution has been used in many ways to describe not spontaneous political events, but rather to describe an evolution of markets, industries and economies. Over the last 20 years, new technologies have emerged in the global media markets. It is known as the “technological revolution” in a world increasingly interconnected technologically and economically. The media industries either anticipate, create or follow these technologies.
But, is this progress changing the basic rules of media economics? In answering such adichotomic question, this essay will look at the specificities of media economics and how they differ from other commodities, analyse succinctly “the revolution technology “ and resurface some historical facts to produce empirical evidence.
This approach will show if technological progress and its consequences in the media industries “follow” the basic rules of media economics in terms of ownership, economies of scale and scope and concentration. And how the new digital innovations do impact the media market in terms of convergence, audiences and consumers changes.
Basic rules of media economics, the (r)evolution technology and facts
Media economics follow the same structural macro and micro-economic laws of any other industries based on the production of profits due to scarcity (capitalist economy) and/or the control by the State on an allocative and/or operational basis (economic policy).
However, the cultural products and services do not share the same “qualities” as in other industries. Media industries generate two sorts of intertwined products: content and audiences. As its content (film, newspaper, stories, etc.) can be reproduced at low marginal costs (MC) or none, it differs from any other industry (automotive, food, equipment, etc.). Furthermore, the audiences not only provide the purchasing basis but are as well part of the economic structure of any “publishing” business as they bring further revenue in terms of advertising. Audience, in an economy nutshell, is the currency of the media industries.
Economies of scale, in other terms the increase of production with MC, and scope (transformation of products for new audiences) follow the same general economic theory of reaching the virtuous circle.
Regarding the size of the players in the media industries, the pattern is the same as in any other industry ranging from one-man PC (eg. freelancers), SMEs (eg. North Rock) to large corporations (eg. Sky). What differs in the mass media world is the market structure, its ways of self-rectification and its access. As economist studies show, the media market is not a contestable market where competition follows the rules of fair trade. As on TV and other platforms, due to some legal and economic constraints and remits, fair and full competition does not exist as such. It appears that the media industry follows specific economic rules in a market regulated at national level by the law and at global level by international agreements (GATT/TRIPS). Such differences in comparison to other industries are the essence of the media industry: culture.
Within the cultural industry, changes are a constant parameter in terms of audiences, content and production. Finally, the production of cultural goods is heavily influenced by technology and its progress. But is this a real revolution or rather an evolutionary trend?
Technological revolution?
The French Revolution of 1789 had been brewing up for years or even decades before it reached its pinnacle on the 14th July. That day changed the political vision of humanity and started the premises of democracy with the Declaration of Citizen and Human Rights. The invention of the steam machine and the development of antibiotics in the 1940s, both had immediate consequences for humanity. In comparison, the recent technological progress in the media didn’t have an instant impact. In the UK, pay-per-view TV took almost 10 years to become profitable and to reach a 10 million viewer basis. The Internet, its email facility and its constant evolution in respect of content and production is still based on Web 2.0 technology, HTML and its subsequent languages and scripts, otherwise known as “digital” platforms. In the press, the DTP “revolution” was an innovation in terms of production and cost efficiency. The mobile phone industry started as a gadget in the early 1990s while walkie-talkie and the FM spectrum were already available. Its success in market penetration and product choices relied on a change in societal behaviour across Western economies.
Finally, the so-called “revolution”, if it did indeed happen, had left, in our “global village”, billions unaware of it! The figures regarding the global reach are amazingly puzzling. In global terms, access to the Internet is at 25% and 16% in developing countries as per the recent Miniwatts Marketing Group shows[1]. Compared to TV and the press, on a global basis and in audience terms, the “digital” platforms are marginal with the exception of the mobile phone with a rate of global subscriptions of 76%[2]
(source ITU). However, these figures do not reveal the disparities on a regional basis (Africa for example has only a ratio of 1 to 10).
(source ITU). However, these figures do not reveal the disparities on a regional basis (Africa for example has only a ratio of 1 to 10).
From the early 1990s to 2010, the media industries underwent numerous innovations and technological transformations as David Hesmondhalgh refers to in his book, The Cultural Industries (2007). Can this be considered as a “revolution“ stricto sensu in terms of market behaviour, industry and on economic grounds? Regarding access, disparities are wide with the rate of the Internet users being three times less in the developing world than developed economies. And this rate is reaching such a figure only because of the PR China national figures (see ITU). Furthermore, the penetration in the modern economies show a similar rate and trends across separate social categories. It is therefore better to talk about digital evolution or transformation rather than revolution.
Digitization is the transformation of analogue information into digital formats. In the media industries, this is reflected in content or products reduced to metadata with the possibility of manipulation and distribution across several platforms. In the mid 1990s, “From print to digital” became the motto encapsulating the new strategies of cross-media expansion for major actors in the media industry.
The digital innovation and its consequences
What is referred to as “digital age or revolution” is very often economies of scale and scope combined. In such a way, with the development and spread of personal computers in the 1980s and 90s in the developed economies, the media industry created a new market segment for the online access of their products. In the early 1990s, this concept and “new industry” was called the “multimedia” world. More recently, the term “convergence” emerged and is more commonly used. Looking at some examples in the industry we can have a better understanding of this “new digital technology” in the mass media.
In the press, most of the UK newspapers went online in the 1990s while keeping their paper version in tacta. In 1995, the Pearson Group launched FT.com (according to some sources at costs equal to their annual profit of £80m at that time) with the same content as its paper twin and further news from across the world. After several revamps and relaunches, it took more than five years for the management to find a way to sustain FT.com on a subscription basis. In comparison, on the TV platform, BskyB became net-profitable in 2003 after 12 years in operation through a business model also based mainly on subscription.
The short history of FT.com and BskyB shows that distribution on new platforms takes medium to long-term investment to reach a virtuous circle in economic terms. These are major players in the media industry and such economic paradigm cannot be followed by SMEs and other minnows in the digital world.
Nowadays, convergence is in osmosis with the telecommunications industry with smartphones and tablet PCs, mainly Apple-based, being “saturated” by existing media suppliers. This market penetration is taking place as, for the media industry, the additional cost of publishing in such devices is low or nil because of their MC and their digitisation as Gillian Doyle analyses in Understanding Media Economics but applied to other platforms (p.143). The other factor is due to the impact of technology on consumer behaviour.
For the Western economies, the mobile phone success story of the 2000s started a change in the pattern of people’s social life as the PCs did in the 1980s and 90s. In 2002, James Meek, in the Guardian 28-page special Mobile G2 section[3], summed it up: “The mobile is a symbol of yearning to reach out over great distances and watch over others, to be in more than one place at once, to share thoughts at the speed of thought; to not be alone, and not let others be alone.” In addition to that factor, the fact that the governments auctioned the “mobile G3” spectrums available for commercial purposes shows that the mobile phone and its platforms are heavily regulated and controlled by the State. As we see the success of the economies of scale and scope follow a change in consumer behaviour managed at the highest level by the State. This is seen as a progressive strategy, at least in the Western economies.
As academic David Hesmondhalg wonders (op. cit p.241): “my overall concern is whether or not digitalization represents a fundamental shift in the cultural industries”. Indeed, the “new media” saw the emergence of a new section of the media industry, new markets and players. In the third part, we will look at these and see if they follow the same rules of media economics.
Structural emergences: new markets, new players, new audiences?
The development of the home-broadband through landline, cable, satellite, and the constantly improved Web free software technology made the online Internet platform an emergent market in the late 1990s and 2000s. As any emerging market, it follows its own dynamic economic rules. For the media players who invested and are still investing in it, if initial costs are as high as to produce and launch a new product (see above for the FT.com), the marginal and distribution costs are low or even non-existent. Moreover, the end consumer bears all the distribution costs from access to reception: electricity, ISP fees, broadband bills, hardware, software, etc. As the Internet is a free platform and because their content is (was) freely accessible, publishers consequently had only three solutions to breakeven: either through advertising, by selling other products through the e-commerce technology or subscriptions. This saw the emergence of new media players and the trend towards concentration.
For the media industries players, the Web has become a part of the business either on advertising grounds to have a presence (Sky) and narrow-casting like the free TV channels through their online TV players (BBC, ITV, Five for the UK) or another method to reach “new” audiences.
Emergence of new media players
The emergence of the new online market - or “the other universe” as Bill Gates once famously described it - has produced major players (eBay, Google, MySpace, AOL) in the media industries as with any new commercial realms (Ford in the automotive, Shell for the oil or Microsoft in the PC industry). Rapidly music, porn (prosaically known as Adult), social sites and search engines were the most visited websites and started to be profitable. On economic grounds, this new market followed the principle of pure liberal economy theory. Firstly, we had the 3-S strategy of the new entrepreneurs (start, success, sale as for Lastminute.com), mergers and purchase of successful websites such as TimesWarner and AOL, the purchase of MySpace by News Corp despite Rupert Murdoch saying at that time to one of his advisers: “I cannot see how to make money out of it”... In addition, the likes of Reed Elsevier, EMAP, Trinity Mirror absorbed an array of small websites to be “in”. So legal and economic ownership concentration trends were already part of the intrinsic new market. A succinct analysis of the search websites shows another well-known economic pattern.
Because companies had to attract their current and new clients to increase their customer base, they had to advertise their services online in order to get increased traffic. This gave more and more power to the search engines.
At the beginning, there were Go, Lycos, AltaVista, AOL/Netscape and dozens more. Fifteen years later, according to Alexa Internet (the independent online traffic metric analyst), the top 11 websites by traffic rank are as follows: Google, Facebook, Youtube, Yahoo, Live, Baidu, Wikipedia, Blogger, MSN, Tencent (QQ.com) and Twitter. A few facts: out of these 11, 3 (Yahoo –its engine search-, Live and MSN) belong to Microsoft, 3 others (Google, Youtube and Blogger) to Google. Of these most popular websites, 55% belong to two companies only! Further analysis of the two shows that together, Google and Microsoft receive 98% of all search engines searches and their revenues. As these are the most profitable online tools in terms of revenues (through advertising/PPC), it demonstrates that with the development of new markets and new players, the ownership concentration follows the simple principles of the media economics: major players tend to have a dominant or even monopolistic position in their area.
Emergence of new audiences?
With the development of interactivity and facility access, fragmentation of mass audiences (as opposed to “new audiences”) emerged on different platforms. A few examples: once (and still?) teenagers were the main consumers of music and very quickly downloads. Expats were a main target for “national” websites trying to find a wider audience online. At one time, the “silver surf wave” (adults 60+ years old) were the new golden bounty. However, these publics were already existing but most had not been tapped by the media industry. These audiences simply found an easier way to buy or view their products from the comfort of their armchair…
The activation of such audiences with some new software development produced a peer-to-peer network where products and services were not bought but shared. Napster was the first website to launch such free swaps. Seen as a danger for the whole industry, it had to change its commercial model (based mainly on advertising) due to several legal wins brought forward by the music cartel. The film, music and software industries have always faced the copying of their products without the purchase of copyright. But the economic structures of these sectors make sure that the cost of pirating is passed into the price of each unit. For example, a cd-rom with a production cost of two pence is resold for a thousand times more in the high street shops, this applies to DVDs, software and other media products. Therefore, the impact of the digital technology alone cannot be the culprit of the music industry or video rental declines as is very often stated. For too long, the media industry relied on coefficient of margins unseen in any other markets.
However, the digital progress brought new profitable opportunities for some. This is particularly outstanding for the games industry.
Games industry
The major “winner” of the digitization and gadget trends, the fragmentation of audience, and spread of platforms is the games industry. Thanks to the increasing simplification of digitization, unregulated markets and disposable income from young audiences, Nintendo, Sega, Sony followed by Microsoft launched over the years a series of platforms (PlayStation, Xbox, Wii) and games targeting almost all audiences (young, teenagers, professionals, women, old, etc.). According to the Entertainment Software Association (ESA), the US market sells a computer or video game per habitant (2007: 267 million unit sold) per year.
However, there was a different “flip” in terms of economics. When the games were PC based, it only took a small team of developers to launch a new product. With audiences available across the Western countries, and as the demand for better graphics, more realistic scenes, interactivity and “professionalization” of players rose, the costs of programming and advertising sky-rocketed with budgets going through the roof. For example, the production cost of Grand Theft Auto IV (GTA4) for the PS3 and X360 platforms had a budget of “roughly $100 million” according to Rockstar North’s president Leslie Benzies, “marking the title as the most costly development of any game to date” in 2008 (source: Shack News). For MTV, GTA4 produced “$500 million in revenue in the first week, selling an estimated 6 million units worldwide”.[4]
As the games are licensed, the largest share of the profits from the game goes to the two platforms owners: Microsoft and Sony. In that aspect the game industry is organized like the books, films and music industries in following the “publishing logic” of commodity identification (Hesmondalgh D. p244).
Economics and politics
With the ownership, concentration and position trends in the media industries, the question arises as to why the State intervenes to try to re/de/regulate such economic complexities.
With constant regulations and barriers put up to protect their main market, the outsider perception of the major media companies is that they are acting together as a cartel. Such a communal force has in the 1970s and 80s placed “cultural imperialism” top of the agenda in academic media research.
Academic polemics aside, it can be seen from a different angle. Is such State intervention, in giving their own national companies an original realm (local market) in order to bring their power and domination at global level, intentional? Examples abound: Sony (original Japanese market), Hachette (French), Bertelsmann (Germany), International Corp./News (Australia), Globo (Brazil), TimeWarner (USA) are just a few. In parallel, the lucrative search engine industry (SEI) presents interesting facts.
The Chinese government trying to force Google “hiding some data” may have had another goal rather than a simple autocratic one: by undermining Google’s entrance in their emerging market, the Chinese authorities were helping Baidu to keep their dominant status (75% share of China SEI) to use China as a platform to compete against global quasi-monopolistic actors in the SEI: Microsoft and Google.
It is a controversial concept still. However, looking at the Hollywood world domination, news agencies history PA AFP, Reuters), newspapers holdings (News International, MGM, MECOM), there are elements showing with empirical evidence that such a strategy from major nations is at least an economic wish for world domination. The French “exception culturelle” (which took cultural products off the GATT equations) may have been a disguise to allow the French media industry main players (Hachette, RTL) to keep their own market and getting dominant sector positions in its former colonies, demonstrating this economic paradigm.
Conclusion and further reflexion
The digital technology “revolution” hasn’t happened yet. The global audience in terms of access to the Internet is only 25% of the world, the international TV channels have a lower audience than the daily worldwide users of Google and international newspapers either on paper or online only reach a fraction of an elite in some countries. As Gholam Khiabany crystalized it in 2003 in “Trends in communication” (TIC Vol 2, Number 11. p.151): “Globalisation has become the gospel of the free market, and technology the redeemer”.
The technological development had an impact on the media industry but didn’t change the economic structure of it. In terms of transversal expansion, ownership and concentration, the digital evolution reflects the economics rules of the “traditional” media with the tendencies to dominant or monopolistic positions. To reach the virtuous circle in that new realm, the same dispositions as seen across the media industry need to be applied: long-term investment to reach a “sustainable” audience. The commercial challenge is to find the right balance between the cost of the product and how much the audiences are ready to pay for it. Pure economics. Regarding newspapers or other media actors, the dilemma whether to make their content accessible through a paywall or by giving their content free will be answered in profitable terms with the fine tuning between advertising, costs and subscription fees.
The media industry major players’ success or failure in economic terms (profit) on the digital platforms, except the games industry, is still debatable, however complex. Firstly, because of the non-divulgation of key figures from the publishers as the Internet advertising revenues are never published on their own. Secondly, online and digital investments have to be seen on a long-term basis. On the other hand, the Internet gives the opportunity of “reaching other parts” of audiences that the traditional platforms cannot offer. In that aspect the Hirschmann-Herfindahl-Index (HHI) may be followed for the Internet as it is for TV.
The technological evolution, in lowering the capital equipment costs, has reduced the number of technicians, produced the casualization (or proletarization?) of creative staff and is creating fierce competition for traditional newspapers’ niches (recruitment and classifieds in modern economies (See G.Doyle op cit. p.151). While the export of menial tasks and operations to developing countries, notably India for web development, has started the digital economy integration worldwide.
Finally, despite constant progress (HD, 3D and sounds formats), the 2-way technology or real interactive technology is still not happening.
Regulations at national level (eg. auctions of spectrums, regulation of the access), continental level (eg. European TV Without Frontiers directive) and the GATT/TRIPS agreement on an international level discourage companies from developing countries from entering the most profitable markets. However, other points need to be addressed beyond economic terms.
The real technological revolution will be the production of fragmented ownership to give pluralism in order to develop locally-created democracies. In a world where liberalism is the norm and democracies are becoming plutocracies, we need to have in mind what French philosopher and sociologist Edgar Morin stated[5]: “The likelihood is uncertain and often it is the unexpected which happens." A maxim to be remembered by the economic, political, spiritual and technological elites who are planning the future of our planet.
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[1] Source: World Market Media - http://www.worldmarketmedia.com accessed on 10/01/11
[4] ^ Stephen Totilo "'Grand Theft Auto IV' Posts Record First-Week Sales". MTV News. http://www.mtv.com/news/articles/1586971/20080507/id_0.jhtml. Accessed 10/01/11.
[5] Le Monde on 10th January 11
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