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Firms and Markets2:B - 1(71)
Entertainment and Media: Markets and Economics
Market Structures
Firms and Markets2:B - 2(71)
Agenda
Price theory – market equilibrium Monopoly Monopsony Intermediate cases
Economic Rent and Capitalization
Profits and Losses
Market Outcomes – Market Power
Firms and Markets2:B - 3(71)
Setting a Price – How To?
Car Amazon.com – Econometric Analysis Restaurant – A Meal Software Vendor – Online Distribution Royalty Holder – Price for an advertiser who uses your jingle or tune Single track of music on iTunes Creative output: Price for someone
who wants to have or use your invention: (book, music, tool, tennis stroke, surgical move, …)
Firms and Markets2:B - 4(71)
Monopoly Equilibrium and ProfitTraditional View
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Sources of Monopoly Profits Sources of monopoly
Possession of some unique feature or product Rockefeller’s oil empire Google, Microsoft Supply based vs. demand based.
Where do the economic profits reside? The music industry The movie business E-books publishing Broadcasting
Firms and Markets2:B - 6(71)
Raymond Syufy Corners the Movie Market
Raymond Syufy buys out the competition in the Las Vegas first run theater market 1982-1984.
1990 Antitrust sues for monopolization Government case is denied
There was still free entry There was no suppression of competition Syufy had no power to raise movie prices.
Firms and Markets2:B - 7(71)
Antitrust case vs. Manhattan theaters
Firms and Markets2:B - 8(71)
Kindle and e-Readers
“Shared monopoly” at the publishers level (with Apple): Agency Model Monopoly on e-readers: Amazon’s price model.
The answer has to do with how Amazon went about building its e-book monopoly in the first place — namely, by setting a price that was lower than what Amazon was paying publishers for the book. What looked to consumers like a great bargain at $9.99 a book looked to others in the industry suspiciously like predatory pricing, or selling below cost today in order to gain a monopoly and raise prices in the future.
What is wrong with this argument? (And with the Syufy case.)
“Pick Your Monopoly: Apple or Amazon,” Steven Pearlstein, Washington Post, 3/11/2012
Firms and Markets2:B - 9(71)
Monopoly in the Reader Market
So which is better: a market in which Amazon uses low prices to maintain its e-book monopoly and drive brick-and-mortar bookstores out of business, or one in which the major book publishers, in tacit collusion with Apple, break Amazon’s monopoly and raise prices?
For the moment, the government has come down on the side of lower prices. Under threat that they will be taken to court for conspiring to fix the price of e-books, the book publishers are trying to work out a settlement with Justice Department’s antitrust division.
Firms and Markets2:B - 10(71)
Winner Take All and Foreclosure
One thing that makes it different is that it is happening in a high-tech sector that, by its nature, is prone to winner-take-all competitions. We saw that with IBM in the 1960s, Microsoft in the 1990s and more recently with Google and Facebook. Because of the “network” quality of such industries, customers prefer to do business with the firm that has the most customers. Moreover, once you decide to do business with one company, the cost and hassle involved in shifting to a competitor is sufficiently high that customers tend to be “locked in” to their original choice.
Antitrust regulators have come to believe that, in such industries, restrictive contracts between firms and their customers, or between suppliers and distributors, may not be as benign as free-market economists and judges once believed. Fiona Scott Morton, chief economist at the Justice Department’s antitrust division, recently dubbed them as “contracts that reference rivals” and warned companies that such provisions would now be viewed with heightened suspicion.
Firms and Markets2:B - 11(71)
Monopolistic Competition
Model for publishing Distinct monopoly
power, indistinct
rates of return. Rents are dissipated
at earlier stages
in the production
chain. Applications: Books, many
consumer products,…
Firms and Markets2:B - 12(71)
Monopsony: Labor Markets
Firms and Markets2:B - 13(71)
Monopsony Applications
Major League Baseball – A Strategy for Using Monopsony Power Cartel – enjoyed supreme court approval Reserve clause’s demise (Curt Flood, Catfish Hunter,
Andy Messersmith) Free agency
Movie Studios and the Star System Illegal cartel Largely became obsolete and irrelevant
Fashion Models (Ford, etc.) … whoops! Who knew the antitrust laws applied to us too?
Firms and Markets2:B - 14(71)
Tech Sector
Monopsony
http://pando.com/2014/03/22/revealed-apple-and-googles-wage-fixing-cartel-involved-dozens-more-companies-over-one-million-employees/
Firms and Markets2:B - 15(71)
An old fashioned, per se illegal, conspiracy in restraint of trade
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Bargaining Situations and Market Power
The bargaining range
The outcome depends on the bargaining strengths of the two parties.
Firms and Markets2:B - 17(71)
Bilateral Monopoly Applications
Baseball Arbitration Free agency
Movies Stars as free lancer Stars taking equity stakes in movies
Music: (ASCAP/BMI) v. (AOL/Yahoo/Real)
Firms and Markets2:B - 18(71)
Entertainment and Media: Markets and Economics
Economic Rent
Firms and Markets2:B - 19(71)
Doug Glanville’s Economic Rent
“One superagent took the time to explain why I should ask for three times the market rate for my signing bonus. He made the compelling argument that since I would be forgoing the use of an Ivy League engineering degree, the team that chose me should compensate me for my lost wages. He made it clear that the sum of this compensation and a little extra should make up my total bonus.” (“Doubleday and Darwin,” by Doug Glanville, NYT, 7/5/2008)
This argument makes no sense. By this construction, Glanville should have been able to tell a prospective engineering firm that they should compensate him for his foregone baseball career. Good luck with that.
Firms and Markets2:B - 20(71)
Sources of Economic Rent
Market value in excess of the value of the next best alternative (opportunity value). (This is the definition.) Where does it come from? Natural endowment Creation of something of value to a market + property
right (ownership) Positioning and market disequilibrium Creation (or exploitation) of a market failure
(apartment brokers in New York)
Firms and Markets2:B - 21(71)
Entertainment and Media: Markets and Economics
Profit
Firms and Markets2:B - 22(71)
Profits…
Gross Revenue Minus Total Cost Cost includes the cost of capital Ambiguities in the allocation of cost Contractual arrangements
Firms and Markets2:B - 23(71)
Profits and Losses
Firms and Markets2:B - 24(71)
Profits in Multiple Output Processes
Allocation of revenues to activities Multiple revenue sources (outputs) Allocation of costs to activities Fixed costs in multiple output firms Theater: Exhibition and Concessions
Firms and Markets2:B - 25(71)
Profits in Multistage Processes
Allocation of net revenues to activities Revenue stream arrives at the end of the chain Allocation of revenue streams to activities in the
chain – essentially transfer pricing Net vs. gross in Hollywood
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Profits in the Movies
Sharing rules: Some participants (usually actors, e.g., Tom (Gump) Hanks) and directors get a % of gross distribution revenue.
Production Distribution
Exhibition
30-50% There is no net!
Box OfficeGross
Net
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There is No Net Forrest Gump (1994) (Paramount Pictures)
US Box Office $330M Foreign Box Office $350M Total, About $830M Soundtracks, etc. $150M Net profit -$ 62M (!) A disappearing act? U.S. Box 50% to Exhibitors (Theaters) Paramount Receives Approx $191M
Distribution “Fee” = 32% $ 62M Distribution Cost $ 67M (Advt., Prints, Screening, etc.) Advt. Overhead $ 7M (10% of Distribution Cost) Production “Negative” Cost $112M
(Tom Hanks, Robert Zemekis, $20M (8% of GROSS, each) Studio Overhead $15M Interest on Negative Costs $ 6M
Net Profits from the Project -$62M Winston Groom, Author 19% of NET = 0 Eric Roth, Screenwriter 19% of NET = 0
Coming to America (1988) – The Art Buchwald Case pried open the books at Paramount and revealed “Hollywood Accounting.” The judge called it “unconscionable.”
Firms and Markets2:B - 28(71)
On the trail of the economic rent.Garrison v. Warner Bros (1995)
Who was Jim Garrison? “On the trail of the Assassins (of JFK. Oliver Stone et al.) Class action on behalf of “talent” Defendant: Every movie studio plus various unnamed
coconspirators. “There is no net” http://variety.com/1998/biz/news/class-is-out-in-garrison-1117471334/
Garrison lost – class action suit was denied.
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Economic Foundations for Entertainment and Media
Organization of Firms in E&M Industries
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Theoretical Departure Pointon Firm Integration
Perfectly Competitive Markets All firms atomistic price takers All firms fully informed and efficient
Integration of some firms in competitive markets Reasons for firm integration: None Reasons against integration: None
Why do we observe integration? Usually: Reaction to a market failure of some sort Creation of a market failure
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Virgin -- Conglomerate
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Firms and Markets2:B - 33(71)
Integration of Firms:Conglomerate, Horizontal, Vertical
Markets Financial Services Professional Sports Traditional Publishing
Final Consumers
Firms and Markets2:B - 34(71)
Economic Foundations for Entertainment and
Media
Organization of Firms in E&M Industries: Conglomerates
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Conglomerate Mergers
Markets Financial Services Professional Sports Traditional Publishing
Economic Motivation for Pure Conglomerate Merger: Perhaps Portfolio Diversification
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Media Conglomerates
Some “common elements” (see “Virgin”) Natural “synergies” Strategic firm organization as markets
evolve: E.g., AOL - Time Warner sought an “option” on an uncertain future.
Firms and Markets2:B - 37(71)
Firms and Markets2:B - 38(71)
The Big 6 (or is it 5?) Media Conglomerates
NBC/Universal/Vivendi now owned by Comcast
Sony is a broader kind of conglomerate: Electronics, movies, financial services
Firms and Markets2:B - 39(71)
Time Warner
Firms and Markets2:B - 40(71)
CapitalLiberty Media Entertainment
Interactive
Firms and Markets2:B - 41(71)
Firms and Markets2:B - 42(71)
Firms and Markets2:B - 43(71)
Firms and Markets2:B - 44(71)
Economies of Scope
Markets Financial Services Professional Sports Traditional Publishing
Sports broadcasting and newspaper
Firms and Markets2:B - 45(71)
“Synergistic” Mergers
Firms in related industries Not a conglomerate merger Exploitation of commonalities Are there economies of scope? Applications?
Hockey and basketball? Newspapers and book publishing? Others?
Firms and Markets2:B - 46(71)
What are the Benefits?
Cablevision has no background in newspapers, but executives there say they can use their digital assets and Newsday to promote each other. They also envision combining ad sales, and using Newsday’s strength in local advertising to drive revenue to Cablevision.
An executive of another business who has worked closely with the Dolans said their interest in Newsday could not be entirely economic “because there’s not a business rationale to spend what they’re willing to spend.”
Cablevision paid the Tribune Company $650M for Newsday.
Firms and Markets2:B - 47(71)
Disintegration? A Miami Fish Story
1997 Florida Marlins (World Series Winner) Tickets+Broadcast+Concession+Other: $58.9M Payroll+Team Costs+Stadium+Other: $88.2M Net loss: ($29.3M)
1997 Florida Marlins + Pro Player Stadium: Net profit = $13.8M How should the related revenues and costs be treated?
Pro Player Stadium (owner receives revenues) Miami Dolphins (football team, same stadium, same
owner) Sports Channel (same owner)
Why was Don Smiley offering $169M for the Marlins if they were losing so much money?
Firms and Markets2:B - 48(71)
Major League Baseball Teams
Huizinga
Zimbalist
Baseball team Fans in seats
Broadcasting
Parking, Licensing, etc.
Stadium Sky boxes
Concessions
Naming, etc.
Fans in seats
Broadcasting
Parking, Licensing, etc.
Sky boxes
Concessions
Naming
Baseball team
Stadium
Other productive inputs
Firms and Markets2:B - 49(71)
Economic Foundations for Entertainment and
Media
Organization of Firms in E&M IndustriesHorizontal Integration
Firms and Markets2:B - 50(71)
Horizontal Integration
MarketsFinancial Services Professional Sports Traditional Publishing
What objective?
Firms and Markets2:B - 51(71)
Horizontal Mergers
Increases market share Extends market power forward May extend market power backward What justifies horizontal integration?
Economies of scale “Synergies?” (What is this?) Capture market power
Firms and Markets2:B - 52(71)
Firms and Markets2:B - 53(71)
Regulatory Inducement
In 1996, the Telecommuncations Act of 1996 became law. This act deregulated media ownership, allowing a company to own more stations than previously. Clear Channel went on a buying spree, purchasing more than 70 other media companies, plus individual stations.
Firms and Markets2:B - 54(71)
Clear Channel’s really bad adventure
20/78
Firms and Markets2:B - 55(71)
Concert Ticket Prices
Connolly, M. and Krueger, Al, “Rockonomics” http://www.irs.princeton.edu/pubs/pdfs/499.pdf
Clear Channel owned Live Nation until 2006
Firms and Markets2:B - 56(71)
Sirius and XM
The merged firms would have 100% of the market. Or, would they?
What is the relevant market? Costs and benefits of the merger? Will the Justice Department and the FCC oppose the
merger? Regulators summarily rejected a similar monopoly merger
of the nation's only two satellite television companies - DirecTV and DISH Network - just a few years back."
The DOJ also rejected a Hollywood Video and Blockbuster merger.
Firms and Markets2:B - 57(71)
Benefits of the Merger?
Firms and Markets2:B - 58(71)
Firms and Markets2:B - 59(71)http://www.nytimes.com/2008/12/28/business/media/28radio.html?scp=1&sq=Satellite%20radio+payday&st=cse
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Sirius XM - 2009
Firms and Markets2:B - 61(71)
Sirius XM - 2013
Firms and Markets2:B - 62(71)
Big 4 Record Labels Become Bigger 3
Warner
EMI
Independent
Universal
Sony/BMG
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Firms and Markets2:B - 65(71)
Universal Music Group completed its acquisition of EMI on 28 September 2012. In compliance [with] the conditions of the European Commission, Universal Music Group sold a German-based music rights company BMG, the Mute catalogue, previously property of EMI on December 22, 2012. On February 8 2013, Warner Music Group is made to [take] control of Parlophone Records, Chrysalis Records, EMI Classics, Virgin Classics and EMI's regional labels across Europe, pending the approval of both European and American regulators, to a value of $765 million (£487 million).[
Firms and Markets2:B - 66(71)
Firms and Markets2:B - 67(71)
Firms and Markets2:B - 68(71)
Measuring Competition
2
Firms in the market
Hirfindahl Index
10,000*
Number of Competitive 'Voices'
N*=10,000/H
iH S
Firms and Markets2:B - 69(71)
Comcast – Time Warner Cable
0 < HHI £ 10,000
Levels>2500 Highly Concentrated
1,000 - 2,500 Moderately Concentrated
Merger Impacts on HHI are Problematic
>200 if Concentrated
>100 if Moderately Concentrated
National Cable Market: About 1815
Post Comcast-TWC Merger About 2454
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Major Studio Market Shares
N* = 8.6 - This is plenty.
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Domestic Movie Studio Market
http://boxofficemojo.com/studio/ March 8, 2014
N* = 8.9HHI = 1,120