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13.1 Characteristics of Media Industries

Learning Objectives

  1. Identify the three basic media business models.
  2. Identify the business models of several media industries.
  3. Describe the differences between the two ways in which media receives revenue.

The merger of Comcast and NBC is just one example of the myriad ways media companies do business. Television, print publishing, radio broadcasting, music, and film all have their own economic nuances and distinct models. However, these business models fall into three general categories: monopoly, oligopoly, and monopolistic competition.

Of these three basic media business models, monopoly is probably the most familiar. A monopolyThe control of a product or service by one company. occurs when one controls a product or service—for example, a small town with only one major newspaper. OligopolyThe control of a product or service by a few companies., or the control of a product or service by just a few companies, commonly occurs in publishing; a few major publishers put out most best-selling books, and relatively few companies control many of the nation’s highest-circulating magazines. Television is much the same way, as the major broadcast networks—Comcast and GE’s NBC, Disney’s ABC, National Amusements’s CBS, and News Corporation’s Fox—own nearly all broadcast and cable outlets. Finally, monopolistic competitionThe control of a product or service by numerous companies offering relatively limited products and services. takes place when multiple companies offer essentially the same product or service. For example, Ticketmaster and Live Nation were longtime competitors until they merged in 2010, with both providing basically the same set of event-management services for music and other live entertainment industries.

The last few decades have seen increasing conglomeration of media ownership, allowing for economies of scale that previously could not be achieved. Instead of individual local radio stations competing for advertising revenue among a range of local companies, for example, large corporations can now buy wholesale advertising for any or all of their brands on a dozen different radio stations in a single media market all owned by a conglomerate such as Clear Channel. The economics of mass media has become a matter of macroeconomic proportions: GE now makes everything from jet engines to cable news. The implications of this go beyond advertising. Because major corporations now own nearly every media outlet, ongoing fears of corporate control of media messaging have intensified.

However, these fears are often channeled into productive enterprises. In many media industries, an ongoing countercurrent exists to provide diversity not found in many corporate-owned models. Independent radio stations such as those affiliated with nonprofit organizations and colleges provide news and in-depth analysis as well as a variety of musical and entertainment programs that are not found on corporate stations. Likewise, small music labels have had recent success promoting and distributing music through online CD sales or digital distribution services such as iTunes appliance program. YouTube makes it easier for videographers to reach a surprisingly large market, often surpassing even professional sites such as Hulu.

Raising Revenue

Companies employ many different ways to raise revenue for their services, but all boil down to two fundamental ideas: The money comes either from consumers or from advertising. In practice, many outlets combine the two to give themselves a flexible stream of income. Equally, consumers may be willing to pay slightly more for fewer ads, or to sit through more advertising in exchange for free content.

Traditional book publishers, which make practically all of their money by selling their products directly to consumers, lie on one extreme end of the spectrum. In some respects, cable companies use a related model under which they directly sell consumers the delivery and subscription of a bundled package of programming channels. However, cable channels primarily rely on a mix of media revenue models, receiving funding from advertising along with subscription fees. Magazines and newspapers may fall into this middle-ground category as well, although online classified advertising has caused print publications to lose this important revenue stream in recent years. Broadcast television is the clearest example of advertising-driven income, as there are no subscription fees for these channels. Because this lack of direct fees increases the potential audience for the network, networks can sell their advertising time at a premium, as opposed to a cable channel with a more limited and likely more narrow viewership.

Print Media

Print media fall into three basic categories: books, newspapers, and magazines. The book publishing industry is basically an oligopoly; the top 10 trade publishers made up 72 percent of the total market in 2009, with the top five alone comprising 58 percent of this.Michael Hyatt, “Top Ten U.S. Book Publishers for 2009,” January 15, 2010, http://michaelhyatt.com/2010/01/top-ten-u-s-book-publishers-for-2009.html. Newspapers tend toward local monopolies and oligopolies, as there are generally few local news sources. In the past classified advertising made up a substantial portion of newspaper revenue. However, the advent of the Internet—particularly free classified services such as Craigslist—has weakened the newspaper industry through dwindling classified advertising revenues.

Newspapers

The newspaper industry also entails a mix of initial, or first copy costsThe added cost of the first unique good produced, such as the initial copy of a print newspaper., and relatively low marginal costsThe costs per unit of a good, such as a print newspaper.. Journalistic and editorial costs are relatively high, whereas the costs of newsprint and distribution are fairly low. The transition from the labor-intensive process of mechanical typesetting to modern electronic printing greatly reduced the marginal costs of producing newspapers. However, the price of newsprint still goes through cyclical ups and downs, making it difficult to price a newspaper in the long run.

The highest costs of publishing a paper remain the editorial and administrative overheads. Back-office activities such as administration and finance can often be combined if a company owns more than one paper. Unlike the historical restrictions on broadcast media that limited the number of stations owned by a single network, print media has faced no such ownership limits. Because of this, a company such as Gannett has come to own USA Today as well as mostly local newspapers in 33 states, Guam, and the United Kingdom.Columbia Journalism Review, “Who Owns What,” August 13, 2008, http://www.cjr.org/resources/index.php. Other companies, such as McClatchy, also run their own wire services, partly as a way of reducing the costs of providing national journalism to many local markets.

Magazines

Like newspapers, magazines are largely owned by just a few companies. However, unlike newspapers, many magazine chains are themselves owned by much larger media conglomerates. Time Warner—the highest-ranking media company in 2003—owns numerous magazines, including Time, Fortune, and Sports Illustrated. Taking all of its publications into account, Time Warner controls a 20 percent share of all magazine advertising in the United States. However, many smaller publishers produce niche publications, many of which do not aspire to a wider market. In all, magazines seem to be undergoing a period of economic decline, with a net loss of some 120 publications in 2009 alone.Matthew Flamm, “367 Magazines Shuttered in 2009,” Crain’s New York Business, December 11, 2009, http://www.crainsnewyork.com/article/20091211/FREE/912119988.

Television and Radio

As discussed in Chapter 9 "Television", large media conglomerates own nearly all television networks. Both national networks and local affiliates are typically owned by conglomerates; however, stations such as Fox-owned WNYW in New York or CBS-owned KCNC in Denver are able to mix local content with national reporting and programming, much as large newspaper companies do.

In a local market, one cable company usually dominates the cable service market. In many places, one cable company, such as Comcast—the largest of the cable companies—is the only option. Over the past several years, however, satellite companies such as Dish Network and DirecTV, which are able to reach any number of consumers with limited local infrastructure, have introduced increased, albeit limited, levels of competition.

Even as cable is expanding, radio has become heavily consolidated. Since the 1990s, massive radio networks such as Clear Channel Communications have bought up many local stations in an effort to control every radio station in a given media market. However, the FCC has designated the lower part of the FM radio band for noncommercial purposes, including nonprofit programming such as educational, religious, or public radio stations—and continues to hold public discussion on frequency allocations. These practices help retain a certain level of programming diversity in the face of increased homogenization, largely because such stations are not supported through advertising. Because they are funded by donations or nonprofit institutions, these stations benefit economically from catering to a minority of listeners who may support the station directly, rather than a larger majority that has other options for entertainment.

Music and Film

Because both the music and film industries face unique business opportunities and challenges, each operates on an economic model unlike either print or broadcast media. Just like those forms of media, however, music and film have undergone significant changes due to consolidation and technological and consumer shifts in recent years.

The Big Four

The music industry is closely related to the radio industry, and the two have a high degree of codependence. Without music, radio would not be quite as lively or nearly as popular; without radio, music would be more difficult for listeners to discover, and perhaps be limited to a local consumer base.

As radio companies have consolidated, so has the music industry. A total of four record companies, popularly called the “Big Four” within the industry, dominate the recorded music business and thus most mainstream radio airwaves. Because a conglomerate such as Clear Channel is ill-equipped to handle local tastes and musical acts—and because it tends to be easier to manage programming across a large regional area than on a station-by-station basis—the Big Four record companies tend to focus on national and international acts. After all, if a label can convince a single radio conglomerate to play a particular act’s music, that performer instantly gains access to a broad national market.

Music is therefore widely considered an oligopoly, despite the presence of countless small, independent companies. A handful of major record labels dominate the market, and they are all basically structured the same way. Universal is owned by NBC, which was in turn owned by GE and now Comcast; Sony Music is owned by the eponymous Japanese technology giant; Warner Music Group, although now its own entity, was previously under the umbrella of Time Warner; and the EMI Group is owned by a private investment firm.

Consolidation and Ticketing

Although the Big Four dominate the recorded music industry, they have surprisingly little to do with live performances. Traditionally, musicians have toured to promote their albums—and sell enough copies to pay off their advances—and the live show was a combination of self-promotion and income. An artist’s record company provided financial support, but a concert ticket generated significantly more income per sale than a CD. Since the merger of ticketing companies Ticketmaster and Live Nation, the ticketing services for large venues have practically been monopolized. For example, Madison Square Garden, one of the largest venues in New York City, does not handle its booking in-house, and with good reason; the technology to manage tens of thousands of fans trying to buy tickets to a soon-to-be-sold-out concert the day they go on sale would likely break the system. Instead, Ticketmaster handles all of the ticketing for Madison Square Garden, adding a 10 percent to 20 percent fee to the face value of the ticket for its exclusive service, depending on the venue and price of the show.

Film

Because of the nature of film, the economics of the medium are slightly different from those of music. The absence of film in broadcasting, the lack of a live performance, and the exponentially higher budgets are just some of its unique facets. As with music, however, large companies tend to dominate the market. These massive studios are now connected corporately with other media outlets. For example, Sony and Universal both have partners in the music industry, while Fox and Disney control major television broadcast and cable networks as well as film studios.

Just as record labels do with radio conglomerates, film distribution companies tend to sell to large chains, such as the over 6,000-screens-strong Regal Entertainment Group and the over 4,000-screens-strong AMC Entertainment, which have national reach.National Association of Theater Owners, “Top Ten Circuits,” July 1, 2009, http://www.natoonline.org/statisticscircuits.htm. However, independent filmmakers still provide limited competition to these larger studios.

From Miramax to the Weinstein Company

Figure 13.2

The founders of Miramax, brothers Bob and Harvey Weinstein, had a messy breakup with major studio Disney.

Brothers Bob and Harvey Weinstein founded Miramax in 1979 with the intention of independence. Over the ensuing years, they released films that were off-limits to major distributors, such as Quentin Tarantino’s violent Reservoir Dogs and Steven Soderbergh’s controversial Sex, Lies, and Videotape. After Disney bought the smaller studio in 1993, Miramax gained access to even larger financial backing, albeit somewhat begrudgingly. Miramax had cultivated relationships with the now-blockbuster directors Tarantino and Kevin Smith—the director of Clerks, Dogma, and Jay and Silent Bob Strike Back—and when Tarantino’s Pulp Fiction made more than $100 million at the box office within 2 years of Disney’s purchase of Miramax, it seemed like a good deal. As a result, Disney signed the Weinsteins to a new contract, giving them an annual budget of $700 million, and in 2003 Disney gave the Weinsteins permission to raise additional hundreds of millions of dollars from Goldman Sachs in order to make even more expensive movies.“Significant Events in Disney’s Ownership of Miramax,” New York Times, March 5, 2005, http://www.nytimes.com/imagepages/2005/03/06/movies/20050306_MIRAMAX.html.

By 2004, however, relations between Miramax and Disney were turning sour. In May of that year, Disney would not allow Miramax to release Michael Moore’s incendiary documentary Fahrenheit 9/11. In response, the Weinsteins sought outside funding and released it themselves to great success; the film became the highest-grossing documentary of all time, with revenue of $222 million on a mere $6 million budget.Box Office Mojo, “Fahrenheit 9/11,” http://boxofficemojo.com/movies/?id=fahrenheit911.htm. A year later, the Weinsteins dissolved their relationship with Disney. Disney, however, kept the Miramax brand and the entire Miramax library of films.

Yet this fissure did not end the Weinsteins’ careers. In 2005, the brothers founded a new independent film company, the Weinstein Co., which has had some success with films including Vicky Cristina Barcelona and The Queen, as well as the Michael Moore documentaries Sicko and Capitalism: A Love Story. However, when even independent film legends such as the Weinsteins have only limited success, it’s clear that success is hard to come by. The A.V. Club—a companion to the satirical newspaper the The Onion—asked in January 2010, just after Disney closed Miramax for good, “How much longer will the studio ‘indie’ model be viable at all?”Scott Tobias, “R.I.P. (Companies Are People, Too, Division): Miramax 1979–2010,” A.V. Club, January 28, 2010, http://www.avclub.com/articles/rip-companies-are-people-too-division-miramax-1979,37639/. Today, there are few true “indie” studios left, and several major studios have closed their boutique studios, such as Warner Independent and Paramount Vantage. But even if some are questioning the economics of the indie-studio models of the 1980s and 1990s, it seems that there will always be an artistic drive for independent film—and, eventually, someone’s bound to make the economics of it work again.

New Media, Old Models

In many ways, the Internet has been a game-changer throughout the media industry. However, a few things have stayed the same; major media companies own popular media content sites such as Hulu and YouTube and control access to a great deal of online information. Even bloggers, who have found a new role as drivers of the media cycle, are at a disadvantage when it comes to the ability to generate original content. They tend to drive much of their traffic by reposting and adding commentary to news stories from established media outlets. One large and relatively influential outlet, the Drudge Report, is mainly composed of links to outside news organizations rather than original journalism. It gained fame during the late 1990s for breaking the Bill Clinton and Monica Lewinsky scandal—albeit by posting about how Newsweek killed reporter Michael Isikoff’s story on the matter.BBC News, “Scandalous Scoop Breaks Online,” January 25, 1998, http://news.bbc.co.uk/2/hi/special_report/1998/clinton_scandal/50031.stm. Still, the economic complications of the Internet have changed the calculus of media permanently, a status made clear by the drastic increase in free content over the past decade.

Key Takeaways

  • The three main media business models are monopoly, oligopoly, and monopolistic competition.
  • The print, recorded music, and film industries are generally oligopolies; television is generally monopolistic competition; and live event ticketing is essentially a monopoly.
  • Media companies employ two main methods of generating revenue. Advertising builds income by selling time or space where a viewer will see it. Consumers may also provide a direct revenue stream by purchasing a good or service.

Exercises

Choose a media outlet such as the Washington Post or CNN and visit its website to determine its parent company. Often this will be in the “Corporate” or “About Us” sections. Then visit the Columbia Journalism Review’s resource “Who Owns What?” at http://www.cjr.org/resources/index.php. Consider and respond to the following questions:

  1. Into which of the three basic media business models does this media outlet fall?
  2. How does this media outlet employ each of the two ways that media receives revenue? Does it exclusively use one way or does it use a blend of the two?
  3. How large is the parent company of this media outlet? Does it own any other outlets?
  4. How might the parent company be using vertical integration to its advantage?
  5. Were there any surprises to what you found? Were there any corporate connections that you did not expect to see? Explain.