Entertainment and Media: Markets and Economics Market Structures 2:B - 1(71) Firms and Markets Agenda Price theory – market equilibrium Monopoly Monopsony Intermediate cases Economic Rent and Capitalization Profits and Losses Market.
Download ReportTranscript Entertainment and Media: Markets and Economics Market Structures 2:B - 1(71) Firms and Markets Agenda Price theory – market equilibrium Monopoly Monopsony Intermediate cases Economic Rent and Capitalization Profits and Losses Market.
Entertainment and Media: Markets and Economics Market Structures 2:B - 1(71) Firms and Markets Agenda Price theory – market equilibrium Monopoly Monopsony Intermediate cases Economic Rent and Capitalization Profits and Losses Market Outcomes – Market Power 2:B - 2(71) Firms and Markets 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, …) 2:B - 3(71) Firms and Markets Monopoly Equilibrium and Profit Traditional View 2:B - 4(71) Firms and Markets Sources of Monopoly Profits Sources of monopoly Where do the economic profits reside? 2:B - 5(71) Possession of some unique feature or product Rockefeller’s oil empire Google, Microsoft Supply based vs. demand based. The music industry The movie business E-books publishing Broadcasting Firms and Markets 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. 2:B - 6(71) Firms and Markets Antitrust case vs. Manhattan theaters 2:B - 7(71) Firms and Markets 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 2:B - 8(71) Firms and Markets 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. 2:B - 9(71) Firms and Markets 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. 2:B - 10(71) Firms and Markets 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,… 2:B - 11(71) Firms and Markets Monopsony: Labor Markets 2:B - 12(71) Firms and Markets 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? 2:B - 13(71) Firms and Markets Tech Sector Monopsony http://pando.com/2014/03/22/revealed-apple-and-googles-wage-fixing-cartel-involveddozens-more-companies-over-one-million-employees/ 2:B - 14(71) Firms and Markets An old fashioned, per se illegal, conspiracy in restraint of trade 2:B - 15(71) Firms and Markets Bargaining Situations and Market Power The bargaining range The outcome depends on the bargaining strengths of the two parties. 2:B - 16(71) Firms and Markets 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) 2:B - 17(71) Firms and Markets Entertainment and Media: Markets and Economics Economic Rent 2:B - 18(71) Firms and Markets 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. 2:B - 19(71) Firms and Markets 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) 2:B - 20(71) Firms and Markets Entertainment and Media: Markets and Economics Profit 2:B - 21(71) Firms and Markets Profits… Gross Revenue Minus Total Cost Cost includes the cost of capital Ambiguities in the allocation of cost Contractual arrangements 2:B - 22(71) Firms and Markets Profits and Losses 2:B - 23(71) Firms and Markets Profits in Multiple Output Processes 2:B - 24(71) 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 Markets 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 2:B - 25(71) Firms and Markets Profits in the Movies Production Net There is no net! Gross Box Office Distribution Exhibition 30-50% Sharing rules: Some participants (usually actors, e.g., Tom (Gump) Hanks) and directors get a % of gross distribution revenue. 2:B - 26(71) Firms and Markets 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% Distribution Cost Advt. Overhead Production “Negative” Cost $ 62M $ 67M (Advt., Prints, Screening, etc.) $ 7M (10% of Distribution 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.” 2:B - 27(71) Firms and Markets 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. 2:B - 28(71) Firms and Markets Economic Foundations for Entertainment and Media Organization of Firms in E&M Industries 2:B - 29(71) Firms and Markets Theoretical Departure Point on 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 2:B - 30(71) Firms and Markets Virgin -- Conglomerate 2:B - 31(71) Firms and Markets 2:B - 32(71) Firms and Markets Integration of Firms: Conglomerate, Horizontal, Vertical Markets Financial Services Professional Sports Traditional Publishing Final Consumers 2:B - 33(71) Firms and Markets Economic Foundations for Entertainment and Media Organization of Firms in E&M Industries: Conglomerates 2:B - 34(71) Firms and Markets Conglomerate Mergers Markets Financial Services Professional Sports Traditional Publishing Economic Motivation for Pure Conglomerate Merger: Perhaps Portfolio Diversification 2:B - 35(71) Firms and Markets 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. 2:B - 36(71) Firms and Markets 2:B - 37(71) Firms and Markets 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 2:B - 38(71) Firms and Markets Time Warner 2:B - 39(71) Firms and Markets Liberty Media 2:B - 40(71) Capital Entertainment Interactive Firms and Markets 2:B - 41(71) Firms and Markets 2:B - 42(71) Firms and Markets 2:B - 43(71) Firms and Markets Economies of Scope Markets Financial Services Professional Sports Traditional Publishing Sports broadcasting and newspaper 2:B - 44(71) Firms and Markets “Synergistic” Mergers 2:B - 45(71) 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 Markets What are the Benefits? 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.” 2:B - 46(71) 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. Cablevision paid the Tribune Company $650M for Newsday. Firms and Markets 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? 2:B - 47(71) Firms and Markets Major League Baseball Teams Huizinga Baseball team Fans in seats Broadcasting Parking, Licensing, etc. Stadium Sky boxes Concessions Zimbalist Naming, etc. Fans in seats Baseball team Broadcasting Stadium Parking, Licensing, etc. Other productive inputs Sky boxes Concessions Naming 2:B - 48(71) Firms and Markets Economic Foundations for Entertainment and Media Organization of Firms in E&M Industries Horizontal Integration 2:B - 49(71) Firms and Markets Horizontal Integration Markets Financial Services Professional Sports Traditional Publishing What objective? 2:B - 50(71) Firms and Markets Horizontal Mergers 2:B - 51(71) 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 Markets 2:B - 52(71) Firms and Markets 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. 2:B - 53(71) Firms and Markets 20/78 Clear Channel’s really bad adventure 2:B - 54(71) Firms and Markets Connolly, M. and Krueger, Al, “Rockonomics” http://www.irs.princeton.edu/pubs/pdfs/499.pdf Concert Ticket Prices Clear Channel owned Live Nation until 2006 2:B - 55(71) Firms and Markets Sirius and XM 2:B - 56(71) 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 Markets Benefits of the Merger? 2:B - 57(71) Firms and Markets 2:B - 58(71) Firms and Markets http://www.nytimes.com/2008/12/28/business/media/28radio.html?scp=1&sq=Satellite%20radio+payday&st=cse 2:B - 59(71) Firms and Markets Sirius XM - 2009 2:B - 60(71) Firms and Markets Sirius XM - 2013 2:B - 61(71) Firms and Markets Big 4 Record Labels Become Bigger 3 Warner EMI Sony/BMG Independent Universal 2:B - 62(71) Firms and Markets 2:B - 63(71) Firms and Markets 2:B - 64(71) Firms and Markets 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).[ 2:B - 65(71) Firms and Markets 2:B - 66(71) Firms and Markets 2:B - 67(71) Firms and Markets Measuring Competition Hirfindahl Index H 10,000 * Firms in the market S 2 i Number of Competitive 'Voices' N*=10,000/H 2:B - 68(71) Firms and Markets 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 2:B - 69(71) Firms and Markets Major Studio Market Shares N* = 8.6 - This is plenty. 2:B - 70(71) Firms and Markets Domestic Movie Studio Market N* HHI = 8.9 = 1,120 http://boxofficemojo.com/studio/ March 8, 2014 2:B - 71(71) Firms and Markets