Business of Entertainment
• All products contain some degree of information.
• Entertainment products contain a higher degree of
information and smaller component of physical
inputs than most other products.
• The Internet Economy is particularly suited to the
transmission of information goods.
• We begin with a review of Useful Economic
Concepts that you may or may not have had in the
past (in MECO 6303, say).
Economic Assumption: Scarcity
1. Our wants are greater than our abilities to fulfill
them (scarcity). Factually correct throughout
history.
2. If we do not have scarcity, then everyone has as
much of all products as they want. There would be
no trading, no markets, and no prices.
3. The problem of scarcity could in principle be
‘solved’ either by increasing output or decreasing
wants. Some religious or philosophical
movements work on decreasing wants; Capitalism
tends to go the increasing output route.
Assumption: Economic Actors Are Rational
1.Voluntary actions are only undertaken when
they are expected to make people better off.
2.Consumers try to get the best deal on
products they buy and they only buy
products when they believe the product
provides greater value to them than what
they pay (the next best values for the
money).
3.Producers try to maximize profits.
Some Useful Economic Concepts
• Supply and Demand
• Elasticity
• Price Discrimination
• Public (Information) Goods
• Consumer and producer surplus
• Fixed and Variable Costs
Demand
•
•
•
•
•
•
•
Defined for a single market – particular product
and particular consumers.
Each unit of the good is identical to all other
units.
represents highest price consumers are willing to
pay.
Holds everything but price and quantity constant
(income, price of other goods, gravity, Y2k
problems….)
time dimensions
law of demand – demand slopes down – based on
empirical observation.
movement along versus movement on
P
Demand
D
Q
Demand for Rethinking Network Economy
P1
P2
PRNE
D
Q1
Q
2
QE
Shift in Demand for RNE
P
Perhaps a positive review in the
Economist leads to an
increase in demand curve
D1
D
Q
Area under demand = total value of
that output
1
P1
2
3
Pe
5
4
D
Q1
Total Value of Q1 Units= 1+2+4
Qe
Total Value of Qe Units= 1+2+3+4+5
Supply:
• Represents minimum price sellers require to
voluntarily provide the product.
• assume it slopes up for now. In reality it
depends on the cost conditions of the firm.
• Same assumptions as with demand:
everything else is held constant.
Meaning of Supply
S
P2
minimum price firm is willing
to accept. Should be equal to the
cost of producing the additional output
P1
Q1
Q2
Illustration of Supply Demand
Equilibrium
S
Surplus
P1
Pe
P2
Shortage
D
Q1
Qe
Q2
Examples of changes in
Equilibrium
• Supply and Demand analysis assumes that market
moves from one equilibrium position to another.
• Shifts in D or S alter equilibrium. For example,
how would you expect the price and quantity of
Video Rentals to change when:
–
–
–
–
–
–
1. Price of television sets falls.
2. Ability to download movies increases
3.Income (GDP) falls.
4. Summer changes to winter.
5. Cable television rates reduced.
6. “On Demand” added.
Answers on next slide.
Price and quantity of Video Rentals
– 1. Prices of televisions fall.
• TV is a complement, meaning that it is used with VCRs and rental
tapes to watch movies. This lowers the overall cost of viewing and
therefore increases the demand for video rentals, raising the price and
quantity if supply is upward sloping
– 2. Ability to download unauthorized movies increases
• This lowers demand for legitimate video rentals. Opposite impact
from (1).
– 3.Income (GDP) falls.
• Most goods have demand fall when income falls. This would decrease
demand for video rentals. It is conceivable that poorer consumers
switch from seeing movies in theaters to rentals (which are cheaper)
and that the demand increases.
– 4. Summer changes to Winter.
• In most locations individuals spend more time out of doors in the
summer and video rentals are likely to be lower then. Might not be
true in Dallas. Of course, students are also out of school which might
cut the other way.
– 5. Cable television rates reduced. “On demand” added.
• These are substitutes for video rentals. When a substitute becomes
more attractive, it lowers the demand for the product we are analyzing
(video rentals). Will lower the quantity purchased and possibly the
price.
Changing Equilibrium
S1
2
P2
P1
1
D2
D1
Q1
Q2
Price Elasticity Of Demand
• def: percentage change in quantity divided
by percentage change in price
• (ΔQ/Q)/(ΔP/P) or (ΔQ/ΔP) (P/Q)
• measure of responsiveness
a.
b.
c.
d.
If Elasticity is >1 known as elastic (responsive
customers)
If Elasticity is =1 ; unit elastic
If Elasticity is <1; inelastic (less responsive
customers)
Infinite and zero elasticity
Illustrations of elasticity
D with zero elasticity
P
D with infinite elasticity
Q
Elasticity and TR
•
•
•
When elasticity is greater than 1 (elastic)
increases in price lead to decreases in
revenue and vice-versa
When elasticity is equal to 1, changes in
price lead to no change in revenues
When elasticity is less than 1 (inelastic)
increases in price lead to increases in
revenue.
Implications of Elasticity
•
•
•
•
•
If Elasticity is <1, firm can always increase
Profit by increasing price (revenues increase and
costs decrease because output decreases)
If Elasticity =1, firm can always increase profit
by increasing price
If Elasticity>1 firm can not necessarily increase
its profits by a change in price.
Thus firms that maximize profits must have
elasticities >1.
Example of early history of prerecorded movies
Demonstrates Importance of knowing elasticity.
Monopoly Vs. Competition
•
Monopoly has:
–
Smaller Quantity
–
Higher Price
–
Price discrimination.
–
The tradeoff associated with patents and copyright deadweight loss in consumption versus possible new
products.
Types of Price Discrimination
• Perfect (only in theory)
• Two or More Markets
• Bundling and Block Booking
• Versioning
Perfect Price Discrimination
•
•
•
•
•
•
Theoretical ideal. Cannot be fully achieved.
Find maximum price that every consumer is
willing to pay and charge them that price.
Requires more information than any firm has,
and the prevention of arbitrage.
Demand Curve becomes MR curve.
No Deadweight Loss.
Approximate examples: automobile dealers,
doctors in the old days.
Perfect Price Discrimination.
P1
P3
S
P6
D
Qo
Examples of Price Discrimination
• Movie theaters (adults, children, seniors)
• Movie producers: theatrical release, pay per
view, dvd, cable, television.
• Books: Hardcover and paperback.
• Software: full versus ‘lite’ versions.
• Charging different prices in different
countries. Optimal but difficult to prevent
arbitrage.
Versioning
• Sometimes (frequently) creating different
grades of products might just better meet
consumer demands.
• Versioning is artificially creating different
products (where the high end product would
meet all needs) to achieve price
discrimination.
• Problem: avoiding cannibalization of higher
end product line.
Marginal Revenue
• We assume the product sells at only one
price.
• Because demand is downward sloping the
price needs to be lowered to sell additional
units.
• The revenue the seller gets from selling an
additional unit is not the price at which it
sells. It is the price minus the impact of the
lower price on the other units which would
be sold at a higher price.
Price Discrimination - 2 or more Markets
•
•
•
•
If markets for a single product have
different MRs, profits can be increased by
shifting output from low MR markets to
high MR markets.
Raise price in low MR market and lower
price in high MR market.
High MR market is high elasticity market.
Need to Prevent Arbitrage.
Bundling (Block Booking)
•
Two or more products that are sold as a
package.
–
–
–
CDs versus singles
Cable television bundles versus a la carte.
Subscription services versus pay per use –
cable versus long distance telephone;
Rhapsody versus iTunes.
Advantage of a Bundle
The Matrix Green Tomatoes Bundle
X
2000
1200
3200
Y
1300
1900
3200
2 x 1300
2 x 1200
5000
6400
When Bundling Works Best
Successful Bundling Makes Demand More
Homogeneous
Px
Py
Qx
Qy
Px+y
Qx+y
Question: Should Cable be forced to
Unbundle?
• Proponents argue consumers shouldn’t have
to pay for what they do not want.
• They suggest consumers will save money.
• Opponents argue that current system
provide consumers with maximum variety.
• Opponents argue that consumers will not
save money by a switch to a la carte.
• What do you think?
Problems with bundles (& Ties)
• They always reduce consumer
sovereignty.
• Consumers don’t like them when they
feel constricted by the choice. Audience
reaction to Five Easy Pieces
• This is the motivation behind criticism of
CDs (without singles) and cable bundles
(without individual stations). May be at
the heart of all restrictions on ties.
Network Effects
•
•
•
•
Increased market size makes product more
valuable to consumers.
This is just like an economy of scale in that it
benefits large firms relative to small ones. Might
lead to natural monopoly.
Since demand increases for large networks, large
networks should have higher prices.
In Microsoft case, judge decided that they were
a barrier to entry, that incumbents were lockedin, or put another way, challengers were lockedout.
Network Effects
• Definition: a product becomes more valuable to a consumer the
more other consumers there are of the product.
– Direct network effects occur when consumers directly interact, as with fax
machines or telephones
– Indirect network effects occur when some ancillary product becomes more
plentiful as the network gets larger. An example would be software titles
becoming more plentiful as an operating system network becomes larger.
• Virtually identical theoretically to economies of scale
•
Markets will tend toward monopoly, winner-take-all result (in
simple world).
• Example: Fax machines, some software, languages, online
networks, computer standards, operating systems.
Network Effects
• Does music have network effects? How about
video games?
• Do Network effects impact total usage of a
product or do they have only distributional
effects?
• Do buyers of CDs or videogames care how many
others also listen/play those games? If so, does it
make them spend more time playing the song or
game?
Did Network Effects Kill Atari and Amiga?
WordPerfect and Lotus 1-2-3? The Macintosh?
• Atari and Amiga were two computers that
were relegated to videogame status since
each had a dearth of productivity software.
• Each tried to increase productivity software – Atari
paid Microsoft to port Write, but it was to little
effect.
• WordPerfect came out with a version for both
computers.
Winner-take-all
• Network effects give bigger networks advantages
over smaller networks.
• This is an ‘economy of scale’ on the demand side.
• Many information products have old fashioned
economies of scale since there is a large fixed cost
and low variable cost.
• These factors tend toward the largest firm/network
having two advantages over smaller competitors
– Lower Costs.
– Greater Willingness to Pay by consumers.
Lock-in
• Claim: Markets do not adopt best products
even when it is efficient to do so.
– QWERTY, VHS-Beta are most common
purported examples.
• Story is one of coordination failure.
– We all prefer Beta. But VHS dominates, and
most movies are on VHS. Since we think that
everyone else will get VHS, we get VHS too.
• Key examples of lock-in are false.
Lock-in Table
T able 1: A D O P T IO N P A Y O F F S
N um ber of P revious A do ptions
0
10 20 30 40 50 60 70 80 90 100
T echnolo g y B (B eta)
T echnolo g y V (V H S )
10
4
11 12 13 14 15 16 17 18 19
7 10 13 16 19 22 25 28 31
20
34
• Technology B Wins although Technology V
is better.
40
Figure 1
V
30
B
20
10
Benefits
0
10
20
30
40
50
60
Number of Adopters
70
80
90
• Assumption about different slopes? What
does it really entail, and is it reasonable?
• Assumption that consumers only look at
their original payoff and not their final
payoff is also unreasonable.
First Mover Wins?
• Because of the advantages that seem to accrue to
the large firms/networks, some thought that the
key to success was to get to market first, since that
would lead to the largest share, giving the firm a
large advantage over competitors.
• Marketing Professors thought they had evidence
that first movers usually went on to dominate
many industries in the past, and this should have
been even stronger for high tech firms.
• The theory of ‘lock-in’ provided new theoretical
support for the idea that the first mover would
win.
Support for Lock-in: Qwerty Story
• Most famous case;
– simple to identify ‘quality’ (speed of typing)
– Consistent with chaos theories of unpredictable small events
leading to big outcomes.
• Usual Story:
– Qwerty Keyboard was designed to slow down typing to keep
keys from getting stuck.
– In a famous typing contest in Cincinnati, pitting touch typist
against ‘hunt-and-peck’ the touch typist used a Qwerty and won.
This is the small accident leading to big outcomes, since people
then associated Qwerty with speed.
– Prof Dvorak designed a keyboard to speed things up in 1930s.
– During WWII Navy tested new keyboard and found that speed
increased 40% and cost of retraining was recouped within 10
days of completed switch.
– Keyboard never adopted. End of war reduced Navy’s need for
fast typists.
Qwerty Story
• Actual Story
– No evidence that Qwerty Keyboard was designed to slow
down typing speed, and it wasn’t necessary to keep keys
from getting stuck.
– There were many other typing contest pitting touch typist
against other touch typists on different keyboards and
Qwerty won many of these. The point is that the
Cincinnati contest was not crucial.
– A highly publicized 1954 test of the Dvorak keyboard by
the General Services Administration found no advantage
in switching to Dvorak.
– The WWII Navy study was biased in the way it calculated
it results. All the biases were in favor of Dvorak. It also
appears that the author of the study was probably Dr.
Dvorak, the designer and patent holder of the keyboard.
– Ergonomics studies on keyboard design confirm that
Qwerty is a good design and not much different than
Dvorak in terms of speed
Beta-VHS Story
• Story
– Beta was better than VHS.
– VHS got an early lead and network effects allowed it to become
dominant even though it was inferior.
– Network effect was the fact that prerecorded tapes were available
in VHS and people wishing to rent tapes would get a VHS
machine to get a good selection of tapes.
• Actual History
– Beta started first, but could only tape for 1 hour.
– Sony (Beta) and VHS (Matsushita) had a patent sharing
agreement.
– Only real difference was size of tape and how it was threaded.
– VHS always had longer playing time which turned out to be
decisive.
– Beta had better editing and so it is used in professional
equipment
– VHS as good or better than Beta according to independent tests.
Other Stories
•
•
•
•
•
•
•
Quadraphonic sound
Railroad gauges
Macintosh versus dos
Internal combustion engine
Metric versus English measurement
Stereo AM
AC versus DC
Network Effects and Software
• Standard Claims: Increased share of OS increases
library of programs written for it; increased
number of programs increases share of OS
– Winner-takes-all.
– Lock-In: Superior challengers cannot replace leader
because it is so difficult to overcome the network
effects.
• Empirical evidence does not support the second
claim, although it does support the first.
Network Effects and Video Games
• Just like the OS/program paradigm.
• More games written for most popular
system; system with most games gets larger
share.
• Is there an important difference between
videogame market and OS market?
– Lack of compatibility with prior generations of
hardware (although this is getting better).
Open or Closed Models?
• If network effects are important, large
networks have advantages.
• Did IBM (Microsoft) defeat Apple because
of open standards hardware?
• AOL kept its Instant Messaging software
incompatible with Microsoft and Yahoo.
• Big proprietary networks usually try to
close their networks to newcomers.
Open or Closed Models?
• Apple currently keeps iTunes/iPod as a
somewhat closed system (it is open to the
larger MP3 network).
– RealNetworks engineered a way for iPod
owners to download music from its site, but
Apple changed iPods so this wouldn’t work.
• Microsoft strategy was to have numerous
hardware manufacturers using its system.
So far it has failed.
Videogames
• How do they differ from older media?
• Which markets are they likely to most
resemble?
• Strong network effects for game systems. Is
this like any other media markets?
– Only if there are competing non-compatible
standards – discs vs. cylinders; beta vs. VHS.
Videogame Models
• Atari was an open system: it produced game
player and anyone could produce the games.
• Nintendo changed that model. Only games
approved by Nintendo (and paying the
license fee) could be produced. It is a closed
system.
• This allows the players to be sold at a loss.
• Is this a better model?
Brief History of Video Games
• Late 1960s. Ralph Baer invents the concept of a video
game.
• Magnavox licenses the technology and introduces the
“Odyssey” in 1972. No micro electronics. Overlays were
pasted on the TV screen for the ‘background’.
• Atari creates Pong in early 1970s, based on the Odyssey
ping-pong game. Magnavox sues and wins (and later sues
Mattel and Nintendo). But Pong is a giant hit. Atari
produces in 1975 home Pong units for hookup to
television.
• Atari (which had become a division of Warner
Communications) home console debuts in 1977. Coleco
and Mattel also have consoles. Steve Jobs works for Atari
(he gets Wozniak to produce a ‘breakout’ game for Atari)
and proposes building a computer, but is turned down.
Brief History
• Nintendo, a maker of playing cards, creates
videogame system in 1977 (after licensing
Magnovox’s game system).
• 1981: Nintendo creates Donkey Kong for arcades.
• 1983, Nintendo tries to get Atari to license its new
videogame system. An agreement is reached but
not finalized and when Atari has personnel
problems at the top, Nintendo decides to go it
alone.
• 1984, the year the video game market crashed.
• Afterwards, the players were Nintendo and Sega.
Flops were Atari Jaguar and 3-DO
Brief History
• Sony Playstation introduced in 1994. Earlier
version played Nintendo games and played
CDs.
• Sony came to dominate consoles and
Nintendo the handheld market. Sega’s
hardware machine floundered.
• In 2000 Microsoft introduced the X-box
• In 2005 Sony takes on Nintendo in the
handheld market.
Business Model
• After the crash of 1984, the business model was
changed.
– System manufacturers produce the hardware; sell it at a
loss
– License game producers and take a share of their
revenues.
• This is a model like that used by inkjet printer
manufacturers. Why?
– To avoid repeat of the crash?
– To price discriminate?
– To reduce risk?
• Should advertising be sold within the games?
[Product placement]
Non-Rivalrous (Public) Goods
1.
2.
3.
4.
Definition: Goods that do not get used up when
consumed. In other words, one person’s
consumption of a good doesn’t reduce anyone
else’s potential consumption of the same good.
Examples: Ideas, television broadcasts, national
defense. Are usually ideas and artistic
expressions.
Most of these creations can usually be put in a
‘tangible’ form, such as a CD or book. The CD is
not a public good, nor is the book. But the music
and stories are public goods.
Since a public good cannot be used up, once it is
produced there is no scarcity of it and its optimal
price is zero.
Titles and Copies
1.
2.
Book titles can be thought of as public
goods, but the physical copies of a single
book title are private goods that embody a
public good.
Several questions arise: how many titles
are optimal to publish? How many copies
of each title would be optimal? How do
competitive markets work? Monopolies?
Finally, is it possible to produce public
goods efficiently?
The Market for reproductions of a single Title
1. Reproductions of a single Title are Private Goods
2. Seller of the Reproductions cannot appropriate the
entire potential value of the reproductions since he is
not a perfect price discriminator.
3. With a single price for the reproductions, too few
reproductions are produced (Q*-Qm). This leads to a
social (deadweight) loss (area 7 in figure).
4. Consumers of the reproductions get surplus, which is
another loss of appropriation for the reproduction
seller. (1+2 in figure)
Consumption of a Title—Too low
Pm
1
2
How big is this?
4
3
7
MC of printing
Pc
5
6
Qm
D
8
D
Q*
MR number of copies of a title
Market for Titles
1.
2.
3.
Because appropriability for reproductions
of any title is imperfect, the sellers of titles
can not achieve the vertical sum of
demands (perfect discrimination demand
in next figure).
Instead, the best the sellers can do is some
distance below the vertical sum of
individual demands (attainable demand
curve in the next figure).
This leads to too few titles being produced
relative to the ‘ideal’.
•
Market Demand for Titles
Pm
Qm
Q**
Q*
number of titles written
Copyright Tradeoffs
• This leads to a tradeoff:
– Under-consumption of individual titles.
– Underproduction of titles.
• Copyright exists to give creators of ‘artistic’ works
the ability to generate revenues.
• The theory is that without copyright, competition
in selling reproductions of a title would drive the
price down to the marginal cost of producing a
reproduction. Competition would also drive the
(economic) profits down to zero, leaving no
money with which publishers can pay the author.
Copyright Tradeoffs
• It isn’t clear, however, that competition
leaves no payment for the author.
• Arnold Plant argued that being first gave
enough of a head start that sufficient profits
could be earned to allow authors to receive
optimal remuneration. (Ex. English authors
in the US market).
• The lead from being first is, with current
technology, unlikely to allow much profit.
Optimal Copyright
• The figure on the next page illustrates
optimal duration of copyright.
• It contrasts the gains from lengthier
copyright (the value of additional works
created) against the harms (unnecessary loss
of consumer surplus)
Actual Copyright
• Life of the author plus 70 years
• ‘Work for hire’ records, movies, games? 95
years.
• Is this too long?
– Creative commons members say ‘yes.’
– 17 economists say ‘yes.’
– Mark Twain says ‘no’.
• In fact, no one knows if it is too long.
An Example
value of books produced
30,000,000
25,000,000
20,000,000
15,000,000
value of books produced
10,000,000
5,000,000
0
1
5
9
13
17
21
25
29
33
37
41
45
49
53
57
Copyright Length
61
65
69
73
77
81
85
89
93
97
101
Fair Use
• There is in the law an attempt to balance the
interests of copyright holders and those of
users.
• Fair use is a defense to a claim of copyright
infringement. It allows copying in instances
when the copying appears not to be hurting
the copyright owners revenues.
Fair Use
• 4 factors
– Amount of the copyright product that is copied.
– Nature of the Copyright product (commercial
versus academic or scholarly.
– Nature of the use of the copied product
– Impact on the revenues of the copyright holder.
• Last factor is the most important.
• Betamax Case said home videotaping was
fair use, and thus home videotaping was
allowed.
Fair Use
• Economic Rationale:
– If a use is too small to make the transaction
worthwhile, we might as well allow it to
happen since it doesn’t harm the copyright
owner and benefits the users.
• As technology changes, this rationale might
disappear.
• DRM can allow payments for individual
uses, so fair use might not be needed.
Does Copyright Last Too Long?
• 17 famous economists say it does.
• Brief in the Eldred Case, which challenged the
constitutionality of the 1998 Sonny Bono Copyright Act.
• They point out that increasing the life from 50 to 70 years
after author dies should have a trivial impact on incentives
to produce work.
• The use the concept of ‘present value’ to demonstrate how
little a dollar paid far in the future is worth now.
• $1 in 70 years, with a 5% interest rate is worth
1/(1.05)^70, or 3.2 cents. The Interest Rate impacts
optimal copyright length.
• Of course the deadweight loss from the extra life is also far
in the future, so it needs to be discounted to present value
terms as well.
On the Other Hand
• Even a small increase in payments can lead
to an increase in new creations – depends
on the elasticity of supply.
• New creations start to provide value
immediately, not 70 years from now.
• An increase of even 3% in titles could
provide significant immediate benefits.
• The 17 economists oversimplified this
issue.
Further
• There is another possible reason for
copyright even if it doesn’t bring forth any
new works.
• It might be important to have ownership
over current works to make sure that they
are properly husbanded.
• Ownership keeps characters from being
misused or overused.
Copyright and CD Sales
Table 1: Relative Present Values of Copyright Extension from 50 to 95 or 80 to 100 Years
Change in Term \ Discount Rate
3%
4%
5%
6%
7%
Extra 45 Years as a Percentage of original 50
21.74%
13.57%
8.49%
5.32%
3.35%
Extra 20 Years as a Percentage of original 80
4.63%
2.47%
1.28%
0.66%
0.33%
Impact of Sound Recording Extension Relative to
More Typical Extension Examined by 17 Economists
4.70
5.51
6.62
8.11
10.07
Extra 20 Years as a Percentage of original 50
13.19%
8.90%
5.95%
3.95%
2.61%
Table 4: Share of 2004 sales by Copyright Date
1940s & earlier
1950s
1960s
1970s
1980s
1990s
2000s
Total Sales
% Of Sales
413,000
1,853,000
6,982,000
13,839,000
16,022,000
17,941,000
88,904,000
0.30%
1.30%
4.80%
9.50%
11.00%
12.30%
60.90%
Table 5: Average Yearly Sales of Sound Recordings in the UK
decade
50s
64-69
70s
80s
90s
2000-2003
sales (millions of units) current relative to past
37.117
95.981
124.567
183.629
231.603
6.24
2.41
1.86
1.26
1.00
Table 6: Later Sales as a Percent of Original Sales
Decade
1950s
1960s
1970s
1980s
1990s
2000s
Current Market Size
% Of
relative to Original
2004 Sales relative to
Total Sales 2004 Sales
Size
Inferred Original Sales
13.0%
1,853,000
1.30%
10.00
30.0%
6,982,000
4.80%
6.24
22.9%
13,839,000
9.50%
2.41
22.9%
16,022,000
11.00%
1.86
20.5%
17,941,000
12.30%
1.26
88,904,000
60.90%
Table 7: Calculating the Increase in Revenues from Increasing the Copyright Term
no discounting
3%
4%
5%
6%
Present Value of 100€ for 5 years
and 25€ for 45 years
1625.00
1070.94
963.18
877.30
807.6
Present Value of 100€ for 5 years
and 25€ for 90 years
2750.00
1233.03
1051.86
926.75
835.7
% Increase in Revenue due to
Extending Copyright Length
69.23%
15.14%
9.21%
5.64%
3.48%
Risk Sharing
• Artistic creations are highly variable in the
their economic success.
• Small number of successes, large number of
failures.
• Publishers appear to be in a better position
to bear the risk.
• An Example follows
Risk Sharing
• If one out of 10 published books generates $20K in profits (revenues
minus publication costs) and the rest make zero, the average book would
generate $2K above publication costs, which could be used to pay authors.
• A publisher of 500 books, could expect to generate profits of
approximately $1 million. Because of the large number of books, the
publisher can predict this value with high precision. [By analogy, this is
like to knowing that if you toss a coin 500 times you will get very close to
250 heads, or how an insurance company knows that X number of people
are likely to die in any given year].
• Authors could be relieved of the risk and all given $2K. Or they could bear
the risk, in which case 90% would get zero and 10% would get $20K.
• Which is the more efficient system? Normally we would think the
publisher should bear the risk. But there is lots of evidence that creators
prefer bearing the risk.
Risk Sharing
• Although we usually assume the individuals are risk
averse, meaning that they do not like risk, authors appear
to want to shoulder some risk.
• Examples:
• Royalties based on sales – standard contract in the industry
book and recording industry.
• Star actors and directors often negotiate a piece of the
revenues or profits for films [Points].
• Actors and writers get residuals.
• Droit de Suite: Artists get paid every time their work gets
resold. This does not currently exist in law, but artists
claim they want it.
• Financial and Syndication Rule
What does a contract look like?
• It is usually exclusive under the life of the
contract.
• Is there an advance against royalties?
• What is the royalty rate? Are royalties based
on wholesale or retail prices?
• Are they based on gross or net sales?
– What about returns? Discounted items?
• Right of First Refusal:
What does a contract look like?
• This is a contract for a book of mine,
with the amounts removed. It is fairly
typical.
Terms to Notice
•
•
•
•
•
•
•
Wholesale or retail prices
Net Receipts or Gross?
Returns
Reprint editions
Directly sold by Publisher
Premium Sales
Countries other than the US
Royalty contracts
More Royalty contracts
What Does a Royalty Statement
Look Like?
Residuals
• Writers guild of America receives money whenever
programs or movies generate revenues in
syndication, domestic or foreign.
• Screen actors guild receives money whenever
movies, programs or commercials are syndicated (as
well as for original production).
• Same is true of directors and others.
• A statement about royalties from the Directors
Guild: “Residual payments are made to DGA
directors following a film's theatrical run for its
subsequent exploitation on videocassette, laserdisc
and DVD, pay television, basic cable and free
television. Residuals represent additional income for
the DGA filmmakers. It's one of the greatest
financial advantages of being a DGA member.”
Fin/Syn rules
• Law that prevented TV Networks from owning more than
a very small share of the television programs that they
broadcast in prime time.
• This essentially forced producers to rent the program to the
television networks for 2 years, after which it reverted to
the producer.
• Producers always had the option of renting their programs
(in theory), so why did they need a law forcing them to do
so?
• Why would producers wish to restrict their ability to sell
programs to television networks?
• Particularly when television networks should be better able
to bear the risk of success or failure, and should be better
at gauging a programs likelihood of success (and
syndication revenues).
Performing Rights
• Composers of music are paid when their works are broadcast on
television.
• This is in addition to the payment that occurs when a composer is
commissioned and the payment that occurs when the music is
‘synchronized’ with the picture.
• Producers wish for the right to combine the upfront payment with the
performing right. Composers do not wish to allow themselves to enter
into such negotiations. Why not?
• Several possible answers.
– Maybe composers are at a bargaining disadvantage relative to networks
and don’t wish to have the entire payment controlled by such
circumstances.
– Alternatively, it is possible that performing rights payments are too high
and composers do not wish to return to a competitive up-front payment.
But if this were the case composers should have been willing to pay to get
their music on television in order to be able to receive the performing
rights payments.
Droit de Suite
• This does not currently exist in US Copyright law,
but artists claim they want it.
• On average, it should leave the payments constant,
unless artists are at a bargaining disadvantage.
• Once again, it ties the artist to the success of the
creation. It increases risk.
• It can’t be a voluntary contract since artists will
not be able to monitor all sales of their creations.
The Sound Recording Industry
• History:
– Edison invents a foil recording device in 1877
– Berliner invented a ‘record’ style device that
was easy to duplicate. Played on the Victrola.
~1890.
– The business gets going in the period 19101920. Radio seems to have damaged it in early
1920s.
– Tremendous crash during the depression.
– 80s and 90s are terrific decades.
Figure 4: Two Measures of the Recording Industry
$35
0.20%
0.18%
$30
0.16%
$25
0.14%
$20
0.12%
0.10%
$15
0.08%
$10
0.06%
Record Sales Revenues
in 1983 dollars
$5
Share o f GDP
$0
0.04%
0.02%
0.00%
2001
1996
1991
1986
1981
1976
1971
1966
1961
1956
1951
1946
1941
1936
1931
1926
1921
Music Industry
Performers
• Deals are struck many different ways.
– Record labels usually signs ‘talent’ or deals with
independents who have signed talent.
• A&R (artist and repertoire) in-house producer is one way to
go.
– Talent deals: As high as 15% of retail for big names,
10% or so for beginners.
– Upfront is thought to be ~50% of expected royalty.
– Talent may have to share royalty with producer. Studio
costs and promotion costs may be taken from royalties
(not advanced) earned by the Talent.
Artists Take on Successful Album
• Two articles today in WSJ
– One on France’s legislation regarding DRM
– One on measuring advertising for Internet
radio.
Composers
• Composer gets a publisher interested. They
split the revenues.
• Publisher then tries to sell the song.
• Money comes from several sources:
– Performing Rights Societies (ASCAP, BMI)
– Mechanical rights
– Synchronization rights
Performing Rights
• Concerts, music halls, radio, television
• Radio, television, cable networks all use a
‘blanket license’.
• Blanket rates are negotiated with the final
determination controlled by a court in NY.
• Copyright Royalty Arbitration Board
(recently replaced) sets some other rates.
• Radio pays about 3% of revenues, TV and
cable, 1.3%
Mechanical Rights
• An amount for each record sold.
• Depends on the length of the track
• Government sets the maximum rate that can be
charged under the ‘compulsory license’ for sound
recordings.
• Compulsory rate is about 10 cents for a 5 minute
track.
• Actual amount is usually lower since the
compulsory rate becomes the maximum.
• Usually collected by the Harry Fox agency.
• Question: Why should there be a compulsory
license?
Copying
• Technologies to aid in copying are not new:
– Unauthorized printing presses, record stamping,
and the like have been in existence as the
authorized versions.
• Slightly Older Technologies (which can be
used at home) include:
–
–
–
–
Photocopying
Audio Cassettes
VCRs
Floppy discs, CDs, DVDs
4 Possible Impacts of Copying on the Producer
• Substitution Effect: Copies replace the purchase of a work.
– This is most basic intuition.
– Clearly decreases sales. Not a problem for videotaping.
– Hard to imagine that it isn’t important for many forms of
copying. Particularly counterfeiting.
Indirect Appropriability
• Producers capture value of copies
(Liebowitz,
J. Political
Economy, 1985)
– Requires:
• no variability in copies made per original
• Or, if there is variability, the ability to identify which originals are
turned into copies
– This is the reason photocopying did not appear to harm
publishers.
Sampling (Exposure Effect)
• Try out before purchase
– Defense in the Napster Case
– If cost of sampling low, it is efficiency enhancing. But not
necessarily revenue enhancing!
• Drunken Sailors Example
– Empirical evidence that sampling doesn’t increase sales.
• Superior choices of Cable TV generally doesn’t increase viewing
hours
• Radio doesn’t appear to increase record sales.
Network Effects
• Users have higher value because there are more other
users.
– It is not clear which products this might apply to, perhaps
business software.
• Users of Copies Increase Value to Purchasers
– Could in theory increase sales.
• Seems unlikely to be important in most instances of
copying.
Copying
• Technologies to aid in copying are not new:
– Unauthorized printing presses, record stamping,
and the like have been in existence as the
authorized versions.
• Slightly Older Technologies (which can be
used at home) include:
–
–
–
–
Photocopying
Audio Cassettes
VCRs
Floppy discs, CDs, DVDs
Historical Impacts of Home Piracy
•
•
•
•
Photocopying.
Took place mainly in libraries
Impacted journals more than books
Publishers were able to engage in indirect
appropriability. Revenues and publications
increased relative to audience of potential
readers.
Impact of Photocopying
• This idea of indirect appropriability has
been examined in a least one market.
• It appears that unauthorized copying has
benefited copyright owners in the case of
photocopying.
Evidence on Price Discrimination and
Indirect Appropriability
Libraries that:
1959
1983
Price Discriminate
3
59
Don’t Price Discriminate
35
21
Ratio of Book to Journal Expenditures, US Academic Libraries
1941
3.02
1961
3.19
1975
1.70
1944
3.41
1965
3.36
1977
1.54
1946
3.13
1968
3.67
1979
1.26
1950
3.01
1971
2.96
1981
1.13
1959
2.46
1973
1.96
Continued
Dependent
variable
Constant Cites
Non-Profit Age
of R-square
Dummy
Journal
Plib/PInd
1.29
.0065 .65
[1.99] [4.14]
Plib/PInd
1.38
.0071 .578
[2.14] [3.36]
.17 n=80
-.16
[1.01]
.17
AudioTaping
• There was a drop during the early stages of
cassette recorders.
• After 1982 there was a rapid increase in
record sales—probably due to mobile
recorded audio, which expanded the market.
• Net effect was unclear. Economic studies
were ambiguous. Based on survey data.
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
6
1980
1979
1978
1977
1976
1975
1974
1973
Albums Sold Per Person
Audiotaping: No Clear Result
Albums Sold per capita
5
4
3
2
1
0
Figure 7: Albums and Cassettes, Per Capita
6
5
Pre-Recorded Cassettes
Albums
Blank Cassettes
4
3
2
1
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
0
The pickup after 83 is inconsistent with
negative impact of copying
Videotaping
• Original concern was for broadcast
television revenues, which made little sense.
• It opened up a new market which benefited
the movie industry—prerecorded video,
although the ability to record was not
required for that.
Table 1: Vogel's Estimates of Film Industry Revenue
Theatrical Release
$3,100
19.25%
Home Video
$7,800
48.45%
Pay Cable
$1,600
9.94%
Network Television
$300
1.86%
Television Syndication
$800
4.97%
Made for TV
$2,500
15.53%
$ in millions; Estimates for year 2000; Foreign Revenues
Excluded; From Table 2.8, p. 62
Slightly updated numbers:
Box office gross was $9.49 billion in 2003 according to the Motion Picture Association
of America. According to Vogel, the movie studios net slightly less than 50% of the box
office. According the Adams Media Research, revenues to the studios from the sale and
rental of DVDs was $11.38 billion, and from VHS tapes $2.56 billion. Thus revenues
earned by the movie studios from prerecorded movies are approximately three times as
great as that from theatrical releases.
Application to File-Sharing
• Can indirect
environment?
appropriability
work
in
Napster-like
• Problem: large variability in the number of copies made
from each original, and identifying at time of sale which
originals are going to be duplicated.
• Large scale Napster copying would seem almost certainly
to significantly harm copyright owners.
• Would work better if Napster had required upload credits
to be earned before downloads were possible.
• Still, Napster is easier to control than Gnutella based
systems.
History of File-Sharing
• Napster begins in fall of 1999.
Figure 1: American File Sharers at Home (000s)
18,000
Napster Decision
16,000
14,000
10,000
8,000
6,000
4,000
Source: ComScore Media Metrix
Feb-02
Jan-02
Dec-01
Nov-01
Oct-01
Sep-01
Aug-01
Jul-01
Jun-01
May-01
Apr-01
Mar-01
Feb-01
Jan-01
Dec-00
Nov-00
Sep-00
Aug-00
Jul-00
Jun-00
May-00
Apr-00
0
Mar-00
2,000
Oct-00
Napster
Napster plus Alternatives
Feb-00
Users
12,000
0.00
April, 2005
March, 2005
February, 2005
January, 2005
December, 2004
November, 2004
October, 2004
September, 2004
August, 2004
July, 2004
June, 2004
May, 2004
April, 2004
March, 2004
February, 2004
January, 2004
December, 2003
November, 2003
October, 2003
September, 2003
August, 2003
July, 2003
June, 2003
May, 2003
April, 2003
March, 2003
February, 2003
2.00
January - 2003
December - 2002
November - 2002
October - 2002
September - 2002
August - 2002
File-Sharing Trends
Figure 2: Various Measurements of File-Sharing
2.50
Big Champagne (Users of Filesharing Networks)
NPD (MP3 Files transferred)
comScore (users of filesharing programs)
1.50
1.00
0.50
Who Engages in File-Sharing?
Table 1: Percentage of Adult Population answering yes to question: "Do you ever download music
files onto your computer so you can play them at any time you want?" Source: Pew Internet Project
July-Aug-00 Aug-Sept-01
Oct-02
Jun-03
Nov-03 May-June-04 Feb-05
Overall
11%
15%
19%
19%
9%
13%
13%
18-29
25%
36%
41%
43%
23%
31%
32%
30-49
11%
16%
21%
20%
9%
11%
13%
50-64
3%
6%
8%
8%
4%
6%
7%
65+
2%
2%
3%
1%
2%
2%
1%
Men
12%
19%
22%
23%
12%
17%
14%
Women
10%
13%
16%
15%
7%
9%
12%
Absolute Amounts
Measurement of US audio files exchanged per month
Webnoize 2001
1,000,000,000
Idate high statement for all of 2003
5,000,000,000
Idate low statement for all of 2003
1,000,000,000
NPD average based on first half 2004
183,694,429
Inspires confidence, doesn’t it?
8
3
2
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Albums Sold Per Person
History of Record Sales
Figure 3: Albums Sold per capita
Predicted Sales (based on historic growth)
7
6
5
4
Napster Begins
Actual Sales
1
How does the timing of the decline in record
sales match up with the growth of file-sharing?
• Napster doesn’t show large numbers of users until second
half of 2000. Record sales begin their steep decline.
• File-sharing continues to grow until lawsuits announced on
June 25th and started on September 8, 2003. The decline in
file-sharing matches a stopping of the decline of record
sales.
• Sales continue to decline in 2005. The only sour note is the
increase in the second half of 2004.
Table 2: Year-to-year changes in half year unit sales of Albums Source: RIAA
2000-1 2000-2 2001-1 2001-2 2002-1 2002-2 2003-1 2003-2 2004-1 2004-2 2005-1
1.25% -8.24% -8.36% -9.40% -8.06% -11.62% -16.79% -1.15% 5.32% 2.15% -4.14%
What about the alternative Explanations?
• Look at alternative factors – GDP, price of CDs,
quality of music, alternative forms of entertainment
(DVDs) and so forth. (Liebowitz 2004)
• None of these factors seem capable of explaining
the change. Price of CDs constant. Concerts up and
radio listening up for contemporary music. GDP
would predict an increase.
• DVD growth is frequently brought up. It is usually
the leading alternative candidate.
• DVD sales provide results quite different from
DVD revenue. Turns out that DVD growth is not a
reasonable candidate.
Alternative Entertainment
Figure 2: Movies, Video, VideoGames
2.25
No rm a lize d Vide o ga m e R e ve nue P e r C a pita
2.00
No rm a lize d B o x Offic e P e r C a pita
No rm a lize d P e r C a pita DVD a nd VHS S a le s a nd R e nta l
1.75
1.50
1.25
1.00
Source: Adams, Ebrain and MPAA
0.75
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
Figure 4: Growth in Pre-Recorded Movie Sales and Rentals
$50
$30
Real Per Capita Spending on Sales and Rentals of PreRecorded Movies
Real Per Capita Spending on Sales of PreRecorded Movies
$45
$25
$40
$35
$20
$30
$25
$15
$20
$10
$15
$10
$5
$5
Source: Adams Media Research
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
$0
1981
$0
Table 3: Album Sales by Genre (000s)
Source: SoundScan
Classical
Jazz
Hard Alternative
Rap
R&B
Country
2000
16,403
18,416 89,924 131,138 105,515 197,141 67,115
2001
15,846
19,514 88,158 131,594
89,279
195,498 67,241
2002
14,776
19,901 74,677 125,752
83,346
160,183 75,362
2003
17,727
22,366 74,629 128,344
75,854
149,972 70,944
2004
19,098
19,156 76,887 135,317
81,558
165,364 82,041
% change 00-04 16.43%
4.02% -14.50% 3.19%
-22.70% -16.12% 22.24%
% change 00-03
8.07%
21.45% -17.01% -2.13%
-28.11% -23.93% 5.71%
Econometric Studies
• Each technique has problems.
• Cross Section of Areas
– Many factors cause differences in behavior across
areas. Can we control for enough of them? Do we have
cross-section measures of file-sharing?
• Cross section of people
– Data on individuals comes from surveys that might not
be reliable.
• Cross section of Albums
– How do you distinguish impact of file-sharing? Is there
a fallacy of composition?
Industry Reaction to Copying
• Shutting down Napster. Shutting down
Grokster.
• Prosecuting users who make copyrighted
materials available to others.
• ‘Spoofing’ and other technologies to make
the trading in copyrighted goods more
difficult.
• DRM, protection device.
• What about article in Science?
Advertising based Industries
•
•
•
•
•
Broadcast television
Broadcast radio
Newspapers
Magazines
Much of the Web
Advertising Models
• Pure advertising models (television and radio) almost
never are used: magazines, cable networks, newspapers, all
use both advertising and subscriptions.
• The TV/Radio model is a flawed model. It was due to
unusual historical factors, not economic forces.
• Better models are usually a mixture of advertising and
subscriptions.
• Net firms thought they could be solely advertising based.
• Cable TV and subscription radio have advantages, but also
(particularly radio) disadvantages (many individuals do not
have access.
Broadcasting
• Consumers of television and radio are the
advertisers. Audiences are the product that
broadcasters sell.
• Broadcasters want audiences to see advertising.
The program itself is only important as an
instrument to that end.
• Size of the audience is more important than the
intensity of the enjoyment.
• Number of advertising minutes used to be
controlled. It no longer is.
• Broadcasters need to gauge viewer reaction to
more ads. Also a function of the entertainment
value of the ads.
A short history of Broadcasting
• Radio begins in the early 1920s. Free entry.
• Government claims it needs to control the
spectrum. See Hazlett for a critique.
• FCC established, which proceeded to give
spectrum away to ‘favorite’ entities. Should have
sold spectrum. Same for TV later.
• Radio peaks in the 1930s and 40. National
networks formed (NBC, CBS), and national
programs. The precursor of television.
• Television gets going in the 1950s. Soon surpasses
radio. For the last 40 years the average household
has watched 50 hours of television per week.
History (cont)
• 3 major networks (ABC, CBS, NBC)
dominate prime time until the 1990s.
• Cable networks do not play a major role
until the mid 1990s. In 2003 cable networks
drew larger total audience than broadcast
television for the first time. The trend
against broadcast continues.
Television killed Movies
Figure 1: Yearly Movie Admissions Per Capita
45
40
35
30
25
20
15
10
5
0
1999
1995
1991
1987
1983
1979
1975
1971
1967
1963
1959
1955
1951
1947
1943
1939
1935
1931
1927
1949
Did TV finally save Movies?
Table 1: Vogel's Estimates of Film Industry Revenue
Theatrical Release
$3,100
19.25%
Home Video
$7,800
48.45%
Pay Cable
$1,600
9.94%
Network Television
$300
1.86%
Television Syndication
$800
4.97%
Made for TV
$2,500
15.53%
$ in millions; Estimates for year 2000; Foreign Revenues
Excluded; From Table 2.8, p. 62
Figure 2: Box Office as Share of Personal Consumption
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
1999
1994
1989
1984
1979
1974
1969
1964
1959
1954
1949
1944
1939
1934
Table 1 lists the various
sources of revenue that TV
allowed movie producers to
collect, which are far in
excess of theatrical
release. But the impact of
TV on movies is still
probably negative. It is
true these other sources
increase movie revenue by
a factor of 5. But movies
have on 1/8 the share of
personal consumption they
used to, and
entertainment’s share of
personal consumption has
grown, leaving movies
behind.
Measuring the Audience
• This is a problem because consumers do not pay
for the program. PPV knows exactly how big its
audience is, as do movie theaters and magazine
publishers.
• Nielsen for television; Arbitron measures radio.
• Diaries were the main method for many years.
They are being replaced by ‘people meters.’
• Measurements are imprecise. Particularly for
small cable stations. Sample used isn’t large
enough to have statistical confidence.
• Diaries can be misleading. So too can the meters.
Measurement Vocabulary
• Reach (or cume): the favorite term of
broadcasters. This is a fairly useless term, often
defined per month, per week, or per day. It
measures the number of individuals or households
who tuned in to that station for at least 15 minutes
during that interval. For major stations, reach can
often be close to 100%. Is the basis for gross
rating points (reach x frequency of adv).
• Share, is the market share of a program for all TVs
that are on at that moment.
• Rating: the share of all (TV) households watching
a show. This is the most accurate and meaningful
measurement.
The People Meter Furor
• Introduced in the late 1980s.
• Replaced, in part, diaries.
• In 1990 Nielsen caused a furor when it claimed
that the television audience was smaller. People
meters generally give lower ratings.
• Industry went into shock. Advertisers asked for
money back. Broadcasters attacked the ratings.
• What does this say about how much advertisers
know about the impact of their advertising?
Broadcasting Regulation
• Federal Communication Commission (FCC)
oversees broadcasting.
• License stuff – renewals, public service, obscenity
(J Jackson; H Stern) – ownership, so forth.
• Limits on networks owning stations, now limits on
the number of viewers they can reach.
• Fin/Syn rules already discussed.
• Broadcast Flag.
• HD requirements.
Television Financial Arrangements
• Networks ‘give’ programs to affiliates, but
affiliates ‘give’ advertising time in the
programs to the networks.
• Independent stations live off the syndication
market (re-runs) and occasional shared first
run programs
Television Financials
Table 1
2000 Data
Affiliation: All Affiliates & All Independents
Revenue Sources
Your
Station
Markets: 1-10
Average
($)
%
-------------------------- Percentiles -------------------------of Average
25%
50% (median)
75%
Nat'l & Reg'l Advertising
$26,165,461
0.0%
$3,665,458
$16,088,864
$39,359,764
Local Advertising
$39,037,703
0.0%
$3,123,402
$18,875,344
$54,816,615
$3,359,556
0.0%
$7,425
$240,255
$4,636,040
$68,562,720
0.0%
$6,732,538
$37,948,307
$113,681,148
Agency Commissions
($9,757,595)
0.0%
$739,884
$4,946,884
$16,020,894
Nat'l & Reg'l Rep Commissions
($1,622,928)
0.0%
$338,421
$773,014
$2,520,432
$994,804
0.0%
$0
$0
$1,144,342
$1,218,135
0.0%
$21,751
$510,042
$1,921,000
$153,394
0.0%
$173
$71,983
$204,151
$1,064,741
0.0%
$0
$229,775
$1,921,000
$774,784
0.0%
$20,296
$92,446
$404,111
$60,169,920
0.00%
$6,417,576
$32,638,171
$98,270,482
Political Advertising
Gross Adv Revenues
$0
Network Compensation
Total Trade-Outs and Barter
Total Trade-Outs
Total Barter
Other B'dcast Related Revenues
Net Revenues
$0
Employment
Full Time Employees
112
0
27
70
190
Part Time Employees
15
0
1
7
25
$1,991,314
$0
$436,350
$1,096,820
$2,434,287
Capital Expenditures
Table 1
2000 Data
Affiliation: All Affiliates & All Independents
Expenses by Department
Your
Station
Average
($)
Markets: 1-10
%
of Average
------------------------ Percentiles -------------------------25%
50% (median)
75%
Engineering
$2,369,121
0.0%
$546,928
$1,304,788
$3,631,484
Program
$8,916,147
0.0%
$357,527
$3,127,962
$13,447,946
$438,571
0.0%
$0
$22,944
$679,786
News
$6,189,794
0.0%
$0
$1,614,625
$14,569,007
Sales
$3,414,231
0.0%
$895,135
$3,433,041
$5,387,989
Advertising & Promotion
$1,291,288
0.0%
$7,658
$1,005,434
$2,200,887
General & Administrative
$4,007,974
0.0%
$1,496,207
$2,691,420
$6,226,664
$26,627,126
0.0%
$4,379,831
$19,044,906
$42,321,869
$10,139,626
0.0%
$529,977
$4,982,805
$19,198,871
Amortization Costs-B'dcast Rights
$7,299,621
0.0%
$0
$1,400,104
$10,133,451
Cash Payments-B'dcast Rights
$6,961,875
0.0%
$0
$3,791,312
$10,179,835
$465,229
0.0%
$39,222
$303,498
$601,235
Ratings Services
Depreciation & Amortization
$573,131
$3,353,641
0.0%
0.0%
$302,282
$1,064,376
$600,000
$2,080,700
$754,661
$4,975,870
Interest
Corporate Allocation Charges
$2,368,701
$399,391
0.0%
0.0%
$0
$0
$0
$97,448
$1,016,090
$507,443
$1,937,382
$14,096,529
$55,201,356
$11,479,021
$41,952,205
Production
Total Expenses
Selected Expense Items
$0
Total Compensation
Music License Fees
Profitability
Cash Flow
$0
$33,542,794
0.0%
Pre-Tax Profits
$0
$27,820,452
0.0%
($623,495)
Advertising on the Net
• Original model was subscription based – AOL ISP
model with specialized content.
• ESPN, Wall Street Journal, Slate, and a host of
others tried this.
• Then advertising was added in, as in TV.
• Only WSJ and a few others stayed with
subscriptions. Many found that when they charged
user, number of users dropped dramatically,
hurting ad revenue and dashing their hopes for
large market share (they believed that network
effects made first movers the winners.
• Eventually, subscriptions are likely to come back.
The Movies
• The history is similar to that of records.
• Edison, in the early 1890s creates first working camera.
• Competing patent claims caused difficulties and in 1908
the “Motion Picture Patents Company” was formed, which
pooled the patents.
• Business moved to California, in part to illegally escape
the patents.
• The advent of sound in the late 20s, along with the
depression caused further consolidation, and the major
studios were formed at that time.
• Numerous antitrust actions were taken, with the major
impact being to separate the production from the
distribution.
Movies
Figure 1: Yearly Movie Admissions Per Capita
45
40
35
1949
30
25
20
15
10
5
2002
1997
1992
1987
1982
1977
1972
1967
1962
1957
1952
1947
1942
1937
1932
1927
0
Movies
• The movie industry is tied-in with other
media companies, such as cable and
television. The following chart shows just
some of the relationships.
• Although not shown on the chart several
are also tied in with record companies,
(Universal, Sony, Warner Brothers).
• There has been a great number of mergers
and acquisitions in the last few years.
Movies
Contracts
• Producers make the movies. Sometimes in house
for a studio.
• They contract with distributors to get the movie
shown. The ‘studios’ are normally the distributors.
• Distributors share revenues with the theaters
(exhibitors).
• Distributor normally get a majority of exhibition
revenues for the first few weeks.
• Distributors and producers share profits,
sometimes along with stars.
Revenue Streams
• Working backwards:
– Ticket sales generated by the exhibitor. These
revenues are split with the distributor, with the
distributor getting a majority percentage after
deducting costs of operation (the nut). This is
known as the distributor’s gross rental.
– Distributor takes a minority percentage (30%
domestic, 40% foreign). Distributor also
deducts direct costs.
Movies: Economic Questions
• Text claims on page 52 : “Ticket sales are
typically insensitive to changes in box
office prices.” does this seem possible?
• Does the fact that theaters also make
revenues from food enter into this analysis?
• Does the fact that customers often have to
pay for babysitters enter into this analysis?
Movies
Real T icket Prices (83$)
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2002
1998
1994
1990
1986
1982
1978
1974
1970
1966
1962
1958
1954
1950
1946
1942
1938
1934
Movies
• Revenues used to come primarily from
theatrical distribution. Foreign audiences
accounted for a large portion of sales for
many decades.
• Now more revenue comes from videotapes,
with smaller amounts coming from cable
television.
Movies
• Movies used to be released in the US first,
and then gradually to the rest of the world.
• Piracy has caused producers to narrow the
window of these releases.
• Ideally, films would have different prices in
different parts of the world.
Proposals for Alternative Copyright Systems
• File-sharing has led to major dislocations.
• Battles in the courts (Grokster), lawsuits, and so
forth.
• Some (Larry Lessig) claim that the problem of
copyright is that it intrudes on the ability of users
to ‘recreate’ using digital technology. Mashups
(think Grey album and Phantom Edit) are chilled
by copyright.
• [Is this last point actually true?]
• Thus, the need for an alternative.
Compulsory License
• An alternative, based on a compulsory license,
has been proposed.
• The compulsory license would require copyright
owners to allow anyone to make digital copies of
their works.
• In return, a pot of money would be established to
pay copyright owners for this right. The pot most
likely would come from a tax on ancillary
products, such as blank discs, stereo equipment,
Internet Service Providers, and so forth. A
copyright Board or Panel would determine the
amount of these taxes, and who would pay.
Evaluating these Proposals
• Two basic questions that need to be faced in any
such system.
– How much revenue should be generated?
– Who is to pay?
– Who gets the revenue?
• Markets normally determine prices, and
consumers vote with their dollars.
• How would a Board attempt to determine the
correct number of titles to support, which titles to
support, which products to tax, how much to tax
them?
• How can we prevent ‘authors’ from gaming a
system to increase their payouts?
Other Issues
• Digital Rights Management (DRM)
– Copyright owner can imbed code into software
that will monitor use and charge accordingly. It
can also prevent copying.
– Copyright owner can virtually costlessly collect
revenues from users.
– It might be the most efficient mechanism since
it approaches perfect price discrimination.
– [or does it?]
DRM
• This has led to a contentious debate among
academics.
– Question: Is this protection ‘too strong’? Too
much power to copyright owner?
– Does it remove or kill Fair use ?
– Does it eliminate free speech?
– Does it reduce the creation of copyrighted
materials?
Descargar

Economics of Information Goods