Mass media have certain common stages of production: creation of content, selection of content and financing of production, and distribution of the resulting package.
Content creation includes producing video entertainment programs, gathering news, putting on sporting events, producing motion pictures, writing, composing and recording music, and like activities. Perhaps because of its creative nature, con-tent production often takes place on an extremely small scale. Entry is generally easy, with low or zero capital requirements or other barriers; however, the usual outcome of entry is commercial failure. Creative enterprises at this earliest stage of media production are extremely risky. For example, for every published article, musical recording, newspaper feature, or video program hundreds or thousands of propos-als are often rejected. Entry at this stage of production persists partly because the creative process is rewarding in itself and on account of optimism, but also because the rewards of success can be great. Skillful entrepreneurship and efficient manage-ment are major ingredients of success. Hollifield (2001) surveyed research results on transnational media management. Kaiser (2001) told the story of Vyacheslav Dagayev, a young Russian entrepreneur, and his successful struggle to establish a commercial weekly newspaper in Ulan-Ude, Russia, in 1992.
From an economic perspective, distinguishing news or explicit political content from entertainment content is not useful. The mass media as businesses exist to make money by offering attractive products that will produces revenues from audiences and advertisers. They will only offer news, political content, or other “serious” con-tent to the excon-tent that it is profitable. As noted earlier, media owners protected from competition may choose to spend their economic rents on less profitable projects, such as political propaganda. In other cases, government regulation may forbid some profitable programming, for instance, pornography, or advertising, such as for li-quor or tobacco products. Dagayev, for example, began his newspaper without any political or news content because he found that other content was more profitable.
Moreover, material that is classified as entertainment may often have important po-litical content, for instance, popo-litical cartoons. Audiences value some “serious” mate-rial in part because it is entertaining. In any event, the stages of production are much the same, regardless of the nature of media content.
The remaining stages of production typically require more substantial scale and capital investment. Much entertainment content fails to become popular, and so media must acquire a portfolio of properties to diversify their risk. In broadcasting, a net-work, studio, or station will select among proposed projects and finance their pro-duction. In newspaper publishing editors seeking to satisfy diverse reader demands select material for publication. Financing of the creative effort is important for cer-tain kinds of content, such as motion pictures and video entercer-tainment, where first copy costs loom large. In other fields, such as magazine publishing, financing may be limited to paying small advances to writers. While the efficient scale of production at the creative stage may be small, as in weekly newspaper publishing, the optimal scale of physical distribution is usually much larger. Thus entry into publishing may require the existence of commercial printing and distribution industries that rely largely on non-newspaper revenue sources.
Selection or editing of content and its subsequent bundling is a crucial function in any mass medium. Of the tens of thousands of messages vying for the public’s atten-tion and money, only a few will be financially successful. It is the role of the editor (whatever his or her title) to select those messages that best satisfy the demands of the reader or viewer. Competition among editors, program directors, or other con-tent selectors ensures that market forces will prevent any arbitrary exercise of the power of selection (see Crawford 2001 for a review of some of the extensive eco-nomic literature on product bundling and market power in the specific context of cable television service).
Not all media rely heavily on a reputation for specific content or predictable qual-ity. Motion picture studios, for example, are more likely to value their reputation with investors than with movie goers; movie goers’ enjoyment of a particular movie provides little indication that they will like any other movie distributed by the same studio. Consumers rely instead on the reputations of actors and directors and on the
Media as Industry: Economic Foundations of Mass Communications 175
effects of extensive promotions in choosing among motion pictures. The editorial or selection process is most often integrated with finance, because its outcome is a port-folio of risky assets. Selection of content for a given media channel thus serves not only to create packages of content attractive to readers or viewers, but also to man-age risk.
Physical distribution of mass media generally requires substantial investment. In the case of print media, a network of agents and delivery vehicles is required. Terres-trial broadcasters require transmitters and spectrum and rely on audiences to pur-chase receiving equipment. Cable television providers must invest in a network of cables, amplifiers, and other equipment. Satellite broadcasters require spectrum, or-bital slots, satellites, and terrestrial facilities for uplinks, as well as receiving equip-ment at consumer locations. The distribution stage of the mass media is usually the stage at which promotion takes place. Most media spend heavily on promotional programs aimed at potential readers or viewers, motivated partly by a desire to spread the first copy costs of content creation and selection over as large an audience as possible, and partly by a desire to have additional audience members to sell to advertisers. The proportion of funds spent on distribution, as opposed to content, varies with the size of the audience. If the audience is small, the costs are chiefly for content, and if the audience is large, the costs are chiefly for distribution.
Almost everywhere controversies are created by disparities in the scale at which media content is created and the scale at which the remaining stages are most effi-cient. Creative individuals (actors, writers, directors, reporters, columnists, photog-raphers) often perceive a disparity in economic power between themselves and the large enterprises that purchase (or reject) their services or works. Similar disparities in size appear at other stages in the mass media. For example, as noted earlier, the editorial process that produces a magazine or other periodical can be managed at extremely small scales compared with the efficient scale at which printing and physi-cal distribution take place. Thus magazines and weekly newspapers seldom own their own printing presses, and most rely on independent distributors who handle many periodicals. At the local level, periodical distribution is often a monopoly.
In contrast to magazines, daily newspapers are vertically integrated. While daily newspapers buy content such as features and wire service news from third parties, they also employ reporters and other content creators. Daily newspapers generally own their own presses and use most of the presses’ capacity. Similarly, daily newspa-pers frequently use employees rather than independent distributors to deliver cop-ies to readers or newsstands. One reason for the vertical integration found in daily newspapers is the need to coordinate the production process so that the newspaper can be produced and delivered on a tight and regular schedule. This is often easier to do within a firm than through contractual arrangements among firms.
Electronic media tend to purchase content from third parties. This is especially true of entertainment content for two reasons. First, virtually all media, even national
media, are “local” with respect to entertainment content with broader appeal, that is, much entertainment programming must appear on multiple media to obtain access to its widest audience. For third parties to produce, or at least to distribute, content that can appear on multiple media makes sense, because that lowers the unit cost of the content, making it competitively more attractive. Of course, a given mass medium may produce some content of its own and sell it to other media, but this is simply partial vertical integration. Second, electronic entertainment content is often exploited in “windows” (Owen and Wildman 1992, chapter 2). Each window is a period of time during which the content is offered exclusively to a particular audience or through a particular medium. Windows provide an opportunity for suppliers to engage in price discrimination. Audiences willing to pay high prices are offered the material first, then the same content is successively offered to audiences willing to wait in exchange for lower prices. The simplest example of this is the release of paperback or mass market books after a period during which only hardbound books are offered at a relatively high price. Another advantage of windows is that they permit particular media to reap the rewards of advertising and other promotional expenditures that would otherwise spill over to the advantage of competing media. This happens because the distributors in each window enjoys exclusive rights in their respective territories.
Vertical integration is sometimes blamed for media concentration (OECD 1993).
Ownership of key resources may present one competitor with opportunities to raise rivals’ costs or to exclude them entirely. Vertical foreclosure in developing nations is likely to be a problem chiefly in vernacular programming given the substantial sup-ply of popular foreign programming that would be difficult to foreclose from com-petitors. In Mexico, for example, for many years Televisa controlled television and radio broadcasting, and Televisa’s dominance was commonly attributed to its exten-sive vertical integration into the production of Spanish-language television program-ming (Barrera n.d.). An independent program production industry might have facilitated entry by broadcasters seeking to compete with Televisa.
Nevertheless, despite the vertical integration, competition did develop in Mexi-can broadcasting when the government privatized additional broadcast frequencies in the 1990s. These channels and other media assets were awarded to Azteca, a new entrant that appears to have been successful. Thus Televisa’s long dominance may have been attributable not to its vertical integration, but to horizontal concentration, that is, to its ownership of all available private broadcast channels, a circumstance attributable to government policy. Moreover, in the case of Televisa, vertical integra-tion may have been responsible for Mexican television’s relative lack of dependence on foreign sources of programming, and has certainly helped to promote Mexico’s success in exporting Spanish-language television programming to the United States and to the rest of Latin America.
The Mexican example underscores the importance of avoiding inefficient vertical disintegration of media stages in response to perceived media concentration problems.
Media as Industry: Economic Foundations of Mass Communications 177
Vertical integration may produce efficiencies by permitting media to control or opti-mize risk. A policy tradeoff seems to exist between economies of vertical integration and the competitive benefits of easier entry in the absence of such integration. The point of the Mexican example is that even though vertical integration was blamed for the media ownership concentration and lack of competition, in reality the government’s spectrum policies sustained the monopolist. In the United States, in the past regulators have sometimes restricted vertical integration by television and cable networks into programming to increase competition or source diversity, but these restrictions are now generally regarded as contrary to consumer interests and are being repealed.