Entertainment and Media: Markets and Economics

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Entertainment and Media Markets and Economics

• Professor William Greene

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Professor William Greene Department of
Economics KMC, Rm. 7-90 212.998.0876 people.stern.
nyu.edu/wgreene wgreene_at_stern.nyu.edu people.stern
.nyu.edu/wgreene/entertainmentandmedia/course.htm
Find link on Sternclasses
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http//people.stern.nyu.edu/wgreene/entertainmenta
ndmedia/course.htm
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Course Objective

• Broad microeconomics based understanding of
  the economic forces that shape the entertainment
  and media industries

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Why Entertainment Industry Economics?

• There Are Unique Aspects of the Market
• Creative talent in production the creator has a
  personal interest in the product.
• Pricing decisions many opportunities for
  strategic pricing.
• Zero marginal cost, production vs.
  replication/distribution.
• Relationship between buyer and seller artists
  and fans.
• Market complementarities shape market structures
  winner take all markets.
• Demand aspects are unlike conventional commodity
  markets.
• There Are Some Commonalities that Allow
  Conventional Economic Analyses
• Production concepts the nature of production
  and supply, technological change.
• Market dynamics market structure, market power,
  market outcomes.
• Demand concepts elasticity, consumer surplus,
  pricing.

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Segments of The Entertainment and Media Market

• Movies
• Television (Broadcast, Cable) and Radio
• Theater
• Publishing (Print, Electronic, Music)
• Music
• Sports
• Art
• Gambling
• Electronic Games (Internet)
• Amusement and Theme Parks
• Hobbies
• Etc.

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Course Agenda

• 1 The Demand for Experience Goods
• 2 Supply. Production, Costs, Markets, Vertical
  Integration
• 3 Contracts, Boundaries of the Firms,
  Conglomerates,Digital Entertainment Business
  Models
• 4 Intellectual Property Laws, Movies, Books,
  Music
• 5 Markets Sports, Art, Gambling, Theater,
  Publishing, etc.
• 6 TV, Print Media, Others

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http//www.marketplace.org/topics/business/movie-t
heaters-move-beyond-ticket-price
The simple explanation is that fewer people are
going to the movies, but they are paying more for
their tickets. Mostly we're talking about 3-D
movies, which are more expensive. But higher
ticket prices aren't necessarily great news for
theater owners. Theaters have to share box office
revenue with studios, says business professor
William Greene of the Stern School of Business at
NYU.
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Analyzing The Experience Economy

• Examine the entertainment and media business with
  conventional economic tools
• Demand Nature and Source
• Supply Characteristics of Production and
  Distribution
• Costs and Profits
• Pricing How prices are determined
• Value
• Market Outcomes Structure, Prices, etc.
• Note interesting special characteristics of the
  experience industry
• Features of the demand
• Aspects of supply and production

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Entertainment and Media Markets and Economics

• Long Run Trends Who We Are

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Why do we work?
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(No Transcript)
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Long Run Trend Hours Worked US 1850-1956
Hours worked stops falling hours spent on
recreation (not working) stops rising.
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Economic fluctuations have much greater impact on
manufacturing than on services.
Recent trend in hours worked (weekly, average),
1965-2009
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International Comparison, Hours WorkedAmericans
generally work more hours than others.
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Spending on recreation is growing in absolute
terms

• Per capita, real spending on recreation
• and recreation services.

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The long run trend in recreation expenditure as
a proportion of real income is growing
Recreation as a of Disposable Income
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The form of recreation spending is changing

• Service Component of Recreation Expenditures
• Service Movies, Sports, (passive) 1959-2009

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Adding It Up

• Household income is not rising very much
• Time spent working is steady or falling slightly
• Time spent on recreation is no longer rising
• Budget allocated to
• entertainment, health care are rising
• food and clothing are falling
• Growing entertainment market is driven by
• budget reallocation
• changes in preferences.
• changing technologies and falling prices
• Demand in the recreational segment of the economy
  is rising faster than overall output.

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Entertainment and Media Markets and Economics

• Consumer Theory

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Consumers allocate their budget to maximize their
well being

• A standard model for consumer behavior
• Utility maximization over choices subject to
  resource constraints
• Income and Prices
• Time

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Time Is the Ultimate Binding Constraint

• Consumers Maximize Utility (Consumption,
  Leisure)
• Constraints that limit the amounts they can
  consume
• Available INCOME Savings WageLabor
• PRICES
• Pcons Goods Prices
• Pleisure Wage Rate opportunity cost of
  leisure
• Available TIME Labor Consumption
  Leisure
• At least for the short term, the wage (ability to
  earn) is fixed
• Tradeoff To consume more, we must work more,
  leaving less time for leisure.
• The fixed amount of time is ultimately the
  binding constraint

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Implications of the Theory for Changes Over Time

• As Wage rises, leisure becomes more expensive.
• As Income rises, leisure becomes more desirable.
• Net effect over time if real wages and incomes
  rise?
• Higher incomes generally lead to greater demand
  for leisure leisure is a normal good
• Higher wages make leisure more expensive
  consumers desire greater consumption rather than
  leisure. Hours worked are not falling very much
  any more.
• Not clear which way the result will go
• Per capita income in the U.S. is not rising much
  at all.
• Demand for entertainment seems to be rising
  cultural shifts.

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Allocating the Consumers Budget

• Consumer Budgets
• Housing
• Transportation
• Food
• Clothing
• Medical and Physical Upkeep
• Recreation (and other stuff)
• Allocation Based On
• Relative prices
• Income
• Culturally influenced preferences.

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The household budget. (2014 looks like 2010. Not
much change in broad allocation.)
Food 6373 Housing
16895 Clothing
1725 Transportation 7658 Health Care
3126 Entertainment 2693 Insurance
5471 Everything Else 5127
http//www.creditloan.com/infographics/how-the-ave
rage-consumer-spends-their-paycheck/
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Consumer Spending by Income Class
Category Avg Top Income 51G
127G Food 6.1 7.1 Health care 4.2
2.8 Entertain. 4.0 3.6 Clothing
3.3 2.6 Education 1.5
1.7 Housing About 31 Transportation
16 Other 35
The figures suggest consumers reallocate spending
as incomes change. Careful! This shows a
difference between consumers, not the change in
behavior of a particular consumer.
It is only suggestive.
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Market for Experience Goods
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EM Is a Large Industry

• Total Economy 15,000b
• Entertainment and Media 6.4
• Health Care 19.0
• Recreation of all kinds 725b
• (Games, sports, clubs, )
• Print Media 110b
• (Books, magazines, newspapers,)
• Movies in theaters 12b
• (2011, current , all figures approximate)

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Aspects of the Demand for Recreation

• Trends in Consumption
• A Standard Microeconomic Model for Demand
• Problems Applying the Model to Experience Goods
• Implicit prices and time constraints
• Derived demands and social capital
• Rational addiction
• Interdependent demands, fads and herding
• Winner take all markets

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HUMDRUM vs. EXPERIENCE GOODMarket for a
conventional commodityWhy does one buy a toaster
or a wrench?

• Functionality of the product
• Utilitarian nature of demand
• Experience (even aesthetics generally secondary
  or irrelevant)

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Ordinary Economics Apply to the Market for
Toasters

• Costs of production
• Variable vs. fixed costs
• Cost characteristics
• Economies of scale
• Economies of scope
• Technological change
• Profit
• Firms in markets market power and brand
  identity, etc.

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Familiar Market Outcomes in Commodity Markets

• Market power
• Monopoly
• Competition
• Branding
• Market segmentation

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The Demand for Experience Goods is Unlike
Familiar Commodity Markets

• What is the good?
• Two qualities that differ between experience and
  humdrum goods
• Intangible nature of the good
• External effects of consumption
• Motivation for consumption
• Aspects of demand
• Implications for markets

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Motivation for Purchase?
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Experience Humdrum Goods
Goods

• How do these markets differ?
• What do they have in common?

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Goods The Coolest Computer Ever Made
Why did it fail the market test?
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?
Did it fail because it looked like a toaster?
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Market Leader
Also cool. Why did it pass the market test?
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Even More Cool
What differentiates this cool appliance from the
coolest computer ever made?
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iPhone as Fashion Statement
New York Times, April 2, 2012, page B1.
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Most Cool
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Shared Experience Common Experience
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Also a Shared Experience
Different from a book? How so from the
consumers viewpoint? Same as a book? How so
from the economists viewpoint?
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Shared Simultaneous and Coincident Experience
The Antichrist
The art film has been ghettoized as audiences
have fragmented into niche markets. The very
notion of what a movie audience is has changed
how do you arouse a public when many are no
longer watching movies publicly, but sitting at
home in front of their entertainment centers?
It's a powerful feeling to share an audience's
collective gasp, such as the one elicited by a
startling suicide in Michael Haneke's Cache.
That can't be duplicated in solitude. But
increasingly rare is the breakthrough movie, such
as a Blue Velvet or a Brokeback Mountain, that
reaches a mass audience. These days we get our
culture jolts in daily, bite-size portions on
YouTube or Facebook, a kind of viral fast-food
diet of scandal, easily digested and quickly
forgotten. David Ansen, Newsweek, 10/26/09,
p. 48
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Shared Experience?
Not quite a theater experience. Definitely in
great demand.
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Coffee as an Experience?
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Shared Experience (?)
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Experience?
Trump pushed to make the new shuttle a luxury
service The Shuttles core passengers chose it
for its convenience, not its costly luxury
features. Trump Shuttle never turned a profit.
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Form vs. FunctionExperience vs. Commodity
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Entertainment and Media Markets and Economics

• What differentiates the demand for experience
  goods from the demand for humdrum goods?