In analyzing the behavior and performance of media companies, economists pay attention to a number of elements—from how media make money to how they set prices and live up to society’s expectations. In addition, many corporations now adapt their practices to new Internet standards. For example, most large regional newspapers from 2009 to 2011 had lost a high percentage of classified ad revenue to Internet companies and were adjusting to the losses by downsizing staff; printing on fewer days of the week; and in some cases declaring bankruptcy, closing down, or moving to an online-only edition.

Collecting Revenue

The media collect revenues in two ways: through direct and indirect payments. Direct payment involves media products supported primarily by consumers, who pay directly for a book, a CD, a movie, or an Internet or cable TV service. Indirect payment involves media products supported primarily by advertisers, who pay for the quantity or quality of audience members that a particular medium delivers. Over-the-air radio and TV broadcasting, daily newspapers, magazines, and most Web sites rely on indirect payments for the majority of their revenue.

Through direct payments, consumers communicate their preferences immediately. Through the indirect payments of advertising, “the client is the advertiser, not the viewer or listener or reader.”⁷ Advertisers, in turn, seek media channels that persuade customers to acquire new products or switch brand loyalties. Many forms of mass media, of course, generate revenue both directly and indirectly, including newspapers, magazines, online services, and cable systems, which charge subscription fees in addition to selling commercial time or space to advertisers.

Commercial Strategies and Social Expectations

When evaluating the media, economists also look at other elements of the commercial process, including program or product costs, price setting, marketing strategies, and regulatory practices. For instance, marketers and media economists determine how high a local newspaper can raise its weekly price before enough disgruntled readers drop their subscriptions and offset the profits made from the price increase. Or, as in 1996, critics and government agencies began reviewing the inflated price of CDs. They demonstrated that the economies of scale principle—the practice of increasing production levels to reduce the cost for each product—should have driven down the price of a CD in the same way that the price of videotapes dropped in the 1980s. Yet it wasn’t until October 2003 that any of the major recording companies dropped its CD prices. At that time, Universal, trying to generate consumer demand in the face of illegal file-sharing of music, cut the recommended retail price of music CDs by a third—to $12.98 each (by 2013 the price had dropped to $9—$13, roughly the same price to download an entire album on sites like iTunes).

Economists, media critics, and consumer organizations have also asked the mass media to meet certain performance criteria. Some key expectations of media organizations include introducing new technologies to the marketplace, making media products and services available to people of all economic classes, facilitating free expression and robust political discussion, acting as public watchdogs over wrongdoing, monitoring society in times of crisis, playing a positive role in education, and maintaining the quality of culture.⁸

Although media industries live up to some of these expectations better than to others, economic analyses permit consumers and citizens to examine the instances when the mass media fall short. For example, when corporate executives trim news budgets or fire news personnel, or use one reporter to do multiple versions of a story for TV, radio, newspaper, and the Internet, such decisions ultimately reduce the total number of different news stories that cover a crucial topic and may jeopardize the role of journalists as watchdogs of society.