The immense reach and heft of the mass media economy raises some complicated questions, beginning with the role government should play in regulating media ownership. Should citizens step up demands for more accountability from media? Is American culture, expressed through our mass media, hurting other cultures? And is concentration of ownership in the media damaging our democracy? To explore possible answers to these questions, we examine how media industries are structured, how companies in these industries operate, and how the Internet is transforming the media economy.

How Media Companies Operate

In analyzing how media companies operate, economists pay attention to several things—including how these firms make money, and how they formulate strategies for establishing their prices, marketing their offerings, and meeting stakeholders’ expectations and demands.

Making Money

Media companies bring in money from two sources: direct and indirect payments. Direct payments come from consumers who buy media products, such as books, movies, and Internet or cable TV services. Indirect payments derive from advertisers—companies that purchase ads in various media to attract specific consumers of those media. Over-the-air radio and TV broadcasting, daily newspapers, consumer magazines, and most Web sites rely on indirect payments for most of their revenue. But many media companies generate revenue through both direct and indirect payments. These include newspapers, magazines, online services, and cable systems, which charge subscription fees in addition to selling commercial space and time to advertisers.

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Increasingly, new media products must blur the line between the two forms of payment. Sales and rentals of physical media, such as CDs and DVDs, are declining (though legal downloads contribute to direct payments), whereas streaming services for music, TV, and movies are becoming more popular. This leads to consumers making direct payments for access to services like Netflix, Hulu, and Spotify, as well as to telecommunication companies who provide the Internet service needed to use those services, rather than direct payments to the companies who produce the content itself. Indirect payments are then made to the content producers by the various services and telecommunication companies.

Formulating Business Strategies

Media companies formulate strategies governing all their business processes. For instance, a local newspaper determines how high it can raise its monthly print or digital subscription price before enough disgruntled readers will drop their subscriptions and offset any profits made from the price increase. Or a book publisher tries to achieve economies of scale by increasing production levels to reduce the cost for each book printed.

Expectations of stakeholders—including customers, investors, and regulators—also strongly shape media companies’ business strategies. For example, economists, media critics, and consumer organizations have asked the mass media to meet certain performance criteria. These criteria include meeting profit goals, introducing new technologies to the marketplace, making media products and services available to less-affluent people, facilitating free expression and robust political discussion, watching for wrongdoing in government and business, monitoring crises, playing a positive role in education, and maintaining the quality of culture.⁴

Media companies are living up to some of these expectations better than others. To illustrate, news executives may trim budgets and downsize staff to improve profit margins, but those actions may also undermine the newsroom’s ability to adequately cover crucial topics and work as watchdogs of society.

How the Internet Is Changing the Game

Historically, media companies have operated in separate industries. That is, the newspaper business functioned separately from book publishing, which operated differently from radio, which in turn worked totally unlike the film industry.

The Internet has changed all that. This medium has not only provided a whole new portal through which people can consume older media forms but also pressured virtually all older media companies to establish an online presence. Today, newspapers, magazines, book publishers, music companies, radio and TV stations, and film studios all have Web sites or mobile apps marketing digital versions and ancillaries of their products.

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This development has presented new opportunities for some media organizations. For example, it enables noncommercial public broadcasters to bring in ad revenue. Public radio and TV stations, which are prohibited by FCC regulations from taking advertising, face no such prohibitions online. Many have begun raising money by posting advertisements on their Web sites.

However, the Internet has also posed new challenges for some older media companies, who must navigate territory with less-established payment models. For instance, when Internet sites like YouTube display content from traditional broadcast and cable services, the companies selling those services lose direct-payment revenue every time someone consumes that content on the Internet rather than paying for services. But this availability may also create exposure for media companies’ offerings. Traditional companies must then ask whether that new awareness translates into an increase in paying customers. Internet-based companies like Hulu are already offering different levels of access: free, ad-supported, but limited versions of their services alongside pay models with greater libraries of media offerings and more versatile formats.

Business Trends in Media Industries

Consolidation and digitization are not the only trends redefining the mass media business landscape. Additional trends shaping business overall have further affected the media economy. These include the growth of flexible markets and the decline of labor unions, as well as downsizing and a growing wage gap.

Flexible Markets and the Decline of Labor Unions

In today’s economy, markets are flexible—that is, business and consumer needs and preferences change continuously and quickly. Companies seeking to increase profitability alter their products, services, and production processes as needed to satisfy specialized, ever-shifting demands. Making niche products for specialized markets is expensive, and most new products fail in the marketplace. To offset their losses from product failures, companies need to score a few major successes—such as a blockbuster movie or a game-changing handheld device. Large companies with access to the most capital—such as media powerhouses—can more easily absorb losses than can small businesses with limited capital. Thus, the powerhouses stand the best chance of surviving in today’s flexible markets.

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To lower their costs and earn back their investments in product development, companies have begun relying heavily on cheap labor—sometimes exploiting poor workers in domestic and international sweatshops—and on quick, high-volume sales. Many U.S. companies now export manufacturing work, such as production of computers, CD players, TV sets, VCRs, and DVDs, to avoid the more expensive unionized labor at home. (Today, many companies outsource even technical and customer support services for their products.) As U.S. firms have gained access to alternative sources of labor, American workers’ power has decreased. Since the early 1980s, membership in labor unions has declined dramatically. Since the 1980s, real wages (wages adjusted for things like inflation) have stagnated for most American workers. This means that as productivity has increased, pay for many effectively has not. Consider also that the pay of chief executives of major companies grew from about twenty times the pay of the average worker in 1965 (a peak time for union membership and overall economic prosperity) to almost three hundred times the pay of the average worker in 2013.⁵ Chief executive officers of major media companies like CBS, Viacom, Comcast, and Walt Disney often show up in annual lists of the highest-paid CEOs.

Downsizing and the Wage Gap

With the advantage to large companies in this age of flexible markets, the disadvantaged are the many workers who have lost their jobs as companies have downsized to become “more productive, more competitive, [and] more flexible.”⁶ Many people today scramble for paid work, often working two or three part-time and low-wage jobs. In his 2006 book The Disposable American, Louis Uchitelle noted unintended side effects of downsizing, including companies’ difficulty in developing innovative offerings after gutting their workforces. In the news media, reporting staffs have been downsized by more than 25 percent since the early 1990s. As a result, traditional news reporting has given way to other forms—such as online news sites and blogs.

The Age of Hegemony

As media corporations have grown larger, they have also been able to manage public debate and dissent about their increasing power. How? One explanation is their ability to exercise hegemony in our society. In hegemony, society’s least powerful members are persuaded (often without realizing any persuasion has taken place) to accept the values defined by its most powerful members.

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In his 1947 article “The Engineering of Consent,” Edward Bernays, the father of modern public relations (see Chapter 12), expressed the core concept behind hegemony: Companies cannot get people to do what they want until the people consent to what those companies are trying to do—whether it is getting more people to smoke cigarettes, or persuading more of them to go to war. To win people’s consent to his clients’ goals, Bernays tried to convince Americans that his clients’ interests were “natural” and “common sense.”

Framing companies’ goals in this way makes it unlikely that anyone will challenge or criticize those goals. After all, who is going to argue with common sense? Yet definitions of common sense change over time. For example, it was once common sense that the world was flat and that women and others who did not own property shouldn’t be allowed to vote. When people buy uncritically into common sense, they inadvertently perpetuate the divisions that some common sense can create, and they shut out any viewpoints suggesting that these divisions are not natural.

The mass media—through the messages they convey in their products—play a powerful role in defining common sense and therefore setting up hegemony in society. Every time we read an article in a newspaper; read a book or magazine; or watch a movie, TV show, or video clip on YouTube, we absorb messages suggesting what is important and how the world works. If we consume enough of these “stories,” we might conclude that what we are seeing in these media products is just the way things are. And if we believe this is “just the way things are,” we probably won’t challenge these trends or come up with other, better possibilities.

The reason the narratives work is that they identify with a culture’s dominant values. In the United States, Middle American virtues dominate our culture, and include allegiances to family, honesty, hard work, religion, capitalism, health, democracy, moderation, and loyalty. These Middle American virtues are the ones that our politicians most frequently align themselves with in the political ads that tell their stories.

These virtues lie at the heart of powerful American Dream stories that for centuries have told us that if we work hard and practice such values, we will triumph and be successful. Hollywood, too, distributes these shared narratives, celebrating characters and heroes who are loyal, honest, and hardworking. Through this process, the media (and the powerful companies that control them) provide the commonsense narratives that keep the economic status quo relatively unchallenged, leaving little room for alternatives. In the end, hegemony helps explain why we sometimes support economic plans and structures that may not be in our best interest.

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