Printed Page 456

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 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.

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), while 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 telecommunications 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.³

Media companies are living up to some of these expectations better than others. To illustrate, news executives may trim budgets and downsize the 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.