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Entertainment and Media: Markets and Economics

Economic Foundations for Entertainment, Media, and Technology. Production, Cost and Organization of Firms in E

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Entertainment and Media: Markets and Economics

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    1. Entertainment and Media: Markets and Economics Professor William Greene

    2. Economic Foundations for Entertainment, Media, and Technology Production, Cost and Organization of Firms in E&M Industries

    3. Production and Cost Economic Foundations Production Functions Costs of Production Economies of Scale and Scope Technological Change Features of Entertainment and Media Firms

    4. Characteristics of the Creative Industries What do we mean by the creative industries? Not synonymous with experience goods: E.g., amusement park vs. art Distinguishing features? Implications for the organization of market activities: Contracts among producers Market organizations for distribution

    5. Caves on Creative Industries Characteristics of Production in Creative Industries Uncertainty of Demand Producers emotional connection to the output Assembly of diverse skills for production (movies, sports) Differentiated products Vertically differentiated (ranked) skills The role of time in consumption Durable products and durable rent streams

    6. Production Function

    7. The Production Function Output Inputs The factors of production The process

    8. About Production Functions Factors and Factor Intensity Higher education Broadway theater labor intensive Major League Baseball - ??? Casino capital intensive Substitution of Factors Live theater Movies Others?

    9. Features of Production Functions Managing a multiplex Two outputs Concessions (the primary source of profits) Movies (the secondary profit center) Casino Making movies (indies vs. studios) Professional sports performance Delivery of professional sports Music Publishing

    10. Multistage Production Is Common Financial Services Professional Sports Publishing Back office Team sports Author Large scale Advertising and Publisher content assembly Retail banking Broadcast to homes Retail distribution

    11. Multiple Stages in Production

    12. Features of Entertainment and Media Stages of production Outputs as downstream inputs Content creation Labor intensive Little substitution Less Technologically Oriented ***** Animation is a MAJOR exception Delivery Exhibition, distribution Capital intensive Technological advance Applications: Books, Movies, TV, Newspapers, Radio, Recorded Music

    13. Live Performance Production Production Function One Stage Simultaneous Production and Consumption Feedback Between Consumers and Producers Concerts Big Sports eBay

    14. The Costs of Production Fixed cost: Not a function of output. Capital Sunk cost: One time, nonrecoverable costs (very significant in the movie business) Variable cost: Variable with respect to output Labor Materials Marginal cost: Avoidable cost of one more (less) unit

    15. Costs of Production

    16. Production Function Implies Costs

    17. Terminator 3 Production $100m Marketing 85m (WB=50m, Sony=35m) Austrian actor 29.25m Rights: WB 50m Sony 75m Profit anticipated (WB) 25m

    18. Cost and Revenue Trends 2002-2004: Revenue growth from $115M to $130M 2002-2004: Cost growth from $111M to $130M 65% due to production and marketing 20% rising home video manufacturing costs 15% due to higher talent participation

    19. Changing Economics for Stars 2005: $10M, $15M, $20M, 2010: Small or no up front (except for Angelina Jolie) CB 0 contract (Cash-Break zero percentage after break even) Far smaller total compensation for start Why? Economics of film making Falling demand for star power in movies

    20. CD Costs

    21. Production and Cost Functions?

    22. Economies of Scale Working definition: Declining average cost Market based definition: Competitive advantage of large size Sources Supply based: Technical, Demand based: Networks Indivisibilities: Lumpiness

    23. Economies of Scale in E&M Cablevision Professional sports Publishing/Movies Backlists of titles Casinos Movies Television

    24. Economies of Scope Cost effect C(Q1,Q2) < C(Q1,0) + C(0,Q2) Not the effect behind vertical integration News media owning the sports team? (Murdoch and Manchester) Applications Cable TV, Internet Mobile phone network Basketball, Hockey

    25. Technological Advance Cost Reduction Digital setup in newspapers Synthesized instruments in Broadway Musical Orchestras No Cost Reduction in Performance Industries: Baumols Disease Live theater, Orchestra, Education

    26. Digitizing Entertainment Technical Advance in Delivery of Existing Forms Music MP3 - affects distribution, not creation Pop music without musicians. Literature: E-books Kindle (Amazon), Nook (B&N) E-zines (Slate.com) Web based news services (NYTimes.com) Movies: Creation digital equipment, Pixar animation Distribution transmission without film Exhibition digital projection (expensive)

    27. Labor Saving Technological Change

    29. Book Production Costs

    31. 3D - The Next New Thing

    33. 3D Economics 30 3D Movies Avatar - $250M Benefit: Net addition to profit $80M (Dreamworks) Obstacle: Digital Projection Insufficient screens (3000 needed for an opening) Uncertain financing for theater digital projection (financial crisis) Pricing the Upgrade ($25 tickets)

    34. Markets for Experience Goods Demand is different Supply and costs are often similar but often very different (books vs. concerts) Economies of scale and scope, technological change, etc. Complex interdependencies in markets Market structures do not mirror the rest of the economy (large pockets of rent) Demand interdependencies Complex contractual arrangements Vertical integration Wrap up.Wrap up.

    35. Entertainment and media production and costs are formed on the same theoretical foundation as other businesses. But, there are unique features of the production of experience goods.

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