Tuesday, September 27, 2005

Academic Research Confirms--and Undercuts-- FCC Media Regulation, Deregulation

I spent last weekend at the Research Conference on Communication, Information and Internet Policy (better known by its organizer’s initials, TPRC) held at George Mason University Law School outside Washington. It was kicked off with a session featuring a rather heated discussion between two former FCC chairmen, Richard Wiley (from the Nixon era) and Reed Hundt (appointed by Pres. Clinton). Despite some substantial differences, they both agreed on Hundt’s major point, that voice telephone calling could or should be free or near free, as just one of many services available via broadband. As VoIP proliferates, that could happen. Thus the focus of policy and regulation should be on broadband, rather than on old school regulation that focused on voice or data or Life Line rates for universal service.

There were several empirical research papers relevant to media ownership regulation. Jun-Seok Kang, a graduate student at Indiana University, was the top of the class in the student paper competition with “Reciprocal Carriage of Vertically Integrated Cable Networks.” His work was specifically addressing the FCC requirement that cable system owners are restricted to systems covering 30 percent of the national market. This was designed to limit their power over unaffiliated cable network providers who might be competing with the cable operator’s own cable networks offering similar programming. For example, his model says that an integrated cable operator A will take cable operator B’s news channels in the “hope” that cable operator B will carry cable operator A’s sports channel. His conclusion, rather overwhelming me in mathematical notation that made my eyes glaze, “suggests” (as they say in academia) that there may be something to the premise that vertically integrated cable operators are more likely to get their new cable networks picked up by other large MSOs than a similar independent network. Kang had to make many assumptions and simplify the real world to make his model work, so it doesn’t resolve anything by itself, but it does provide some empirical evidence that supports the FCC’s ownership limits.

A team of researchers from the University of Michigan also presented an empirical analysis, “Duopoly Ownership and Local Informational Programming on Television.” This study showed that in markets where one broadcast company owns two stations (usually one affiliated with a major broadcast network combined with one affiliated with a small, minor network or an independent station) the combined stations aired “significantly less local news programming than their same market non-duopoly counterparts.” The measurements were taken in 1997 and 2003. This study is important for policy because one of the arguments of the broadcasters who favored the change in FCC rules allowing duopoly was that the combination of stations would allow more resources to go to news and information. In fact there was more news in such combinations in 2003 than in 1997—but less of an increase than on the stations that were not part of duopolies. Moreover, almost all the increase was on only one of the two stations—the “major” station.

Putting aside what the broadcasters promised would happen to convince the FCC to allow duopolies, from both a business and audience perspective this would not only make sense but could be consumer friendly. Just as there is no need for three networks to simultaneously broadcast a speech by the President these days (let those who want to watch it go to CNN and let those who don’t watch their regular programs), why not beef up one station for people who like the news while freeing up the other to reach a different market niche? This could be the Steiner effect: In a 1954 economics dissertation, Peter Steiner held that a single monopolist would maximize product diversity and economic welfare in a broadcast market, because the monopolist would want to capture every single viewer, and would therefore not duplicate programming. Social welfare is therefore higher under monopoly—in this case, a duopoly-- because more viewers receive their preferred programming. But that’s a hard sell for public policy, so this Michigan study ultimately does not help the broadcasters’ arguments for allowing greater in-market mergers.

Though not by themselves proving anything, these two studies, coming as they do from non-stakeholders, do “suggest” that media industry regulation will continue to be needed, so long as it is well supported by empirical data.

(Full disclosure: I served on the Board of TPRC, Inc. – a nonprofit corporation—from 2000 to 2004 and was its chairman from 2001-2003.)

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Thursday, September 15, 2005

Advertising Trends Not Favorable for Old Media

I wrote here last month about the battle for consumers’ attention among old media and new media. That’s only part of the problem.

Ther battle for advertising dollars is more intense than ever, as an expanding menu of media forms and players vie for what is essentially a fixed pool of advertiser expenditures. Lots of folks are counting on advertising for survival, if not generous profits. Broadcasters have always had this single revenue stream. Daily newspapers get about 80% of revenue from advertising and the hot print properties, such as the give-away Metro dailies, depend about 100% on advertising. Now much of the Web is counting on advertising: Google, Yahoo! and increasingly AOL to name just a few of the biggies. News Corp. just shelled out $600 million for MySpace.com, which has no real revenue except advertising.

Diane Mermigas at the Hollywood Reporter.com trumpets “Convergence fulfilled: A fleet new class of corporate entrepreneurs invents the future.” The article covers a broad territory but essentially paints a positive future for the established media players, with this caveat: their “ business models, revenue streams, creative dynamics and key relations with global advertisers, consumers and competitors will be dramatically different…” That’s for sure, and here’s why.

Mermigas quotes many of the usual suspects: Forrester Research, the investment banking analysts (who were so wise in their analysis in the late nineties—not), and consultant prognosticators. For years I’ve been threatening to do a study of the old “predictions” made by all these folks and match them up with actual results. My hypothesis is that the rate of accuracy will be no better than a coin toss.

But one thing jumped out at me in this piece—and others I have seen. Mermigas cites these sources for her contention that “Ad revenue will grow impressively as advertising takes on new forms.” She says that Internet-based advertising will grow most dramatically, but even traditional media will see growth of 4.3% annually.

Can’t happen. The reality is that over time advertising cannot grow—or at least has not grown—faster than the economy. Over the past 70 years—-that’s a long trend -- advertising expenditures has varied within a rather narrow range of 2.00% to 2.50% of GDP. And for most of that time it has been closer to 2.20%-2.30%. This has held true through recession and boom times. It had held true even as new media forms joined the fray—television, cable, now the Internet. In 1990, advertising expenditures were 2.28% of GDP. In 2003 it was 2.27%.

Of course, there have been winners and losers. Newspaper publishers had 45% of the pie until radio came along, which quickly stole share as newspapers fell into the 30% range. In the 1950s and 1960s television’s impact on newspapers was far less than it was on radio. One of the most robust segments of advertising has been direct mail, which has actually increased slightly in recent years and never really dipped as did newspapers, radio and magazines. It now accounts for about 20% of advertising, considerably more than do newspapers.

In good times the U.S. economy can grow about 4% annually. This constancy in advertising as a proportion of the economy means that if any media segment grows faster than 4%-- such as Internet advertising has been—then other sectors must grow slower—like newspapers. So when Forrester Research predicts that Internet advertising will be 8% of the total by 2010,-- an average of almost 50% annually, then it is hard to buy in to Morgan Stanley’s prediction that traditional media will still grow an average of 4.3% unless the economy is on a real rip.

Although I’m generally not a betting man, my money says that Forrester’s guess aout the Internet will be more accurate than Morgan Stanley’s about traditional media. If that’s the case, the outlook for traditional media players is at best one of treading water. That’s why companies like News Corp. need MySpace.com-like investments.

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Tuesday, September 06, 2005

Media Monopoly? Investors Don't Think So. Yet More Evidence of a Competitive Industry

For anyone who still maintains there is anything even approaching a media monopoly among U.S. media, Adam Thierer and colleague Dan English put another notch in the empirical arsenal that blows away any such assertions. Taking yet another approach (beyond concentration ratios, audience market share, etc. etc.) Thierer and English examine the value that investors give the largest media companies.

In "Testing 'Media Monopoly' Claims: A Look at What Markets Say", the authors find that the five so-called media titans-- Time Warner, News Corp., Clear Channel, Comcast, and Viacom-- have lost 52% of their value over the past five years. Market capitalization is computed by multiplying the number of shares these firms have outstanding times the price per share. The price per share can be affected by many variables, especially over the short term. But in the longer term—as over five years—it is largely a function of current and anticipated profit. The bigger picture, the entire Dow Jones U.S. Broadcasting & Entertainment Index, is down almost 45 percent below where it stood in 2000, according to their study.

In the case of Time Warner much of that decline may be due to the erosion of value from of AOL, with whom they merged at the peak of the dot com boom. But Thierer and English shows that all five of the biggest players have taken substantial hits. This is not the outcome one would expect of a “monopolist” which by definition is in a position to charge above market prices and reap extraordinary profits. Rather, the findings support the model of a highly competitive industry, where overall profit margins are kept modest by the actions or fear of entry of players with similar products or those that can substitute for some products (think DSL for cable modem service and other technologies in the wings). Although some pieces of these media companies may be very profitable (e.g., local broadcast station in large markets), the broader picture is quite a variance from the expectation of a monopoly (or technically, oligopoly when referring to a small number of dominating players).

Of course, economic monopoly is not what the folks who advocate for democracy in the media really care about. As Thierer and English remind us “In large part, the critics’ case against modern media is a case against commercialism or capitalism in general.” That is, they want a media industry—and indeed an economic structure in general—that would have more rules and programming that could only be imposed from above, rather than the media industry that is essentially responsive to the vast audiences’ needs, wants and choices as it is more than ever today.

For the rest of us, those who may even get frustrated with what the media do and say sometimes but recognize that any alternative structure would be far less honest and responsive, “Testing 'Media Monopoly' Claims” is another piece of evidence supporting the case for a highly competitive media landscape.

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