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The Economics of Media Consolidation

October 5th, 2006 by David Kronemyer · No Comments

On October 3, 2003, the Federal Communications Commission (“FTC”) held one of its show-case hearings in Los Angeles. The topic: media consolidation. It goes without saying that these hearings basically are useless. The commissioners are bored and listless. A predictable laundry-list of gadflies shows up to complain, to nobody in particular, supported by a cadre of loyalists. In the meantime, all goes on as before. I think the reason why the FCC does it – aside from it being legally mandated – is to try and show the grass-roots that they “care” about their “issues,” in the worst new-age-speak sense of both of those terms.

Reports of the hearings are at: Schatz, A., “Media Ownership Rules Reviewed, And Tense Fight Is Likely Brewing,” Wall St. Journal (Oct. 4, 2006); Granelli, J., “Consolidation in Media Is Called Stifling,” Los Angeles Times (Oct. 4, 2006); McNary, D., “H’wood gives FCC an earful,” Daily Variety (Oct. 4, 2006); and DiOrio, C., “A call for more owners,” Hollywood Reporter (Oct. 4, 2006).

I have yet to read anything remotely on point about the economics of media consolidation. And by ”economics,” I don’t mean quasi-cultural issues like the “need for diversity in points of view.” Rather, what I would like to see is something that really rolls up its shirtsleeves and delves into who owns what, how much it costs, and that actually counts noses, to see whose points of view are being expressed, or stifled.

In principle, everybody is for freedom of expression. In principle, most broadcasters and newspapers have built a “Chinese Wall” between their editorial and sales staffs, in order to prevent the filthy lucre of commerce from infecting the virginal truth and purity of the news. [NOTE: I’m not sure I understand the term “Chinese Wall,” any more than I understand the terms “Little Saigon” or “Korea Town,” that appear on street-signs here in Los Angeles. Isn’t there something implicitly racist in the phrase, “Chinese Wall”?]

So let’s concentrate on the facts, and here they are, as I see them. For a variety of reasons that have nothing to do with freedom of expression, media outlets are incredibly expensive to own. The owner of a media outlet typically is looking for some return on investment. Thus, with a few nut-case exceptions, the owner is unlikely to sanction or promote a vehicle that marginalizes itself within its community of constituents, whatever its parameters. Rather, the owner will want the broadest appeal possible, again within the confines of that affinity group, however it’s defined. Broader appeal means better circulation, which means more advertising revenue, turnover, and (hopefully) profitability.

It therefore would be against the owner’s economic incentive to suppress opposing viewpoints, because that’s what the listenership-readership wants to hear. Even if there was only one owner of all of the media outlets in the United States, that one owner would, of necessity, market and promote a diversified portfolio of properties with different points of view that, on balance, would appeal to the broadest audience possible.

Let’s also look at it from the audience’s standpoint. Opponents of media consolidation assume there is only so much media to go around. In what we ubiquitously refer to as the “old days,” that might have been true. And it certainly is true from the FCC’s perspective, because it regulates a scarce economic commodity, that is, broadcast bandwidth.

Today, however, that’s not the case. Instead, our friend the Internet has exploded all of these assumptions. There are an estimated 12 million blogs in the U.S., and an estimated 8.7 million in Japan alone. “Blogs, chat rooms and other Internet formats are increasingly providing the inspiration, and in many cases the verbatim content, for books, television shows and other old-media products,” Kane, Y., “How Demon Wife Became a Media Star And Other Tales of the ‘Blook’ in Japan,” Wall St. Journal (Oct. 5, 2006). They might as well have added MySpace and YouTube to this list, too. MySpace has 106 million accounts, and attracts new registrations at a rate of 230,000 per day. 100 million clips are viewed daily on YouTube, with an additional 65,000 new videos uploaded every 24 hours.

These types of statistics – and there are many others I could cite – strongly suggest the perils of media consolidation are not as dire as they may seem. If anything, there is so much freedom of expression that it’s impossible to wade through all of it. The function of the “media company” over the next decade increasingly will be to sift through all of these creative works, and decide how to allocate scarce marketing and promotional resources amongst them. It no longer will be to serve as a quasi-vertically-integrated “proprietor” of intellectual property rights. Rather, like the baleen of a whale, it will be a sifter and a sorter of what’s pertinent and interesting, as defined by the audience to which it seeks to appeal.

Let me draw an analogy. In the middle ages, there only were a certain number of people who wanted to be poets. It probably was not a particularly lucrative profession; much better to be a stone-cutter at a cathedral. As a result, there isn’t that much poetry from the middle ages hanging around, and I would venture to say that we pretty much have all of the poetry from the middle ages, that was written.

Today, however, anybody can be a poet, or a screenwriter, or a novelist, or a songwriter, and many people are. There no longer are effective entry barriers to the “creation” of works. And, in principle, there no longer are effective barriers to their distribution. I can download anything I want in a matter of seconds, if it’s available. Rather, the challenge for the proprietor of a creative work, who wants to monetize it, is to find an audience. And this in turn implicates the need for effective marketing and promotion. These always have been necessary ingredients; but now, more than ever.

Another reason why I am not all that perturbed about media consolidation is the emergence of web “communities” or affinity groups. There is a profound sense in which the heavy-metal music fan in Tokyo has more in common with the heavy-metal music fan in Des Moines, than either of them has with their next-door neighbors. In other words, the web has dissolved the notions of “territory” and “geographic boundary,” instead reorganizing potential audience members into different hierarchies or groupings, based upon what they actually want, not what they’re told to want.

This has significant implications for the media company, which often exploits licensed rights on a territory-by-territory basis. If the entire concept of “territory” is becoming irrelevant, then the concept of a local or a regional distributor to service that territory, is as well. The media distributors of the future will need to accommodate this. Instead of organizing around territories, they must amalgamate around marketing and promotional styles, and their abilities to market effectively to certain pre-defined affinity groups. Only in this way will consumers recognize them as a “portal” or entry-point for queries as to what’s available, given tightly-defined parameters as to area of interest.

Another implication for the media company has to do with the distinction between “push” media and “pull” media. Push media is the classic old-school template, where items of information are sent to the user (viewer, listener, etc.) in a sequence, and at a rate, determined by the media outlet. Examples abound: the newspaper, the evening news, a movie or television show – really, any kind of linear entertainment experience. Pull media, on the other hand, permits the user to request those bits of content, in a sequence, and at a rate, that the user determines.

The significance of this distinction is that it promotes the growth of communities, or affinity groups, based upon narrow selection criteria. If users can decide what they want, as opposed to having it decided for them, then they will search actively for new and interesting alternatives, within their sphere or penumbra of interest. Like a magnet attracting iron filings, they will tend to aggregate or clump together, as this process occurs. These affinity groups in turn will be easier to market to, because they are self-defining; from a demographic standpoint, they are pre-clustered, and require no further efforts at identification.

I think this phenomenon would tend to promote diversity, not impede it. One of the main problems advertisers traditionally have faced, is judging the efficacy of the media they utilize to sell to their intended audience. Media like “television” or “newspapers” are a kind of blunderbuss approach, because, when all is said and done, you really don’t know who it is you’re getting. Yes, different shows have different demographic characteristics, and a certain type of socio-economic profile reads the newspaper, and there are whole industries that provide these types of analyses.

But now, instead of there being one gigantic, fundamentally undifferentiated lump of potential consumers, there is a neatly-ordered array of different types of consumers, each group susceptible to a unique form of media, and a unique marketing style and approach. And what’s more, they’ve arranged themselves, on their own volition; they haven’t been arbitrarily stuck there by some analyst trying to discern order out of chaos, or impose a schematic, where there isn’t one.

If they are to be reached effectively, this plethora of different groups per se will require many more media outlets, than presently exist. They require different editorial “content,” in order for their many diverse and divergent points of view to be expressed. They also will require completely different marketing strategies and techniques, in order for advertisers to reach them. And this phenomenon also should promote media diversity.

UPDATE: A shout out to Barry Diller, who recently expounded on “new media” at a technology conference sponsored by Forbes Magazine, Kirsner, S., “Titans Talking Tech,” Daily Variety (Oct. 25, 2006). Michael Eisner asked Diller whether he expects to see more traditional media companies buying new-media startups, like News Corp.’s purchase of MySpace. “It doesn’t matter who buys what,” Diller said. “Because the Internet makes it possible for anyone to self-publish and attract a sizable audience, controlling the chokepoints of distribution is no longer a viable strategy.” Diller continued: “Traditional media companies historically have been based on being dictatorial and telling people how they’ll do business with them and exercising every point of leverage at all points in the process. In the new era, media companies [will] have to master this new form of plenty, rather than scarcity.”

Diller criticized the model of network TV. While he saw the continuing value of local TV stations, he’s less convinced about the value of “the single-channel, general entertainment approach” of a national network today. Instead, Diller said he expects that channels would need to have a tighter focus on specific topical niches and audiences. Eisner seemed more bullish than Diller about the potential for user-generated content to continue to attract viewers, noting that talent agencies had begun signing hot Internet personalities. “There aren’t that many talented people,” Diller countered, “whose creative ability is going to resonate with a lot of people.” Eisner noted that the Internet makes it easier to ferret out a talented storyteller in Paris or Eastern Europe. “I don’t think there are great singers, musicians and writers in garrets somewhere doing great work that no one finds,” Diller rejoined.

Diller is absolutely right. The function of the modern media company will not be to originate creative properties. Those will come from all sorts of places — some big, some small, some pro, some amateur. Rather, the media company will act like the baileen of a whale, sifting through and arranging these works, making recommendations to consumers, prioritizing, marketing, and promoting them. The days of a strictly vertically-integrated (or quasi-vertically integrated) media company are gone.