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Marc BOURREAU* Michel GENSOLLEN** Jérôme PERANI***
Abstract The economic literature considers that in the media industry production is characterized by high fixed costs and economies of scale. However, empirical evidence seems to belie that idea, for very often the programs and films with large audiences also have high production costs. In this article we propose a program production cost function that reconciles the theory of high fixed costs in content production with empirical evidence. To that end, we develop an empirical estimation of the program cost function in pay-television, and put forward some ideas to explain why production cost is an increasing function of the targeted audience.
JEL Codes: L82; L15. Keywords: Media economics; Program production cost; Economies of scale; Stars.
ENST, Department of Economics, 46 rue Barrault, 75634 Paris Cedex 13, France. Tel: 33 1 45 81 72 46. Fax: 33 1 45 65 95 15. Email: email@example.com.
ENST, Department of Economics and France Télécom. E-mail: firstname.lastname@example.org. Canal Plus. E-mail: email@example.com.
Since Samuelson (1958), the economic literature1 has considered that production in the media industry (films, TV programs, etc.) is characterized by high fixed costs and economies of scale. For example, costs of creating a TV program schedule will be high when first copy costs were high.2 Once the schedule has been published the incremental cost of physical distribution to an additional consumer is very low or even nil. Broadcast television should therefore exhibit large economies of scale. The same naturally applies to the production of content.
Yet empirical studies have shown that, very often, the more successful a TV program or film, the more it costs. In particular, this correlation has been highlighted by Litman (1983) and Ravid (1999) for cinema. The existence of a relation between production costs and audiences is also recognized in the economic literature. Spence and Owen (1977) think that it may be necessary to increase production budgets to draw larger audiences. Owen and Wildman (1992) consider that a program's production costs can influence its potential audience: “The cost of producing a television program is independent of the number of people who will eventually see it. (The production cost, however, may very well influence how many people will want to see it).”
How can the theoretical idea that programs are goods with high fixed costs – which implies the existence of economies of scale in program production – be reconciled with empirical
For a review of the economic literature on television, cf. Owen and Wildman (1992); for the cinema and entertainment industry in general, cf. Vogel (2001).
Cf. Waterman (1990: 291) and Owen and Wildman (1992: 151).
evidence that program costs are positively correlated with their audiences? The aim of this article is to explain this paradox by proposing, for films and television programs, a program production cost function that reconciles the theory of high fixed costs with empirical evidence suggesting that marginal costs are not negligible.
To this end, we first present an empirical analysis of the cost function of a television channel. More precisely, based on a statistical analysis of program costs and audiences of French payTV channel, Canal Plus, and French cable channels, we show that the production costs of a television channel's program schedule are not unrelated to its maximum audience. This analysis highlights the theoretical problem mentioned above, i.e. that no economies of scale are observed for what is commonly called the "production" of television programs.
To illuminate the issue of possible economies of scale in content production, we propose a program production cost function for cultural goods such as cinema or television. This enables us to account for empirical results (the absence of economies of scale) and logical evidence (production costs cannot depend on ex post audiences). We consider that costs of a program or film increase in relation to the audience targeted by the producer, and that there is a correlation between this expected audience and the actual audience.
In the second part of the article, we consider the nature of the relationship between production costs and targeted audiences, based on the example of cinema and television. In the case of the media, production costs depend on expected audiences through specific, so-called "talent" or "star" production factors which inform and orient demand and impact on social processes needed to develop the consumption of experience goods. These "stars" are able to negotiate remuneration based on fame, i.e. on the mean audiences they draw. Sometimes they are even
Dependence between production costs of information and audiences In this section we first assess the cost function of a program schedule for a pay television channel (French pay-TV channel. the cost of the program schedule. costs of acquisition and management of subscribers). In 2001. We show that in both examples the program schedule cost is largely dependent on the maximum audience of the channel. Estimation of production costs for a pay-TV channel Canal Plus was created in 1984 and it was at the time the first pay-TV channel in France. Canal Plus has production costs relating to commercialization (promotion and advertising costs. we distinguish production of the program schedule from its diffusion.1. consisting in the sorting of positive copies and their distribution to cinemas. we distinguish the production of the negative from the diffusion phase. In order to do so. not the distribution and diffusion phases.9 million subscribers. cost of decoders. 4 The number of annual subscribers of year N is equal to the mean number of subscribers on 31 December of years N-1 and N. the content production function seems to be more or less comparable to a publishing function. In the case of television. Then.remunerated on the basis of ex post audiences. 2. we propose a program production cost function that reconciles the theory of high fixed costs with empirical evidence. Thus. We assess only total programming costs here. We consider only the content production phase. it had 4. we compare the annual mean number of subscribers4 3 In the case of cinema.3 The question of economies of scale in the media industry thus relates only to the initial production phase. 2. Canal Plus) and a cable channel. 4 . that is.
We find that a =1. [FIGURE 1 SOMEWHERE HERE] The analysis of Canal Plus program schedule costs suggests a linear increase of total schedule costs with the channel's maximum audience. 5 .676 and that the regression is statistically significant (R²=0. We thus obtain 11 values for the program schedule cost. 5 We can consider that program purchasing conditions hardly changed for Canal Plus between 1986 and 1996.5 The data are drawn from Canal Plus annual reports between 1991 and 1996. This finding must be qualified. We can nevertheless note that the schedule cost is a function of the number of subscribers.986). Figure 1 below presents the cost of the Canal Plus program schedule in relation to the channel's number of subscribers. The satellite multichannel package TPS was introduced in 1997 only. The small size of the sample obtained does not allow a precise adjustment of the cost function. for the number of points used for this estimation is small. We perform a logarithmic regression of the cost of the program schedule (expressed in millions of 1996 francs) related to the number of subscribers (in millions of subscribers). the audience that the channel could draw if all households able to receive it watched it for the entire duration of the schedule. b=−10. when it started to compete with Canal Plus for rights to cinema films and football matches. The number of subscribers provides a proxy for the maximum audience.and the programming costs of Canal Plus between 1986 and 1996.e. ln(PROG )=a*ln(ABO )+b . i. depending on the number of subscribers.2297 . We have limited ourselves here to showing the relation between program costs and audiences. During that period Canal Plus was the only pay-television channel in France.
000 mean subscribers of channels present on analogue Canal Satellite.2.8841). As observed for the cost of the Canal Plus program schedule.8118 and that the results obtained were statistically significant (R²=0. this finding has to be qualified in so far as the number of points is limited (ten points). We thus consider that the 260. We found that c=0. ln(CT )=c*ln(ABO )+ d . The total budget of a cable channel is a good estimate of program costs. We thus obtained ten values for ten cable channels (cf. We estimated a logarithmic regression of the channels' budgets (in millions of francs) in relation to the number of subscribers of each channel. in so far as broadcasting costs vary little from one channel to the next (in 1995 these were equal to the annual rate for renting an Astra or Eutelsat analogue satellite capacity). 6 . in 1996. have no impact on channels' budgets. Estimation of production costs for a cable channel In the case of cable channels. Once again. the same result obtained for Canal Plus is found for their total production costs.6 More precisely. We carried out an identical analysis of French cable channels in 1995. d =−7.2. for the year 1995. [TABLE 1 SOMEWHERE HERE] [FIGURE 2 SOMEWHERE HERE] 6 That year enabled us to take into account the satellite subscribers of each channel since digital multichannel packages were launched the following year. we found that the budget of a cable channel in 1995 increased with the number of subscribers to the channel. Table 1). we tried to determine whether there was a relation between the total budget of a cable channel7 and its number of subscribers. 7 The total budget is equal to the difference between the channel's income and its profits.8999 .
for example. to contractual clauses indexing the purchase prices of these programs over actual audiences or maximum audiences. Is it possible to reconcile this result with the idea that program production for television or cinema has high fixed costs? This is what we now wish to do. we have shown that the cost of a program schedule increases in line with the maximum audience. distribution and remuneration of participants. broadcasting rights on content are negotiated at prices which depend on an audience estimated ex ante.3. the number of entries – and its production cost. The relation that we have shown between programs costs and maximum audiences could thus be related. In his study. by proposing a formalization for the program production cost function.2. Yet in the case of television channels a distinction must be made between the content cost and the price for purchasing that content from copyright owners. the production cost explicitly excludes the costs of marketing. 7 . at least partly. In other words. This price can be defined by complex contracts and may depend more or less directly on ex post audience scores. Ravid (1999) shows a strong correlation between the gross takings of a cinema film – hence. but does this hold true for the production cost of a program? Studies undertaken in the film industry provide a positive answer to this question. and sometimes also on the audience measured ex post. Litman (1983) and Litman & Kohl (1989) confirm that result. In the case of television. which are indexed on actual revenue. Production cost of information and expected audience We have presented two estimations which show that the programming cost of a pay-television channel is not a fixed cost in relation to the channel's maximum audience.
if C is an increasing function of a* ( ∂C ∂a* > 0 ). In the following section we shall revert to the relation between content production cost and targeted audience a* . and that the program cost. then ∂C ∂a* > 0 . 8 . The average production cost with rational expectations is then simply CM ( a. the program cost will increase in line with the size of the targeted audience. since there are rational expectations. independent producer. a. chooses to invest in a program. In a market equilibrium. Figure 3 illustrates the construction of a function of production cost with rational expectations. aware of the relation between investment and expected audiences. Initially the producer. In this figure we assumed that the average cost of programming based on actual audiences could be CM ( a* . a* . C . We suggest that this audience is not only expected but is actively targeted during the production. Producers and broadcasters must use more complex strategies discussed in the second part of this article. a. a* . Then viewers watch the program or not. is a function of the expected audience. the production cost is obviously independent of the actual audience measured ex post. the program will be broadcast and will draw an actual audience. one could imagine the following sequence.When they make a program. In perfect information the producer can predict the viewers' behaviour in the second stage. the producer's predictions prove to be correct. for 8 For example. We then have ∂C ∂a = 0 . a ) = C ( a* ) a = a * a . this example is extreme. For example. We shall see below that this expectation is difficult for a film or particular program (variance of a is very great or infinite). If it costs a program producer too much to target a bigger expected audience. which means that a * = a . etc. the expected audience. for a set value of a* . For example.8 The function of production cost with rational expectations is then C ( a ) .) anticipate an audience. a ) = 1 . Naturally. imagine that the producer can perfectly predict the actual audience. Once it has been produced. studio. producers (TV channel. On the other hand.
C . the average production cost observed ex post is not necessarily strictly decreasing (for ∂C ∂a* > 0 ). This demand function decreases with n and increases with n * . a * . Note that the cost function suggested here for film and TV program production can be likened to a demand function for goods with externalities. In this part we specify the nature of that relation. and the expected audience of that program. is p n. n * . Economides (1996) shows that the willingness to pay for an n-th good. 9 . Relation between programming cost and expected audience In the previous section we introduced the hypothesis of a relation between the cost of a program. n ) . as shown in the following section. ( ) [FIGURE 3 SOMEWHERE HERE] 3. due to the externality effect. The formalization that we propose enables us to reconcile the idea of program production with high fixed costs and the empirical observation which shows that the function of cost. does not have large economies of scale depending on the actual audience. for a set targeted audience (since ∂C ∂a = 0 ). a. when the targeted quantity of goods sold is n * . assuming that at the equilibrium n = n * . The demand function with rational expectations is then p (n.producers are not able to perfectly anticipate the success of the programs they produce. While it is true that the average production cost decreases in line with the actual audience. observed ex post.
We then define the notion of "talent" and the economic characteristics of this type of production factor. by the mode of remuneration of talents. after achieving a degree of autonomy. 10 .e. and unless there is a correlation between the expected audience at the time of production and the actual audience in the end. Sometimes these contracts are even indexed on gross takings or on profits (i. 10 Especially since 1948. impose modes of remuneration which reflect a sharing of created value rather than payment for a job done. 9 This remuneration must be counted not in production costs but as a share of profits. now distinct in the television industry. Lastly. the year of the US Supreme Court ruling in a case against Paramount.e. we explain the absence of economies of scale of the production function in empirical studies. dependent on the ex post audience: a). a. and demand achieved ex post.10 In this section we first analyse the nature of the relation between demand targeted ex ante. their mean capacity to induce a demand: a*). are identifiable by demand. These "talents". are probably the main source of the relation between production costs and targeted audience.If we exclude the case in which certain production factors are remunerated in relation to actual audiences. because of they directly induce audiences. the "brand" of a star when s/he was bound to the studio by a long-term exclusivity contract. studios also lost the possibility to invest in the construction of a specific asset. In so far as they contribute directly to the production of demand they can. The greater a star's fame (i. and can serve to inform and orient supply. The relation between this industrial trend and the mode of remuneration of talents is described by Chisholm (1993) who shows that by losing control of distribution. We are going to argue that particular inputs. has been clearly observed in the case of the film industry. for example film stars.9 the production costs of program content cannot be linked to the ex post audience unless production factors depend on the expected audience (it is necessary to spend more to target a vaster audience. a * . the more advantageous their contracts will be. This trend. introduced into the economic literature under the name of "talent". at least on average). which banned vertical integration between production and exploitation. This ruling marked the transition between the Star System of studios and the emergence of independent stars.
film. etc. In a study of 300 films released between May 1985 and January 1986. 11 In the case of ordinary goods and services. the media economy is becoming a general reference used to explain the functioning of a "dematerialized" economy. in so far as the process of producing products or delivering services can be adapted: supply can be adjusted to demand as it is revealed. Once the content (book. there is no correlation between the time a writer takes to write a book and the number of readers of the book). e. Empirical research in the film industry suggests that the media industry is characterized by extreme variability of ex post audiences. In so far as ordinary goods incorporate more and more R&D and have an increasingly short lifespan. If. In this case there would be no empirical correlation between production costs and audiences (an extreme case which does exist for certain types of "craft" production. information goods would be normal goods.1. For information goods.11 costs would depend directly on demand.g. satisfaction of demand induces no more production costs. Only irreversible initial investments and product-specific R&D induce initial economies of scale. program. the very notion of expected demand would be meaningless (producers would not target a specific demand when making their products). De Vany and Walls (1996) show that distribution of audiences. Nature of the relation between a and a* Due to the extreme uncertainty concerning a. Economies of learning can subsequently develop. scriptwriter William Goldman commented that in the media "No one knows anything". and to adjust production ex ante. This uncertainty characterizing the media largely explains the nature of relations between the demand targeted at the time of production ( a* ) and demand finally expressed and satisfied (a). it is as if all production costs had to be agreed ex ante. If these two quantities were closely correlated. a and a* were unrelated. only distribution-exploitation costs. production costs depend on the demand finally satisfied. 11 .) is made.3. a. on the other hand. with precision. not by temporal adjustment but by the capacity to accurately predict the public's tastes.
from those who have already consumed. Once the content (book. from the precarious balance between a few disasters13 and a small number of extraordinary successes. plays a crucial part in the formation of demand. 1996). the process of acquisition of information by potential consumers. a correlation is found between a and a * .15 In any case. Almost all profits derive from a few rare cases. In the late 1940s. 14 15 Such as consumption based on imitation or fashion. only distribution-exploitation costs. etc. the media economy is becoming a general reference used to explain the functioning of a "dematerialized" economy. In the case of ordinary goods and services. Only irreversible initial investments and product-specific R&D induce initial economies of scale. Such variability of demand is related to the very nature of the media. the result in both cases is unpredictable (no one knows anything). satisfaction of demand induces no more production costs. and in 1993. film. 12 These are distributions such as Prob(X>x) is of the order of x• for x big enough with • between 0 and 2. Economies of learning can subsequently develop. ex post. For information goods. See Weinstein (1998). Because information is an experience good (the usefulness of which is not known ex ante) and a network good (more useful when consumed by others as well). it is as if all production costs had to be agreed ex ante.takings and profits are of the Pareto-Lévy type. see Bikhchandani et al. with infinite variance (sometimes even with an infinite mean).) is made. (1992). in the early 1960s they earned 6%. This may be a pure phenomenon of imitation14 or a more complex process of information exchange. In the case of cinema. 12 . we observe cascades (or avalanches!) of decisions leading to extremely uncertain results. we generally find values of • of the order of 1. 13 This concentration of income is increasing with time. In so far as ordinary goods incorporate more and more R&D and have an increasingly short lifespan. 14% (in the latter case only two films were concerned).12 In this case. in so far as the process of producing products or delivering services can be adapted: supply can be adjusted to demand as it is revealed. even if at the production level an audience a * is targeted and even if. 1% of films (the best) brought in 2% of all income. program.5 (see De Vany and Lee. production costs depend on the demand finally satisfied.
TV series). simply through their presence. Brand effects make it possible to reduce consumers' uncertainty as to the nature of a new product. etc. book. When the rarity of means of distribution or a monopoly position enables producers to impose a certain type of content. This may consist of certain original characteristics of the film. to attract a specific audience. rather than production itself. • Efforts to achieve direct control over demand through vertical integration between production and the various phases of distribution-exploitation. v. 13 . the novelty of special effects. This was the strategy developed by studios until the 1948 Supreme Court ruling (U. the fact that it is a sequel to a well-known film or based on a success in another medium (book.The strategies of media content producers thus naturally concern control of meta-information diffusion processes needed for the formation of audiences.S. Paramount). In this context the notion of "talent" relates less to the ability to create quality content than to the capacity to directly induce a demand through a brand effect. There are two such types of strategy: • Incorporation of production factors making it possible to attract attention to the content (film. e. program. Certain actors or film producers (the stars) thus act as audience prescribers.) and. it becomes possible for them to build up a reputation and then to take advantage of the rent thus created (extracted by means of long-term contracts with audience prescribers).g.
14 . For example.3. There are also artistic inputs which. Crandall (1972) and Owen. Thus. etc. scriptwriters. most actors are not stars. Crandall (1972) distinguished only between inputs of "talent" and other input. It is also because they can still be recognized by audiences after the production phase that they are able to act on processes of information exchange prior to the consumption of experience goods. Such exchanges of information are all the more necessary in so far as consumers' tastes. cameramen.) and capital input (décor. They are responsible for a large part of the quality of content. because they are unknown to the general public. vary widely in time and from one individual to the next. for example. etc. play a part that is no different from that of ordinary work inputs. Beebe & Manning (1974). because they are not directly known to consumers. which guide their choices. work) only by their rarity and low level of substitutability. standard models try to account for the originality of the media industry.). Yet stars are not distinguished from other inputs (capital. For instance. special effects.2.) along with input of production work (lighting engineers. for this quality is considered to be an objective variable judged in the same way by everyone (vertical differentiation). actors. in so far as their participation in a film has no statistically identifiable impact on audiences.16 The inputs of "talent" are presented as non-substitutable and "rare". By introducing the notion of "talent". the notion of talent is not only related to the "artistic" character of inputs. designers in the luxury industry. The role of talent in the formation of demand To describe information goods such as films. economists have introduced the notion of input of the work of "talent" (producers. are remunerated independently of the success of the products they define. Likewise. De Vany and 16 See. etc.
Kevin Costner. If a surgeon is 10 percent more successful in saving lives than his fellows.) also acquire a value.Walls (1999) identified only 19 stars in all North American actors and film producers during the period 1984-1996. 18 See Rosen (1981). Stars in themselves are not rare. Consequently. for example: "Lesser talent often is a poor substitute for greater talent. ex ante. The number of stars identified by De Vany and Walls (1999) could therefore be interpreted in the following way: an informal database on about 20 actors represents a maximum load as far as a consumer's attention is concerned. Sandra Bullock. The rarity of talent should not be analysed as rarity of an ordinary production factor. whereas demand is only for the best. for example. books. Jim Carrey.). etc.17 The very small number of stars is often explained by a "winner takes all" effect because mediocre talent is seen simply as an imperfect substitute for eminent talent. storing and processing data needed to estimate. The author writes. the larger the sustainable rent accruing to higher quality sellers because demand for the better sellers increases more than proportionately: hearing a succession of mediocre singers does not add up to a single outstanding performance. Tom Cruise. The worse it is." 15 . etc. These factors are used to inform consumers and to 17 Most of whom are actors (Warren Beatty. most people would be willing to pay more than a 10 percent premium for his services. programs. The only star producers whose names create a specific demand are Spielberg and Coppola. consumers are prepared to devote limited time to processing the meta-information needed to guide their choices. factors predicting the usefulness of information goods (films.18 An alternative explanation could be proposed: it is the generalized costs of gathering. the usefulness obtained ex post from information goods which ultimately limits the number of signals that can be taken into account. there are few of them because consumers' attention is rare and because the time they have to seek information for their consumption of experience goods is limited. In the case of films.
There are only a few actors who please the public. 16 . the rarity of talent is not inherent to processes of formation of demand. the fact remains that. 1997): The Attention Economy: The Natural Economy of the Net. January 23-26. for example). for example with the spread of the Internet.orient demand. it is relative to them. infinite) but20 • by increasing takings: median takings are US$21m for films without stars. 20 21 See De Vany and Walls (1999): it concerns films in the period 1984-1996. the time budget is more constraining than the financial budget. but because actors orient demand and the current process of ex ante evaluation of ex post quality is costly in terms of attention. Goldhaber in 1997 during the conference "Economics of Digital Information" (Cambridge. in any case. The fact remains that currently stars play an essential part in the success of films. not because the fact of acting well or being likeable is "rare". the processing of information needed for consumption represents most of the cost borne by the consumer. The author defends the idea that the only really important rarity today is consumers' attention. If this process changes. compared to US$38m for films with stars. For this type of good. While this argument may seem excessive. MA. For De Vany and Walls (1999). We can thus reasonably talk of an "attention economy"19 in which the essential resource lies in the ability to draw the public's attention to a particular experience good and to reduce uncertainty on the usefulness that can be derived from it. 19 A notion introduced by Michael H. a "hit" is a film with gross takings of over US$50m. • by substantially increasing the probability of the film being very successful. From this point of view. not by substantially reducing the risk taken by the producer (variance of distribution of takings is. at least for experience goods (information goods of radically new products.21 although this probability remains extremely slight. the nature of this rarity will also change.
were not known by name in the public at large. In a study on a random sample of 180 films released between 1991 and 1993. 17 . "packaged" in the form of typical characters. The first actress to be known by her name was Florence Lawrence. 1993). the "boudoir dandy". 24 25 Mary Pickford was the first actress to have a long-term contract. TV hosts. etc.). "talent" inputs are characterized by their ability to act on information processes that generate demand for experience goods.25 this is the "star system". Remuneration of talent As defined previously. studios directly organize their fame. She was employed by Independent Motion Pictures Company (the ancestor of Studios Universal).22 Classically. initially.3. are in a good position to demand remuneration based more or less directly on audiences. Contracts binding actors to producers vary widely. the "sinful woman". There was the "dangerous man".3. Actors were related to one of these types. this was typically the case of silent film actors who. etc. 22 23 See Weinstein (1998). because they are at least partially responsible for the formation of demand.23 • payment by salary. Ravid (1999) found that while stars increase the box-office takings of films. (see Chisholm. These inputs (film stars. the "folk hero". the following are distinguished: • a fixed payment for each service: actors who are not well-known are remunerated in this way. from 1913. sometimes even to a particular character. In the case of cinema. Before 1910 she was simply called "The IMP Girl". it seems that stars have progressively managed to capture most of the surplus they generate. they capture the income thus created and finally play no part in its financial success. with long-term contracts:24 in so far as actors inform audiences on the nature of films and on their potential usefulness. as in the case of Johnny Weismuller as Tarzan.
in these conditions the star shares with the producer a single type of risk – the film's success. but also that of not meeting production costs (a risk over which the actor has no control). While it may seem natural for stars to try to capture the rents they generate through their presence. It is generally thought that private individuals are more sensitive to risk than firms. • remuneration dependent on net profits: in this case. (1994). Various attempts have been made to explain this situation. the risks are so great in the entertainment industry that risksharing is necessary. It does not stand to reason that stars are more sensitive to risk than those 26 Weinstein (1998) cites recent cases. Finally. Inc. However. (1990). 27 See Weinstein (1998) for details of this discussion. the fact of them doing so by means of risk-sharing contracts (dependence on a) rather than fixed remuneration (dependence on a* ). (1996). 18 .• remuneration dependent on gross income: mostly a percentage of income.27 First. such asymmetry of information is highly improbable and there is no reason for an actor to have better knowledge of risks than the studio (besides. participation in takings or profits can be an incentive for the actor to work well. Paramount Pictures Corp. the actor can benefit from private information on the probability of success and the producer buys that knowledge. In this context of moral hazard it is difficult to see why the sharing exists primarily for stars and not equally generously for all actors or all those who participate in making a film. Warner Brothers et al. Batfilm Productions v. this type of contract often leads to legal dispute26 and the courts readily consider it as one-sided. may seem strange. in excess of a set level. in particular: Buchwald v. "no one knows anything"!). the star shares two types of risk: the risk related to audience size. Warner Bros. and Estate of Jim Garrison v. Moreover. with the arguments of the Court of Justice.
a* . Woodbury. a. talent inputs are remunerated by producers according to their fame (that is.who make decisions in the studios. the marginal cost of an additional consumer is not nil. The role of talent inputs in the case of television The preceding analysis of relations between producers and talent inputs was based primarily on examples from the "pure" case of cinema.g. The fact that stars (who are often very rich) frequently give up all up-front payment if that is the only way a film can be produced. First. It can also be illustrated by examples from the more complex case of television. 19 . is thus twofold. James Cameron for Titanic. Robin Williams for Good Will Hunting. The relation between production costs and actual audience. this relation exists through the link between production costs and expected audiences. a* ) or according to the actual audience they generate (a). These authors showed that the producers of these series were 28 The most frequently cited examples are: James Stewart for Winchester '73. The marginal profit increases and is distributed between the producer and the talent input.28 attests to this. according to the mean ex ante audience. ABC. CBS and NBC. It is an apparent cost since the considered production factor (e. Tom Hanks for Forrest Gump. since the remuneration of talent inputs is indexed on the actual audience. In any case. and through the correlation between a and a* . In the case of US broadcast television. Dustan Hoffman for Wag the Dog. etc. Georges Lucas for Star Wars.4. Besen and Fournier (1983) analysed a sample of 99 series programd in the US in 1977 and 1978 on the three national broadcast networks. Second. Anthony Hopkins for Amistad. 3. a film actor) is not used more because there is an additional consumer.
fame and market power.remunerated in accordance with the "popularity" of the programs they had made (i.e. Besen & Fournier (1983). combined with the host's fame. At the end of the year 1997 the producer of the series.31 In the case of French broadcast television. cost for the channel). enables them to maintain their position in program schedules far more easily than other types of producer. for TV channels. Variety. the network distributed part of the surplus to the producer. the ex post actual audience. planned to negotiate on the basis of 10 million dollars per episode. "Seinfeld exit jolts NBC". a). 30 31 32 Cf. the case of the series ER broadcast on NBC illustrates the relation between audience and program value (i. which de facto enhanced their bargaining power in the market.30 In January 1998 the two parties reached an agreement to renew the broadcasting contract on the basis of 13 million dollars per episode. 20 September 1998. Warner Bros. in 29 For Woodbury. the network tried to maintain good relations with these producers in order to obtain new programs. of the different short-lived programs broadcast in 1993. The New York times Magazine. A host's bargaining power with distributors increases along with her/his fame: that is the virtuous circle of success. The bigger the audiences of a host.e.29 More recently.. for the latter can maximize their advertising income by using her/his services. For example. the greater her/his fame among televiewers and distributors. and they are subject to little pressure from potential entrants. Littleton. The guarantee of audiences. Figure 4 presents mean costs. A star-host can then bargain with distributors on the basis of her/his qualities as a host and the services of her/his production company. 29 December 1997 See: "The Thursday-Night Massacre". the market power of talent input is illustrated by the case of host-producers. if a program draw a larger audience than expected. 20 .32 The first half of the 1990s was characterized by bigger audiences of programs produced by these hosts. and relinquished part of the surplus in order to ensure good performance from them. There are very few of these production companies in which the main shareholder bundles the animation and production of the program. C. Benzoni and Perani (1996) describe a “virtuous circle” for these host-producers between audience.
Conclusion The economic literature generally considers that the media industry is characterized by high fixed costs and economies of scale.33 As shown. Drucker with "Stars 90"). B.-P. 21 . in which production costs depend on the targeted audience at the time the content is produced. To illuminate this paradox we introduced a cost function of a program or film. Pivot with "Bouillon de Culture") or large (J. whether their audiences are small (J. Cavada with "La Marche du Siècle". More precisely. In the case of both television and cinema. programs with high mean costs are presented by famous hosts. there seems to be a correlation between the audience of a program or film and its production cost. talent inputs capture part of the surplus they create. This 33 In certain cases the "costs" of these programs for channels can be purchase prices and not production costs. in terms of subscription revenue or advertising revenue generated by the program. In this article we have shown that this analysis does not correspond to the findings of empirical research. the content production phase is considered to have fixed costs. This property has been demonstrated by estimating the cost function of pay-television in France.relation to the audiences of those programs. Foucault with "Sacrée Soirée" and M. [FIGURE 4 SOMEWHERE HERE] 4.-M. which suggests that the production cost of a program is an increasing function of audience. This analysis shows that in the case of television as well.
In this case it is hardly surprising that production costs depend on ex post demand. The paradox described at the beginning of this article and the proposed explanation provide insight into the economic logic of the media and its originality. there is an indirect relation between production costs and ex post demand. However. a best quality generating a superior demand. Once a program has been produced its cost cannot depend on the number of viewers.cost function is logically independent of the actual audience. It is never possible to substantially reduce the risk. This relation stems from the fact that the producer targets a certain audience at the time of production. Apart from the case in which profits are shared with certain production factors. we note that certain production factors index their remuneration on actual demand. it is more accurate to take into account in production costs only remuneration that is independent of ex post audiences. and consequently chooses certain production factors. These inputs have a price that increases in direct relation to their effectiveness in influencing social processes of generation of demand. ex post audiences vary widely. To account for the relation between production costs and targeted demand. First. the explanatory model cannot be limited to the classic schema linking production factors to an objective quality of the product. Producers make use of talent inputs capable of drawing the public's attention and of guiding its choices. As this is a form of profit-sharing. irrespective of 22 . but it can increase with the targeted audience and thus statistically with the actual audience when these two variables are correlated. due to the very nature of these processes.
their "formal quality") because consumers are in any case incapable of accurately estimating ex ante their potential ex post usefulness (experience goods). to a certain extent. experience goods) from an empirical and theoretical point of view. they belong less to the production function of content (film. is it possible to create stars (and at what price?) when demand is not controlled (when the Star System was created studios did have some control over demand)? Can producers create temporary stars at a low cost and thus avoid.g. Several questions are raised. Demand does not rely primarily on the goods themselves and their characteristics (e. Talent inputs act directly on demand. sharing profits with them? The case of a program like Big Brother will be interesting in this respect. Finally. talent inputs have a considerable effect on takings. In short. program. as will the development of films without actors (Final Fantasy). This analysis could open interesting perspectives for the study of the media industry (and. book. Demand depends primarily on the processes through which consumers can be informed and production is essentially customized through action on these processes.the costs incurred to target an audience. How do talents emerge? Can possible forms of the production of this type of input be specified? For example. more generally. etc.) than to the production function of social devices allowing that demand to develop. But in the very rare cases of hits. the originality of the media stems from the nature of the information good. is it really necessary to produce content? Is it not becoming worthwhile to invest most costs in processes of generating demand (the case of the film Blairwitch Project would be interesting to analyse from this point of view)? 23 .
24 .Acknowledgements The views expressed in this paper are not necessarily those of France Télécom or Canal Plus.
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5 7 6.TABLES AND FIGURES 8.2 ln(average number of subscribers in 1995) Figure 2 : Quadratic regression curve budget=f (subscribers) in 1995 28 .4 14.5 6 13.5 5 ln(budget in 1995) 4.2 13.6 13.2 14.4 12.8 15 15.8 14 14.6 14.2 15.8 14 14.4 13.5 3 12.4 ln(number of subscribers) Figure 1 : Cost of the Canal Plus program schedule in relation to number of subscribers 5.8 13 13.6 12.5 ln(annual cost of schedule for Canal Plus) 8 7.5 4 3.
a ) 1 0 10 20 30 a 40 50 Figure 3 : Construction of a production cost function with rational expectations 29 .5 4 CM( 10 . a ) 2 CMar( a ) 3 CM PROG a * = 50. a ) CM( 30 . a ) CM( 50 . a ( ) CM PROG (a. a ) CM( 20 . a ) CM( 40 .
00 Perdu de vue Bas les masques Que le meilleur Le juste prix Bouillon de culture gagne 5. July 1993. Source for program costs: TVSD.00 0 5 10 15 Audience 20 25 30 Figure 4 : Average cost per minute for channels showing short-lived programs in 1993 (cost per minute as a function of audience)34 34 Source for audience: Médiamétrie.00 Dimanche Martin 15.00 La nuit des Césars 25.00 La chance aux chansons Questions pour un Français.00 Stars 90 30. n°2261.00 La marche du siècle 10. Télérama. 30 . may 1993. si vous champion Des chiffres et parliez des lettres 0.35.00 Sacrée Soirée Les marches de la gloire Cost per minute 20.
2 50. France Télécom Câble.0 85.112.000 300. two planned channels of MK2 (FF20m) and Téva (FF50m).216 776.716 1.036. Compagnie Générale de Vidéocommunication. Sources for the budget of channels: commercial court records. Free One (FF50m).4 71.587 1. the press.716 914.203.5 157. France Courses (FF15m). Ecran Total. Canal Soleil (FF50m). Réseaux Câbles de France.0 40. Festival (FF42m). The mean number of subscribers of the new channel is equal to the expected number of subscribers if the channel obtains a contract with one of the following cable operators: Lyonnaise Communications. Canal Plus.3 74. CSA (broadcasting regulatory authority).Average number of cable subscribers Euronews Eurosport Canal J Planète MCM Paris Première Canal Jimmy Série Club La Chaîne Météo Nouvelle chaîne 1.1 95.452 325. EDF Videopole. 31 .716 928.216 843.216 468. Voyage (FF35m). The mean budget of a new channel is calculated on the basis of projected budgets in 1995-1996 of Odysée (FF35m).0 Table 1 : Subscribers and budget of cable channels in 199535 35 Sources for the mean number of subscribers: AVICA.000 Budget (million francs) 131.0 35.2 93.
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