Entertainment Marketing

Professor Phillip Cartwright

Paris School of Business EMBA
Entertainment and Media: Markets and
Economics I*

*Acknowledgement to Professor William Green – New York University

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Why do we work?
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  http://ap.google.com/article/ALeqM5ghvs_Nv2S8Im_l8OjmG7zDT0xjKQD8VAR1O01
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Agenda
1: The Demand for Experience Goods
2: Production, Costs, Markets, Vertical Integration
3: Contracts, Boundaries of the Firms, Conglomerates,
Digital Entertainment Business Models
4: Intellectual Property: Laws, Movies, Books, Music
5: Markets: Sports, Art, Gambling, Theater, etc.
6: TV, Radio, Others
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Segments of The Entertainment

and Media Market
 Movies
 Television (Broadcast, Cable) and Radio
 Theater
 Publishing (Print, Electronic, Music)
 Music
 Sports
 Art
 Gambling
 Electronic Games (Internet)
 Amusement and Theme Parks
 Etc.
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E&M Is a Large “Industry”

 Entertainment $ 400b
 (Games, sports, clubs, …)
 Media $ 260b
 (Books, movies, radio, music,…)
 Total Economy $13,000b
 (2008, current $, all figures approximate)
 Entertainment and Media 5%
 Health Care 16.0%
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Aspects of Demand for

Recreation
 Trends in Consumption
 A Standard Microeconomic Model for Demand
 Problems Applying the Model to Experience
Goods
 Implicit prices and time constraints
 Derived demands and social capital
 Rational addiction
 Interdependent demands, fads and herding
 Winner take all markets
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The Long Run

Recreation Expenditure as a
Proportion of Income is Growing
Recreation as a % of Disposable Income 1929-
2005
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Spending on Recreation is
Growing
Per capita, real spending on recreation
and recreation services, 1929-2005

Partly driven by market

saturation and falling
prices (rising technology)
for entertainment durables
such as televisions.
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The Form of Recreation

Spending is Changing
Service Component of Recreation Expenditures
Service = Movies, Sports, … (passive) 1959-2005
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Time Is the Ultimate Constraint

 Consumers: Maximize U(Cons,Leisure)
 Pcons = Goods Prices
 Pleisure = Wage Rate
 Tradeoff: To consume more, we must work more, leaving less
time for leisure.
 The fixed amount of time is the binding constraint
 As Wage rises, leisure becomes more expensive
 As Income rises, leisure becomes more desirable.
 Net effect over time as wages and incomes rise?
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Allocating the Consumer’s

Budget
 Consumer Budgets
 Housing
 Transportation
 Food
 Clothing
 Medical and Physical Upkeep
 Recreation (and other stuff)
 Allocation Based On
 Relative prices
 Income
 Culturally influenced preferences
 Recreation competes for a growing budget.
 The budget has grown over time.
 Recreation’s share has grown over time.
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Consumer Spending by Income

Class
Health Care vs. Entertainment
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Consumer Spending Data

 8.5% of personal consumption on
entertainment
– Books and Magazines
– Music and videos
– Movies, etc.

 Almost $700 billion on entertainment in

2005; 21% on cable or satellite (17% in
2000)
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Global media consumption per week
Entertainment and Media

(PricewaterhouseCoopers 2010)
 Where is the growth 2010-
2014?
 Fastest growing region is:
– Latin America growing at 8.8 per cent compound annual rate
(CAR) during the next 5 years to US$77 billion in 2014.
 Next is:
– Asia Pacific is next at 6.4 per cent CAR through to 2014 to
US$475 billion.
 Then:
– Europe, Middle East and Africa (EMEA) follows at 4.6 per
cent to US$581 billion in 2014.
 Slowest:
– The largest, but slowest growing market is North America
growing at 3.9 per cent CAR taking it from US$460 billion
in 2009 to US$558 billion in 2014.

(PricewaterhouseCoopers, 2010)
E&M growth continues

Following a year of decline in 2009,

the global E&M market will grow
by 5.0 per cent annually
to 2014 reaching US$1.7 trillion,
up from US$1.3 trillion in 2009
(PricewaterhouseCoopers, 2010)
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Adding It Up
 Household income is not rising much
 Time spent working is steady or rising
 Time spent on recreation is not rising
 Budget allocated to:
– Entertainment, health are rising
– Food and clothing are falling
 Growing entertainment market is driven by
– budget reallocation
– changes in preferences.
– Changing technologies
 Demand in the recreational segment of the
economy is rising faster than overall output.
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Entertainment and Media: Markets and

Economics

The Market for Experience

Goods
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The Experience Economy

 What is it?
 Entertainment and media
 Information economics
 What is it?
 Just another industry
 Special characteristics
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The Economist’s Viewpoint

 Interesting features of a market
– Demand
– Supply
– Costs and Profits
– Pricing
– “Value”
– Market Outcomes: Structure, Prices, etc.
 Humdrum Goods vs. Experience Goods
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Toaster Market
 Functionality of the product
 Utilitarian nature of demand
 Individual consumers
 Benefits to consumers

Price Surplus Value

Demand
Q Quantity
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Cost and Profits in Toasters

 Costs of production
 Variable vs. fixed costs
 Cost characteristics
 Economies of scale
 Economies of scope
 Technological change
 Profit
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Market Outcomes

 Market power
 Monopoly
 Competition
 Branding
 Market segmentation
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The Economists View

of Markets for “Goods”
 The nature (and source of) demand for the
good
 Characteristics of production and delivery
to the consumer
 Elements that determines the price that a
consumer pays for the good
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Signature Features

of Experience
Goods
 Qualities that make them different from
humdrum goods
 The nature of demand
 What is the “good?” Not always obvious.
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Understanding Demand for

Experience Goods
 Differences between experience and
“humdrum” goods
 Motivation for consumption
 Aspects of demand
 Implications for markets
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Experience Humdrum
Goods Goods

 How do these markets differ?

 What do they have in common?
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Goods: Form and Function

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Goods: The Coolest

Computer Ever Made

Why did it fail the market test?

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?
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Market Leader

Also cool. Why did it pass the market test?

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Even More Cool

What differentiates this from

the coolest computer ever
made?
Most Cool!
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Shared Experience
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Shared Experience

Different from a book? How so – from the consumers viewpoint?

Same as a book? How so – from the economist’s viewpoint?
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The Antichrist
[T]he art film has been ghettoized as audiences have fragmented into niche
markets. The very notion of what a movie audience is has changed: how do you
arouse a public when many are no longer watching movies publicly, but
sitting at home in front of their entertainment centers? It's a powerful feeling to
share an audience's collective gasp, such as the one elicited by a startling suicide
in Michael Haneke's Cache’. That can't be duplicated in solitude. But
increasingly rare is the breakthrough movie, such as a Blue Velvet or a Brokeback
Mountain, that reaches a mass audience. These days we get our culture jolts in
daily, bite-size portions on YouTube or Facebook, a kind of viral fast-food diet of
scandal, easily digested and quickly forgotten. [David Ansen, Newsweek,
10/26/09, p. 48]
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Coffee as an Experience?
$5,00
$4,50
$4,00
$3,50
$3,00
$2,50 Price
$2,00
$1,50
$1,00
$0,50
$0,00
Commodity Good Service Experience
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Shared Experience (?)

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Tru
sh mp Experience?
Sh uttle push
for uttle a lux ed t
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lux its c ’s co ury ma
tur ury onv re p serv ke th
ne fea eni ass ice en
d a tur en e … e
pro es. ce, nger The w
fit. Tru not s ch
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Sh cos e it
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r
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Form vs. Function

Entertainment and Media: Markets and
Economics

End Class 1 – Part 1

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Economic Foundations
for Entertainment,
Media, and Technology

Special Features of the

Demand for Experience
Goods
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Understanding the Demand

for Experience Goods
 Differences between experience and
“humdrum” goods
 Motivation for consumption
 Aspects of demand
 Implications for markets
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Demand for a Good or Service

from the Consumer’s Viewpoint

Experience Utility Good

Good
Derived Shared Gasoline
Demand
Final Purely Shoes
Demand Internal
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Consumption of Experience
Goods

 Experience vs. Utilitarian Consumption

 Experience Goods - Motivation
 Purely internal
 Immediate utility (satisfaction)
 Rational addiction

 Interactive and interdependent

 Common interests - discourse
 Accumulation of social capital
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Experience Goods vs. Utility

Goods

The classical theory of demand falls short when

applied to markets for experience goods.
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Rational Addiction
 
Qi ,t  f Price, Income,  s ... Qi ,t 1 ,
t 1

The amount demanded depends on

the amount consumed previously.

 Acquired taste (opera, renaissance art, rap

music)
 Accumulated expertise – a capital stock
 This implies a decreasing demand elasticity (an
addiction).
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Economic Foundations
for Entertainment,
Media, and Technology

The Demand for

Experience Goods is
Strongly Influenced by
Interactions of
Preferences and
Consumption
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Social Capital Stock

Art Dali, Pollock, Monet, Picasso, Barnett, O’Keefe,
Warhol, Haring, Wyeth, Rembrandt, Klimt
Opera Pavarotti, Carmen, Tommy, Aida, Soap
Movies Gone with the Wind, Casino Royale, Kill Bill, Brave One
Theater Lion King, TONY, Rent, Blue Man Group, Hairspray
Books E. Leonard, J. Collins, W. Greene, S.Hawking, H. Clinton, Sarah Palin,
Dan Brown, T. Clancy, J. Grisham, T. Wolfe, J. Michener, Ann Coulter
Sports Yankees, Rugby, T. Woods, Super Bowl, Replay Camera,
Agassi, Lebron James, Hat trick, A-Rod, March Madness
Red Sox, NASCAR, Giants, Olympics,
Gambling Full House Blackjack Point Spread
TV Seinfeld, Jay Leno, Survivor, American Idol, You’re Fired, Olsen Twins,
CNN, History Channel
Politics (You name it)
Amusement Sky Diving Roller coaster Bungee jump
Media Time, Slate, People, Scientific American, The Economist, NYT, YouTube
Music Britney Spears, Norah Jones, BB King, Clapton, Grammys, Eminem,
VMA, Dire Straits, Billy Joel, Bonnie Raitt, Fleetwood Mac, Music Choice
Gadgets iPod, iPhone, Blackberry, Guitar Hero
Someone Else’s Capital Stock
Art Arnold Böcklin
Opera -
Movies The Truman Show, Tinklebell, Pulp Fiction, The Matrix
Theater -
Books Max Dendermonde, Simon Vestdijk, Gabriel García Márquez
Sports -
Gambling -
TV Martin Morning, Sesame Street, Mega Mindy, Kim Possible,
The Five, Phineas and Ferb
Politics -
Amusement Family games
Media NRC, Le Monde, Nice Matin, Dagens Industry, Wikipedia, Reuters
Music XFM, SlamFM, NonStopPlay.com, Radio4.nl, BBC World Service,
France Inter, DJ Tiesto, Yelle, Eminem, Queen, Michael Jackson,
Lionel Richie, ABC, Robbie Williams
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Social Capital Stock

Art
Opera
Movies
Theater
Books

Sports Yours?
Gambling
TV
Amusement
Media
Music
Any Others?
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The Social Capital Stock

 Functions it serves in the community
 Aspects – It is similar to other capital stocks
– Maintenance
– Depreciation
– Investment
 Implications for demand: A motivation for
consumption.
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TIVO Capital
TiVo has made me
realize that “pulling
the plug” rather than
recording shows
separates the TV
boycotter from the
rest of society. My
TiVo allows me to
contribute to
conversations
revolving around TV
rather than silently
observing them.
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Wal Mart and Social Capital

Public Choice (2009) 138: 109–136
Does Wal-Mart reduce social capital?
Art Carden · Charles Courtemanche · Jeremy Meiners

 Increase consumption of “humdrum goods”

with less external connectedness
 Reduce connection to the community by
lowering viability of small “local” businesses
 (Unfortunately, empirical data do not support
the hypothesis.)
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Interdependent Demands
· Bandwagon effect
· d(i) = f [price, other prices, Income, d(j)]
· Amount demanded depends on the amount others (are
known to) have purchased
· Applications
· Bestsellers (books, music, movies)
· Movies
· Electronic innovations
· This year’s hot toy
· Others?
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Bandwagons
Elasticity of demand increases as sales increase
Demand shifts outward as buyers see aggregate
sales rise.
Implication 1: Lowering the price brings large
benefits.
Implication 2: Advertising to increase demand
is likely to be very effective.
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Extreme Case: Concerts

 i d(i) = i d(i)[price, other prices, Income,D]
D = total demanded (observed by the consumer)
 Total demand depends on observed total demand
 Effect can produce positive relation between price and
quantity. (Note, not a “demand curve.”)
 For the concert, MC = 0 (or close to it)
 End result: Profit = revenue maximization may occur with
excess demand (fans outside the facility)
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Excess Demand
Paul McCartney’s (April, 2002) concert in Madison Square Garden
was sold out within two hours of the opening of the box office. A
representative of the Garden was asked what the effect of doubling
the $50 - $150 ticket price would be. Her reply: “It probably would
have taken three hours to sell out.”

A 1998 Spice Girls concert at the Garden sold out within minutes.
(http://www.eonline.com/News/Items/0,1,3245,00.html)

In the 2007 Reunion Tour: A subsequent Dec. 15 one-off show at

London's O2 Arena sold out in 38 seconds.
(http://www.livedaily.com/news/13609.html)
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Excess Demand for U2

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Network Externalities
· Utility from use of a good by a person depends on the
total number of people using the good.
· Applications:
· Telegraph
· Telephone
· Fax
· Cellular phone
· Operating system, word processor, etc.
· Implications: Monopoly? Natural? Desirable?
· This monopoly is demand based, not supply.
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Fastest Growing and Largest

Website on the Planet Until 2007
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150,000,000 members (…
160, … 170,…)
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Facebook

 The product
– Information Sharing
– Virtual Community
 It’s not just for the fun of it.
– Advertising sales
– Valuation
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Bestsellers and Blockbusters

 Herding behavior: Acting suboptimally (against one’s best interest) in response to
external information. (Lemmings)
 Information Cascades (Bikhchandani et al.)

D Payoff = +1, probability = 1/2

Public e
Yes
Signal c
i Payoff = -1, probability = 1/2
Private High: p > .5 s
Signal Low: p < .5 i
o
n
No: Payoff = 0, probability = 1
 Public signal = observed decisions of previous decision makers
 Consider a sequence of decision makers
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Blockbuster Movies
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Outside Information

IMDb

NetFlix
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Connecting Consumers:
Cinematch
PERSONALIZED MOVIE RECOMMENDOR PROVIDES
NETFLIX VISITORS WITH HIGHLY ACCURATE FILM
RECOMMENDATIONS BASED ON THEIR INDIVIDUAL
MOVIE TASTE HISTORY

http://www.nytimes.com/2008/11/23/magazine/23Netflix-t.html?hp=&pagewanted=all (11/23/08)
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Cumulative Advantage

“It sold well because lots of

people bought it.”
The Publisher
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A Theory of Justin Timberlake’s

Cumulative Advantage
[W]hen people tend to like what other people like, differences
in popularity are subject to what is called “cumulative advantage,” or the
“rich get richer” effect. This means that if one object happens to be
slightly more popular than another at just the right point, it will tend to
become more popular still. As a result, even tiny, random fluctuations
can blow up, generating potentially enormous long-run differences
among even indistinguishable competitors — a phenomenon that is
similar in some ways to the famous “butterfly effect” from chaos theory.
Thus, if history were to be somehow rerun many times, seemingly
identical universes with the same set of competitors and the same
overall market tastes would quickly generate different winners:
Madonna would have been popular in this world, but in some other
version of history, she would be a nobody, and someone we have never
heard of would be in her place.

Duncan Watts study in NYT. (4/15/07)

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No Longer a Fad
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Inference from Cascades

Model
 Cascades occur as individuals substitute
others’ actions for their own private
information
 Outside information comes from
certifiers (critics, film buffs)
 Cascades should occur most of the time.
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Cascades and Experience Goods

Why are experience goods susceptible to
herding, cascades and fads?
 Can’t assess quality without consuming
– Limited value of advertising
– Inherent uncertainty in consumption
 Social capital aspect of consumption
– Network effects
– Membership and social standing
 Sources of outside information – critics and certifiers
– Riskiness of critical information – endogeneity of reviews
– What role do prizes play? (Oscars, MTV Video Awards?)
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Creating Cascades
And ….

 The Discipline of Market

Leaders (1995). The authors
secretly purchased 50,000
copies from bookstores
whose sales drive the New
York Times best seller list.
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The Roles that Critics and

Experts Play
 Critical acclaim
– Academy Awards, All time best list, “100 Must See Films of the 20 th
Century”
– Booker Prize in publishing
– Music competitions

 Rewards = f(acclaim)
 Or, acclaim = f(rewards)
 Why do we have the academy awards?
 (“Awards, Success and Aesthetic Quality in the
Arts: Ginsberg, JEP)

Smart Money Magazine: March 8, 2010

http://www.smartmoney.com/investing/stocks/The-Oscars-A-Corporate-Scorecard/?print=1
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Winner Take All Markets

The Winner-Take-All Society, Frank, R., Cook, P., Penguin, 1995.

“The entire planet can

get along nicely now
with maybe a dozen
champion performers
in each area of human
giftedness.” (Kurt
Vonnegut, Bluebeard,
1987.)

Sherwin Rosen, “The Economics of

Superstars,” AER, 1981.
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A Winner Take All Market

Of the top 50 best sellers of all types in 1990-
1998, 43 were novels and 41 of them were by
John Grisham, Stephen King, Danielle Steele,
Michael Crichton, Tom Clancy, and Mary Higgins
Clark. Together, they sold just under 200,000,000
books.

Any others? (James Patterson: 20,000,000)

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Winner Take All Markets

 A characteristic of winner take all markets:
Barely perceptible quality difference spells
the difference between success and failure.
 Tiger Woods
 The one stroke difference between #1 and #40 in golf
 Opera – Pavarotti(?)
 The iPod
 Google?
 YouTube?
 Others?
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Elements of Winner Take

All Markets
 Network externalities (books), cascades and
“tipping” in markets
 First mover/success (Windows plug-ins, AOL
Instant Messenger, iPod, Google?)
 Production cloning and economies of scale
 Risk avoidance by consumers
 Consumers’ desire to accumulate common
social capital
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A Theory of Winner Take All:

Rosen on Superstars

 Empirical regularity: skewed

distribution of income in talent based
industries

 Underlying conditions of demand and

supply combine to produce this result.
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An Economics of Superstars
 What creates the skewness in the distribution of
rewards?
– Uneven distribution of talent
– Huge economies of scale in production of “quality” in
performance
– Huge economies of scale in the delivery of performance
– Relatively low cost of purchasing marginal increases in quality
of performances at market equilibrium.
– Result: rewards increase more than proportionally with
increases in talent.
 Implications?
– Winner take all markets.
– Investment by promoters in relatively few “acts”
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Winners Take All?

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Employing a well known

theorem:
$240M/0.016 = $15.0B

www.msnbc.com/id/21458486/
 25/47

Worth $15 Billion. Why?

End Class 1 – Part 2