Financial Management of Media Firms - Key Issues, Theories, and Case Evidence

Media XXI, FormalPress, Lda.,Rua Prof. Vitor Fontes, 1600-670 Lisbon

[email protected]

Special Issue Research Report

Financial Management of Media Firms –Key Issues, Theories, and CaseEvidence

Prof.Dr. Paul Murschetz, MSc.Murschetz Media Consulting Salzburg / Cologne

1 May 2006

Interim Report

Trends in Labour Market in the Media Sector in EU 25

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Financial Management of Media Organizations

AcknowledgementsThis report was prepared by Paul Murschetz on behalf of FormalPress, Lda.,Lisbon.

ContactFor further information about this Report please contact:

Paul Murschetz Research consultantMurschetz consulting, Salzburg/AustriaPillweinstr. 4, 5020 Salzburg, [email protected]

Paulo FaustinoGeneral ManagerMedia XXI, FormalPress, Lda.,Rua Prof. Vitor Fontes, 1600-670 Lisbon

Rights RestrictionsMaterial from this report can be freely used and reproduced but notcommercially resold and, if quoted, the exact source must be clearlyacknowledged.

Lisbon, May 2006


Table of Contents

Executive Summary..................................................41 Introduction to Financial Management of the Media..............5

Study objectives and research questions.......................8Methodology and study organization............................9

2 Financial Management of Media Organizations – Key Issues......102.1 General issues – The impact of competition on firm

performance.............................................102.2 Specific issues of financial media management...........162.3 Further theoretical approaches to financial media

management..............................................212.4 Financial indicators and measures of firm performance. . .232.5 Strategic responses of media companies..................26

3 Financial Management in Media Practice – Case Evidence........32Case Study A: http://DerStandard.at – The Internet success for

quality news publishing.................................32Case Study B: ORF – The Austrian Broadcasting Corporation

exploiting cross-media financial strategies.............374 Conclusions...................................................42

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Executive Summary

Research background and objectiveThe research study project “Financial Management of Media Firms –Key Issues, Theories, and Case Evidence” (in the followingabbreviated as ‘the study’) will research and analyse key issues offinancial economics and financial management of the media sector. Itwill introduce fundamental concepts of financial economics andfinancial management of the media sector, present the vocabulary offinancial economics and financial management and as applied to themedia sector, present key issues and main principles of financialmanagement of media organizations, and offer analytical reasoningfor the impacts of general socio-economic forces on firm performancein the media sector. Further, this study will present two best-practice case studies in the media sector in order to testtheoretical issues discussed against empirical evidence.The study must be regarded as an exploratory pilot study of mappingthematic issues regarding financial management in general and themedia in particular. Main objective is to introduce key theoreticalissues of financial economics and financial management of the mediasector and to test these issues against two selected best-practicecase studies in the media sector. By this, this study providestheoretical and empirical analysis of financial economics andfinancial management of the media sector in order to understand thefollowing multi-levelled key issues in more detail:

(a) Impacts of competition on media firm performance asviewed from an Industrial Organisation theory perspective

(b) Potential behavioural responses of media firms as viewedfrom a media economics perspective

(c) Sources of finance of off-line and online media firms inselected industry sectors as possible responses to requiresufficient funding for their operations

(d) Specific theoretical issues of financial media management(e) Background theories to explain issues of financial media

economics and media management(f) Indicators and measures of firm performance as adapted

for the media sector, and(g) Issues of strategic management in general and marketing

management in particular

5 Interim Report, 1 May 2006


ResultsThis study defines financial management in a broad sense. This meansthat while financial management theory in general is concerned withthe “acquisition, financing, and management of assets with some overall goal in mind”(Van Horne & Wachowicz 2001, p. 2), this study proposes the viewthat financial management of media firms needs to be defined morebroadly. A proper definition needs to include issues of governance,marketing, and competitive strategy. This said, the decisionfunction of financial management can not only be broken down intothree major areas: the investment, financing, and asset managementdecisions, but, following the American Marketing Association, mayview financial management in a broader way as an “organizational functionand a set of processes for creating, communicating, and delivering value to customers andfor managing customer relationships in ways that benefit the organization and itsstakeholders” (American Marketing Association, website).Only few scholars in media economics and media management researchoffer analytical reasoning and explanations for issues ofinvestment, financing, asset management, governance and firm valuecreation processes for media firms. This study has laid thegroundwork for analysing theoretical issues in financial mediamanagement. It looked into the theoretical offers of the theory ofthe firm and the Industrial Organisation model of competition toset-up a theoretical framework for effects of financial mediamanagement on competition. Further, it identified a set of othertheoretical approaches well applicable to the field of financialmedia management such as theories of ownership control and itseffects on media performance, financial commitment and financialcontrol, resource dependence theory, and corporate governancetheory. Case studies on the financial management practices ofmass media firms revealed that, in fact, print andbroadcasting media apply various sets of management andmarketing practices to become economically and financiallyviable organizations.This study showed that able to show that the Internet’s impact onthe content utilization chains of a traditional print mediapublisher manifests itself in various ways. It identified a set ofnew revenue-generation practices, whereby the media firm studiedexploited its content wealth and unique selling propositions (USPs)for its online representations. As for the second best-practice casestudy, the ORF’s positive economics is mainly accounted for by wellaccepted informational programming, programming of low-cost US-feature films and series, exclusive sports transmissions and anoverall successful ‘Austrification’ of programmes. Further, Internetstrategies, cross-media marketing strategies, and digitization as

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innovation strategy make for a strong Public Service Broadcaster inthe future.



1 Introduction to Financial Management ofthe Media

Chapter overview

The following chapter will: Introduce fundamental concepts of financial economics and financial management of the

media sector.

Present the vocabulary of financial economics and financial management and as appliedto the media sector.

Define objectives and selected methods for the present study.

Offer a set of research questions which will guide this study and will be answered in theconcluding chapter.

Give a brief overview of the organisation of this present study.

The economics and financing of media companies is a central issue inmedia management research and practice. According to Picard (2002,p. xi), “the economics and financing of media companies are the foundations uponwhich all media activity takes place. Regardless of cultural, political, and social roles andexpectations for media, media must cover their costs and create returns, just as any otherbusiness, or they will wither and disappear. The forces that require effective operation arethe same for both private media and non-commercial media such as public servicebroadcasting”.The financial requirements of varying types of media operationsaffect the forms and structures of media firms, as do the scale andscope of their operations (see, Picard 2002, p. 2-3). The three mostcommon legal forms of business organization are sole proprietorship,the partnerships, and the corporation. Sole proprietorship is a formof business owned by one person and operated for his or her ownprofit. A partnership is a business owned by two or more people andoperated for profit. A corporation is an artificial being created bylaw (often called a “legal entity”) (see, Gitman 2003). Because theneeds of media differ and because of the organizational requirementsto create media goods and services vary depending upon theirmarkets, the sizes of media organizations cover the range from smallto large.Media organizations are guided by specific goals-sets. These goalsinclude cultural goals, as well as economic goals such asefficiency, effective organization of resources and processes,profit maximization, economic growth, and economic stability.

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Profit maximization as primary firms goal: The traditional ‘Theoryof the Firm’ which studies the behaviour of firms with respect tothe inputs they buy, the production techniques they adopt, thequantity they produce, and the price at which they sell theiroutput, asserts that the development and operations of firms isguided by the primary goal of maximizing profit and the value of thefirm (Coase 1937, Crew 1975, Jensen & Meckling 1973). The purpose ofthe creation and operation of commercial media firms is thus toproduce the most profit and the highest value for the firm. Theformer tends to be a short-term annual perspective, while the latteris a longer-term goal. If resources and the processes by which theyare transformed into goods and services are efficiently andeffectively organized and managed, the ability to achieve thesegoals becomes possible.1

What is profit? Profit is a primary goal of firms. Profit is definedas a “measure of surplus by a company from some activity or project over some timeperiod” (Bannock et al. 2002). Bannock et al. (2002, p. 293) continueas follows: “While simple at first sight, profit has a number of definitions, and is farfrom simple in practice. In an accounting sense of the term, two important concepts of profitare: (a) net profit before tax (or pretax profit), which is the residual after reduction of allmoney costs, i.e. sales revenue minus wages, salaries, rent, raw materials, interest paymentson loan, and depreciation, and (b) gross profit, which is net profit before depreciation andinterest. In other words, economic profits are equal to total revenue minus total cost”.Thus, a profit-maximizing firm chooses to produce at an output levelor price that maximizes the difference between total revenue andtotal cost (Hoskins et al. 2004).For commercial firms, profit creates the money available to paytheir owners or investors, make capital expenditures, and pay debts.For non-commercial media, ownership/investor do not receive theprofit, but it provides funds to improve the company through capitalinvestments, make additional expenditures on content and otheritems, and pay debts (Picard 2002). To investors, revenue is lessimportant than profit (which in US business, somewhat confusingly,often is called income), which is the amount of money the businesshas earned after deducting all the business’s expenses.There is a difference between economic profit and accounting profit.Economic profit is different from the profit that a business mightdeclare in its accounts, which might typically exist of someeconomic rent plus normal profit, i.e. a return that justcompensates the producer for the opportunity cost of the capital andentrepreneurship that it provides.2

1 Some critics of this theory have argued that the rise of modern corporations andthe separation of management and ownership may lead to objectives other than profitmaximization such as firm growth, or management utility (Klein 1998).2 Opportunity cost is a ubiquitous concept and can be translated as the value thathas to be given up – a lost opportunity – as a result of a decision. It ensures



The role of profit: Profit measures the return to risk when makingan investment. The role of profit in capital investment decisions isexplained by the risk theory of profit (Knight 1921). This arguesthat the potential for high economic profits is necessary to induceinvestment, especially in industries with higher risk. As a result,firms operating in these industries require above-average returns,or the capital will move to other more profitable investments(Picard 2002).The role of profit in the media sector: The media sector is not“naturally” profit-driven. Some industries in the sector areregulated by law to operate as not-for-profit firms. For example,broadcasting law imposes specific income restrictions on mediacompanies. In addition, media companies have to pursue other goalsthan profit maximisation such as cultural and social goals as partof their public remit.Financial economics: Financial economics is the branch of economicsstudying the interrelation of financial variables, such as prices,interest rates and shares as opposed to those concerning the realeconomy. Besides studying financial market and instruments,financial economics is concerned with issues of asset valuation,i.e. the determination of the fair value of firm assets (cash, bankdeposits, bills receivable; land buildings, plant, machinery;intangible assets such as patents, goodwill). This asset valuationinvolves questions such as: ‘How risky is the asset?’(identification of the asset appropriate discount rate), ‘What cashflows will it produce?’ (discounting of relevant cash flows), ‘Howdoes the market price compare to similar assets?’ (relativevaluation), and ‘Are the cash flows dependent on some other asset orevent?’ (derivatives, contingent claim valuation).Financial management: Financial management is concerned with theacquisition, financing, and management of assets with some overallgoal in mind (Van Horne & Wachowitz 1997). According to Picard(2002), “financing involves meeting the monetary needs of a firm so that it may beestablished, operated, and developed. Issues of financing range from creating sufficientfunds to establish a firm, to obtaining money to pay for operations, to gathering funds tofund growth” (p. 154). The essential objective of financial managementcan be categorized into two broad functional categories: recurringfinance functions and non-recurring or episodic finance functions,defining the functional role of a financial manager. This time-perspective gives financing issues a specific note: they need tounderstand the financial flow in the firm. In this context, criticalissues are cash flow management, credit management, investmentdecisions, and financing decisions (Alexander et al. 1993).

that the price of every input to production is charged at the price equal to itsvalue in its best alternative use.

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According to Bradley (cited in: Gitman 1999, p. 8), “financialmanagement is the area of business management, devoted to a judicious use of capital anda careful selection of sources of capital, in order to enable a spending unit to move in thedirection of reaching its goals”. This definition points to the fouressential aspects of financial management:

Financial management is a distinct area of business management,i.e. financial manager has a key role in overall businessmanagement.

Prudent or rational use of capital resources, i.e. properallocation and utilization of funds.

Careful selection of the source of capital, i.e. determiningthe debt equity ratio and designing a proper capital structurefor the corporate.

Goal achievement, i.e. ensuring the achievement of businessobjectives viz. wealth or profit maximization.

Academic reasoning in financial management for the media is sparse.Discipline development could be undertaken alongside traditionaltopic heading such as (Van Horne & Wachowitz 1997):

Introduction to financial management for the media Valuation of assets Tools of financial analysis and planning of media operations Working capital management Investment in capital assets The cost of capital, capital structure, and dividend policy Intermediate and long-term financing of media operations Special areas of financial management for the media

The role of a financial manager: The role of a financial manager canbe best understood by analyzing the definition of financialmanagement. Following (Gitman 2003, p. 3), “financial managers activelymanage the financial affairs of any type of businesses – financial and non-financial, privateand public, large and small, profit-seeking and not-for-profit. They perform such variedfinancial tasks as planning, extending credit to customers, evaluating proposed largeexpenditures, and raising money to fund the firm’s operations. In recent years, the changingeconomic and regulatory environments have increased the importance and complexity of thefinancial manager’s duties. As a result, many top executives have come from the financearea”.Treasurer and controller: Corporate organizations differ betweentreasurer and controller. The treasurer is the firm’s chieffinancial manager, who is responsible for the firm’s financial



activities, such as financial planning and fund raising, makingcapital expenditure decisions, and managing cash, credit, thepension fund, and foreign exchange. The controller is the firm’schief accountant, who is responsible for the firm’s accountingactivities such as corporate accounting, tax management, financialaccounting, and cost accounting.Relationship to accounting: The firm’s finance (treasurer) andaccounting (controller) activities are closely related and generallyoverlap. Indeed, managerial finance and accounting are not ofteneasily distinguishable. In small firms the controller often carriesout the finance function, and in large firms many accountants areclosely involved in various finance activities. However, there isone major difference between finance and accounting: theaccountant’s primary function is to develop and report data formeasuring the performance of the firm, and the financial manager’sprimary function is to evaluate the accounting statements and makedecisions on the basis of their assessment of the associated returnsand risks.The financial manager must understand the economic environment andrelies heavily on the economic principle of marginal analysis tomake financial decisions. The marginal analysis is a principle ineconomics that states that financial decisions should be made andactions taken only when the added benefits exceed the added costs.Financial managers use accounting but concentrate on cash flows anddecision making.In addition, managerial finance involves separate further types ofpositions and functions within a business firm: (a) the financialanalyst, who primarily prepares the firm’s financial plan’s andbudgets. Other duties include financial forecasting, performingfinancial comparisons, and working closely with accounting; (b) thecapital expenditures manager, who evaluates and recommends proposedasset investments and may be involved in the financial aspects ofimplementing approved investments; (c) the project finance manager,who arranges financing for approved asset investments, coordinatesconsultants, investment bankers, and legal counsel in large firms;(d) the cash manager, who maintains and controls the firm’s dailycash balances; (e) the credit analyst, who administers the firm’scredit policy and evaluates credit applications, extending credit,and monitoring and collecting accounts receivable; (f) the pensionfund manager, who oversees or manages the assets and liabilities ofthe employees’ pension fund; and (g) the foreign exchange manager,who manages specific foreign operations and the firm’s exposure tofluctuations in exchange rates (Gitman 2003).

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Study objectives and research questionsMain objective: Main objective of this study is to introduce keytheoretical issues of financial economics and financial managementof the media sector and to test these theoretical issues against twoselected best-practice case studies in the media sector.By this, this study provides theoretical and empirical analysis offinancial economics and financial management of the media sector inorder to understand the following multi-levelled key issues in moredetail:

(h) Impacts of competition on media firm performance asviewed from an Industrial Organisation theory perspective

(i) Potential behavioural responses of media firms as viewedfrom a media economics perspective

(j) Sources of finance of off-line and online media firms inselected industry sectors as possible responses to requiresufficient funding for their operations

(k) Specific theoretical issues of financial media management(l) Background theories to explain issues of financial media

economics and media management(m) Indicators and measures of firm performance as adapted

for the media sector, and(n) Issues of strategic management in general and marketing

management in particular

Research Questions: The following general research questions guidethis study:

1. RQ1: Which socio-economic forces influence firm performance inthe media sector?

2. RQ2: Do new information and communication technologies have animpact on firm performance?

3. RQ 3: Which sources of finance are vital for viability andsustainability of operations?

4. RQ4: Which specific fields may guarantee financial viabilityand sustainability?



5. RQ4: What background theories do explain the relations betweenstructure, firm conduct, and performance of firms in the mediasector and the impact of these factors on financial management?

6. RQ 5: Which indicators and measures are used to show thefinancial performance of media firms?

7. RQ6: What role does strategy play in market positioning offirms in the media sector?

8. RQ7: What role does marketing strategy play in strengtheningthe financial position of firms in the media sector?

Methodology and study organization

Selected research methods: The analysis will apply a set oftheoretical and empirical methods: scientific literature review,study of business reports and industry data, and case studyresearch.

Literature review: We apply a scientific literature review,i.e. a documentation of a comprehensive review of thepublished academic and practitioner’s work from secondarysources of data in the areas of interest.

Study of other written material: We will study other datasources to include published and unpublished documents, expertreports, industry data, company reports, memos, letters, andnewspaper articles.

Case Study research: We explore particular cases by applyingthe case study method. Single-case studies of financialmanagement in media organization are analyzed as an empiricalvalidation of our approach.

Study organisation: This study is organized alongside the followingthree main chapters, according sub-chapters, and a referencesection:

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Chapter 1 Introduction – Fundamentals, study objective, methodology

Chapter 2 Financial Management of Media Organisations – Key issues

Chapter 3 Financial Management of Media Organisations – Case Evidence

Appendix References



2 Financial Management of MediaOrganizations – Key Issues

Chapter overview

The following chapter will: Present key issues and main principles of financial management of media organizations.

Offer analytical reasoning for the impacts of general socio-economic forces on firmperformance in the media sector including competition, market forces, cost forces,regulatory forces, and barriers to entry and mobility.

Analyse specific issues of financial media management such as sources of revenue, start-up financing management, cash flow and credit management, and investmentmanagement

Discuss background theories of financial media management, and

Present key indicators and measure of firm performance

Introduce theories and key issues of strategic responses of firms to market challenges andopportunities, and

Depict marketing strategies as specific firm responses to market pressures

2.1 General issues – The impact of competition onfirm performance

According to Picard (2002), four major drivers of change areaffecting media operations and put pressure on choices of managersof media firms to develop appropriate responses to them: (1) marketforces, (2) cost forces, (3) regulatory forces, and (4) barriers toentry and mobility. Picard (2002, p. 48) defines “market forces as externalforces based on structures and choices in the marketplace. Cost forces are internal pressuresbased on operating expenses of firms. Regulatory forces represent the legal, political, andself-regulatory forces that constrain and direct operations of media firms. Barriers representfactors that make it difficult for new firms to enter and successfully compete in a market”.In the following paragraph, these four categories of market forceswill be described and impacts for financial media management will beintroduced and discussed. Additionally, this chapter will introducethe impact of technology as main driver of market changes and itspotential impacts in financial management of the media.

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Market forces

Competition: The theory of the firm forms the basis of theindustrial organization (IO) model that provides an analyticalframework for examining competition in the media and otherindustries. Most media economics texts follow the IO model using theSCP-paradigm. This paradigm posits a causal relationship betweenmarket structure, conduct and performance. Market structuredetermines the conduct of firms, which in turn determines industryperformance.

Exhibit 2-1: The Structure-Conduct-Performance paradigm, variables and relationships


Micro dataLegal form

Organization structure

Leadership

Market structureNumber of sellers and buyers

Market sharesProduct differentiation

Economies of scale

Entry and exit barriers

Market phase

Market conductPrice and product policy

Marketing

Innovation

Market resultAllocative efficiency

Productive efficiency

Diversity of opinion

Macro data

Competition policy

Business cycle policy

Technology policy

Source: Berg 1999.


Factors of competition: Of the factors that determine competition,market structure usually takes precedent. It involves threecharacteristics: (1) the number of sellers, (2) the nature of theproduct, and (3) barriers to entry (Picard 1989). The number ofsellers can range from many, as in models of pure competition, toone, the condition of monopoly.Economic theory states that competition exists when buyers cansubstitute one product for another. This willingness to substitutedepends on several factors, such as price, price of substitutes,quality of products, income and degree to which various productsprovide the consumer with equivalent services. With news media, fewproducts are perfect substitutes because readers add to the meaningby interpreting content and develop preferences for specific bundlesof information, such as particular newspapers. Because of thesepreferences and the utility they provide, newspapers and all mediado not fit well the assumptions of classic economic theories ofperfect competition (Lacy 2004).Classic models of competition suggest there are many firms in amarket, each selling an identical product. Each firm also paysidentical costs to produce its product. Consumers want to buy theproduct at the lowest possible price, and it doesn’t matter whichfirm produces the product. Any firm that increases its price losescustomers who switch to another firm selling the same product at alower price. Each firm’s product is a perfect substitute for anyother firm’s product. Firms cannot influence competitors and areforced to sell at a price that just covers their costs. Marketconditions must change before firms can increase prices withoutlosing all of their customers. If only a few firms compete, eachindividual firm’s actions will influence the response from otherfirms. In oligopolistic markets firms might agree to raise pricesabove production costs, earning excess profits. Explicit pricingagreements are illegal, so oligopolists must depend on tacitunderstandings to maintain pricing discipline. However, suchagreements are unstable, and individual firms will violate theseunderstandings if they believe they can gain an advantage.Newspaper markets tend to be either oligopolistic ormonopolistically competitive. The nature of the product refers toits substitutability. While products under pure competition differonly in price, competition under monopolistic competition is basedon product differentiation and advertising. Barriers to entry cantake on several forms, from technology to regulation to illegalbehavior of firms. Lacy (2004) has studied the relationhsip of competition,circulation, and advertising on the performance of daily newspapers.According to Lacy, economic theory and research provide evidence

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that intense newspaper competition among newspapers will result inincreases in newsroom budget, changes in content and decreases inadvertising cost per thousand. However, empirical evidence is lessstorng that competition decreases subscription prices. Considerablevariations across newspapers can be found with all theserelationships, which represent a variety of managerial decisions.However, the following general statements are supported by Lacy’s(2004) research:

Intense newspaper competition increases expenditures in thenewsroom and improves journalism performance.

The increased expenditure and performance translates intochanges in content and improvements in quality aimed atattracting readers.

The relationship between these content changes and circulationgrowth is not perfect. However, evidence suggests qualitycontent can attract readers and that failure to provideacceptable levels of quality and content will lead to declinesin circulation and penetration.

Competition for advertising decreases the cost per thousandthat advertisers pay newspapers for at least some forms ofadvertising. At least some advertisers see other media assubstitutes for some forms of newspaper advertising,especially retail advertising. The number of advertisers whoaccept this seems to be growing. At some point, rising costper thousand probably leads to businesses moving theiradvertising to other media, although this is just one factorin the substitution.

Clustering reduces competition and affects content andadvertising prices.

As a result, market performance is impacted by these relationshipsand dynamics. As put forward by Lacy (2004, p. 33), “as readershipdeclines and the cost per thousand increases, advertisers will be more likely to switch toimperfect substitutes. If ad lineage declines, newspapers that want to maintain profitmargins will either have to increase ad prices or maintain revenue or cut newsroom andother expenses to control costs. In the former case, the probability of advertisers’ seekingsubstitutes increases. In the latter, quality declines will cause readers to leave, increasing thecost per thousand. As cost per thousand increases, businesses are more likely to substituteother forms of advertising”.Lacy (2004, p. 34) continues as follows: “Newspapers often take advantageof declining competition to enhance short-term profits. However, this is a strategic choice.According to economic theory, businesses that cut quality and pursue aggressive pricingpolicies can invite competition. A recent study of the relationship between type of dailyownership and existence of weekly competition in a county found that counties with publicly



owned dailies or no dailies averaged about one more weekly newspaper than did countieswith privately owned dailies. Because publicly owned dailies tend to cut newsroom budgetsand price aggressively, this exploratory study suggests that dailies might be inviting weeklycompetition through short-run pricing and content strategies”.Changes in consumer demand: There is a multitude of factors forchange in consumer demand in printed products. Lifestyle changes andthe focus individuals place on their leisure time have changed.There has also been a reduction in the number of younger peoplereading newspapers as new communications channels continue toproliferate. Individual working patterns continue to change either.Further, there are visible demands for higher performance from mediaproducts, through higher quality, personalisation of services orother means. To leverage consumer trust, media publishers areadvised to build on their potential strengths in branding andcustomer relationship management in print and new online markets.Changes in the value chain: The media publishing value chain isinformed by a variety of different market players who contribute toadding value to information-based products and services underspecific competitive and environmental conditions. A set of newaccess, service and technology providers have entered the scene inthe media sector. These new providers put pressure on incumbents,some forward-integrate their businesses and thus increase horizontalsupplier market power while others become vertically integrated anddifferentiate-out into key specialists in niche markets. On theother hand, these challenges open ways for new supply chainpartnerships.Changes in customer relations: Today, a new business model isemerging: electronic networks and markets allow the break-up of whatpreviously thought to be firmly controlled value chains. The valuechain looses its chain attributes, and is replaced by flexiblerelations, so-called ‘value webs’ (Reichwald et al. 2004). Byintegrating customers into market research and product developmentactivities, companies can get efficient support to improve productsfor more customer satisfaction as well as to identify new sources ofrevenue. Equally, the role of the customer is changing from a pureconsumer of products or services to a coequal partner in a processof adding value - consumers are becoming co-producers and co-designers. Both e-business partners are tied together in these valuewebs. Mass customisation as pre-condition of customer integrationmay result in economies of integration which may lead to productinnovation, lower transaction costs, more precise information aboutmarket demands, and increase in brand loyalty by directlyinteracting with each customer. In practice, the Publishing andPrinting industry sector needs to improve supplier-customerrelations in order to strengthen market position in an increasingly

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dynamic market environment. Individualisation, personalisation, andcustomer integration are achieved by integration of CRM-systemsolutions and direct marketing tools.Competitive pressures: Publishers are facing increased pressuresfrom competition through market players within the sector (e.g., inpublishing through the increasing number of ‘free sheets’ in majorcities) and from other sectors moving into the industry. These newcompetitors apply new ICTs to enter core publishing fields todistribute their content. To counter customer churn, branding is aneffective counter measure and strengthens customer loyalty.Additionally, the general macro-economic situation greatly affectsthe media industry (Picard 2002). A bad economic situation triggersa decrease on advertising spend on print products as well as ondirect consumer sales and the level of circulation. Particularly thejob, housing, and car advertisement markets are increasingly readonline and mostly for free. Overall, there is potentially increasedcompetition in shrinking markets.

Cost forces

A variety of forces related to the costs of operations playimportant roles in the economics of media. These include input costssuch as costs for newsprint or personnel, production costs, anddistribution, marketing and advertising costs of media goods andservices. Total costs of production can be divided into fixed andvariable costs, the former being those costs that are incurredregardless of the volume of production, the latter varying withoutput. As Picard (2002, p. 56) has put it: “Television stations have basicexpenses for facilities, studios, and transmitters that do change significantly whether thestation broadcast sixteen hours per day or twenty-four hours a day”. And: “A magazinethat increases its press run from 100,000 to 125,000 will incur additional variable cost forpaper, ink, production time, and distribution because of the added production. Conversely, ifit reduces its press run, those costs will be reduced” (ibid.). Transaction costtheory would assume that a major source of market failure is foundin the fact that transactions which would need to occur for the sakeof economic efficiency simply do not occur because transaction costsinterfere with or discourage the process of transacting. Examplesinclude the cost of writing contracts, or the cost of findingpartners with whom to trade. The costs of enforcing agreements, andthe costs of bargaining (Coase 1937, Coase 1960, Williamson 1985).Economies of scale and scope: As with other business functions,large enterprises tend to profit from economies of scale, i.e. costsavings to cause the average cost of producing a commodity to fallas output of the commodity rises. This generally results from



technological factors which ensure optimal size of production islarge. With high fixed costs in plant and machinery, the larger theproduction the lower the costs per unit of the fixed inputs. Largecompanies can afford to implement disproportionately more powerfulIT solutions in printing and publishing and achieve higher EoS.Economies of scope are cost savings that make it cheaper to producea range of related products by one single firm than to produce eachof the individual products by a single firm. In addition, largercompanies need to employ relatively fewer IT people (measured as %of the total staff) than small enterprises, even if the architectureof their ICT networks is much more complex. SMEs face barriers toentry into new markets which result from a lack of EoS, limitationsin access to high-quality printing, an inability to offer suitablepackages to advertisers and an inability to obtain finance at ratesavailable to larger publishers.

Regulatory forces

According to Picard (2002, p. 69), “regulatory forces involve approvals formedia operations or requirements placed on media to avoid or to behave in certain ways”.Regulatory forces may differ in degree, object, goal, and effects ofregulation.Market failure: Market failure or market imperfections are viewed asa necessary but not sufficient condition for governmentintervention. Hoskins et al. (2004) discussed theories of governmentintervention as applicable to the media industries: public interesttheory (Posner 1974) and capture theory (Stigler 1971). The publicinterest theory of regulation explains, in general terms, thatregulation seeks the protection and benefit of the public at large.This will maximize wealth and, hence, the size of the pie to beshared. The capture theory is that government intervention isprovided to further the economic interests of specific groups, suchas producers and labour unions. The theory has been particularlyapplied to intervention in the form of regulation, where it claimsregulators are “captured” by the industry they are regulating andintervene in ways demanded by industry. Additionally, the regulatorygame involves information asymmetry. Since the state does not runthe firm, it does not have the full information on how well or badlythe firm is performing.Government failure: Government failure is the case when interventionis undertaken when the costs of intervention are greater than thebenefits. This type of failure may occur because it is too costly toset up and operate the subsidy scheme, regulation, or other form ofintervention proposed.

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Barriers to entry and mobility

Barriers are defined as factors that make it possible forestablished firms in an industry to enjoy supra-normal profitswithout attracting new entry (McAfee et al. 2004, Bain, 1956).Without entry barriers there can be no long-run market power(Schmalensee 1988). Additionally, industrial organization (IO)theory has identified strategic behaviours working as entry barrierssuch as exclusive dealing and long-term contracts with retailers(Tirole 1988). Further, government regulation, patents, predatorypricing, economies of scale, customer loyalty, and investmentrequirements can act as barriers to entry too.The movie industry is a best-practice example for the existence ofbarriers to entry. There, the most obvious barrier for independentsto entry is the high cost of acquisition. Larger studios owe theirsurvival to ample resources, which afford them the ability toweather box office disasters. Small studios would not necessarily beable to survive box office failures. Major studios also have anadvantage in their ability to maintain distribution networks acrossthe country and in foreign markets. This ensures that their filmsget to theatres and television screens. Further, barriers to entryexist in huge marketing expenditures in opening a film in severaltheatres simultaneously, particularly on a national or world-widebasis. Importantly, intellectual property rights create apparentlystrong barriers to entry.Mobility barriers, on the other hand, are factors which impede theability of firms to exit an industry, or to move from one segment ofan industry to another.The following Exhibit 2-2 shows a typical industry analysis and thefactors impacting on the industry competitors as conceptualized byHarvard Business Professor Michael Porter (1980).



Exhibit 2-2: Industry Analysis following Michael Porter (1980)

Source: Porter 1980

As shown in exhibit 2-2 above, Porter (1980) identifies five forcesthat drive competition within an industry:

(1) The threat of entry by new competitors. (2) The intensity of rivalry among existing competitors. (3) Pressure from substitute products. (4) The bargaining power of buyers. (5) The bargaining power of suppliers.

One obvious application of all this is to would-be entrants and theproblem of entering new markets. Another is to the currentcompetitors and the ongoing task of staying competitive in marketswhere they already operate. Perhaps the most important thing to keep

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in mind is the inverse relationship between profit margins orreturns and the intensity of competition: as the intensity of competition goesup, margins and returns are driven down. This can require changes incompetitive strategy to remain in an industry and, under somecircumstances, it can occasion the decision to exit a business or anindustry (Nichols 2000).

Technology as market driver

Digitization is currently having sustainable impact on the mediaindustry sector. The sector is undergoing structural changes both interms of organizational processes and with respect to the type ofproducts and services which are produced, delivered, and consumed.Publishing has become a complex, multi-channel, rich-media contentdelivery business. Adoption and use of Internet-based and other ICTscauses companies to embrace new strategies, platforms, andinfrastructure and value chains. Publishers can place theirstrategic development and business modelling on content as theircore competence. However, to fulfil changing customer expectationsand requirements, Internet offers need to be more complex as opposedto the printed version and offer value added to consumers. The‘content’-business model can be supplemented by the ‘community’-business model whose viability is based on user loyalty. Further,publishers have been able to develop innovative business models forfinancing their Internet presence and other online activities, thusstrengthening the third pillar of business modelling ‘commerce’. Asshown in one of our case studies, traditional publishers can benefitfrom the Internet business model. Online advertising and onlineclassifieds can be a definite business opportunity for newspaperpublishers.Investment in information technology (IT): There is a sizeablestream of research examining the domain of the business value of ITinvestments (Melville et al. 2004). Early studies failed to find theexpected link between enormous increases in IT capital investmentson the one hand and productivity improvement on the other, leadingto the so-called “productivity paradox” (Brynjolfsson 1993).However, subsequent studies established that, in general,investments in IT capital do produce net efficiency benefits,although this varies depending on other factors such as managementpractices, and organizational and industry structure (Bresnahan etal. 2002). Also there is no assurance the investing firm, rather thancustomers or competitors, will capture the value of those efficiencyimprovements (Hitt & Brynjolfsson 1996).



2.2 Specific issues of financial media management

Sources of finance

Sources of finance: Most generally, media firms collect revenuesfrom sales in circulation of items sold or from sales in advertisingspace. Circulation is defined as the number of copies issued of anadvertising medium in print; by extension, the audience reached byother advertising media, outdoor posters, radio, and televisionprograms. Circulation sales in the print media can be made on thebasis of single-copy sales or on the basis of subscription. Single-copy sales are “newsstand sales” sold to customers at retail. Printmedia can also be sold on a subscription basis. Most single-copysales are made in supermarkets and other mass retail outlets. Manypublishers also distribute through specialty stores.As for advertising sales, media companies such as TV channels, cablenetworks or radio stations collect most of their revenues fromselling “eye-balls” through advertisement space during variousprogrammes. Similarly, print media companies sell advertising spaceto be filled in their outlets to readers and, accordingly,advertisers. Media work on dual markets: information/ideas marketsand advertising markets (Picard 1989). How these two markets areinterlinked is explained by the theory of the circulation spiral,originally proposed by the media scholar Lars Furhoff (1973). Themain point of this theory as applied to newspaper competition iswell synthesized by the following quotation by Gustafsson (1978, p.1): “The larger of two competing newspapers is favoured by a process of mutualreinforcement between circulation and advertising, as a larger circulation attractsadvertisements, which in turn attracts more advertising and again more readers. In contrast,the smaller of two competing newspapers is caught in a vicious circle; its circulation has lessappeal for the advertisers, and it loses readers if the newspaper does not contain attractiveadvertising. A decreasing circulation again aggravates the problems of selling advertisingspace, so that finally the smaller newspaper will have to close down”.Under this perspective, the key objective of the media revenuemanagement problem is to optimally allocate advertising space acrossupfront and scatter markets to hedge against audience uncertainty,honor client contracts and maximize short-term profits. Scattermarkets are the remnants of TV network markets of unsold commercialtime that remain after preseason upfront buying has been completed.New ICTs and e-business solutions have introduced a variety of newonline business models which are well applicable to newspaperpublishers. Prof. Rappa from North Carolina State University has

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systematized online business models as follows (see,http://digitalenterprise.org/models/models.html):

Brokerage: Brokers are market-makers: they bring buyers andsellers together and facilitate transactions. Brokers play afrequent role in business-to-business (B2B), business-to-consumer (B2C), or consumer-to-consumer (C2C) markets.Usually a broker charges a fee or commission for eachtransaction it enables. The formula for fees can vary.

Advertising: The web advertising model is an extension ofthe traditional media broadcast model. The broadcaster, inthis case, a web site, provides content (usually, but notnecessarily, for free) and services (like e-mail, chat,forums) mixed with advertising messages in the form ofbanner ads. The banner ads may be the major or sole sourceof revenue for the broadcaster. The broadcaster may be acontent creator or a distributor of content createdelsewhere. The advertising model only works when the volumeof viewer traffic is large or highly specialized.

Infomediary: Data about consumers and their consumptionhabits are valuable, especially when that information iscarefully analyzed and used to target marketing campaigns.Independently collected data about producers and theirproducts are useful to consumers when considering apurchase. Some firms function as infomediaries (informationintermediaries) assisting buyers and/or sellers understand agiven market.

Merchant: Wholesalers and retailers of goods and services.Sales may be made based on list prices or through auction.

Manufacturer: The manufacturer or ‘direct model’, it ispredicated on the power of the web to allow a manufacturer(i.e., a company that creates a product or service) to reachbuyers directly and thereby compress the distributionchannel. The manufacturer model can be based on efficiency,improved customer service, and a better understanding ofcustomer preferences.

Affiliate: In contrast to the generalized portal, whichseeks to drive a high volume of traffic to one site, theaffiliate model provides purchase opportunities whereverpeople may be surfing. It does this by offering financialincentives (in the form of a percentage of revenue) toaffiliated partner sites. The affiliates provide purchase-point click-through to the merchant. It is a pay-for-performance model -- if an affiliate does not generatesales, it represents no cost to the merchant. The affiliate


http://digitalenterprise.org/models/models.html


model is inherently well-suited to the web, which explainsits popularity. Variations include banner exchange, pay-per-click, and revenue sharing programs.

Community: The viability of the community model is based onuser loyalty. Users have a high investment in both time andemotion. Revenue can be based on the sale of ancillaryproducts and services or voluntary contributions.

Subscription: Users are charged a periodic - daily, monthlyor annual - fee to subscribe to a service. It is notuncommon for sites to combine free content with ‘premium’(i.e., subscriber- or member-only) content. Subscriptionfees are incurred irrespective of actual usage rates.Subscription and advertising models are frequently combined.

Utility: The utility or ‘on-demand’ model is based onmetering usage, or a ‘pay as you go’ approach. Unlikesubscriber services, metered services are based on actualusage rates. Traditionally, metering has been used foressential services (e.g., electricity water, long-distancetelephone services). Internet service providers (ISPs) insome parts of the world operate as utilities, chargingcustomers for connection minutes, as opposed to thesubscriber model common in the U.S.A.

Media firms may apply a range and combination of these businessmodels. In practice, publishing companies, for example, maybenefit from leasing software use as ASP (application serviceprovider) on a subscription basis rather than selling software andmaintenance to companies (the ‘subscription’-model). Or they mayprofit from models of selling archived newspaper articles to userson a per-use or subscription basis (the ‘utility’-model). Or theymay try to improve customer satisfaction through leverage ofcustomer loyalty programmes (the ‘Community-model). Overall,publishers try to achieve business growth coming from incrementalbusiness expansion through new online selling channels.

Start-up financing management

Financing issues of new companies and products is very important,because in the research and development stages there is no incomefrom consumers, and income begins slowly in the introduction stagebut is generally insufficient to cover costs.

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Financing is one of the most critical obstacles of new firm growth(Moore 1994, Berger & Udell 1998). Binks and Ennew (1996) show thatyounger and growing firms suffer more from credit constraints thanolder and non-growing firms. New firm’s equity position is very weakand debt financing is often impossible or restricted (Stiglitz &Weiß 1981). The higher risk of failure of young innovative firms andmissing tangible assets as collateral leads to credit rationing bylenders with the result of a funding gap.3

Media firms overall are not the most attractive for start-up anddevelopment financing because traditional media industries are notperceived as having the potential for growth. Most tend to berelatively unexciting to investors compared to high technology, bio-technology, and other industries that are perceived as modern andrising industries. The most attractive media-related firms today arethose involved in online and other new media activities, despiteproblems in their current finance (Picard 2002).The film production and distribution (i.e. movie) industry isparticularly strongly affected by issues of start-up finance. Inbrief, film productions are projects whose net value is notpredictable at the time of planning and production. Vogel has putthis relationship in simple words: “There is truly little, if any, correlationbetween the cost of a picture and the returns it might generate” (Vogel 1998, p.110). The film producer can not automatically sell his finishedproduct at a price which covers his costs and calculated return dueto the fact that film exploitation and sales at the box office arehighly uncertain. This makes the financial flow a very complicatedmatter. Producers, distributors and exhibitors have thus to agree onrisk-sharing financing arrangement procedures affecting all threeparties at an agreed, albeit different share (Eggers 2003).Instruments on offer are debt financing (e.g. credit financing, pre-sales contracts, completion bonds, gap financing and shortfallguarantees), internal financing means (e.g. film funds, co-productions), and further means of revenue (e.g., product placement,merchandising, blocked funds and debt equity, film subsidy) (Eggers2003, Hoskins et al. 2004, Vogel 1998).Sustainable finance in the film industry: According to Hahn andSchierse (2004), as licensee film distributors are prime taker ofthe price risk. Due to the uncertainty of the film’s theatreperformance, there is no guarantee that the license sum paid inadvance will amortize at the box offices. If a film does not find acinema audience, it will thus be the distributor hit hardest.

3 These lenders may be venture capital investors. Venture capital is private equityfinancing of companies by aggressive investors who seek substantially above averagereturns and accept correspondingly high risks (Gastineau & Kritzman 1992, p. 294).



Selling rights to TV channels is no licence guarantee either even ifrights were pricey. This is because the TV channels may have to safemoney and would not be able to afford the rights. Further, thedistributor carries the risk of terms of film delivery. He isdependent on the producer to deliver in time. Similarly, he carriesthe quality risk if he buys the film ‘blind’ prior to completion,only relying on a good script or simple treatment. Moreover, thedistributor carries the credit risk to deliver theatres with copiesand advertising materials before the exhibitor may achieve anyturnover at the box office. Building costs for new houses or highrents may cause exhibitors to stop paying their film rentals.Although the distributor may find a perfect release date, he alsocarries the risk of competing movies which were released earlier andbecame unexpectedly strong at the box office. Finally, film successis dependent on exogenous factors such as the overall economic trendor weather conditions. In times of a recession, for example,audiences may not attend the cinema. This will have obvious negativeeffects on possible value flows to the exhibitor and up-streamdistributor. Dally et al. (2002, p. 412) explain the businesspractices in film financing as follows: “Within a so-called “net profit deal”agreement, in which the distributor charges a fixed or graduated percentage of rentals (onaverage 30% in the U.S. domestic theatrical market) as a distribution fee and then advancesthe funds for other distribution costs, including those for prints, trailers, and nationaladvertising. The distributor commonly recovers these expenses before making any paymentsto the producer and would normally, before arriving at a definition of ‘net profit’, prioritizerecoupment by taking distribution fees and expenses first, then interest on negative costs,then negative costs, and finally deferments and various participations. Although this net dealpredominates, there is also a so-called “gross deal” wherein the distributor (usually of low-budgeted independently made and independently distributed films), is not separatelyreimbursed for distribution expenses, but instead retains a distribution fee (e.g., 50-70%)that is considerably higher than normal. Distribution expenses are then recouped out of thishigher fee, while the producer receives the remaining unencumbered portion of grossrentals”.

Cash flow and credit management

“Once a firm is established and cash flow has developed, it is still not unusual fro revenuefrom sales to be insufficient to meet all financial needs of the firm. This occurs because thefirm may need to invest in expensive equipment or purchase buildings, because the firm mayexperience seasonal fluctuations in income that do not provide sufficient revenue duringsome parts of the year to cover operating expenses, or because it may obtain an order thatrequires making a large initial expenditure that will be recouped only when the order iscompleted” (Picard 2002, p. 161).

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For example, a magazine company may find that it obtains the bulk ofits advertising revenue in two months during the spring and twomonths during the fall. If it has not reserved sufficient incomefrom those months for the lean months, it may need to seek financingto pay expenses during some of the other eight months of the year.Picard (2002, p. 167) further: “In addition to the capital and debt issues facedby companies, they also encounter issues involving cash that the firm receives from investorsand operations. Capital and revenue must be controlled to ensure its availability to pay forassets and future expense payments. Cash management involves the control of this cash in afirm’s account in such a way that it produces the best possible results for the company”.This involves making choices about cash availability (liquidity) andinterest income and choices about when to use the funds and for whatpurposes. Decisions are made regarding cash coming into a firm, cashleaving a firm, and cash held or invested.Picard defines credit management as follows: “Credit management involvesdeciding whether to issue sales or service credit, controlling the use of that credit, andcollecting the accounts” (Picard 2002, p. 161). Credit management in mediafirms involves controlling sales credit for customer purchases ofadvertising space and time, and service credit for purchases ofsubscriptions for media products by audiences. Credit managementissues involve credit evaluation, credit risk management,collection, bad debt, and credit reporting (Picard 2002).

Investment management

In addition to ongoing involvement in financial analysis andplanning, the financial manager’s primary activities are makinginvestment decisions and making financing decisions. Investmentdecisions determine both the mix and type of assets held by thefirm. Financing decisions determine both the mix and type offinancing used by the firm (Gitman 2003). The sorts of decisions canbe conveniently viewed in terms of the firm’s balance sheet.Current Asset Management: Assets are partitioned into two primarycategories: current assets and fixed assets. With current assets,the key decisions relate to day-to-day management, includingfrequent decisions regarding the level and efficient management ofcash, inventory, and receivables. Because these decisions arerecurring, the use of financial models that employ standardizedtechniques of analysis is typical. These models often have theirorigin in management science, the application of mathematicaltechniques to management problems. The importance of physicalinventory varies across the respective media industries. For bookpublishers, inventory decisions are important, and the size of pressruns for particular titles is a significant issue. In contrast,



broadcast media have relatively little physical inventory and thisis a minor decision area (Alexander et al. 1993).Fixed asset management – Capital budgeting: In contrast to the day-to-day focus in the management of current assets, fixed assetsfinancial management is not involved on an ongoing basis. With fixedassets, the day-to-day management is the responsibility ofoperations management. Financial management becomes involvedperiodically to contribute toward making major decisions regardingthe acquisition and disposal of divisions/units/plants. The decisiontechniques require the comparison of costs with expected benefits.Because the stream of expected benefits occurs over a future timehorizon, the interest factor (“time value for money”) must be takeninto account. In this context, Hoskins et al. (2004) have shown thatthe net present value criterion is a valuable and important decisiontool in media management. The net present value is defined as thepresent values of future cash flows minus the initial cost orprincipal invested. The net cash flow in any year is the incrementalcash inflow (revenue) in the year minus the incremental cash outflow(cost) in the year. The general formulation is as follows:

Exhibit 2-3: The Net Present Value (NPV) formulation

NPV = B1/(1 + i) + B2/(1 + i)2 + B2/(1 + i)3 + … + Bn/(1 + i)n – C

Legend:

NPV = Net present value C = Cost outlay or investment (assumedimmediate)

B1 = Net cash flow at end of year oneB2 = Net cash flow at end of year two

i = return available elsewhere atsimilar risk

Source: Hoskins et al. 2004, p. 123.

Importantly, present capital investment decision are based onestimated future cash flows and relevant interest rates must betaken into account to arrive at the value today of the anticipatedflows. If the benefits (in value of money) exceed the costs(discounted in today’s value of money), then quantitatively theinvestment project is acceptable. Of course, quantitative analysisis only part of the total decision analysis. Particularly in themanagement of media properties, qualitative factors are important incoming to a final conclusion.Capital budgeting is defined as the process of evaluating andselecting long-term investments that are consistent with the firm’sgoal of maximizing owner wealth (Gitman 2003).Capital budgeting decisions can be focused on new assets andincreasing the size of the firm or reducing the set of assets

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employed and shrinking the firm. Alexander et al. (1993, p. 283)explain that capital budgeting tools and techniques has actuallybeen strongly affecting investment decisions in the U.S. as follows:“Much of the restructuring activity that occurred in the media industries during the 1980sresulted from a capital-budgeting analysis of existing products/divisions/units. Many firmsfound that for various reasons, some existing operations were worth more sold than theycould generate as part of the firm. There was a net benefit to selling some operations ratherthan continuing to operate them. This awareness is the analysis behind much of the sell-offactivity that has been widespread in recent years”.

2.3 Further theoretical approaches to financialmedia management

Ownership and financial performance: The impact of ownership hasreceived a great deal of scholarly attention during the last fortyyears, but early research was often non-theoretical, concentratingon the decline of family-owned newspapers and the growth ofnewspaper groups. Recent studies have found limited differences inperformance between independent and group newspapers. Compaine andGomery (2000) concluded that corporate-owned newspapers were as goodor bad as independently owned newspapers. However, their review didnot include more recent research about the impact of publicownership on newspapers’ financial performance.During the 1990s, Demers (1996) integrated organizational andownership variables in examining the ‘corporate newspaper’. He saidthe claim that corporate newspapers negatively affect journalism isoverstated. He emphasized corporate structure but did not considervariations that might be connected to public versus privateownership. In a follow-up, he found that the structural complexityof a daily newspaper had a moderate correlation with use of contentperceived as critical by city officials. Public ownership wasincluded as one measure of Demers’ ownership structure variable, butit only correlated slightly with two of the other four measures of acorporate newspaper.Blankenburg and Ozanich (1993) looked at the influence of outsidecontrol of stock in newspaper corporations and found the degree ofoutside ownership affected financial performance. For example, asoutside ownership increased, profit margins increased. The study wasreplicated in 1996 with similar results. Again, increased publicownership was positively correlated with increased profit margins. Astudy by Martin found similar results for 1988 and 1998. As outsidecontrol of publicly held groups increased, profit margins increased.In a 2001 book, Cranberg, Bezanson, and Soloski (p. 9) presented a



long list of potential effects of public ownership on newspaperperformance. They state: “For public companies (with but few exceptions), thebusiness of news is business, not news. Their papers are managed and controlled forfinancial performance, not news quality”. Though based on extensive data aboutpublicly held newspapers, the book proceeds from a limitedfoundation of economic and managerial theory and did not adequatelyconsider the impact of some constraining variables, such ascompetition from other newspapers for readership. The impact ofownership stems from the relationship of organizational goals toperformance. Lacy and Simon (1997) explained that organizationalgoals could vary within type of newspaper (private versus publicownership, and group versus non-group) and that environmentalfactors can constrain organizational goals. The relationship betweenpublic ownership and newspaper performance reflects the scatteredand decentralized nature of public ownership. Newspaper companygoals must reflect the expectation of the stock market, whereinvestors are interested in financial performance such as stockprices and profit margins. This reasoning is consistent withresearch that found profit margins of publicly held newspapercorporations increased as the amount of outside control increased.Financial commitment theory: The basis for the financial commitmentmodel, which has been supported by research, is that newspapersfaced with competition must differentiate themselves through theircoverage. Efforts to differentiate coverage could result inincreases in number of newsroom employees.4

Research into the impact of competition on newspaper performancebegan in the 1940s, but it was 1986 before mass communicationscholars developed a theoretical basis for its impact. Two studiesexamining national samples found a relationship between intra-citydaily competition and amount of money spent on the newsroom. Calledthe “financial commitment theory” by Litman and Bridges (1986), thisrelationship was formalized by Lacy (1992). Lacy concluded that thebulk of research supported the hypothesis that intense competitionresulted in greater expenditures on the newsroom for intra-citynewspaper competition, intercity newspaper competition, and localtelevision news competition. More recently, Martin (2001) found thatclustering was associated with reduced newsroom spending. Cranberg,Bezanson, and Soloski (2001, p. 13) concluded that competition haslittle impact on news quality: “Because of increasing concentration ofnewspapers in the hands of large companies, competition among newspapers based on thequality of news is diminishing. The terms of competition have little or nothing to do withnews quality – the quality of the product produced by the firm – in most markets today”.

4 The financial commitment theory may be rooted on Selznick’s (1949) wider conceptof organizational commitment.

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Resource dependence theory: An and Jin (2005) have used resourcedependence theory to explain the relationship between theinterlocking of newspapers with financial resources andprofitability. Here, interlocking is defined as a financing strategyof publicly traded newspaper companies with financial institutions.The resource dependence perspective (Selznick 1949, Pfeffer &Salancik 1978) views interlocking as a critical link to the externalenvironment. It contends that financial interlocking will provideaccess to critical resources and information and facilitate inter-firm commitments which in turn enhance a firm’s profitability.Financial control theory: Financial control theory, however, holds avery different view on interlocking with financial institutions. Itbegins with the assumption that financial institutions seek toprofit from debt financing, which leads bank-controlled companies tocarry heavy debt loads. In order to protect these loans, financialinstitutions require those corporations to operate moreconservatively and thus less profitably (Kotz 1978). Viewing thedegree of interlocking with financial institutions as an indicatorof financial control, such a presence is expected to be negativelyassociated with a firm’s profitability (Mariolis 1975).Corporate governance: Picard (2002, p. 2) defines corporategovernance as follows: “Corporate governance is concerned with the owner andmanagement relationships, distribution of power, and accountability in corporations.Governance structures and processes are inextricably linked to the environments in whichcorporations are created and operate. Corporations are legally created entities with specificrights and responsibilities, and these differ depending upon the nation in which they wereestablished, their structures, and whether shares are privately held or publicly traded”.Corporate governance theory assumes that higher transparency andtrust between firms, investors and then public can be achievedthrough the establishment of principles, policies and practices(CalPERS 2004, OECD 2004, Carlsson 2001) which, in turn, may resultinto better financial performance. With regard to specific issues offinancial media economics and media management, corporate governancetheory particularly the rising significance of institutionalinvestment in media firm ownership (An & Jin 2005).

2.4 Financial indicators and measures of firmperformance

It is important for media managers to review the financial health oftheir firms regularly because financial data provide the keyindicator of whether a firm is becoming or remaining a viablebusiness entity. Basic indicators that need to be reviewed regularlyinvolve sales and cash flow, profitability, the status of workingcapital, and the condition of the balance sheet.



As noted in the introduction of this study, monetary profit alonedoes not indicate the efficiency with which a firm produces themonetary results. To gain the broader picture one can use theconcept of return (Picard 2002).Financial statements: There are four key financial statements: (1)The income statement; (2) The balance sheet; (3) The statement ofretained earnings, and (4) the statement of cash flows (Gitman2003).In the following, financial indicators and measures will be listedalphabetically:Balance sheet: The balance sheet reports the financial condition ata point in time and is a statement of levels (stocks). The incomestatement reports the financial performance over an interval of time(most frequently, a year) and is a statement of flows. The balancesheet has two sides. On the left side are uses of funds and on theright side, sources. Uses are assets and sources can be liabilities(debt) or equity.Exhibit 2-4: Major components of a Balance Sheet

Major Components of the Balance Sheet

Assets Sources

Current Assets Current Liabilities

Cash Bank loans – short term

Accounts receivable Accounts Payable

Inventory Accrued Payable

Investments Term Liabilities

Financial investments Bank loans (bonds anddebentures)

Fixed assets Equity

Plant, equipment Par (stated) value

At historical cost Paid-in surplus (over par)

Less accumulateddepreciation

Retained Earnings

Source: Alexander et al. 1992, 276.

Capitalisation ratio: Analysis of a company’s capital structureshowing what percentage is debt, preferred stock, common stock, andother equity (Alexander et al. 1993, p. 288).

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Cash flow: In finance, cash flow refers to the amounts of cash beingreceived and spent by a business during a defined period of time,sometimes tied to a specific project. It is generally defined as netprofit plus depreciation (net cash flow) but may be used moreloosely to include all cash movements (Bannock et al. 2002).Cost per thousand: In advertising performance analysis, CPT isdetermined by dividing the cost of a print or broadcastadvertisement or of a total advertising campaign by the totalestimated audience, computing the total audience on a base ofthousands.Economic rent: Excess over a competitive rate of return attributableto owning an asset or resource whose supply is limited, at least inthe short run (Gastineau & Kritzmann 1992).EBIT: Earnings before interest and taxes; a measure of firm cashflow, largely replaced in recent finance literature by EBITDA.EBITDA: Earnings before depreciation, amortization, interest, andtaxes paid; a measure if enterprise cash flow.EPS: Share indicator of publicly traded media firms. EPS representthe amount earned during the period on behalf of each outstandingshare of common stock. EPS is measured as total earnings divided bythe number of shares outstanding. Companies often use a weightedaverage of shares outstanding over the reporting term. EPS can becalculated for the previous year (“trailing EPS”), for the currentyear (“current EPS”), or for the coming year (“forward EPS”). Notethat last year's EPS would be actual, while current year and forwardyear EPS would be estimates.Equity: Amount of capital invested in an enterprise. It represents aparticipative share of ownership, and in an accounting sense iscalculated by subtracting the liabilities of an enterprise from itsassets.Gross margin: Profitability indicator; generally in finance, “thegross margin defined as the is the difference between the price at which something is boughtand the price at which it is sold” (Bannock et al. 2002, p. 209). In otherwords, gross margin is commonly defined as net selling price lesscost of merchandise. A more accurate estimate of gross margin isadjusted to include trade promotion allowances. The magazineindustry, for example, typically provides allowances to supportretail display space, front end racks and new title introductionincentives.Market share: Further important measures of firm performance aremarket share, and gross margin. Market share, in strategicmanagement and marketing, is defined as the percentage or proportionof the total available market or market segment that is being



serviced by a company. It can be expressed as a company’s salesrevenue (from that market) divided by the total sales revenueavailable in that market. It can also be expressed as a company’sunit sales volume (in a market) divided by the total volume of unitssold in that market. As explained by Picard (2002, p. 231), “byconsidering the market share of the market for a particular good or service, one gains anunderstanding of its position in the market and whether that position is being maintained,improved, or degraded. Changes in market share indicate that competitiveness has beenmaintained, improved, or lost by firms or that the market structure is being affected by entryor exit or better competitiveness on the parts of other firms” (p. 230). Picardcontinues that “in the past a media firm was evaluated as healthy if its market sharewas growing. Today, with the proliferation of media, health tends to be evidenced inmaintaining market share or growth wihtin a small niche in which the firm operates”(ibid.).Market value: The calculate market value (market capitalization),the total number of shares is multiplied by the share price at theclose of the period. Market value does not include any companyshares held by the company itself. The importance of market valuelies in the fact that, according to current financial theory, themost important goal for the company’s top management is to maximizeshareholder value. Shareholder value is generated by increasingmarket value and by the payment of dividends.Net present value: If a decision has implications for the cash flowsof a company over a year or more, the time value of money must betaken into account. The comparison of the present value of thefuture cash inflow with the current investment is taken care of bythe net present value (NPV) criterion. It is defined as the presentvalue (sales price attainable) of future cash flows (expected cashflows if retained) minus the initial cost or principal invested.Net sales growth: Net sales growth (%) is one of the most commonindicators of volume growth and companies use it as a dailyindicator of their success at various levels of the organization.Apart from n increase or decrease in organic growth, it can also beaffected by other factors such as acquisitions.Operating cash flow (OCF): The cash flow a firm generates fromordinary activities. OCF is calculated as EBIT minus taxes plusdepreciation.P/E ratio: The P/E (price/earnings) figure (market value divided bynet income, or share price divided by EPS to give a per sharefigure) describes the market value in relation to net income overthe most recent 12 months. When calculating the P/E ratio anyminority interest is subtracted from net income. Hence the P/E ratiodescribes the number of years needed by the company to earn itsmarket value, i.e. pay itself back to its investors, assuming netincome remains unchanged. With a P/E of 10, for example, the company

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would earn net revenue equivalent to its value in ten years (currentlevel of net income unchanged). The lower the P/E ratio, the cheaperthe share price is considered to be.Price elasticity of demand: The notion that income, prices ofsubstitutes and complementary goods, consumer preferences andtastes, and consumer expectations in a given market are economicfactors which impact on the consumer demand of services in theperforming arts industries is hardly new (Marshall 1922/1890).Changes in demand are typically indicated by price changes.Elasticity is defined as the relative response of one variable to asmall percentage change in another variable. In standard economictheory, price elasticity of demand is a measure of sensitivity ofdemand for a product to changes in its price. Demand elasticity ismeasured by the percentange change in quantity demanded for an itemdivided by the corresponding percentage change in price thatgenerated the change in demand. An elasticity of -1 would indicatethat a 1% increase in price leads to a 1% fall in demand. Thetheorem of price elasticity of demand has impacts on the sales andadvertising revenues of media companies. As far as advertisingrevenues are concerned, research on the relationship betweencompetition and advertising has shown that the derived demand bysellers of goods and services for advertising in a medium will bemore price inelastic: (a) The weaker is the substitutability withother media; (b) the more inelastic is consumer demand forinformation about products and services; (c) the more inelastic isthe supply of other advertising media; and (d) the smaller is theshare of total costs accounted for expenditures on the advertisingmedium (Bagwell 2005).Profitability: Profitability can be described using threeindicators: operating margin, return on capital employed and netincome. The operating margin shows operating income as a percentageof net sales. Operating income, roughly speaking, is what remainsbelow the line before financial items and taxes. As the namesuggests the operating margin measures how the company’s result ofoperations is formed but its level varies is different businesssectors depending on margins and capital employed. Return on capitalemployed describes the annual return to the company from the capitalit has tied up, for example in machinery, equipment and stocks. Tocalculate it, operating income less financial costs and taxes isdivided by the total of shareholders’ equity and interest-bearingdebt. Return on capital employed should be clearly higher than therisk-free interest level. Ten percent can be considered a roughsatisfactory level. Net income describes the absolute net revenueleft to the owner after interest expenses and taxes as well as anyextraordinary or other items unrelated to the company’s businessoperations.



Return: Theorists commonly use Return on Sales (ROS), Return onAssets (ROA) and Return on Equity (ROE), and ROI (return oninvestment) ratios in order to measure financial efficiency of acorporation (Tallman & Li, 1996). ROS is defined as “net incomedivided by sales” (Gastineau & Kritzmann 1992), ROA as “net incomedivided by total assets, expressed as a percent” (ibid.), ROE as“net income divided by net worth” (ibid.)Sales: Income from sales of goods and services.Working capital: Current assets minus current liabilities; workingcapital measures how much in liquid assets a company has availableto build its business. The number can be positive or negative,depending on how much debt the company is carrying. In general,companies that have a lot of working capital will be more successfulsince they can expand and improve their operations. Companies withnegative working capital may lack the funds necessary for growth.

2.5 Strategic responses of media companies

Definition strategy

The modern use of the term ‘strategy’ derives from games theory andmay be defined as a “complete plan to offer the right choices for all possiblesituations” (Welge & Al-Laham 1999, p. 12). It is the process ofspecifying an organization’s objectives, developing policies andplans to achieve these objectives, and allocating resources so as toimplement the plans. The process involves matching the companies’strategic advantages to the business environment the organizationfaces.Mintzberg (1994) assumes that strategy can be defined in a number ofways. He argues that strategy is one of those words that weinevitably define in one way, yet often use in another. As aconsequence it turns out that strategy can be seen as a plan, i.e. adirection or course of action into the future, or more “softly” as apattern, that is as consistency of behaviour over time. Porter foundstrategy to be a position (Porter 1996). Simply put, a strategy isan integrated set of decisions and actions made in order to meet thebusiness objectives.

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Strategic ManagementStrategic management is the process of specifying an organization’sobjectives, developing policies and plans to achieve theseobjectives, and allocating resources so as to implement the plans.It is the highest level of managerial activity, usually performed bythe company’s Chief Executive Officer (CEO) and executive team. Itprovides overall direction to the whole enterprise. Anorganization’s strategy must be appropriate for its resources,circumstances, and objectives. The process involves matching thecompany’s strategic advantages to the business environment theorganization faces. One objective of an overall corporate strategyis to put the organization into a position to carry out its missioneffectively and efficiently. A good corporate strategy shouldintegrate an organization’s goals, policies, and action sequences(tactics) into a cohesive whole.Strategic management can be seen as a combination of strategyformulation and strategy implementation.Strategy formulation involves:

Doing a situation analysis: both internal and external; bothmicro-environmental and macro-environmental.

Concurrent with this assessment, objectives are set. Thisinvolves crafting vision statements (long term view of apossible future), mission statements (the role that theorganization gives itself in society), overall corporateobjectives (both financial and strategic), strategicbusiness unit objectives (both financial and strategic), andtactical objectives.

These objectives should, in the light of the situationanalysis, suggest a strategic plan. The plan provides thedetails of how to achieve these objectives.

This three-step strategy formation process is sometimes referred toas determining where you are now, determining where you want to go,and then determining how to get there. These three questions are theessence of strategic planning. Analytical tools to help thisplanning are: SWOT (analysis of strengths and weaknesses, andopportunities and threats) or IO economics (i.e. IndustrialOrganisation analysis) for the external factors, and the resource-based view of strategy (Wernerfelt 1984) for the internal factors.Strategy implementation involves:

Allocation of sufficient resources (financial, personnel, time,computer system support).



Establishing a chain of command or some alternative structure(such as cross functional teams).

Assigning responsibility of specific tasks or processes tospecific individuals or groups .

It also involves managing the process. This includes monitoringresults, comparing to benchmarks and best practices, evaluatingthe efficacy and efficiency of the process, controlling forvariances, and making adjustments to the process as necessary.

When implementing specific programs, this involves acquiringthe requisite resources, developing the process, training,process testing, documentation, and integration with (and/orconversion from) legacy processes.

Types of strategies: Porter (1985) has described a category schemeconsisting of three general types of strategies that are commonlyused by businesses (see, below). These three generic strategies aredefined along two dimensions: strategic scope and strategicstrength. Strategic scope is a demand-side dimension (Porter wasoriginally an economist before he specialized in strategy) and looksat the size and composition of the market you intend to target.Strategic strength is a supply-side dimension and looks at thestrength or core competency of the firm. In particular he identifiedtwo competencies that he felt were most important: productdifferentiation and product cost (efficiency).Porter (1980) has suggested cost leadership, productdifferentiation, and market segmentation (or focus) as the threegeneric managerial strategies to achieve competitive advantage andfirm growth.Cost leadership: The cost leadership strategy emphasizes efficiency.By producing high volumes of standardized products, the firm hopesto take advantage of economies of scale and experience curveeffects. The product is often a basic no-frills product that isproduced at a relatively low cost and made available to a very largecustomer base. Maintaining this strategy requires a continuoussearch for cost reductions in all aspects of the business. Theassociated distribution strategy is to obtain the most extensivedistribution possible. Promotional strategy often involves trying tomake a virtue out of low cost product features. To be successful,this strategy usually requires a considerable market share advantageor preferential access to raw materials, components, labour, or someother important input. Without one or more of these advantages, thestrategy can easily be mimicked by competitors. Successfulimplementation also benefits from: process engineering skills,products designed for ease of manufacture, sustained access to

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inexpensive capital, close supervision of labour, tight costcontrol, and incentives based on quantitative targets.Differentiation: The product differentiation strategy involvescreating a product that is perceived as unique. The unique featuresor benefits should provide superior value for the customer if thisstrategy is to be successful. Because customers see the product asunrivaled and unequaled, the price elasticity of demand tends to bereduced and customers tend to be more brand loyal. This can provideconsiderable insulation from competition. However there are usuallyadditional costs associated with the differentiating productfeatures and this could require a premium pricing strategy. Tomaintain this strategy the firm should have: strong research anddevelopment skills, strong product engineering skills, strongcreativity skills, good cooperation with distribution channels,strong marketing skills, incentives based largely on subjectivemeasures, be able to communicate the importance of thedifferentiating product characteristics, stress continuousimprovement and innovation, attract highly skilled and creativepeople.Market segmentation: In the market segmentation strategy the firmconcentrates on a select few target markets. It is also called afocus strategy or niche strategy. It is hoped that by focusing yourmarketing efforts on one or two narrow market segments and tailoringyour marketing mix to these specialized markets, you can better meetthe needs of that target market. The firm typically looks to gain acompetitive advantage through effectiveness rather than efficiency.It is most suitable for relatively small firms but can be used byany company.As a focus strategy it may used to select targets thatare less vulnerable to substitutes or where a competiotion isweakest to earn above-average return on investments.Impact dimensions: Further, the following core impact dimensions onmanagerial strategy are frequently discussed in competition theoryand strategic management (Bain 1956, Porter 1980, Scherer and Ross1990):

Size and number of suppliers and buyers indicating the degreeof concentration

Elasticity of supply and demand signalling the suppliers’ability to adapt to market changes in demand and structures ofproduction and the buyers’ willingness to change product orservice

Barriers to market entry which are based on cost advantages(economies of scale) of dominant firms

Current stage of market development to serve as indicator ofintensity of competition



Strategies of media firms: As put forward by Picard (2004, p. 1),strategic planning of media firms is influenced by four main typesof influence that are external and internal to media firms:“Environmental influences represented the broadest changes in the nature of society andenvironment for all businesses. Media specific policy influences represent changes in waymedia are regarded and controlled in society. Market specific influences related to factorschanging specific markets of firms. Firm-specific influences relate to factors within firms thatare inducing changes”. According to this typology, all four types offorces influence strategic company behavior.The strategic options for media firms are related to theinstitutional setting in which they operated (Loube 1991), to theirresources (Wernerfelt 1984), and to their capabilities (Eisenhardt &Martin 2000) and competencies (Prahalad & Hamel 1990, Barney 1991).Thus, strategy needs to be individually constructed and regularlyreappraised.The kinds of strategies media firms develop and which are most oftenevident involve integration, diversification, niche products, andinternationalization.Integration: Media companies are using horizontal and some verticalintegration as a means of achieving cost efficiencies and companygrowth (Compaine & Gomery 2000, Picard 2004, Picard et al.1988).Integration is a strategy used by a business that seeks tosell a type of product in numerous markets. To get this marketcoverage, several small subsidiary companies are created. Verticallyintegrated companies are united through a hierarchy and share acommon owner. Usually each member of the hierarchy produces adifferent product or service, and the products combine to satisfy acommon need.Diversification: Because of the market growth and market shareproblems in individual media, many firms have begun diversificationinto other media and are creating of media product portfolios. Thechoice to stay within media has typically occurred because there aresome similarities in the types of business activities. Both largeand mid-sized firms now have holdings in multiple media.There are many possible motives behind diversification strategies(Amit & Livnat 1988, Jung 2003, Montgomery 1994). Montgomery (1994)has identified three categories of motives: (a) the market powerview, (b) the agency view, and (c) the resource view. Lindgren &Persson (2005) have added the financial and the synergetic view.Niche marketing: A trend affecting media firms is the growth ofniche media products. The increase in media and media units ishaving a significant impact on the types of titles, channels, andother products being created by media firms. Although firms havetraditionally sought to create media products that appeal to large

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general audiences, significant product differentiation efforts arebeing made in the new, more competitive environment. Company productchoices are focusing primarily on creating niche media products thatcan survive in highly competitive media environment (Dimmick 2003).Internationalization: Internationalization to overcome saturateddomestic markets or competition regulations that limited growth isalso an option for firms. Globalization, of course, increases thecomplexity of strategy by requiring firms to make choices involvingresource allocation between domestic and international operationsand between different international operations (Daniels & Bracker1989, Toyne & Walters 1989) and to maintain complex organizations tocoordinate international activities. Nevertheless, the globalbusiness option becoming increasingly attractive to media firms(Gershon 1997). Innovation strategies with the firm’s rate of newproduct development and business model innovation. It asks whetherthe company is on the cutting edge of technology and businessinnovation. There are three types: (a) pioneers, (b) closefollowers, and (c) late followers or laggards.

Marketing strategies

Marketing strategy: A marketing strategy serves as the foundation ofa marketing plan. A marketing plan contains a list of specificactions required to successfully implement a specific marketingstrategy.A strategy is different than a tactic. While it is possible to writea tactical marketing plan without a sound, well-considered strategy,it is not recommended. Without a sound marketing strategy, amarketing plan has no foundation. Marketing strategies serve as thefundamental underpinning of marketing plans designed to reachmarketing objectives. It is important that these objectives havemeasurable results.A good marketing strategy should integrate an organization’smarketing goals, policies, and action sequences (tactics) into acohesive whole. The objective of a marketing strategy is to providea foundation from which a tactical plan is developed. This allowsthe organization to carry out its mission effectively andefficiently.Every marketing strategy is unique, but if we abstract from theindividualizing details, each can be reduced into a genericmarketing strategy. There are a number of ways of categorizing thesegeneric strategies. A brief description of the most commoncategorizing schemes is presented below:



Market dominance strategies: Strategies can also typologized basedon market dominance. Market dominance strategies are marketingstrategies which classify businesses by reference to their marketshare or dominance of an industry (Dolan 1981, Woo and Cooper 1982,Hamermesh et al. 1978). Typically there are four types of marketdominance strategies:

Market leader Market challenger Market follower Market nicher

Market leader: The market leader is dominant in its industry. It hassubstantial market share and often extensive distributionarrangements with retailers. It typically is the industry leader indeveloping innovative new business models and new products (althoughnot always). It tends to be on the cutting edge of new technologiesand new production processes. It sometimes has some market power indetermining either price or output. Of the four dominancestrategies, it has the most flexibility in crafting strategy. Thereare few options not open to it. However it is in a very visibleposition and can be the target of competitive threats and governmentanti-combines actions.The main options available to market leaders are:

Expand the total market by finding o new users of the product o new uses of the product o more usage on each use occasion

Protect your existing market share by: o developing new product ideas o improve customer service o improve distribution effectiveness o reduce costs

Expand your market share: o by targeting one or more competitor o without being noticed by government regulators

Market challenger: A market challenger is a firm in a strong, butnot dominant position that is following an aggressive strategy oftrying to gain market share. It typically targets the industryleader (for example, Pepsi targets Coke), but it could also target

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smaller, more vulnerable competitors. The fundamental principlesinvolved are:

Assess the strength of the target competitor. Consider theamount of support that the target might muster from allies.

Choose only one target at a time. Find a weakness in the target’s position. Attack at this point.

Consider how long it will take for the target to realign theirresources so as to reinforce this weak spot.

Launch the attack on as narrow a front as possible. Whereas adefender must defend all their borders, an attacker has theadvantage of being able to concentrate their forces at oneplace.

Launch the attack quickly, then consolidate. Some of the options open to a market challenger are:

price discounts or price cutting line extensions introduce new products reduce product quality increase product quality improve service change distribution cost reductions intensify promotional activity

Market follower: A market follower is a firm in a strong, but notdominant position that is content to stay at that position. Therationale is that by developing strategies that are parallel tothose of the market leader, they will gain much of the market fromthe leader while being exposed to very little risk. This ‘play-it-safe’ strategy is how Burger King retains its position behindMcDonalds. The advantages of this strategy are:

no expensive R&D failures no risk of bad business model best practices are already established able to capitalize on the promotional activities of the market

leader no risk of government anti-combines actions minimal risk of competitive attacks



don’t waste money in a head-on battle with the market leader Market nicher: In this niche strategy the firm concentrates on aselect few target markets. It is also called a focus strategy. It ishoped that by focusing ones marketing efforts on one or two narrowmarket segments and tailoring your marketing mix to thesespecialized markets, you can better meet the needs of that targetmarket. The niche should be large enough to be profitable, but smallenough to be ignored by the major industry players. Profit marginsare emphasized rather than revenue or market share. The firmtypically looks to gain a competitive advantage througheffectiveness rather than efficiency. It is most suitable forrelatively small firms and has much in common with guerrillamarketing warfare strategies. The most successful nichers tend tohave the following characteristics:

They tend to be in high value added industries and are able toobtain high margins.

They tend to be highly focussed on a specific market segment. They tend to market high end products or services, and are able

to use a premium pricing strategy. They tend to keep their operating expenses down by spending

less on R&D, advertising, and personal selling.

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3 Financial Management in Media Practice –Case Evidence

Chapter overview

The following chapter will:

Present two best-practice case studies in the media sector

Deliver general company facts and background information of both cases

Look into the financial situations and financial activities of both cases

Test theoretical issues against the empirical evidence collected through both cases

Discuss impacts of financial matters of both cases on firm performance and competition

CASE STUDY A: HTTP://DERSTANDARD.AT – THE INTERNET SUCCESSFOR QUALITY NEWS PUBLISHING

Case CharacteristicsFull name of the company Bronner Online AGLocation Vienna, AustriaSector PublishingYear of foundation 1995No. of employees 70Turnover in last financialyear

€ 4.1 Mio

Primary customers 919.000 unique users (Quelle: ÖWA März 2004)

Most significant market Online advertising and online classifieds

Full name of the company Bronner Online AGFinancial Management FocusOnline advertising and classifieds

Content management solutions



= in implementation stage; = used in day-to-day business; = critical business function

Background and objectivesAustria’s daily quality newspapers with nation-wide distributionis represented by four newspapers: Der Standard, Die Presse, and theWiener Zeitung, all of them published in Vienna, as well as theSalzburger Nachrichten, which is published in the region of Salzburg.It is the traditional media who dominate Austria’s webcommunity. The Internet presence of the quality daily of DerStandard, http://derStandard.at, is the leading online qualitymedia and its constantly developing website has set standards inAustria. Second to move was the ORF, who created ORF-ON as theirweb brand, which is now the most visited online media inAustria.http://derStandard.at started back in 1995 as first German-speaking newspaper on the Internet. In 2003, the printed versionreached 5,8% of the Austrian reading population, i.e. 390.000people (Austrian Media Analysis, 2003). Its online version couldattract more than 919.000 unique users, 4.6 million visits and32.3 million page impressions (Austrian Web Analysis - ÖWA,2005) in January 2005. Meanwhile, derStandard.at is constituentpart of the Austrian digital information culture landscape,offering a broad scale of services. DerStandard/Web is visitedmost frequently, with the channels derStandard/Politik (politics),/Panorama (chronicle), and /Investor (economy) following up. Thesectors sport, media/advertising, culture, and science followneck and neck.

Financial activityValue propositions in the advertising market 70 employees of http://derStandard.at have achieved a turnoverof € 4.1 million in 2004. Ten years ago, 230,000 people wereusing the Internet in Austria on a regular basis. Today, it ismore than 3.1 million users making the internet increasinglyimportant for advertisers. Having a broad and attractive userbase, derStandard.at can benefit directly from the growth ofonline advertising and online classifieds markets.

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http://derStandard.at/



Exhibit 3-1: http://DerStandard.at, share of turnover in 2004

From revenuesof € 4.1million,onlineadvertisingaccounted for60% ofoverallturnover,onlineclassifieds(mainly jobadvertise-ments) acc-ounted for28%, and thebusinessfield‘Contentsolutions’for 12% (seebelow).

derStandard.at employs thewhole rangeof onlineadvertisingforms such asdynamicallyplaced bann-ers, sky-scrapers,rectangle,big-sizebanner, andpop-ups,staticbuttons,advertorials,site link,content ad,newsletter,or topic add-ons. Adplacement


Share of turnover in 2004

Online advertising: 60%Online classifieds: 28%

Content solutions: 12%

http://DerStandard.at/


allows foroptimalspread of itscampaigns andperfecttarget-marketing toachieveoptimal mediaeffects.

In the classifieds market, DerStandard.at/ Karriere (career) has aleading position in the online job market. Targeting the upperend of the market, it is one of only a few newspapersinternationally which is able to compete successfully with pureonline plays in the job market. Furthermore, DerStandard.atoperates in real estate (DerStandard.at/Immobilien), automobiles(DerStandard.at/Autos) and dating (DerStandard.at/ ZuZweit).Content solutionsIn terms of content, DerStandard.at offers two channels: the‘Newsroom’ channel A: Politik (politics), Investor (investment), Web,Sport, Panorama (weather, miscellaneous), Etat (media), Kultur(culture), Wissenschaft (science), and the ‘Livingroom’-channel B,offering LeichtSinn (fashion, literature), Reise (travel), Karriere(jobs), Immobilien (housing), automobiles, chat, and ZuZweit(dating). Further, this kind of contextual advertising can beused to track an individual user’s surfing behaviour. Alladvertising forms are smoothly integrated with the editorialcontent provided.DerStandard.at/ContentSolutions started in 1999. In the beginning,this business field dealt with selling web content fromDerStandard.at to commercial customers such as banks, insurancecompanies, telecommunication companies and Internet serviceproviders. Today, DerStandard.at/ContentSolutions alsoexclusively produces prime content for business customers andoffers its mature web experience as Application Service Provider(ASP) to third party customers on a licence basis.DerStandard.at thus offers long-term know how in web publishing,applications developed over time, generated content, andtechnical infrastructure. There are three components of its ASPsolution: (1) Content Management System; (2) ContentPresentation System; (3) Content Hosting System. Data input andcontent management is achieved by a web-based editorial systemwith a reporting and statistics tool, content presentation runsvia a web-based database to generate content dynamically.Hosting runs via a SQL database and webservers. Successful

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examples for ASP content solutions of DerStandard.at arewww.cyberschool.at and www.ecaustria.at.Mobile services: DerStandard.at offers PDA and WAP versions, both ofwhich comprise the newsroom channels of DerStandard.at.Additionally, DerStandard.at offers SMS and MMS news, supportedby increased internet and mobile media bandwidth to delivermultimedia content. These services are offered for asubscription fee. The fee is payable with the monthly invoicefrom the mobile carrier.DerStandarddigital.at: is a product bundle consisting of an archive(ca. 250,000 articles since October 1996), the newspaper webedition, the e-paper edition and the Avantgo-version, the lastthree of which are different digital newspaper versions.Subscription is only open for the entire product bundle. E-paper, the web edition and the Avantgo-version use advancedprocessing software by Comyan. Newspaper data is taken directlyfrom the editorial system and converted into these threeeditions. The presentation of the web edition and the archiveare self developed systems.Email services: DerStandard.at posts a variety of email newsletterversions. There are some 100,000 newsletter subscribers,receiving some 150,000 newsletters. In total, the servicecomprises three weekly newsletters, eight daily newsletters(containing a news overview of all news channels) and an ad-hocbreaking news service. The newsletters also contain advertising(part of online advertising).Forum: Here, DerStandard.at was highly innovative and attachedin 1999 forums right to the article where the users could posttheir comments and opinions. This resulted in total postings of700,000 in 2004. Another technical innovation concerns anautomat for the classification of postings. This project hasbeen developed co-operatively with the Austrian Institute forArtificial Intelligence. DerStandard.at moderates the chat roomsto keep editorial quality on high levels and to avoid legalproblems. Formerly, the moderation was done manually – i.e. eachposting was red by the editorial staff and then published orcancelled. Now, the automat pre-selects the postings and only30% of all postings have to be processed manually. This savestime for the editorial staff. Furthermore, 70% of all postingsare published immediately.

Impacts and lessons learnedThe annual result of http://derStandard.at has turned positivefor the first time in 2004. It is one of the first online media


http://www.ecaustria.at/

http://www.cyberschool.at/


to achieve a positive result. Defying the economic crisisbattering the newspaper industry, DerStandard.at could improverevenues from € 1.7 million in 2000 to 4.1 million in 2004.Georg Zachhuber, Board Member of DerStandard.at, concludes asfollows: “well established and well managed online media are profitable,

due to the increasing market share of online advertising and online classifieds,online media can achieve double digit growth rates for at least the next few years,

fears that online would cannibalize print have not come true as both media coverdistinctive users demands, and

being an independent company was a prerequisite for DerStandard.at to unleashits full innovative power”.

The findings of this case study need to be seen in contrast to thegeneral view that Internet-based content utilization windows hardlygenerate extra revenues or cannibalize existing ones. Based on theresults of this present case study, it can be concluded that theInternet has an impact on the composition of publishers’ contentutilization chains and its strategic positioning. Althoughtraditional print publishers’ revenue models have not changedsignificantly so far through new online business models, the presentcase has shown new trajectories for innovative revenue generation innew fields of online journalism and e-commerce.

References and acknowledgementsThis case study was conducted by Paul Murschetz on behalf of theEC funded project e-Business W@tch (empirica/Bonn, Germany)References

Interview conducted with Georg Zachhuber, Board Member ofDerStandard, http://derStandard.at, as interviewed onFebruary, 25, 2005.

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CASE STUDY B: ORF – THE AUSTRIAN BROADCASTING CORPORATIONEXPLOITING CROSS-MEDIA FINANCIAL STRATEGIES

Case CharacteristicsFull name of the company ORF – Austrian Broadcasting

CorporationLocation Austria, A-1136 ViennaSector Media, full-scale portfolioYear of foundation 1955No. of employees 3.655 (2005)Turnover in last financialyear

€ 882.7m

Primary customers National cross-media advertisersMost significant business market

TV advertising, radio advertising, Internet

Full name of the company Österreichischer Rundfunk und Fernsehen

Financial Management FocusBroadcasting advertising and classifieds

Investment in digital technology

= in implementation stage; = used in day-to-day business; = critical business function

The present case study describes the financial situation of the ORFin the context of its surrounding competitive situations andstructures. Further, it discusses corporate strategies in generaland as responses to market changes induced by higher competition anddigitization.

Background informationTelevision in Austria has long been synonymous with public servicebroadcasting organised by the PSB, the Austrian BroadcastingCorporation (ORF). Under the technical conditions of limitedfrequency, the ORF was granted the only licence for radio andtelevision broadcasting over two national frequencies chains foranalogue terrestrial television in 1955: ORF1 and ORF2. Insufficient



frequencies of terrestrial airwaves were the initial significantentry barrier to a free television market and allowed the design fora monopoly in public television to appear appropriate. It took until1997 when the Cable and Satellite Broadcasting Act of 1997 createdthe legal basis for active cable and satellite broadcasting.Although the ORF has enjoyed a long-term monopoly from a supply-sideperspective, it has been facing increasing competition fromextensive overspill of German TV programmes. Today, 85.6% (as of2004) of all Austrian TV households are equipped either withsatellite or cable TV and the average TV household receives 35channels. These programmes compete against ORF for audience shares,and – increasingly – for advertising budgets. Despite this, the ORFhas managed to keep both the German competitors and the Austriannewcomer ATV at bay. ATV, which started as low-scale regional cablestation Wien1, soon developed into the ORF’s biggest competitor.Today, it technically reaches some 30% of Austrian cable-TV viewersand 3% of digital satellite households. Content on offer is a full-programme mix of local entertainment, news, business, talk shows,sports, light entertainment, and sex. Two programme reforms in 1995and 1998 could successfully win back primarily younger viewers whohave been lost to foreign competition, enlarge the distance to itscompetitors, and increase market share with primarily Austrian-specific programming.As for Austrian TV households, more than 80% of are equipped withcable and satellite, with many terrestrial households havingswitched to (analogue) satellite reception. However, there is stillsome 20% of households receiving programmes only terrestrially,statistically notwithstanding those who dually use satellite dishesbut are still equipped with roof aerials to receive ORF1 and ORF2which are not transmitted via analogue satellite.In 2004, the ORF (51%) is uncontested market leader with an overallmarket share of 51% in multi-channel homes (adults aged 12plus).This comes to the debit of its big German private competitors RTL(7%), Pro7 (6%), SAT.1 (6%), and the public stations ARD (3.6%) andZDF (3.4%) (ORF 2004). In addition, the ORF is domestic marketleader in three electronic media segments: television, radio and theInternet. ORF-Enterprise customers benefit from this enormouscompetitive advantage by way of highly efficient communicationsolutions. In the TV sector in particular, what ORF-Enterpriseoffers is unique in the European market. A peculiar feature of theAustrian television landscape is its unbeatable audience figures andmarket shares, which, unlike many other countries, are achieved by apublic service broadcaster, not a private provider, and also thepossibility of broadcasting the same commercial on two channels at

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the same time, thereby acquiring a market share that cannot bebeaten.ORF’s wholly subsidiary ORF Enterprise who ORF-Enterpriseexclusively markets the advertising times and offers of all ORFmedia and brands could thus proudly present the following results:“ORF is streets ahead of any competition - from private Austrian broadcasters as well asfrom German channels that can be received throughout the country. The Austrian televisionlandscape is simply unique. In other European countries, private providers lead the market,but in Austria, no other broadcaster is able to come close to ORF. Via the two ORF channels,around half of all Austrians can be reached on a daily basis! We also have our USP –simultaneous showings. By broadcasting commercial slots simultaneously on both channelsaround the most popular “Zeit im Bild 1” news program at prime time, we can help youreach up to more than 1 million viewers! As the two television channels are positioned verydifferently in the market, advertising customers also have the opportunity to place theirbrands in such a way as to accurately address their target groups – all through a singlecontact, and with top audience figures!” (http://enterprise.orf.at).

Finance

The ORF receives revenues from three sources: licence fee revenues,advertising revenues, and other revenues. In 2005, the ORF couldmeet its financial objectives. It could raise its annual turnoverfrom € 876.5m in 2004 to € 882.7m in 2005. Turnover in licence feerevenues could be increased from € 444.5m in 2004 to € 450.8m in2005. After increasing licence fees by 8.2% in 2004, the turnoverimprovements in 2005 could be achieved without an additionalincrease in licence fees. 3.25m radio listeners and TV viewersbrought the ORF to its highest user level at all times in itshistory.In 2005, advertising revenues could be held at the satisfactorylevel of 300.8m EUR (2004: € 312.1m). Advertising revenues in radiocould be slightly improved while TV ad revenues dipped due to adprice decreases. Other revenues such programme sales and licencerevenues accounted for by ca. 13% of overall revenues in 2005.Competition for advertising revenues became fiercer in 2005:ATVplus, ORF’s competitor in national analogue televisionbroadcasting could further enlarge its share on national ad spent.Further, a new advertising window from Germany (VOX) dragged awayadvertising from the Austrian market in analogue broadcastingwhereas, in addition, digital TV advertising windows started cuttingaway revenues from the ORF as well.Exhibit 3-2: ORF Business data in 2004 (in million EUR)

No. of employees (FTE in yearly 3.700 (2004)


http://enterprise.orf.at/


average)Revenues 966.8

Licence fees 444.5 Advertising (net) 312.1 (TV: 230.8; Radio: 81.3) Other 212.2

Expenditures 965.5 Material 401.5 Personnel 345.5 Other 20.6

OCF (Operating Cash Flow) + 1.2Source: ORF 2004In 2005, biggest cost item were expenditures on material. Theyaccounted for by 401.5m EUR (41,6% of total). This was an increasein 36m EUR. Second largest cost item is personnel which fell in 2005by 8.7m EUR to 345.5m EUR. Operative costs for personnel could thusbe trimmed, mainly by reducing stock.In 2005, the ORF could generate an annual result of € 3.5m, thusoperating in the black and achieving some further plus against 2004(€ 1.2m). This positive annual result is surprising considering theoverall economic situation is still curbed and the competitivesituation is getting fiercer.

Strategies

The strategic path of the ORF management can be broken down into thefollowing strands: (a) stable financial management building on corestrengths of domination in market share and audience reach; (b)Keeping German competitors at bay through special Austrianprogramming in culture, society, and sports; (c) strict savingspolicy targets as imposed by regulation; (d) Augmenting licence feerevenues where possible, e.g. by progressive policies on detectionof free-riders; (e) Intensification of advertising revenues throughcross-media syndication of contents and detection of new advertisingchannels (radio, Internet), and (f) following innovation strategiesin terms of digitization with a view to broadening future revenuebases.

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Impacts and lessons learnedLatest annual result: In 2005, the ORF could generate an annualresult of € 3.5m, thus operating in the black and achieving somefurther plus against 2004 (€ 1.2m). This positive annual result issurprising considering the overall economic situation is stillcurbed and the competitive situation is getting fiercer.Turnover and revenues: The ORF could improve its overall turnover.It could upgrade its licence fee in 2004 and could hold steady itstraditional sources of revenue from advertising. In addition, itcould find new sources of revenue from extra services such ascommercial revenues from game shows and privatisation revenues(selling infrastructure). There is also a peak in listeners andviewers of ORF programmes in radio and television. This is anotherplus.Commercial revenues: The ORF has accelerated growth of itscommercial services which conflict with its role as public servicebroadcaster and its legal mandate. For example, ORF TV entertainmentshows are supplemented by special ORF Internet service offers. Userscan play games or visit micro sites, and are, additionally, offerede-commerce platforms. These new services are critical because theORF is obliged to offer not-for-profit programming services underits legal mandate. In addition, full transparency of sources ofrevenues is not guaranteed.Digital technology: The future of television broadcasting will bedigital and this means noise and loss-free transmission of pictures,higher capacity of broadcasting channels and a substantially largerprogramme palette with additional television services. But even ifthe attraction of digitisation is as strong as widely promised, doesit really mean better television?Acceptance of innovation strategy: Audience acceptance of digitaltelevision programmes offered by the ORF will also depend on atangible added content value as compared with private provision.Only this would increase the ORF’s chance of market penetration in afragmented digital TV audience environment. Above all, consumersshould derive advantages from new technology and content. Email andinteractive applications should supplement TV and help compensatefor the loss in social integration that is said be aggravated bydigitisation (digital divide).Financial strategies: Apart from its strong position in advertisingand viewer markets, the ORF embarks on strategies to widen itsfinancial portfolio through Internet and commercial advertisingrevenues, and sales revenues from divestiture of infrastructuretransmission technology. Besides the ORF has a solid and healthyliquidity and equity base.



Programming strategies: The ORF’s positive economics is mainlyaccounted for by well accepted informational programming, low-costUS-feature films and series, exclusive sports transmissions and anoverall successful ‘Austrification’ of programmes, that is a stresson innovative in-house productions aiming at the preservation ofAustrian culture. In 2000, ORF relaunched its TV design to reflectthe different market positions of its two analogue channels. ORF1 isthe dynamic entertainment and events channel for the younger urbantarget groups. ORF1 programming features sports, movies,international serials, comedy, entertainment and children’sprogrammes. ORF2 is the more traditional Austrian general interestchannel, offering information, cultural and educational programmes,arts, Austrian traditional culture shows and more traditionalfiction.Internet strategies: The ORF follows a programming diversificationstrategy in the Internet realm. There is sixteen Internet channel toplace advertising.Regulation: In some areas, regulation regarding permittedadvertising and sponsoring activities are framed more restrictivelysince the last change in broadcasting regulation. Possibilities ofinterstitials are limited and product placement outwith cinemafilms, TV films and TV series is prohibited. In the future, cross-promotion of ORF radio programmes and television is forbidden.Intended limitations are said to be necessary in order to offerprivate TV providers sufficient possibilities of finance.

References and acknowledgementsThis case study was conducted by Paul Murschetz (Murschetz MediaConsulting Salzburg / Cologne). An earlier version of this casestudy was published by the author in JMM – International Journal onMedia Management (see, Reference below).

References Murschetz, P. (2002). Public Service Television at the

Digital Crossroads – The Case of Austria, JMM – InternationalJournal of Media Management, 4(2), 24-33.

Murschetz, P. (2003). Abkassiererei oder Notwendigkeit?Ein Plädoyer gegen die ORF-Gebührenerhöhung aus Sicht derRundfunkökonomie, Wiener Zeitung, June 12, 2003.

ORF (2004). The Business Year 2004 [Das Geschäftsjahr2004], Annual Business Report 2004, Vienna.

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4 Conclusions

Chapter 1: Introduction to Financial MediaManagement

The economics and financing of media companies is a central issuein media management research and practice.Investment decisions are the most important of the firm’s threemajor decisions when it comes to value creation. It begins withthe determination of the total amount of assets needed to be heldby the firm. For example, how many total assets of the firmshould be devoted to cash or to inventory? Also, the flip side ofinvestment – disinvestment – must not be ignored. Assets that canno longer be economically justified may need to be reduced,eliminated, or replaced.Financing decisions are the second major decisions of the firm.Here, the financial manager is concerned with the makeup of theright hand side of the balance sheet. Some firms, for example,have relatively large amount of debts, whereas others are almostdebt free. Does the type of financing employed make a difference?If so, why? And, in some sense, can a certain mix of financing bethought of as best?The third important decision of the firm is the asset managementdecision. Once assets have been acquired and appropriatefinancing provided, these assets must still be managedefficiently. The financial manager is charged with varyingdegrees of operating responsibility over existing assets. Theseresponsibilities require that the financial manager be moreconcerned with the management of current assets than with that offixed assets. A large share of the responsibility for themanagement of fixed assets would reside with the operatingmanagers who employ these assets.The financial requirements of varying types of media operationsaffect the forms and structures of media firms, as do the scaleand scope of their operations.Media organizations are guided by specific goals-sets. Thesegoals include cultural goals, as well as economic goals such asefficiency, effective organization of resources and processes,profit maximization, economic growth, and economic stability.

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Profit maximization may not always be a reasonable goal of thefirm. It may fail for a number of reasons: It ignores (a) thetiming of returns, (b) cash flow available to stockholders, and(c) risk (i.e. the chance that actual outcomes may differ fromthose expected). The media sector is regulated with respect toopportunities for making profits. For example, broadcasting lawimposes specific income restrictions on media companies. Inaddition, media companies have to pursue other goals than profitmaximisation such as cultural and social goals as part of theirpublic remit.Financial management is an academic field with financialeconomics which is concerned with the acquisition, financing, andmanagement of assets with some overall goal in mind.The essential objective of financial management can becategorized into two broad functional categories: recurringfinance functions and non-recurring or episodic financefunctions. The overall goal of financial management is toguarantee a stable liquidity and equity base of the firm overtime.The role of financial managers is to organize: (a) the prudent orrational use of capital resources, i.e. proper allocation andutilization of funds; (b) careful selection of the source ofcapital, i.e. determining the debt equity ratio and designing aproper capital structure for the corporation; and (c) goalachievement, i.e. ensuring the achievement of business objectivesviz. wealth or profit maximization.The financial manager must understand the economic environmentand relies heavily on the economic principle of marginal analysisto make financial decisions. The marginal analysis is a principlein economics that states that financial decisions should be madeand actions taken only when the added benefits exceed the addedcosts. Financial managers use accounting but concentrate on cashflows and decision making.Managerial finance and accounting are not often easilydistinguishable but basically differ in that the financialmanager is the decision-maker whereas the accountant’s (i.e.controller) primary function is to develop and report data formeasuring the performance of the firm. This data often supportsthe financial manager’s decision.Question raised in this report and in connection with financialmanagement in general include: (a) Which socio-economic forcesinfluence firm performance in the media sector?; (b) Do newinformation and communication technologies have an impact on firmperformance?; (c) Which sources of finance are vital for



viability and sustainability of operations?; (d) Which specificfields may guarantee financial viability and sustainability?; (e)What background theories do explain the relations betweenstructure, firm conduct, and performance of firms in the mediasector and the impact of these factors on financial management?;(f) Which indicators and measures are used to show the financialperformance of media firms?; (g) What role does strategy play inmarket positioning of firms in the media sector; and (h) Whatrole does marketing strategy play in strengthening the financialposition of firms in the media sector?

Chapter 2: Financial Management of Media Firms – KeyIssues

Issues of financial management of organisations or firms in themedia sector are broad and dynamic. They range from generalissues of impact of environmental forces on the financialoperations of media firms (such as regulation and general macro-economic climate), to market-driven forces (such as competition,market availability of capital, audience and consumer demand,advertiser demand), to cost forces (i.e. economies of scale andscope, transaction costs), specific characteristics of the mediaproducts and services themselves, to technology as main driver ofchange.Scholars in media economics and media management offer analyticalreasoning and explanations for the impact relations and theeffects of these mutually dependent and impacting forces. Thetheory of the firm, for example, forms the basis of theindustrial organization (IO) model which provides a valuableanalytical framework for examining competition in the media andother industries. Most media economics texts follow the IO modelusing the SCP-paradigm.The Industrial Organisation model of industry competition showsfactors of impact as determined by the structure, conduct, andperformance of the firm operating in an industry sector.Theoretical and empirical analyses of the media sector have shownthat industry structure (i.e. the number of buyers and sellers inthe market, their market shares, their product and servicespecifics offered, the market phase, the existence of economiesof scale and scope, and barriers of entry and exit) determinesthe behaviour of firms (i.e. product and price policies,marketing policies, innovation policies) which, in effect,determine the performance (i.e. efficiency) of the marketplayers. In practice, Lacy (2004), for example, has studied the

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relationhsip of competition, circulation, and advertising on theperformance of daily newspapers. According to Lacy, economictheory and research provide evidence that intense newspapercompetition among newspapers will result in increases in newsroombudget, changes in content and decreases in advertising cost perthousand. However, empirical evidence is less storng thatcompetition decreases subscription prices. Considerablevariations across newspapers can be found with all theserelationships, which represent a variety of managerial decisions.This said, the financial media manager may decide upon whichpricing strategy to pursue. As put forward by Lacy (2004, p. 33),“as readership declines and the cost per thousand increases, advertisers will be morelikely to switch to imperfect substitutes. If ad lineage declines, newspapers that want tomaintain profit margins will either have to increase ad prices or maintain revenue or cutnewsroom and other expenses to control costs. In the former case, the probability ofadvertisers’ seeking substitutes increases. In the latter, quality declines will cause readersto leave, increasing the cost per thousand. As cost per thousand increases, businesses aremore likely to substitute other forms of advertising”.The media industry sector continues to go through major change.New technologies offer new revenue opportunities, channels tomarket, and possibilities for more efficient workflows and reuseof information. However, they also provide the threat ofdeclining revenues from more traditional products, and thechallenge of new competitors, new business models and majororganizational change. Meeting these opportunities and facingthese challenges requires strategic vision backed up by a clearknowledge of the marketplace, competitor activity, workablebusiness models, effective delivery channels and availabletechnologies.Further, a variety of forces related to the costs of operationsplay important roles in the economics of media. These includeinput costs such as costs for newsprint or personnel, productioncosts, and distribution, marketing and advertising costs of mediagoods and services. Cost economies can also be achieved throughraising the scale and scope of business. In addition, as marketsmay fail regulatory forces may set rules for business behaviourand thus financial performance. Barriers to entry and mobilityexert further constraints on market competition.Technology is another prominent market driver for change.Information and communication technologies (ICT) have drivenchange in the graphics and media industries in the areas ofcompetitiveness, work organisation, industry performance, andemployment in the last decades. Research studies establishedthat, in general, investments in IT capital do produce netefficiency benefits, although this varies depending on other



factors such as management practices, and organizational andindustry structure.Sources of finance for media operation are multiple: Generally,they come from internal or external sources. For newspapercompanies, internal revenue sources are circulation sales andadvertising sales. Media work on dual markets: information/ideasmarkets and advertising markets. How these two markets areinterlinked is explained by the theory of the circulation spiral.This has implications on the financial management of mediaorganizations. Under this perspective, the key objective of themedia revenue management problem is to optimally allocateadvertising space across upfront and scatter markets to hedgeagainst audience uncertainty, honour client contracts andmaximize short-term profits.Media managers can choose from a set of traditional businessmodels to achieve viability of their operations: The ‘content’-business model builds on the basic strengths of media, to producehigh-quality content for targeted audiences. This model can besupplemented by the ‘community’-business model whose viability isbased on user loyalty. Further, publishers have been able todevelop innovative business models for financing their Internetpresence and other online activities, thus strengthening thethird pillar of business modelling ‘commerce’.As traditional media businesses move into the digital era, newrevenue opportunities emerge. Online business models includerevenue generation from brokerage, web advertising, and affiliateactivities.More specific issues of financial media management concern start-up financing, credit and cash flow management, and investmentmanagement. Importantly, present capital investment decision arebased on estimated future cash flows and relevant interest ratesmust be taken into account to arrive at the value today of theanticipated flows. Financial media managers can rely on theformula of Net Present Value to take into consideration thisaspect of financing.Theories of ownership control and its effects on mediaperformance, financial commitment and financial control, resourcedependence theory, as well as corporate governance theories havebeen applied to media economics and media management. They offertheoretical explanations for various variable relationsconcerning financial media operations and strategies.There are a number of indicators and measures of firm performanceapplied in the media sector. These indicators and measures may

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grossly be differentiated into indicators of profitability,market value (or market capitalization), and share indicators.Strategies are processes of specifying an organization’sobjectives, developing policies and plans to achieve theseobjectives, and allocating resources so as to implement theplans. Media management may apply a set of strategies in ordersafeguard financial viability and health, and to maximize profitor market growth respectively. Strategic management can be seenas a combination of strategy formulation and strategyimplementation.The doyen of competitive strategy theory, Michael Porter (1980),has suggested cost leadership, product differentiation, andmarket segmentation (or focus) as the three generic managerialstrategies to achieve competitive advantage and firm growth.Besides these general managerial strategies, the kinds ofstrategies media firms regularly develop and apply and which aremost often evident involve market integration, diversification,niche marketing, and internationalization.Marketing is defined by the American Marketing Association (AMA)as “an organizational function and a set of processes for creating, communicating, anddelivering value to customers and for managing customer relationships in ways thatbenefit the organization and its stakeholders” (www.marketingpower.com).Marketing can thus be seen as an integral element of financialmanagement theory and practice.Marketing strategies are partially derived from broader corporatestrategies, corporate missions, and corporate goals. They shouldflow from the firm’s mission statement. They are also influencedby a range of microenvironmental factors.Market dominance strategies may be categorized as marketingstrategies which classify businesses by reference to their marketshare or dominance of an industry. Typically there are four typesof market dominance strategies: (a) market leader, (b) marketchallenger, (c) market follower, and (d) market nicher.

Chapter 3: Financial Management in Media Practice –Case Evidence

Two best-practice cases in the media industry sector show thatfinancial management plays an important role in media practice.The cases delivered general company facts and backgroundinformation, looked into the financial situation and financialactivities of both players, enabled testing of theoretical issues


http://www.marketingpower.com/


developed in the chapter 2 and 3 of this study against empiricalevidence from media practice, and discussed impacts of financialmatters on firm performance and the competitive behaviour.Case study A refers to a financially successful online web-portalfor quality news in the print media. Case study B refers to thedifficult path of a European Public Service Broadcaster inredefining its role in the digital era. Financial management iscrucial for both media firms.Evidence from the first case study A, the online version of thequality daily ‘Der Standard’, http://DerStandard.at, suggeststhat print media can offer online news economically andfinancially successfully. Starting back in 1995, DerStandard.atwas the first German speaking newspaper on the Internet. Itsconstantly developing website has set standards in Austria.Incorporated in 1999 as a separate entity, it became profitablein 2004 with revenues of € 4.1 million annually. Onlineadvertising and online classifieds are most important andrepresent almost 90% of total turnover. Given the increasingmarket shares of online in advertising and classifieds, furthergrowth with double digit rates is assured for the next few years.Evidence form case study B suggests that the Austrian PSB, theAustrian Broadcasting Corporation (ORF), will retain a centralrole in the provision of public service broadcasting in the nextyears to come. This is due to its well established marketposition, leaving room for competitors to establish only veryhesitantly (the market was only liberalized in 1997), and itsoverall business clout. However, in order accomplish and reaffirmthis, the ORF will have to improve its overall service portfolioon analogue and digital platforms somewhat faster and morecritically approved than it has during the 1990s. Overall, theAustrian television broadcasting market is currently in a stateof flux. This is because private national analogue television hasfinally been granted a licence, and public service broadcastingand cable-TV are currently switching over to digitaldistribution. Already facing strong competition from privatecross-border analogue television, Austria’s public servicebroadcasting station ORF is facing fiercer competition on manyfronts and on many levels. In this context, the ORF contentoffers converge towards private commercial television. By this,it has embarked on a set of cross-media marketing strategies toexploit traditional revenue bases and invent new ones. This is tosafeguard the economic viability of its operations.

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Financial Management of Media Firms - Key Issues, Theories, and Case Evidence

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