Student Script

Module 20.4 – Media Finance

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

Prof.Dr. Paul Murschetz, MSc.

Cologne Business School GmbH

May 1, 2006

Media Finance

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Acknowledgements

This report was prepared by Paul Murschetz on behalf of Cologne Business School GmbH.

Rights Restrictions

Material from this report can be freely used and reproduced but not commercially resold and, if quoted, the exact

source must be clearly acknowledged.

Cologne, May 2006

3 15 May 2011

Table of Contents

Executive Summary ................................................................................................................................ 4

1 Introduction to Financial Management of the Media .................................................................... 6

Study objectives and research questions ................................................................................ 9

Methodology and study organization ................................................................................... 10

2 Financial Management of Media Organizations – Key Issues .................................................... 12

2.1 General issues – The impact of competition on firm performance .......................... 12

2.2 Specific issues of financial media management ......................................................... 19

2.3 Further theoretical approaches to financial media management ............................ 33

2.4 Financial indicators and measures of firm performance ......................................... 35

2.5 Strategic responses of media companies .................................................................... 38

3 Financial Management in Media Practice – Case Evidence ....................................................... 46

Case Study A: http://DerStandard.at – The Internet success for quality news publishing

........................................................................................................................................ 46

Case Study B: ORF – The Austrian Broadcasting Corporation exploiting cross-media

financial strategies ........................................................................................................ 51

4 Conclusions ................................................................................................................................. 56

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Executive Summary

Research background and objective

The research study project “Financial Management of Media Firms – Key Issues, Theories, and Case

Evidence” (in the following abbreviated as „the study‟) will research and analyse key issues of

financial economics and financial management of the media sector. It 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 applied to the media sector, present key

issues and main principles of financial management of media organizations, and offer analytical

reasoning for the impacts of general socio-economic forces on firm performance in the media sector.

Further, this study will present two best-practice case studies in the media sector in order to test

theoretical issues discussed against empirical evidence.

The study must be regarded as an exploratory pilot study of mapping thematic issues regarding

financial management in general and the media in particular. Main objective is to introduce key

theoretical issues of financial economics and financial management of the media sector and to test

these issues against two selected best-practice case studies in the media sector. By this, this study

provides theoretical and empirical analysis of financial economics and financial management of the

media sector in order to understand the following multi-levelled key issues in more detail:

(a) Impacts of competition on media firm performance as viewed from an Industrial Organisation

theory perspective

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

(c) Sources of finance of off-line and online media firms in selected industry sectors as possible

responses to require sufficient 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

Results

This study defines financial management in a broad sense. This means that while financial

management theory in general is concerned with the “acquisition, financing, and management of

assets with some overall goal in mind” (Van Horne & Wachowicz 2001, p. 2), this study proposes the

view that financial management of media firms needs to be defined more broadly. A proper definition

needs to include issues of governance, marketing, and competitive strategy. This said, the decision

function of financial management can not only be broken down into three major areas: the investment,

financing, and asset management decisions, but, following the American Marketing Association, may

view financial management in a broader way as an “organizational function and a set of processes for

creating, communicating, and delivering value to customers and for managing customer relationships

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in ways that benefit the organization and its stakeholders” (American Marketing Association,

website).

Only few scholars in media economics and media management research offer analytical reasoning and

explanations for issues of investment, financing, asset management, governance and firm value

creation processes for media firms. This study has laid the groundwork for analysing theoretical issues

in financial media management. It looked into the theoretical offers of the theory of the firm and the

Industrial Organisation model of competition to set-up a theoretical framework for effects of financial

media management on competition. Further, it identified a set of other theoretical approaches well

applicable to the field of financial media management such as theories of ownership control and its

effects on media performance, financial commitment and financial control, resource dependence

theory, and corporate governance theory. Case studies on the financial management practices of

mass media firms revealed that, in fact, print and broadcasting media apply various sets of

management and marketing practices to become economically and financially viable

organizations.

This study showed that able to show that the Internet‟s impact on the content utilization chains of a

traditional print media publisher manifests itself in various ways. It identified a set of new revenue-

generation practices, whereby the media firm studied exploited its content wealth and unique selling

propositions (USPs) for its online representations. As for the second best-practice case study, the

ORF‟s positive economics is mainly accounted for by well accepted informational programming,

programming of low-cost US-feature films and series, exclusive sports transmissions and an overall

successful „Austrification‟ of programmes. Further, Internet strategies, cross-media marketing

strategies, and digitization as innovation strategy make for a strong Public Service Broadcaster in the

future.

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1 Introduction to Financial Management of the 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 applied to 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 the concluding

chapter.

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

The economics and financing of media companies is a central issue in media management research

and practice. According to Picard (2002, p. xi), “the economics and financing of media companies are

the foundations upon which all media activity takes place. Regardless of cultural, political, and social

roles and expectations for media, media must cover their costs and create returns, just as any other

business, or they will wither and disappear. The forces that require effective operation are the same

for both private media and non-commercial media such as public service broadcasting”.

The financial requirements of varying types of media operations affect the forms and structures of

media firms, as do the scale and scope of their operations (see, Picard 2002, p. 2-3). The three most

common legal forms of business organization are sole proprietorship, the partnerships, and the

corporation. Sole proprietorship is a form of business owned by one person and operated for his or her

own profit. A partnership is a business owned by two or more people and operated for profit. A

corporation is an artificial being created by law (often called a “legal entity”) (see, Gitman 2003).

Because the needs of media differ and because of the organizational requirements to create media

goods and services vary depending upon their markets, the sizes of media organizations cover the

range from small to large.

Media organizations are guided by specific goals-sets. These goals include cultural goals, as well as

economic goals such as efficiency, effective organization of resources and processes, profit

maximization, economic growth, and economic stability.

Profit maximization as primary firms goal: The traditional „Theory of the Firm‟ which studies the

behaviour of firms with respect to the inputs they buy, the production techniques they adopt, the

quantity they produce, and the price at which they sell their output, asserts that the development and

operations of firms is guided by the primary goal of maximizing profit and the value of the firm

(Coase 1937, Crew 1975, Jensen & Meckling 1973). The purpose of the creation and operation of

commercial media firms is thus to produce the most profit and the highest value for the firm. The

former tends to be a short-term annual perspective, while the latter is a longer-term goal. If resources

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and the processes by which they are transformed into goods and services are efficiently and effectively

organized and managed, the ability to achieve these goals becomes possible.1

What is profit? Profit is a primary goal of firms. Profit is defined as a “measure of surplus by a

company from some activity or project over some time period” (Bannock et al. 2002). Bannock et al.

(2002, p. 293) continue as follows: “While simple at first sight, profit has a number of definitions, and

is far from simple in practice. In an accounting sense of the term, two important concepts of profit are:

(a) net profit before tax (or pretax profit), which is the residual after reduction of all money costs, i.e.

sales revenue minus wages, salaries, rent, raw materials, interest payments on loan, and depreciation,

and (b) gross profit, which is net profit before depreciation and interest. In other words, economic

profits are equal to total revenue minus total cost”. Thus, a profit-maximizing firm chooses to produce

at an output level or price that maximizes the difference between total revenue and total cost (Hoskins

et al. 2004).

For commercial firms, profit creates the money available to pay their owners or investors, make

capital expenditures, and pay debts. For non-commercial media, ownership/investor do not receive the

profit, but it provides funds to improve the company through capital investments, make additional

expenditures on content and other items, and pay debts (Picard 2002). To investors, revenue is less

important than profit (which in US business, somewhat confusingly, often is called income), which is

the amount of money the business has 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 might declare in its accounts, which might typically exist of some economic

rent plus normal profit, i.e. a return that just compensates the producer for the opportunity cost of the

capital and entrepreneurship that it provides.2

The role of profit: Profit measures the return to risk when making an investment. The role of profit in

capital investment decisions is explained by the risk theory of profit (Knight 1921). This argues that

the potential for high economic profits is necessary to induce investment, 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 are regulated by law to operate as not-for-profit firms. For example,

broadcasting law imposes specific income restrictions on media companies. In addition, media

companies have to pursue other goals than profit maximisation such as cultural and social goals as part

of their public remit.

Financial economics: Financial economics is the branch of economics studying the interrelation of

financial variables, such as prices, interest rates and shares as opposed to those concerning the real

economy. 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, bank deposits,

bills receivable; land buildings, plant, machinery; intangible assets such as patents, goodwill). This

asset valuation involves questions such as: „How risky is the asset?‟ (identification of the asset

appropriate discount rate), „What cash flows will it produce?‟ (discounting of relevant cash flows),

1 Some critics of this theory have argued that the rise of modern corporations and the separation of management and

ownership may lead to objectives other than profit maximization such as firm growth, or management utility (Klein 1998). 2 Opportunity cost is a ubiquitous concept and can be translated as the value that has to be given up – a lost opportunity – as a

result of a decision. It ensures that the price of every input to production is charged at the price equal to its value in its best

alternative use.

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„How does the market price compare to similar assets?‟ (relative valuation), and „Are the cash flows

dependent on some other asset or event?‟ (derivatives, contingent claim valuation).

Financial management: Financial management is concerned with the acquisition, financing, and

management of assets with some overall goal in mind (Van Horne & Wachowitz 1997). According to

Picard (2002), “financing involves meeting the monetary needs of a firm so that it may be established,

operated, and developed. Issues of financing range from creating sufficient funds to establish a firm,

to obtaining money to pay for operations, to gathering funds to fund growth” (p. 154). The essential

objective of financial management can be categorized into two broad functional categories: recurring

finance 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 to

understand the financial flow in the firm. In this context, critical issues are cash flow management,

credit management, investment decisions, and financing decisions (Alexander et al. 1993).

According to Bradley (cited in: Gitman 1999, p. 8), “financial management is the area of business

management, devoted to a judicious use of capital and a careful selection of sources of capital, in

order to enable a spending unit to move in the direction of reaching its goals”. This definition points

to the four essential aspects of financial management:

Financial management is a distinct area of business management, i.e. financial manager has a

key role in overall business management.

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

Careful selection of the source of capital, i.e. determining the debt equity ratio and designing a

proper capital structure for the corporate.

Goal achievement, i.e. ensuring the achievement of business objectives viz. wealth or profit

maximization.

Academic reasoning in financial management for the media is sparse. Discipline development could

be undertaken alongside traditional topic 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 can be best understood by

analyzing the definition of financial management. Following (Gitman 2003, p. 3), “financial managers

actively manage the financial affairs of any type of businesses – financial and non-financial, private

and public, large and small, profit-seeking and not-for-profit. They perform such varied financial

tasks as planning, extending credit to customers, evaluating proposed large expenditures, and raising

money to fund the firm‟s operations. In recent years, the changing economic and regulatory

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environments have increased the importance and complexity of the financial manager‟s duties. As a

result, many top executives have come from the finance area”.

Treasurer and controller: Corporate organizations differ between treasurer and controller. The

treasurer is the firm‟s chief financial manager, who is responsible for the firm‟s financial activities,

such as financial planning and fund raising, making capital expenditure decisions, and managing cash,

credit, the pension fund, and foreign exchange. The controller is the firm‟s chief accountant, who is

responsible for the firm‟s accounting activities such as corporate accounting, tax management,

financial accounting, and cost accounting.

Relationship to accounting: The firm‟s finance (treasurer) and accounting (controller) activities are

closely related and generally overlap. Indeed, managerial finance and accounting are not often easily

distinguishable. In small firms the controller often carries out the finance function, and in large firms

many accountants are closely involved in various finance activities. However, there is one major

difference between finance and accounting: the accountant‟s primary function is to develop and report

data for measuring the performance of the firm, and the financial manager‟s primary function is to

evaluate the accounting statements and make decisions on the basis of their assessment of the

associated returns and risks.

The financial manager must understand the economic environment and relies heavily on the economic

principle of marginal analysis to make financial decisions. The marginal analysis is a principle in

economics that states that financial decisions should be made and actions taken only when the added

benefits exceed the added costs. Financial managers use accounting but concentrate on cash flows and

decision making.

In addition, managerial finance involves separate further types of positions and functions within a

business firm: (a) the financial analyst, who primarily prepares the firm‟s financial plan‟s and budgets.

Other duties include financial forecasting, performing financial comparisons, and working closely

with accounting; (b) the capital expenditures manager, who evaluates and recommends proposed asset

investments and may be involved in the financial aspects of implementing approved investments; (c)

the project finance manager, who arranges financing for approved asset investments, coordinates

consultants, investment bankers, and legal counsel in large firms; (d) the cash manager, who maintains

and controls the firm‟s daily cash balances; (e) the credit analyst, who administers the firm‟s credit

policy and evaluates credit applications, extending credit, and monitoring and collecting accounts

receivable; (f) the pension fund manager, who oversees or manages the assets and liabilities of the

employees‟ pension fund; and (g) the foreign exchange manager, who manages specific foreign

operations and the firm‟s exposure to fluctuations in exchange rates (Gitman 2003).

Study objectives and research questions

Main objective: Main objective of this study is to introduce key theoretical issues of financial

economics and financial management of the media sector and to test these theoretical issues against

two selected best-practice case studies in the media sector.

By this, this study provides theoretical and empirical analysis of financial economics and financial

management of the media sector in order to understand the following multi-levelled key issues in more

detail:

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(h) Impacts of competition on media firm performance as viewed from an Industrial Organisation

theory perspective

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

(j) Sources of finance of off-line and online media firms in selected industry sectors as possible

responses to require sufficient 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 guide this study:

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

2. RQ2: Do new information and communication technologies have an impact on firm

performance?

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

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

5. RQ4: What background theories do explain the relations between structure, firm conduct, and

performance of firms in the media sector and the impact of these factors on financial

management?

6. RQ 5: Which indicators and measures are used to show the financial performance of media

firms?

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

8. RQ7: What role does marketing strategy play in strengthening the financial position of firms

in the media sector?

Methodology and study organization

Selected research methods: The analysis will apply a set of theoretical and empirical methods:

scientific literature review, study of business reports and industry data, and case study research.

Literature review: We apply a scientific literature review, i.e. a documentation of a

comprehensive review of the published academic and practitioner‟s work from secondary

sources of data in the areas of interest.

Study of other written material: We will study other data sources to include published and

unpublished documents, expert reports, industry data, company reports, memos, letters, and

newspaper articles.

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Case Study research: We explore particular cases by applying the case study method.

Single-case studies of financial management in media organization are analyzed as an

empirical validation of our approach.

Study organisation: This study is organized alongside the following three main chapters, according

sub-chapters, and a reference section:

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

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2 Financial Management of Media Organizations – 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 firm performance

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 investment management

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 and

opportunities, and

Depict marketing strategies as specific firm responses to market pressures

2.1 General issues – The impact of competition on firm performance

According to Picard (2002), four major drivers of change are affecting media operations and put

pressure on choices of managers of media firms to develop appropriate responses to them: (1) market

forces, (2) cost forces, (3) regulatory forces, and (4) barriers to entry and mobility. Picard (2002, p. 48)

defines “market forces as external forces based on structures and choices in the marketplace. Cost

forces are internal pressures based on operating expenses of firms. Regulatory forces represent the

legal, political, and self-regulatory forces that constrain and direct operations of media firms.

Barriers represent factors that make it difficult for new firms to enter and successfully compete in a

market”.

In the following paragraph, these four categories of market forces will be described and impacts for

financial media management will be introduced and discussed. Additionally, this chapter will

introduce the impact of technology as main driver of market changes and its potential impacts in

financial management of the media.

Market forces

Competition: The theory of the firm forms the basis of the industrial organization (IO) model that

provides an analytical framework for examining competition in the media and other industries. Most

media economics texts follow the IO model using the SCP-paradigm. This paradigm posits a causal

relationship between market structure, conduct and performance. Market structure determines the

conduct of firms, which in turn determines industry performance.

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

Factors of competition: Of the factors that determine competition, market structure usually takes

precedent. It involves three characteristics: (1) the number of sellers, (2) the nature of the product, and

(3) barriers to entry (Picard 1989). The number of sellers can range from many, as in models of pure

competition, to one, the condition of monopoly.

Economic theory states that competition exists when buyers can substitute one product for another.

This willingness to substitute depends on several factors, such as price, price of substitutes, quality of

products, income and degree to which various products provide the consumer with equivalent services.

With news media, few products are perfect substitutes because readers add to the meaning by

interpreting content and develop preferences for specific bundles of information, such as particular

newspapers. Because of these preferences and the utility they provide, newspapers and all media do

not fit well the assumptions of classic economic theories of perfect competition (Lacy 2004).

Classic models of competition suggest there are many firms in a market, each selling an identical

product. Each firm also pays identical costs to produce its product. Consumers want to buy the product

Micro data

Legal form

Organization structure

Leadership

Market structure

Number of sellers and buyers

Market shares

Product differentiation

Economies of scale

Entry and exit barriers

Market phase

Market conduct

Price and product policy

Marketing

Innovation

Market result

Allocative efficiency

Productive efficiency

Diversity of opinion

Macro data

Competition policy

Business cycle policy

Technology policy

Source: Berg 1999.

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at the lowest possible price, and it doesn‟t matter which firm produces the product. Any firm that

increases its price loses customers who switch to another firm selling the same product at a lower

price. Each firm‟s product is a perfect substitute for any other firm‟s product. Firms cannot influence

competitors and are forced to sell at a price that just covers their costs. Market conditions must change

before firms can increase prices without losing all of their customers. If only a few firms compete,

each individual firm‟s actions will influence the response from other firms. In oligopolistic markets

firms might agree to raise prices above production costs, earning excess profits. Explicit pricing

agreements are illegal, so oligopolists must depend on tacit understandings to maintain pricing

discipline. However, such agreements are unstable, and individual firms will violate these

understandings if they believe they can gain an advantage.

Newspaper markets tend to be either oligopolistic or monopolistically competitive. The nature of the

product refers to its substitutability. While products under pure competition differ only in price,

competition under monopolistic competition is based on product differentiation and advertising.

Barriers to entry can take on several forms, from technology to regulation to illegal behavior 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

that intense newspaper competition among newspapers will result in increases in newsroom budget,

changes in content and decreases in advertising cost per thousand. However, empirical evidence is less

storng that competition decreases subscription prices. Considerable variations across newspapers can

be found with all these relationships, 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 the newsroom and improves

journalism performance.

The increased expenditure and performance translates into changes in content and

improvements in quality aimed at attracting readers.

The relationship between these content changes and circulation growth is not perfect.

However, evidence suggests quality content can attract readers and that failure to provide

acceptable levels of quality and content will lead to declines in circulation and penetration.

Competition for advertising decreases the cost per thousand that advertisers pay newspapers

for at least some forms of advertising. At least some advertisers see other media as substitutes

for some forms of newspaper advertising, especially retail advertising. The number of

advertisers who accept this seems to be growing. At some point, rising cost per thousand

probably leads to businesses moving their advertising to other media, although this is just one

factor in the substitution.

Clustering reduces competition and affects content and advertising prices.

As a result, market performance is impacted by these relationships and dynamics. As put forward by

Lacy (2004, p. 33), “as readership declines and the cost per thousand increases, advertisers will be

more likely to switch to imperfect substitutes. If ad lineage declines, newspapers that want to maintain

profit margins will either have to increase ad prices or maintain revenue or cut newsroom and other

expenses to control costs. In the former case, the probability of advertisers‟ seeking substitutes

increases. In the latter, quality declines will cause readers to leave, increasing the cost per thousand.

As cost per thousand increases, businesses are more likely to substitute other forms of advertising”.

15 15 May 2011

Lacy (2004, p. 34) continues as follows: “Newspapers often take advantage of declining competition

to enhance short-term profits. However, this is a strategic choice. According to economic theory,

businesses that cut quality and pursue aggressive pricing policies can invite competition. A recent

study of the relationship between type of daily ownership 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 counties with privately owned dailies. Because publicly owned dailies tend to cut

newsroom budgets and price aggressively, this exploratory study suggests that dailies might be

inviting weekly competition through short-run pricing and content strategies”.

Changes in consumer demand: There is a multitude of factors for change in consumer demand in

printed products. Lifestyle changes and the focus individuals place on their leisure time have changed.

There has also been a reduction in the number of younger people reading newspapers as new

communications channels continue to proliferate. Individual working patterns continue to change

either. Further, there are visible demands for higher performance from media products, through higher

quality, personalisation of services or other means. To leverage consumer trust, media publishers are

advised to build on their potential strengths in branding and customer relationship management in

print and new online markets.

Changes in the value chain: The media publishing value chain is informed by a variety of different

market players who contribute to adding value to information-based products and services under

specific competitive and environmental conditions. A set of new access, service and technology

providers have entered the scene in the media sector. These new providers put pressure on incumbents,

some forward-integrate their businesses and thus increase horizontal supplier market power while

others become vertically integrated and differentiate-out into key specialists in niche markets. On the

other hand, these challenges open ways for new supply chain partnerships.

Changes in customer relations: Today, a new business model is emerging: electronic networks and

markets allow the break-up of what previously thought to be firmly controlled value chains. The value

chain looses its chain attributes, and is replaced by flexible relations, so-called „value webs‟

(Reichwald et al. 2004). By integrating customers into market research and product development

activities, companies can get efficient support to improve products for more customer satisfaction as

well as to identify new sources of revenue. Equally, the role of the customer is changing from a pure

consumer of products or services to a coequal partner in a process of adding value - consumers are

becoming co-producers and co-designers. Both e-business partners are tied together in these value

webs. Mass customisation as pre-condition of customer integration may result in economies of

integration which may lead to product innovation, lower transaction costs, more precise information

about market demands, and increase in brand loyalty by directly interacting with each customer. In

practice, the Publishing and Printing industry sector needs to improve supplier-customer relations in

order to strengthen market position in an increasingly dynamic market environment. Individualisation,

personalisation, and customer integration are achieved by integration of CRM-system solutions and

direct marketing tools.

Competitive pressures: Publishers are facing increased pressures from competition through market

players within the sector (e.g., in publishing through the increasing number of „free sheets‟ in major

cities) and from other sectors moving into the industry. These new competitors apply new ICTs to

enter core publishing fields to distribute their content. To counter customer churn, branding is an

effective counter measure and strengthens customer loyalty. Additionally, the general macro-economic

situation greatly affects the media industry (Picard 2002). A bad economic situation triggers a

decrease on advertising spend on print products as well as on direct consumer sales and the level of

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circulation. Particularly the job, housing, and car advertisement markets are increasingly read online

and mostly for free. Overall, there is potentially increased competition in shrinking markets.

Cost forces

A variety of forces related to the costs of operations play important roles in the economics of media.

These include input costs such as costs for newsprint or personnel, production costs, and distribution,

marketing and advertising costs of media goods and services. Total costs of production can be divided

into fixed and variable costs, the former being those costs that are incurred regardless of the volume of

production, the latter varying with output. As Picard (2002, p. 56) has put it: “Television stations have

basic expenses for facilities, studios, and transmitters that do change significantly whether the station

broadcast sixteen hours per day or twenty-four hours a day”. And: “A magazine that increases its

press run from 100,000 to 125,000 will incur additional variable cost for paper, ink, production time,

and distribution because of the added production. Conversely, if it reduces its press run, those costs

will be reduced” (ibid.). Transaction cost theory would assume that a major source of market failure is

found in the fact that transactions which would need to occur for the sake of economic efficiency

simply do not occur because transaction costs interfere with or discourage the process of transacting.

Examples include the cost of writing contracts, or the cost of finding partners with whom to trade. The

costs of enforcing agreements, and the 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. cost savings to cause the average cost of producing a commodity to fall as

output of the commodity rises. This generally results from technological factors which ensure optimal

size of production is large. With high fixed costs in plant and machinery, the larger the production the

lower the costs per unit of the fixed inputs. Large companies can afford to implement

disproportionately more powerful IT solutions in printing and publishing and achieve higher EoS.

Economies of scope are cost savings that make it cheaper to produce a range of related products by

one single firm than to produce each of the individual products by a single firm. In addition, larger

companies need to employ relatively fewer IT people (measured as % of the total staff) than small

enterprises, even if the architecture of their ICT networks is much more complex. SMEs face barriers

to entry into new markets which result from a lack of EoS, limitations in access to high-quality

printing, an inability to offer suitable packages to advertisers and an inability to obtain finance at rates

available to larger publishers.

Regulatory forces

According to Picard (2002, p. 69), “regulatory forces involve approvals for media operations or

requirements placed on media to avoid or to behave in certain ways”. Regulatory forces may differ in

degree, object, goal, and effects of regulation.

Market failure: Market failure or market imperfections are viewed as a necessary but not sufficient

condition for government intervention. Hoskins et al. (2004) discussed theories of government

intervention as applicable to the media industries: public interest theory (Posner 1974) and capture

theory (Stigler 1971). The public interest theory of regulation explains, in general terms, that

regulation seeks the protection and benefit of the public at large. This will maximize wealth and,

hence, the size of the pie to be shared. The capture theory is that government intervention is provided

17 15 May 2011

to further the economic interests of specific groups, such as producers and labour unions. The theory

has been particularly applied to intervention in the form of regulation, where it claims regulators are

“captured” by the industry they are regulating and intervene in ways demanded by industry.

Additionally, the regulatory game involves information asymmetry. Since the state does not run the

firm, it does not have the full information on how well or badly the firm is performing.

Government failure: Government failure is the case when intervention is undertaken when the costs

of intervention are greater than the benefits. This type of failure may occur because it is too costly to

set up and operate the subsidy scheme, regulation, or other form of intervention proposed.

Barriers to entry and mobility

Barriers are defined as factors that make it possible for established firms in an industry to enjoy supra-

normal profits without 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 barriers such as exclusive dealing and long-

term contracts with retailers (Tirole 1988). Further, government regulation, patents, predatory pricing,

economies of scale, customer loyalty, and investment requirements can act as barriers to entry too.

The movie industry is a best-practice example for the existence of barriers to entry. There, the most

obvious barrier for independents to entry is the high cost of acquisition. Larger studios owe their

survival to ample resources, which afford them the ability to weather box office disasters. Small

studios would not necessarily be able to survive box office failures. Major studios also have an

advantage in their ability to maintain distribution networks across the country and in foreign markets.

This ensures that their films get to theatres and television screens. Further, barriers to entry exist in

huge marketing expenditures in opening a film in several theatres simultaneously, particularly on a

national or world-wide basis. Importantly, intellectual property rights create apparently strong barriers

to entry.

Mobility barriers, on the other hand, are factors which impede the ability of firms to exit an industry,

or to move from one segment of an industry to another.

The following Exhibit 2-2 shows a typical industry analysis and the factors impacting on the industry

competitors as conceptualized by Harvard Business Professor Michael Porter (1980).

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1 May 2011 18

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

Source: Porter 1980

As shown in exhibit 2-2 above, Porter (1980) identifies five forces that 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 the problem of entering new markets.

Another is to the current competitors and the ongoing task of staying competitive in markets where

they already operate. Perhaps the most important thing to keep in mind is the inverse relationship

between profit margins or returns and the intensity of competition: as the intensity of competition goes

19 15 May 2011

up, margins and returns are driven down. This can require changes in competitive strategy to remain

in an industry and, under some circumstances, it can occasion the decision to exit a business or an

industry (Nichols 2000).

Technology as market driver

Digitization is currently having sustainable impact on the media industry sector. The sector is

undergoing structural changes both in terms of organizational processes and with respect to the type of

products and services which are produced, delivered, and consumed.

Publishing has become a complex, multi-channel, rich-media content delivery business. Adoption and

use of Internet-based and other ICTs causes companies to embrace new strategies, platforms, and

infrastructure and value chains. Publishers can place their strategic development and business

modelling on content as their core competence. However, to fulfil changing customer expectations and

requirements, Internet offers need to be more complex as opposed to 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 for financing their Internet presence and other online activities, thus

strengthening the third pillar of business modelling „commerce‟. As shown in one of our case studies,

traditional publishers can benefit from the Internet business model. Online advertising and online

classifieds can be a definite business opportunity for newspaper publishers.

Investment in information technology (IT): There is a sizeable stream of research examining the

domain of the business value of IT investments (Melville et al. 2004). Early studies failed to find the

expected link between enormous increases in IT capital investments on the one hand and productivity

improvement on the other, leading to 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 management practices, and

organizational and industry structure (Bresnahan et al. 2002). Also there is no assurance the investing

firm, rather than customers or competitors, will capture the value of those efficiency improvements

(Hitt & Brynjolfsson 1996).

2.2 Specific issues of financial media management

Definition of Media Finance

All forms of internal & external procurement of capital

Media finance studies how and with what effect media industries, media companies, media

content, and media products/services (i.e. the production and selling) are refinanced

There is a wide variety of media finance methods. This owes to the fact that there are many

types of media itself: Print, audio-visual, Online etc. All have their specific media finance

models.

A business model describes the rationale of how an organization creates, delivers, and

captures value - economic, social, or other forms of value.

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1 May 2011 20

Most generally, media firms collect revenues from sales in circulation of items sold or from

sales in advertising space.

Circulation is defined as the number of copies issued of an advertising medium in print; by

extension, the audience reached by advertising media, outdoor posters, radio, and television

programs. Circulation sales in the print media can be made on the basis of single-copy sales or

on the basis of subscription. Single-copy sales are “newsstand sales” sold to customers at

retail. Print media can also be sold on a subscription basis. Most single-copy sales are made in

supermarkets and other mass retail outlets.

As for advertising sales, media companies such as TV channels, cable networks or radio

stations collect most of their revenues from selling “eye-balls” through advertisement space

during various programmes.

Similarly, print media companies sell advertising space to be filled in their outlets to readers

and, accordingly, advertisers.

Sources of finance

Sources of finance: Most generally, media firms collect revenues from sales in circulation of items

sold or from sales in advertising space. Circulation is defined as the number of copies issued of an

advertising medium in print; by extension, the audience reached by other advertising media, outdoor

posters, radio, and television programs. Circulation sales in the print media can be made on the basis

of single-copy sales or on the basis of subscription. Single-copy sales are “newsstand sales” sold to

customers at retail. Print media can also be sold on a subscription basis. Most single-copy sales are

made in supermarkets and other mass retail outlets. Many publishers also distribute through specialty

stores.

As for advertising sales, media companies such as TV channels, cable networks or radio stations

collect most of their revenues from selling “eye-balls” through advertisement space during various

programmes. Similarly, print media companies sell advertising space to be filled in their outlets to

readers and, accordingly, advertisers. Media work on dual markets: information/ideas markets and

advertising markets (Picard 1989). How these two markets are interlinked is explained by the theory of

the circulation spiral, originally proposed by the media scholar Lars Furhoff (1973). The main point of

this theory as applied to newspaper competition is well synthesized by the following quotation by

Gustafsson (1978, p. 1): “The larger of two competing newspapers is favoured by a process of mutual

reinforcement between circulation and advertising, as a larger circulation attracts advertisements,

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 less appeal for the advertisers,

and it loses readers if the newspaper does not contain attractive advertising. A decreasing circulation

again aggravates the problems of selling advertising space, so that finally the smaller newspaper will

have to close down”.

Under this perspective, the key objective of the media revenue management problem is to optimally

allocate advertising space across upfront and scatter markets to hedge against audience uncertainty,

honor client contracts and maximize short-term profits. Scatter markets are the remnants of TV

network markets of unsold commercial time that remain after preseason upfront buying has been

completed.

21 15 May 2011

Direct types of media finance

Media content directly funded or finances by user = User-financed

This means that media content is directly funded by users with the purchase of media content

(similar to other markets for other products). Here, the principle of consumer sovereignty is

crucial: demand for content and media forms determines supply. Such one-off direct payments

also exist in media markets

Direct payment – single copy sales of carrier media (i.e. carrying content);

advantage: price discrimination becomes possible between premium users and

commodity users

Ex: books, mags, newspapers, music CDs, digital files (iTunes), video tapes

Revenues from sound files sold: downloadable MP3 files

Sales of ringtone services (would that be selling media?)

Revenues from games sold (online or offline)

Subcription payments (Abonnement)

E.g.: newspapers, magazines, pay TV

Rental: e.g. video or DVD, pay TV?

Directly funded media content can be usage-dependent or non-usage dependent.

Usage dependent:

One-off transactions: volume or duration of usage (e.g. single VoD film

download of Premiere for duration of 24 hours)

Non-usage dependent:

One-off:

Access charges to basic cable service (e.g. Kabelanschlussgebühr)

Periodical:

Broadcast licence fee (Grundgebühr GEZ) to be payable for TV and

radio sets that may receive PSB programming

Subscription to basic cable or sat service (e.g. pay TV)

What are rentals?

EC law: Renting of carrier media is exclusively dealt with by author and artist

Ban on renting music carriers (1996), no commercial book renting; but video renting is

important

“Sell-Through” – In the home video business, movies that are sold to consumers rather than

rented to them; there is (still) a market for video and DVD

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1 May 2011 22

Film Rental: What the theater owner pays the distributor for the right to show the movie. As a

rough rule of thumb, this usually amounts to about half of the box office gross; normally the

revenue split is 50/50 between cinema and distributor.

Direct payment - Single Copy Sales

Distribution via retailers

Chain stores, shops, discounters, garages, etc.

Internet as distribution channel (B2C is business to customer)

Pros & Cons:

Direct connection to acquisition and consumption of good through user.

Principle of consumer sovereignty is fulfilled, i.e. the consumer takes out the things

s/he prefers

Carrier media like CD or book allow for durable and unlimited use of content

Paid content is an example of SCS (music files on iTunes)

With purchase users gain rights for unlimited use

Indicators: Sales volumes by country

DE: www.ivw.de

Ad info portal in general: www.warc.com

Direct payment – Subscription revenues

Distribution via retailers

Similar to single copy sales, but makes buyer-seller relation durable. This is important for

customer retention; otherwise they switch to another provider

This decreases information problems for buyers and reduces high costs of retailing and avoids

costs of remissions

This allows for greater bargaining security as money is paid in advance

But: No ad effectiveness of goods in retailing is achieved

And: Market entry barriers are higher, as seller needs to undertake a lot of customer research

and advertising in consumer and what they wish to purchase (and how their lifestyles are in

general); customer loyalty has to be achieved

For the ad market, subscription is better, as subscriber data improves target marketing (higher

prices can be charged!)

Ex: Newspapers, mags, but also Music CD, Pay-TV (without carrier medium, only right to

access and watch program).

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Newspapers: Most important means of delivery is subscription revs, but majority of revs are

made through ad and supplements. Just consider Sunday editions of newspapers, how heavy

they are and how many pages they include; in addition, they carry a lot of supplements (in the

UK this is drastic; there will be a lots of product samples in newspaper to tease new

consumers. Consumer industry wants to prove the product quality and raise attention for new

products; they are all for free as well.

Pay-TV subscription is most popular in USA; strongest players in EU are Canal+ and BSkyB;

Premiere is small comparatively; 3.5 m subscribers in 2008.

Subscribers receive basic cable services and premium channels (when paying an extra fee)

Indirect types of media finance

Media content that is also indirectly funded or financed

Indirect media finance accrues from advertising and third parties as well as through sales of

products & services.

Advertising finance

3rd party financed or product / services financed (i.e. not directly through the media content

offered but through additional products or services offered; e.g. when you watch teleshopping

on RTL Shop, you do not pay for it directly but you pay for it by calling into the show to

purchase some consumer goods (or nice tiger-patterned dresses for real ladies!)

Indirect types of media finance - Advertising

Advertising is sometimes not to be differentiated to be either informative, entertaining,

exaggerated, untruthful, … but so much is non-advertising content

Advertising is protected by public law in D (Grundrecht auf Meinungsfreiheit)

Advertising promotes other goods but is not in itself object of consumer demand

“TV stations are in the business of producing audiences. These audiences, or means of access

to them, are sold to advertisers” (Owen, Beebe & Manning 1974, p. 4)

Advertising finance is attractive as financing media content through other means may be

difficult! Why, because perhaps the topography in a country does not allow for broadcasting

TV signals (there are many mountains in Switzerland); the provider must convince the

advertiser to pay for the broadcasts (which will be difficult because he wants to access

consumers); or the volume of consumers is too small to finance full-scale PSB (such as in

Austria because the country is too small; and only advertising can finance all the programming

on Österreichischer Rundfunk; it is a 50/50 % split of revenues, which is unique in the world;

the BBC, by contrast is financed exclusively by fees. And then, the ORF programs are bad

which dissatisfies viewers, and, as a result, … advertisers = the vicious circle!

This is because it is technically very costly to charge monetary prices for radio and TV; or

media content is not dividable, thus charging prices for use is impossible

Ex: newspaper content consumer pay the same price whether they are reading much business

news or not; similar to pay-TV. In theory this means, that no price discrimination is possible

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1 May 2011 24

and that makes consumers dissatisfied and angry; and providers do not like that either because

they cannot skim-off all WTP (willingness to pay) from premium customers, for example. As

a result, they are losing producer surplus.

Advertising finance make it possible to link payments to use intensity (just as with use-

dependent monetary consumer payments)

Advertising is subject to regulation: consumer and youth

Ban on product advertising (tobacco in D); user mis-lead; specific targets (children); ad

messages mixed with content; we know advertorials (these have to be marked as such)

Ban on TV ad: Total time of ad breaks, time distance of ad breaks is important too; naturally

there are time laps of 20min between 2 min breaks.

PSB is subject to tight regulation

TV in Germany: Ad ban on political, Ideological, and religious kind (§ 7 Abs 7

Rundfunkstaatsvertrag)

When are ads most effective (dependent on content)

For advertisers: Not only price but also effectiveness of contacts is important

Effectiveness is dependent on:

(a) Qualitative consistency of recipients;

(b) Image of media content;

(c) Technical adequacy of medium.

Consistency of recipients:

Local / regional media: Geographic concentration, socio-demographic characteristics

Goal: To attract homogeneous and attractive group of recipients (= higher prices for average

contact)

Practically speaking: would you advertise alcohol during a children‟s programming; or

alcohol and car adverts?

Young recipients are most attractive target group: brand loyalty is not pronounced (e.g. CPT

prices for ZDF viewers under 50 years 4 times as high)

Image of media content: program context and ad spot need to be homogeneous (e.g. car

producer should not advertise with sportive cars when context program content on car

accidents was aired)

Technical problems: Ad in books is difficult. They are sold to one common language area,

reception takes a long time, i.e. regional and current ad can hardly be communicated

Newspaper and magazines are much more flexible: socio-demographic targeting (mags) and

geographic targeting is highly effective

TV ad: flexible and target-effective, but more emotional, suggestive

25 15 May 2011

Problem overall: How to measure effectiveness? Media-Analyses: factual media consumption

remains unclear

Consumer aversion to advertising: ad is annoying; gross utility of use of TV program is

reduced

Media content thus can get devalued to a point where its consumption is just more attractive

than other consumption opportunities; people switch to outdoor activities for example or meet

friends; but – on the other hand – overall media consumption time gets larger.

Ad aversion is also empirically evident: EMNID surveys.

But, there is lower aversion to print media advertising than TV ad

Overall: advertisers look for high purchasing power of consumers and low brand affinity

And: Direct funding of content may be more effective than indirect ad finance (e.g. even if

PPV channels charge such a high price for top-sport events that excludes 90% of viewers, the

remaining 10% may bring revenues which are much higher than ad revenues

TV spots

Political TV advertising (social advertising)

Infomercials

Product placement (e.g., cars in James Bond movies)

Promo (television program): “Dauerwerbesendung” (at least 90sec); it is legal if the ad

character is explicitly presented; they must also be signed as such.

Sponsorship

Merchandizing

The sale of products that are thematically related to TV or movie productions. Typical

merchandising products include accompanying books, video cassettes and audio cassettes.

Merchandising also refers to the sale of licensing rights, meaning the rights to use programs

and trademark-protected brand names, symbols, figures or logos.

A term of many varied and not generally adopted meanings. It can (1) relate to the

promotional activities of manufacturers that bring about in-store displays, or (2) identify the

product and product line decisions of retailers.

An indirect finance instrument for media content

Media-related merchandising: special variation of merchandize. This shall enhance the level

of awareness of the media-reated programs, titles, persons on TV, artists, in order to promote

sales of the media content.

E.g.: Tokyo Hotel: Magazines, DVD, CDs, Baseball caps, scarfs, etc.

E.g.: DVD of DSDS; T-shirts, caps

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“We love” collection worn by the contestants of Germany‟s next top model

Sponsoring

A cooperative arrangement, usually between advertisers and the media. In television,

sponsoring is a special advertising form, an independent way of directly or indirectly

financing a broadcast. At the beginning and / or end of every sponsored broadcast, a mention

of financing by the sponsor must be presented for a reasonable length of time [for example,

"This show brought to you by"]. Unlike other special advertising forms, sponsoring is subject

to no time limits under German broadcast regulations. But program sponsoring is subject to its

own set of regulations under the State Broadcasting Treaty and the Advertising Guidelines of

the State Regulatory Agencies for Broadcasting. Cooperation between advertiser and media

firm.

Within TV, sponsoring is a special ad form of direct and indirect financing of content or

programs. At the beginning or at the end of a TV show sponsoring needs to be explicitly

mentioned (“Die Sendung wird Ihnen präsentiert von …”).

Sponsoring (by companies): e.g. Krombacher presents the games of the German national

soccer team on ARD.

In contrast to other special ad forms, sponsoring is not subject to time restriction in Germany.

However, program sponsoring is bound to specific ad regulation (Rundfunkstaatsvertrag and

Werberichtlinien der Landesmedienanstalten).

Teleshopping & testimonials

Commission revenues from teleshopping (e.g. RTL Shop, HSE, QVC)

Viewers of a teleshopping program are given the opportunity to order the offered products by

telephone or fax during the program. The EU Television Directive, as amended in June 1997,

provides specific rules for teleshopping. Teleshopping spots continue to be subject to the

hourly advertising time limits [Advertising Guidelines], but teleshopping windows, on the

other hand, are permitted up to a maximum of three hours and eight windows per day, and

each window must be at least 15 minutes long. Under the new directive, moreover, pure

teleshopping channels are permitted without any advertising time restrictions at all.

Testimonials: Advertising format in which the product message is conveyed by personal

experience reports, either those of well-known personalities [celebrity testimonials] or normal

consumers [real-people testimonials].

Placement of brand-name products, services or known company logos in TV and movie

productions for commercial purposes. In Germany, the State Broadcasting Treaty prohibits

product placement both by the public television broadcasters and the privately-owned

broadcasting stations. According to the Advertising Guidelines, the presentation of products in

the editorial sections of the program is not considered to be a product placement if the

products and services are presented mainly for artistic or dramatic reasons or to fulfill

information duties.

27 15 May 2011

Product placement

Product placement is a type of advertising, in which promotional advertisements placed by

marketers using real commercial products and services in media, where the presence of a

particular brand is the result of an economic exchange. When featuring a product is not part of

an economic exchange, it is called a product plug. Product placement appears in plays, film,

television series, music videos, video games and books. It became more common starting in

the 1980s, but can be traced back to at least 1949. Product placement occurs with the inclusion

of a brand's logo in shot, or a favorable mention or appearance of a product in shot. This is

done without disclosure, and under the premise that it is a natural part of the work. Most major

movie releases today contain product placements. The most common form is movie and

television placements and more recently computer and video games. Recently, websites have

experimented with in-site product placement as a revenue model.

Product placement of brand-name products, services or known company logos in TV and

movie productions for commercial purposes. In Germany, the State Broadcasting Treaty

prohibits product placement both by the public television broadcasters and the privately-

owned broadcasting stations. According to the Advertising Guidelines, the presentation of

products in the editorial sections of the program is not considered to be a product placement if

the products and services are presented mainly for artistic or dramatic reasons or to

fulfill information duties (wow! Consider Raab‟s WOK WM, is this true?)

A telepromotion is a form of extended-length commercial. It is an advertisement for goods or

services that is editorially designed to resemble a television program. The rules applicable to

extended-length commercials must be observed.

Direct Response TV, a special form of advertising, refers to advertising spots in which

viewers are invited to contact the product supplier by fax or telephone. Unlike teleshopping,

DRTV spots are not designed to collect direct product orders, but to give viewers an

opportunity to learn more about the products being offered. Unless they are set up as

extended-length commercials, DRTV spots are subject to the commercial time-per-hour

restrictions applicable to spot advertising. Furthermore, DRTV spots are subject to the

maximum allowable advertising times for special advertising forms.

Direct Response Television, or DRTV for short, includes any TV advertising that asks

consumers to respond directly to the company --- usually either by calling an 800 number or

by visiting a web site. This is a form of direct response marketing. When it first appeared,

DRTV was used to market goods and services directly from the manufacturer or wholesaler to

the consumer, bypassing retail. Over time, it has also become used as a more general

advertising medium and is now used by a wide range of companies --- often to support retail

distribution.

Call-in media: Ad and marketing for products and services, which are fulfilled via tele VAS

(0190 / 0900/ 013X), mobile phone networks (call media SMS) or the Internet; services used

are erotic services, votes, polls, games, consulting and general information services).

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Syndication

In broadcasting, syndication is the sale of the right to broadcast radio shows and television

shows to multiple individual stations, without going through a broadcast network. It is

common in countries where television is organized around networks with local affiliates,

notably the United States. In the rest of the world, however, countries have mainly centralized

networks without local affiliates and syndication is less common. Shows can also be

syndicated internationally.

Syndication and program sales (e.g., reselling programs to other broadcasters; very popular in

USA).

first-run syndication refers to programming that is broadcast for the first time as a

syndicated show (not any one particular network), or at least first so offered in a given

country (programs originally created and broadcast outside of the United States, first

presented on a network in their country of origin, have often been syndicated in the

U.S. and in some other countries);

off-network syndication involves the sale of a program that was originally run on

network television: a rerun;

Public-broadcasting syndication has arisen in the U.S. as a parallel service to stations

in the PBS service and the handful of independent public stations.

Opening snapshot of The Muppet Show, with Kermit The Frog in the O, one of the

most successful (and successfully) syndicated TV series in the U.S. during the 1970s,

and shown worldwide for decades since (see, Cover page).

Licensing

Lisensing revenues: such as Music licensing is the licensed use of copyrighted music. Music

licensing is intended to ensure that the creators of musical works get paid for their work. A purchaser

of recorded music owns the media on which the music is stored, not the music itself. A purchaser has

limited rights to use and reproduce the recorded work

Other revenue models

Yes, many more; this list above was not exhaustive.

Just consider hardware sales: e.g. through selling set-top-boxes by Premiere (BSkyB in the

UK has given them away for free which made achieve such a big market share)

Premiere Hotel (also a revenue source for Premiere)

Handelsblatt archive articles from the print copy to be purchase online

In economics, a subsidy is a form of financial assistance paid, usually by the government, to

keep prices below what they would be in a free market, or to keep alive businesses that would

otherwise go bust, or to encourage activities that would otherwise not take place.

Subsidies can be a regarded as a form of protectionism or trade barrier by making domestic

goods and services artificially competitive against imports. Subsidies often distort markets,

and can impose large economic costs.

29 15 May 2011

The term subsidy may also refer to assistance granted by others, such as individuals or non-

government institutions, although this is more commonly described as charity.

New ICTs and e-business solutions have introduced a variety of new online business models which are

well applicable to newspaper publishers. Prof. Rappa from North Carolina State University has

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

Brokerage: Brokers are market-makers: they bring buyers and sellers together and

facilitate transactions. Brokers play a frequent 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 each transaction it enables. The formula for fees can vary.

Advertising: The web advertising model is an extension of the traditional media

broadcast model. The broadcaster, in this case, a web site, provides content (usually, but

not necessarily, for free) and services (like e-mail, chat, forums) mixed with advertising

messages in the form of banner ads. The banner ads may be the major or sole source of

revenue for the broadcaster. The broadcaster may be a content creator or a distributor of

content created elsewhere. The advertising model only works when the volume of viewer

traffic is large or highly specialized.

Infomediary: Data about consumers and their consumption habits are valuable, especially

when that information is carefully analyzed and used to target marketing campaigns.

Independently collected data about producers and their products are useful to consumers

when considering a purchase. Some firms function as infomediaries (information

intermediaries) assisting buyers and/or sellers understand a given 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 is predicated on the power of the

web to allow a manufacturer (i.e., a company that creates a product or service) to reach

buyers directly and thereby compress the distribution channel. The manufacturer model

can be based on efficiency, improved customer service, and a better understanding of

customer preferences.

Affiliate: In contrast to the generalized portal, which seeks to drive a high volume of

traffic to one site, the affiliate model provides purchase opportunities wherever people

may be surfing. It does this by offering financial incentives (in the form of a percentage of

revenue) to affiliated partner sites. The affiliates provide purchase-point click-through to

the merchant. It is a pay-for-performance model -- if an affiliate does not generate sales, it

represents no cost to the merchant. The affiliate model is inherently well-suited to the

web, which explains its popularity. Variations include banner exchange, pay-per-click,

and revenue sharing programs.

Community: The viability of the community model is based on user loyalty. Users have a

high investment in both time and emotion. Revenue can be based on the sale of ancillary

products and services or voluntary contributions.

Subscription: Users are charged a periodic - daily, monthly or annual - fee to subscribe to

a service. It is not uncommon for sites to combine free content with „premium‟ (i.e.,

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1 May 2011 30

subscriber- or member-only) content. Subscription fees are incurred irrespective of actual

usage rates. Subscription and advertising models are frequently combined.

Utility: The utility or „on-demand‟ model is based on metering usage, or a „pay as you go‟

approach. Unlike subscriber services, metered services are based on actual usage rates.

Traditionally, metering has been used for essential services (e.g., electricity water, long-

distance telephone services). Internet service providers (ISPs) in some parts of the world

operate as utilities, charging customers for connection minutes, as opposed to the

subscriber model common in the U.S.A.

Media firms may apply a range and combination of these business models. In practice, publishing

companies, for example, may benefit from leasing software use as ASP (application service

provider) on a subscription basis rather than selling software and maintenance to companies (the

„subscription‟-model). Or they may profit from models of selling archived newspaper articles to

users on a per-use or subscription basis (the „utility‟-model). Or they may try to improve customer

satisfaction through leverage of customer loyalty programmes (the „Community-model). Overall,

publishers try to achieve business growth coming from incremental business 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 income from consumers, and income begins slowly in the introduction

stage but is generally insufficient to cover costs.

Financing is one of the most critical obstacles of new firm growth (Moore 1994, Berger & Udell

1998). Binks and Ennew (1996) show that younger and growing firms suffer more from credit

constraints than older and non-growing firms. New firm‟s equity position is very weak and debt

financing is often impossible or restricted (Stiglitz & Weiß 1981). The higher risk of failure of young

innovative firms and missing tangible assets as collateral leads to credit rationing by lenders with the

result of a funding gap.3

Media firms overall are not the most attractive for start-up and development financing because

traditional media industries are not perceived as having the potential for growth. Most tend to be

relatively unexciting to investors compared to high technology, bio-technology, and other industries

that are perceived as modern and rising industries. The most attractive media-related firms today are

those involved in online and other new media activities, despite problems in their current finance

(Picard 2002).

The film production and distribution (i.e. movie) industry is particularly strongly affected by issues of

start-up finance. In brief, film productions are projects whose net value is not predictable at the time of

planning and production. Vogel has put this relationship in simple words: “There is truly little, if any,

correlation between the cost of a picture and the returns it might generate” (Vogel 1998, p. 110). The

film producer can not automatically sell his finished product at a price which covers his costs and

3 These lenders may be venture capital investors. Venture capital is private equity financing of companies by aggressive

investors who seek substantially above average returns and accept correspondingly high risks (Gastineau & Kritzman 1992,

p. 294).

31 15 May 2011

calculated return due to the fact that film exploitation and sales at the box office are highly uncertain.

This makes the financial flow a very complicated matter. Producers, distributors and exhibitors have

thus to agree on risk-sharing financing arrangement procedures affecting all three parties 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 shortfall guarantees), 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) (Eggers 2003, Hoskins et al. 2004, Vogel

1998).

Sustainable finance in the film industry: According to Hahn and Schierse (2004), as licensee film

distributors are prime taker of the price risk. Due to the uncertainty of the film‟s theatre performance,

there is no guarantee that the license sum paid in advance will amortize at the box offices. If a film

does not find a cinema audience, it will thus be the distributor hit hardest. Selling rights to TV

channels is no licence guarantee either even if rights were pricey. This is because the TV channels

may have to safe money and would not be able to afford the rights. Further, the distributor carries the

risk of terms of film delivery. He is dependent on the producer to deliver in time. Similarly, he carries

the quality risk if he buys the film „blind‟ prior to completion, only relying on a good script or simple

treatment. Moreover, the distributor carries the credit risk to deliver theatres with copies and

advertising materials before the exhibitor may achieve any turnover at the box office. Building costs

for new houses or high rents may cause exhibitors to stop paying their film rentals. Although the

distributor may find a perfect release date, he also carries the risk of competing movies which were

released earlier and became unexpectedly strong at the box office. Finally, film success is dependent

on exogenous factors such as the overall economic trend or weather conditions. In times of a

recession, for example, audiences may not attend the cinema. This will have obvious negative effects

on possible value flows to the exhibitor and up-stream distributor. Dally et al. (2002, p. 412) explain

the business practices 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 (on average 30% in the U.S.

domestic theatrical market) as a distribution fee and then advances the funds for other distribution

costs, including those for prints, trailers, and national advertising. The distributor commonly recovers

these expenses before making any payments to the producer and would normally, before arriving at a

definition of „net profit‟, prioritize recoupment by taking distribution fees and expenses first, then

interest on negative costs, then negative costs, and finally deferments and various participations.

Although this net deal predominates, there is also a so-called “gross deal” wherein the distributor

(usually of low-budgeted independently made and independently distributed films), is not separately

reimbursed 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 this higher fee, while

the producer receives the remaining unencumbered portion of gross rentals”.

Cash flow and credit management

“Once a firm is established and cash flow has developed, it is still not unusual fro revenue from sales

to be insufficient to meet all financial needs of the firm. This occurs because the firm may need to

invest in expensive equipment or purchase buildings, because the firm may experience seasonal

fluctuations in income that do not provide sufficient revenue during some parts of the year to cover

operating expenses, or because it may obtain an order that requires making a large initial expenditure

that will be recouped only when the order is completed” (Picard 2002, p. 161).

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1 May 2011 32

For example, a magazine company may find that it obtains the bulk of its advertising revenue in two

months during the spring and two months during the fall. If it has not reserved sufficient income from

those months for the lean months, it may need to seek financing to 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 faced by companies, they also

encounter issues involving cash that the firm receives from investors and operations. Capital and

revenue must be controlled to ensure its availability to pay for assets and future expense payments.

Cash management involves the control of this cash in a firm‟s account in such a way that it produces

the best possible results for the company”. This involves making choices about cash availability

(liquidity) and interest income and choices about when to use the funds and for what purposes.

Decisions are made regarding cash coming into a firm, cash leaving a firm, and cash held or invested.

Picard defines credit management as follows: “Credit management involves deciding whether to issue

sales or service credit, controlling the use of that credit, and collecting the accounts” (Picard 2002, p.

161). Credit management in media firms involves controlling sales credit for customer purchases of

advertising space and time, and service credit for purchases of subscriptions for media products by

audiences. Credit management issues involve credit evaluation, credit risk management, collection,

bad debt, and credit reporting (Picard 2002).

Investment management

In addition to ongoing involvement in financial analysis and planning, the financial manager‟s primary

activities are making investment decisions and making financing decisions. Investment decisions

determine both the mix and type of assets held by the firm. Financing decisions determine both the

mix and type of financing used by the firm (Gitman 2003). The sorts of decisions can be conveniently

viewed in terms of the firm‟s balance sheet.

Current Asset Management: Assets are partitioned into two primary categories: current assets and

fixed assets. With current assets, the key decisions relate to day-to-day management, including

frequent decisions regarding the level and efficient management of cash, inventory, and receivables.

Because these decisions are recurring, the use of financial models that employ standardized techniques

of analysis is typical. These models often have their origin in management science, the application of

mathematical techniques to management problems. The importance of physical inventory varies across

the respective media industries. For book publishers, inventory decisions are important, and the size of

press runs for particular titles is a significant issue. In contrast, broadcast media have relatively little

physical inventory and this is 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 assets financial management is not involved on an ongoing basis.

With fixed assets, the day-to-day management is the responsibility of operations management.

Financial management becomes involved periodically to contribute toward making major decisions

regarding the acquisition and disposal of divisions/units/plants. The decision techniques require the

comparison of costs with expected benefits. Because the stream of expected benefits occurs over a

future time horizon, the interest factor (“time value for money”) must be taken into account. In this

context, Hoskins et al. (2004) have shown that the net present value criterion is a valuable and

important decision tool in media management. The net present value is defined as the present values of

future cash flows minus the initial cost or principal invested. The net cash flow in any year is the

33 15 May 2011

incremental cash 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 (assumed immediate)

B1 = Net cash flow at end of year one

B2 = Net cash flow at end of year two

i = return available elsewhere at similar risk

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

Importantly, present capital investment decision are based on estimated future cash flows and relevant

interest rates must be taken into account to arrive at the value today of the anticipated flows. If the

benefits (in value of money) exceed the costs (discounted in today‟s value of money), then

quantitatively the investment project is acceptable. Of course, quantitative analysis is only part of the

total decision analysis. Particularly in the management of media properties, qualitative factors are

important in coming to a final conclusion.

Capital budgeting is defined as the process of evaluating and selecting long-term investments that are

consistent with the firm‟s goal of maximizing owner wealth (Gitman 2003).

Capital budgeting decisions can be focused on new assets and increasing the size of the firm or

reducing the set of assets employed and shrinking the firm. Alexander et al. (1993, p. 283) explain that

capital budgeting tools and techniques has actually been strongly affecting investment decisions in the

U.S. as follows: “Much of the restructuring activity that occurred in the media industries during the

1980s resulted from a capital-budgeting analysis of existing products/divisions/units. Many firms

found that for various reasons, some existing operations were worth more sold than they could

generate as part of the firm. There was a net benefit to selling some operations rather than continuing

to operate them. This awareness is the analysis behind much of the sell-off activity that has been

widespread in recent years”.

2.3 Further theoretical approaches to financial media management

Ownership and financial performance: The impact of ownership has received a great deal of

scholarly attention during the last forty years, but early research was often non-theoretical,

concentrating on the decline of family-owned newspapers and the growth of newspaper groups.

Recent studies have found limited differences in performance between independent and group

newspapers. Compaine and Gomery (2000) concluded that corporate-owned newspapers were as good

or bad as independently owned newspapers. However, their review did not include more recent

research about the impact of public ownership on newspapers‟ financial performance.

During the 1990s, Demers (1996) integrated organizational and ownership variables in examining the

„corporate newspaper‟. He said the claim that corporate newspapers negatively affect journalism is

overstated. He emphasized corporate structure but did not consider variations that might be connected

to public versus private ownership. In a follow-up, he found that the structural complexity of a daily

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1 May 2011 34

newspaper had a moderate correlation with use of content perceived as critical by city officials. Public

ownership was included as one measure of Demers‟ ownership structure variable, but it only

correlated slightly with two of the other four measures of a corporate newspaper.

Blankenburg and Ozanich (1993) looked at the influence of outside control of stock in newspaper

corporations and found the degree of outside ownership affected financial performance. For example,

as outside ownership increased, profit margins increased. The study was replicated in 1996 with

similar results. Again, increased public ownership was positively correlated with increased profit

margins. A study by Martin found similar results for 1988 and 1998. As outside control 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 newspaper performance. They state:

“For public companies (with but few exceptions), the business of news is business, not news. Their

papers are managed and controlled for financial performance, not news quality”. Though based on

extensive data about publicly held newspapers, the book proceeds from a limited foundation of

economic and managerial theory and did not adequately consider the impact of some constraining

variables, such as competition from other newspapers for readership. The impact of ownership stems

from the relationship of organizational goals to performance. Lacy and Simon (1997) explained that

organizational goals could vary within type of newspaper (private versus public ownership, and group

versus non-group) and that environmental factors can constrain organizational goals. The relationship

between public ownership and newspaper performance reflects the scattered and decentralized nature

of public ownership. Newspaper company goals must reflect the expectation of the stock market,

where investors are interested in financial performance such as stock prices and profit margins. This

reasoning is consistent with research that found profit margins of publicly held newspaper

corporations increased as the amount of outside control increased.

Financial commitment theory: The basis for the financial commitment model, which has been

supported by research, is that newspapers faced with competition must differentiate themselves

through their coverage. Efforts to differentiate coverage could result in increases in number of

newsroom employees.4

Research into the impact of competition on newspaper performance began in the 1940s, but it was

1986 before mass communication scholars developed a theoretical basis for its impact. Two studies

examining national samples found a relationship between intra-city daily competition and amount of

money spent on the newsroom. Called the “financial commitment theory” by Litman and Bridges

(1986), this relationship was formalized by Lacy (1992). Lacy concluded that the bulk of research

supported the hypothesis that intense competition resulted in greater expenditures on the newsroom for

intra-city newspaper competition, intercity newspaper competition, and local television news

competition. More recently, Martin (2001) found that clustering was associated with reduced

newsroom spending. Cranberg, Bezanson, and Soloski (2001, p. 13) concluded that competition has

little impact on news quality: “Because of increasing concentration of newspapers in the hands of

large companies, competition among newspapers based on the quality of news is diminishing. The

terms of competition have little or nothing to do with news quality – the quality of the product

produced by the firm – in most markets today”.

Resource dependence theory: An and Jin (2005) have used resource dependence theory to explain

the relationship between the interlocking of newspapers with financial resources and profitability.

4 The financial commitment theory may be rooted on Selznick‟s (1949) wider concept of organizational commitment.

35 15 May 2011

Here, interlocking is defined as a financing strategy of publicly traded newspaper companies with

financial institutions. The resource dependence perspective (Selznick 1949, Pfeffer & Salancik 1978)

views interlocking as a critical link to the external environment. It contends that financial interlocking

will provide access 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 a very different view on

interlocking with financial institutions. It begins with the assumption that financial institutions seek to

profit from debt financing, which leads bank-controlled companies to carry heavy debt loads. In order

to protect these loans, financial institutions require those corporations to operate more conservatively

and thus less profitably (Kotz 1978). Viewing the degree of interlocking with financial institutions as

an indicator of financial control, such a presence is expected to be negatively associated with a firm‟s

profitability (Mariolis 1975).

Corporate governance: Picard (2002, p. 2) defines corporate governance as follows: “Corporate

governance is concerned with the owner and management relationships, distribution of power, and

accountability in corporations. Governance structures and processes are inextricably linked to the

environments in which corporations are created and operate. Corporations are legally created entities

with specific rights and responsibilities, and these differ depending upon the nation in which they were

established, their structures, and whether shares are privately held or publicly traded”.

Corporate governance theory assumes that higher transparency and trust between firms, investors and

then public can be achieved through the establishment of principles, policies and practices (CalPERS

2004, OECD 2004, Carlsson 2001) which, in turn, may result into better financial performance. With

regard to specific issues of financial media economics and media management, corporate governance

theory particularly the rising significance of institutional investment in media firm ownership (An &

Jin 2005).

2.4 Financial indicators and measures of firm performance

It is important for media managers to review the financial health of their firms regularly because

financial data provide the key indicator of whether a firm is becoming or remaining a viable business

entity. Basic indicators that need to be reviewed regularly involve sales and cash flow, profitability,

the status of working capital, and the condition of the balance sheet.

As noted in the introduction of this study, monetary profit alone does not indicate the efficiency with

which a firm produces the monetary results. To gain the broader picture one can use the concept of

return (Picard 2002).

Financial statements: There are four key financial statements: (1) The income statement; (2) The

balance sheet; (3) The statement of retained earnings, and (4) the statement of cash flows (Gitman

2003).

In the following, financial indicators and measures will be listed alphabetically:

Balance sheet: The balance sheet reports the financial condition at a point in time and is a statement

of levels (stocks). The income statement reports the financial performance over an interval of time

(most frequently, a year) and is a statement of flows. The balance sheet has two sides. On the left side

are uses of funds and on the right side, sources. Uses are assets and sources can be liabilities (debt) or

equity.

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1 May 2011 36

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 and debentures)

Fixed assets Equity

Plant, equipment Par (stated) value

At historical cost Paid-in surplus (over par)

Less accumulated depreciation Retained Earnings

Source: Alexander et al. 1992, 276.

Capitalisation ratio: Analysis of a company‟s capital structure showing what percentage is debt,

preferred stock, common stock, and other equity (Alexander et al. 1993, p. 288).

Cash flow: In finance, cash flow refers to the amounts of cash being received and spent by a business

during a defined period of time, sometimes tied to a specific project. It is generally defined as net

profit plus depreciation (net cash flow) but may be used more loosely to include all cash movements

(Bannock et al. 2002).

Cost per thousand: In advertising performance analysis, CPT is determined by dividing the cost of a

print or broadcast advertisement or of a total advertising campaign by the total estimated audience,

computing the total audience on a base of thousands.

Economic rent: Excess over a competitive rate of return attributable to owning an asset or resource

whose supply is limited, at least in the short run (Gastineau & Kritzmann 1992).

EBIT: Earnings before interest and taxes; a measure of firm cash flow, largely replaced in recent

finance literature by EBITDA.

EBITDA: Earnings before depreciation, amortization, interest, and taxes paid; a measure if enterprise

cash flow.

EPS: Share indicator of publicly traded media firms. EPS represent the amount earned during the

period on behalf of each outstanding share of common stock. EPS is measured as total earnings

divided by the number of shares outstanding. Companies often use a weighted average of shares

outstanding over the reporting term. EPS can be calculated for the previous year (“trailing EPS”), for

the current year (“current EPS”), or for the coming year (“forward EPS”). Note that last year's EPS

would be actual, while current year and forward year EPS would be estimates.

37 15 May 2011

Equity: Amount of capital invested in an enterprise. It represents a participative share of ownership,

and in an accounting sense is calculated by subtracting the liabilities of an enterprise from its assets.

Gross margin: Profitability indicator; generally in finance, “the gross margin defined as the is the

difference between the price at which something is bought and the price at which it is sold” (Bannock

et al. 2002, p. 209). In other words, gross margin is commonly defined as net selling price less cost of

merchandise. A more accurate estimate of gross margin is adjusted to include trade promotion

allowances. The magazine industry, for example, typically provides allowances to support retail

display space, front end racks and new title introduction incentives.

Market share: Further important measures of firm performance are market share, and gross margin.

Market share, in strategic management and marketing, is defined as the percentage or proportion of the

total available market or market segment that is being serviced by a company. It can be expressed as a

company‟s sales revenue (from that market) divided by the total sales revenue available in that market.

It can also be expressed as a company‟s unit sales volume (in a market) divided by the total volume of

units sold in that market. As explained by Picard (2002, p. 231), “by considering the market share of

the market for a particular good or service, one gains an understanding of its position in the market

and whether that position is being maintained, improved, or degraded. Changes in market share

indicate that competitiveness has been maintained, improved, or lost by firms or that the market

structure is being affected by entry or exit or better competitiveness on the parts of other firms” (p.

230). Picard continues that “in the past a media firm was evaluated as healthy if its market share was

growing. Today, with the proliferation of media, health tends to be evidenced in maintaining 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 the close of the period. Market value does not include any company

shares held by the company itself. The importance of market value lies in the fact that, according to

current financial theory, the most important goal for the company‟s top management is to maximize

shareholder value. Shareholder value is generated by increasing market value and by the payment of

dividends.

Net present value: If a decision has implications for the cash flows of a company over a year or more,

the time value of money must be taken into account. The comparison of the present value of the future

cash inflow with the current investment is taken care of by the net present value (NPV) criterion. It is

defined as the present value (sales price attainable) of future cash flows (expected cash flows if

retained) minus the initial cost or principal invested.

Net sales growth: Net sales growth (%) is one of the most common indicators of volume growth and

companies use it as a daily indicator of their success at various levels of the organization. Apart from n

increase or decrease in organic growth, it can also be affected by other factors such as acquisitions.

Operating cash flow (OCF): The cash flow a firm generates from ordinary activities. OCF is

calculated as EBIT minus taxes plus depreciation.

P/E ratio: The P/E (price/earnings) figure (market value divided by net income, or share price divided

by EPS to give a per share figure) describes the market value in relation to net income over the most

recent 12 months. When calculating the P/E ratio any minority interest is subtracted from net income.

Hence the P/E ratio describes the number of years needed by the company to earn its market value, i.e.

pay itself back to its investors, assuming net income remains unchanged. With a P/E of 10, for

example, the company would earn net revenue equivalent to its value in ten years (current level of net

income unchanged). The lower the P/E ratio, the cheaper the share price is considered to be.

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1 May 2011 38

Price elasticity of demand: The notion that income, prices of substitutes and complementary goods,

consumer preferences and tastes, and consumer expectations in a given market are economic factors

which impact on the consumer demand of services in the performing 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 a small percentage change in another variable. In

standard economic theory, price elasticity of demand is a measure of sensitivity of demand for a

product to changes in its price. Demand elasticity is measured by the percentange change in quantity

demanded for an item divided by the corresponding percentage change in price that generated the

change in demand. An elasticity of -1 would indicate that a 1% increase in price leads to a 1% fall in

demand. The theorem of price elasticity of demand has impacts on the sales and advertising revenues

of media companies. As far as advertising revenues are concerned, research on the relationship

between competition and advertising has shown that the derived demand by sellers of goods and

services for advertising in a medium will be more price inelastic: (a) The weaker is the substitutability

with other media; (b) the more inelastic is consumer demand for information about products and

services; (c) the more inelastic is the supply of other advertising media; and (d) the smaller is the share

of total costs accounted for expenditures on the advertising medium (Bagwell 2005).

Profitability: Profitability can be described using three indicators: operating margin, return on capital

employed and net income. The operating margin shows operating income as a percentage of net sales.

Operating income, roughly speaking, is what remains below the line before financial items and taxes.

As the name suggests the operating margin measures how the company‟s result of operations is

formed but its level varies is different business sectors depending on margins and capital employed.

Return on capital employed describes the annual return to the company from the capital it has tied up,

for example in machinery, equipment and stocks. To calculate it, operating income less financial costs

and taxes is divided by the total of shareholders‟ equity and interest-bearing debt. Return on capital

employed should be clearly higher than the risk-free interest level. Ten percent can be considered a

rough satisfactory level. Net income describes the absolute net revenue left to the owner after interest

expenses and taxes as well as any extraordinary or other items unrelated to the company‟s business

operations.

Return: Theorists commonly use Return on Sales (ROS), Return on Assets (ROA) and Return on

Equity (ROE), and ROI (return on investment) ratios in order to measure financial efficiency of a

corporation (Tallman & Li, 1996). ROS is defined as “net income divided by sales” (Gastineau &

Kritzmann 1992), ROA as “net income divided 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; working capital measures how much in

liquid assets a company has available to 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 successful since they can expand and improve their operations.

Companies with negative working capital may lack the funds necessary for growth.

2.5 Strategic responses of media companies

39 15 May 2011

Definition strategy

The modern use of the term „strategy‟ derives from games theory and may be defined as a “complete

plan to offer the right choices for all possible situations” (Welge & Al-Laham 1999, p. 12). It is the

process of specifying an organization‟s objectives, developing policies and plans to achieve these

objectives, and allocating resources so as to implement the plans. The process involves matching the

companies‟ strategic advantages to the business environment the organization faces.

Mintzberg (1994) assumes that strategy can be defined in a number of ways. He argues that strategy is

one of those words that we inevitably define in one way, yet often use in another. As a consequence it

turns out that strategy can be seen as a plan, i.e. a direction or course of action into the future, or more

“softly” as a pattern, that is as consistency of behaviour over time. Porter found strategy to be a

position (Porter 1996). Simply put, a strategy is an integrated set of decisions and actions made in

order to meet the business objectives.

Strategic Management

Strategic management is the process of specifying an organization‟s objectives, developing policies

and plans to achieve these objectives, and allocating resources so as to implement the plans. It is the

highest level of managerial activity, usually performed by the company‟s Chief Executive Officer

(CEO) and executive team. It provides overall direction to the whole enterprise. An organization‟s

strategy must be appropriate for its resources, circumstances, and objectives. The process involves

matching the company‟s strategic advantages to the business environment the organization faces. One

objective of an overall corporate strategy is to put the organization into a position to carry out its

mission effectively and efficiently. A good corporate strategy should integrate an organization‟s goals,

policies, and action sequences (tactics) into a cohesive whole.

Strategic management can be seen as a combination of strategy formulation and strategy

implementation.

Strategy formulation involves:

Doing a situation analysis: both internal and external; both micro-environmental and

macro-environmental.

Concurrent with this assessment, objectives are set. This involves crafting vision

statements (long term view of a possible future), mission statements (the role that the

organization gives itself in society), overall corporate objectives (both financial and

strategic), strategic business unit objectives (both financial and strategic), and tactical

objectives.

These objectives should, in the light of the situation analysis, suggest a strategic plan. The

plan provides the details of how to achieve these objectives.

This three-step strategy formation process is sometimes referred to as determining where you are now,

determining where you want to go, and then determining how to get there. These three questions are

the essence of strategic planning. Analytical tools to help this planning are: SWOT (analysis of

strengths and weaknesses, and opportunities and threats) or IO economics (i.e. Industrial Organisation

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1 May 2011 40

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 to specific individuals or groups .

It also involves managing the process. This includes monitoring results, comparing to

benchmarks and best practices, evaluating the efficacy and efficiency of the process,

controlling for variances, and making adjustments to the process as necessary.

When implementing specific programs, this involves acquiring the requisite resources,

developing the process, training, process testing, documentation, and integration with (and/or

conversion from) legacy processes.

Types of strategies: Porter (1985) has described a category scheme consisting of three general types

of strategies that are commonly used by businesses (see, below). These three generic strategies are

defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand-side

dimension (Porter was originally an economist before he specialized in strategy) and looks at the size

and composition of the market you intend to target. Strategic strength is a supply-side dimension and

looks at the strength or core competency of the firm. In particular he identified two competencies that

he felt were most important: product differentiation and product cost (efficiency).

Porter (1980) has suggested cost leadership, product differentiation, and market segmentation (or

focus) as the three generic managerial strategies to achieve competitive advantage and firm growth.

Cost leadership: The cost leadership strategy emphasizes efficiency. By producing high volumes of

standardized products, the firm hopes to take advantage of economies of scale and experience curve

effects. The product is often a basic no-frills product that is produced at a relatively low cost and made

available to a very large customer base. Maintaining this strategy requires a continuous search for cost

reductions in all aspects of the business. The associated distribution strategy is to obtain the most

extensive distribution possible. Promotional strategy often involves trying to make a virtue out of low

cost product features. To be successful, this strategy usually requires a considerable market share

advantage or preferential access to raw materials, components, labour, or some other important input.

Without one or more of these advantages, the strategy can easily be mimicked by competitors.

Successful implementation also benefits from: process engineering skills, products designed for ease

of manufacture, sustained access to inexpensive capital, close supervision of labour, tight cost control,

and incentives based on quantitative targets.

Differentiation: The product differentiation strategy involves creating a product that is perceived as

unique. The unique features or benefits should provide superior value for the customer if this strategy

is to be successful. Because customers see the product as unrivaled and unequaled, the price elasticity

of demand tends to be reduced and customers tend to be more brand loyal. This can provide

considerable insulation from competition. However there are usually additional costs associated with

the differentiating product features and this could require a premium pricing strategy. To maintain this

strategy the firm should have: strong research and development skills, strong product engineering

41 15 May 2011

skills, strong creativity skills, good cooperation with distribution channels, strong marketing skills,

incentives based largely on subjective measures, be able to communicate the importance of the

differentiating product characteristics, stress continuous improvement and innovation, attract highly

skilled and creative people.

Market segmentation: In the market segmentation strategy the firm concentrates on a select few

target markets. It is also called a focus strategy or niche strategy. It is hoped that by focusing your

marketing efforts on one or two narrow market segments and tailoring your marketing mix to these

specialized markets, you can better meet the needs of that target market. The firm typically looks to

gain a competitive advantage through effectiveness rather than efficiency. It is most suitable for

relatively small firms but can be used by any company.As a focus strategy it may used to select targets

that are less vulnerable to substitutes or where a competiotion is weakest to earn above-average return

on investments.

Impact dimensions: Further, the following core impact dimensions on managerial strategy are

frequently discussed in competition theory and strategic management (Bain 1956, Porter 1980, Scherer

and Ross 1990):

Size and number of suppliers and buyers indicating the degree of concentration

Elasticity of supply and demand signalling the suppliers‟ ability to adapt to market changes in

demand and structures of production and the buyers‟ willingness to change product or service

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 of intensity of competition

Strategies of media firms: As put forward by Picard (2004, p. 1), strategic planning of media firms is

influenced by four main types of influence that are external and internal to media firms:

“Environmental influences represented the broadest changes in the nature of society and environment

for all businesses. Media specific policy influences represent changes in way media are regarded and

controlled in society. Market specific influences related to factors changing specific markets of firms.

Firm-specific influences relate to factors within firms that are inducing changes”. According to this

typology, all four types of forces influence strategic company behavior.

The strategic options for media firms are related to the institutional setting in which they operated

(Loube 1991), to their resources (Wernerfelt 1984), and to their capabilities (Eisenhardt & Martin

2000) and competencies (Prahalad & Hamel 1990, Barney 1991). Thus, strategy needs to be

individually constructed and regularly reappraised.

The kinds of strategies media firms develop and which are most often evident involve integration,

diversification, niche products, and internationalization.

Integration: Media companies are using horizontal and some vertical integration as a means of

achieving cost efficiencies and company growth (Compaine & Gomery 2000, Picard 2004, Picard et

al. 1988).Integration is a strategy used by a business that seeks to sell a type of product in numerous

markets. To get this market coverage, several small subsidiary companies are created. Vertically

integrated companies are united through a hierarchy and share a common owner. Usually each

member of the hierarchy produces a different product or service, and the products combine to satisfy a

common need.

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1 May 2011 42

Diversification: Because of the market growth and market share problems in individual media, many

firms have begun diversification into other media and are creating of media product portfolios. The

choice to stay within media has typically occurred because there are some similarities in the types of

business activities. Both large and 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

power view, (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 of niche media products. The increase

in media and media units is having a significant impact on the types of titles, channels, and other

products being created by media firms. Although firms have traditionally sought to create media

products that appeal to large general audiences, significant product differentiation efforts are being

made in the new, more competitive environment. Company product choices are focusing primarily on

creating niche media products that can survive in highly competitive media environment (Dimmick

2003).

Internationalization: Internationalization to overcome saturated domestic markets or competition

regulations that limited growth is also an option for firms. Globalization, of course, increases the

complexity of strategy by requiring firms to make choices involving resource allocation between

domestic and international operations and between different international operations (Daniels &

Bracker 1989, Toyne & Walters 1989) and to maintain complex organizations to coordinate

international activities. Nevertheless, the global business option becoming increasingly attractive to

media firms (Gershon 1997). Innovation strategies with the firm‟s rate of new product development

and business model innovation. It asks whether the company is on the cutting edge of technology and

business innovation. There are three types: (a) pioneers, (b) close followers, and (c) late followers or

laggards.

Marketing strategies

Marketing strategy: A marketing strategy serves as the foundation of a marketing plan. A marketing

plan contains a list of specific actions required to successfully implement a specific marketing

strategy.

A strategy is different than a tactic. While it is possible to write a tactical marketing plan without a

sound, well-considered strategy, it is not recommended. Without a sound marketing strategy, a

marketing plan has no foundation. Marketing strategies serve as the fundamental underpinning of

marketing plans designed to reach marketing objectives. It is important that these objectives have

measurable results.

A good marketing strategy should integrate an organization‟s marketing goals, policies, and action

sequences (tactics) into a cohesive whole. The objective of a marketing strategy is to provide a

foundation from which a tactical plan is developed. This allows the organization to carry out its

mission effectively and efficiently.

Every marketing strategy is unique, but if we abstract from the individualizing details, each can be

reduced into a generic marketing strategy. There are a number of ways of categorizing these generic

strategies. A brief description of the most common categorizing schemes is presented below:

43 15 May 2011

Market dominance strategies: Strategies can also typologized based on market dominance. Market

dominance strategies are marketing strategies which classify businesses by reference to their market

share or dominance of an industry (Dolan 1981, Woo and Cooper 1982, Hamermesh et al. 1978).

Typically there are four types of market dominance strategies:

Market leader

Market challenger

Market follower

Market nicher

Market leader: The market leader is dominant in its industry. It has substantial market share and

often extensive distribution arrangements with retailers. It typically is the industry leader in

developing innovative new business models and new products (although not always). It tends to be on

the cutting edge of new technologies and new production processes. It sometimes has some market

power in determining either price or output. Of the four dominance strategies, it has the most

flexibility in crafting strategy. There are few options not open to it. However it is in a very visible

position and can be the target of competitive threats and government anti-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, but not dominant position that is

following an aggressive strategy of trying to gain market share. It typically targets the industry leader

(for example, Pepsi targets Coke), but it could also target smaller, more vulnerable competitors. The

fundamental principles involved are:

Assess the strength of the target competitor. Consider the amount 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 their resources so as to reinforce this weak spot.

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1 May 2011 44

Launch the attack on as narrow a front as possible. Whereas a defender must defend all their

borders, an attacker has the advantage of being able to concentrate their forces at one place.

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 not dominant position that is content to

stay at that position. The rationale is that by developing strategies that are parallel to those of the

market leader, they will gain much of the market from the leader while being exposed to very little

risk. This „play-it-safe‟ strategy is how Burger King retains its position behind McDonalds. 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 a select few target markets. It is also

called a focus strategy. It is hoped that by focusing ones marketing efforts on one or two narrow

market segments and tailoring your marketing mix to these specialized markets, you can better meet

the needs of that target market. The niche should be large enough to be profitable, but small enough to

be ignored by the major industry players. Profit margins are emphasized rather than revenue or market

share. The firm typically looks to gain a competitive advantage through effectiveness rather than

efficiency. It is most suitable for relatively small firms and has much in common with guerrilla

marketing warfare strategies. The most successful nichers tend to have the following characteristics:

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

45 15 May 2011

They tend to keep their operating expenses down by spending less on R&D, advertising, and

personal selling.

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1 May 2011 46

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

SUCCESS FOR QUALITY NEWS PUBLISHING

Case Characteristics

Full name of the company Bronner Online AG

Location Vienna, Austria

Sector Publishing

Year of foundation 1995

No. of employees 70

Turnover in last financial year € 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 AG

Financial Management Focus

Online advertising and classifieds

Content management solutions

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

function

Background and objectives

Austria‟s daily quality newspapers with nation-wide distribution is represented by four

newspapers: Der Standard, Die Presse, and the Wiener Zeitung, all of them published in

Vienna, as well as the Salzburger Nachrichten, which is published in the region of Salzburg.

It is the traditional media who dominate Austria‟s web community. The Internet presence of the

quality daily of Der Standard, http://derStandard.at, is the leading online quality media and its

47 15 May 2011

constantly developing website has set standards in Austria. Second to move was the ORF, who

created ORF-ON as their web brand, which is now the most visited online media in Austria.

http://derStandard.at started back in 1995 as first German-speaking newspaper on the Internet.

In 2003, the printed version reached 5,8% of the Austrian reading population, i.e. 390.000

people (Austrian Media Analysis, 2003). Its online version could attract more than 919.000

unique users, 4.6 million visits and 32.3 million page impressions (Austrian Web Analysis -

ÖWA, 2005) in January 2005. Meanwhile, derStandard.at is constituent part of the Austrian

digital information culture landscape, offering a broad scale of services. DerStandard/Web is

visited most frequently, with the channels derStandard/Politik (politics), /Panorama (chronicle),

and /Investor (economy) following up. The sectors sport, media/advertising, culture, and science

follow neck and neck.

Financial activity

Value propositions in the advertising market

70 employees of http://derStandard.at have achieved a turnover of € 4.1 million in 2004. Ten

years ago, 230,000 people were using the Internet in Austria on a regular basis. Today, it is

more than 3.1 million users making the internet increasingly important for advertisers. Having a

broad and attractive user base, derStandard.at can benefit directly from the growth of online

advertising and online classifieds markets.

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

From revenues of €

4.1 million, online

advertising

accounted for 60%

of overall turnover,

online classifieds

(mainly job

advertisements) acc-

ounted for 28%, and

the business field

„Content solutions‟

for 12% (see

below).

derStandard.at

employs the whole

range of online

advertising forms

such as dynamically

placed banners, sky-

scrapers, rectangle,

big-size banner, and

pop-ups, static

buttons, advert-

orials, site link,

content ad,

Share of turnover in 2004

Online advertising: 60% Online classifieds: 28%

Content solutions: 12%

Media Finance

1 May 2011 48

newsletter, or topic

add-ons. Ad place-

ment allows for

optimal spread of its

campaigns and

perfect target-

marketing to

achieve optimal

media effects.

In the classifieds market, DerStandard.at/ Karriere (career) has a leading position in the online

job market. Targeting the upper end of the market, it is one of only a few newspapers

internationally which is able to compete successfully with pure online plays in the job market.

Furthermore, DerStandard.at operates in real estate (DerStandard.at/Immobilien), automobiles

(DerStandard.at/Autos) and dating (DerStandard.at/ ZuZweit).

Content solutions

In 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 be used to track an

individual user‟s surfing behaviour. All advertising forms are smoothly integrated with the

editorial content provided.

DerStandard.at/ContentSolutions started in 1999. In the beginning, this business field dealt with

selling web content from DerStandard.at to commercial customers such as banks, insurance

companies, telecommunication companies and Internet service providers. Today,

DerStandard.at/ContentSolutions also exclusively produces prime content for business

customers and offers 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, and technical infrastructure.

There are three components of its ASP solution: (1) Content Management System; (2) Content

Presentation System; (3) Content Hosting System. Data input and content management is

achieved by a web-based editorial system with a reporting and statistics tool, content

presentation runs via a web-based database to generate content dynamically. Hosting runs via a

SQL database and webservers. Successful examples for ASP content solutions of

DerStandard.at are www.cyberschool.at and www.ecaustria.at.

Mobile services: DerStandard.at offers PDA and WAP versions, both of which comprise the

newsroom channels of DerStandard.at. Additionally, DerStandard.at offers SMS and MMS

news, supported by increased internet and mobile media bandwidth to deliver multimedia

content. These services are offered for a subscription fee. The fee is payable with the monthly

invoice from the mobile carrier.

DerStandarddigital.at: is a product bundle consisting of an archive (ca. 250,000 articles since

October 1996), the newspaper web edition, the e-paper edition and the Avantgo-version, the last

three 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 advanced processing

49 15 May 2011

software by Comyan. Newspaper data is taken directly from the editorial system and converted

into these three editions. The presentation of the web edition and the archive are self developed

systems.

Email services: DerStandard.at posts a variety of email newsletter versions. There are some

100,000 newsletter subscribers, receiving some 150,000 newsletters. In total, the service

comprises three weekly newsletters, eight daily newsletters (containing a news overview of all

news channels) and an ad-hoc breaking news service. The newsletters also contain advertising

(part of online advertising).

Forum: Here, DerStandard.at was highly innovative and attached in 1999 forums right to the

article where the users could post their comments and opinions. This resulted in total postings of

700,000 in 2004. Another technical innovation concerns an automat for the classification of

postings. This project has been developed co-operatively with the Austrian Institute for

Artificial Intelligence. DerStandard.at moderates the chat rooms to keep editorial quality on

high levels and to avoid legal problems. Formerly, the moderation was done manually – i.e.

each posting was red by the editorial staff and then published or cancelled. Now, the automat

pre-selects the postings and only 30% of all postings have to be processed manually. This saves

time for the editorial staff. Furthermore, 70% of all postings are published immediately.

Impacts and lessons learned

The annual result of http://derStandard.at has turned positive for the first time in 2004. It is one

of the first online media to achieve a positive result. Defying the economic crisis battering the

newspaper industry, DerStandard.at could improve revenues from € 1.7 million in 2000 to 4.1

million in 2004.

Georg Zachhuber, Board Member of DerStandard.at, concludes as follows:

“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 cover

distinctive users demands, and

being an independent company was a prerequisite for DerStandard.at to unleash its full

innovative power”.

The findings of this case study need to be seen in contrast to the general view that Internet-based

content utilization windows hardly generate extra revenues or cannibalize existing ones. Based on the

results of this present case study, it can be concluded that the Internet has an impact on the

composition of publishers‟ content utilization chains and its strategic positioning. Although traditional

print publishers‟ revenue models have not changed significantly so far through new online business

models, the present case has shown new trajectories for innovative revenue generation in new fields of

online journalism and e-commerce.

Media Finance

1 May 2011 50

References and acknowledgements

This case study was conducted by Paul Murschetz on behalf of the EC funded project e-

Business W@tch (empirica/Bonn, Germany)

References

Interview conducted with Georg Zachhuber, Board Member of DerStandard,

http://derStandard.at, as interviewed on February, 25, 2005.

51 15 May 2011

CASE STUDY B: ORF – THE AUSTRIAN BROADCASTING

CORPORATION EXPLOITING CROSS-MEDIA FINANCIAL STRATEGIES

Case Characteristics

Full name of the company ORF – Austrian Broadcasting Corporation

Location Austria, A-1136 Vienna

Sector Media, full-scale portfolio

Year of foundation 1955

No. of employees 3.655 (2005)

Turnover in last financial year € 882.7m

Primary customers National cross-media advertisers

Most significant business market TV advertising, radio advertising, Internet

Full name of the company Österreichischer Rundfunk und Fernsehen

Financial Management Focus

Broadcasting 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 ORF in the context of its surrounding

competitive situations and structures. Further, it discusses corporate strategies in general and as

responses to market changes induced by higher competition and digitization.

Background information

Television in Austria has long been synonymous with public service broadcasting organised by the

PSB, the Austrian Broadcasting Corporation (ORF). Under the technical conditions of limited

frequency, the ORF was granted the only licence for radio and television broadcasting over two

national frequencies chains for analogue terrestrial television in 1955: ORF1 and ORF2. Insufficient

frequencies of terrestrial airwaves were the initial significant entry barrier to a free television market

and allowed the design for a monopoly in public television to appear appropriate. It took until 1997

when the Cable and Satellite Broadcasting Act of 1997 created the legal basis for active cable and

satellite broadcasting.

Although the ORF has enjoyed a long-term monopoly from a supply-side perspective, it has been

facing increasing competition from extensive overspill of German TV programmes. Today, 85.6% (as

of 2004) of all Austrian TV households are equipped either with satellite or cable TV and the average

TV household receives 35 channels. These programmes compete against ORF for audience shares, and

– increasingly – for advertising budgets. Despite this, the ORF has managed to keep both the German

competitors and the Austrian newcomer ATV at bay. ATV, which started as low-scale regional cable

station Wien1, soon developed into the ORF‟s biggest competitor. Today, it technically reaches some

30% of Austrian cable-TV viewers and 3% of digital satellite households. Content on offer is a full-

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1 May 2011 52

programme mix of local entertainment, news, business, talk shows, sports, light entertainment, and

sex. Two programme reforms in 1995 and 1998 could successfully win back primarily younger

viewers who have been lost to foreign competition, enlarge the distance to its competitors, and

increase market share with primarily Austrian-specific programming.

As for Austrian TV households, more than 80% of are equipped with cable and satellite, with many

terrestrial households having switched to (analogue) satellite reception. However, there is still some

20% of households receiving programmes only terrestrially, statistically notwithstanding those who

dually use satellite dishes but are still equipped with roof aerials to receive ORF1 and ORF2 which are

not transmitted via analogue satellite.

In 2004, the ORF (51%) is uncontested market leader with an overall market 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%) and ZDF (3.4%) (ORF 2004).

In addition, the ORF is domestic market leader in three electronic media segments: television, radio

and the Internet. ORF-Enterprise customers benefit from this enormous competitive advantage by way

of highly efficient communication solutions. In the TV sector in particular, what ORF-Enterprise

offers is unique in the European market. A peculiar feature of the Austrian television landscape is its

unbeatable audience figures and market shares, which, unlike many other countries, are achieved by a

public service broadcaster, not a private provider, and also the possibility of broadcasting the same

commercial on two channels at the same time, thereby acquiring a market share that cannot be beaten.

ORF‟s wholly subsidiary ORF Enterprise who ORF-Enterprise exclusively markets the advertising

times and offers of all ORF media and brands could thus proudly present the following results: “ORF

is streets ahead of any competition - from private Austrian broadcasters as well as from German

channels that can be received throughout the country. The Austrian television landscape 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 channels around the most popular “Zeit im Bild 1” news

program at prime time, we can help you reach up to more than 1 million viewers! As the two television

channels are positioned very differently in the market, advertising customers also have the opportunity

to place their brands in such a way as to accurately address their target groups – all through a single

contact, 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 could meet its financial objectives. It could raise its annual turnover from

€ 876.5m in 2004 to € 882.7m in 2005. Turnover in licence fee revenues could be increased from €

444.5m in 2004 to € 450.8m in 2005. After increasing licence fees by 8.2% in 2004, the turnover

improvements in 2005 could be achieved without an additional increase in licence fees. 3.25m radio

listeners and TV viewers brought the ORF to its highest user level at all times in its history.

In 2005, advertising revenues could be held at the satisfactory level of 300.8m EUR (2004: € 312.1m).

Advertising revenues in radio could be slightly improved while TV ad revenues dipped due to ad price

decreases. Other revenues such programme sales and licence revenues accounted for by ca. 13% of

53 15 May 2011

overall revenues in 2005. Competition for advertising revenues became fiercer in 2005: ATVplus,

ORF‟s competitor in national analogue television broadcasting could further enlarge its share on

national ad spent. Further, a new advertising window from Germany (VOX) dragged away advertising

from the Austrian market in analogue broadcasting whereas, in addition, digital TV advertising

windows started cutting away revenues from the ORF as well.

Exhibit 3-2: ORF Business data in 2004 (in million EUR)

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

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) + 1.2

Source: ORF 2004

In 2005, biggest cost item were expenditures on material. They accounted for by 401.5m EUR (41,6%

of total). This was an increase in 36m EUR. Second largest cost item is personnel which fell in 2005

by 8.7m EUR to 345.5m EUR. Operative costs for personnel could thus be trimmed, mainly by

reducing stock.

In 2005, the ORF could generate an annual result of € 3.5m, thus operating in the black and achieving

some further plus against 2004 (€ 1.2m). This positive annual result is surprising considering the

overall economic situation is still curbed and the competitive situation is getting fiercer.

Strategies

The strategic path of the ORF management can be broken down into the following strands: (a) stable

financial management building on core strengths of domination in market share and audience reach;

(b) Keeping German competitors at bay through special Austrian programming in culture, society, and

sports; (c) strict savings policy targets as imposed by regulation; (d) Augmenting licence fee revenues

where possible, e.g. by progressive policies on detection of free-riders; (e) Intensification of

advertising revenues through cross-media syndication of contents and detection of new advertising

channels (radio, Internet), and (f) following innovation strategies in terms of digitization with a view

to broadening future revenue bases.

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1 May 2011 54

Impacts and lessons learned

Latest annual result: In 2005, the ORF could generate an annual result of € 3.5m, thus operating in

the black and achieving some further plus against 2004 (€ 1.2m). This positive annual result is

surprising considering the overall economic situation is still curbed 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 its traditional sources of revenue from advertising. In addition, it could

find new sources of revenue from extra services such as commercial revenues from game shows and

privatisation revenues (selling infrastructure). There is also a peak in listeners and viewers of ORF

programmes in radio and television. This is another plus.

Commercial revenues: The ORF has accelerated growth of its commercial services which conflict

with its role as public service broadcaster and its legal mandate. For example, ORF TV entertainment

shows are supplemented by special ORF Internet service offers. Users can play games or visit micro

sites, and are, additionally, offered e-commerce platforms. These new services are critical because the

ORF is obliged to offer not-for-profit programming services under its legal mandate. In addition, full

transparency of sources of revenues is not guaranteed.

Digital technology: The future of television broadcasting will be digital and this means noise and

loss-free transmission of pictures, higher capacity of broadcasting channels and a substantially larger

programme palette with additional television services. But even if the attraction of digitisation is as

strong as widely promised, does it really mean better television?

Acceptance of innovation strategy: Audience acceptance of digital television programmes offered by

the ORF will also depend on a tangible added content value as compared with private provision. Only

this would increase the ORF‟s chance of market penetration in a fragmented digital TV audience

environment. Above all, consumers should derive advantages from new technology and content. Email

and interactive applications should supplement TV and help compensate for the loss in social

integration that is said be aggravated by digitisation (digital divide).

Financial strategies: Apart from its strong position in advertising and viewer markets, the ORF

embarks on strategies to widen its financial portfolio through Internet and commercial advertising

revenues, and sales revenues from divestiture of infrastructure transmission technology. Besides the

ORF has a solid and healthy liquidity and equity base.

Programming strategies: The ORF‟s positive economics is mainly accounted for by well accepted

informational programming, low-cost US-feature films and series, exclusive sports transmissions and

an overall successful „Austrification‟ of programmes, that is a stress on innovative in-house

productions aiming at the preservation of Austrian culture. In 2000, ORF relaunched its TV design to

reflect the different market positions of its two analogue channels. ORF1 is the dynamic entertainment

and events channel for the younger urban target groups. ORF1 programming features sports, movies,

international serials, comedy, entertainment and children‟s programmes. ORF2 is the more traditional

Austrian general interest channel, offering information, cultural and educational programmes, arts,

Austrian traditional culture shows and more traditional fiction.

Internet strategies: The ORF follows a programming diversification strategy in the Internet realm.

There is sixteen Internet channel to place advertising.

Regulation: In some areas, regulation regarding permitted advertising and sponsoring activities are

framed more restrictively since the last change in broadcasting regulation. Possibilities of interstitials

55 15 May 2011

are limited and product placement outwith cinema films, 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 offer private TV providers sufficient possibilities of finance.

References and acknowledgements

This case study was conducted by Paul Murschetz (Murschetz Media Consulting Salzburg / Cologne).

An earlier version of this case study was published by the author in JMM – International Journal on

Media Management (see, Reference below).

References

Murschetz, P. (2002). Public Service Television at the Digital Crossroads – The Case of

Austria, JMM – International Journal of Media Management, 4(2), 24-33.

Murschetz, P. (2003). Abkassiererei oder Notwendigkeit? Ein Plädoyer gegen die ORF-

Gebührenerhöhung aus Sicht der Rundfunkökonomie, Wiener Zeitung, June 12, 2003.

ORF (2004). The Business Year 2004 [Das Geschäftsjahr 2004], Annual Business

Report 2004, Vienna.

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1 May 2011 56

4 Conclusions

Chapter 1: Introduction to Financial Media Management

The economics and financing of media companies is a central issue in media management

research and practice.

Investment decisions are the most important of the firm‟s three major decisions when it comes to

value creation. It begins with the determination of the total amount of assets needed to be held by

the firm. For example, how many total assets of the firm should be devoted to cash or to

inventory? Also, the flip side of investment – disinvestment – must not be ignored. Assets that

can no 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 the right hand side of the balance sheet. Some firms, for example,

have relatively large amount of debts, whereas others are almost debt free. Does the type of

financing employed make a difference? If so, why? And, in some sense, can a certain mix of

financing be thought of as best?

The third important decision of the firm is the asset management decision. Once assets have

been acquired and appropriate financing provided, these assets must still be managed efficiently.

The financial manager is charged with varying degrees of operating responsibility over existing

assets. These responsibilities require that the financial manager be more concerned with the

management of current assets than with that of fixed assets. A large share of the responsibility for

the management of fixed assets would reside with the operating managers who employ these

assets.

The financial requirements of varying types of media operations affect the forms and structures

of media firms, as do the scale and scope of their operations.

Media organizations are guided by specific goals-sets. These goals include cultural goals, as well

as economic goals such as efficiency, effective organization of resources and processes, profit

maximization, economic growth, and economic stability.

Profit maximization may not always be a reasonable goal of the firm. It may fail for a number of

reasons: It ignores (a) the timing of returns, (b) cash flow available to stockholders, and (c) risk

(i.e. the chance that actual outcomes may differ from those expected). The media sector is

regulated with respect to opportunities for making profits. For example, broadcasting law imposes

specific income restrictions on media companies. In addition, media companies have to pursue

other goals than profit maximisation such as cultural and social goals as part of their public remit.

Financial management is an academic field with financial economics which is concerned with the

acquisition, financing, and management of assets with some overall goal in mind.

The essential objective of financial management can be categorized into two broad functional

categories: recurring finance functions and non-recurring or episodic finance functions. The

overall goal of financial management is to guarantee a stable liquidity and equity base of the firm

over time.

57 15 May 2011

The role of financial managers is to organize: (a) the prudent or rational use of capital resources,

i.e. proper allocation and utilization of funds; (b) careful selection of the source of capital, i.e.

determining the debt equity ratio and designing a proper capital structure for the corporation; and

(c) goal achievement, i.e. ensuring the achievement of business objectives viz. wealth or profit

maximization.

The financial manager must understand the economic environment and relies heavily on the

economic principle of marginal analysis to make financial decisions. The marginal analysis is a

principle in economics that states that financial decisions should be made and actions taken only

when the added benefits exceed the added costs. Financial managers use accounting but

concentrate on cash flows and decision making.

Managerial finance and accounting are not often easily distinguishable but basically differ in

that the financial manager is the decision-maker whereas the accountant‟s (i.e. controller) primary

function is to develop and report data for measuring the performance of the firm. This data often

supports the financial manager‟s decision.

Question raised in this report and in connection with financial management in general include:

(a) Which socio-economic forces influence firm performance in the media sector?; (b) Do new

information and communication technologies have an impact on firm performance?; (c) Which

sources of finance are vital for viability and sustainability of operations?; (d) Which specific fields

may guarantee financial viability and sustainability?; (e) What background theories do explain the

relations between structure, firm conduct, and performance of firms in the media sector and the

impact of these factors on financial management?; (f) Which indicators and measures are used to

show the financial performance of media firms?; (g) What role does strategy play in market

positioning of firms in the media sector; and (h) What role does marketing strategy play in

strengthening the financial position of firms in the media sector?

Chapter 2: Financial Management of Media Firms – Key Issues

Issues of financial management of organisations or firms in the media sector are broad and

dynamic. They range from general issues of impact of environmental forces on the financial

operations 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 and scope, transaction costs), specific

characteristics of the media products and services themselves, to technology as main driver of

change.

Scholars in media economics and media management offer analytical reasoning and explanations

for the impact relations and the effects of these mutually dependent and impacting forces. The

theory of the firm, for example, forms the basis of the industrial organization (IO) model which

provides a valuable analytical framework for examining competition in the media and other

industries. Most media economics texts follow the IO model using the SCP-paradigm.

The Industrial Organisation model of industry competition shows factors of impact as

determined by the structure, conduct, and performance of the firm operating in an industry sector.

Theoretical and empirical analyses of the media sector have shown that industry structure (i.e. the

number of buyers and sellers in the market, their market shares, their product and service specifics

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offered, the market phase, the existence of economies of scale and scope, and barriers of entry and

exit) determines the behaviour of firms (i.e. product and price policies, marketing policies,

innovation policies) which, in effect, determine the performance (i.e. efficiency) of the market

players. In practice, Lacy (2004), for example, has studied the relationhsip of competition,

circulation, and advertising on the performance of daily newspapers. According to Lacy, economic

theory and research provide evidence that intense newspaper competition among newspapers will

result in increases in newsroom budget, changes in content and decreases in advertising cost per

thousand. However, empirical evidence is less storng that competition decreases subscription

prices. Considerable variations across newspapers can be found with all these relationships, which

represent a variety of managerial decisions.

This said, the financial media manager may decide upon which pricing strategy to pursue. As

put forward by Lacy (2004, p. 33), “as readership declines and the cost per thousand increases,

advertisers will be more likely to switch to imperfect substitutes. If ad lineage declines,

newspapers that want to maintain profit margins will either have to increase ad prices or maintain

revenue or cut newsroom and other expenses to control costs. In the former case, the probability

of advertisers‟ seeking substitutes increases. In the latter, quality declines will cause readers to

leave, increasing the cost per thousand. As cost per thousand increases, businesses are more likely

to substitute other forms of advertising”.

The media industry sector continues to go through major change. New technologies offer new

revenue opportunities, channels to market, and possibilities for more efficient workflows and

reuse of information. However, they also provide the threat of declining revenues from more

traditional products, and the challenge of new competitors, new business models and major

organizational change. Meeting these opportunities and facing these challenges requires strategic

vision backed up by a clear knowledge of the marketplace, competitor activity, workable business

models, effective delivery channels and available technologies.

Further, a variety of forces related to the costs of operations play important roles in the economics

of media. These include input costs such as costs for newsprint or personnel, production costs, and

distribution, marketing and advertising costs of media goods and services. Cost economies can

also be achieved through raising the scale and scope of business. In addition, as markets may fail

regulatory forces may set rules for business behaviour and thus financial performance. Barriers to

entry and mobility exert further constraints on market competition.

Technology is another prominent market driver for change. Information and communication

technologies (ICT) have driven change in the graphics and media industries in the areas of

competitiveness, work organisation, industry performance, and employment in the last decades.

Research studies established that, in general, investments in IT capital do produce net efficiency

benefits, although this varies depending on other factors such as management practices, and

organizational and industry structure.

Sources of finance for media operation are multiple: Generally, they come from internal or

external sources. For newspaper companies, internal revenue sources are circulation sales and

advertising sales. Media work on dual markets: information/ideas markets and advertising

markets. How these two markets are interlinked is explained by the theory of the circulation spiral.

This has implications on the financial management of media organizations. Under this perspective,

the key objective of the media revenue management problem is to optimally allocate advertising

space across upfront and scatter markets to hedge against audience uncertainty, honour client

contracts and maximize short-term profits.

59 15 May 2011

Media managers can choose from a set of traditional business models to achieve viability of their

operations: The „content‟-business model builds on the basic strengths of media, to produce high-

quality content for targeted audiences. This 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 for financing their Internet presence and other online

activities, thus strengthening the third pillar of business modelling „commerce‟.

As traditional media businesses move into the digital era, new revenue opportunities emerge.

Online business models include revenue generation from brokerage, web advertising, and

affiliate activities.

More specific issues of financial media management concern start-up financing, credit and cash

flow management, and investment management. Importantly, present capital investment decision

are based on estimated future cash flows and relevant interest rates must be taken into account to

arrive at the value today of the anticipated flows. Financial media managers can rely on the

formula of Net Present Value to take into consideration this aspect of financing.

Theories of ownership control and its effects on media performance, financial commitment

and financial control, resource dependence theory, as well as corporate governance theories have

been applied to media economics and media management. They offer theoretical explanations for

various variable relations concerning financial media operations and strategies.

There are a number of indicators and measures of firm performance applied in the media

sector. These indicators and measures may grossly be differentiated into indicators of profitability,

market value (or market capitalization), and share indicators.

Strategies are processes of specifying an organization‟s objectives, developing policies and plans

to achieve these objectives, and allocating resources so as to implement the plans. Media

management may apply a set of strategies in order safeguard financial viability and health, and to

maximize profit or market growth respectively. Strategic management can be seen as a

combination of strategy formulation and strategy implementation.

The doyen of competitive strategy theory, Michael Porter (1980), has suggested cost leadership,

product differentiation, and market segmentation (or focus) as the three generic managerial

strategies to achieve competitive advantage and firm growth. Besides these general managerial

strategies, the kinds of strategies media firms regularly develop and apply and which are most

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, and delivering value to customers

and for managing customer relationships in ways that benefit the organization and its

stakeholders” (www.marketingpower.com). Marketing can thus be seen as an integral element of

financial management theory and practice.

Marketing strategies are partially derived from broader corporate strategies, corporate missions,

and corporate goals. They should flow from the firm‟s mission statement. They are also influenced

by a range of microenvironmental factors.

Market dominance strategies may be categorized as marketing strategies which classify

businesses by reference to their market share or dominance of an industry. Typically there are four

types of market dominance strategies: (a) market leader, (b) market challenger, (c) market

follower, and (d) market nicher.

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Chapter 3: Financial Management in Media Practice – Case Evidence

Two best-practice cases in the media industry sector show that financial management plays an

important role in media practice. The cases delivered general company facts and background

information, looked into the financial situation and financial activities of both players, enabled

testing of theoretical issues developed in the chapter 2 and 3 of this study against empirical

evidence from media practice, and discussed impacts of financial matters on firm performance and

the competitive behaviour.

Case study A refers to a financially successful online web-portal for quality news in the print

media. Case study B refers to the difficult path of a European Public Service Broadcaster in

redefining its role in the digital era. Financial management is crucial for both media firms.

Evidence from the first case study A, the online version of the quality daily „Der Standard‟,

http://DerStandard.at, suggests that print media can offer online news economically and

financially successfully. Starting back in 1995, DerStandard.at was the first German speaking

newspaper on the Internet. Its constantly developing website has set standards in Austria.

Incorporated in 1999 as a separate entity, it became profitable in 2004 with revenues of € 4.1

million annually. Online advertising and online classifieds are most important and represent

almost 90% of total turnover. Given the increasing market shares of online in advertising and

classifieds, further growth with double digit rates is assured for the next few years.

Evidence form case study B suggests that the Austrian PSB, the Austrian Broadcasting

Corporation (ORF), will retain a central role in the provision of public service broadcasting in the

next years to come. This is due to its well established market position, leaving room for

competitors to establish only very hesitantly (the market was only liberalized in 1997), and its

overall business clout. However, in order accomplish and reaffirm this, the ORF will have to

improve its overall service portfolio on analogue and digital platforms somewhat faster and more

critically approved than it has during the 1990s. Overall, the Austrian television broadcasting

market is currently in a state of flux. This is because private national analogue television has

finally been granted a licence, and public service broadcasting and cable-TV are currently

switching over to digital distribution. Already facing strong competition from private cross-border

analogue television, Austria‟s public service broadcasting station ORF is facing fiercer

competition on many fronts and on many levels. In this context, the ORF content offers converge

towards private commercial television. By this, it has embarked on a set of cross-media

marketing strategies to exploit traditional revenue bases and invent new ones. This is to

safeguard the economic viability of its operations.

61 15 May 2011

5 Calculations

Calculation: CPM for TV

A) How much is one second advertising on a private radio broadcasting channel which

is calculating with a CPM of € 1,80 (14+) and 0,5 mio. listeners (14+) in prime time?

B) A TV channel reaches 250.000 viewers with a TV show (14+). There are 12 min

advertising shown for a CPM (14+) of € 20,-. What are the total ad revenues of the

channel achieved through the TV show?

Solution:

A) 1,80 x 1.000/500.000 = 900

B) 20 x 250.000/1.000 = 5.000. As 12 min or 720 secs can be sold as advertising, total

revenues of € 120.000,- can be made

Calculation: Maximizing Profit of a Monopolist

Consider a media monopoly (e.g., cable TV in USA) that faces the demand curve represented

by the equation

Q = 100 – 2p (1)

This demand curve is a straight line.

Suppose that production requires a fixed cost of 300 and a constant marginal cost of 10 per

unit. (e.g. laying cable)

a) What is the total cost of producing Q = 40 units?

b) What is the monopolist‟s maximum profit?

Solution:

Rearranging equation (1), the price, expressed as function of quantity, is

P = (100-Q)/2

Hence, the total revenue R(Q) = p x Q = ½(100Q – Q2)

For finding the max profit, you need to deliver the solutions for the following formula: MR =

MC

MR = ½(100-2Q)

MR = MC

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Hence:

dR(Q)/dQ = ½ (100-2Q)

We can obtain the profit maximizing production scale by equating the MR (marginal revenue)

to MC (marginal cost).

Hence:

½ (100-2Q) = 10

Solving, the profit-maximizing production scale is Q = 40. By substituting Q = 40 into Q =

100 – 2p, we obtain the profit-maximizing price p = 30.

Hence, TR (total revenue) is p x Q = 40 x 30 = 1.200

Hence, TC (total costs), C(Q) = 300 + (10 x 40) = 700

Therefore, the monopolists profit is 1.200 – 700 = 500

Calculation: Measuring Household Demand

Suppose that a typical household„s demand for long distance calls is represented by the

equation:

D = 200 – 4p + 0.4Y

Where D is the quantity demanded in minutes a month, p is the price of calls in cents per

minute and Y is the household„s income in thousands of dollars a year: Assume that Y = 100.

(a) Draw the households demand curve.

(b) How many minutes will the household buy at a price of 25 cents a minute?

(c) What is the maximum lump sum that a long-distance carrier can charge the household

for a package of 140 minutes of calls?

Solution:

(a) Maximilian Stuhl has drawn a graph on the classroom wall (good!). This is

very easy; just draw a graph as you learnt in economics, name the curves,

go for Y = 100; set p = 0, and check the resulting D. (b) 140 minutes; D = 200 – 4p + 40 = 140 (with p = 25cents)

(c) $59.50 = (.25 x 140) + .5[(.60 - .25) x 140]. You obtain this sum by looking at

the graph you have drawn under (a); (0.25 x 140) is the PS (producer

surplus); 0.5 [(0.60 – 0.25( x 149] is the consumer surplus which you also

wish to cream off as carrier; (btw 0.5 stands for the triangle, i.e. have the

square that you see)

Calculation: Long-run price and output determination

The market for DVD rentals in Charlotte, North Carolina, can best be described as

monopolistically competitive. The demand for DVD rentals is estimated to be

63 15 May 2011

P = 10 – 0,004Q (1)

Where Q is the number of weekly DVD rentals. The long-run average cost function for

Blockbuster is estimated to be

LRAC = 8 – 0,006Q + 0,000002Q2

Blockbuster„s managers want to know the profit-maximizing price and output levels, and the

level of expected total profits at the price and output levels.

Solution:

First, compute total revenue (TR) as:

TR = p x Q = 10Q – 0.004Q2

Next, compute marginal revenue (MR) by taking the first derivative of TR:

MR = 10 – 0.008Q

Compute total costs (TC) by multiplying LRAC by Q:

TC = LRAC x Q = 8Q – 0.006Q2 + 0.000006Q

2

Next, set MR = MC

10 – 0.008Q = 8 – 0.012Q + 0.000006Q2

0.000006Q2 – 0.004Q – 2 = 0

Use the quadratic formula to solve for Q. Q* is equal to 1.000.

At this quantity, price is equal to

P* = 10 – 0.004 (1.000)

= 10 – 4

= $6

Total profit is equal to the difference between TR and TC, or

PROFIT π = TR – TC

= 10Q – 0.004Q2 – [8(1.000) – 0.006(1.000)

2 + 0.000002 (1.000)

3]

= $2.000

The MR and MC at these price and output levels are $2. (as we applied the Quadratic formula

above).

The fact that Blockbuster expects to earn a profit of $2,000 suggests that the firm can

anticipate additional competition, resulting in price-cutting that will ultimately eliminate this

profit amount.

Calculation: Long-run price and output determination

Let the individual demand curve for a media item (e.g. IPAD) be

D = 30 – 2p + 0.04Y + 4s

Whereby Y stand for income and s for a special factor, i.e. the price of a related product,

advertising expenditure, season, weather etc.

Suppose that Y = 100; s = 0.5

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(a) Draw the demand curve

(b) Calculate the total benefit of the buyer and the buyer‟s surplus.

Solution:

D = 36 – 2p

At a price p = 10, the buyer purchases the quantity D = 16. The buyer‟s total benefit is

represented by the trapezium 0dac, while the buyer‟s expenditure is represented by the

rectangle 0dab. Hence, at the price p = 10, the buyer‟s surplus is represented by the triangle

bac. The area of this triangle is ½ x $(18-10) x 16 = $64.

Now suppose that the buyer„s income rises to Y = 150. The other factor remains S 0.5. Then,

the demand curve becomes

D = 30 – 2p + 6 +2 = 38 – 2p

In this case, when the price is p = 0, the quantity demanded D = 38, while if the quantity

demanded D = 0, the price p = 38/2 = 19.

Marking and joining these two points, we have the demand curve with the income of Y = 150.

This is a straight line that lies to the right of the demand curve with the income of Y = 100.

By contrast to a change in price, the change in income is represented by a shift of the entire

demand curve.

Recall that s is the value of another factor in demand. Originally, s = 0.5. Suppose that the

other factor increases to s = 0.6; while income remains Y = 100. Then, the demand curve

becomes

D = 30 -2p + 4 + 2.4 = 36.4 – 2p

What will happen to the demand curve?

65 15 May 2011

This other factor could be the price of a related product, advertising expenditure, season,

weather, or location.

Solution:

You should be able now to answer this yourself.

Calculation: Long-run price and output determination

A Hong Kong mobile telephone operator set the following rates for calls from Japan back to

Hong Kong during peak hours; HK $20 for the first minute and HK$14,70 for each

subsequent minute. Wong takes a five-minute call.

(a) What is the average price per minute of Wong„s call?

(b) What is the price of Wong„s marginal minute?

Solution:

(a) Average price per minute = (20 + 14.70 x 4)/5 = HK$ 15.76 per minute

(b) Price of marginal min. = HK$ 14.70

Calculation: Advertising revenues and content licensing – Die Feuerwache

Your new docusoap is called “Die Feuerwache” (subtitle – Mami wird Feuerwehrfrau).

It is a flight of 7 episodes you wish to purchase.

You need to calculate the purchasing price of each episode, depending on the following data:

o Length of episode = 60min.

o Planned broadcast time: 4pm

o Planned target group: 14-19 year olds (total: 4.5 Mio.)

o Planned Market share: 8,5%

VOX – Die Feuerwache

Expected viewers 4.5 million

Market share for show 8,5%

Rating (number of viewers) ?

Zapping (-20%)

Ad break rating Rating – ad zapping = ?

Viewers in 1.000

Price (= TKP): 18 € Gross price/spot (30 sec.)

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Max number of spots ?

Sold in cash 50%

Gross revenue BWE ?

Net revenue NWE (rebates, discounts, etc.)

Program costs

DB (gross margin) NWE – program costs

Solution:

VOX – Die Feuerwache

Expected viewers 4.5 million

Market share for show 8,5%

Rating (number of viewers) 382.500 (8,5%*4,5Mio)

Zapping (-20%) 76.500

Ad break rating Rating – ad zapping = 306.000

Viewers in 1.000 5508 €/30 sec.

Price (= TKP): 18 € Gross price/spot (30 sec.)

Max number of spots 24 Spots (20%*60min=12min, /0,5min = 24 Spots)

Sold in cash 50%

Gross revenue BWE 132.192 (5508*24)

Net revenue NWE (rebates, discounts, etc.) BWE*50% = 66.096

Program costs Benchmarking = 100.000 (virtual number)

DB (gross margin) NWE – program costs

= - 33.904 (maybe by economies of scale decreasing

production costs, directly producing more episodes)

Calculation: Upper price limit for sports show purchase

Calculate an upper price limit for another new program purchase

Formula: P < R/1.000 x TKP x WZ

TKP (CPM) = EP x 1.000 divided by expected reach (example)

R: Expected reach 5.000.000

67 15 May 2011

TKP: CPM 5€/30sec

WZ: Ad time (30sec) 10% of 90min

P: Price upper limit for program purchase ?

Solution:

p = 450.000 €

Calculation: Upper price limit for sports show purchase

German sports channel DSF wants to go for the exclusive rights of DHB-trophy between SC

Magdeburg and THW Kiel. DSF calculates with a reach of 700.000 viewers. For 4 minutes of

advertising DSF calculates a TKP of 15€/min, for 9 minutes in the context of the game with a TKP of

10€/min. Moreover, there are 35.000 EUR for the technology in transmitting the show and staff costs

etc;

(a) What is the upper price limit which DSF is willing to spend maximally?

ATTENTION: Please calculate on a minutes price level (normally 30 sec prices) with 15 EUR/MIN

(during game out-time) and 10 EUR/MIN (around the game). The 30sec basis values would be much

too high.

Solution:

p = 700.000/1.000 * 15 * 4 * 2 plus 700.000/1.000 * 10 * 9 * 2 = 84.000,- plus 126.000,- plus

35.000,- = € 245.000,-

Or :

P<R/1000*TKP*WZ + additional costs

P1:700.000/1000*30*4 = 84.000

P2: 700.000/1000*20*9 =126.000

Production Costs = 35.000

Total =245.000

Calculation: Advertising and sales optimization

Suppose that the sales revenues (S) depends on the quantity of advertising (A), in a

relationship estimated as:

S = 14 + 16A – 2A2

We seek the value of A to maximize S. First, differentiate with respect to A; ds/dA = ?

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1 May 2011 68

Note: the derivate gives the precise value of the tangent slope of a curve at a particular point).

Then set zero and solve,

If 16 -4A = 0

A = 4

When advertising equals 4, sales revenue is at a maximum or at a minimum. In order to

distinguish between them, we need to consider the second order condition:

D2s/d

2A = ?

Since the result is negative, the point A = 4 must be a maximum.

To maximize sales revenues, how many advertisements must be undertaken?

Solution:

4 advertisements must be undertaken.

69 15 May 2011

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