Economies of Scale and Scope

Economies of Scale and Scope

During the past decade, the increase in competition in the television market has driven both broadcast networks and station groups to seek ever-greater

FERGUSON

economies of scale and scope to offset challenges to their revenue. Scale and scope are part of a larger system of resource allocation, based on perceived value. To some extent, information and entertainment on television are a social good beyond any economic value. Certain televised events like moon landings and Olympic contests have a value to viewers and society beyond the price paid for the service. Nevertheless, television remains a business, and economic decisions are necessary for the allocation of scarce resources. For broadcast network television, allocation decisions are made in several markets.

First, there is a competition for audience and programs among sources of television broadcasting, usually among the networks and stations but also with nonbroadcast forms of programming. This macrolevel involves an in- dustry that seeks an optimal system of resource allocation to benefit the greatest number of producers and consumers. Broadcast networks com- pete with premium services such as cable television by offering major events through support from advertisers (e.g., Super Bowl) and by declin- ing to carry lesser events (e.g., soccer). On the other hand, some events with high revenue potential (e.g., title boxing matches) are supplied by pay-per- view channels.

The second market concerns the internal efficiency of the television sta- tion or program producer, both of whom are interested in holding down the cost of making a television show. Large companies take advantage of econ- omies of scale (full-time utilization of expensive studios) and economies of scope (the producer and the distributor comprise the same organization). The networks can afford to commission very expensive programs, where individual stations (or ad hoc consortia of stations) cannot. The four largest networks combined spend $18 billion per year for their vast array of pro- gramming. Over the decades, the system has evolved from advertiser-con- trolled programs in the 1950s, to network-controlled programs in the 1960s, to studio-controlled programs in the heavily regulated 1970s and 1980s, and finally returning to network-controlled shows in the deregulated 1990s. Starting with the Fox network in 1987, association with Hollywood studios became primarily a matter of ownership.

Networks also widened their scope by aligning with or acquiring addi- tional cable channels and broadcast networks. As mentioned before, repur- posing was made possible and eventually adopted by some networks (e.g., ABC in 2002) as an overarching strategy. ABC and CNN began serious dis- cussion about merging their news operations in 2002. Networks also at- tempted to establish a foothold on the World Wide Web.

In the third market, the consumers (viewers) of broadcast products look for their own cost-benefit goals. The television audience seeks the channels to satisfy its needs and wants at a reasonable cost. In the case of advertiser- supported broadcasting, the consumer pays very few direct costs but does

7. THE BROADCAST TELEVISION NETWORKS

pay the opportunity cost of leisure time allocation. This latter cost—lost time for other activities, like sleeping or studying—is sometimes trivial to the individual because it is not usually measured like money.

Finally, the fourth market is where stations and other programmers sell the attention of audiences toward programs. The buyer is the advertiser who wants access to those audiences. Noncommercial television broad- casters do not compete in this market, although they compete with other re- ceivers of public funding.

The structure of choices in television broadcasting is under two pres- sures (Collins, Garnham, & Locksley, 1988). One is the competition of distri- bution technologies, including cable television, direct-to-home satellites, home video (DVDs), and digital interactive television. The other is the pres- sure to broaden their market base to pay for the increased cost of competing with others.

This final point cannot be overemphasized. In the recent past, television broadcasters comprised a small oligopoly of stations for each market, fed by an oligopoly of national broadcast networks. The competition was fierce but self-contained. Stations benefitted from a predictably certain zero-sum game among a small number of players. If NBC had the best shows on Thursday, another network was the winner of the three-way race on a dif- ferent night. As other sources of video entertainment have appeared, how- ever, the television broadcasters have continually needed to attract more revenue to pay for more desirable products—at the same time that their au- dience has been segmented into less-valuable pieces in an advertiser-sup- ported scheme. The advertiser who bought a commercial in the last-place program was assured a goodly portion of the potential viewers when only three choices competed. Today, an advertiser in the first-place program may only reach a fifth of the viewers because of competition from cable net- works.