THE FUNCTIONAL DIMENSIONS OF MEDIA FIRMS

Awareness of microeconomic principles provides a conceptual framework for understanding the operations of media firms. These principles directly apply to such dimensions as industrial organization, production and distribution, technology use, promotion, marketing and distribution, accounting and information systems, financial management, and transactions in the financial system. These are now considered in turn.

Organization

Business firms of any substantial size are what sociologists term complex organizations. The sophistication of contemporary technology and the size of operation necessary to release the economies of scale often associated with its implementation mean that many business firms are indeed very complex organizations. Certainly many media firms fit this profile. It is difficult to envisage the functions of a television network being accomplished with- out a large and complex structure.

An organization can be defined as two or more people working together to achieve a common goal, and most media and other business organizations require the coordination of many individuals and activities. The coordination of activities requires a structured interrelationship between the various functions and subtasks that are required to achieve the overall organizational goals. The primary representation of this in the typical business firm is the organization chart. The organization chart formalizes the grouping of tasks, areas of responsibility, and reporting channels. A typical organization chart of a U.S. media corporation is shown in the following il- lustration.

Organizational Structure

A typical organization chart reflects the legal and functional structure of the corporation in the so-called mixed capitalist economy. Members of the board of directors are appointed (at least technically and legally) by the stockholders. The chief executive officer (CEO) is responsible for the ongo-

1. AN INTRODUCTION TO MEDIA ECONOMICS THEORY AND PRACTICE

ing operations across all the functional areas within the policy guidelines 26 provided by the Board of Directors. Primary functional areas range from production (e.g., movie) to financial (e.g., raising monies for movie production). In addition to these primary functional areas, there is an increasing role of international operations.

Just how the responsibility for each functional area is allocated is determined by the type of organizational structure employed. The type reflected earlier is a combination of line and staff organizational format. Line refers to the actual production of the goods and services that the firm primarily ex- ists to produce, whereas staff describes those functions that do not directly produce the primary good or service, but which are necessary for the overall functioning of the firm. The functional areas of accounting and person- nel are typical of staff functions in media firms. The matrix form of organization has both vertical and horizontal (in the context of the organization chart shown earlier) areas of responsibility. Quite often the organization of international operations employs the matrix arrangement. The manager of a foreign branch will often have responsibility for all the functional areas in his territory, but will work closely with the home office functional vice presidents in each area for major decisions in the respective arena. For example, the marketing of television programs in multiple foreign markets is handled by one vice president of international program- ming, who coordinates her activities with other relevant vice presidents within the network.

Production

In the terminology of economics, production refers to the creation of the good or service being provided by the firm. In the media industries, the pro-

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duction varies from the physical products of print media (e.g., newspapers, magazines) to the transient products of broadcast media (e.g., broadcast news and entertainment programs). Much of this book is devoted to consid- eration of the specifics of the production undertakings of the various media industries. Thus the line function receives more general attention here.

The process of creating a product to distribute to market varies widely across the media industries. In the case of newspapers, for example, production is by necessity compressed into a few hours. Most processes—as- sembling newsworthy items from reporters and wire services, layout and typesetting, the physical availability of the product for distribution—must take place in a compressed time frame. In contrast, the time frame for a book may be months or years.

Within particular segments of the industry, there have been some notable changes in the production process in recent years. For example, few book and magazine publishers now physically undertake their own printing, as major commercial printers such as R.R. Donnelley & Sons Co. do the majority of book and magazine printing on an ongoing basis. Technological developments have facilitated efficient operations for firms that require geographically dispersed facilities locations. For example, the availability of satellite communications improves the efficiency of the production process for publications where there is a standard product that is printed (with minor variations reflecting regional editions) in several locations. Promi- nent examples include The Wall Street Journal and USA Today.

Marketing & Distribution

The channels of distribution, market coverage, use of intermediaries, and techniques of physical distribution clearly vary markedly according to the specific media industry being considered, and the significance of distribution management varies. For the TV networks, the pattern of owned and af- filiated stations provides a relatively stable pattern and distribution is not perceived to be an area of that business requiring continual attention. In contrast, for small-scale book publishers, channels of marketing and distribution generate repetitive problems and the search for a “better” solution is in some ways ongoing.

One of the most notable changes in distribution that occurred as a result of technology was the growth of the number of homes that have VCRs and remote controls. The number of homes with VCRs increased from 1% in 1980 to more than 65% in 1989. They are now close to ubiquitous. The impact of VCRs is twofold. First, VCRs led to a whole new “ancillary” market for theatrical films. Motion picture companies now derive reve- nues from video sales to either video rental outlets or direct sales (sell through) to consumers. Film companies now often obtain greater profits from home video sales than from box-office receipts. Home video viewing

1. AN INTRODUCTION TO MEDIA ECONOMICS THEORY AND PRACTICE

has also had an impact on pay-cable viewer-ship, broadcast TV viewer-ship, and theater movie-going. Second, VCRs have resulted in a whole new way for people to view television. Viewers can now time shift, that is, tape programs to watch at another time, rather than at the time a broadcast or cable network airs its programs. The most popular type of program that is recorded is the daytime soap opera, a direct result of the increasing number of working women in this country. Viewers can also “graze,” or sample programs across the dial at any one time. More importantly for advertisers, viewers can zip through commercials by fastfor- warding or zap them by not recording them.

The expansion of fiber optics in the cable industry during the 1980s resulted in consumers having the potential of receiving hundreds of channels. Even more importantly, the development of the addressable converter meant that cable companies could more easily implement pay-per-view (PPV) services. So far, PPV has been used for major event types of broad- casts (e.g., heavyweight championship fights, concerts, etc.) and as movie services. The expansion of fiber optics also means there is the potential for more narrowly targeted cable services. In the future, sports fans may be able to view electronic media channels dedicated to football, basketball, or baseball. The narrowness of the market will only be limited by the potential revenue (either through advertising or by subscription) of that market.

Marketing & Promotion

Marketing is an inclusive term involving market identification and research, evaluation and standardization of products and services, and the promotion and selling of the product or service. Over time and frequently in a cy- clical manner, most of the media industries both benefit and suffer from changes in the markets served and changes brought about by technological developments. For example, the beeper industry grew as a result of the technological developments facilitating its operation, and now faces chal- lenging competition from the cellular telephone technology and industry. Clearly broadcast TV is exposed to new competitive challenges with the pervasive availability of cable television, direct broadcast satellite services, VCRs, and high-definition television technology.

The nature of the competitive arena varies widely within the media industries. Book publishing includes literally thousands of firms in the United States, and there are few barriers to entry. Although structural challenges such as distribution channels explain why the industry is dominated by a relatively small number of firms, nevertheless many small, specialized firms continue to prosper. In some ways, this approximates the economist’s notion of a fully competitive market. In contrast, until the widespread availability of cable television, the networks operated under approxi- mately oligopolistic market conditions, under which a small number of

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firms dominate and control the market. Now, however, the technological and distributional developments mean that many TV consumers see nu- merous substitutes to network TV available. Reflecting full awareness of these trends, there is now considerable investment by networks in those ad- ditional services (e.g., ABC and ESPN) although such investment is moni- tored by the FCC.

Accounting and Information Systems

Some familiarity with the essentials of financial accounting is necessary for

a full awareness of what is involved in media management. Accounting must process many types of data as a functional area of activity. Whereas the general presentation of accounting focuses on the types of accounting data found in financial statements, a broader interpretation of the role of accounting is to perceive the accounting function as part of the total information system within the firm.

Accounting as a profession has two primary branches—financial accounting, and cost and management accounting. The head accountant (often referred to as the Controller) is in many firms considered to have overall information technology (IT) responsibility.

The accounting functions and accounting statements (Balance Sheet, In- come Statement/Profit & Loss Statement, and Statement of Cash Flows) are considered in Appendix A online at https://www.erlbaum.com/shop/ tek9.asp?pg=products&specific=0-8058-4580-1. Directly above the descrip- tion of the book will be a link that says View Appendices for the Book. After identifying the main concerns of cost and management accounting, this appendix focuses on financial accounting.

Financial Management of Media Operations

Many of the numbers reported in the balance sheet and income statement are the result of operating and financial decisions made by the firm. For example, the level of debt is typically determined at least partly by management’s interpretation of what is an optimal level of debt. The results of the firm’s operating decisions also have an impact on the firm financial statements. Clearly, whether sales are profitable will have a major impact on the overall financial performance. Analysis and interpretation of accounting statements thus includes an examination of past results and an anticipation of likely future results.

Financial Decisions

Modern financial management perceives the challenges of this functional responsibility to be selecting worthwhile investments in media assets and

1. AN INTRODUCTION TO MEDIA ECONOMICS THEORY AND PRACTICE

managing existing assets, acquiring the necessary funds to finance the assets, and providing returns to the sources of funds (interest to lenders, divi- dends and capital gains to stockholders).

These investments, financing, and distribution decisions are considered in turn in Appendix B. The essential elements are describes in what follows.

Rate of Return

The rate of return (ROR) is a primary metric in finance. It is a generally sim- ple concept, and can be introduced by way of a numerical example. If a security was purchased a year ago for $100, today it is worth $110, and the security paid a $5 dividend throughout the year, then an intuitively appeal- ing (and correct) rate of return is 15% over the year. Formally:

PRICEend – PRICEbeginning INCOMEd uring

THE FUNCTIONAL DIMENSIONS OF MEDIA FIRMS