Economic Foundations for Entertainment Media and Technology Organization

Economic Foundations for Entertainment, Media, and Technology Organization of Firms in E&M Industries Vertical Integration 2: C - 1(52) Vertical Integration

Vertical Integration in Markets Financial Services Professional Sports Traditional Publishing Final Consumers 2: C - 2(52) Vertical Integration

This one’s not a wrap! The benefit of integration 2: C - 3(52) Vertical Integration

Create Something That Was Not There Before ORLANDO, Fla. — Pull down your lap bars: Universal Studios, theme park chain now controlled by Comcast, is rolling out new weapons in its battle against Walt Disney Parks and Resorts — and Disney is fortifying its defenses. Universal’s parks have always languished in the shadow of mouse ears, and that will not change anytime soon. Disney has eight parks in California and Florida that attract over 73 million visitors each year, with summer the busiest season. Universal operates three parks, with annual attendance totaling about 18 million. But, Universal is starting to look a lot less puny. A $265 million Harry Potter-themed addition to its resort here sent 2010 attendance soaring 30 percent over the year before, draining attention from Walt Disney World in the process. Universal is now racing to replicate the attraction at its parks in California and Japan while expanding the boy wizard’s presence in Orlando. To maintain momentum, Universal — with more Comcast money — is introducing a swarm of offerings. 2: C - 4(52) Vertical Integration

2: C - 5(52) Vertical Integration

2: C - 6(52) Vertical Integration

Vertical Integration in E&M · Analysis · Where is it observed? · What are the benefits / motivation? · What are the costs? · Applications · Alleged conspiracy of Apple and 5 publishers · Cablevision and home delivery of cable generally · End to end production · Internet service providers and cable operators · The movie business (at several stages) 2: C - 7(52) Vertical Integration

Vertical Integration in Entertainment and Media p Vertically integrated firms n n n n p 2: C - 8(52) Viacom, Paramount, Blockbuster CBS, Showtime: Disney and ABC Comcast and NBC/Universal Clear Channel and Live Nation Nokia and Loudeye Microsoft and Nokia (and Loudeye) What are the gains? Vertical Integration

Digital Comix The Seattle-based online company has admired Comi. Xology and its reader experience for years, said David Naggar, Amazon vice president of content acquisition and independent publishing. He called Comi. Xology's panel-to-panel "Guided View" technology "the Rolls. Royce in the space. ” "It felt like a really strong ability for us to work together and learn from each other, " Naggar said. Comi. Xology will continue to exist as a wholly owned subsidiary of Amazon based in New York City, says CEO David Steinberger, who co-founded Comi. Xology in 2007. Naggar said there is no timeline for consumers on either the Kindle platform or those with the Comi. Xology app to notice a difference in their reading experiences. "Comi. Xology is a strong, healthy business, " he said. "There are no plans beyond seeing what we can do to help that business grow, and see what are the ways Comi. Xology can help Kindle, as well. " Foreclosure 2: C - 9(52) Vertical Integration

The Dolans’ ongoing efforts to buy back the stock of the full company do not relate to this vertical integration. (It does focus its meaning, however. ) Knicks Rangers Optimum Online Liberty Rainbow Media Radio City Enter. Cablevision CSC Holdings and Optimum TV: The cable system Homes Lightpath FSN Sports Networks to Comcast, Feb. 2007 2: C - 10(52) Madison Square Garden The Wiz Businesses Clearview Cinemas (Now Bow Tie Cinema, 2013) Vertical Integration

Implications of Strongly Multistaged Production: A Motivation for Vertical Integration · Where are the profits created · Where are the profits captured? · Applications: · · 2: C - 11(52) Book production Movies Recorded music Television Vertical Integration

2: C - 12(52) Viacom < Paramount Vertical Integration

Larry Gerbrandt is chief content officer and senior analyst at Kagan World Media, a research firm that covers the movie business. http: //www. pbs. org/wgbh/pages/frontline/shows/hollywood/interviews/gerbrandt. html Viacom vertically integrated its movie release windows (2001) Viacom is as good an example as any of vertical integration. Paramount produces the movie. In the case of Sumner Redstone, he personally is one of the largest exhibitors in the country. His National Amusements is one of the largest consumers of movies. So it made a lot of sense for him to own not only a studio, but also the other businesses that Viacom has. In the case of Viacom, they also own Blockbuster, so the movies go from Sumner Redstone's theaters to Blockbuster stores. The next window after that, aside from a small pay-per-view window, it then goes to Showtime, its pay window. And then now with CBS, the next window after that is a network window and then it goes, could go into syndication on the CBS TV stations. So, in theory, a hit Paramount film can actually play on virtually every one of its windows on a Viacom property. And in each case, they can maximize the revenue that is generated from that. Of course, they can't program 100 percent of all of those assets with just Paramount. They do have to go out and source films from other studios. But at least for what Paramount generates, they extract pretty much maximum revenue or, more important, maximum profit at each window of exhibition. The large question of all of this is what is the benefit of this integration? E. g. , why would Viacom want to own Blockbuster? 2: C - 13(52) Vertical Integration

Benefits of Vertical Integration · · · 2: C - 14(52) All arise from some market failure Lower transaction costs: Firm organizational limitations · Transactions involving information Avoidance of government restrictions, taxes, or regulations. Extension of market power (forward or backward) Avoidance of upstream market power Assurance of steady or reliable input supply · Murdoch’s purchase of Manchester United Internalization of market failures · Franchising reduces problems of free riding Vertical Integration

BSky. B News’ View of Manchester United Murdoch Soccer Deal Sets Up Bigger Play Goals for Media Empire Motivate $1 -Billion Purchase of Famed Team MARJORIE MILLER, Times Staff Writer LONDON--There is one reason media mogul Rupert Murdoch would spend $1 billion and change to buy Britain's most revered soccer team--more than three times what he paid for the Los Angeles Dodgers--and it is not just to tweak the noses of Manchester United fans. Even more than potential profits, owning one of the leading teams in the world's most popular sport gives Murdoch's News Corp. enormous clout with broadcasters worldwide, while guaranteeing that its games never leave the company's flagship satellite service, British Sky Broadcasting, an international cable news and entertainment network that is the dominant pay television source in Britain. Manchester United was purchased in 2004 by Malcolm Glazier for $1. 44 billion. 2: C - 15(52) Vertical Integration

Costs of Vertical Integration · Private costs · Loss of economies of scale · Organizational complexity · Assumption of risk · Social costs · Creation or extension of market power (1948 Paramount case – forced divestiture of theaters by studios) · Possible cartelization 2: C - 16(52) Vertical Integration

Foreclosure by Backward Integration? Echo Nest Music Data Service Pandora 2: C - 17(52) Spotify Rhapsody Beats Vertical Integration

A Football Mini-Case Study The XFL – 4 th and Long Football History The Major Player: NFL National Football League (NFL) 1920, 10 teams, Akron, Ohio American Football League (AFL) 1960, AFL merged with NFL, 1966, one schedule, 1970. The Competitors and Entrants WFL: 1974 -1975 USFL: 1983 -1985 World League: 1991 Arena Football League: 1987 – (a couple incarnations) XFL: 2001 (RIP) UFL: 2009 - 6 teams, 2012 – 4 teams. Formative. Attempted sale of 30% interest to NFL failed Ceased operation in 2012 with only 5 teams existing 2: C - 18(52) Vertical Integration

Football League NFL XFL Labor Pool Other inputs NY ABC Labor Pool NFL Draft LA CLE NBC ESPN CHI FOX WWF/NBC Homes Is it vertical integration? Homes Is it a cartel in the labor market? Why were salaries so low compared to NFL? What does WWF bring to the party? 2: C - 19(52) Vertical Integration

About the XFL: Economics What was the form of entry? – What was the product? Innovation? p What was the market structure? p Production structure? p What was the demand? (What market segment)? p Was the product priced? How? p Why was there no profit? Why did it fail? p 2: C - 20(52) Vertical Integration

The Real XFL – 2007, 2010, 2012, 2013 2014 – A Texas Minor League: XFLFootball. com, but … 2: C - 21(52) Vertical Integration

Professional Football Monopoly p Monopoly based on n p Attempt(s) to enter n n 2: C - 22(52) Economies of scale at several points Barriers to entry Vertical integration, foreclosure Strategy Success (or lack of) – Why? Vertical Integration

Concert Production Live Nation's mission is to maximize the live concert experience. Our core business is producing, marketing and selling live concerts for artists via our global concert pipe. Live Nation is the largest producer of live concerts in the world, annually producing over 16, 000 concerts for 1, 500 artists in 57 countries. The company sells over 45 million concert tickets a year and expects to drive over 60 million unique visitors to Live. Nation. com in 2008. Live Nation is transforming the concert business by expanding its concert platform into ticketing and building the industry's first artist-to-fan vertically integrated concert platform. 2: C - 23(52) Vertical Integration

Ticketmaster 2: C - 24(52) Vertical Integration

A Merger Made in Heaven? 2: C - 25(52) Vertical Integration

Vertically Integrated Live Nation p The Back End n p The Venues n p p p Frontline Management: Madonna, Jay-Z, Nickelback, Miley Cyrus, The Eagles, 200+ others Gibson Amphitheater, The House of Blues… The Tickets: Ticketmaster The Secondary Market (Scalpers): Tickets Now The Issue: Is there market power? n British competition authority thinks so – rejected the merger in the UK http: //www. reuters. com/article/industry. News/id. USTRE 59 F 4 CO 20091016 2: C - 26(52) Vertical Integration

Antitrust approval of Live Nation-Ticketmaster mandated that tickets be made available to Anschutz Entertainment Group. 2: C - 27(52) Vertical Integration

Vertical Integration in Sports Broadcasting: League Networks? 2: C - 28(52) Vertical Integration

Alternative Distribution: What does the NFL gain by becoming the network? 2: C - 29(52) Vertical Integration

WWE Is Now a Network 2: C - 30(52) Vertical Integration

The Paramount Case (1948) Block booking p Forward integration: theaters p Backward integration: the “studio system” (An exercise in monopsony power) p The Case p http: //www. cobbles. com/simpp_archive/1 film_antitrust. htm 2: C - 31(52) Vertical Integration

Echoes of Paramount p p Paramount, 1920 s – 1940 s The Paramount Case ABC and CBS backward integration into the movie business, 1970 s when the cost of a film for network broadcast rose 800% from 19611967. Produced 50% of their own output from 1967 -1971. n n n p p p Does this strategy reduce cost? Violated Paramount Violated the FCC’s Fin-Syn rules. (To be revisited later. ) 1980 s studios reintegration into exhibition: 1986, MCA bought 50% of Cineplex-Odeon. 1987, Columbia bought all of Tri. Star. 1980’s Time Inc. bought Warner Bros. linking cable networks and studios. Then, Turner Broadcasting. 20 th Century Fox acquired built Fox broadcasting. Sony (electronics) acquired Columbia Pictures. (Shades of The Wiz? ) IN EACH CASE, IS THERE A CLEAR BENEFIT? 2: C - 32(52) Vertical Integration

Nor is this one. 2: C - 33(52) Vertical Integration

Comcast Redux, October 2009 p Comcast n n n p p + NBC Universal (minus Vivendi) Backwards: n p 2: C - 34(52) Universal pictures Forward: n p (Cable & Internet) Regional sports networks E Entertainment Telemundo, NBC, MSNBC, CNBC, USA Network Hulu (partly owned by NBC) Sideways: Universal Theme Parks Horizontal (2014) Time Warner Cable Vertical Integration

Yahoo Integration – More or Less 2: C - 35(52) Vertical Integration

Vertical Disintegration: Yahoo Music is no more. Outsourced to CBS. 2: C - 36(52) Vertical Integration

Yahoo music is not music; it is about music 2: C - 37(52) Vertical Integration

Vertical Disintegration: AOL 2: C - 38(52) Vertical Integration

Market Structure Evolves Millions of songs! 2: C - 39(52) Vertical Integration

Music Download – Backward Integration FRANKFURT, March 25 (Reuters) - German retailer Metro AG has taken a controlling stake in Britain's 24 -7 Entertainment, which supplies technology used in music downloads, Metro said on Wednesday. 24 -7 managed 93 million downloads in Europe last year. The London based company operates 41 download stores in 13 countries and has licenses with more than 12, 000 record labels. 2: C - 40(52) Vertical Integration

More Backwards Integration Nokia and Loudeye Corp. announced that they have signed an agreement for Nokia to acquire Loudeye for approximately USD 60 million. Loudeye is one of the global leaders of digital music platforms and digital media distribution services. By acquiring Loudeye, Nokia can offer consumers a comprehensive mobile music experience, including devices, applications and the ability to purchase digital music. The multi-function mobile device will become the preferred medium for enjoying music and Nokia is leading this trend. With music optimized products like the Nokia N 91 and other Nokia devices, Nokia sold more than 15 million music enabled devices in the 2 nd quarter, making it the world's largest manufacture of digital music players. 2: C - 41(52) Vertical Integration

Microsoft owns Nokia … and Loudeye One Year Later … 2: C - 42(52) Vertical Integration

Entertainment and Media: Markets and Economics Coming Soon: A Theater Near You http: //www. marketplace. org/topics/business/movie-theaters-move-beyond-ticket-price 2: C - 43(52) Vertical Integration

Coming Soon: A Theater Near You Studios and Exhibitors p The Problem of “Holdup” p Incentives of the Two Parties p Vertical Integration p n n p 2: C - 44(52) Forward by the Studios Backward by the Exhibitors Bollywood’s Boycott of Major Theater Chains Vertical Integration

Evolution of a Holdup Problem In ’ 80 s and ‘ 90 s: (1) 15, 000 new screens were built – increase to 36, 000 by 2000 (2) Nearly all theater chains were in bankruptcy (3) Movie distribution contracts give up to 80% of the first week’s “box office” to studios. Summer 1991 Dropoff in 2 nd Week Revenues of the Number one Movie, by Week 2: C - 45(52) FX 2 What about Bob? Backdraft City Slickers Robin Hood Naked Gun Terminator 2 Hot Shots! Summer 2001 -30% +22% -28% -13% -29% -44% -35% -26% The Mummy Returns Shrek Pearl Harbor Swordfish Lara Croft Fast and Furious A. I. Cats and Dogs Legally Blonde Jurassic Park III Planet of the Apes -50% even -50% -30% -59% -50% -52% -45% -46% -56% -60% Vertical Integration

Same Market Results: 10/2009 2: C - 46(52) Vertical Integration

A number of movie theater circuits are refusing to put tickets on sale for Iron Man 3 even though its one of this summer’s most anticipated hits when it opens May 3 rd. That’s because Disney decided to leverage the film in order to renegotiate the studio’s future terms with the chains beginning with this humongous Marvel blockbuster. I’m told that AMC, one of America’s largest exhibitors, is among those holding out even though the Robert Downey Jr movie opens wide in North America in just 17 days. Some chains were selling advance tickets — and then stopped. Distributors tell me Disney hasn’t negotiated its terms with the movie chains in several years — not even for Summer 2012′s huge tentpole The Avengers — so the studio thinks it’s due for a new overall deal on future Disney titles. http: //www. bloomberg. com/news/2013 -04 -26/disney-settles-dispute-with-exhibitors-over-iron-man-3 -. html 2: C - 47(52) Vertical Integration

Solutions to Holdup p Diversify the specific capital: n p What else can you do with a movie theater? Vertical integration n n 2: C - 48(52) Theaters and the Paramount case Sony and Leows Theaters Vertical Integration

2: C - 49(52) National. Cinemedia. com Fathom Business Events Vertical Integration

2: C - 50(52) Vertical Integration

Disappearing DVD Market Implications of the shorter first run release window p Implications of increased VOD and disappearing DVD market p n n n First run release window Best Buy, Wal-Mart Movie theaters 2: C - 51(52) Vertical Integration

Bollywood 2: C - 52(52) Vertical Integration