Economic issues

The picture of the copyright industry that we outline in the third post of this series has many economic consequences. An important one deals with the economics of mediatisation and its impact on creation or diversity. Another with the role of copyright and related internalisation strategies.

Each copyright industry is now confronted with a change of its ecosystem, which affects both mediatisation and distribution. And which in turn, loops back onto production. This process is uneasy to address in a general way because each industry evolves within its own ecosystem. Moreover, each public figure – artist, author, columnist, sportsman, politician, etc. – behaves like an autonomous brand, generating its own topicality, building its own community on social networks.

intellectuallicensing.com

From a microeconomic standpoint, the utility of a copyrighted works can be termed as the sum of the expression and its associated mediatisation. When the mediatisation is subject to network effects, its utility grows with its coverage and with the consumption of the mediatised good. Copyright industries – from the serialized novels published in the newspapers to the Hollywood star-system (Caves, 2000) – have always been confronted with the necessity to generate network effects around brands and branded products. In the analogue world, such network effects were obtained through well-tested strategies combining a release investment calibrated to reach a critical mass and a media reverberation buzzing on the product. And when the buzz was feared to be negative, then the release investment was made to avoid it. (Cf. the case of the Hollywood “ten-ton turkey” release commented by Richard Caves (2000) p.166.)

An open question concerns the achieving of such network effects in digital ecosystems. According to a recent consulting study,

“total global artist income from recorded music in 2013 was $2.8 billion, down from $3.8 billion in 2000 but up slightly on 2012. Meanwhile artists’ share of total income grew from 14% in 2000 to 17% in 2013 (Mulligan, 2014).

But the top 1% artists grasped 77% of this revenue making digital recorded music a “superstar economy”. This suggests that network effects may be more massive but less accessible in digital ecosystems than in analogue ones. Such a trend would favour on the one hand, big incumbent artists whose long lasting presence grants a critical mass (a lower access cost to media), and, on the other, new artists showing extravagance enough to saturate news and social media (Rihanna, Psy, Lady Gaga, Miley Cyrus…). In other words, the competition for network effects in global digital media seems to induce more “winner-takes-all” behaviours than in the analogue walled ecosystems.

The current paradox of digital ecosystems is that works have become accessible through nearly infinite databases but they are less extensively consumed than in the analogue system. Some more empirical evidence is required to validate such hypothesis, but whether true or not it means that the “long tail” theory (Anderson, 2004) is seriously challenged by the economics of mediatisation. In effect, the diversity of creation – when related to effective consumption – relies more on mediatisation economics than on the productivity of search. A key issue both for economists and media is to design mediatisation models that could enhance the notice of niche products.

Mediatisation economics has long been associated with marketing or advertising whose external effects on sales are difficult to quantify. Simply because the utility of the meaningful complement relies on network effects that are as hazardous to predict as the success of creative works. However, more and more consulting firms are now measuring brands digital presence and their apparent valuation by consumers. Such data, if their collection costs are affordable, might be used to model the network effects associated with mediatisation procedures. (According to our experience, the collection of homogeneous data picked up from various digital media sources requires a dedicated task force with a high fixed cost. The specificity of each mediatisation scheme tends to inhibit such an investment.)

Copyright policy implications

Last, but nor least, the growing importance of mediatisation changes the traditional vision of copyright exploitation. While copyright was for long identified as a way to internalise creation efforts, it is also a way to internalise mediatisation strategies. In a media ecosystem, a copyrighted good can be given for free if its consumption increases its media component. This means first, as noticed by various authors, that piracy or counterfeiting can prove socially useful. Not because it provides access to a lower segment of consumers (Watt, 2000). But because it can raise the utility of the good (the media component) and then, generate a higher willingness-to-pay that is collectable where excludability can apply (as already explained by Paul Belleflamme on this blog).

It also means that the previous consent of copyright holders may raise transaction costs preventing them to benefit from mediatisation opportunities. The “notice and take down” procedure applying on digital platforms corresponds to an ex post consent that allows some right holders to better internalise many spontaneous mediatisation efforts. At the cost, of course, of a careful watch of their product mediatisation. The case of the countless parodies posted on YouTube that can be withdrawn on right holders’ request illustrates this trend. Parodies are pieces of the informational complement that add value to the original copyrighted expressions.

The previous consent rule should then apply but with lenience. A too stringent behaviour would prevent right holders from valuable media externalities. Conversely, take down notices corresponding to an effective internalisation decision of the right holder should involve the responsibility of the noticed intermediary. This is the point where copyright enforcement now meets tort law (Lefort, 2013).

More generally, the dissemination of copyrighted works is anything but natural. Following the B&M premise, the utility of copyrighted expressions relies on a media complement produced through publishing and progressive dissemination. Such complement carries network effects and, thanks to its contextual dimension, allows right holders to gain from economies of scale in publishing other works. This point is clearly underestimated by the economic literature. It explains why the Copyright Term Extension Act (CTEA, 1998) has been mocked by so many conventional economists while supported only by a few copyright experts (Liebowitz and Margolis, 2004): the loss of property rights on the Mickey Mouse cartoons would have, no doubt, spoilt the Disney brand and its ability to mediatise new works. Hence, the economics of mediatisation deserve more research and quantitative analysis. It should also promote a better coordination between trademark and copyright law.

Media ecosystems

The term ecosystem is primarily used in biology do designate a community of living organisms (plants, animals and microbes) in conjunction with the non-living components of their environment (things like air, water and mineral soil), interacting as a system (Wikipedia). These biotic and abiotic components are regarded as linked together through nutrient cycles and energy flows. Willis (1997) traces back the history of the concept and its adaptation to the description of natural systems. Ecosystems are defined by the network of interactions among organisms, and among organisms and their environment. They can be of any size but usually encompass specific, limited spaces.

By analogy, a business ecosystem applies to a community of economic agents interacting for the balance of all, in a framework favourable to externalities (Teece, 2007).

A business ecosystem finds its roots in the idea of value networks and can be seen as a group of companies, which simultaneously create value by combining their skills and assets. Business ecosystems create value for a participant only when the participant is not capable to of commercializing a product or service relying on its own competences. (Clarysse, Wright, Bruneel, Mahajan, 2014, p.1164)

The concept of ecosystem differs from the one of industry, market or sector, because it relies on the prevalence of external effects. Quite frequently, the externalities come from private or informal information exchanges – on individuals, organizations or institutions – that decrease transaction costs and favour various forms of business clustering. Such kinds of ecosystems could be called “transactional” since most of the externalities come from the impact on transaction costs of circulating knowledge, informal relations and institutional information.

Similarly, one can consider that a communicating society runs like a biotope in which public messages are received and re-emitted by media. Media interaction participates in society coordination although media are not systematically linked together by formal or contractual relations. As such ecosystem contributes to the production of a “favourable notice”, the participants rely on it to commercialize their products. Quite often, “the skills and assets” that are shared by media deal with trademarks or talent names equivalent to “brands” that provide a meaningful context to goods or expressions (Bomsel, 2013). The mediatisation of people, firms or goods proceeds from ecosystems dedicated to specific products. One can distinguish the ecosystem of books, the one of the news, of scientific papers, of plastic arts, of music, of cinema, of sports, etc. But there is also a media ecosystem for fashion, luxury goods, cosmetics, automobile, food, drugs, etc. While transactional ecosystems decrease transaction costs between the participants, media ecosystems produce the public image – the informational complement – of business or institutional agents and their related products.

Digital technologies are bringing new media in all ecosystems: online newspapers and magazines, blogs, science portals, audio and video platforms, social networks… The echoing of the news, for instance, can follow many new routes and reach consumers faster and wider than could the pre-digital media. Moreover, the connection between advertising or mediatising a product and its actual purchase by a customer can be internalised through online procedures: an html link will transform a viewer into a purchaser, an audio or video platform teases for free until the viewer decides to pay for a service. As a consequence, the borders between mediatisation and sales tend to blur. This trend affects the economic means used to internalise the externalities of the media ecosystem. This is particularly sensitive in all the copyright industries that produce expressions to be distributed in a dematerialised form.

The mediatisation of copyrighted expressions

Copyrighted expressions are informational goods that have to be mediatised. An inspired poem or a scientific theorem posted on an anonymous blog will remain unnoticed. The release of a novel, of a scientific article, of a music tune, of a movie or a TV series, of a sports event, follows a symbolic route constituting a publishing protocol. The public image of a movie disclosed at the Festival de Cannes will differ from the one of a blockbuster presented in a Hollywood showy opening, and even more from a B movie released straight on DVD. The mediatisation of copyrighted expressions adds meaning and value to the works. It is achieved through a media ecosystem providing a direct and indirect echo to the works.

Copyrighted expressions differ from other goods by the fact that, being non-rival, they can be mediatised through free consumption. Thanks to external effects, the supply of free copyrighted works can be financed by ads paid by other firms, by authors (gold open access reviews), or by other contents bundled on a publishing platform. Digitization, which extends the non-rivalness thanks to the dematerialisation of the supports, increases the potential of mediatisation through free consumption. Hence, the coexistence of free and pay content – news, music, video, scientific articles, sports, etc. – on the same digital platforms, tends to narrow the gap between mediatisation and distribution.

In effect, a media ecosystem reflects a state of the technology. Let’s take the case of music. Under the phonographic period, music was taped on records and mediatised through record sleeves, radios, concerts, magazines, video clips and record shops. The radios had to notice the release of the records and to start the buzz. Competition between record producers gave even rise to the payola system – a bribe to disc jockeys in order to get aired – that was depicted by Ronald Coase (1979) as a hidden publicity. Concert tours were keeping the topicality of the artists. Magazines were feeding fans with stories related to music performers. At the end of the chain, record shops were the ultimate media displaying the sleeves and their assortment in racks. In this ecosystem, most of the relations between copyright holders and media were internalised by formal arrangements. The production and sales of records was shaping the ecosystem. Broadcasters were paying license fees while getting paid through publicity. Showcase and tour operators were hiring performers as to sell tickets and drinks. For the most popular artists, record producers invested in video clips and TV ads. Distributors were rewarded on record sales. Only a few players (magazines, talk-shows, variety-shows) benefitted from informal cross-externalities.

With digitization, the phonographic ecosystem gets supplemented both on the media and the distribution side. On the media side, streaming platforms and social networks can create and amplify a buzz that was formerly produced by showcases and radios. The online press will link a music review to a playlist that is just one-click from the reader. TV promotion is re-focussed on ads and talent shows whose viewers argue on social networks. On the distribution side, music downloads and, increasingly, streaming services substitute to CD sales.

A key pattern of this trend is the convergence of mediatisation and distribution. Streaming platforms deliver both mediatisation – through free access service and discovery or thematic apps – and distribution. On such platforms, a subscriber can share his playlists with his social network’s friends. Thus, a listener can become a disc jockey, now called a curator, getting followers for his selection service. On video platforms, amateurs can post video parodies that will increase the popularity of the original. Right holders can either accept or refuse such parodies and even, for a commercial use, license performers their music publishing rights. In other words, with the continuous surge and rollout of new media, the music ecosystem gets denser and denser making the internalisation strategies more open and flexible than in the past.

What happens with music also happens with books, scientific articles, news, sports, cinema, TV series… Each copyright industry – characterised by the production and the publishing of specific expressions – is confronted with the surge of new media that change its former ecosystem. For a while, this change has been perceived as a dematerialisation arousing competition or cannibalisation between distribution channels. This view was suggested by the vertical design of the industry resulting from the copyright transaction chain and the distribution of material supports.

Actually, the change is far more sophisticated. The newness of the digital ecosystems is that mediatisation gets blurred with distribution. In other words, digitization makes copyrighted works distribution a particular case of mediatisation. This already existed when, for instance, radio stations had to pay license fees to mediatise music. But with digital ecosystems, such practises are widespread and continuously expanding. This in turn, makes internalisation – copyright exploitation – an iterative process adapting to new media, new practises, requiring new contracts and new pricing schemes.

The last post of this series examines economic issues and policy implications related to media ecosystems.

Advertising as a complementary good

Since George Stigler’s paper on information costs (1961), the issue of advertising is widely discussed among economists. For many of them, advertising is a means to reduce consumer’s transaction costs and therefore, to increase demand by decreasing the real price of the product. However, as many advertisements do not provide objective information, some economists see them also as a means to change consumer’s preferences about the product. Therefore a distinction is made between informative and persuasive advertisement: informative ads are perceived as socially useful because they cut transaction costs, while persuasive ads generate artificial, if not lousy, needs (Dixit and Norman, 1978). This approach raises two issues: first, it is nearly impossible to separate informative from persuasive advertising as most messages carry the two aspects; second, from a theoretical point of view, if the consumer has free will, his or her preferences cannot be manipulated by third parties (Stigler and Becker, 1977).

This is why Becker and Murphy (B&M, 1993) uphold that advertising should be seen as a complementary good being positively or negatively valued by the consumer. Advertising is then an informational complement, comparable to a quality surplus or deficit, that helps to better discriminate among consumers: consumers who value more advertising will get more of it attached to the product while others will buy the product according to their valuation of its plain utility. Since the meaning associated with information can have a social value, the information complement may carry network effects increasing the utility of the good with the number of consumers. Such analysis of a meaning value brought by advertising to the product is both in line with the free will consumer hypothesis, and with the change in product utility that publicity can bring.

In their approach, B&M define advertising as giving a “favorable notice” to the good advertised so that an increase in ads raises the marginal utility of this good. They underline that such “notice” can either be paid by the advertiser and given away to the consumer, or sold to him or her through various media channels.

For example sports columns in newspapers provide plenty of notice about local professional teams, even though sports sections are not free to readers, and team owners do not pay for the columns.” (p.946).

Such notice generate additional audience to sporting events, whatever their distribution channel.

Marketers commonly distinguish three kinds of channels: paid media that is used for traditional advertising (TV, radio, Press, etc.); owned media, that is the information delivered by the product itself, by an integrated distributor, by an owned website and all the channels related to it; earned media that is the information published by reviewers or consumers, more and more through social networks (Edelman and Salsberg, 2010). In other words, the information complement associated with the product is not only paid advertising it is the accrued meaning resulting from all media channels. This is why we prefer to call it “mediatisation”. Mediatisation economics consists in getting the most valuable complement at the cheapest cost.

thinkofthat.net

A good illustration is given by the historic launch of the Apple Macintosh by Steve Jobs in January 1984 (Isaacson, 2012, Chapter 15). At that time, Jobs had financed a commercial movie shot by Ridley Scott setting up the myth of the liberating machine. The ad was such a storybook that the machine did not even appear in it. Jobs decided to broadcast it during the Super Bowl, reaching at once 96 million Americans. The ad created a massive expectation enabling Jobs to disclose the product in a theatrical keynote echoed as a global event. In other words, while the paid ad was focussed on persuasion, the informative side was covered by the keynote, which got relayed for free all across the world. This “publishing protocol” became a routine that helped Apple to establish its brand as a powerful context adding value to all the new products marketed by the firm. The innovative genius of Steve Jobs did not only focus on products but also on their mediatisation that catalysed their commercial success.

The multiplicity of media channels and the differences in their pricing schemes underline the importance of external effects in providing the media complement. The quest of such effects does not concern only marketers, but all the talents involved in the product, as well as media professionals and consumers. In the Apple example, the media earned by Jobs’ keynotes are external effects of the initial ad investment. The heuristics of marketing aim at generating the most valuable mediatisation as possible. It is frequently related to the maximisation of the externalities associated with the release investment.

Mediatisation results from a publishing protocol

www.dulwichclassics.com

Schematically, two components contribute to the media complement value: one is the myth, the story conveyed by the media; the other is the reach, the social coverage of the message. The myth, which starts with the design or the packaging, the visible appearance of the product, relies on a creative work. It adds a universe that can be more or less valued by the consumer. (For instance, Alfred P. Sloan (1965, pp. 272-273) explains how the curvaceous design of the 1929 Buick has been mocked as « the poor Buick enceinte » leading to a pitiful commercial flop.) The social coverage can either be obtained trough paid, owned or earned media. It may generate network or snob effects according to the positive or negative valuation of the number of consumers. In some cases, the buzz corresponding to earned media can get hi-jacked by angry consumers willing to spoil the image of the product.

However, these components are not independent. For instance, the disclosure of the product relates both to the story and to the coverage: the product’s entry into the public sphere, its arrival to the world takes part in its mythology. The delivery of the Macintosh coming after the Super Bowl announcement and brilliantly staged by its creator, is fully part of Apple’s myth. The disclosure sets up a before and an after which has the dimension of an event. If spectacular, such event can be covered and echoed freely through the news. A resounding release establishes both the newness and the coverage of a product whatever its objective innovation.

In other words, mediatisation proceeds from a “publishing protocol” which provides the product – whether material or not – its meaningful complement (Bomsel & al., 2013). We use this expression by analogy with a correspondence protocol, which connects together two identified agents who agree to start an information exchange. A publishing protocol connects an identified emitter to indistinct receivers. It announces the disclosure of a message and establishes its public status. By doing so, it creates a context adding meaning to the published expression. Hence, such protocol has the economic dimension of a creative work: nobody knows in advance what its utility will be and how much it will add to the product. Although a mediatisation is needed to give the product its public status, it can be perceived either as a good or as a bad.

In this process, the information complement (the myth) is embedded in a set of names: the emitter of the expression who can be a single artist, a sportsman, a politician, or a cast, a team, provides a context which adds sense to the expression. It is the role of the publishing protocol to make the emitter identified by the public and to provide his name – in fact, his brand – with a contextual value. A publishing brand can be seen as an informational asset providing the branded expression with a context valued by the consumer. Such context has cumulative properties: its meaning value changes at every occurrence. A football team, where each player gets mediatised at every game, is a contextual asset portfolio (Bomsel & al., 2013).

Once the utility of the myth is tested, many techniques can be used to maximise its social coverage and the sales revenue. Because a “publishing protocol” deals with disclosure, it is also a piece of news. Hence, it can benefit from the externalities of the news echo. In effect, the news is not restricted by copyright and fuel media competition: a sensational event is instantly relayed on all the news channels including social networks (Facebook, Twitter, Instagram, Weibo, Weixin, QQ, etc.). Moreover, the brand value of popular artists attracts audiences on every platform that takes up the news. The importance of such externalities in producing the media complement deserves a specific focus. It will refer to the concept of ecosystem, which we explore in the next post of this series.

The objective of this series of posts is to show that in the case of copyright, the value added to proprietary expressions is produced through media ecosystems. The prevalence of external effects associated with the media coverage – the mediatisation of the works – reinforces the internalisation function of copyright. But in a way that differs from the traditional vertical chain of contracts. And that makes copyright exploitation a highly empirical activity.

Copyrighted expressions are usually created to address audiences, e.g. receivers that are unknown from the emitter. They are then brought to the attention of the public through media.

Media provide to the expression its public status. Conversely to business talks, or private correspondence, mediatised expressions are messages formally addressed to the public.

Of course, this is not only true for expressions. It applies to any kind of goods addressing indistinct consumers on competitive markets. Consumers are noticed through media of the availability and characteristics of tradable goods and services.

However, expressions are specific because they consist of information, a non-rival commodity subjected to peculiar property rights. As long as copyrighted expressions were published on material supports, the symbolic dimension of the mediatisation was hidden by the economics of the support. The support was bringing rivalness to the expressions, which were then considered as the informational component of a delivery media (Watt, 2000). In a digital environment, the publishing of copyrighted expressions adds information to information.

This series of posts deals with mediatisation that is the operation carried by media so to give material or immaterial goods a public status. Mediatisation indeed covers signalling or advertising, but also all the kinds of information – design, brands, names, reviews, buzz, word-of mouth, social image – attached to a public or tradable item.

Our thesis is that mediatisation is an information complement attached to the mediatised item. It is a complementary good that alters – increases or decreases – the utility of the plain product. The complement is produced through a set of media packed with information externalities. In the analogue world, such ecosystems used to be rather stable. So were the relations between producers, media and distributors, allowing fixed arrangements to internalise the externalities. In the digital environment, media ecosystems get continuously denser which makes internalisation strategies a moving target.

Mediatisation adds meaning to functional goods or services. In the case of copyrighted expressions, this meaning is added to products whose utility is already meaning. Besides, as we will show, the dematerialisation of media tones down the borders between mediatisation and distribution. Hence, mediatisation economics are even more difficult to assess for copyrighted goods than for material ones.

The rest of this series of posts (to be released in the coming weeks) is structured as follows:

• The second post recalls the economic literature presenting advertising as a complementary good instead of a transaction cost. This approach will be extended to unpaid advertising or mediatisation. This post also examines the mediatisation content and its production through what we call “publishing protocols”. Publishing protocols will be used to describe the information externalities that shape the media ecosystems.
• The third post describes the specificities of the mediatisation of copyrighted goods and the changes brought by digitization.
• The fourth post underlines the importance of mediatisation economics and its impact on creation diversity. It also presents our concluding comments, regarding the internalisation function of copyright in media ecosystems.

Source: mjfellright.wordpress.com

A media bias is defined by Wikipedia as

the bias or perceived bias of journalists and news producers within the mass media in the selection of events and stories that are reported and how they are covered.

The first source of media bias that comes to mind is political. It is indeed often perceived in many countries that newspapers, magazines or TV channels occupy a clear position on the political spectrum. In French-speaking Belgium, for instance, it is commonly accepted that Le Soir is located more to the left and La Libre Belgique more to the right of the spectrum. Similarly, in the UK, The Guardian and The Times are respectively located at the Centre-Left and Centre-Right (for a classification of all UK newspapers, see here).

Such biases reflect the political opinions of either the owners, or the editors, or even the journalists of the media in question. I leave it to political science scholars to comment on the social impacts of such biases, as well as on the optimal diversity of opinions in the media (for an introduction, see e.g., this presentation of “Manufacturing Consent: The Political Economy of the Mass Media”, by Herman and Chomsky, 1988).

The purpose of this post is to shed some light on another potential source of media bias, namely profit. To understand how media biases can be profit-oriented, we refer to the theory of two-sided platforms, which we already presented a number of times on this blog (see, e.g., here and here).

The basic intuition is pretty clear: newspapers, magazines, radio stations, TV channels can be seen as two-sided platforms that link two groups of agents: on one side, we have the audience (readers, listeners or viewers) and on the other side, we have advertisers. As is common on many two-sided platforms, the price structure is heavily asymmetric, with one side contributing to the largest part, if not all, of the revenues. For media platforms, advertisers are commonly the ‘paying side’, while the audience is the ‘subsidy side’.

• What do advertisers pay for? They pay for having access to the attention of the audience. Naturally, their willingness to pay grows with the audience that they have access to. In the jargon of the economic literature, it is said that the audience exerts a positive indirect network effect on advertisers.
• What does the audience pay for? It pays for content. The question is then how the value of this content is affected by the presence of advertising. The answer to this question determines whether the advertising side exerts a positive or a negative indirect network effect on the audience. The effect is positive if, for instance, advertising contains useful information (think, e.g., of classified ads); conversely, the effect is negative if advertising is seen as a nuisance (e.g., because it spoils the reading or viewing experience). Note that the perception of such effects is likely to differ across individuals.

The sign and the magnitude of these indirect network effects are crucial to predict the importance of profit-oriented biases on media platforms. One can indeed conjecture that media biases are more likely to occur when the audience mainly sees advertising positively rather than negatively. In fact, when the audience welcomes advertising, there are positive indirect network effects on both sides. A positive feedback loop is thus in place: the larger the audience, the easier it is to attract advertisers and the more advertising the media contains, the more the media becomes attractive for the audience. In such a context, the owner of the media platform has higher incentives to favour content that pleases advertisers (or to avoid content that may displease advertisers) as this further fuels the positive feedback loop. The reverse applies when the audience mainly dislikes advertising: here, biasing the content towards the advertisers’ taste is less profitable as any increase in the amount of advertising would drive part of the audience away, thereby reducing the willingness to pay of the advertisers.

Two specific cases seem to confirm this intuition. The first case (which I already described on this blog) shows how costly it can be for a magazine to publish a piece of news that upsets one major advertiser. The second case (coming from a a recently published working paper) examines empirically how advertising by automobile manufacturers affects automobile reviews in a leading German car magazine.

A tales of Sheiks and cheques

Source: www.dailybastardette.com

The Bulletin is a magazine for expatriates moving to or living in Belgium. In its issue of July 10, 2008, the magazine picked up a story that had already been reported in the Belgian and international press. The article described a police raid at the fourth floor of the Conrad Brussels hotel, which had been rented by some members of the Nahyan royal family of the United Arab Emirates. These people were accused of exploiting and mistreating their servants.

The hotel management regarded the publication of these reports as “unethical” and decided to cancel its subscription to the magazine. Two other hotels from the same group soon followed suit.

At first glance, this looked like a minor event for the magazine. The three hotels together distributed about 700 copies of the magazine, which amounted to 5 percent of its circulation. Yet, the magazine’s editor in chief, Derek Blyth, declared to the New York Times: “Our financial stability is at stake with such a major response. We’re reeling from the impact.”

Hence, there seems to be a disproportion between the scale of readership loss and the economic consequences for the magazine. Yet, the apparent paradox quickly clears when one realizes that the rich patrons of these five-star hotels constitute the audience that advertisers value the most.

Biased car reviews

Dewenter and Heimeshoff (2014) examine the potential bias in car reviews of a leading German car magazine, Auto, Motor und Sport. More precisely, they investigate whether there is a link between car manufacturers’ advertising volumes in the magazine and the reported performance of the respective cars. Ample information is available to measure the characteristics of cars in a quite objective way (horse power, trunk capacity, mileage, emissions, etc.). Such objective measures can then be used to evaluate to which extent the test scores published in the magazine are based on such objective technical characteristics or on more subjective views “suggested” by advertising car manufacturers.

It is important to note that while an influence of advertising on test scores may exist (which is precisely what the authors try to uncover), the reverse influence may also exist: test scores may influence (future) advertising volumes (for instance, manufacturers may reduce their advertising expenditures after bad test scores have been reported). Neglecting this possibility may lead the authors to overestimate the impact of advertising volumes. To address this possibility of reverse causality, the authors use a number of appropriate econometric methods, which allow them to state with the following with some confidence:

Our main finding is a statistically significant influence of advertising on test scores, which provides evidence that a media bias caused by manufacturers’ advertising expenditures exists in car reviews.

What I would like you to do is to have a look at other economic studies of media bias and/or to articulate your own views about this issue. Here follows a list of recent papers on the topic (the dates generally correspond to the published version, while the links often point to previous, working paper, versions): George and Waldfogel (2003), Boykoff and Boykoff (2004), Mullainathan and Shleifer (2005), Gentzkow and Shapiro (2006), Reuter and Zitzewitz (2006), DellaVigna, S. and E. Kaplan (2007), Ellman and Germano (2009), Reuter (2009), Anderson and McLaren (2010), Gentzkow and Shapiro (2010), Gal-or et al. (2012).

Source: bgr.com

You probably know “Game of Thrones”, the most popular TV series of the moment. The first two seasons were a huge hit and the third season premiered on March 31, 2013 on HBO (the American premium cable network that produces the series). There are about 4.5 million subscribers who follow the series. But overall, the audience is much broader as one should also count several million (the exact figure is difficult to estimate) of “illegitimate” viewers. For example, the first episode of season 3 was downloaded over one million times in the space of 24 hours.

Contrary to what one might think, these record numbers of illegal downloading have not panicked HBO officials. Quite the opposite! HBO programming president (Michael Lombardo) told Entertainment Weekly that he viewed this rather positively:

I probably should not say this, but this is a kind of compliment. The demand is there. And it clearly did not have a negative effect on DVD sales.

One of the directors of the series (David Petrarca) went even one step further by stating that in fact, the series benefits from piracy because it feeds the “cultural buzz” that allows this kind of program to “survive”.

Beyond the specific case of this series, what do economists think of all this? From a theoretical perspective, numerous studies have demonstrated the positive effects that piracy may have on the profits of content producers. I sketch here three mechanisms (for a thorough description, see Belleflamme and Peitz, 2010).

• First, illegal copies of a content good can play a sampling role by attracting consumers and driving them to purchase a legitimate copy later.
• Second, many content goods generate network effects; that is, the attraction of the good increases with the number of consumers of that good, regardless of the consumed copies being legitimate or not.
• Finally, in the same vein, piracy can increase demand for goods that are complementary to the pirated content; the producer is then able to capture indirectly the value that consumers attach to the pirated good.

So here are three mechanisms that could calm the fears of content producers regarding piracy. But naysayers might say that these are nothing but vague theoretical possibilities. To answer this criticism, theories must be submitted to the test of facts. Fortunately enough, the empirical literature on piracy (mainly in the music industry) has grown considerably in recent years (for a recent survey, see Waldfogel, 2012). Numerous studies have converged on the conclusion, now widely accepted, that piracy has had a negative impact on physical music sales (that is to say, CDs). In the jargon of this literature, it is said that illegal downloading has “displaced” physical sales. However, the estimated “displacement rate” is slightly above zero and nowhere near unity, reflecting the observation that the vast majority of goods that were illegally consumed would not have been purchased in the absence of piracy (contrary to what the recording industry would like the general public to believe by counting any download as a lost sale).

Does this conclusion also apply to the online legal sales of digital music (through online stores such as iTunes or via “streaming” services such as Spotify)? This is what Aguiar and Martens (2013) try to establish by analyzing the behavior of digital music consumers on the Internet. The authors use direct observations of the online behavior of more than 16.000 Europeans, whose socio-economic characteristics (age, gender, education, occupation, household size and income, number of children, region of residence) are also known. The data comes from Nielsen, a company that specializes in audience measurement (on television or on the Internet).

What are the results of this analysis? Essentially that illegal downloading has no effect on legal consumption of digital music. At best, this effect is positive: a 10% increase in clicks on illegal download websites leads to an increase of 0.2% in clicks on legal purchase websites. Piracy does not induce any “displacement” of the legal music purchase in digital format; it might even slightly boost sales.

Of course, we must not forget that the households in the sample have willingly accepted to be observed by Nielsen. This introduces two potential biases: on the one hand, it is quite likely that the “heavy downloaders” have refused to be part of the sample; on the other hand, individuals in the sample may have changed their behavior knowing that they were observed. We must also remember that online music sales still account for a small fraction of the overall revenues of the music industry and that physical sales have been shown to suffer from piracy. This being said, the share of online music is increasing (5% in 2010 and 8% in 2011 according to IFPI).

The results of this study can therefore, at least, be interpreted as a sign that the legal purchase of music in digital format is becoming a serious competitor for illegal downloading. Piracy could even become an ally of copyright holders.

So, would the absence of piracy become even worse than piracy itself? I’d be happy to hear your views about that.

(This is a shortened version of a post that was originally published in French on this blog and republished later on Regards Economiques.)

Once Research In Motion (RIM), the Canadian company that makes the BlackBerry, has been market leader in the mobile phone market; since then, Apple and other Android phones have hugely overtaken it. Beth Snyder Bulik offers a clear and better understanding of the reasons why the company’s leader position (and profits) plunged through the past years. In order to turn over its critical situation, the firm has operated several key changes early 2013, among which the release of the new BlackBerry smartphone Z10. A few days after the announcement of this release, an article published in The Economist in early February 2013 raised the issue: “BounceBack or ByeBye?”. This question emerged as RIM finally reacted to its difficult situation by announcing some novelty: (1) a brand new operating system (OS), (2) a new generation of mobile phones, (3) a renaming from “RIM” to “BlackBerry”.

In short, through the past months the firm has been striving to restore its image. Yet, do these key changes arrive on time? Or aren’t they already too late? Will they be encouraging enough for the company to sustain its activities?

“Network effects”

As explained in “Industrial Organization: Market and Strategies” (Belleflamme and Peitz, 2010), network effects in the digital world can be formally defined as follows:

“a product is said to exhibit network effects if each user’s utility is increasing in the number of other users of that product or of products compatible with it”.

From there, it is obvious why BlackBerry should care about generating network effects. Active in the digital and social media world with its mobile phones, and forming a system market with its OS, BlackBerry has a lot of reasons to focus on network effects as a prime aspect of its strategy. In this regard, one can particularly observe three types of network effects at play.

Cross-sided network effects. The most important network effects concern the applications (apps) available on BlackBerry’s OS. Smartphone users are indeed concerned about being able to download a wide variety of apps while at the same time, the more an OS is used (i.e. the more users have adopted it), the more apps developers are willing to invest in apps compatible with this OS (at the advantage of the users). Such OS are thus facing a “chicken-and-egg” problem: how can they get both apps developers and apps users at the same time, since both of them are waiting for the other side to adopt the OS first. BlackBerry is aware of that and has therefore announced the availability of about 70,000 apps for the launch of its new OS. Despite this effort, this basket is still far less attractive than the main competitors’ ones (there are more than 700,000 applications available on Google and Apple’s OS). BlackBerry’s new claimed focus is thus to foster the development of many apps compatible with their OS. Thanks to network effects, they expect that the quality and the size of the developers’ community will bring in new customers, hence launching a virtuous circle (or snowball effect).

Direct network effects: communication benefits. The second source of network effects relevant to BlackBerry’s business has to be found in a specific application of the firm that has largely contributed to make its past success: BlackBerry Messenger. As much as Skype or MSN messenger in their fields have succeeded in gathering a community of loyal users, this app did the same for former mobile phone users. It was meant for its users to send text messages through the app for free; in other words, the success of the app rested on network effects: the more users got the app, the more the app was useful and beneficial for its users. It is worth noticing that while network effects may create a positive snowball effect, they may induce the opposite as well. Regarding this app, it has suffered from the decline of BlackBerry and hence from the reduction of its users, fostering further the disutility of the app. Because of the potential of this formerly-successful-community, BlackBerry has recently made an attempt to counteract the negative slope on which the app was stepping. It indeed announced during the BlackBerry Live 2013 event on May 14, 2013 that BlackBerry Messenger was going to be compatible with Android and iOS by this Summer. While we are still waiting for it, it seems that it is going to come soon, this Thursday? Using their famous app would thus be another way to rely on network effects to bounce back in the mobile phone market.

Direct network effects: word-of-mouth. Finally, another network effect on which BlackBerry could plan its catching up is particularly observable in emergent countries, where the firm has substantial market shares (e.g., India, Indonesia or Venezuela). In those countries, people are not technology-informed as we are. The word-of-mouth is still predominant, and BlackBerry is still surfing on the good reputation it acquired over the past years. However, this is not going to last forever, and it is even already changing in some places, like Christopher Mims mentioned it in his article:

“In September 2012, Android became a more popular mobile OS than BlackBerry in Indonesia, which had previously been the biggest market in which it still held sway. Once that tipping point was crossed, network effects that were preserving RIM’s lead started to work against it.”

This network effect is thus useful for a while but it cannot be part of BlackBerry’s new strategy.

A good device, but not an astounding one.

Combined with the release of its own OS in its attempts to revive in the smartphone market, BlackBerry has launched a new model: BlackBerry Z10 (note that the Z30 is going to be released soon). Outwardly, it is a well-designed and manufactured smartphone, working on the new and interesting OS. Per se, it is able to compete with Apple or Samsung. Furthermore, a gigantic marketing budget has been unlocked to make sure having a sufficient impact on the public (e.g., the ad for the Super Bowl, or the presence of Alicia Keys at the presentation of the Z10 and Q10. BlackBerry’s CEO indeed announced for the Wall Street Journal:

“it’s gonna be big. Let’s say several hundreds of million dollars. You will see a huge spend coming in the next quarter once it’s launched, with a global marketing campaign.”

However, one can reasonably be doubtful about the ability of such new phone to capture substantial market shares. Its advantages and qualities are indeed not sufficiently different from competitors’. Moreover, what historically generated the reputation and the competitive advantage of BlackBerry mobile (e.g., security, reliability, BlackBerry’s Messenger’s concept, etc.) has vanished as these features have been successfully imitated by the competition. As a matter of example, iOS and Android have been adopted by some US federal institutions over the past years.

Besides, another former BlackBerry’s competitive advantage was their stranglehold on the B2B market: many companies bought plenty of phones to redistribute them for a professional use to their employees. However, a new conceptual model seems to prevail nowadays: “Bring Your Own Device” (BYOD); it refers to the new practice when employees use their own phones in a professional way. Then, companies do not contract anymore with phone manufacturers, and B2B tends to disappear.

The question is then: can BlackBerry secure a new competitive advantage now? In this respect, it seems that the new OS has been conceptually well-thought out; however, it is still not differentiated enough to reasonably forecast a mass effect of adoption at the expense of competitors’. Furthermore, the marketing positioning does not seem to be optimal. BlackBerry is indeed mainly effective in emerging countries where there is a lower purchasing power, while the Z10 is a high-quality smartphone, likely to be too expensive for such markets. In a nutshell, the old competitive advantages the firm used to possess do not longer exist and, on the other hand, the new BlackBerry Z10 only seems to catch up with competitors’ devices without offering anything on top; at best, the phone is above the market regarding to common characteristics, but it does not offer something more, something that could switch Apple and Google users towards BlackBerry.

Switching costs

On top of these considerations, another obstacle may impede BlackBerry’s successful revival: the costs of switching from another smartphone and/or another OS to BlackBerry’s phone and OS. Switching costs have indeed a strong potential to discourage users from changing of services or products. Potential buyers would for instance have to learn how to use the new phone, the new OS, the new apps compatible with it, etc. In this respect, it may be argued that as the smartphone market is in constant motion and that users are changing of mobile devices relatively often, switching costs are not that important regarding the device in itself (read: the hardware). Moreover, BlackBerry’s OS has been highlighted as simple, and it seems there is no apparent difficulty to move from one competitor’s OS to BlackBerry’s. However, this regards the OS itself; it is another matter regarding the services that are running on it. As a matter of example, iOS and Windows are designed as to be optimized with Apple and Microsoft’s other services, such as calendar, mail, cloud, etc. All these features make the cost of switching to another OS with other apps higher. Switching costs are thus a true concern for BlackBerry.

Moreover, “true” costs may be considered as well; by switching device, users may indeed be required to repay for applications they owned previously. Besides, applications for sale on BlackBerry are on average more expensive than on Apple Store or Google Store, which may drive consumers choosing for the latter instead. Finally, the costs that the developers may face for adapting their apps to BlackBerry’s OS is quite low in itself. As mentioned earlier, what really matters for them is the whole network that will concretely use their new applications.

All in all, the onetime market leader position that BlackBerry enjoyed now belongs to the past, and the situation does not seem to change soon. The prospects are indeed gloomy, and only time will tell us how well the Canadian firm will stand up to a fierce market with such a loss of shares in the recent past. What about you? What is your opinion about BlackBerry’s future? Do you have any advice about how the firm could turn around the situation in its favor?

“Know Thy Customers!”

This is the very first motto of marketing. The idea behind this motto is simple: the more information a firm has about its current and potential customers, the more it can segment its customer base into smaller groups, to which specific prices, product features and ads can be adjusted. Thereby, the firm has the potential to increase not only its sales (by informing customers about – and by making them buy – products that are closer to their needs or tastes), but also the margin it makes on each sale (as customers can be charged prices that are closer to the maximum amount that they are willing to pay).

Up to three or four decades ago, knowing one’s customers was more easily said than done: collecting and processing relevant information was as costly as adjusting the product range and prices on a regular basis. Things are, however, completely different today. The massive deployment of information technologies and of the Internet has indeed equipped firms with unprecedented tools to gather and process detailed information about their potential customers. As a result, achieving an increasingly finer segmentation of customer bases is made not only widely possible, but also commercially feasible.

Targeted advertising

The most visible part is targeted advertising. When surfing the Internet, you must have noticed that the ads you are exposed to are closely connected to pages you visited or to items you bought (or considered buying) in the past. This is of course no coincidence: Internet advertising is increasingly targeted so as to raise the chances that the right person sees the right ad at the right time. Targeting relies on a number of proxies: online web activities of consumers are tracked; mobile web activities too (with the added advantage of localizing consumers); the historical demographics of consumers visiting a particular web page is used to predict this web page access in the future; implied interest is inferred from search words; automated systems select and serve ads on the basis of the content displayed to the user; etc.

Note that targeted advertising is by no means limited to the Internet. For instance, the UK’s two big pay-TV operators will soon start showing targeted ads to viewers in 2013. Similar tools are also transposed to the off-line, brick-and-mortar, world.

Good news for firms, bad news for consumers?

At first glance, all this is good news for firms and, conversely, bad news for consumers. Yet, this claim has to be qualified in at least two ways.

The effects of competition

First, competition forces have to be taken into account. As explained in Belleflamme and Peitz (2010, p. 194),

“In monopolistic industries, more information and a wider range of tariff instruments can only increase the firm’s profits (at the expense of consumer surplus, the effect on welfare being ambiguous). In oligopolistic industries (or in monopoly markets in which the monopolist lacks commitment power), however, it is much less clear whether more information and more instruments translate into higher profits. The positive surplus-extracting effect of price discrimination may be offset by its negative competition-enhancing effect.”

The last sentence deserves some explanations. The “surplus-extracting effect” is the one I described above: by knowing its consumers better, the firm can charge them higher prices (thereby reducing the “consumer surplus”, which is computed as the difference between the maximum price that a consumer would agree to pay and the price that she actually pays). As for the “competition-enhancing effect”, it corresponds to the idea that if a firm can tell its own loyal consumers apart from those of its competitor, it can set lower prices so as to target aggressively the rival’s customer base. As the other firm will act likewise, competition will increase.

Nicola Jentzsch, Geza Sapi, and Irina Suleymanova further develop this issue in an article recently published in the International Journal of Industrial Organization (entitled “Targeted pricing and customer data sharing among rivals”; you can find the working paper version here). They examine the incentives of competing firms not only to use but also to share detailed information about their customers. Their main results can be summarized as follows:

“First, information sharing incentives depend on the type of customer data, more precisely, only data on the flexibility [i.e., the ease with which consumers can substitute one brand for another] of consumers are shared. Second, the incentives to share such data depend on consumer heterogeneity in flexibility. Firms have stronger incentives to share data, when consumers are relatively homogeneous in their reaction to price changes. Third, customer data sharing is most likely to be detrimental to consumer surplus, while the effect on social welfare can be positive.”

So, according to their model, sharing customer data that can be used for price discrimination can turn out to be a profitable strategy for competing firms. As this strategy is likely to harm consumers, the authors advise competition authorities to pay more attention to customer data sharing agreements and to include competitive price discrimination as a possible theory of harm.

Ad-avoidance

The second reservation is that there are two reasons for which consumers may not necessarily suffer from the firms’ increased ability to discover details about them. On the one hand, targeted advertising may increase the relevance of the ads that consumers are exposed to, which is beneficial for them. On the other hand, if the first effect does not work, consumers still have the possibility to use advertising-avoidance tools. This is what Justin P. Johnson examines in an article published in the Spring 2013 issue of the RAND Journal of Economics (“Targeted advertising and advertising avoidance“). He first notes that

“a variety of techniques exist that allow consumers to avoid advertising, from the time-tested ignoring of ads or changing of the channel during commercials to recent innovations such as skipping past ads (while watching content stored on a digital video recorder; DVR), blocking online ads, filtering email, or subscribing to do-not-call, do-not-mail, or do-not- track programs.”

(For a do-not-track program, see for instance www.abine.com). In this context, how does targeted advertising affect market outcomes? Here are the author’s main findings:

“[I]mproved targeting raises the profits of all firms. This is despite the fact that consumers endogenously adjust their advertising-avoidance decisions and that (…) competition may increase for some available ad space.
Consumers do not fare as well. Although they may gain by witnessing more-relevant ads, there are two negative consequences of improved targeting. One is that the number of ads received may increase, which is bad for consumers because, in equilibrium, they tend to disdain marginal ads although they may appreciate inframarginal ones. The other is that, rather counterintuitively, improved information accuracy may lead consumers to receive ads that they prefer less than those that they receive when targeting is less precise.”

Source: www.digitaltrends.com

It seems thus that firms end up benefiting – and consumers end up suffering – from targeted advertising, even if consumers have somehow the possibility to avoid the intrusion of ads. Simon Anderson and Joshua Gans also share this view in their paper entitled “Platform Siphoning: Ad-Avoidance and Media Content” (American Economic Journal: Microeconomics, 2011; you can find the working paper version here). The difference with Johnson’s analysis is that Anderson and Gans also examine the impact of ad avoidance on the provision of content. For an informal account of the findings of this paper, see this blog entry of Joshua Gans on Digitopoly.

What do you think?

Do you see targeted advertising as an invasion of your privacy? If yes, do you already use (or intend to use) some ad-avoidance or do-not-track technology? In contrast, do you consider it as something positive (as it increases the chance that you will be made aware of products that you like), or as a necessary evil (“I have to accept some invasion of my privacy to keep, e.g., Facebook free of charge”)?

Express you own opinion and try to find on the web to which extend others share your opinion.

(You can read past comments here.)

As Christmas is drawing nigh, I found it fun appropriate to collect a number of “IP Xmas stories”. As you will discover below, these stories add some Christmas spirit to the IP, IT and innovation issues that we regularly discuss on this blog.

* Like everyone, I loathe love poinsettias. Because they blossom in winter and display striking red and green colors, poinsettias are ideal for Christmas decorating. Yet, their market domination did not happen by chance. It resulted from more than a century of clever decision-making by the Ecke family in California. The story of the Ecke poinsettias provides a nice illustration of two major choices that many innovative firms face one day or another:

• What is the most effective way to protect an innovation: secrecy or patent?
• Which market(s) should an innovative firm operate in: the market for ideas and/or the market for products? (See the related IPdigIT post.)

Regarding the first question, part of the Ecke’s success is due to a technique for grafting together two varieties of poinsettias that was kept secret for decades. It is only when this technique was discovered that competitors were able to enter the market. Yet altogether, secrecy allowed the Ecke family to protect their innovation for a longer period than if they had been granted a patent.

The discovery of the Ecke’s secret brings us to the second question. As competitive pressure increased on the product market, the Ecke family decided to focus increasingly on the markets for ideas: they sold off more than half of their land, invested heavily into new research facilities, and started to patent new varieties.

*  You probably remember Nick Hornsby’s novel “About a boy” and the eponym movie (if not, you can watch the trailer here). You also probably remember that in the movie, Hugh Grant plays the role of a self-confessed “shallow” man, who does not have to work because his dad wrote a huge Christmas hit. You may then wonder how realistic this story is. I do not mean whether it is possible to be as shallow as Hugh Grant’s character (I hope it is not!), but whether those lucky enough to have written a classic Christmas hit are actually living in clover.

Well, as you might have guessed, the reality is much tougher than movies would like us to believe. Even if some Christmas hits turn out to be cash cows that can be milked December after December, songwriters and recording artists often get very little of that money. As written in a Guardian article published last December,

“The biggest non-charity Christmas hit in the UK is Mary’s Boy Child by Boney M. (Watch the cult video here.) (…) In the unlikely event that Boney M sold £1m-worth of Christmas records a year, the four band members would receive £357.14 each.”

And the numbers are pretty much the same on the other side of the Atlantic, as explained in this article (published last December as well):

“When it comes to CD sales, a record label has to pay the writer 9.1 cents per song, which is often split with the publisher. That means a songwriter will earn $45,500 on a million-selling CD — half that if the song was co-written. Given that only 13 albums went platinum last year out of around 100,000 releases, that’s not such a high payout for 1 in 8,000 odds.”

*  To top the Christmas tree, I propose two short stories. The first comes from the blog IPWatchdog, which tracks, year after year, the oddest “Xmas patents”. The so-called Santa Claus Detector is definitely worth a look!

The second story is more recent and, potentially, of great practical use. A team of math students from the University of Sheffield proposes a calculator to compute the number of baubles, tinsel and lights needed for a perfectly decorated Christmas tree. (I’m not sure it would be of any help for this one, though…).

Happy festive season to you all (and if you are, like me, a Seinfeld fan, “Happy Festivus”)!

It is interesting to find the criteria used by the CJEU to set the limits of what falls under the exclusive control by the copyright owner.

To do this, you could analyse some of the following decisions (You do not have to review all those cases — although it is not forbidden to do so! The Premier League decision as well as the last two decisions are the most relevant):

A. Old cases:

• 3 Febr. 2000, C-293/98, Egeda/Hoasa
• 14 July 2005, C-192/04, Lagardère

B. Turning point:

• 7 Dec. 2006, C-306/05, SGAE/ Rafael Hoteles

C. Recent decisions (since Infopaq I):

• 22 Dec. 2010, C-393/09, BeSoft
• 4 Oct. 2011, C-403/08 & C-429/08, Premier League
• 13 Oct 2011, C-431/09 and C-432/09, Airfield
• 24 Nov. 2011, C-283/10, Globus Circus
• 15 March 2012, C-135/10, Consorzio Fonografici v. Del Corso
• 15 March 2012, C-162/10, Phonographic Performance Ltd

Thanks for your response.

Where is the public?