Chapter 11: ‘It’s the media economy, stupid’:
the basic principles of media economy
1. The basic economic principles of media
1.1 Use and exchange value
The first principle is the complex relationship between the use value and the exchange value of
media products. The use value refers to the ‘natural’ value that results from the use of the product.
The exchange value refers to the market value as determined by the prevailing production
relationships. The use and exchange value are not independent of each other. Where the use value
involves an individual or even a wider social benefit, the exchange value is simply the economic form
of the media product. This exchange value can only be realized if the consumer of the media product
also regards this benefit as a use value. When the production of a product is targeted in the first
instance on accumulating capital rather than maximizing the usefulness of the product, we can speak
of commodification.
1.2 Two-sided markets
In a two-sided market, a central institution forms a mediating platform where different actors can
meet each other. These actors operate on different sides of the market, but are fundamentally linked
to each other. Participation and use on the one side influences the usefulness created on the other
side. Both sides must participate for the market to function. In the consumer market, media products
are either directly sold to consumers or are offered via permanent media services. In the second
instance, the interest among the audience that is generated in this manner can be sold on in the
advertising market. It is the audience that becomes the ‘good’.
In the economic field, media can focus on one or other of the two income streams. However, in many
cases media prefer to work in both of these mutually influencing markets. This has a number of
repercussions for the way in which media companies and media products are financed. In the case of
advertising, a sum of money is demanded in advance from the advertisers based on an estimate of the
likely number of users and the size and positioning of the media product. In contrast, income for the
consumer market is ex post – after sale – as opposed to ex ante. In addition, there are also significant
differences between countries in terms of the relative weight of advertising income versus consumer
income, both for newspapers and for television. There are also a variety of different criteria used to
assess performance. In the consumer market, it is first and foremost the number of consumers that is
important. This is also important in the advertising market, but reaching the right type of user is even
more important. Commercial media are primarily interested in specific target groups.
1.3 The distinctive characteristics of media products
Another important characteristic of many media products and services is the fact that the regular
operation of the market is insufficient to meet their economic requirements. When this happens, we
speak of a market failure. First, in the sense that supply and demand are not sufficiently well attuned.
Second, in the sense that the market fails to offer media products promoting non-economic objectives
which are nonetheless socially desirable.
The reason for this is that media products often resemble public goods. This latter concept refers to
three specific aspects of the media product.
(1) The use of these goods or services is non-rivalrous. The consumption of the good by an
individual has no effect on the availability of the good or service for consumption by others.
(2) Media consumption is often also non-excludable; nobody is denied the use of a media
product.
(3) Various externalities are often associated with the use of a public good. Externalities or
external effects are the costs or benefits arising from an economic transaction that fall on a
third party and are not taken into account by either of the principal parties of the transaction.
, As a result, media products and services are often described as being merit good. These are goods
whose value for the individual and for society are greater than the value attached to them by the
individuals themselves, who are therefore less willing to pay for them than they should be.
Consequently, people consume fewer of these goods than is ideally desirable. Because the regular
operation of the market does not make it possible to reach this desired situation, it is necessary for the
public authorities to intervene.
Viewed from a purely economic perspective, public goods and/or merit goods are something of a
problem, because it is difficult to put a price on them. Scarcity is usually the factor that regulates
supply and demand and sets prices accordingly, but this is much less evident in the media than in
many other economic sectors. In essence, the media sector is characterized by a poorly functioning
price mechanism and an unorthodox cost structure, which contributes to the high level of risk
associated with entrepreneurship in the media and cultural industries.
1.4 Risky business and the media cost structure
The symbolic aspect of media production makes consumption behavior notoriously difficult to predict.
In one sense, every media product is a prototype, based on a idea where it is very hard to forecast
whether or not the development of that idea into a media product will catch on with the public. As a
result, failures in the media sector are common and often go hand in hand with high costs. Moreover,
the emotional relationship that consumers have with media products is often different from their
response to more standard consumer goods. Emotional reactions are inherently unpredictable; they
can be hugely positive, but also equally negative.
Most media products have high fixed costs and low variable costs. The production costs are
astronomical and the reproduction costs are minimal. The size of this difference is one of the things
that sets the media sector apart from other goods sectors. Once a media product breaks even, this
means that the sale of every extra unit is pure profit.
1.5 Economies of scale and economies of scope
Two concepts that are often mentioned when discussing the specificity of the media sector are
economies of scale and economies of scope.
Economies of scale occur in an industry when the marginal costs are lower than the average costs.
The marginal costs refer to the change in total costs resulting from an increase in production by a
single unit. The average costs refer to the total costs associated with the production, distribution, and
sale of a product or service, divided by its total number of users or consumers.
Economies of scope aims to secure greater efficiency and more savings, but in this case through the
increased consumption of a company’s output and the extension of its reach. In practice, this often
translates into the production of different kinds of products. Economies of scope will be present if
large-scale multi-product production and distribution enables a firm to supply goods more cheaply than
would be the case were each good being supplied separately by individual firms. This process of
diversification is once again common in the media sector.
Neo-classical economic assumptions Media economics
Main objective: efficient production, distribution Main objective: besides efficiency, also quality,
and consumption of scarce goods diversity, pluralism, and innovation
Information and opinions not really scarce
Tends to focus on private goods Information goods have a public character
Products that are homogeneous Products that are unique
Equilibrium between demand and supply Basic problems with determining optimal
determines efficient quantity and price demand, supply and price
Marginal cost is significant Marginal cost very low
Behavior of actors: rational, profit maximizing Suppliers seek societal influence, consumer
preferences are erratic
Focus on price competition Price competition secondary or non-existent
Market structure: perfection competition vs Market structure: inherent tendency to
monopoly concentration: should optimize quality, diversity,
the basic principles of media economy
1. The basic economic principles of media
1.1 Use and exchange value
The first principle is the complex relationship between the use value and the exchange value of
media products. The use value refers to the ‘natural’ value that results from the use of the product.
The exchange value refers to the market value as determined by the prevailing production
relationships. The use and exchange value are not independent of each other. Where the use value
involves an individual or even a wider social benefit, the exchange value is simply the economic form
of the media product. This exchange value can only be realized if the consumer of the media product
also regards this benefit as a use value. When the production of a product is targeted in the first
instance on accumulating capital rather than maximizing the usefulness of the product, we can speak
of commodification.
1.2 Two-sided markets
In a two-sided market, a central institution forms a mediating platform where different actors can
meet each other. These actors operate on different sides of the market, but are fundamentally linked
to each other. Participation and use on the one side influences the usefulness created on the other
side. Both sides must participate for the market to function. In the consumer market, media products
are either directly sold to consumers or are offered via permanent media services. In the second
instance, the interest among the audience that is generated in this manner can be sold on in the
advertising market. It is the audience that becomes the ‘good’.
In the economic field, media can focus on one or other of the two income streams. However, in many
cases media prefer to work in both of these mutually influencing markets. This has a number of
repercussions for the way in which media companies and media products are financed. In the case of
advertising, a sum of money is demanded in advance from the advertisers based on an estimate of the
likely number of users and the size and positioning of the media product. In contrast, income for the
consumer market is ex post – after sale – as opposed to ex ante. In addition, there are also significant
differences between countries in terms of the relative weight of advertising income versus consumer
income, both for newspapers and for television. There are also a variety of different criteria used to
assess performance. In the consumer market, it is first and foremost the number of consumers that is
important. This is also important in the advertising market, but reaching the right type of user is even
more important. Commercial media are primarily interested in specific target groups.
1.3 The distinctive characteristics of media products
Another important characteristic of many media products and services is the fact that the regular
operation of the market is insufficient to meet their economic requirements. When this happens, we
speak of a market failure. First, in the sense that supply and demand are not sufficiently well attuned.
Second, in the sense that the market fails to offer media products promoting non-economic objectives
which are nonetheless socially desirable.
The reason for this is that media products often resemble public goods. This latter concept refers to
three specific aspects of the media product.
(1) The use of these goods or services is non-rivalrous. The consumption of the good by an
individual has no effect on the availability of the good or service for consumption by others.
(2) Media consumption is often also non-excludable; nobody is denied the use of a media
product.
(3) Various externalities are often associated with the use of a public good. Externalities or
external effects are the costs or benefits arising from an economic transaction that fall on a
third party and are not taken into account by either of the principal parties of the transaction.
, As a result, media products and services are often described as being merit good. These are goods
whose value for the individual and for society are greater than the value attached to them by the
individuals themselves, who are therefore less willing to pay for them than they should be.
Consequently, people consume fewer of these goods than is ideally desirable. Because the regular
operation of the market does not make it possible to reach this desired situation, it is necessary for the
public authorities to intervene.
Viewed from a purely economic perspective, public goods and/or merit goods are something of a
problem, because it is difficult to put a price on them. Scarcity is usually the factor that regulates
supply and demand and sets prices accordingly, but this is much less evident in the media than in
many other economic sectors. In essence, the media sector is characterized by a poorly functioning
price mechanism and an unorthodox cost structure, which contributes to the high level of risk
associated with entrepreneurship in the media and cultural industries.
1.4 Risky business and the media cost structure
The symbolic aspect of media production makes consumption behavior notoriously difficult to predict.
In one sense, every media product is a prototype, based on a idea where it is very hard to forecast
whether or not the development of that idea into a media product will catch on with the public. As a
result, failures in the media sector are common and often go hand in hand with high costs. Moreover,
the emotional relationship that consumers have with media products is often different from their
response to more standard consumer goods. Emotional reactions are inherently unpredictable; they
can be hugely positive, but also equally negative.
Most media products have high fixed costs and low variable costs. The production costs are
astronomical and the reproduction costs are minimal. The size of this difference is one of the things
that sets the media sector apart from other goods sectors. Once a media product breaks even, this
means that the sale of every extra unit is pure profit.
1.5 Economies of scale and economies of scope
Two concepts that are often mentioned when discussing the specificity of the media sector are
economies of scale and economies of scope.
Economies of scale occur in an industry when the marginal costs are lower than the average costs.
The marginal costs refer to the change in total costs resulting from an increase in production by a
single unit. The average costs refer to the total costs associated with the production, distribution, and
sale of a product or service, divided by its total number of users or consumers.
Economies of scope aims to secure greater efficiency and more savings, but in this case through the
increased consumption of a company’s output and the extension of its reach. In practice, this often
translates into the production of different kinds of products. Economies of scope will be present if
large-scale multi-product production and distribution enables a firm to supply goods more cheaply than
would be the case were each good being supplied separately by individual firms. This process of
diversification is once again common in the media sector.
Neo-classical economic assumptions Media economics
Main objective: efficient production, distribution Main objective: besides efficiency, also quality,
and consumption of scarce goods diversity, pluralism, and innovation
Information and opinions not really scarce
Tends to focus on private goods Information goods have a public character
Products that are homogeneous Products that are unique
Equilibrium between demand and supply Basic problems with determining optimal
determines efficient quantity and price demand, supply and price
Marginal cost is significant Marginal cost very low
Behavior of actors: rational, profit maximizing Suppliers seek societal influence, consumer
preferences are erratic
Focus on price competition Price competition secondary or non-existent
Market structure: perfection competition vs Market structure: inherent tendency to
monopoly concentration: should optimize quality, diversity,
