CMNS 230 1

Business, Contracts and Copyright

AKA: Follow the Money

CMNS 230 2

Economics of the Cultural Industries

Last Week Examined changes in capitalism, and

especially cultural economics over time Explored the nature of the cultural

commodityThis Week Look at the nature of the cultural production

process Especially, how to negotiate creative

contracts to get money for cultural production

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Learning Objectives

Identify three key features of the cultural transaction

Last Week:Key Q: what is special about the cultural

industries? (Hes: pages 17-22)

- This week:Key Q: within the cultural industries, what are

some key differences?How are cultural products bought and sold?

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Nature of the Production Process

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What is the same about Media Production as a Factory

Process? Fixed assets:

– Plant and machinery Daily Demand:

– Constant supply of raw materials, continuous production Distribution Stimulation of Demand

– Constant market research Advertising Similar to many forms of factory production

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What is so special about the cultural industries?

- Risky: Offset Risk through Concentration, Integration and co opting Publicity

- High Production/Low Reproduction Costs means a cultural product is intrinsically Semi Public ( use does not use up or diminish value):

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Consequences of Low Marginal Costs/Semi Public Good Nature

- A Need to Create Artificial Scarcity- Monopoly/Oligopoly market rationalization- Development of Formats- Tight control of reproduction- High investment in marketing and distribution

- In Media which use the Spectrum, there is Actual condition of scarcity

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Key Differentiators of the Types of Processes in different

cultural Industries Degree of ephemerality

– How long will the product last? Eg. News lasts half day or less; film and sound recording longer shelf lives ( eg. Reissues, builds audiences over time: classic case the Star Wars franchise, or how Disney manipulates releases of its key cartoon series.)

Degree of technology intensiveness Until 1990s, very distinct process of industrial production; different guilds Now, digital techniques are ‘deskilling’ or ‘reskilling’ modes of production As well, DVD capture means a cross over: TV series now sold/rented like films

Degree of Structural Integration– Are firms controlling all parts of the production/distribution cycle? ( vertical

integration)– Are firms able to buy shares/in other companies/ to aggregate market

share and reduce competition? ( Oligopoly is a form of horizontal competition)

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Different Processes in Different Cultural IndustriesNewspapers and Live Broadcasting Continuous production and

distribution necessitates steady cash flow

High fixed costs

High proportion of revenue from ads

Wide, controlled distribution Output taken to be

entertainment and information

Recorded Music and Film Production

Sporadic Production; interrupted revenue flows

Each project/production has a separate budget ( lowers fixed costs)

Revenue from placement, rentals, ancillaries

Global distribution Output taken as entertainment

and ‘art’ Source: Branston and

Stafford, 222.

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Key Elements of Market Exchangebetween Creator and Distributor

Degree of market power: control over inputs of materials, resources or ideas– Range of celebrities, products, formats, resources

Barriers to entry Economies of scale

– When large numbers of copies of an original prototype are produced, per unit costs fall

– Semi public good nature implies these are virtually infinite– In cultural industries, size advantages especially accrue in film

and TV Economies of scope

– When a range of complementary prototypes create synergy: a conglomerate would be a typical ideal type

– Especially implies control over distribution, technically and organizationally

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Mapping the Creative Process

Once the creative process is ‘fixed’; seek to realize revenues from it

An intellectual creation: a different kind of “property”

Creator sells product by herself, or leases rights to reproduce and sell to third parties by contracts

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The Importance of Contracts

Creators Rewards depend upon contracts they can negotiate; First, must protect “exclusivity” to the cultural expression of their work

through copyright Then, exercise control over “licensing” the use and distribution of their

work Self Interest dictates leveraging a share or “royalty” in subsequent use Want to trap a share of every stage of the process after creation ( ie a

share of distribution) and in some cases,create a vertically integrated firm

Where per unit production costs are high in the creation of the master ( eg Film, TV) licensing or royalties are typically LOW

Where unit costs are lower, royalties high: Some Music deals 50-50; others much lower

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Anatomy of a TV contract

Develop Property:– Copyright structures the pricing of a product.– Copyright is based on time and space ( 70 years; definable

geographic territory; definable “window” of exhibition) Ie: in the creators’ interest to infinitely subdivide deal and negotiate

each stage

Pitch to get Investors: – Licence to Broadcasters for exhibition ( at home and

abroad)– Raise money from the Bank ( personal loan)– Go to the State: if a public loan, tax incentive– Get artists to reduce their labour costs

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TV Deal Continued

Factors affecting terms of trade between broadcaster and producer:– If buyers market ( ie: if more producers than buyers)– If sellers market ( scarcity of supply to buyers)– If separate or bundle ancillary rights – If there is a high degree of price competition

To make DeGrassi High costs about a million to make But, the cost of an imported US show of the same youth soap

type costs about $50,000

– If there is a high degree of non price competition

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Problems in Negotiating with Power Asymmetries

Unequal information Unequal bargaining Unequal risk

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Understanding Macro Economics of the Cultural Industries

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Rights Transactions

Driven from agreements based on copyright– Rights bought and sold in the following way: by

national/regional or local market boundaries– By time– By format – EG: windowing: prime time first run series: reruns

DVD Special event /ppv ( issue: video on demand downloads / time shifting) Syndication ( threshold: usable number of library of episodes) The idea is to extract he mazimum surplus At each stage, price paid declines

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Structure of Economic Transaction

Direct: Consumer End Retail Market– Pay for a book, music cd, dvd per unit, video games basis (

discontinous)– Or, by subscription: eg. Satellite TV(continous revenue

stream)– Thus, Price covers full cost plus a profit– Consumer rents or owns product

Indirect: Wholesale, Intermediate Demand Sets Market– Pay by advertising– Eg: over the air radio, TV, magazines– What is sold is access to consumer: consumer does not

own or rent the actual broadcast– Price to consumer is well below cost

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Competition in Cultural Markets

Competition for audiences Competition for resources from other media (

eg. ad dollars, time spent with media) Competition for Distribution/Exhibition:

– Most products require a distribution system involving certain shelf space: idea of tiers of attractive shelf space

– These are based on selling exclusive access– IE: vendors vie for ‘exclusive’ rights to offer certain product

lines ( eg. Stern on Sirius Satellite Radio); arrange for preferential access ( Telus: sports package)

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Determinants affecting Profits

Audience Size Cost Containment of Production Non price competition Calculation of break even points: hit to release ratio

– Drive to recover costs up front– Only after break even reached do artists reap royalties– It is the hits which cross subsidise the failures– In most cultural industries, the failures outnumber hits or

blockbusters– It is the hits that generate huge ancillary markets: t shirts,

cell phone ring tones and so on– And it is the hits that go on to syndication

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Changes in the Organization of Cultural Businesses

Most important change in transition from market professional era to complex era is the growth in firm size and scope

Part of a long term trend in mergers and acquisitions after the Long Downturn, according to Hesmondalgh

Two waves ( See Hesmondalgh, table 5.1) Late 90s boom Led to three tiers of cultural industry firms

– Big six (TW,Disney, Viacom, Vivendi,Bertelsmann, News)– 42 other companies with over I B a year– Most based in North America and Europe ( several in Latin

America)– And many small fish: located in sub regional clusters

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Measuring Market Concentration: the Goliath

Side Market share– eg.: 6 largest film studios control 90 % pf revs, 132 of 148 films– Eg: 5 largest music firms control 87% music– In EU high levels of concentration in print and TV

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Restraint on Goliath

– Hesmondalgh argues that rhetorical focus on statistics of market share obscures the underlying “network” dynamic of cultural production

– need to understand the continuing presence of small companies (149)

Why?– Conception stage of texts still small scale, autonomous and

relatively inexpensive– mature /decline of certain industries, ,new entry– Discourses of entrepreneurialism– Disintegration of existing networks ( TV) outsourcing is rising– Emphasis on marketing– Ethical and aesthetic premium on independence higher in music,

growing in film ( see H, page 151)

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Why David and Goliath Joint Ventures

To avoid competition To save money and share risks To buy a seat on a rival’s board To create a safety net To make links with foreign companies,

to avoid punitive tax regulation

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Independents/The Goliath Story

Use of the term independent is problematic– All productions require collaboration between creative and

technical teams and an organisation– Better to think of various levels of ‘dependencies’: Branston and

Stafford, page 245.– Various rationales for how producers approach such

dependencies The maverick The Artist The politically committed; the avant garde

– Each industry approaches alliances with independents differently: In global networks, film is much more highly centralized; sound recording decentralized

Majors are not monoliths– Not integrated across all sectors evenly– EG Disney in music is a fringe player