Media Competition

CHAPTER THREE

In order to formulate a policy position on media markets it is necessary to know how they function and with what outcomes.  A crucial question is this:  How does the market perform in serving the public interest with respect to the media industries?  To the extent that desirable outcomes can be achieved by leaving the market alone, there is no need for government intervention.  On the other hand, to the extent that the market fails to serve the public interest there is a prima facie case for government action to achieve better outcomes.  In this chapter I consider the nuts and bolts of the media industries as a background to the following chapter's treatment of market failure and its implications for public policy.

CHARACTERISTICS OF MEDIA MARKETS

Mass media industries share many characteristics.  They supply at least one of two linked products, namely, content for information or entertainment, and advertising.  Content is either sold or provided free of charge to consumers and is generally used to generate audiences or potential markets for the delivery of paid advertising messages on behalf of advertisers.

The degree to which the sale of advertising is used to generate revenues varies widely.  Some sectors such as commercial free-to-air broadcasting and suburban newspapers depend entirely on the sale of advertising for their revenue.  Others, such as daily newspapers, magazines and subscription television, depend on both the sale of content to consumers and advertising for their revenue.  The relative importance of each varies.  Daily newspapers raise about 30 per cent of their revenue from content sales and about 70 per cent from advertising.  Magazines, depending on type, can range from about equal proportions of revenue from both sources for popular wide circulation magazines to about 70 per cent or more from content sales for glossy specialist magazines.  Subscription television raises most of its revenue from subscription fees.

The geographic availability of media products and services also varies.  For example, a suburban newspaper is available in a small portion of a city while daily newspapers are available throughout major cities or even nationally.  Similarly, while a local radio station may reach only an area within a few kilometre radius from the station, a major station may reach a whole capital city or region and, through syndication, some of its programmes may have even wider coverage.

Effective competition between media services requires a high level of substitution between them.  Within broadcasting, consumers may regard two programmes broadcast at the same time on two television stations with the same coverage area as being highly substitutable.  Where it is available, pay television is substitutable with free-to-air television.  Similarly, radio stations in the same area may also be highly substitutable with each other.

Within print media, major daily newspapers in the same city are substitutable with each other.  Similarly, national newspapers are substitutable with each other.  However, city-based daily newspapers are less substitutable with national ones.  Substitutability may also be high between some magazines but not others.  The level of substitutability between newspapers and magazines is generally weak.

Although the outputs of different media have some common characteristics, their differences tend to be greater than their similarities.  Radio and television programmes, for example, may be suitable substitutes for news but not necessarily for entertainment (television has supplanted radio as the main evening family entertainment medium).  Also, radio is convenient to use in conjunction with some other activity (e.g., driving a car, reading) while television is less so.  Similar factors also limit the level of substitutability between print and electronic media.  Currently, substitution between television and daily newspapers is relatively weak.  However, the introduction of television with a main evening news bulletin is reputed to have been a major cause of the decline and eventual demise of afternoon daily newspapers in Australia (Windschuttle, 1985).

ASPECTS OF COMPETITION

All commercial media are primarily in the business of selling access to audiences to advertisers.  This is true not only of the broadcast media that give away entertainment and information to attract audiences, but also of media such as newspapers that are sold to consumers.  For example, the business function of a newspaper was unambiguously stated in a submission to the House of Representatives Select Committee on the Print Media (1992) by Independent Newspapers PLC as follows:

A newspaper must never forget that, as a business, its purpose is to deliver an audience to advertisers in the most effective way possible, subject to the dictates of honest journalism and a respect for the dignity of the individual.  (p. 54;  emphasis in original)

In performing their business function, all media compete with each other and with other activities to attract audiences and simultaneously compete with each other for advertising expenditure.  At any given time, the degree of competition between two media for both audiences and advertising expenditure depends on how well the attributes of the products offered by each meet the specific needs of consumers and advertisers.

Although media products share some attributes, the various media appeal to audiences for different reasons and are used differently by them.  Someone with a broad general interest in current affairs may regard radio and television news bulletins as substitutes, but someone seeking more in-depth information on a particular story is unlikely to regard either of them as satisfactory substitutes for a newspaper.  The circumstances in which a medium is used will also affect its substitutability.  A jogger is unlikely to consider reading a newspaper as a substitute for listening to radio while jogging.  Similarly, someone wanting to watch a television show is unlikely to regard a radio broadcast of the same show as a suitable substitute.  These types of differences in media products indicate that the media do not constitute a single homogenous market but may be fragmented in a series of sub-markets reflecting the unique properties of each medium, and the specific needs that each medium is required to satisfy.

Operators using the same medium to reach similar audiences compete strongly with each other.  Two daily newspapers in the same city compete directly with each other for both readership and advertising.  Similarly, radio or television stations operating in the same licence area will compete directly for audiences and advertising.  Media operators in direct competition with each other try to limit the level of competition between them by differentiating their outputs.  Daily newspapers, for example, may adopt a different format (broadsheet versus tabloid) and present reports in ways that may appeal to different classes of readers.  Radio stations also adopt different formats (such as fine music, rock music, talk, etc.) and try to appeal to different age or demographic groups.  Competitive television stations also try to differentiate themselves by focusing on different types of programming (sport, drama, etc.) and demographically different audiences.

Subscription television services provide consumers with an expanded range of services with attributes similar to those offered by free-to-air services, but with the obvious difference that consumers face a direct charge for access.  In markets where both services are available, the similar products offered by subscription and broadcast television would make the two services highly substitutable.  The audiences of subscription television channels are small relative to those of free-to-air television because of the limited reach of subscription services and their low take-up rate in the areas where they are available.

The level of competition between subscription and free-to-air television is high in homes where both services are available.  After subscribing to a pay television service an individual would be indifferent to the source of the programming.  For such an individual, therefore, the two services are highly substitutable and compete with each other for the individual's attention.  To retain the subscriber, the subscription service needs to provide a level of viewer benefits that ensures renewal of subscriptions.  Simultaneously, free-to-air television, whose revenue is directly proportional to its audience, needs to compete strongly to limit erosion of its audience and advertising revenue base.

Experience in other countries indicates that subscription television has been in direct competition with free-to-air television for audiences.  For example, in the United States, the share of households viewing basic cable networks increased from 7.2 per cent in 1982 to 31 per cent in 1996, whereas viewing of broadcast television stations decreased from 86.3 per cent in 1984 to 69.9 per cent in 1994.  More particularly, in households connected to cable television, the combined prime-time ratings of the cable networks are about the same as the aggregate ratings of the three major broadcast networks.  Indeed, they surpassed the aggregate ratings of the broadcast networks for the first time in the third quarter of 1995 (Carrol & Howard, 1998).  These findings suggest that audiences tend to use subscription television to increase the choice of programmes available to them.  Thus, new or renewed subscriptions depend on the value audiences place on the additional choice and not necessarily on whether the benefits derived from subscription television exceed those derived from free-to-air television.  However, while their audiences remain small, subscription services are unlikely to be effective substitutes for free-to-air television advertising.

Similar factors also affect competition within the print media, for which the nature of the medium and its primary geographic market are the principal determinants of the level of competition.  For example, while national newspapers and national magazines have the same geographic market, their different content and publication frequency limit the extent to which they can be thought of as substitutes for readership.  However, depending on the demographics of their readership, they may be substitutable for advertising.

Readership competition between print media products requires both content substitutability and availability in the same geographic market.  While a national newspaper overlaps with the geographic market of a metropolitan newspaper, it has a different focus and a different level of local content.  Similarly, advertising competition is likely to be limited.  An enterprise operating only in the Sydney market is unlikely to consider a national newspaper as an effective substitute for a Sydney daily newspaper.

COMPETITION FOR ADVERTISING

Generally advertisers seek to deliver their messages to audiences with particular demographic characteristic in areas coinciding with their markets.  The medium they choose must be able to deliver the message cost-effectively to the desired market and audience.  The type of advertisement may also determine the choice of medium (e.g., classified advertisement versus advertisements for household detergents).  To maximise the benefits they derive from their advertising expenditure, advertisers seek the most effective medium or combination of media for their particular needs.  In assessing the effectiveness of a medium, an advertiser considers how well the characteristics of the medium's audience match those of potential consumers of the product to be advertised.  Having made a choice of medium, the advertiser then seeks to reach the largest possible audience with any given expenditure.  The audience's response to a medium is another important consideration.  Advertisers often use more than one medium in an advertising campaign because of the different responses the same audience is likely to have to different media.  Advertisers tend to be indifferent between two media or two combinations of media that are likely to generate similar benefits for similar levels of expenditure.

Each medium has unique characteristics giving it special advantages for particular types of advertising.  For example, a local independent supermarket is unlikely to seek to advertise to the large and widely dispersed audience of a television station, most of which would be well beyond the catchment area for its customers, but may find a local suburban newspaper ideal for its advertisements.  On the other hand, a manufacturer of widely distributed products such as household detergents is likely to regard large television audiences to be essential for its advertising.

Television is the most preferred medium for national advertising expenditure.  The latest available advertising expenditure data (CEASA, 1998) show that television now accounts for 52.4 per cent of national advertising and 30 per cent of all advertising expenditure in main media.  Although newspapers account for only 20.4 per cent of national advertising revenue, their 36.8 per cent share of total advertising exceeds that of television and highlights their dominance of non-national advertising with a 52.6 per cent share of the total.  Television's share of non-national advertising is only 7.9 per cent of the total.  Of the other main media, magazines (including business publications) account for 15.4 per cent of national and 4.3 per cent of non-national advertising, and radio for 7.1 per cent of national and 7.3 per cent of non-national advertising.  Classified directories are an important medium for non-national advertising and account for a 23.9 per cent share of the total.

Because of their different characteristics, the various media are unlikely to be highly substitutable.  Advertisers may not find them interchangeable because their audiences may differ widely in terms of their interest in the product or service being advertised, and in their geographic, demographic and psychographic characteristics (Picard, 1989).  In addition, the characteristics of the media themselves may make them particularly well suited for some types of advertisements and not for others.

When considering this issue, the House of Representatives Select Committee on the Print Media (1992:63) concluded that "while the media may be substitutable to a degree, (they) are not fully interchangeable".  In particular, the Committee noted the assessment of the Trade Practices Commission that:

in terms of news and information there is some substitutability between print and electronic media, and that for advertising of certain products there is substitutability.  However, (the Commission's) market place inquiries, particularly of major advertisers, has tended to indicate that competition is limited, and that there are substantial core markets for print and electronic media separately.

Studies such as Busterna (1987) and reports by the Bureau of Transport and Communications Economics (1993, 1996) also suggest that the main media are likely to have low substitutability.  An indication of the likely level of substitutability between media may be gauged by the media's dependency on a particular type of advertising for their revenue.  Data on the relative dependency of the main media on national and non-national advertising are provided in Table 3.1.

Table 3.1:  Proportion of National and Non-National Advertising for Main Media

	National		Non-national		Total
	$'000	Per cent	$'000	Per cent	$'000	Per cent
Television	1,949,080	86.7	299,299	13.3	2,248,379	100.0
Radio	261,848	48.5	277,906	51.5	539,754	100.0
Newspapers	752,653	27.4	1,993,703	72.6	2,746,356	100.0
Magazines a	568,429	77.7	163,439	22.3	731,868	100.0

Note:  ^a Includes business publications

Source:  CEASA (1998).

The data in table 3.1 indicate the relative importance of national and non-national advertising to each of the main media.  They suggest that both television and magazines are highly dependent on national advertising.  In contrast, newspapers as a group are highly dependent on non-national advertising.  For radio, the two sources of advertising appear to be equally important.  In terms of competition between media, the more dependent a medium is on one of the two types of advertising, the more strongly it is likely to compete for it.  For example, television is likely to be a much stronger competitor for national than for non-national advertising.  Thus, the relative dependence of two media on national and non-national advertising is likely to be indicative of the level of competition between them.

COMPETITION FOR INPUTS

The supply of information and entertainment to audiences is a key feature common to all the entities operating in media industries.  Irrespective of whether the supply of information and entertainment to audiences is an intermediate or the final step in the production process, each entity aims to maximise the audience attracted by its products.  For commercial media, audience maximisation is a prerequisite for profit maximisation.  Although publicly-funded media may follow different programming strategies from those of their commercial counterparts, their programming choices are also driven by audience appeal.  It would be very difficult to justify continued funding of programming that nobody or only a few want.

Within a medium, competitors keenly seek popular programming.  A popular newspaper or magazine columnist can command a high price.  Similarly, popular radio personalities or television programmes can command high prices because of the substantial effect they can have on the audiences and revenues of stations.  The allegedly high fees paid by the ABC for the Uncensored series of interviews by Jana Wendt, much discussed in the popular press, are an example of the price that a well-known personality can command.

The production of "content" is by far the most important activity of all media industries and can account for more than half of the total cost of a media enterprise.  Although the contents of different media have some unique characteristics they also have some characteristics in common.  All media, for example, produce news or information outputs whose production is to some extent dependent upon similar inputs.  Media industries will tend to compete with each other to secure the resources necessary for the creation of their outputs.  The level of competition is likely to be strong between companies operating in the same industry but less strong between companies operating in different media industries.

All media collect information for news and current affairs stories or for popular magazine-style columns or programmes such as cooking and travel which they then package in a form suitable for their audience.  The research and writing skills used in finding and collecting information of this kind are likely to be similar irrespective of the medium for which the output is prepared.  Journalists therefore often pursue careers that see them move from one medium to another.

MANAGEMENT AND DISTRIBUTION SKILLS

Within a particular medium competition for inputs is likely to be very strong.  In radio, for example, where programmes and audience appeal are highly dependent on "personalities", individuals with the appropriate skills are highly sought after.  The so-called "golden tonsils" of radio personality John Laws is an indirect reference to both his value to the station that employs him as well as the reputedly high fees paid to him.  Personalities are also very important in some elements of television.  A television newsreader can make a substantial difference to audience ratings and stations go to considerable lengths to differentiate each other by their choice of newsreaders.

Television programming comprises programmes produced in-house as well as those purchased from domestic and international sources.  For in-house-produced programmes stations compete with each other for concepts, writers, directors, actors and other talents required to make programmes.  With ready-made or commissioned programmes from independent sources they compete with each other for the rights to broadcast the programmes.  Often long-term relationships are formed with producers.  Competition for popular imported programmes tends to be strong.  Broadcasters quite often enter into long-term "output" deals with studios overseas whereby they commit to purchase the entire studio output to ensure continued supply of potentially popular programmes.  Stations also compete with each other to secure long-term rights to broadcast popular sporting events.

In television, subscription and free-to-air television are also likely to compete strongly with each other for certain programmes.  The anti-siphoning rules essentially eliminate competition for major sporting events.  Distribution arrangements for other programmes are likely to reduce the level of competition between subscription and free-to-air television.

The nature of a programme may have a major influence on its distribution arrangements.  Some programmes, such as drama and children's programmes, retain at least some of their appeal and value over time.  This allows such programmes to be distributed to different media at different times and at different prices through a series of "distribution windows".  The aim of this discriminatory pricing strategy is to exploit purchasers' willingness to pay to get as much sales revenue from distribution as possible.  Given that costs are fixed once the programmes are produced, maximising total revenue from programme distribution also means maximising profits.

Because much of the value of news and sport programmes derives from their immediacy, there is little, if any, incentive for sequential release of these programmes in the different broadcasting windows.  Consequently subscription and free-to-air broadcasters compete directly for the rights to such programmes or for the resources required to produce them.

NETWORKING

Networking of programmes for broadcasting by a number of stations in different geographic markets is a prevailing feature of Australian television but is not used as extensively in radio.  Until the introduction of three competing commercial television stations throughout most of Australia, networking of programmes by commercial stations was limited to State capital cities which already had three competing stations.  Ownership controls, which prohibited individuals from holding a prescribed interest in more than two television stations, were a major constraint on the formation of commercial networks.  Similar controls preventing common ownership of more than four radio stations in any one State or more than eight Australia-wide were in place until the late 1980s and acted as a major constraint on the formation of radio networks.

The ABC, as a national service, has always had a substantial amount of networking among its stations.  The amount of networking varies from service to service and ranges from networking of national news bulletins to the broadcasting of the same programme from all the stations connected to the ABC FM fine music radio network.  On ABC television, news and some current affairs programmes have separate State editions for broadcast within each State while other programmes are broadcast nationally.  SBS Television broadcasts the same programme from all its stations.

Commercial television networks are made up of directly-owned stations and independently-owned affiliated stations that carry networked programmes subject to long-term agreements.  The relaxation of television ownership limits in the late 1980s and early 1990s and the introduction of competitive stations in regional markets appear to have been the prime catalysts for the formation of television networks.  The relaxation of ownership rules led to the formation of capital city-based networks under common ownership.  These networks became, de facto, the only viable sources of programming for regional stations.  Before the introduction of three commercial television services in most licence areas, regional stations enjoyed a local monopoly in their service area and were able to purchase programming from all three capital city networks.  With the change in policy, however, the lack of alternative sources of programming dictated affiliation with one of the three networks.  Apart from minor variations to accommodate local daily news bulletins or other small amounts of local-interest programming, most regional television programmes are networked.  The lack of alternative sources of programmes means that the fortunes of the regional stations are tied to the success of the programme policies of network-owned stations.

Because of its more "local" character and dependence on the personality of presenters, commercial radio is not as conducive to networking as television.  This is likely to be a contributing factor in the almost total absence of commercial national networks even though the formation of such networks under common ownership or through affiliation is not prohibited by regulation.  Nonetheless, certain aspects of radio can be networked successfully.

National news services are highly conducive to networking and are widely used by radio stations.  A large component of radio programming is made up of music that can be packaged in a form suitable for wide distribution.  While this tends to be more a syndicated programme packaging service rather than traditional networking, it serves similar functions and is widely used by radio stations.  Other forms of syndicated programmes include the relay of talk back-style programmes by popular personalities.  These types of programming arrangements are widespread in the radio industry (BTCE, 1993).

Networks offer substantial benefits to advertisers seeking to reach undifferentiated audiences in large geographic markets.  For them an advertisement delivered simultaneously in all the licence areas of the stations making up the network would be more cost effective than arranging separate delivery of the same advertisement by each station.  On the other hand, advertisers seeking to reach audiences with specific demographic characteristics or only in specific licence areas may find networks less appealing than individual selection of stations.

Networking of programmes may also involve opportunity costs to stations by reducing their ability to schedule programmes reflecting local rather than national audience preferences.  In network stations, a local programme can be scheduled only by replacing a networked programme.  Although network schedules tend to provide some opportunity for insertion of popular local programmes such as news, more substantial variations of network schedules to accommodate local tastes could erode some of the benefits of networking and are uncommon.

CONCLUSION

All broadcasters deliver programmes for consumption by audiences.  Commercial broadcasters, however, are also engaged in the delivery of advertising messages to audiences so that programmes are intermediate products used to attract potential audiences for paid advertising messages.

Competition occurs within each medium and, in some cases, between different media.  Commercial radio (or television) services compete for audiences with each other and with non-commercial services operating in the same area.  The level of competition is high between commercial services, but is less intense between commercial and non-commercial services.  Commercial operators also compete with each other in the sale of access to audience to advertisers (advertising market).  There is some competition between parts of the electronic media and parts of the print media.

Networking is an important feature of Australian broadcasting, especially in television.  It has always been important for the ABC, but regulations prevented its development in commercial television until the late 1980s.