MEDIA MANAGEMENT strategy, business models and case studies. [2 ed.] 9783030479138, 3030479137

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Springer Texts in Business and Economics

Bernd W. Wirtz

Media Management Strategy, Business Models and Case Studies Second Edition

Springer Texts in Business and Economics

Springer Texts in Business and Economics (STBE) delivers high-quality instructional content for undergraduates and graduates in all areas of Business/Management Science and Economics. The series is comprised of self-contained books with a broad and comprehensive coverage that are suitable for class as well as for individual self-study. All texts are authored by established experts in their fields and offer a solid methodological background, often accompanied by problems and exercises.

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Bernd W. Wirtz

Media Management Strategy, Business Models and Case Studies Second Edition

Bernd W. Wirtz Information and Communication Management German University of Administrative Sciences Speyer, Germany

ISSN 2192-4333 ISSN 2192-4341 (electronic) Springer Texts in Business and Economics ISBN 978-3-030-47912-1 ISBN 978-3-030-47913-8 (eBook) https://doi.org/10.1007/978-3-030-47913-8 # The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

In modern economies, media plays a significant economic and social role. One of the fundamental characteristics of media markets is their increasing dynamics and complexity. Against this background, the textbook media management takes a business management, industry-oriented perspective to better understand the media market. The contents of this textbook are based on the German textbook “Medien- und Internetmanagement”, which was first publishes by Springer Gabler in 2000 and is now in its tenth edition. In revising the second edition of this textbook, I received substantive support. In particular, I am grateful towards the former employees and doctoral students of the chair, as well as my current employees and doctoral students Ms. Isabell Falke (MA), Mr. Paul F. Langer (MSc), Mr. Florian W. Schmidt (MSc), and Mr. Jan C. Weyerer (MSc) for their outstanding commitment and team spirit. The scientific development of a subject area thrives through the critical analysis and discussion of concepts and content. Given this fact and the currently inchoate state of knowledge regarding media and Internet management, I am grateful for every comment or suggestion for improvement. Furthermore, lecturers who are interested in using graphics and lecture with materials from this book are welcome to contact the author. Speyer, Germany January 2020

Bernd W. Wirtz

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Contents

1

Foundations of Media Management . . . . . . . . . . . . . . . . . . . . . . . .

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2

Characteristics of Media Management . . . . . . . . . . . . . . . . . . . . . .

23

3

Value Creation Systems of Media Enterprises . . . . . . . . . . . . . . . . .

53

4

Functions of Media Management . . . . . . . . . . . . . . . . . . . . . . . . . .

73

5

Business Models and Value Creation in the Newspaper and Magazine Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

6

Business Models and Value Creation in the Book Market . . . . . . . . 117

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Business Models and Value Creation in the Movie Market . . . . . . . 127

8

Business Models and Value Creation in the TV Market . . . . . . . . . 139

9

Business Models and Value Creation in the Radio Market . . . . . . . 151

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Business Models and Value Creation in the Music Market . . . . . . . 159

11

Business Models and Value Creation in the Video and Gaming Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

12

Business Models and Value Creation in the Internet Market . . . . . . 185

13

International Media Management . . . . . . . . . . . . . . . . . . . . . . . . . . 215

14

Integrated Media Conglomerates and Cross-Media . . . . . . . . . . . . . 237

15

Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311

vii

About the Author

Bernd W. Wirtz studied business administration in Cologne, London, and Dortmund, culminating in an MBA (Master of Business Administration). He later served as a lecturer for media management at the Universities of Düsseldorf (Germany) and Zurich (Switzerland). In 1994, he was awarded a doctorate in the field of new media and competition strategies (Doctorate in Business Administration). After finishing his studies, Prof. Wirtz worked as a consultant with Roland Berger & Partners as well as Andersen Consulting/Accenture (Manager in the field of new media/electronic commerce) and as a Lecturer at the University of Zurich. From 1999 to 2004, he was a Full Professor (Deutsche Bank Chair for Strategic Management) at the University of Witten/Herdecke (Germany). Since 2004, he has been a Full Professor (Chair for Information and Communication Management) at the German University of Administrative Sciences Speyer (Germany). Prof. Wirtz is an editorial board member of the journal Long Range Planning, the Journal of Media Business Studies, the International Journal on Media Management, the International Journal of Business Environment, the International Journal of Public Administration, the Public Organization Review, and the International Review on Public and Nonprofit Marketing. He has several years of experience in consulting on strategy projects for leading media and telecommunication enterprises and the European Commission. His publications focus on media management, business model management, marketing, e-government, and electronic business (approximately 300 publications). In

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About the Author

total, Prof. Wirtz has published 20 books (e.g., tenth edition of Media and Internet Management in German, sixth edition of Electronic Business in German, fourth edition of Direct Marketing in German, and fourth edition of Business Model in German).

1

Foundations of Media Management

In the modern information society, the media play a very important role in economic and societal development. Innovations in information and communication technology have changed the usage patterns of the recipients, simplify market entry for new competitors, and facilitate new media formats. This development changes not only the technical, cultural, and social structures but most profoundly the commercial ones.1 Recipients simultaneously use a plethora of media in order to satisfy their needs for information, communication, and entertainment. Deregulation of the media market has lowered the market entry barriers, and due to the emergence of new market actors and increasing globalization, the established local markets lose their significance. Strategic alliances are forged ever more frequently on the international level. In recent years, one can observe a fundamental, information technology-induced change in modern industries. This change is mainly caused by increasing digitalization: “With the beginning of the ‘digital age’, also called ‘digital revolution’, which evolved throughout the development of the multimedia market, there will be a fundamental change of existing structures in the telecommunication, computing, entertainment and media industries” (Denger and Wirtz 1995, p. 20). This assessment in 1995 aptly illustrates the impact of digitalization. The Internet now represents an established distribution channel for nearly all types of media. The use of various distribution channels and the transfer of core competencies to differing media types have become important success factors for media enterprises. Meeting these challenges is the main task of media management, whose basic features will be addressed in the following. The discussion focuses not only on an analysis of developments in the sectors that are relevant for the media industry but

1

See also for the following chapter Wirtz (2011b, 2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_1

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Foundations of Media Management

also on the question of how the opportunities associated with the information society can be commercially utilized by media enterprises. Further, it indicates how potential risks can be countered. The first chapter presents the conditions that potentially influence management in media enterprises. It starts with a definition of the proper terminology. Next, the environment of media enterprises is taken into consideration. Thereby, the recent developments in the media, information, and communication markets along with the main issues in the media sector are of utmost interest.

1.1

Structure of the Textbook

This textbook intends to contribute to the topic of media management from the perspective of business administration. This research area continues to gain in importance as numerous international publications have emerged during the past few years. In the light of the necessity of integrated higher education in business administration, universities, above all in the United States, offer courses in the area of media management that fulfill the requirements of the recently formed and rapidly growing media markets. Figure 1.1 provides an overview of the structure of the textbook. Chapter 2 presents the foundation and the relevant characteristics of media management. It provides a theoretical and terminological classification of media management and explores the characteristics of the media market as well as its products. In addition, the impact of digitization on media management will be demonstrated. In Chap. 3, the value creation systems of media enterprises are presented, and value creation structures, core assets, and core competencies, as well as business models for media enterprises, are described. This is followed by a discussion of the action parameters available for the management of media enterprises in pursuing the corporate goals. A general overview of strategic management, supply management, production management, marketing, and organizational management is provided. In the subsequent Chaps. 5–12, a branch-specific discussion of media management follows. The various branches, from newspapers, magazines, and books, to movies, television, radio, and music, to video and computer games, and finally the Internet and social media, are presented in detail. Every chapter provides an overview of the range of services and interactions of market participants as well as value creation structures, core assets, core competencies, and business models. The branch-specific value creation system, as well as specific management characteristics of the various branches, will be explored. Because of the increasing internationalization of media products and the increasing significance of management in an integrated media enterprise, both topics are separately treated in Chaps. 13 and 14. Chapter 15 presents several case studies from different branches.

1.2 Development of Media Management

3

Chap. 1: Foundations of media management Chap. 2: Characteristics of the media management Chap. 14: Integrated media conglomerates and cross-media

Chap. 13 International media management

Chap. 5-12: Business models and value creation in the media markets

Chap. 4: Functions of media management

Chap. 3: Value-creation systems of media enterprises

Chap. 15: Case studies Fig. 1.1 The structure of the textbook

1.2

Development of Media Management

The term “media management” is not uniformly used in the literature. In Anglophone literature, the term “media economics” can regularly be found alongside “media management.” In these research areas, economic perspectives usually take the forefront. Within the context of this textbook, however, media management is conceptualized as a business administration discipline, so that at first the classification into the business administration context will be necessary.

1.2.1

Media Management as a Business Administration Discipline

To develop a scientific concept of media management, we first have to examine which position media management takes in business administration. Within the

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Foundations of Media Management

context of this textbook, media management is conceptualized as a business administration discipline that identifies and describes strategic and operational phenomena as well as problems of managing media enterprises. At the same time, media management is an applied science that intends to provide assistance to practitioners in media enterprises. This classification of media management within business administration leads to the conclusion that media management can be portrayed as an independent media business theory that is classified as a theory of branch economics in the field of business administration, on equal standing with banking or insurance, for example.

1.2.2

Development of Media Management and Media Economics

Examining the literature in the area of media management and media economics reveals a comparatively low output until the mid-1980s.2 After this period a noticeable increase in publications can be observed. At the beginning of the 1990s, both the number of reviewed journals in which the articles appear and the total number of articles increased considerably (see for the following Wirtz et al. 2013b). Figure 1.2 presents the number of publications in the field of media management and media economics over the course of time. The book, radio, newspaper, and television industries represent the four oldest research fields. Occasional publications already appeared in the early 1920s, but the first seminal works were documented in the 1950s. In 1951/1952, Ray was the first to study competition and concentration in the newspaper industry. At the same time, in 1952, Steiner analyzed the competition in the radio industry. Foundational economic studies on the subject of television can be attributed to Levin (1958) and Berlson (1961), who researched the TV market structure and competition in comparison with other types of media. During this early phase of media economics, microeconomic concepts were frequently employed for analysis. From 1966 to 1973, the first articles that explicitly addressed management and practical applications appeared in the research fields of radio, newspaper, and television. A case in point is the article “The Television Station Manager” by Winick (1966) in the Advanced Management Journal, which specifically addressed TV management: “Here is a comprehensive analysis of the rarely examined management aspect of this vital communications medium.” With the development of the magazine, music, and movie industries, further research fields crystallized in the 1970s. At the same time, a trend developed that employed macroeconomic, in addition to microeconomic concepts for analysis. Buchan and Siegfried (1978), for example, took a macroeconomic perspective in 2

Within the framework of a database analysis (EBSCO), a total of 200,827 articles were identified that could be attributed to the research field of media management and media economics. With 155,811 articles, the largest portion of the publications appeared in non-peer-reviewed journals, whereas only 45,386, or 23% of the articles, were published in peer reviewed journals.

1.2 Development of Media Management

5

Number of publications 50.000 45.000 40.000 35.000 30.000 25.000 Non Peer Reviewed

20.000 15.000 10.000

Peer Reviewed

5.000 0 19201975

19761980

19811985

19861990

19911995

19962000

20012005

20062010

20112015

20162018

Fig. 1.2 Number of publications in the field of media management and media economics. Source: Based on a research with the EBSCO Database (05/2019)

their article “An Economic Evaluation of the Magazine Industry.” During the following years, both microeconomic and macroeconomic concepts were consistently employed in media research. Within the framework of economic analysis, all established research fields increasingly addressed the generation of revenues. Especially in the areas of radio, television, newspapers, and magazines, the focus was on the optimal layout as well as on profit maximization through advertising revenues. Collins and Jacobson (1978), for example, dealt with the effect of radio commercials, whereas Landon (1971) analyzed the effect of market concentration on advertising rates in the newspaper industry. With Internet economics emerging in the 1990s and video game economics around 2000, the two latest research fields of media economics developed. While the research on video game economics still is in the initial phase of development, the number of articles in the area of Internet economics has increased exponentially. This extremely strong research interest can be attributed, in part, to the fact that this area has a significant economic influence on the established media. The characteristic of the media as an informational asset, as well as the new form of distribution via the Internet, resulted in a reconsideration of entire branch structures. Starting in 2000, an increasing number of articles that deal with price differentiation, profit maximization, bundling, and versioning of information goods can be observed [such as Bakos and Brynjolfsson (2000), Chuang and Sirbu (2000), and

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Foundations of Media Management

Varian (2000)]. With respect to the publication of books, it can be stated that the development of book publications has been analogous to the publication of scientific articles, whereupon the first books were concerned primarily with the oldest research fields. In the context of the book industry, these include, for example, the first comprehensive economic analyses by Grannis (“What Happens in Book Publishing,” 1967) and Bingley (“The Business of Book Publishing,” 1972). The book by Quaal and Brown (1968), “Broadcast Management: Radio, Television,” is characterized by the first parallel analysis of the research fields of radio and television. An exclusive analysis of television economics was carried out several years later in the book “Television Economics” by Owen et al. (1974). In the 1970s, “Movie Business: American Movie Industry Practice” by Bluem (1972) was the first monograph in the field of movie economics. After publication of an increasing number of media management books, in the following decade, more comprehensive perspectives were taken into account. One of the first integral discussions of media management was presented in the book “Electronic Media Management” by McCavitt and Pringle (1986). Only 3 years later, Picard (1989) published the first monograph on “Media Economics: Concepts and Issues,” which offered an interdisciplinary approach to media economics. Figure 1.3 summarizes the chronological order of the establishment of research areas in media management and media economics. In the course of the privatization of the electronic media, however, all the subareas of the media sector received increased attention in research and education. In 1988, Robert G. Picard started to publish the “Journal of Media Economics” (JME), reflecting the increased research interest in media economics. From that time on, besides a constant increase in the number of publications, the significance of the topic of media management also grew in the educational field. Moreover, in 1999, the “International Journal on Media Management” was founded for corresponding research dealing with business management topics in the media sector. Since then, the number of publications has steadily increased and the subject area has also become more and more important in teaching. An examination of the peer-reviewed articles yields a differentiated picture with respect to the diverse research areas focusing on the different branches (see Fig. 1.4). Today, research considering books, radio, television, and newspapers no longer receives the most attention. It is striking that, at present, most of the articles are published in the areas of the Internet, movies, and music industries. The research interest in these branches is apparently most strongly pronounced. The Internet has changed all value creation structures in the media branches and has especially affected the movie and music industries. Today, the Internet, movie, and music industries form one focus of media economics research. Figure 1.4 lists the number of publications in the media economics literature over the course of time.

• • • •

• • • •

1940

Nielsen (1942) Dunn (1952) Steiner (1952) …

Inglis (1952) Currier (1960) Rosse (1967) …

1960

• • • •

• • • •

• • • •

Book economics

Levin (1966) Quaal, Brown (1968) Zufryden (1974) …

Cole (1966) Grannis (1967) Bingley (1972) Levy (1978)

1980

• • • •

• • • •

• • • •

Curwen (1985) Haughey, Selsky (1990) Greco (1999) …

Duncan (1985) Borrell (1997) Hargittai (2000) …

Tillinghast (1981) Ferguson (1983) Slade (1998) …

• • • •

• • • •

• • • •

• • • •

• • • •

• • • •

• • • •

2000

Ducey (1983) Brody (1984) Schwer, Daneshvary (1995) …

Newspaper economics

Radio economics

Rosse (1967) Lee (1973) Reekie (1976) …

• • • •

Television economics

• • • •

Dickson (2000) Yoo (2007) Biczok et al. (2010) …

Internet economics

Music economics Colonna et al. (1993) Crain, Tollison (1997) Dolfsma (1999) …

• Amos et al. (1991) • Danaher (1992) • …

Video game economics Matsumura, Kurimoto (2000) Cox (2008) Liu (2010) …

Benlian et al. (2006) Fishwick (2008) Trivedi (2010) …

Sweeting (2009) Ting (2010) Sweeting (2010) …

Logan, Sutter (2004) Asplund et al. (2008) Chiang et al. (2009) …

Zigmond et al. (2009) Bellman et al. (2010) Chenghuan (2010) …

2020

Van Herpen (2000) Depken (2004) Oster, Scott Morton (2005) …

Kwok, Lui (2002) Brousseau (2008) Cohendet et al. (2009) …

DeVany, McMillan (2004) Gli (2009) Chintagunta et al. (2010) …

Movie economics Smith et al. (1986) Gandal, Salant (1995) Swami et al. (1999) …

Magazine economics

• • • •

• • • •

• Rayport, Sviokla (1995) • Mathieu, Woodard (1996) • …

• • • •

Fig. 1.3 Chronological development of media management and media economics research fields. Source: Wirtz et al. (2013b), and Wirtz (2019b)

1920

• Tosdal (1915)

Childs (1924) Karol (1938) Beckman, Dameron (1938) …

• • • •

Winick (1966) Levin (1971) Owen et al. (1974) Bowman (1976)

• • • •

Gibson (1946) Levin (1958) Bogart, Dunn (1959) …

• • • •

Luthe (1968) Peterson, Berger (1975) Shanahan (1978) …

• • • •

• Buchan, Siegfried (1978) • Rashid (1978)

Bluem (1972) Moorhouse (1973) Farber (1976) …

• • • •

• Herron (1950)

• Graves (1937) • Harris (1938)

First books

First management articles

1.2 Development of Media Management 7

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Foundations of Media Management

Number of publications 12.000

Video games Magazine Newspaper

10.000

Book 8.000

Radio Television

6.000

Music Movie

4.000 Internet

2.000

0 19201975

19761980

19811985

19861990

19911995

19962000

20012005

20062010

20112015

20162018

Fig. 1.4 Number of publications in media management/economics (only peer-reviewed articles). Source: Based on a research with the EBSCO Database (05/2019)

1.2.3

Definition of Media Management

The term “medium” is used in communication and media sciences as well as in psychology, sociology, physics, chemistry, and education science. The English translation of the Latin word medium, “middle, mean value, something that mediates,” forms the basis for the term that is characterized by the respective academic disciplines. In communication sciences, journalism, and media economics, it has been taken for granted that media is a technical term. Hence, media can be understood as the technical means or instruments that are necessary to disseminate information. Definition of Media Media encompasses all goal-oriented technical means or instruments for the procurement of information in print, visual, or auditory forms, as well as the organizational and institutional entities behind them that generate and provide this information. The information is directed, in a traditional manner, at a broad and public audience (Wirtz 2007).

1.2.4

Definition of the Media Sector

Given that the media sector is service-oriented, the demarcation criteria for the service orientation of the enterprise should be addressed. According to these criteria, all enterprises that provide informational or entertainment-related content to their

1.2 Development of Media Management

9

recipients and/or to the advertising markets are part of the media sector. Generally, only those media are considered that have one sender and a large number of recipients (one-to-many-communication). The focus is specifically on newspapers, magazines, books, movies, television, radio, music, and games, as well as the Internet. This demarcation, however, does not do full justice to an integrated media management. The past few decades have seen the emergence, via mergers and takeovers, of large media groups that are active in several media and communication branches. A separate chapter on integrated media management covers the management and issues of these enterprises. The topic of international media management is likewise addressed in a separate chapter.

1.2.5

Definition of Media Enterprises

Basically, to define the term “media enterprise,” one can resort to the economic definition of a business. According to this definition, businesses can be understood as strategically organized economic entities in which tangible assets and/or services are generated and marketed. The tangible assets and/or services that a media enterprise generates and markets are regarded as media. Key features of media enterprises consist of the production and marketing of media. Bundling of internally and externally generated editorial content, as well as the transformation of the content to a storage medium can be understood as the two constituent value-added activities on which the generation of media is based. Direct or indirect distribution should be added as a third constituent value creation activity. In the following discussion, the term “media enterprise” is used only for companies that present all three of these activities. Non-media enterprises, which are also part of media economics, but do not have all three of the abovementioned value creation activities as components of their business models (e.g., a printing house), need to be differentiated. In fact, complementary tasks are fulfilled within the media industry. When examining television broadcasters, radio stations, newspaper publishing houses, or Internet content providers, all three of the constituent features of media enterprises are to be found. In contrast, not all of the three constituent value creation activities are present in the case of distributors, logistical service providers in the media sector, rights agencies, and mere retailers of media products. Thus, media enterprises can be defined as strategically organized economic entities in which the bundling of internally and externally generated editorial content (informational and/or entertainment-related), the transformation of the content to a storage medium, and direct or indirect distribution is undertaken. This definition seems appropriate, especially in the light of the plethora of actors involved in value creation in the media sector. They merely focus on one value creation activity and hence support media enterprises within the framework of the value-adding process. In Fig. 1.5, the constituent features and demarcation criteria of media enterprises are listed.

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Definition of media enterprises Media enterprises can be defined as systematically organized economic entities, in which the bundling of internally and externally generated editorial content (informational and/or entertainment-related content), the transfer of content to a storage medium, and direct or indirect distribution is undertaken. Bundling of internally and externally generated editorial content • Compilation of different editorial content aspects and categories (e.g. informational and entertaining content) • This content can be self-created or externally created

Transfer of content to a storage medium

Distribution of content to the recipients

• Transferring the content to a storage medium which helps by its distribution

• Direct transmission or indirect transmission through inter-mediaries or sales support

• The carrier medium does not necessarily have to be identical to the medium used by the recipient

• There is a demarcation line between editorial and advertising content

Main features of the business model of media companies

Examples of media companies • Radio stations • TV stations • Film studios • Newspaper publishers, Magazine publishers • Book publishers • Record producers • Video and computer game producers • Internet content provider •…

No media companies in the sense of the demarcation criterion • Printing houses • Pure retailers of media products • Logistics suppliers • Pure network operators • Storage medium manufacturers • Independent artists/authors/reporters • Advertising and media agencies • Rights agencies •…

Fig. 1.5 Definition of media enterprises. Source: Wirtz (2007, 2019b)

1.2.6

Media Economics

All US-American definitions of the term “media economics” share as a common feature the factor of the utilization of resources for the creation of distributable content (see Table 1.1). Here the economic orientation of this discipline becomes apparent. In fact, a few subareas of “media economics” indeed deal with business

1.2 Development of Media Management

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Table 1.1 Overview of the definitions of media economics Definitions of “media economics” “Media economics is a term employed to refer to the business and financial activities of firms operating in the various media industries. The operations of these firms are undertaken in the context of given market conditions and technological alternatives and their anticipated financial implications. Media economics is concerned with how the media industries allocate resources to create information and entertainment content to meet the needs of audiences, advertisers and other societal institutions” “Media economics combines the study of economics with the study of media. It is concerned with the changing economic forces that direct and constrain the choices of managers, practitioners and other decision-makers across the media” “Media economics is the study of how media industries use scarce resources to produce content that is distributed among consumers in a society to satisfy various wants and needs”

Author Picard (1989)

Doyle (2003) Albarran (2010)

Table 1.2 Definitions of “media management” Author Sherman (1995) Küng (2008) Albarran (2010)

Definitions of “media management” “Media management consists of (1) the ability to supervise and motivate employees and (2) the ability to operate facilities and resources in a cost-effective (profitable) manner” “The core task of media management is to build a bridge between the general theoretical disciplines of management and the specifics of the media industry” “The changing nature of the communication industries precludes the adoption of a universal theory of electronic media management. The complex day-to-day challenges associated with managing a radio, television, cable, or telecommunications facility make identifying or suggesting a central theory impossible”

administration problems, but these cannot be equated with “media management” as defined in this book.

1.2.7

Media Management

Attempting to create an overview of media management based on different approaches, one comes to the conclusion that there is general agreement on the business administrative character of media management but that no uniform point of view exists yet (see Table 1.2). In the US-American media literature, there are definitional approaches that are derived from a functional understanding of management: “Management may be defined as the process of planning, organizing, influencing and controlling to accomplish organizational goals through the coordinated use of human and material resources” (Pringle et al. 2006, p. 3) or “The process of decision making equals the process of managing. [. . .] We define decision making as the allocation of scarce

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resources by individuals or groups to achieve goals under conditions of uncertainty and risk” (Sylvie et al. 2008, p. 1). In the following, the functional management concept of media management will be taken on up and extended by the aspect of corporate leadership. Business leadership constitutes a goal-oriented, constructive intervention in the value creation process of a business. Hence, media management has an instrumental character because it serves to pursue overarching goals of a business. According to this terminology, media management should not be understood as an interdisciplinary science but rather as a management doctrine related to the media sector. Definition of Media Management Media management encompasses all the goal-oriented activities of planning, organization, and control within the framework of the creation and distribution of information or entertainment content in media enterprises (Wirtz 2000c).

1.2.8

Economic Significance of the Media

The necessity of business penetration of the media sector results from the growing significance of the media as an economic factor. The increasing coalescence of previously separate economic sectors, such as telecommunication, information technology, and media, results in considerable changes in the macroeconomy and requires a reorientation in the area of employment policy. It was the innovations of information and communication technology which brought about the change from an industrial society to an information society. The media, which are in part responsible for the distribution of information, played a special role in this process (Küng 2008). The underlying principle of this development can be illustrated with the concept of Kondratieff cycles, according to which the states of societal developments are essentially determined by technological innovations and yield sinusoidal waves or phases. Information and communication technology is a basic innovation of major importance similar to other fundamental technologies, such as the railway, electricity, or petrochemistry. It thereby provides the impetus for a technological, economic, and social change—the prevailing fifth Kondratieff cycle (see Fig. 1.6). This change has far-reaching consequences for the work environment. The information and communication sector is increasingly emerging as an independent (quaternary) sector of the economy as implied by Fig. 1.7. Accordingly, employment has significantly shifted from the traditional sectors of agriculture and industrial production to the information economy. This development has considerable consequences for the work environment, especially regarding changes in the occupational and employment fields, as well as the creation of new forms of employment (e.g., telecommuting).

1830-1850

1870-1890

2000-2005

6th Kondratieff

?

Information Society

5th Kondratieff

• Information technology

1950-1980

4th Kondratieff

• Automobile industry

• Petrochemistry

1920-1935

3rd Kondratieff

• Electrical engineering

• Chemical industry

Fig. 1.6 The development of a technological revolution. Source: Based on Nefiodow (2006), and Wirtz (2019a)

1780

2nd Kondratieff

• Steel

• Cotton

1st Kondratieff

• Railway

• Steam engine

Industrialized Society

20xx

1.2 Development of Media Management 13

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Foundations of Media Management

% Employment by sector (Share of the total number of employment in %)>

Forecast

60

Information management *

50

Production

40 30 20

Services 10 0 1882

Agriculture 1892

1902

1911

1921

1931

1941

1951

1961

1971

1981

1991

2001

2010

2030

Fig. 1.7 Evolution of the information society in Germany. Source: Based on Dostal (2006); Data source: Statistisches Bundesamt (2018) and previous records, Wirtz (2019b)

1.3

Development of Media and Communication Applications

The development of media and communication applications looks back on a long history. The basic prerequisites for modern media and communication technology were created in prehistoric times, in antiquity, and in the Middle Ages. In the broadest sense of the word, the first manifestations relevant to the media emerged during the Stone Age. Explicit knowledge (e.g., on animal hunting, hunting techniques, or the animals’ migratory routes) was preserved and passed down by means of cave paintings in the form of a symbolic language. The first cave paintings date back to approximately 30,000 B.C. and were discovered in the French Chauvet Cave. The first true writing system, however, developed only around 3000 B.C. Egyptian hieroglyphs, along with Sumerian cuneiform script, are considered to be the oldest known writing systems. Both writing systems were originally purely pictographic systems and were used primarily by the peoples of the Ancient Orient or Egypt and Nubia. The apex of the development of writing, however, was the development of the Phoenician alphabet. The exact origin of the Phoenician alphabet remains a mystery even today. The only thing that is certain is that the Phoenicians developed their alphabet around 1500 B.C. in the Eastern Mediterranean and that all subsequent modern alphabets, including the Cyrillic, Greek, and Latin alphabets, originate from the Phoenician alphabet. The writing materials necessary for the dissemination of information and knowledge were developed in antiquity along with the writing systems. The papyrus scroll is the best-known progenitor of the book form known today. The ancient Egyptians first used papyrus as writing material around 3000 B.C. Papyrus was further spread by the Greeks and was widely distributed throughout the entire Roman Empire.

1.3 Development of Media and Communication Applications

15

Although the first simple books in the codex form that is used today were already produced around 300 B.C. in Greece, the papyrus scrolls remained in use into the fifth century A.D. With the prevalence of papyrus scrolls and codex books, libraries assumed an increasing importance. The library of Alexandria, Egypt, founded in 285 B.C., for example, is considered to be the most important library of classical antiquity. During the course of time, more and more libraries were founded that served as knowledge bases for scholars and philosophers. Books were further circulated in the Middle Ages, especially by scribes and monks, who manually copied them. Figure 1.8 summarizes the milestones in the development of media and communication applications in prehistoric times, more precisely antiquity, and the Middle Ages. The printing press with flexible metal letters, developed by Johannes Gutenberg in Mainz, Germany, in 1450, is considered one of the most important media-related inventions. Gutenberg’s invention revolutionized the production of books and is considered the essential catalyst for the development of the media. Gutenberg’s printing press process created the prerequisites for the establishment of two media types, the newspaper and the magazine. Thus, the first newspaper in the world appeared in Strasbourg in 1605 under the German title “Relation aller fürnemmen und gedenckwürdigen Historien” and in 1665, Denis de Sallo published the first magazine in the world in Paris, France, under the title “Journal des sçavans.” A further groundbreaking invention in media and communication technology is attributed to Philipp Reis, who succeeded in building the first functioning electric telephone link in 1861 in Friedrichsdorf, Germany. Thus, Philipp Reis is considered the pioneer of the telephone. Based on Philipp Reis’ research, Alexander Graham Bell developed the Reis telephone to the point of marketability. Four years later, the Dane Hans Rasmus Johann Malling-Hansen invented the first typewriter capable of being mass produced, the so-called “Skrivekugle” (writing ball). The first passable transmission of a picture by means of a fax machine was realized by the German physicist Arthur Korn in 1904—the so-called “Korn transmission” via a telephone wire from Munich to Nuremberg and back. An essential invention for the music industry was the work of Emil Berliner from Germany. The native Hanoverian invented the gramophone and the disk record in 1887. Only one year later, the French Louis Le Prince produced the first movie in history. With his merely two-second long moving movie “Roundhay Garden Scene,” Louis Le Prince is considered the founding father of the movie industry. On this basis, the movie studio Warner Bros. produced the first sound motion picture ever in 1927 under the direction of Alan Crosland and with Al Jolson in the leading role. Two years later in Great Britain, the BBC broadcasted the first television program in the world. The most important inventions for the radio industry are attributed to Nikola Tesla, Guglielmo Marconi, and Alexander Popow. They are accredited with the development of the technical foundations for the radio in 1895. However, eleven years later, it was the Canadian inventor and radio pioneer Reginald Fessenden who first succeeded in transmitting the first radio program from Brant

3,000 B.C.

2,500 B.C.

1,500 B.C.

300 B.C.

In Greece, the first basic books are manufactured in the codex form which is common today

In the Middle Ages, writers and monks transcribe books in order to duplicate them

285 B.C. till 1,400 A.D.

Structured collection of knowledge in libraries, e.g. the library of Alexandria or the Celsus library in Ephesos

Fig. 1.8 Development of media and communication applications (prehistory to Middle Ages). Source: Wirtz (2013a, 2019b)

The Phoenicians develop the Phoenician writing in the Eastern Mediterranean area

The Egyptians first use papyrus as writing material – papyrus served as writing material till the 5th century A.D.

1

About 3,000 years B.C., the first writing systems develop, e.g. the cuneiform writing in Mesopotamia or the hieroglyphs in Egypt

30,000 B.C.

In the Stone Age, messages are left in the form of cavepaintings

Development of media and communication applications (prehistory to Middle Ages)

16 Foundations of Media Management

1605

1861

1865

1887

Rasmus MallingHansen invents the first typewriter which is ready for serial production

1895

1904

1929

Broadcast of the first TV show by the BBC

1927

First feature-length sound film directed by Alan Crosland

Reginald Fessenden broadcasts the first radio program from Brant Rock

1906

First acceptable transmission of a picture via fax machine by Arthur Korn

Invention of the technical basics of the radio by Nikola Tesla, Guglielmo Marconi, Alexander Popow

1888

Louis Le Prince presents the first motion picture film named “Roundhay Garden Scene”

Invention of the telephone and Emil Berliner invents setup of the first functioning the gramophone and voice com-munication by the disk record Philipp Reis

1665

Denis de Sallo publicizes the first magazine in the world, the “Journal des Sçavans”

Fig. 1.9 Development of media and communication applications (1450–1929). Source: Wirtz (2013a, 2019b)

Johann Carolus founds the world‘s first newspaper called “Relation”

1450

Johannes Gutenberg invents the printing press with flexible metal letters

Development of media and communication applications (1450 to 1930)

1.3 Development of Media and Communication Applications 17

18

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Foundations of Media Management

Rock, United States. Figure 1.9 summarizes the abovementioned milestones in the development of media and communication applications from 1450 to 1930. The period before 1930 was primarily shaped by fundamental inventions in media and communication technology. After 1930, these fundamental inventions were continuously refined and supplemented. In 1941, the German civil engineer, inventor, and businessman Konrad Ernst Otto Zuse invented the first fully automatic, program-controlled, and freely programmable computer in the world. On this basis, Alexander “Sandy” Douglas developed the first graphic computer game Noughts and Crosses at the University of Cambridge, Great Britain, and is thus considered the pioneer of the computer game industry. A further essential development for the video and computer game industry, made in 1967, is attributed to the German-American game designer Ralph Baer, who created the first game console, “Odyssey,” that was meant for home use. Finally, via its introduction of the personal computer in 1981, IBM paved the way for private home computers and set basic standards for media and communication technology. The program Windows 1.0, introduced four years later, facilitated this development. The graphic user interface simplified use of the MS-DOS operating system. The music industry was especially shaped by developments that allow sounds or voices to be stored and distributed. The first functional magnetic tape recorder, developed in 1935 by the German engineer Eduard Schüller, is considered the basis for the cassette and the associated tape recorder introduced by Philips in 1963. Only 19 years after the invention of the tape cassette, Philips and Sony introduced the CD and the CD player (1982). For the TV and movie industry, the development of the video recorder in 1951 by the US-American pioneer of magnetic tape recording, Charles Paulson Ginsburg, was important in connection with storage and distribution. The introduction of color television in the United States in 1953 is considered a further important milestone in the development of media and communication technology for the TV and movie sector. Further important accomplishments that were pivotal for the increasing digitalization of media and communication technology were the initiation, in the United States, of the first worldwide mobile communications network (in 1946) and the first decentralized network, ARPANET, created by Paul Baran and Donald Watts Davies in 1969. Figure 1.10 summarizes the abovementioned milestones in the development of media and communication applications from 1931 to 1985. With the debut of the World Wide Web in 1989, the Internet has shaped the media to an increasing extent and triggered a digitalization trend in media and communication applications that continues today. Thus, for example, the radio station WXYC was the first traditional radio station that, starting in 1994, transmitted its program over the Internet (89.3 FM Chapel Hill, North Carolina, United States). Further, Zattoo was the first station to transmit broadband applications such as television programs and movies over the Internet. Innovative firms were created that offered their services for finding and organizing information already present in the Internet. Google Incorporated, founded by Larry Page and Sergei Brin on September 4, 1998,

1941

1946

1952

1963

1969

Fig. 1.10 Development of media and communication applications (1931–1985). Source: Wirtz (2013a, 2019b)

Ralph Bear develops the first game console called Magnavox Odyssey

1967

1985

Microsoft releases Windows 1.0

1982

Philips und Sony launch the CD and the CD player

Presentation of the first “personal computer” by IBM

1981

Philips presents the tape Paul Baran and Donald cassette and the related Watts Davies develop the tape recorder first decentralized network called ARPANET

Launch of the color TV in the United States

1953

A. Sandy Douglas develops the first graphical computer game

Charles Ginsberg develops the first functioning video recorder

1951

Launch of the first worldwide mobile communications network in the USA

Konrad Zuse creates the first fully automatic, program-controlled and freely programmable computer

1935

Eduard Schüller invents the first functioning tape recorder

Development of media and communication applications (1931 to 1985)

1.3 Development of Media and Communication Applications 19

20

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Foundations of Media Management

is the best-known enterprise in this context that aims “to organize the world’s information and make it universally accessible and useful” (Google 2011). In the music industry, digitalization advanced to the point that a standardized procedure for the storage and transmission of music (MP3) could be introduced in 1995. The MP3 format was developed in 1982 by a group led by Karlheinz Brandenburg and Prof. Dr.-Ing. Hans-Georg Musmann at the Fraunhofer Institute for Integrated Circuits in Erlangen, Germany, and at the Friedrich-Alexander University of Erlangen-Nürnberg, Germany, in collaboration with Thomson and AT&T Bell Labs. On this basis, Apple Inc. succeeded in establishing digital music distribution with the development and marketing of iPod and iTunes. Another important trend in the development of media and communication technology was set by the introduction of the first smartphones by Nokia in 1996. This trend was facilitated by the refinement of the mobile communications network. Hence, the introduction of the first UMTS network worldwide, in 2001, on the Isle of Man by the firm Manx Telecom, which is domiciled there, is considered an essential milestone of mobile media and communication technology. Finally, three other innovations in the field of media and communication technology are worth mentioning: (1) the increasing establishment of smartphones with the introduction of the first iPhone in 2007, (2) the sale of the first television with 3D playback technology since 2010, and (3) the third generation of the Apple Watch introduced by Apple in 2017, which not only is capable of recording health data (pulse, steps, sleep patterns, etc.) but also makes multimedia applications accessible on a watch and synchronizes personal online profiles by means of the Internet. This further strengthened the trend toward wearable technologies. Figure 1.11 summarizes the abovementioned aspects of the development of media and communication applications from 1986 to 2017. Knowledge Review Questions 1. Name four development stages of media and communication applications in the time 1931–1985! 2. How does the traditional use of the media differ from media use in the age of the Internet? 3. What are the characteristics of media enterprises?

1995

1996

2001

Lawrence Edward Page und Sergei Brinfound the internet service provider Google Inc.

1998

Apple establishes the digital music distribution with the help of iTunes/iPod

2006

2017

2019

Implementation of LoRa-WAN as a communication network

The 3rd generation of Smartwatch from Apple consolidates the trend towards wearable technologies

2010

Sale of the first television sets with 3D playback technology

Apple introduces the first iPhone and starts the trend towards the smartphone

2007

Zattoo first to broadcast broadband applications, such as TV programs and movies over the Internet

2002

Manx Telekom implements one of the first UMTS networks at the Isle of Man

Fig. 1.11 Development of media and communication applications (1986–2019). Source: Wirtz (2013a, 2019b)

Karlheinz Brandenburg develops a standardized method to store and to transmit music (MP3)

1994

Start of the World Wide Web

1989

As the first traditional radio Nokia develops and station WXYC (89.3 FM sells the first Chapel Hill, NC USA) broadcasts via the Internet smartphones

Development of media and communication applications (1989 to 2019)

1.3 Development of Media and Communication Applications 21

2

Characteristics of Media Management

Media markets have characteristics that differ from those of other sectors. These characteristics must be taken into account to successfully manage media enterprises. Thus, this chapter will first provide a market definition in the media sector and then go on to discuss the multidimensional competition in the media markets. On this basis, the special features of media products and the structure of the media markets will be explored.1

2.1

Market Definition in the Media Sector

Economic competition constitutes a dynamic process in markets. In order to portray the action parameters of media enterprises, it stands to reason that first the markets in which the media enterprises participate should be classified. An overview of the relevant markets is provided in Fig. 2.1. The specific characteristic of media enterprises consists of the fact that they sell their services not only in one market but in two business markets simultaneously. The services that media enterprises usually provide represent a service package of information and entertainment (content) on the one hand and advertising space on the other hand. These two services, however, are traded on different markets. For the content, the consumer markets are relevant. In media sciences, consumers are referred to as “recipients.” Figure 2.1 shows that the business markets on the consumer side primarily differ according to the type of media and the manner in which the recipients consume the media content (e.g., as readers or listeners). The advertising spaces, however, are traded on the advertising markets with the advertising industry.

1

See also for the following chapter Wirtz (2011b, 2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_2

23

24

2

Characteristics of Media Management Readership markets

Newspaper markets

Primary nonelectronic media markets: print markets

Advertisement markets Procurement markets

Readership markets

Magazine markets

Advertisement markets Procurement markets Readership markets

Book markets

Advertisement markets Procurement markets Audience markets

Film markets

Media markets

Advertisement markets Procurement markets Audience markets

TV markets

Advertisement markets Procurement markets Listener markets

Primary electronic media markets

Radio markets

Advertisement markets Procurement markets Listener markets

Music markets

Advertisement markets Procurement markets User markets

Video and computer game markets

Advertisement markets

Internet markets

Advertisement markets

Procurement markets User markets Procurement markets

Fig. 2.1 Market definition in the media sector. Source: Wirtz (1994, 2019b)

Media enterprises usually do not produce all the content contained in their service packages themselves. For this reason, the procurement markets for content are also important in both the information and entertainment segments. The relevance of the procurement markets varies because the portion of the self-produced content takes on different extents, depending on the respective sector as well as within the sector. Furthermore, the procurement markets for content also constitute, to some extent, business markets. The enterprises can, for example, purchase the complete rights to an event and then resell them in the form of secondary utilization rights. In addition, enterprises can also reuse their own productions. Within the framework of this textbook, the enterprises examined are primarily those that produce content that is utilized within their own media spectrum and for whom exploitation of the content markets is only a secondary goal. Aside from the content markets, media enterprises are active in further procurement markets such as the finance or human resources markets.

2.2 Multidimensional Competition

25

Money

Target group

Advertisement market

Media and internet companies

Content procurement market

Procurement success

Content structure

Recipient market

Fig. 2.2 Interdependencies in the media market. Source: Wirtz (1994, 2019b)

Because these markets do not have any fundamentally media-specific characteristics, they will here only be addressed to the extent to which they are relevant to the media sector. Figure 2.2 portrays the submarkets of the media sector. It becomes clear that there are strong interdependencies between these submarkets. The relationships between the markets, however, differ in their intensities. A very strong relationship exists between the content market and the recipient market because the attractiveness of the content plays a decisive role in determining the level of demand. There is an equally strong relationship between the advertising and the recipient markets because the success among recipients substantially influences the amount of advertising revenue. Primarily in those areas in which content procurement is associated with high investments, such as for broadcasting licenses for sports broadcasts in the TV segment, the potentially attainable advertising revenue is an important variable for the amount of investment and, finally, a variable for the content’s attractiveness.

2.2

Multidimensional Competition

The competition between media enterprises can be analyzed in different dimensions. The type of competition is the first dimension. The different submarkets in which the media enterprises compete with one another constitute the second dimension. The difference between intramediary and intermediary competition is the third dimension of competition. Finally, the fourth dimension concerns the object of competition itself and thus raises the question of what the media enterprises are competing for.

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Characteristics of Media Management

These four dimensions of competition among media enterprises will be individually addressed below. Regarding the first dimension of competition among media enterprises, two types of competition may be distinguished, i.e., economic and journalistic competition. The difference between economic and journalistic competition lies in the application of diverse standards for evaluating the results of the competition. Competition is referred to as economic competition if its standard for success is expressed in monetary terms and can be measured in profits, market shares, or sales figures. Journalistic competition, however, underlies more strongly qualitative measures of success such as timeliness of the information, diversity of opinion, or balanced reporting. Concerning the second dimension, a subsegment analysis of the competitive market is carried out. In this context, for media enterprises, the competition on the recipient markets is the most important one. On the recipient markets, a significant portion of the revenues is realized and success in those markets has a major influence on the success in the advertising market. Regarding differing shares of the advertising revenues with regard to the total revenues, the competition in the advertising market varies in intensity according to the different types of media. The same applies to the procurement markets because the share of in-house and outsourced productions varies from media sector to media sector. The distinction between intermediary and intramediary competition constitutes the third dimension of media competition. On the one hand, all media products are subject to competition that is intrinsic to the products’ category. This is called intramediary competition because here the various products of one media category compete with each other in all markets. Supra-regional daily newspapers or television broadcasters are examples of this kind of competition. On the other hand, different types of media compete with each other. For example, the print and TV products compete with each other (intermediary competition). The intensity of the competition depends on the interchangeability of the media. The interchangeability between the individual types of media differs and depends on the functions they are meant to fulfill for the recipients. Thus, for example, there is a higher level of interchangeability between newspapers and the Internet than between newspapers and TV, because TV programs, in contrast to newspapers, employ moving pictures and are primarily used for entertainment. The question of the object of competition as the fourth dimension of media competition is relevant only for the consumer market. Whereas the competition for advertising sales in the advertising markets and the content procurement markets is determined by attracting content, the competitive situation in the consumer markets is ambiguous. On the one hand, media enterprises compete for the purchase of media products, but on the other hand, they also compete for the time budgets and the attention of their recipients. Figure 2.3 summarizes the four dimensions of competition among media enterprises.

2.3 Product Specifications

27

Dimensions of competition among media enterprises 1st dimension: economic vs. journalistic competition • The economic competition is expressed by quantitative success standards (e. g. profit, market share, sales and turnover figures) • The journalistic competition is expressed by qualitative success standards (e. g. currency and quality of information, diversity of opinion)

2nd dimension: multimarket competition • Submarket-specific view of the competition of media enterprises (recipient markets, advertisement markets, procurement markets) • Recipient markets are particularly important for media enterprises because of its high share of revenue and therefore the influence on the success on the advertisement markets is high

3rd dimension: intermediary vs. intramediary competition • The intermediary competition describes the competition of media types, whereby the intensity of competition depends on the inter-changeability of the particular media types • The intramediary competition describes the competition of different products of a media category on all relevant markets

4th dimension: components of demand competition • Relevant for the consumer markets only • There is a competition about the expenses for the purchase of media products, about the time budget and about the recipients‘ attention • Thereby, the opportunity costs of the recipients should especially be considered

Fig. 2.3 The four dimensions of competition among media enterprises. Source: Wirtz (2011c, 2019b)

2.3

Product Specifications

“The first and most serious mistake that an analyst of the television industry can make is to assume that TV stations are in business to produce programs. They are not. TV stations are in business to produce audiences. These audiences, or means of access to them, are sold to advertisers” (Owen et al. 1974, p. 4). This statement by Owen, Beebe, and Manning can be applied to nearly the entire media sector and highlights the fact that media are complex products that combine multiple product qualities. These product specifications, inter alia, result from the revenue structure and the production process of media. Given that the product specifications concern numerous aspects of management, such as product policy, they are addressed more closely in the following.

2.3.1

Media Products as Combined Products

Media revenue can usually be broken down into sales and advertising revenues. Media are simultaneously marketed in recipient and advertising markets, in which

28

2

Input actors

Characteristics of Media Management

Product categories

Actors of the recipient market

Combined products Own editorial offices, news agencies etc.

Content

Recipients

Advertising companies, advertising market

Advertisement

Recipients

Fig. 2.4 Media products as combined products. Source: (2011c, 2019b)

they offer specific services. In the recipient market, the service consists of a combination of information and entertainment content. Whereas the advertising market is characterized by the opportunity to transmit an advertising message via the medium to the recipients. Thus, media enterprises seek to attain the highest possible number of target group contacts while simultaneously minimizing wastage (Martin 2005). Since the service in the advertising market cannot be rendered independently of the service in the recipient market, as both service components are combined in one final product, media production always is a combined production. In the creation of a media product, the demands of both the recipients and the advertising clients must be taken into account equally in order to guarantee long-term market success. Hence, the demands of newspaper readers for objective and comprehensive coverage must be balanced against the interests of the advertising clients that show a clear commercial target group orientation. Figure 2.4 summarizes the issue of media products being combined products.

2.3.2

Media Products as Public Goods

Media products exhibit some of the characteristics of public goods. Typical features of public goods are the non-exclusivity of consumption and non-rivalry in consumption. Non-exclusivity of consumption refers to the fact that no recipient can be prevented from using a public good. Therefore, the use of the good cannot be made subject to remuneration. The second feature, non-rivalry in consumption, refers to the fact that consumption by an individual recipient does not limit the consumption by remaining recipients. The criterion of non-exclusivity of consumption, for example, applies to the TV sector because the use of unencrypted programs is difficult to prevent. For this reason, no remuneration is charged for the use of unencrypted TV programs. Instead, the program is financed by fees or advertising revenues. The assumption of non-exclusivity of consumption in the print media is questionable, however, because

2.3 Product Specifications

29

the media contents are linked to the carrier medium “paper.” Hence, every reader has to purchase a newspaper and can exclude other potential readers from consumption by keeping the newspaper to him- or herself. Regarding non-rivalry in consumption, it is necessary to distinguish whether the consumption concerns only the content or also the respective carrier medium. When considering the content on its own, the characteristic of non-rivalry is applicable because the information or entertainment content does not wear out through consumption. In the area of television, for example, this means that each viewer, independent of the total number of viewers, may consume the same program in the same quality. However, it becomes more complicated when the carrier medium has to be taken into consideration. Looking at video streaming via the Internet, for example, the number of simultaneous accesses affects the server in question, so that the quality of the product may suffer.

2.3.3

Media Products as Services

Media products are a composition of physical products and services. Services primarily refer to intangible activities that are not associated with direct changes in ownership. The service provision, however, can be connected with a tangible asset. As constituent characteristics of services, the following features are considered: intangibility of the product, the allocation of effective services in terms of personnel, material, or immaterial resources, and the integration of external factors. The reason for the immateriality of services is due to the fact that service implementation requires performance potentials, which are intangible and not perceptible prior to its realization. The immaterial nature of services results in the hindered storage and transportation. This means that a service can only be used at the time and place of its production. The necessary allocation of service productivities means that specific capabilities, such as know-how, are required to produce the service. The integration of external factors is mentioned since the subject or object for which the service is carried out lies beyond the enterprise’s influence and the success of the service production is thus, at least in part, heteronomous. At the moment of production, media conform to the constituent characteristics of a service. Thus, media are to a large extent immaterial goods. For example, in the performance of a piece of music, voices and sounds are necessary that are created exactly at the moment of performance. The participating musicians and instruments represent the material and personnel resources that are necessary to compile the service “music.” The listener for whom the service is performed constitutes an external factor. Based on the fact that human performance dominates in the process of creating the service, a musical performance, like many other media products as well, may be characterized as a personal service.

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Characteristics of Media Management

As soon as a media product is stored on a data medium, for example, on a CD or as an MP3, it loses part of its service character and becomes a material good to which the constitutive characteristics of services no longer fully apply. Since storage on a carrier medium is necessary for most media companies in order to make the product accessible to the customer, media are referred to as refined services, some of which are material goods and some of which are services.

2.3.4

Media Products as Meritorious Goods

Media products are frequently referred to as meritorious goods. Those kinds of goods are characterized by a small-scale demand regarding a socially desired level of penetration that is determined by official decision-makers. Therefore, it is concluded that the consumer preferences have to be adjusted through subsidization or consumer stress and pressure to consume. This is reflected, for example, in a lower sales tax on printed products or in fixed book prices that are justified by the goal of promoting diversity of opinion and providing a diversity of information. Regarding meritorious goods, there are concerns that perfect competition can lead to adverse selection. Relating to media, the recipients are not able to assess the quality of the media products because of asymmetric information. Thus, they are only willing to pay an average price for those products. Suppliers offering qualitatively more valuable products and intending to charge a higher price for their service are elbowed out of the market due to the consumers’ low willingness to pay. Instead, those suppliers will survive who offer lower-quality products, designed to make profits at an average price. Adverse selection especially occurs considering experience goods that are not consumed regularly. This, however, is usually not the case for media products that are not individual items. Thus, customers of a newspaper can assess the quality of the information and draw comparisons after several purchases. The seller is likewise interested in building a reputation for quality in order to ensure product sale. Thereby, products other than only low-quality products are available on the market. Another way to solve the problem of asymmetric information is through the intervention of reliable third parties who regularly screen and guarantee the quality of the products. In this context, government agencies come into play making the supplier’s authorization dependent on compliance with specific standards, e.g., the competent state media authorities that grant licenses for radio broadcasts. Apart from that, nongovernmental institutions, such as consumer protection organizations or professional associations, can also take on watchdog functions. However, the question of whether media products are meritorious goods is quite controversial because the assessment is ultimately based on value judgments. Beside the view that media products are meritorious goods, there are other opinions that some media products manifest rather demeritorious characteristics. That means that certain media products are consumed to a greater extent than what is societally desirable. A frequently cited

2.3 Product Specifications

31

example is the undesirable broadcasting of children’s programs that portray violence.

2.3.5

Quality of Media Products

In communication science literature the cultural dimension of media products is regularly emphasized. The discussion primarily focuses on the quality of media products. For the management of media enterprises, this poses the question of whether and how the quality of media products can be assessed by the media enterprises and the recipients as well as to what extent it can be influenced by the management. Because of its merely subjective measurability, it is precisely the quality of media products that is an important factor for media management. Indeed, in journalism, the timeliness, relevance, correctness, and transmission of information are overwhelmingly cited as objective criteria for the quality of media products. But even these criteria are finally subjective and do not apply to the area of entertainment. Thus, the quality of media products can only be planned and controlled by the management to a limited extent. Quality can neither be guaranteed at the beginning of the production phase nor controlled at will during the production phase. However, a positive correlation between the available budget and the quality of a media production is generally assumed. But usually this is an average consideration for which huge outliers on both ends of the scale frequently occur (Owen and Wildman 1992). Moreover, the management’s limited influence on the quality of media productions is due to the fact that media production is a creative process that frequently cannot be standardized. For example, regarding movie productions, the intuition and creativity of the director play a paramount role when it comes to the quality of the output. Neither factor, however, can be influenced to a great extent. Radio programs, on the other hand, are frequently led by headstrong star radio presenters who play a decisive role in the consumers’ perception of the product. Finally, the content of the advertising, which is part of the product and contributes to its overall impression, can also be influenced only to a limited extent. From the recipient’s perspective, the quality assessment of media products is likewise problematic. When testing quality, basically three quality characteristics can be derived from the consumers’ perception: search qualities, experience qualities, and credence qualities. Search qualities can be assessed by the consumer, at least in part, through inspection prior to purchase. Experience qualities can only be assessed after consuming the product. With respect to credence qualities, even after consuming the service, the consumer has no opportunity to assess the quality. The relationship between these three quality features is portrayed in Fig. 2.5. Some media products only manifest search qualities to a limited extent. Many information and entertainment products have already been depleted through the initial consumption. Hence, a quality assessment of these media products is not

32

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Majority of the material goods

Characteristics of Media Management

Majority of the services

Legal advices

Car repairs

Medical diagnoses

Restaurants

Furniture

Jewelry

Clothing

-

Experience qualities dominant

-

Media products (newspaper, internet offer, TV program, other)

-

-

-

-

-

-

-

Search qualities dominant

-

-

-

-

-

Cars

Difficult to judge

Houses

Easy to judge

Credence qualities dominant

Fig. 2.5 Quality assessment of tangible assets and services. Source: Based on Zeithaml (1991), and Wirtz (2019b)

possible prior to consumption. For instance, the quality of the information contained in a newspaper article can only be assessed after it has been read, but at the same time there is no necessity to reread the consumed information. The same is true for books, as the entertainment value can also only be assessed after the book has been read. Hence, many media are experience goods. Consumers can, however, try to make conjectures about the quality prior to consumption by means of product features, such as the author. If the quality of the media product cannot be assessed by the recipient even after consumption, additionally, credence qualities are present in the media sector. This is the case to some extent in the area of information. Although the recipient can gauge whether the need for information was fulfilled, he or she is often unable to pass judgment on the correctness and completeness of the information. Figure 2.6 summarizes the specifications of media products.

2.4

Market Structure

An analysis of the market structure provides information on the intensity of competition within the sector. Therefore, conclusions can be drawn regarding the profitability of the business in the sector and the strategic options available to the management of media enterprises in order to pursue their business goals. For media management, two aspects of the market structure are of special significance: the concentration, i.e., the supply and demand structure in the respective markets, as well as market entry barriers that exist for established and new suppliers (Fu 2003).

2.4 Market Structure

33

Product specifications of media products Media products as combined products

Media products as public goods

Media products as services

Media products as meritoric goods

Quality of media products

• Media revenues are made up of sales revenues and advertising revenues

• Non-exclusivity of consume: no recipient can be restrained of using public goods, the use is free

• Media products fulfill the constitutive characteristics of intangible services at the time of production

• Meritoric goods are characterized by a lower demand as socially desired

• The influence of the management on the quality of media products is limited because the media production normally is a creative process which is difficult to standardize

• The service on the advertisement market cannot be performed independently from the service on the recipient market • Both service components have to be combined within a final product

• Non-rivalry concerning the consume: a recipient‘s consume does not limit the other recipients‘ consume

• These services are called refined services because most of the media companies consider a storage on a carrier medium as necessary

• The demand has to be adjusted with the help of subsidization or compulsion to buy (e. g. lower VAT on print products)

• Quality features from the recipient’s point of view are: search qualities, experience qualities and credence qualities

Fig. 2.6 Product specifications of media products. Source: Wirtz (2011c, 2019b)

2.4.1

Concentration

To assess competition within a sector, concentration is frequently used as an indicator wherein a positive correlation between the number of suppliers and the intensity of competition is assumed (Scherer and Ross 1990). The absolute concentration results from the total number of active suppliers in a market. But given that the size of this number does not permit conclusions about the supplier’s market power, the relative concentration is used as a standard for concentration. The relative concentration is the product of the accumulated shares of turnover from the largest three, six, or ten market participants in comparison to the total turnover in the relevant market. When assessing media market concentration, one must consider that media enterprises are operating in consumer, advertising, and procurement markets, which are characterized by different demand situations. Accordingly, there are different types of markets and behaviors in the submarkets. Hence, a polypolistically structured market with numerous consumers and a small concentration is assumed in the recipient markets. In the advertising markets, there are indeed multiple consumers, but it is rather rare that one advertiser holds a major market share. Consequently, the market concentration is moderate. Only a few procurement markets, such as the market for broadcasting rights for sports events, are dominated by a few suppliers that can exercise considerable power in those markets (Hoskins et al. 2004; Noam 1983).

34

2.4.2

2

Characteristics of Media Management

Market Entry Barriers

Market entry barriers are defined as “anything that requires an expenditure by a new entrant into an industry but imposes no equivalent cost upon an incumbent” (Baumol et al. 1988, p. 198). They decrease the probability of a new supplier entering into a market, thus protecting the established enterprises. There are three different kinds of market barriers: structural, strategic, and institutional. Structural market entry barriers are caused by media product characteristics and the media production process. Economies of scale and network effects, switching costs, increasing returns, and the spiral effect belong to structural market entry barriers. Economies of scale result from the structure of media production costs. The production of media is characterized by a high proportion of fixed costs. When a media product, such as a movie, is created, considerable costs are incurred for the technical and human infrastructures as well as for the rights of use. These so-called first copy costs are necessary for the creation of the first copy of the media product and are independent of the number of subsequent media users. If the first copy costs are high and the respective variable costs of the production comparably low, considerable economies of scale can be realized. This means that the average costs rapidly decrease as the output increases. Since first copy costs are allocated to all the copies produced, the higher the number of copies produced, the lower the average costs (cost degression effect). This effect can be observed in all media sectors but especially in digital products such as video games. The fixed costs for the production of a video game are relatively high, but the variable costs for reproduction by means of pressing the game on DVD or Blu-ray discs are comparatively low. This means that an increase of the output rapidly decreases the average costs per copy (see Fig. 2.7). First copy costs lead to a high financial risk for the production of media products because they usually constitute sunk costs, i.e., irreversible costs (costs incurred in

Average costs

Significant cost degression effects First copy costs

Number of recipients

Fig. 2.7 Economies of scale by means of first copy costs. Source: Wirtz (2000c, 2019b)

2.4 Market Structure

35

the past that can no longer be retroactively influenced) that cannot be recovered in case of failure. High first copy costs act as market entry barriers because many potential suppliers are not in a position to incur the risk of an unprofitable investment. Furthermore, the economies of scale favor an established supplier with a high production capacity. New suppliers are forced to enter the market with production capacities similar to those of established suppliers and to quickly achieve a high number of units in order to avoid competitive disadvantages from high average costs. Aside from economies of scale, there are also economies of networks associated with media products (Economides 1996). These describe the external effects arising in real or virtual networks through the increasing number of users. In real networks, there is an actual, physical interconnectedness (e.g., via the Internet), whereas virtual networks consist of groups that use the same product (e.g., users of the LINUX operating systems). If the value of a network increases with the number of its users, there are direct network effects. With direct network effects, an increasing number of users are tantamount to an increase in the network’s efficiency. Metcalfe’s law seeks to express this relationship mathematically: “The value of a network goes up as the square of the number of users” (Shapiro and Varian 1999, p. 184). Indirect network effects primarily concern goods that consist of a basic product and different complementary products (e.g., operating systems and application software). Here, a large number of users of an operating system frequently lead to an expanded supply of complementary products that in turn indirectly enhances benefits associated with the basic product. For example, in the market for video game consoles, one can observe indirect network effects because the video game console provider with the highest market share usually offers the largest amount of games. Individuals’ participation in a specific network requires investments in goods that facilitate affiliation with the network. These investments can be both monetary (e.g., the purchase of a pay-TV decoder) and non-monetary (e.g., time that a user invests in understanding and handling a software product). Switching to another network renders, these investments are worthless since these then become sunk costs. Switching costs consist of investment and opportunity costs. Investment costs are those costs that are related to integration into the new network. Opportunity costs arise if participation in one network excludes the participation in another network. Switching costs lead to a lock-in effect, i.e., to a certain extent, the participants are committed to the network initially chosen (Shapiro and Varian 1999). In order to facilitate communication between the network participants, compatibility decisions must be made. Compatibility is achieved through uniform interface configuration (standardization). With the chosen standardization strategy, the supplier of a network can significantly influence exchange costs and thus the strength of the lock-in effect. The higher the switching costs, the more expensive it is for the user to join another network. Competing systems have to be in a position to compensate switching costs with substantial additional benefits. Positive network externalities, high first copy costs, and high switching costs can lead to increasing returns. Positive feedback is created through direct and indirect

36

2

Characteristics of Media Management

network effects. The higher the number of consumers who join a network, the higher the network’s attractiveness. Decreasing average costs due to economies of scale facilitate price reductions, whereas high switching costs hinder the consumers’ migration to competitors. In the media sector, network effects can be found, for example, in the areas of TV, Internet, and video and computer games. Hence, an increasing number of participants in a cable network leads to an expanded offering of stations and thus to positive feedback. In the Internet, an increasing number of users lead to an increase in services. This applies, for instance, to peer-to-peer networks. By means of strategic decisions, e.g., regarding standardization, the management of a media enterprise can contribute considerably to a network’s success and establish high market entry barriers for new suppliers. Another structural market entry barrier is the spiral effect, which describes the interdependent effects between advertising markets and recipient markets. This effect arises when revenues in the advertising markets increase in an overly proportional manner due to high market shares in the recipient market. Investments in increasing product attractiveness thus become affordable, further increasing the market shares in the recipient market. The spiral effect may be observed primarily in media with a high share of financing through advertising, e.g., in newspapers and magazines. Strategic market entry barriers serve to prevent the entry of new suppliers into the market. For example, product differentiation strategies act as strategic market entry barriers since they serve to exploit market potentials to reduce the sales potential for new suppliers. Institutional market entry barriers are based on legislative or administrative measures. They affect primarily the areas of TV and radio because these are mostly subject to strict regulation. For example, state-regulated broadcast licensing can be designated as an institutional market entry barrier. Figure 2.8 summarizes the individual market entry barriers.

2.5

Changes in Media Usage Pattern

The media usage pattern has changed considerably over time. The following section portrays the change in the media usage pattern by means of various figures. The development of the media usage pattern is closely connected to technological developments or media prevalence. Figure 2.9 illustrates the speed of technology diffusion of different types of media in the United States. While radio, color TV, and the microcomputer have all taken a similar amount of time (about 10 years) to reach 50% of US households, modern information and communication technology (developments of the last 10 years) evolved twice as fast. It took only 4 years for smartphones and 6 years for social media to reach more than 50% of US households (Ritchie and Roser 2019). Altogether, technology diffusion is becoming faster and faster and the number of technological devices is increasing rapidly. While in the past there were only TV and

2.5 Changes in Media Usage Pattern

37

Market entry barriers Structural market entry barriers

Strategical market entry barriers

Institutional market entry barriers

• Structural market entry barriers arise from the product characteristics and the media production process

• Strategical market entry barriers are used by the market participants to complicate resp. to prevent the entrance of new suppliers in the existing market

• Entry barriers justified by legislative or administrative measures: in particular tariff and non-tariff trade barriers

• Economies of scale and network effects, exchange costs, increasing returns and the spiral effect belong to structural market entry barriers in the media economy

• In the media branch, market participants can strengthen existing barriers, signal/ implement retaliations resp. react accordingly if a new market participant appears (e. g. price war or quality reduction)

• Institutional market entry barriers in the media branch can be located especially in the TV and radio sector (e. g. state-controlled issuing of broadcasting licensing or the fee financing of the public service broadcasting in different nations)

Fig. 2.8 Overview of market entry barriers. Source: (2011c, 2019b) % of households (USA)

Radio

100

Mobile Phone Internet 80

Colour TV Smart phone Social Media usage

Cable TV 60 reaching 50% of the house holds in the USA

Tablet 40

Microcomputer

Podcasting Ebook reader

20

0 1925

1935

1945

1955

1965

1975

1985

1995

2005

2015

Fig. 2.9 Development of information and communication technology in the United States. Data source: Ritchie and Roser (2019)

radio, nowadays more and more devices and services for media use are developed (e.g., tablets, smartphones, ebooks). Since the advent of the Internet in the mid-1990s, new technologies emerged, spreading much faster than before. A main reason for this development is the increasing interdependence between users, technologies and services, the resulting network effects, as well as the numerous changes of technologies. These aspects create a very strong dynamic in the media market, which in turn leads to changes in user behavior and the development of new technologies.

38

2

Characteristics of Media Management

In recent years, the time that people devote to media use has constantly increased due to new media and technologies and amounted to over 10 h and 25 min/day in 2017. The major portion of daily media use is attributed to the radio (2017: 178 min/ day) and to TV (2017: 248 min/day). The Internet has gained increasing importance since 2000. Between 2000 and 2005, the usage time had increased by about 238% to 44 min/day and further rose to about 149 min/day in 2017. Although the usage time of print media had increased by 9 min between 1995 and 2005, it has ever since declined significantly reaching a lower level in 2017 (31 min) than back in 1995 (see Fig. 2.10) (Wirtz et al. 2006b).2 In the future, a moderately increasing media usage may be expected. It can be assumed that Internet use, in particular, will further increase, while the use of radio, classical television, and the print media will stagnate or decrease. The first signs of the significance that the Internet has garnered as a mass medium can be seen primarily among the younger media consumers. For male youth, the computer is the most important medium, even more important than television, and for young people in general, the Internet is an important part of daily life. Even among elderly people, the use of this medium is expected to considerably increase in the next few years. This circumstance is primarily attributable to the fact that various media products will be incrementally distributed via the Internet. In this context, music and TV in particular but also radio, magazines, and newspapers will be accessed more intensely via the Internet—not least due to current developments regarding mobile Internet via smartphones and other mobile devices. This will have a considerable influence on the usage of traditional sound carriers (physical carrier media such as CDs). The daily usage time has an average of 19 min/ day by 2017. To a large extent, traditional sound carriers are being replaced by digital storage media such as mp3, whose compatibility with various types of terminal equipment is convenient for the recipients. Even TV and radio are affected by this development. Because the Internet has a return path, TV programs distributed over the Internet can be supplemented by interactive functions. Based on the dynamic growth of the broadband market, however, one can expect a greater usage of Internet TV and a decline in the use of traditional TV by 2017.

2.6

Changes in the Advertising Markets

Along with changes in the recipient markets, the development of advertising revenue is of particular importance for media enterprises. There are clear correlations between the advertising market and the global economy. After the bursting of the dotcom bubble and the financial crisis in 2008, advertising revenues sharply decreased. That means that there is a dependence of the media branch on other 2

Study has been carried out among German recipients.

1995

56

158

162

0 14

6:30h

+4%

+17%

+27%

+57%

2000

58

185

206

13 22 30

44

2005

65

202

193

+30%

+12%

+9%

-6%

+36%

8:04h +238%

8:54h

-22%

+10%

-3%

+10%

+89%

2010

51

223

187

33

83

9:37h

2015

50

225

186

26

115

-38%

+10%

-4%

-27%

+30%

2017

31

248

178

19

149

10:25h

-15%

+4%

-3%

-3%

+16%

2020**

26

259

173

18

173

-30%

+7%

-5%

-5%

+23%

* From the age of 14 up, Monday to Sunday in Germany

-2%

+1%

-1%

-21%

+39%

10:02h

10:50h

Print media

Television

Radio

Sound carrier

Internet

** Forecast

2025 **

18

278

165

18

213

11:31h

Fig. 2.10 Amount of time spent on various media from 1995 to 2025 in Germany. Data source: Wirtz et al. (2006a), ARD (2016), Mediendaten Südwest (2015), Verband Privater Rundfunk und Telemedien e.V. (2017), and Wirtz (2019b)

0

100

200

300

400

500

600

700

800

Media usage Per day in minutes*

2.6 Changes in the Advertising Markets 39

40

2

Characteristics of Media Management

in million U.S.-$

250,000

243,303 211,921

200,000

150,000

170,050 6,326 11,491

21,411

100,000

176,205

+270% -2% -9%

11,258 19,599

+56%

+94%

107,487

Internet

36,600

+98%

10,200 16,100

+4%

10,611

+3%

10,308

Direct mail

+8%

17,450

+2%

17,796

Radio

71,100

+1%

72,020

-1%

70,980

TV

18,000

+17%

21,050

-5%

20,056

Magazines

20,700

-12%

18,270

-14%

15,676

Newspaper

-9% -17%

72,520

67,791 +4%

50,000

23,448

172,700

16,319

46,712

+1%

-26%

70,707

16,453 34,740

+1%

+9%

-40%

0 2004

2008

2012

2016

2018

Fig. 2.11 US advertising revenue by medium. Data source: Business Insider (2010), PWC (2013, 2017, 2019), US Census Bureau (2019), and on the basis of own analyses and estimates

branches, which the management of a media enterprise explicitly needs to take into account (Picard 2010). After 2000, there was a slump in the entire advertising market due to overall market conditions. In recent years the advertising market recovered in the United States and reached a peak in 2018 at 243,303 million USD. Nevertheless, for example, the revenue of daily newspapers shrank steadily, which is primarily attributable to the shift of the regional advertising markets to online portals. The increasing prevalence and use of competing Internet services constitutes a special threat to the classical revenue structure of publishing houses in this segment. Therefore, digitalization affects the development of the advertising markets in several respects. Traditional media also profit from the further development of the Internet and telecommunications sector because the competition among numerous new suppliers has led to high advertising investments. Furthermore, no cannibalization effect has yet occurred, due to the largely stable usage of traditional media. Nevertheless, based on the Internet and the growing significance of e-commerce, new advertising opportunities have emerged. Online promotional activities are implemented as supplements to traditional campaign elements. In recent years, online advertising revenues have continuously grown compared to other sectors. An overview of US advertising revenue development between 2004 and 2018 is shown in Fig. 2.11.

2.7 Media Competition and Convergence

2.7

41

Media Competition and Convergence

The situation in the media markets is characterized by structural upheavals. On the one hand, the competitive environment of traditional media enterprises has changed profoundly as new market participants from the computer or telecommunications sectors are entering the media markets. On the other hand, classifications between relevant markets are becoming more difficult because the boundaries between media, computer, and telecommunication products are becoming more fluid (Picard 2009). This, for example, is reflected in a supplementation of established print and TV products by new services of the Internet and multimedia sectors. Harvard Business Publishing, for instance, offers a free podcast for download each week, presenting current ideas and comments of leading business managers. This arises from the increasing convergence between the media sectors information technology and telecommunication. Regarding the sector of information and communications technology, convergence is understood as the harmonization of certain technologies, the combination of individual value-added processes of telecommunication, media and information technologies, and, finally, a merging of the markets as a whole. The following three factors can be distinguished as determinants of convergence development: digitalization, deregulation, and changes in user preference (see Fig. 2.12).

2.7.1

Digitalization

Digitalization offers new opportunities for the presentation, storage, and distribution of media products and forms the technological basis for convergence (Rayport and Jaworski 2001). The standardization of previously separated storage media, e.g., through the storage of movies, music, and texts on hard drives, facilitates the exploitation of economies of scope in the upstream and downstream stages of the value-added chain. For example, reference books are published as bound editions or as multimedia programs on CD-ROM, and academic articles are issued in journals or as PDF files via the Internet. Furthermore, digitalization has effects on the technological infrastructure. In light of the conversion from analog to digital data communication, different communication networks are usable for data transfer and thereby substitutable for one another. For example, Internet access can be accomplished via telephone, cable, satellite, and mobile networks, as well as via wireless LAN. This is accompanied by an increase in data transmission capacity and the development of new interaction formats.

42

2

Characteristics of Media Management

Determinants of the convergence development Technological innovations

Market deregulation

• Digitalization • Higher broadcast capacity • Intelligent network structures

• New competitors • Cross-sectoral competition • Continuous deregulation

Change of the user preferences • Individualization of customer relations • Systemic solutions • Social Media and social Networking

Sectoral convergence

Telecommunications

Multimedial convergence sector

Media

Information technology/ entertainment electronics

Fig. 2.12 Convergence in the information and communication sector. Source: Wirtz (2000c, 2019b)

2.7.2

Deregulation of the Information, Media, and Communication Markets

Since the middle of the 1990s, comprehensive deregulatory measures have been implemented in the United States (introduction of cross-sectoral competition and liberalization of vertical integration regulations). In the European Union, deregulatory efforts, such as the liberalization of the telecommunication sector, also led to the emergence of competitive structures in the information, media, and communication industries. Without this development, there would not have been an appropriate macroeconomic framework for the convergence process.

2.7.3

Changes in User Preferences

The increasing supply of media services has led to a fragmentation of media consumption. Especially young consumers use a diversity of services to satisfy their needs for information and entertainment (Rayport and Jaworski 2001; Napoli

2.7 Media Competition and Convergence

43

2007). At the same time, one can assert that there has been a change in user preferences for the application of personal information and communication tools. Further, user preferences have shifted to personalization and individualization of the used media, which is closely connected with this change (e.g., personalized newspapers such as wsj.com (The Wall Street Journal Online) or mobile telephone services offering individual information and ring tones). This interconnectedness is accompanied by a trend toward systematic solutions insofar as enterprises create integrated information and communication services by means of functional integration on the one hand and service bundling on the other hand. These developments have considerably changed the competitive conditions for media enterprises. Technological convergence leads to a coalescence of markets that have previously been differentiated from one another. In the market for communication services, cable network companies, telecommunication enterprises of mobile and landline sectors, and satellite providers now compete with each other. In order to distinguish themselves from their competitors, they diversify with integration strategies in the area of content production and therefore pose a competitive threat to media enterprises. In addition, the Internet is a communication platform that differs from others, being a time- and location-independent medium offering the opportunity to develop completely new business models on the basis of process innovations (Choi et al. 1997). In this new, large marketplace, enterprises operate by unbundling and rebundling value creation chains. Previously separate activities, such as production and distribution, are being replaced by new, Internet-based business models. Other enterprises expand their content basis through mergers and employ more distribution formats in order to win new user groups. TV enterprises, such as News Corporation, which market their programs worldwide via cable and satellite transmission, also belong to this category. In recent years, this development has contributed to a greater and still pending restructuring of the competitive landscape in the area of media enterprises. Within the multimedia sector, different convergence types can be observed depending on the level of aggregation (Greenstein and Khanna 1997). Aside from the sector or branch convergence described above, convergence tendencies can also be seen at the product level, the business unit level, and the enterprise level. Thereby, the digitalization of all media content, in connection with the opportunity to arbitrarily distribute the data without loss of quality, as well as irrespective of time and place, via multiple channels, constitutes the origin of the convergence of products and services. For instance, previously there were own devices for music consumption and for mobile telecommunications. Meanwhile, however, the increasing technological service performance has led to the mobile telephone’s capability for the transmission and acquisition of music. This highlights that product convergence involves the affiliation of different functionalities into a new product. Differing forms of combined broadband Internet services may be cited as another example of product convergence. In this context, a fragmented supply of services that the consumer previously obtained from different suppliers was associated with high effort and a relatively

44

2

Characteristics of Media Management

complex selection process. Thus, the central advantages of combined broadband Internet services lie in the attractiveness of the product bundle as well as in the price savings for the entire product in comparison with the individual products. Telecommunication products (Internet access, voice communication) are enriched with content to provide added value to the consumer. In this context, double play is the combination of Internet access and traditional telephony or voice over IP, triple play expands the service to entertainment services (e.g., IPTV), and quadruple play adds mobile telephone use as a fourth component. The unique configuration of services that are combined by the customer (or by different suppliers) is referred to as “individual multiplay.” With advanced product convergence, it can be advantageous for an enterprise to integrate convergent business areas either within the company or by means of outside cooperation. In this manner, economies of scale can be realized, and new, innovative products emerge by recombining individual performance features of existing services from various business areas. If the convergence of previously separate services affects not only single business units but rather the entire enterprise, this may lead from business cooperation to merger. These cases are referred to as supplier or enterprise convergence. However, in this context, it should be noted that the merger of enterprises in the course of the convergence may be difficult, especially in light of integration processes. With regard to the achievement of corporate goals, the post-merger integration process is of particular importance. Assuming product and service complementarity, the resources fit, i.e., the similarity of other enterprise resources, such as corporate culture or organizational structure, may facilitate the integration process and thus increase the M&A success. In fact, general convergence tendencies that relate to the entire branch can be observed. In this context, it is therefore referred to as branch or sector convergence. This form of convergence is considered the final stage of the convergence process and, in the end, leads to a gradual dissolution of previous branch boundaries. Figure 2.13 summarizes the various levels of convergence. Sector convergence is a worldwide phenomenon and thus of global significance. Figure 2.14 provides international experts’ evaluations of the convergence processes situation in the Triad (Europe, the United States, and Asia) (Wirtz et al. 2006b). Outcomes indicate that the most advanced convergence process is the process of supplier convergence, i.e., the emergence of integrated suppliers of multiplay services, such as broadband access, content (Internet TV, video-on-demand), and voice communication. The second most advanced convergence process refers to technology convergence. This is the provision of one single IP-based broadband service via telephone networks, cable networks, and satellite. A similar advanced convergence process is the process of end devices’ convergence, which is defined as the use of various services and networks via one single end device. The least advanced convergence process is the process of product convergence, which refers to the integration of various functions into one single online service (e.g., interactive shopping TV).

low

Level of aggregation

high

2.7 Media Competition and Convergence

45

Sector convergence

• Convergence of a growing number of companies within the involved sectors finally leads to a convergence of these sectors

Supplier-/company convergence

• Convergences forces companies to reassess their position within the value chain • Reconfiguration of the value chain leads to the alignment of the company barrier

Business segment convergence

• Product convergence affects various business units of a company or business units of different companies • Chances and risks through coordination and cooperation

Product convergence

• Convergence of content (e. g. through standardization of the formats) • Convergence of distribution channels • Convergence of end devices through integration of functionalities

Fig. 2.13 Four-level convergence model. Source: Wirtz (2006, 2019b)

Answers in

Supplier convergence

percent 40 %

Technology convergence

End devices convergence

Product convergence

40.4 % 4.1 % Very high

28.2 %

24.2 %

4.2 % Very high High 36.3%

20 %

Very high

20.9 %

2.0 % 4.2 % Very high

High 24.0 %

High 22.2 %

High 16.7 %

0% Low 21.9 %

Low 23.2%

20 %

1.0 %

60 %

Low 41.7 %

3.1 %

24.2 % 40 %

Low 34.4 %

Very low

Very low

25.0 %

Very low 3.0 %

37.4 %

7.3 % Very low

49.0 %

Fig. 2.14 Rank of the convergence processes in the Triad. Source: Wirtz et al. (2006b), and Wirtz (2019b)

46

2

Answers in percent 40 %

Organizational structure

Marketing

Characteristics of Media Management

Business strategies

M&A activities

28.6 % 19.0 %

20 %

9.5 %

High 19.0 %

High 9.5 %

0%

20 %

Low 52.4 %

Low 52.4 %

40 % 60 %

4.8 % Very high

14.3 % 4.8 % Very high High 9.5 %

Low 38.1 %

Very low 14.3 % 9.5 %

Very low

61.9 %

4.8 %

Very low

57.2 %

High 23.8 %

Low 33.3 %

33.3 %

52.4 %

Fig. 2.15 Preparation for convergence of media enterprises in various areas. Source: Wirtz et al. (2006b), and Wirtz (2019b)

Given that supplier and technology convergence are the most advanced ones, the results emphasize that the convergence in the Triad takes place on an aggregated level. Therefore, in the near future, the convergence process will take place at the level of product and end devices and thus will offer an even greater extent of integrated products and services for Internet users. Media enterprises in particular suffered considerable losses during the past years due to convergence-related competition between offline and online advertising markets. According to expert evaluations, traditional media enterprises are still not sufficiently prepared for sector convergence (see Fig. 2.15). Thereby, organizational and editorial structures have been least adapted to the dynamic competition of innovative Internet enterprises. Likewise, with respect to implementation of marketing and sales, the changed framework conditions have only been taken into consideration to a minor extent. Media enterprises have also failed to adapt their business strategies to the needs of sector convergence. Except in the area of M&A activities, good outset positions are evident for competition within the convergent media branches.

2.8

Environmental Changes and Dynamics in the Media Sector

The media sector is continuously changing. Beside deregulations that are conducive to the development of competition, the media sector to date has been primarily shaped by two factors. On the one hand, an increasing internationalization in business activities can be seen. On the other hand, there have been concerted efforts to form integrated media enterprises through mergers and takeovers. Within the context of internationalization, media enterprises that previously had focused their activities in national submarkets have developed into widely diversified and globally

2.8 Environmental Changes and Dynamics in the Media Sector

News Corp. Ltd./ 21st Century Fox

43,4%

Walt Disney

47

56,6%

75,0%

Time Warner

25,0%

68,0%

Bertelsmann

34,0%

0%

20%

66,0%

40%

Domestic revenue (2017) 1 Including

32,0%

60%

80%

100%

Foreign revenue (2017)

Canada

Fig. 2.16 Share of revenue for selected domestic/foreign media enterprises in 2017. Source: On the basis of own analyses and estimates as well as business reports

active enterprises. The Bertelsmann conglomerate, which in total generates 66.1% of its revenue abroad, may be cited as an example (see Fig. 2.16). The revenue structure of the major media conglomerates reveals that in a few businesses the media sector constitutes only a portion of the total turnover. For example, the share of the media revenue at Sony amounts to about 31%. Most enterprises operate in several business areas such as TV production, movie, radio, and the print media (see Table 2.1). The determination of revenues in the area of the Internet is difficult since many enterprises no longer consider the Internet and multimedia sector as an independent business area. Instead, they enter the revenues against other accounting entries. In addition to sufficient financing, market participants should have access to content, distribution channels, and technologies in order to exploit the potentials of the technological and market convergence. Since these different areas are frequently covered by more than one single enterprise, during recent years, considerable merger and alliance activities in order to gain control of these strategically important resources have been observed in international media markets. Table 2.2 provides an overview of the most important takeovers in the information and communication market in the past years. These endeavors aim to develop integrated media conglomerates in order to exploit the convergence potentials. Thereby, three phases of merger activities with differing motives can be observed: • In the United States, so-called “mega-mergers” have become increasingly apparent in the media sector since the mid-1990s. In this context, the acquisition of

b

a

– 46% 3%

75% – – –

25% 54% 37% 19%

– – 19% 32%

13,263 31,270 20,530 7069

– – 19%

Internet/ multimedia 35% 9% 54%

– – 22% 49%

Other 30% 33% –

2

USD 1 ¼ 110 JPY USD1 ¼ 0.85 EUR Source: On the basis of own analyses and annual reports

Company Sonya (JP) Walt Disney (US) Twenty-First Century Fox (US) Viacom, CBS (USA) Time Warner (USA) Bertelsmannb (DE) Lagardere Mediaa (FR)

Share of the media revenue with regard to total turnover Press/ TV/ Music/ magazines Books video Movies radio – – 26% 9% – – 43% 15% – – – 27% 9% –

Revenue in 2017 (in million USD) 77,040 55,137 30,014

Table 2.1 Media enterprises according to size of revenue in 2017

48 Characteristics of Media Management

2.8 Environmental Changes and Dynamics in the Media Sector

49

Table 2.2 Selected examples of mergers and takeovers in the information and communication sectors Buyer/business focus AOL Internet portal, Internet service provider Comcast Corp. Television cable network operator Google Internet services Vivendi Universal Entertainment Telecommunication, media Comcast Corp. Television cable network operator Walt Disney Media conglomerate Comcast Corp. Television cable network operator AT&T Telecommunication Verizon Mobile phone company Microsoft Software company AT&T Telecommunication

Acquisition price 182 billion USD

Date/ country 2001 USA

AT&T Broadband Cable business of AT&T

47 billion USD

2001 USA

YouTube Video portal Activision Game Publisher

1.65 billion USD 8.1 billion USD

2006 USA 2007 USA

Walt Disney 39.5% share in E! Networks, E! Entertainment and style network Marvel Entertainment Comic conglomerate NBC Universal 51% share. TV channels (e.g., MSNBC), cable broadcaster, movie studios and theme parks DirecTV Pay-TV AOL Online service provider

1.23 billion USD

2009 USA

4 billion USD 13.8 billion USD

2010 USA 2013 USA

48.5 billion USD 4.4 billion USD

2014 USA 2015 USA

LinkedIn Professional social network Time Warner Print media, TV (e.g., CNN, HBO), music publishing, movies

26.2 billion USD 85 billion USD

2016 USA 2018 USA

Acquired enterprises/business focus Time Warner Print media, TV (including CNN, HBO), music publishing, movie

Source: On the basis of own analyses and annual reports

ABC/Capital Cities by the Walt Disney Company in 1995 serves as an example. The acquisition of Turner Broadcasting by the media enterprise Time Warner Inc. can be cited as a further example. As a result Time Warner Inc. has become the media enterprise generating the highest revenue in the United States. Efforts to integrate individual areas of value creation and to build up the utilization chain can be seen as motives for these mergers. The association of manufacturing companies and TV broadcasters is an example of the integration of value-added steps. The setup of a utilization chain, e.g., takes place in the integration of cinema, pay TV, and free TV.

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Characteristics of Media Management

• Since the end of the 1990s, telecommunication suppliers have increasingly been participating in the acquisitions or mergers in the media sector. The attempt to diversify in the content market can be considered the driving force for such mergers or acquisitions. Examples of this kind of diversification are the mergers of the French telecommunication enterprise Vivendi with the Canal+ Group and of the Canadian conglomerate Seagram with the affiliated enterprise Universal Music and Universal Studios. • The third phase was shaped by M&A activities of enterprises in the Internet sector and reached a peak with the takeover of Time Warner by AOL in 2001. In this process, the content resources of Time Warner were made available to AOL and were tapped by means of a new distribution channel. However, the merger of AOL and Time Warner has not been successful. Following AOL’s write-offs and value adjustments, the conglomerate suffered a loss of 99 billion USD for the financial year 2002. In order to counteract the downward spiral, AOL had to be eliminated from the company title in 2003. Finally, Time Warner separated from its troublesome subsidiary AOL on December 9, 2009. In 2015, Verizon acquired AOL for 4.4 billion USD, and the digital advertising division was sold to Microsoft. The acquisition of Time Warner by AT&T will reinforce the vertical integration strategy of the mega-mergers of the 1990s. This will generate integrated offerings that combine attractive content and physical distribution capacities. Due to company takeovers and merger activities, the structure of the media sector has undergone to rapid changes. Thus, the American entertainment conglomerate Walt Disney ousted the long-standing market leader Time Warner from its top position. According to stock market capitalization, Time Warner is still one of the largest media enterprises worldwide; however, its stock price has dropped considerably due to the abortive AOL merger. Viacom, a vertically integrated media conglomerate, has primarily grown through strategic takeovers, however in early 2006 it was split into two separately listed associations on the stock exchange: Viacom Inc. and CBS Corp. These are examples of the potentials and risks of M&A transactions in the media sector. With Yahoo!, an Internet company has established itself among the largest media enterprises so far (see Fig. 2.17). Knowledge Review Questions 1. What are the product specifications of media products? 2. What does medial convergence mean and what repercussions does it have for the media landscape? 3. How are the media markets delineated from each other, and what interdependence structures do they have?

2.8 Environmental Changes and Dynamics in the Media Sector

51

Microsoft Corporation

981,377

Amazon

920,168

Alphabet (Google)

809,161

Apple Inc.

802,159

Facebook

500,189

AT & T Inc.

236,942

Comcast

197,619

Walt Disney

154,456

Charter Communications Inc.

86,931

Netflix Inc.

85,495

Thomson Reuters

32,872

Vivendi

27,327

Liberty Media Corp

25,128

CBS Corp.

18,136

Viacom

11,715 0

Billion U.S.-$

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Exchange rate 2019/05/20; 1 EUR =1,12 U.S.-$

Fig. 2.17 Selected media enterprises according to market capitalization in 2019. Data source: Reuters (2019)

3

Value Creation Systems of Media Enterprises

In the previous chapters, we have primarily focused on external conditions that influence the activities of media enterprises. In this chapter, we will focus on the value creation system of media enterprises. The value creation system comprises all factors that are crucial for the competitiveness of a media enterprise and its range of services. The value chain, the core assets, and the core competencies, as well as the business model, are its essential elements.1 Figure 3.1 provides an overview of the value creation system of media enterprises. Thereby, core assets, core competencies, and value chains are considered as complementary concepts of analysis. While, the value chain facilitates the differentiated, structured presentation and analysis of media enterprises’ activities, core assets and core competencies are the basis of competitive advantage. The business model covers both concepts and also takes into consideration external aspects of media enterprises management.

3.1

Value Creation in Media Enterprises

When developing a business model, initially, the individual value creation activities within the enterprise are analyzed. This analysis especially focuses on specifiable physical and technological activities of an enterprise that are considered as components of a product that is beneficial for the consumer (Porter 2004). A relatively simple but successful instrument to depict enterprises’ value creation represents the concept of the value chain analysis by Porter. The value chain serves to functionally structure in-house activities, in order to identify approaches to improve the quality of products and processes. Originally, the value chain was developed for manufacturing companies. In this context, it 1

See also for the following chapter Wirtz (2011b, 2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_3

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Business Model The entire value creation and value-in-use for the target group (product and service business model)

Value Chain Core assets and competencies as fundamental inputs to the value creation chain

Core Assets

Core Competencies

All assets in the broader sense used to create value

Sustainable and transferable competencies as basis for competitive advantages

Fig. 3.1 Value creation system of media enterprises. Source: Wirtz (2005, 2019a)

comprises primary activities with regard to physical production and distribution of products. These include inbound of materials, creation of the products, outbound logistics, product marketing and sales, as well as after-sales activities. Further, during the entire value creation process, supporting activities influencing the individual primary activities are necessary. Supporting activities include procurement, research and development, human resource management, and the infrastructure of the enterprise. The sequential portrayal of these activities clarifies the consistent orientation of value creation activities toward the consumer, whereas the profit margin represents the ultimate goal. The profit margin comprises the difference between total revenue and total costs that are incurred in conducting the value creation activities (Porter 2004). The value chain can be understood as a vastly simplified depiction that has to be individually adapted to each enterprise. However, particularly concerning primary activities, the value chain structure cannot be transferred to service enterprises, respectively, media enterprises, without any difficulty. In this regard, inbound logistics may not be interpreted as logistic activities in the sense of inventory planning since the input factors of the production process are often intangible. Furthermore, regarding operations on the advertising market, the first contact with advertising clients already occurs at this point since the advertising company considerably contributes to the input. In terms of product creation in media enterprises, it is not appropriate to summarize all production activities in one single value-added step. For this reason, the aggregation and content production is separated from product composition and technical production. In sectors in which tangible storage mediums are required to

3.2 Core Assets and Core Competencies Procurement of Information and content Acquisition of advertisement

Production and aggregation of content Advertisement placement

• Purchase of text contributions

• Production of text contributions

• Purchase of film contributions

• Production of film contributions

• Procurement of advertisement contributions

• Converting advertisement contributions

Product packaging

• Selection of the product components • Editorial work

55

Technical production

Distribution

• Print

• Sale

• Provision of infrastructure and transmissibility

• Transmission

Recipient

• Portals • Allocations of end devices

Fig. 3.2 Value chain of the media industry. Source: Wirtz (2000c, 2019b)

transmit the content, it has to be distinguished between technical production and distribution. However, in other sectors, for example, both activities coincide in the radio sector. Customer service also does not have the same importance in the value creation chain of media enterprises as in the material goods sector or in many other service enterprises. Hence, an eventual analysis of customer services can be carried out at the point of distribution. Although the media sector is very heterogeneous, the generic value chain in Fig. 3.2 may serve as a basis for further considerations. Here, supporting activities are not represented in the value chain, as generally, only minor media-specific characteristics arise. Some key elements for differentiating the value-creation chain have already been addressed. Chapters 5–14, which deal with the various media sectors, will expand the topic by presenting the typical value chain models of each sector, taking the specific features of the various branches into account.

3.2

Core Assets and Core Competencies

Core assets and core competencies are highly important for the long-term success of a media enterprise. Core assets are those tangible and intangible assets that play a central role in service creation and marketing. This includes the corporate brand name and its geographical scope. Furthermore, core assets are complemented by core competencies. These represent the enterprise’s ability to combine its assets and core assets in such a way that special customer benefits can be created. Examples of media enterprises’ core competencies are high-quality programming or cross-media marketing expertise (Wirtz 2014). Core assets and core competencies provide a lasting competitive advantage that is reflected in the long-term attainment of above-average returns on capital (Fahy and Smithee 1999). Hence, the identification and management of core assets and core competencies is especially important for media enterprises.

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3.2.1

Value Creation Systems of Media Enterprises

Analysis of Core Assets and Core Competencies in Media Enterprises

Core assets and core competencies provide media enterprises sustainable competitive advantages in the recipient and advertising markets. This chapter will portray the most important core assets and core competencies of media enterprises and clarify their significance for long-term success. Core assets are all those company-specific resources and assets that play a particularly important role in an enterprise’s value creation process. Assets will turn into an enterprise’s core assets precisely when they are valuable for the specific enterprise and scarce on the market. Additionally, the assets may not be easy for competitors to acquire and to imitate. Only in this way may core assets provide longterm competitive advantages (Barney 1991). Such core assets, for example, may be developed in the context of in-house refining of simple assets and production factors. On the basis of these considerations, the following definition of assets and core assets is developed. Definition of Assets and Core Assets Assets are tangible and intangible resources that form the basis for the enterprise’s activities and competitiveness. Core assets are company-specific assets, are accumulated or refined in-house, and have a special intrinsic value for an enterprise’s value creation process. They are relatively scarce and do not lend themselves to imitation or substitution by competitors. Core assets thus constitute the basis for a long-term competitive advantage (Wirtz 2005). The most important core assets of media enterprises are employees, brands, networks, and customer base. Employees are know-how carriers and often have complementary abilities. The combination of individual abilities in a team can lead to an improved service creation and thus to a competitive advantage. Only those employees who are of central importance for service creation and marketing, such as employees in the editorial office of newspaper publishers, can be viewed as core assets. This core asset is only imitable with considerable difficulty, since interaction patterns within a team cannot be gauged from the outside and are not connected to an individual employee. A brand is a benefit bundle with specific features that can be recognized and differentiated by the relevant target groups. Brands are value propositions, and customers associate brands with specific, mostly positive product characteristics. Due to brands’ uniqueness, their nature usually does not lend themselves to imitation and can hardly be substituted. Therefore, brands are core assets of media enterprises. Since media products are experience goods, the brand name demonstrates a superior product quality. This is advantageous when launching new products, as brand awareness reduces advertising costs.

3.2 Core Assets and Core Competencies

57

In the media sector, networks arise at various steps in the service creation process. These networks, for example, serve to procure information and thus deliver input for content creation. In many media sectors, there are production networks including specialized actors. With regard to distribution, access to certain distribution channels is frequently only possible via networks. Networks require intensive maintenance and frequently personal commitment. Since they have evolved historically, it is difficult to imitate them. Furthermore, the scarcity of potential network partners limits the opportunities of imitation. Networks are highly important for service creation and provide media enterprises with differentiation or cost benefits; they hence constitute core assets. In the media sector, the size of the customer base in recipient markets is often subsumed under the term “scope.” In many cases, the customer base is the result of successful, long-term operation in a certain market segment. Therefore, competitors can imitate customer bases only with difficulty. Due to interdependencies between recipient and advertising markets, extensive scopes result in a prominent competitive advantage. Greater scope in the recipient market tends to result in higher advertising revenues. Core competencies are necessary to make use of core assets. Organizational competencies and abilities facilitate a skillful combination of assets and core assets. Competencies foster the coordination and use of core assets, resulting in competitive advantage for the enterprise. The concept of core competencies originated in the management-oriented publication by Prahalad and Hamel in 1990. According to these authors, core competencies are characterized by three factors: • Core competencies supply enterprises with access to various business areas. • Core competencies may be transferred to many different products, services, and/or customer groups. • Thus, core competencies of an enterprise form the basis for its core products that in turn generate business areas from which end products emerge. Based on this discussion, competencies and core competencies may be defined as follows. Definition of Competence and Core Competence Competencies form the foundation for collective action in an enterprise and facilitate the service creation process in which assets and core assets are combined into marketable services. Core competencies are a special form of competencies. They are relatively scarce and do not lend themselves to imitation or substitution by competitors. Core competencies significantly contribute to the perceived customer benefits of an end product and provide enterprises with a lasting competitive advantage (Wirtz 2005).

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The following elements constitute core competencies of media enterprises: content sourcing, content creation, format competence, distribution competence, and technology competence. Content sourcing describes the ability to obtain high-quality information and entertainment content as well as to attract authors or producers for content production. This ability provides media enterprises relying on input products a unique competitive edge. This is especially true for procurement of exclusive content. Content creation covers all abilities that are necessary for the production of successful media content. Subcompetencies of content creation are, for example, trend competence and refinement competence. Trend competence is the ability to identify social developments and issues at an early stage. Refinement competence is the ability to convert them into informative or entertaining media products such as TV programs. Subcompetencies are media-, genre-, and format-specific, as the factors that make the content attractive for recipients differ according to the purpose of the media usage and the target group. Thus, the production of informative content requires abilities other than the production of entertaining content. Moreover, implicit knowledge of employees and organization-specific routines strongly influences content creation. Their action mechanisms are not readily comprehensible to outsiders, so that content creation hardly lends itself to imitation. Further, on the basis of its importance for service creation, it is likewise hardly substitutable. Competence in content creation facilitates the attainment of long-term competitive advantages through superior service creation and constitutes one of the most important core competencies in most media enterprises. Product development competence contributes to a profitable positioning in recipient and advertising markets. It consists of the ability to develop promising media products and to assess them with respect to market opportunities and chances of refinancing. This competence requires in-depth knowledge about the specific market segment in which the media enterprise operates. This knowledge is usually available only implicitly and is thus non-transferable. For product policy in media enterprises, this fact is of major importance since a balanced product portfolio facilitates a steady revenue flow. Promotion competence of media enterprises is primarily relevant for media products that constitute individual products whose promotion of brand identity presents difficulties. Movies, music productions, or books belong to this category. Promotion competence involves the ability to promote public attention to media products. In this manner, media enterprises achieve an advantageous market position or respectively improve their market position. It is based on knowledge that is generated in-house and is thus difficult to imitate. Since for many media products promotion competence is an essential success factor, it also has to be regarded as a core competence. In various media sectors, the competence of cross-media utilization is likewise relevant. It is based on the ability to provide to the recipients content in a timely manner, in the desired amount, and via appropriate channels. On the one hand, media managers often have to adapt media products in a channel-specific manner for the respective target group. On the other hand, media enterprises have to be able to

3.2 Core Assets and Core Competencies

59

Competitive advantages

Core assets

Core competencies

• Employees

• Content sourcing competence

• Brand

• Content creation competence

• Networks

• Product development competence

• Customer base

• Promotion competence • Cross-medial utilization competence • Technology competence

Fig. 3.3 Core assets and core competencies in media enterprises. Source: Wirtz (2005, 2019b)

control the distribution channels technologically and logistically. By utilizing media content, economies of scope lead to competitive advantages and to better recipient accessibility. Closely associated with distribution competence is technology competence. In particular, technology competence describes the ability to employ modern information and communication technology to create and market content. In this manner, media enterprises achieve efficiency benefits and realize cost-reduction potentials. Both competencies require considerable knowledge about distribution channels and applicable or used technologies. This knowledge is created through internal learning, which generates implicit and hence non-transferable knowledge. An overview of core assets and core competencies in media enterprises is provided in Fig. 3.3.

3.2.2

Management of Core Assets and Core Competencies in Media Enterprises

The concept of core competencies offers a valuable basis for the strategy formation process in media enterprises. The analysis of current assets and competencies is an important premise to develop recommended follow-up actions, which are supposed to ensure the enterprise’s future success. At first, on the basis of an external market analysis, it is necessary to predict assets and core competencies that are strategically important for the future. In this context, media managers may derive scenarios for future procurement, advertising, competition, and recipient markets and, in turn, promising core assets and competencies. For example, it can be assumed that in the future it will become increasingly important for media enterprises to offer their content via various channels.

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Actual situation

High

 Market analysis  Development of future scenarios  Derivation of relevant future assets and core competencies

Target and actual situation comparison

Build up through investment and knowledge management

Maintenance and further upgrading

Low

Target profile

Current forming of core assets and core competencies Low High

Future significance of core assets and core competencies

 Value-added chain analysis  Identification of core assets and core competencies that are  valuable  rare  difficult to imitate  difficult to acquire

Course of action

Outsourcing and further cutback

Dismantling and disinvestment

Fig. 3.4 Analysis and management of core assets and core competencies. Source: Wirtz (2005, 2019b)

A comparison of the current asset and competence profile as well as the profile relevant for the future indicates need for action. Accordingly, an enterprise without access to the competencies that will make it fit for the future should start to actively develop and expand its asset and competence basis. Thereby, strategic considerations in the context of competence analysis also relate to the potential depletion of present assets and competencies. Thus, assets and competencies in areas other than the core areas, as well as those which are assumed to have no strategic importance for the media enterprise in the future, may be resigned. Only these efforts can ensure the goal-oriented straightening of an enterprise’s available resources and competencies at fulfilling core tasks. In Fig. 3.4 an overview of the analytic processes and the strategic course of action is presented.

3.3

Business Models and Types of Business

The concept “business model” is used rather inconsistently in the literature (Wirtz et al. 2015). However, despite the frequent use of the term “business model,” it is usually limited to issues focusing on business activities and revenue acquisition. “A business model is defined as the organization (or ‘architecture’) of product, service and information flows, and the sources of revenues and benefits for suppliers and customers” (Timmers 2001, p. 31). Accordingly, a business model illustrates the material, work, information, and finance flow both between the enterprise and its environment and within the enterprise itself (for a comprehensive discussion of the

3.3 Business Models and Types of Business

61

definition, see Wirtz 2011a). According to Wirtz, a business model can be defined as follows: Definition of a Business Model “A business model is a simplified and aggregated representation of the relevant activities of a company. It describes how marketable information, products, and/or services are generated by means of a company’s value-added component. In addition to the architecture of value creation, strategic as well as customer and market components are considered in order to realize the overreaching objective of generating and securing a competitive advantage” (Wirtz 2016a, p. 67). Thus, the business model goes beyond the concept of the value chain because it is not limited to a physical production process but also includes service processes. A business model contains statements about which combination of production factors benefits the implementation of an enterprise’s business strategy and which functions the participating actors have to perform. It explicitly involves the suppliers or strategic partners because “the unit of strategic analysis has moved from the single company [. . .] to an enhanced network” (Prahald and Ramaswamy 2000, p. 81). Regarding this process, business models resort to relevant, specific doctrines of business administration. The intention of the business model lies in its aggregation of essential aspects of business administration subdisciplines in order to obtain a simplified, condensed overview of the company’s business activities. Figure 3.5 presents an integrated business model including its partial models. The strategic components of an integrated business model consist of three partial models: the strategy model, the resource model, and the network model. The internal resources and networks build an upper unit of the integrated business model concept and are therefore particularly important when analyzing value creation in business models. These strategic partial models generate an operational scope for the other partial models and define which types of value creation are generally possible. In the strategy model, the top management defines medium- and long-term goals and activities of a company in order to persist on the market. In this context, it is generally postulated that these strategies unite the business vision, mission, and goals. The determination of the positioning and definition of strategic business areas is connected to this. A strategic situational analysis that comprises changes in framework conditions, scope of action, and strengths and weaknesses of the company serves as a basis. In the resources model, the core assets and core competencies are depicted as well as their subordinate elements relevant to value creation. It is thus a summary of all relevant tangible and intangible input factors of the business model. In this process, both internal and external resources and competencies are presented. The network model gives an overview of the value constellation partners in value creation and the connections between different business models. In this context, the network model is

• Value generation

• Information analysis

Fig. 3.5 Partial models of an integrated business model. Source: Wirtz (2010a, 2019a)

• Resource monitoring and controlling

• Service development

Value Creation Model

• Customer touchpoint

• Channel configuration

• Customer relationships/target groups

• Resourcing

Procurement Model

• Value offering/ products and services

• Demand structure

• Competitors

Market Offer Model Customer Model

• Core assets & Assets

• Strategic positions and development paths

• Value proposition

• Core competencies

• Company mission

Resources Model

• Cost structure model

• Capital structure

Finance Model

• Revenue differentiation

• Revenue streams

Revenue Model

• Business model partners

• Business model networks

Network Model

3

Value Creation Component

Customer Demand Component

Strategic Component

Strategy Model

Partial Models of the Integrated Business Model

62 Value Creation Systems of Media Enterprises

3.3 Business Models and Types of Business

63

an instrument of the top management to control and manage value distribution within a collaborative value creation. Different tangible and intangible streams of information and goods are analyzed in this process. In this way, particular stakes in value creation may be determined and classified to a network of connections and relations. The partial models of the area of customer and demand components depict basic influence factors for the design and operation of a business model. The three main components are the market offer model, the customer model, and the revenue model. The information from these models describes the corporate environment and connects it to internal value creation by means of revenue. They are consequently the link between the business strategy and its value generation. Before transferring strategic targets to the process of value creation, first adaptations to customer needs and market situations need to be made. The data that is obtained by means of the customer and market components can also be used for the corporate strategy. The market offer model is oriented along the market environment. This model seeks to make use of available market opportunities. This partial model is therefore closely aligned with competitors, the market structure, and the value offer, in other words, the products and services. As a result, the company’s value proposition is developed and shaped against the background of an analysis of competing business models. The customer model is used to display the offers (products and services) relevant to the business model and the customer structure. The customers are segmented in order to define different target groups. Different strategies are derived from demographic differentiation criteria and differences in usage patterns. In the literature, the customer model is therefore also of particular importance for the development of a business model. Powerful information and communication applications support the necessary activities and thus offer the opportunity to determine the demand according to the needs of specific customer groups. The segmentation of markets pursued to date on the basis of geographical, sociodemographic, psychographic, and behavioral criteria can therefore be refined. This ultimately means that individual customers and market segments (segmentof-one) can be addressed individually according to their specific preferences. In addition, innovative applications on the Internet make it possible to increasingly integrate end customers into the service creation process. In this connection, efficient and effective data management becomes more relevant to success in order to identify the needs and willingness of users to participate. Actual revenue streams and their relevance to the business model are managed by the revenue model. This partial model depicts the value capture of internal value creation. This means that it clarifies how and to what extent the value generated can be monetized for the company. The revenue model is thus responsible for the absorption of a portion of the added value generated from the production of goods and services. The partial models within the value creation component comprise the internal value generation. In this context, the manufacturing model, the procurement model,

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and financial model are relevant. Here, the focus is put on how and under which conditions value can be generated by means of a central value creation logic. The partial models of value creation are thereby influenced by the strategic components as well as the customer and market components of the business model. The procurement model describes the structure and sources of the raw materials, goods, and services that are necessary for the production of value-added goods and services. In this context, the specific procurement phases of initiation, agreement, and processing must be addressed in order to ensure a structured procurement process, particularly by means of electronic procurement. Furthermore, the market structure and market behavior on the procurement markets have a direct impact on the procurement model. For example, if there is a high market concentration on a procurement market, there are only few potential suppliers available who also differ only marginally in their offerings (peaceful oligopolistic behavior). This must be considered in the different procurement phases. The value creation model depicts the combination of goods and services as well as their transformation into offers. Here, the economic relationships between the input quantities of the production factors and the achievable output quantity are of particular interest rather than the technical laws of production. Based on the segmentation of demand, the service offer model provides information on which service spectrum shall be offered to which demander or customer groups. The individual demand groups are each to be offered a segment-specific range of services according to their in parts widely differing demand characteristics. In this context, the Internet and innovative information and communication applications have opened up the possibility of mass customization, thus realizing an individualization of the service offering at a low cost level. The financial model provides information about which financial resources are transferred to a business model and how the refinancing of corporate activities can be organized. Consequently, the model also shows the sources of financing for the business model. Furthermore, with the aid of data from recent periods, it enables an evaluation of the financial success of a business model and thereby allows to forecast prospective financing and liquidity requirements.

3.3.1

Revenue Model

The revenue model constitutes an essential component of the business model of an enterprise. In discussing the way revenues should be realized, various revenue models are conceivable in the media sector. To make fundamental decisions on possible revenue models regarding strategic management, the latter has to systematize these models. For that purpose, the enterprise is modeled in its economic environment. Thereby, the enterprise is accompanied by private and legal persons or entities that operate in the markets, respectively, as governmental institutions (see Fig. 3.6). The illustration shows the enterprise’s cash flows, which constitute the sole deciding factor. Cash flows between external actors are not applied in this context.

3.3 Business Models and Types of Business

65

Rights

Fees

Other Licenses

Rights markets

State

• Subsidies • Tax advantages • etc.

Media enterprises

Media access

Recipient markets

Advertisement markets

Media usage Other • Service • Merchandising • etc.

Advertisement

Other • Data mining • Commissions • etc.

Fig. 3.6 Potential sources of revenue. Source: Wirtz (2000c, 2019b)

3.3.2

Recipient Market

Since media products are directly addressed to the recipients, the recipient markets, being the primary source of revenue acquisition, should be first presented. Regarding transaction-dependent payment, the recipient only pays for the utilization of media products. The amount of the payment depends on the activity quantity (e.g., price per newspaper, price per movie for pay-per-view TV) or the duration of the service (e.g., price per minute for online media). In contrast, regarding transaction-independent payment, the recipient does not pay for the actual use of the media product but for the opportunity of utilization. Transaction-independent payments are predominantly paid on a regular basis (e.g., newspaper subscription, pay-tv subscription). The use is frequently limited by natural and technical restrictions. A recipient’s television consumption, for example, is limited by time. Also, the data transfer of online media is limited by broadband or server capacity. Apart from media usage payment, fees may also be charged for media access. Considering fees, which are usually paid only once, the customer receives the technical and administrative prerequisites for the use of a media product. Thereby, the customer is usually not entitled to usage.

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For example, payments for media access are collected in the form of registration fees. The acquisition of a technical device also falls into this category, provided that the payment is made to a media enterprise (e.g., decoder for pay-tv). However, in both cases, the recipient usually pays an additional payment for the media use. Other revenues, aside from remuneration for media access and media use, are realized in the recipient markets, e.g., revenue from the use of archive services offered by newspapers or television broadcasters. Marketing of merchandising products also falls into this category.

3.3.3

Advertising Market

For some media, a significant amount of revenue is realized in the advertising market. Companies pay for advertising space and related services of media enterprises. These are, for example, newspaper ads, TV spots, or Internet banners. Product placement and sponsorships are additional forms of advertising which may be marketed. Aside from advertising revenue, other revenues can accrue in the advertising market, e.g., through the sale of user data. Additionally, commissions are increasingly being paid to media enterprises, primarily in the Internet, if transactions with a customer are generated via a link provided by the media enterprise (e.g., the affiliate program of Amazon).

3.3.4

Licenses

Utilization rights and licenses are the third form of revenue. In this context, utilization rights are original rights, which means that they allow the owner to discretionary use the content. Licenses are derived rights that may only be used to the extent that the owner of the original rights permits. Book publishers who own the utilization rights to a bestseller and grant licenses for paperback editions can be cited as an example. In the rights acquisition market, media enterprises act both as demanders and as suppliers. Revenues are realized primarily by using the enterprise’s own productions but also by reselling previously acquired utilization rights and licenses.

3.3.5

Government Fees

Aside from the revenues described above, Fig. 3.6 lists the government as a fourth source of revenue. Although the realized fees are not revenues in a business administrative sense, in certain media sectors, they are significant for media enterprise management due to their large volume. They hold an exceptional position within the system of revenue models since they are regulated by the government and hence do not serve as management action parameters.

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67

For media enterprises’ financing, no general conclusions can be drawn as to the relevance of revenue models discussed above. This is partially due to the fact that the revenue mix is branch-specific. Furthermore, within the individual media branches, likewise no general conclusions are possible since the choice of revenue models depend on the type of business model. However, two important aspects need to be considered when it comes to the decision of revenue-model architecture (European Communication Council 2001). On the one hand, selecting revenue models should be oriented toward the cost situation of the undertaking. In the case of predominantly continuous costs, regular payment should be favored, whereas in the case of high development costs, lumpsum payments for media access make more sense. On the other hand, the recipients’ perception of benefits also needs to be taken into account. This is particularly problematic if high development costs of a new product result in high fees for media access but the recipients, however, cannot assess its usefulness in advance due to the novelty of the product. For the purpose of comparing enterprises and branches, it is recommended to classify the various business models of media enterprises. Therefore, the business models will be aggregated into groups based on selected characteristics. Here, a clear demarcation is not always possible, so that overlaps between the groups may occur. However, it is decisive that the business models be relatively homogeneous within a group and as heterogeneous as possible between the groups. The demarcation criteria have to be selected accordingly.

3.3.6

Production of Goods and Services Model

The production of a goods and services model portrays the media enterprises’ core activities that are necessary to produce and deliver media products. Cost drivers and potential cost reduction measures can be identified by analyzing the major processes and procedures. The comparison of production of goods and services models of different enterprises further allows to identify of competitive advantages that are based on superior process structures or eliminations of specific processes. For instance, in several branches direct distribution is usual, whereas in other branches there are complex multichannel systems involving various intermediaries. To illustrate the production of goods and services models, the cost and revenue structure of the service creation can be used. Figure 3.7 depicts the typical cost and revenue structure of media enterprises. The starting point is the revenue that flows into the media enterprise from one sold copy of a media product. Revenue is structured according to its different sources, e.g., advertising and sales. The next step includes the allocation of costs and cost fractions that accrue during the production and distribution of media products. The individual pools of cost can be summarized as first copy costs, production and distribution costs, as well as trade margins.

68

3 100 %

Value Creation Systems of Media Enterprises

13.4 %1

Trade margin

Advertisement revenues

20.1 %1

Production/ distribution

39.6 %1

55.4 %1

First copy costs

Other revenues (sale revenues) 60.4 %1

11.1 %

1

Profit Medium

AdvertOther revenues isement

Trade margin2

Production/ distribution3

First copy costs4

Profit

Newspapers/ magazines

38 %

62 %

-

48 %

42 %

10 %

Book

100 %

-

29 %

23 %

39 %

9%

Movie

100 %

-

33 %

14 %

49 %

4%

TV

14 %

86 %

-

12 %

78 %

10 %

Radio

13 %

87 %

-

7%

84 %

9%

Music

100 %

-

20 %

44 %

35 %

6%

Video/computer games

100 %

-

27 %

13 %

44 %

16 %

18 %

82 %

Internet

Average

60.4 %5 39.6 %5

-

-

75 %

25 %

13.6 %5

20.1 %5

55.4 %5

11.1 %5

1) Average of below mentioned media branches 2) Trade margin = Intermediation costs 3) Copy costs and delivery to the intermediaries 4) Including content production costs, licensing costs, advertisement acquisition costs, marketing and administration costs 5) Average calculated across all 8 media

Fig. 3.7 Cost and revenue structure of manufacturing in media economics. Source: Wirtz (2009, 2019b)

First copy costs refer to all costs that accrue with regard to the creation of the first sample of a media product (first copy). They include, for example, the answer print of a movie or the master tape of a music production. The structure of first copy costs depends on the type of media. Besides media production costs (content production), the costs for marketing and administration are included in the first copy costs in all media branches. In a few media branches, costs for advertising acquisition and licenses further accrue. The average share of the first copy costs in total turnover for a media production is around 55%, but it varies significantly between the various types of media. The higher the share of first copy costs in comparison to the total turnover, the larger the economies of scale for the media product’s duplication. Media depending on a physical storage medium (e.g., such as paper) and on expensive production procedures have a very high percentage of production and

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69

distribution costs, whereas for digital products the share of duplication costs is particularly low. If media products are not delivered to the recipient directly by the producer, the costs of different distribution stages (intermediaries) must also be taken into account. The trade margin averages 13.6%. Since in many branches the trade margin comprises a major share of the final retail price, direct distribution constitutes an interesting strategic alternative for media enterprises. This applies to the book sector, for example, as the share of the trade margin is around 29% of the total turnover.

3.3.7

Types of Business

The value creation chain of media enterprises presented in Sect. 3.1 constitutes a starting point to differentiate various types of business in the media sector. Thereby, a particular type of business is especially defined according to the activities adopted by the media enterprise within the value chain. Content integration, content bundling, and content presentation are considered the three most important types of business in media management.

3.3.8

Content Integration

A content integrator is a media enterprise that adopts all activities along the value creation chain. Such an enterprise is characterized by an overall high depth of vertical integration. In particular, program design and content development are carried out by the enterprise itself. Both the production of in-house content and the procurement of content from outside sources usually take place in terms of content development. The advantage of such a business type primarily lies in the opportunity to set oneself apart from competitors by using attractive content. In the intermediate term, this can help to build up a strong brand name. However, it has to be noted that the implementation of this type of business is associated with high efforts. Certain core assets and competencies are necessary to develop attractive content. For example, a highly educated and specialized editorial department is required to provide high-quality content. Furthermore, generating ideas in the context of program conception constitutes a significant role in the enterprise’s ability to distinguish itself from the competition.

3.3.9

Content Bundling

If a media enterprise primarily sources its content from the public domain, with only minimal editorial refinement, this is called content bundling. It is characterized by a medium depth of vertical integration. The enterprise is mainly concerned with selecting product components and designing its content-program offerings. Since

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also in this context some editing takes place, particular resources are necessary for content bundling. However, the resource expenditure is rather moderate. Therefore, the advantage of this type of business is cost efficiency, as well as a relatively broad coverage of various subjects including peripheral issues. The main disadvantage is that differentiation and positioning of the enterprise are more difficult. In the area of the Internet, there are a few enterprises representing this type of business, e.g., msn.com.

3.3.10 Content Presentation Content presentation with the least depth of vertical integration is a third type of business. The supplier specializes in content compilation and layout without any editorial refinement. The content is either completely supplied by a partner or generated by a standardized public domain source. The resource expenditure is minimal for this type of business because it does not need to employ its own editors to develop the content. Thus, content presentation is the most cost-effective solution. Figure 3.8 illustrates the various types of businesses. Therefore, the length of the respective arrow indicates which activities are undertaken by the media enterprise in the respective type of business. Further, the figure illustrates the respective depth of

Procurement of information and content

Production and aggregation of content

• Purchase of text contributions

• Purchase of text contributions

• Purchase of film contributions

• Purchase of film contributions

Product packaging

Acquisition & placing of advertisement

• Selection of the product components

• Content compilation/ layout

• Editorial work

• Placing of the advertisement

Technical Distribution production

Distribution

• Print

• Sale

• Provision of infrastructure and transmissibility

• Transmission • Portals • Procurement of end devices

Business typ “content integrator” • High vertical depth of integration and high expenditure of resources • High competitive differentiation potential • Requires distinctive competences/assets at the creative/editorial refinement process

Business typ “content bundling” • Average vertical depth of integration and average expenditure of resources • Use of content from the public domain with slight editorial refinement • Requires competencies/assets with editorial bundling

Business typ “content presentation” • Little vertical depth of integration and little expenditure of resources • No distinctive competitive differentiation potential • Requires little assets/competencies because content is either part of the content partner or gets compiled of standardized content from the public domain without any editorial refinement

Fig. 3.8 Overview of media business types. Source: Wirtz (2006, 2019b)

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71

vertical integration of the particular types of business. In a slightly modified form, this is resorted to the value creation chain of Sect. 3.1. Knowledge Review Questions 1. Describe the value chain of the media industry! 2. What are the core assets and core competencies in media enterprises? 3. Draw the submodels of an integrated business model!

4

Functions of Media Management

In the previous chapters, the general conditions of media and various elements of the value creation system of media enterprises have been presented. In the next step, the action parameters of media management shall be pointed out. Therefore, at first, strategic management will be addressed. Afterward, procurement management, production management, and marketing of media enterprises will be presented in more detail. This is followed by an overview of organizational management, finance management, and human resource management.1

4.1

Strategic Management

In the context of strategic management, corporate leaders have to make fundamental decisions on the intermediate and long-term goals and enterprise’s activities. Strategy formation thereby is preceded by a process that traverses the development stages of vision, mission statement, and goals. The enterprise’s vision describes the ideals that are based on actions and constitute the justification for its existence. The vision is a simple, comprehensible picture clarifying the ideas behind the enterprise for all of its participants. A characteristic example for the media sector in this context is The Walt Disney Company, whose vision is “to make people happy” (O’Shaugnessy 1995, p. 40). A mission emerges on the basis of this vision and defines the long-term goals of the enterprise. Within the context of the mission statement, an operationalization takes place about which path will lead toward a realization of the vision. For example, defining the strategic business units in which the enterprise is operating or intends to become active is part of this process. Building on the mission, the enterprise’s intermediate to long-term goals can be developed. Although these 1

See also for the following chapter Wirtz (2011b, 2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_4

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development stages cannot always be clearly delineated from one another, they still indicate the foundation for the strategic management of media enterprises.

4.1.1

Strategic Development

The development and implementation of strategies usually follows a system based on the enterprise’s goals. Built on this understanding, an in-depth analysis of the enterprise’s situation takes place. Only then can a company strategy be developed based on the gained findings. This system is illustrated in Fig. 4.1. An important step of strategy development pertains to the situation analysis. This analysis includes a company’s environment, market analysis, competitor analysis, and competence/resources analysis. The competitor analysis and the competence/ resources analysis are integrated into a strengths/weaknesses analysis. This strengths/weaknesses analysis, together with the environment analysis and market analysis, in turn, is included in an opportunity/risk analysis. The approach is explained in more detail below (see Fig. 4.2). Within the framework of the situation analysis, an environment analysis takes place first. It portrays the general conditions in which the media enterprise operates. At this point, particular problems resulting from the technical and regulatory developments discussed above arise for the media sector. Furthermore, other influencing factors, such as the sociopolitical environment, also have to be taken into consideration. Thereafter, a market analysis is necessary. Thereby, regarding the media sector, the structure of the advertising and recipients markets, including the analysis of consumer behavior, has to be closely analyzed. In the media sector, however, the analysis of the procurement markets is of likewise major importance. In this context, the content constitutes a considerable bottleneck, so that there is strong competition, e.g., for movies, sports, and cultural events, or authors. In the next step, a competitor analysis has to be carried out. This analysis involves identifying all actual and potential competitors. This is difficult for the media sector since new competitors previously active in other markets are

Corporate goals

• Corporate goals are derived from the corporate mission and vision • Formulation of explicit goals as a foundation for current and future behaviors

Situation analysis

• External analysis: environment and competitors • Internal analysis: competencies and resources

Strategy formulation • Formulation of alternative courses of action on the foundation of the results of the situation analysis • Evaluation and choice of a strategy

Fig. 4.1 System of strategy development. Source: Wirtz (2003b, 2019b)

Strategy implementation • Passed strategies are transferred into behavior guidelines • Allocation of the required resources and controlling of the realization progress

4.1 Strategic Management

Corporate goals

75

Situation analysis

Strategy formulation

Strategy implementation

Environmental analysis Environment analysis • Technical surrounding • Regulative surrounding • Economical surrounding

Branch and market analysis

• Market structure • Consumer behavior

Corporate analysis Competitive analysis

Analysis of competences/resources • Core competencies

• Competitors‘ behavior

• Complementary competencies

• Corporate resources

• Peripheral competencies

• Social surrounding Analysis of opportunities and risks • Identification of opportunities and risks through environmental, branch and market developments

Analysis of strengths and weaknesses

Strategic fit analysis • Alignment of the market side opportunities and risks with the corporate-specific strengths and weaknesses profile

• Alignment of the core and complementary competencies with those of the competitors • Identification of advantages and disadvantages compared to the respective strongest competitors

Fig. 4.2 Stages of the situation analysis. Source: Wirtz (2003b, 2019b)

entering this market as a result of the increasing convergence. Thereby, sectors with relatively high market entry barriers – primarily in the area of TV and radio – can focus on existing competitors. In sectors with low market entry barriers, such as in the Internet, the anticipatory observation of potential competitors is difficult. If competitors can be identified, their behavior in the market needs to be studied. Afterward, the competitors’ resources need to be analyzed. Analogous to the competitor analysis, the own competencies and resources need to be examined. Naturally, this must be carried out in a much more detailed manner than the competitor analysis. Here, core, complementary, and peripheral abilities need to be delineated from each other. The mandatory resources the enterprise requires for service provision in an internalized form are denoted as core abilities. Complementary abilities are the necessary resources that can also be acquired from a cooperation partner. Finally, the peripheral abilities do not constitute any necessary resource capital. They can rather be obtained from the market. It becomes clear that in this early stage of strategy development, an integration of market-based and resource-based views is already possible and reasonable. On the basis of the competitor analysis and the abilities/resources analysis, a strengths/weaknesses analysis is carried out, in which a comparison between the media enterprise and one or more of its competitors is drawn. This involves identifying existing advantages and disadvantages toward the most important

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competitors and deriving scopes of action of both an offensive and a defensive nature. The conclusion of this strengths/weaknesses analysis, together with the conclusion of the environment analysis and market analysis, is taken into account through the opportunity/risk analysis. In this regard, the external situation of the media enterprise is compared with its internal situation. The goal is to timely identify development tendencies of the enterprise’s environment and markets and to subsequently elicit whether future developments will impact strengths or weaknesses of the enterprise. Hence, indications of potential needs for strategic action can be derived from this analysis. Based on the results, a strategy can be developed for the media enterprise.

4.1.2

Strategy Options

The strategic options of media enterprises can be classified according to various criteria. For example, a strategic orientation to sales markets, procurement markets, products, or customers is conceivable. In this section, the strategy options are developed by means of the media value chain. Therefore, strategic options are developed from two positions: the position an enterprise occupies in the value chain and the position it strives to occupy in the future (Küng 2008).

Focusing Strategies Within the framework of a focusing strategy, the media enterprise restricts itself to a stage of the media value chain and attempts to achieve a prominent position in that area. A focusing strategy allows cost or differentiation advantages to be gained in one step of the value chain. TV production enterprises specializing in the production of news items are an example of focused enterprises. A focusing strategy can also make sense in complex and innovative markets if the core competencies of the enterprise facilitate a leading position in the corresponding stage of the value creation chain. In the case of media enterprises, however, it becomes obvious that focusing strategies are rather inappropriate for gaining a prominent position in international media markets over the long term (Wirtz 1999). This strategic option should thus be viewed as a transitional stage for enterprises that have recently entered the media sector or are divesting themselves of unattractive business units in the course of a reorganization. Examples of such reorganization can be found in the initial phases of many Internet enterprises. Yahoo! was at first merely a search engine specialized in Internet navigation. However, the services offered expanded quickly to include content services (e.g., news) or communication services (e.g., email service). Integration Strategies In contrast to the focusing strategies, integration strategies are directed to expand of the service range. Given the lack of uniformity in the use of the term “integration,” in the following, “integration” should be understood as the expansion of the range of services. Yet, distinctions need to be drawn between horizontal, vertical, and lateral

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77

integration strategies, depending on the value creation chain and stage. In this process, integration strategies can be pursued by independently developing new services (internal expansion) and through additional acquisition from existing suppliers (external expansion). Within the framework of a horizontal integration strategy, media enterprises attempt to expand their service range within existing value creation stages. Here, they aim to occupy new markets or market segments. Further causes can be found in the realization of synergy effects, for example. Horizontal integration tendencies can be observed in all media sectors. The TV sector, in which the major broadcast television networks (e.g., NBC, Fox, etc.) cover different market segments, can be taken as an example. In contrast to horizontal integration, the focus of vertical integration is on the expansion of the service range by upstream or downstream stages of the value creation chain. For the integration of upstream stages (backward integration), the media enterprise becomes proactive in business areas that deliver input factors for its previous business processes. In this context, again, the TV sector can be cited as an example. Suppliers of TV programs are increasingly running their own production firms that they acquire or independently develop. The integration of downstream valuechain stages (forward integration) follows the opposite direction and expands the business activities to fields that use the enterprise’s previous service range as input. Lateral integration refers to the integration of value creation stages that belong to outside or newly created medial value creation chains. An enterprise’s existing core competencies should be exploited, and its dependency on a market should be minimized. Sony’s entry into the video game console business is an example.

Network Strategies Aside from focusing and integration strategies, the option of a network strategy is also available to media enterprises. It is comprised of the formation of enterprise groups that jointly and cooperatively work on a value creation process. In the media sector, these network strategies can be observed on horizontal, vertical, and lateral levels (Albarran 2010). Here, cooperative efforts with a horizontal orientation are called strategic alliances, whereas cooperative efforts with a vertical or lateral orientation are termed strategic networks. In the context of network strategies, the enterprises maintain their legal independence and are merely connected by their common goal. Media enterprises are in a position to couple the advantages of focusing strategies and integration strategies by means of network strategies. On the one hand, they facilitate concentration on the enterprise’s previous value creation stage and development of its core competencies. On the other hand, many advantages described within the context of integration strategies can be realized. Both the complexity of the media markets and the increasing pace of innovations make it more and more difficult for enterprises to offer marketable products by their own means. By use of network strategies, enterprises are more likely to keep pace with the increasing rate of innovations and under certain circumstances, to appear as the leading innovators. However, this

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4 Functions of Media Management

Corporate strategies

Focus strategy

Integration strategy

Network strategy

• Concentration on one stage of the medial value chain

• Extension of the medial range of services

• Establishment of production and marketing cooperations

• Goal: realization of cost or differentiation advantages

• Goal: assurance of procurement and sales channels

• Goal: reduced expenditure of resources and access to complimentary competencies

Fig. 4.3 Strategies of media enterprises. Source: Wirtz (2006, 2019b)

strategy is associated with risks of losing know-how to competing enterprises or of free-riding by cooperating partners (Albarran et al. 2006). Moreover, networks tend to be unstable. In the case of larger networks, there is often a core group of enterprises that has long been affiliated with the network and a much broader group of associated enterprises participating only intermittently. This lack of stability constitutes an essential uncertainty for the participating enterprises and not infrequently complicates their smooth collaboration, which overrides the advantages. A further disadvantage of the network strategy can be seen in the loss in sales arising from relinquishing value creation stages, since the increase in sales resulting from specialties performed in the network often compensates for only a fraction of the turnover relinquished. Figure 4.3 provides an overview of the strategies pursued by media enterprises. The external procurement of content is of considerable importance for a major portion of media enterprises. For example, procurement management is closely connected to marketing strategy because a strategic positioning is frequently possible only with the help of externally procured content. Strategic behavior in the procurement market is a necessary component of long-term strategic product and program positioning. Thereby, it is primarily the influencing factors in procurement management that are especially important. In the following, procurement strategies will be presented that media enterprises use for external sourcing of content.

4.1.3

Influencing Factors

The procurement management in media enterprises is primarily influenced by six factors. They concern the costs for content acquisition, revenue expectations, content attractiveness, contract conditions, behavior of the competitors, and government regulations. Figure 4.4 portrays these influencing factors. The above-named influencing factors are discussed below. Initially, this is a general observation which is valid for the majority of the considered media branches.

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79

Fig. 4.4 Influencing factors of procurement management. Source: Wirtz (1994, 2019b)

R ex eve pe nu cta e tio ns

Con con tract diti ons

Procurement management

Competitors

Characteristics specific to the media branches are explained in the respective branch chapters. At this juncture, it has further to be noted that the influencing factors exhibit interdependencies. For example, anticipated high revenues for content lead to increasing demand and thus increase the procurement price.

Costs The costs for content procurement constitute an important influencing factor in procurement management in media enterprises. This can especially be attributed to the intensive competition for content in the procurement market. Basically, there are two components of costs that need to be considered: the procurement price which is paid for content and the transaction costs for concluding a contract. The procurement price is essentially determined by quality and exclusivity of the content. Thereby, the price usually rises with increasing quality and content exclusivity. Furthermore, the price of the content is also influenced by the extent of the utilization rights. Revenue Expectations The potential revenues for content tend to increase with greater attractiveness of the content. However, the attractiveness of media content is difficult to assess since there are hardly any sound indicators for judging attractiveness. Attractiveness indicators, such as currentness and correctness, are subjective and do not generally concur with consumer preferences. Hence, for certain content only expected values can be formed for revenue expectations. However, in the context of procurement, the formation of revenue expectations is an important task for media management. This concerns the revenue in the recipient market as well as the revenue in the advertising markets. Thereby, one can distinguish between indirectly and directly acquired revenue. Direct revenues are generated by an immediate effect in the recipient and advertising markets.

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For example, higher sales figures and larger scopes are associated with the publication of attractive content in the field of general interest magazines (e.g., exclusive interviews). Indirect revenues are acquired through effects that need to be determined in the longer term, e.g., a continuously improved market position of a medium with regard to a relevant target group.

Contract Conditions The contract conditions, i.e., the terms and conditions under which an assignment of rights and licenses for content occurs, likewise constitute an important influencing factor for procurement management. Content does not usually exhibit rivalry in consumption. Accordingly, rights and licenses can be sold multiple times by their owners to interested media enterprises. Hence, the attractiveness of the content decisively depends on the moment of its utilization. In this context, the criterion of the publication’s currentness or the availability of its content is crucial. Thus, the largest recipient potential is usually achieved with the first publication of TV broadcasts or the availability of current or innovative content in the Internet. This applies to both entertainment content and information. Repetitions, however, only seldom garner an attention level from recipients that is as high as it was for the first publication or broadcast. In order to eliminate the risk of value loss, it is contractually possible to agree on exclusive acquisition of rights and licenses. This acquisition can be comprehensive and exclusive, but it can also exhibit boundaries in space, time, or substance. It can be further seen that the acquisition of content property is not possible in all areas of the media. In these cases, the buyer instead is granted a more or less restricted right to use the content, which is usually subject to temporal and other restrictions. Moreover, in the context of contractual provisions of procurement management, media enterprises do not tend to acquire rights and licenses to individual content anymore. Rather, complete rights, as well as pre-sales contracts, package, and output deals, are being increasingly agreed upon. Competitors Regarding the area of media in general, a continuously increasing competitive situation can be ascertained. This intensifying competition occurs both between competitors within a particular media sector and between the various types of media. Thus, attractive content is considered a scarce resource in the procurement market. Moreover, in the remarks on contract conditions, it was specifically said that the behavior of the media enterprises in the content procurement markets is primarily aimed at guaranteeing exclusive access to the content. Consequently, on the one hand, it is very important for individual media enterprises to observe the behavior of competitors within their sector. On the other hand, it is also important to observe the entire media market, since the danger of market entry of enterprises from other media sectors exists.

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81

Government Regulations The influencing factor of government regulations has a different relevance for various media sectors. While in the area of Internet and multimedia, government regulations have only little influence on content procurement, they must be more carefully taken into consideration by enterprises, e.g., in the areas of TV and radio. For example, the government influences programming and thereby indirectly influences procurement management both through meritorious aims for public suppliers and regulations pertaining to the composition of programs by private suppliers. Aside from national law, international law is becoming an increasingly important influence factor on procurement behavior. For example, the television policy of the European Union allows individual states to designate programs of national interest that must be made accessible to the recipients via broadcasting free of charge.

4.1.4

Procurement Strategies

Based on the influencing factors in procurement management, the following basic procurement strategies relevant to media enterprises can be identified: direct contracting, cooperation or partnership, and syndication strategies. Figure 4.5 illustrates different procurement strategies. At this juncture, the procurement strategies shall be described in a general and abstract manner. In the context of direct contracting strategy, the content-enquired enterprise directly contacts the copyright holder, in order to enter into a bilateral agreement. Especially the exclusive procurement of high-quality content is a priority. In the field of TV management, for instance, direct contracting is of paramount importance. Cooperation or partnership strategies involve an exchange of already existing content between the partners. Cooperation takes place on both national and Procurement strategies

Direct contracting strategy

Cooperation respectively partnership strategy

Syndication strategy

• Direct contact between copyright holder and demanding company

• Establishment of cooperations for the exchange of existing content

• Use of a content intermediary/ content broker

• Goal: exclusive procurement of attractive content

• Goal: reduction of the expenditure of resources compared to external procurement/in-house production

• Goal: reduction of the expenditure of resources compared to in-house production

Fig. 4.5 Procurement strategies for media enterprises. Source: Wirtz (2001b, 2019b)

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international levels. In the field of radio management, for example, radio broadcasters exchange some of their content with each other. A major goal of this strategy is to use synergy effects and reduce material and human resources expenditures that are incurred with outsourcing at the enterprise’s expense or with in-house content production. A further strategy in this context is the syndication strategy. With this strategy, the enquired enterprise contacts a content intermediary, the so-called content broker. The broker is usually supplier-independent and collaborates with content suppliers on the procurement side. Content brokers bundle the supplies of third-party enterprises. On the sales side, they operate as content suppliers toward the media enterprises interested in procurement. For remuneration, the enterprises can procure the desired content that content brokers have compiled. The goal of this strategy is to reduce transaction costs. The aggregation of the procurement volume with one supplier reduces the initial costs of content searching. It further reduces the need to have contracts with numerous content suppliers, which in turn leads to an overall reduction of transaction costs.

4.2

Production Management

The production of media goods is closely related to the respective branch and its brand-specific characteristics. Here, technical production, such as pressing of sound storage mediums or printing of newspapers, is usually not a top priority compared to the development of content. Content production is a central task of media management. The content produced constitutes the core service of the media product and considerably influences the brand image of the media enterprise. In order to portray the demands on the production management of a media enterprise, the influencing factors in media production are explored first. Subsequently, an overview of the strategic action alternatives for media production is presented.

4.2.1

Influencing Factors

The term “production” is generally understood as the combination of production factors according to certain procedures. Influencing factors in production are the production process, production factors, and structure of production costs. For production costs, it is primarily the media-specific characteristics of the production process that are important.

Production Process A schematic portrayal of the production process for media is shown in Fig. 4.6. The starting point for media production is usually formed by an idea for a certain media product. This idea frequently results from the recognition of trends or – especially in the information area – of current events. The basis for a concept can, however, be an

4.2 Production Management

Concept

• Events • Trends • Ideas

Selection

• Concept evaluation • Evaluation of work samples (e. g. music, texts)

83

Production in the narrower sense

Duplication/ distribution

• Creative period (e. g. screenplay, research)

• Distribution (e. g. broadcasting, upload)

• Technical period (e. g. transcript, recording)

• Duplication (e. g. print, pressing)

Fig. 4.6 Media production process. Source: Wirtz (2001b, 2019b)

already existing content. For example, a book can trigger the idea for a television production. The initiative need not necessarily originate with media enterprises themselves. Rather, it often originates from external persons such as artists, agents, or producers. In the first step, an idea is formulated as a concept. In the selection process, not only the qualitative congruence of the concept and the requirements of the media enterprise are examined but also the economic reasonableness on the basis of the expected costs and revenue. Only after selecting a promising concept does the production phase begin in the narrower sense of the word. In this phase, the creative and technical processes necessary for creation of the actual work take place, i.e., in this subprocess a news item, a manuscript, a movie, or a sound recording, for example, is created. In the last phase of the production process, duplication and distribution take place.

Resources A further influencing factor in production management is the resources that are necessary for content production. Therefore, material and human resources should be divided. The area of physical production resources includes the technical equipment that content production requires. Its importance for production varies according to the type of media. For example, far fewer material resources are needed to generate a newspaper article than to produce a television show. The availability of material resources is usually not problematic in the media field. However, the picture differs in the area of human resources. Here, it is primarily creative employees and artists who are of paramount importance. In all areas of the media sector, such people determine the quality and attractiveness of the content. Authors, actors, musicians, or radio presenters are examples. In contrast to material resources, the human resources usually constitute a bottleneck in content production. Production Costs The structural characteristics of media production also influence production management. An essential feature can be seen in the structure of the production costs.

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The production of content is associated with high fixed costs. These are primarily caused by the allocation of human resources. Furthermore, concerning some media sectors, a high proportion of material resources can be validated. The production studio business in the areas of television, radio, or music can be cited as an example. Aside from the high share of fixed costs, the production of media products is primarily characterized by a high degree of uncertainty. Media productions exhibit project character since unique copies are usually produced and the production processes are rarely subject to regularity. It is precisely in the creative environment of content production that the production planning proves itself to be extremely uncertain. Thus, in all areas of the media sector, unforeseeable events frequently occur in content production, causing the production costs to exceed those originally planned. However, the project character of media production simultaneously leads to the situation in which the utilization of a media product is only possible upon a finalization of the project. If production is terminated prematurely, the parts produced until this point usually cannot be used, and thus the accrued costs turn into sunk costs.

4.2.2

Production Strategies

In the production of content, the media enterprise has to reach a make-or-buy decision. This means that the enterprise has to decide whether the content should be created in-house or by an external supplier in outside production. Regarding in-house production, the media enterprise undertakes the implementation of the production processes itself. In outside production, the production processes are carried out by a legally and commercially independent content producer. In this process it is not essential that the entire production process be outsourced. Rather, it is usual that only subprocesses of the production, primarily the production in the narrower sense, are given to external service providers. Media enterprises usually strive to reduce their production costs through external content production. However, due to the project character of media production, the allocation of subtasks of content production to external service providers does not automatically lead to economies of scale. For instance, economies of scale are created if the fixed costs of production result in a considerable share of material resources, such as production studios, and the utilization of the supplier’s capacity is increased due to outsourcing. However, the major share of the fixed costs usually originates with human resources that uniquely accrue for each production project. External production firms, however, realize learning-curve effects through a targeted specialization in certain content, which can reduce production costs over time. Media enterprises can attain cost and capital structure effects by outsourcing content production. The downsizing of human resource and material production capacities reduces the fixed costs of production that can be transformed into variable costs in purchasing individual content contributions (cost structure effect).

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Even with respect to the balance sheet, outsourcing of content is advantageous for media enterprises. Production capacities are categorized in the balance sheets as fixed assets, so that dismantling production capacities positively affects the balance sheet ratios, such as the return on investment (capital structure effect). Moreover, the risk of sunk costs is reduced by outsourcing; as with acquisition of content at primarily fixed prices, the risk is almost completely on the external producer’s side. While the motives for outsourcing of content primarily lie in the area of production costs, the reasons for an enterprise’s own production are found in other areas. An essential reason for in-house content production is securing the desired quality. Since the content decisively influences the media enterprise’s brand image, above all, the content to position the enterprise’s brand in the market has to continuously meet the highest quality standards. In the context of media production, quality is a dimension that is extremely difficult to measure or control. If content is outsourced, the enterprise takes a risk that the product quality will not reach the desired level. Outsourcing of production can lead to adulteration of the media enterprise’s brand image. This danger is especially great with fixed purchase prices because the producer can only improve his or her margin by reducing costs. There is a principal-agent problem. Furthermore, especially up-to-date content often has to be created rapidly, so that a continuous quality control of outsourced content is practically impossible. The reason for in-house production lies not only in an improvement of quality but also in the reduction of transaction costs. Aside from the costs for quality control, transaction costs are understood as those costs that are justified by the need for adaption due to frequent and current changes. For example, it can be observed that media enterprises with daily products, such as newspaper publishers, tend to have a larger share of content produced in-house than other media enterprises, such as book publishers. But even within the individual media categories, the current content tends to be produced in-house (e.g., news), whereas external content producers tend to be commissioned with content that is less current, such as entertainment articles. As in all sectors, media enterprises are also exposed to the risk of losing core competencies by outsourcing the production process. The selection of externally produced content accordingly has to be oriented to retaining in-house production ability for important contributions. In order to combine the advantages of outside and in-house production, media enterprises increasingly select hybrid strategies of production. In such a strategy, the commissions for content production are allocated to external service providers who are legally independent but commercially dependent on the media enterprise to a greater or lesser extent. This commercial dependence is usually achieved through equity participation. Hence, the media enterprises are given a share of potential profits from the production. But simultaneously, they considerably influence the determination of and compliance with quality standards and thus reduce the risk of sunk costs. Furthermore, the media enterprise can keep its core competencies in its own sphere

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Production strategies

In-house-production

Co-production

Outside-production

• Realization of the production processes within a media enterprise

• Participation of one or multiple production companies

• Outsourcing of the production to an independent company

• Goal: quality assurance and contemporary content procurement

• Goal: split-up of the financing and diversification of risk

• Goal: reduction of the fixed costs and improvement of the capital structure

Fig. 4.7 Production strategies in media economics. Source: Wirtz (2009, 2019b)

of influence and take advantage of its specialization. Figure 4.7 provides an overview of the production strategies used by media enterprises.

4.3

Marketing

Marketing constitutes a special challenge for media enterprises. The reasons for this are varied. On the one hand, marketing concepts need to be developed for the recipient, as well as for advertising markets and hence for customers with differing, and to some extent opposing, requirements. On the other hand, these markets are more profoundly interdependent on one another, which is expressed in the circulation-ad spiral, for instance. As a result, these concepts cannot be developed separately but have to be integrated into an entire concept. The marketing policy instrument provides elementary action parameters. It is usually divided into the areas of product and program policy, price policy, distribution policy, and communication policy (see Fig. 4.8). This division is pursued further in the following discussion, although the focus is on the media-specific aspects of the marketing instrument. A central task of marketing is customer relationship management. A goal of customer relationship management is to maintain customer relations in order to induce customers that have already acquired the same or similar products. The customer relationship process can be portrayed as a sequence of various individual phases (see Fig. 4.9). The most important individual phases are contact, order acquisition, purchase, use, new order acquisition, attrition, and reclamation. The marketing instruments are used to a varying extent in each individual phase in order to achieve the overriding goal of maintaining customer relations. Against the backdrop of the customer relationship process, the concept of “customer” is understood as both individuals and customer target groups. During the contact phase, the initial contact with the customer is established. To accomplish this, potential customers and their needs

Price differentiation Discount Conditions of payment …

Product quality

Branding

Features

Assortment

Fig. 4.8 Marketing instruments. Source: Wirtz (2019b)

…

Customer service

Price

Price policy

Product innovation

Product policy

…

Public relations

…

Distribution channels

Market coverage

Advertisement Sales promotion

Physical distribution

Distribution policy

Communication design

Communication policy

Marketing Mix

4.3 Marketing 87

Contact phase

Order acquisition phase

5a 2

4

• Creation of customer-specific service offers

Fig. 4.9 Customer relationship process. Source: Wirtz (2003a, 2019b)

1

5c

• Avoidance of customer attrition by monitoring customer satisfaction

• Identification of potential customers and customers‘ needs • Initial contact

5b

Attrition phase

3

88 4 Functions of Media Management

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must first be identified in order to allow the enterprise to address them selectively, for example, through communication policy measures. In a successful first contact, during the course of the order acquisition phase, services adapted to their needs are presented to potential customers. This is primarily a function of product and price policy. If the customer is induced to purchase, the delivery of the product to the customer must be ensured during the purchase phase. Subsequent to the transaction, actions must be undertaken in order to induce the customer to repurchase. To this end, a dialogue between the media enterprise and the customer should take place during the time that the product is being used by the customer (use phase). Customer satisfaction should be checked through customer feedback in order to prevent possible attrition. If these actions are successful, the new order acquisition phase can be initiated. However, if it comes to attrition, targeted measures should be initiated in the reclamation phase to prevent losing the customer.

4.3.1

Product and Program Policy

Product and program policy can be designated the core of marketing, as the service packages are furnished for revenue acquisition in the sales market. Only if the enterprise aligns itself to the optimal satisfaction of customer needs within the framework of product and program policy can the long-term survival of the enterprise be guaranteed through sustained revenue acquisition. Therefore, the market adequacy, i.e., the orientation to the demands of the market, has to be the starting point for all performance-related planning measures. In this context, a package of various useful characteristics that is marketed by enterprises as a unit is designated as a product. In contrast, the program designates the entirety of all products that an enterprise offers. The impact of the program, however, cannot be equated with the sum of the impacts of all the products. In fact, additional effects occur through the program policy as there is usually interdependence between individual products. For this reason, the program policy plays an important role in media enterprises’ marketing and is considered to be an equal part of an integrated product and program policy. Since the recipient and advertising markets are relevant regarding sales markets, the product and program policy has to be analyzed from various angles. In order to explore media-specific scenarios, the terms “product” and “program” have to be explained in more detail first. In the advertising markets, this is possible by means of the abovementioned definition. According to the definition, products can be defined as the individual advertising spaces, e.g., advertising spots, banners or commercials, and all other advertising activities. The program is composed of all the various advertising spaces that are offered by the respective enterprise. In contrast, the definition of product and program in the recipient market is more difficult. A newspaper, an Internet service, or a television program consists of various partial services, rendering the demarcation between product and program

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problematic. For instance, it is possible to consider a TV station’s informative program or a movie as a product. However, in the context of a broadcasting group, even the entire station can have a product character, although, in the printing area, the entire newspaper or magazine, but not the individual article, always constitute the product. It becomes obvious that the demarcation depends to some extent on the context. Considering the design of product and program policy, different action parameters are available. They are usually divided into the areas of performance core, packaging, brand policy, and other services.

Performance Core The performance core forms the enterprise’s actual marketing object. In the media sector, this is on the one hand the content and on the other the various types of advertising spaces. Within the framework of the content structure of the program, the media enterprise has to make various decisions. Therefore, it is primarily a basic orientation for the program policy that needs to be set. This results from the definitions of the market and business area that are predetermined by corporate management. Furthermore, the structure and extent of the service range have to be set. Here a distinction can be drawn between the program range and depth. In the media sector, the content-related diversity of the service is designated as the program range, and the number of products within the content-related program line as the program depth. Regarding newspapers and magazines, for example, one can speak of a broad service if the service covers a comprehensive assortment of special interest titles aside from general interest titles. A deep service can often be found in computer magazines for PC games, Xbox games, and PlayStation games, for example. Even in the advertising markets, the design of the core performance is quite important, primarily because the advertising space in media products is frequently limited. This means that the share of TV broadcasters’ advertising duration cannot be considerably increased. Hence, the marketing management has to explore new pathways and possibly redefine its core performance. Here, expanding the service range, e.g., through sponsorship, is the focus. Packaging With the exception of newspapers and magazines, as well as the book and music sectors, product packaging is not as significant in the media sector as it is in the area of physical goods. In the latter case, the packaging must have certain characteristics in order to fulfill the needs of the producer, the retail market, and the consumer. In the individual media branches, the question of product packaging takes on varying degrees of significance. Packaging is mainly relevant for media products that are dependent on a storage medium. This includes music CDs, DVDs, Blu-rays, or video and computer games, for example. For these products, the wrapping plays a major role in protecting the product during transport and for customer perception during purchase. TV or radio

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programs, however, are not dependent on a storage medium, and therefore, the issue of packaging is non-existent.

Brand Policy Brands are distinctive images of a product or service that are anchored in a consumer’s mind. The brand is not merely a name or symbol, but should rather communicate product characteristics such as high quality, superior advantages, or the product personality. By signalizing positive product characteristics, the uncertainty of the customer should be reduced prior to purchase. This is especially important for media products that in large measure represent experience and credence goods. Since recipients are not able to sufficiently examine the quality of the media before consumption, the signaling function of the brand plays a significant role in the consumer’s purchase decision, respectively, intention to use the product. In the media branches, brand policy has developed in different directions. Whereas in particular the newspaper and magazine sector began relatively early with brand formation due to the largely liberal market, for a long time, it has been restricted in the TV or radio sector due to strict regulations. With the deregulation of the broadcasting markets, private broadcasters have slowly begun to develop a uniform brand concept. In the Internet sector, however, these delays in brand formation did not occur. In this case, a strong brand orientation was present right from the beginning. The establishment of a brand is associated with considerable expenditures, especially for communication measures. However, these expenditures are accompanied by major advantages in the recipient and advertising markets. Uniform standards with respect to the product quality can be communicated to the recipients through the signaling function of the brand. This reduces the recipients’ uncertainty and increases their commitment to the corresponding medium. In this manner, the scope and composition of the customer base in the recipient market (reach) are stabilized. Furthermore, a change in the structure of the customer base can be achieved by altering the brand policy. A stable reach simultaneously offers the media enterprise advantages in the advertising market. The stability in the scope and composition of the customer base that is achieved through brand formation facilitates a precise ascertainment of the qualitative reach and thus clear positioning in the advertising market. This has a positive effect on the advertising revenue. The brand management can pursue various brand strategies. Brand strategies differ in their depth, i.e., the number of marketed products under one brand name, and in their breadth, i.e., the number of brand names in one service area. The options include a single- or multi-brand strategy, a brand family strategy, or an umbrella brand strategy. The concept of the brand family consists of offering various products under one uniform brand name; thus, the positive image of one brand name is transferred to several products. In contrast to the umbrella brand strategy, it is not the enterprise’ s name itself that constitutes the brand, but rather the product group or product line.

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The expenditures for the establishment and maintenance of the brand are borne by various products and facilitate the realization of economies of scope. Moreover, new products encounter greater acceptance by consumers and retail market participants. The disadvantages are primarily negative spillover effects in case the products have vastly different positioning or one product has quality problems. Apart from that, repositioning opportunities for individual products are limited, since the brand core continuously has to be taken into account. In contrast to brand family strategies, in which several brands can exist within one enterprise, umbrella brand strategies limit the product offers to one uniform umbrella brand – the name of the enterprise. This allows an allocation of the brand budget to all products, but this is only possible if the target groups for the individual products do not vastly differ. If this is not the case, the identification of a client-specific brand profile is extremely difficult.

Services The offer of purchase- and use-related services constitutes a further product policy action parameter. These services allow for better differentiation from other enterprises and products. The mere distribution of the core product is frequently insufficient to satisfy customer needs. Therefore, in the area of physical goods, secondary services are often offered in addition to the tangible product, e.g., in terms of advice, and support or delivery services, in order to support the customer before, during, and after the purchase. In this context, a trend can be observed in that the scope of the secondary services increases with the complexity of the primary product. Thus, for example, the necessity of training to use individual software is considerably greater than for established standard software. The concept of secondary services can be transferred to the media sector. Due to extensive supplies, recipients are frequently offered information services in order to facilitate their use of media products. For this reason, TV broadcasters regularly inform their viewers in teletext messages about the current program, news, and sports events. Pay-TV broadcasters (e.g. Showtime) send their customers an individual program magazine. Even in the advertising markets, secondary services are offered depending on the complexity of the product. Thus, the private advertising customer of a daily newspaper hardly requires advice, whereas detailed advice about what actions to take with a concluding efficacy analysis is very important for the commercial customer in the context of a comprehensive advertising spot campaign. In order to document advertising efficacy, market studies are conducted by organizations and media enterprises at regular intervals. These studies describe the media usage pattern by means of various indicators. The indicators are primarily of a quantitative nature. Research on media use, however, has recently begun to employ qualitative approaches allowing for considerably more economically priced data collection and providing information about the quality of customer contact that is of central importance for the advertising industry.

4.3 Marketing

4.3.2

93

Price Policy

Price policy involves the setting and comparison of alternative prices for potential customers as well as their enforcement, while making use of the full scope of decision-making, which is limited by internal and external factors. Using the price as a marketing action parameter has various advantages. Price policy measures have minimal lead times and can often be implemented more quickly than other marketing measures. Furthermore, consumers or demanders react quickly and comparatively strongly to price changes. However, competing companies can also react to these measures for the same reasons and without major delay. Due to the highly divergent revenue structures, the importance of price policy for media and Internet management has to be considered dependent on the branch and markets affected. Internal pricing can take place according to various criteria. One can distinguish between cost-oriented, demand-oriented, and competition-oriented pricing. In cost-oriented pricing, information about costs is used as the basis for pricing. Both total and partial cost approaches can be employed in this context. Hence, on the one hand, it is possible to set prices that cover costs in the long term and, on the other, to determine short-term lower price limits at which a positive contribution margin is still being generated. Demand-oriented pricing, in contrast, is based on the concept of the price-sales function. The price-sales function describes all price-quantity combinations on the sales market and thus allows conclusions to be drawn about the demand behavior in the event of price changes. Of crucial importance is the price elasticity of demand, which expresses the relationship between relative changes in sales volume and relative price changes. The price decision is thus based on the likely reaction of the buyer. Competitive pricing focuses on the behavior of competitors on the relevant markets. The supplier does not use autonomous pricing and instead follows a price leader. Another possibility is the adoption of prices customary in the industry. Cost-oriented pricing does not seem to make sense for media that are at least partially financed by advertising. But cost orientation is also not always appropriate for media financed purely by fees (such as pay TV). In this case, a technical device, the decoder, is necessary for media access. A necessary purchase of the device will discourage many customers from participating, so that the amortization of the device must take place via the subscription fees. Internal pricing will then be demand-oriented or competitive. The decisive influencing factors are the pricing of the competition and the price elasticity of demand. It should be noted here that as the recipient becomes more familiar with the service, price elasticity decreases. In the newspaper and magazine sector, for example, this phenomenon is referred to as reader-paper loyalty. Media companies regularly use price differentiation as a price policy instrument on the recipient markets. With the help of price differentiation, identical services are sold at different prices. For this purpose, the demand side can be subdivided according to different criteria. Personal characteristics of the buyer (e.g., age,

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membership of a certain group) are often applied here, but also local, temporal, and quantitative differences regularly serve as criteria for price differentiation. Price differentiation usually serves to skim the purchasing power of different groups of buyers. In the media sector, however, another goal can also have priority. Especially in the case of media that is mainly financed by advertising, price differentiation serves to bind certain buyer groups, such as students, to the media product at an early stage. In advertising-financed media companies, internal pricing for the advertising markets is predominantly based on cost orientation. However, due to the very transparent markets and standardized products, demand and competition considerations are also necessary. Media companies are faced with relatively price-elastic demand and intense inter- and intramedia competition. Different pricing strategies can be pursued here. Since advertising space service is not storable as a service, but a certain marketcompatible capacity must be maintained, the pricing policy can be used for active demand management. Accordingly, prices are differentiated over time, leading to a leveling of demand. Examples of personal differentiation include newspapers and magazines that charge different prices for private and commercial advertisements. Here, the buyer groups have different price-sales functions, so that the purchasing power of both groups can be optimally utilized through price differentiation. In addition to price differentiation, price bundling is also a widespread instrument in this context. Several products are bundled as a product package and sold at a price below the sum of the individual prices. Depending on whether the products can also be purchased individually or exclusively in a bundle, one speaks of mixed bundling or pure bundling. In the context of media management, the bundling of attractive and less attractive advertising space on TV or the bundling of several regional offers in newspapers can be cited as examples. Here, too, the objective is to skim purchasing power and utilize free capacities. In some cases, however, price bundling is also used to reduce market transparency and thus to differentiate the company from its competitors and ultimately achieve a higher price.

4.3.3

Distribution Policy

Distribution policy concerns the issue of how a product or a service can be made available for use or consumption. In the context of distribution policy, decisions must be made regarding the structure of the distribution channel (acquisition-driven distribution) and the logistical systems. The distribution channels encompass the relationships of all the people who participate in the distribution process, whereas with the logistical system, the physical transfer of the product is the focal point of consideration. Within the framework of the structure of distribution channels, marketing principles distinguish between direct and indirect distribution. Direct distribution is viewed as a traditional instrument of services marketing, through which direct contact between the supplier and consumer takes place. This results from the

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provision of the service to a subject or object. However, regarding indirect distribution, at least one additional level of distribution is interposed between the two participants. These are selected primarily if the provision of the service involves derivative distribution tasks (e.g., ticket sales for concerts). In structuring the distribution system, marketing pursues different goals. Aside from the overall marketing goals, the target variables primarily are the distribution costs, the degree of distribution, the image of the sales channel, the duration of development, the flexibility, and control of the sales channels. The importance of distribution policy for the marketing of media enterprises, however, varies depending on the branch. For example, the distribution costs for TV, radio, and Internet enterprises in the recipient markets can be neglected as a target variable as they are primarily fixed and dependent on the technology rather than on the distribution channel. However, the newspaper, magazine, book, and music sectors have to take the distribution costs much more closely into consideration due to the physical storage medium. In the areas of TV, radio, and the Internet, the derived distribution tasks have only a minimal volume. For this reason, distribution is primarily direct. The TV broadcaster disseminates his program, without additional distribution steps, via cable or satellite to the recipients. Likewise, the content supplier in the Internet also makes his services directly available. Both branches might avail themselves of external transmission technology, which, however, cannot be viewed as an individual distribution step. In contrast, indirect distribution systems are typical for the newspaper, magazine, book, and music sectors. This is related to the physical characteristics of the storage medium. Regarding directly distributed media, it is basically possible that the first access may also require special technical prerequisites or advisory services. Therefore, the distribution of the media products is free from derived services, while the establishment of media access may suggest an additional distribution step. For example, the necessary hardware for pay TV is marketed to some extent in the television retail market. Even in the advertising markets, different distribution channels are encountered. In the newspaper/magazine sector, direct distribution prevails. The enterprises in this sector usually sell their advertising spaces to their end clients without the involvement of sales intermediaries. It is irrelevant whether the advertising customer is an enterprise or an agency commissioned by an enterprise because the agency acts as a customer vis-à-vis the print enterprise. In the TV or radio sectors, advertising agencies are frequently used which book advertising space quotas from various broadcasters and sell them in packages to advertising companies or to agencies. The advertising agencies receive a commission for this service. Decisions must be made not only about distribution channels but also about physical distribution. Physical distribution is concerned with the issue of how the product is physically sent from the supplier to the consumer. In this process, both the advertising and recipient markets can be simultaneously portrayed, because with the distribution of media products to the recipients, the advertising service is provided at the same time. In the newspaper, magazine, and book sectors, problems primarily

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arise in the area of storage and transport as well as concerning the quality of the delivery service. This consideration also applies to Internet enterprises that offer tangible products to their customers. For them, the logistical system is of fundamental importance because the transfer of the products frequently constitutes an essential criteria of demarcation vis-à-vis traditional enterprises. In other media sectors, the problem is to a large extent reduced to the decisions about the use of certain technologies. For example, in TV enterprises, the issue whether the program will be transmitted via satellite or cable may arise. It becomes clear that the considerations about the general distribution policy cannot be simply transferred to the media sector. It is primarily the use of technology and the product “content” that are responsible for the unique features of distribution in the recipient markets. On the one hand, technology facilitates completely novel distribution channels. On the other hand, the distribution itself has effects on the characteristics of the product. Especially in the information area, the speed of the delivery determines the value of the product. Therefore, the distribution policy goals cannot usually be analyzed independently of the overall marketing strategy goals. Moreover, there are often dependencies on other instruments. From this basis a strategy regarding the distribution channels and the logistical systems has to be derived.

4.3.4

Communication Policy

For media enterprises that compete in the advertising and recipient markets, it is not sufficient to merely make the product available there. Rather, the existing and potential customers must be provided with information about the products and the enterprise. Thus, communication policy has the task of influencing the respective audience in compliance with these goals and hence causing behavior that directly or indirectly corresponds to the highest goals of the enterprise. The strategic part of communication policy primarily concerns itself with the communicative positioning in the respective markets. Here, it is especially a positioning by means of topicality, emotion, or factual information that is suitable. However, in the context of operative communication policy, these positioning goals must be operationalized, which can occur in terms of awareness levels. It is precisely the fact that media products have a service character that makes communication important since it is charged with the task of making visible the special competencies for problem-solving. In the media sector, no general conclusions can be drawn considering applications of communication instruments. Even here, a differentiated analysis of the individual sectors and their relevant markets is necessary. In the recipient markets, various positioning goals are possible. In general, emotional positioning prevails, especially when media enterprises have to convey certain experience categories. Advertising plays the largest role as a communication instrument. In this context, it is primarily advertisements and commercials in mass media that are relevant.

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Thereby, media products themselves act as advertising media and can be used for communication. Dependent on media types, either the product itself is used as an advertising medium, e.g., in the TV sector, or other media from the same proprietary network are used. Self-advertising, for example, makes sense in the context of a customer loyalty strategy provided that already existing recipients use the product anew or should be introduced to other product parts. However, to win new customers, communication via other media is necessary. An approach using a competing medium is an obvious alternative but is usually refused by competing enterprises. Therefore, it makes sense to place advertisements in media that, to a large extent, address the same target audience, but that do not directly compete with the advertiser’s own product. For example, supra-regional newspapers regularly place advertisements in student magazines. Another example is that business magazines advertise via TV spots in news networks. Also sales promotion is a frequently used instrument, although even in this case there is the problem that measures undertaken to increase profits are frequently propagated via one’s own medium. Thus, such sales promotion is minimally adequate to acquire new customers. However, temporally limited special offers can only be offered for media products that are distributed against payment. Hence, it is not surprising that in recent years, public relations has considerably grown in importance in the area of electronic media. It is primarily sponsoring and event marketing that can be cited here. In the advertising markets, the strategy of achieving positioning through factual information is the most prevalent. On the one hand, factual information allows better objective quality assessments. On the other hand, such positioning takes place due to the structure of the markets, in which it is primarily enterprises that act in an economically rational manner that are encountered. Hence, advertising and direct marketing, but also personal forms of communication, are used as communication elements in many market segments.

4.4

Organizational Management

Essential characteristics of successful enterprises, such as high transparency, flat hierarchies, clear responsibilities, short decision-making processes, distinctive market orientation, and high employee motivation and satisfaction, can be definitely traced back to the organizational structure. Especially with regard to media enterprises, the importance of organizational management is reflected, e.g., in the necessity of clearly regulated competencies and responsibilities within the editorial office in order to react quickly to unexpected events or, rather, in the closely market-oriented organizational structure of large media enterprises, as a prerequisite for the customer-oriented focus of their product lines. It becomes clear that the terms “organization” and “organizational management” primarily concern the creation of rules and guidelines, with whose help a concerted

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and thus efficient daily business routine and business operation can be guaranteed. These rules restrict the employees’ individual scopes of action and so ensure organizationally consistent behavior that corresponds to the enterprise’s goals. At the same time, organizational rules may have negative repercussions on the enterprise’s flexibility and on employee motivation. Hence, the organizational structure should be coordinated to the internal and external demands on the respective enterprise. Consequently, the optimal structure for achieving the enterprise’s goals, such as for a newspaper publisher with a rather stable assortment and market environment, can be completely different than that for an online enterprise in a turbulent market environment. An expedient service provision in the context of media management requires the arrangement and combination of individual activities in addition to specific qualifications. This means that following the necessary division or splitting of labor for service creation, a corresponding combination or unification of the individual work steps has to take place. Hence, the terms “differentiation” and “integration” are frequently designated basic elements of organizational management in the relevant literature. However, the fundamentally sequential and opposing course of both of these management functions should be noted: the more intensively the differentiation of an organization is practiced, the more difficult the implementation of subsequent integration is. Both of these fundamental principles of the management function “organization” are addressed below, although the specifics of media enterprises need to be carved out.

4.4.1

Organizational Differentiation

Since generally the necessary activities for achieving the enterprise’s goals cannot be accomplished by an individual person, the optimal division and allocation of organization members’ work steps form the starting point for each systemically implemented organizational differentiation. As a result, there are formally set enterprise structures whose differentiation level depends on the degree of specialization in the departments or areas. A prerequisite for the organizational division and allocation of work steps is a detailed task analysis that can take place by means of the five dimensions of performance, objects, rank, phase, and mutual relationship. Thereafter, corresponding organizational units can be carried out within the framework of a task synthesis. In business practice, it should alternatively be resorted to various organizational standards, such as the difficulty, variability, interdependence, complexity, novelty, and structure of the tasks. If the enterprise’s overall task is finally subdivided by means of these criteria, the determined fields of activities have to be allocated to particular positions or departments. Within the framework of horizontal job creation, two structural principles are differentiated: centralization, i.e., the compilation of similar subtasks into one job/department, and decentralization, i.e., separation of similar tasks and allocation to several jobs/departments. In contrast, vertical job creation distinguishes

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99

between line authority, i.e., direct command of the superior over the subordinates, and staff authority, i.e., professional support of the line and other jobs. Centralization of advertisement sales in the online area in comparison with decentralized sales of printed advertisements, for example, is typical for media enterprises for which the location of the customer often dominates over spatial bundling opportunities. Altogether, the process of job creation, however, should not be static, but rather flexibly set up, since the individual jobs can be subject to considerable changes over the course of time. While in the past, technical knowledge and know-how did not necessarily constitute prerequisite qualifications for an editor, today they are considered basic qualifications. As fundamental principles of organizational differentiation, the functional and the object-oriented structure can be distinguished.

Functional Organization According to the basic idea of functional organization, all competencies necessary for a homogeneous task spectrum are pooled into one decision unit, i.e., the formation of the organizational units follows the performance principle. The functional organization is primarily found in small- to medium-sized enterprises that often operate in only one single business field with a relatively homogeneous production program and are not exposed to major environmental changes. Even initial efforts at internationalization are often organizationally embedded in the establishment of the enterprise’s own export department. The advantages of efficient service creation and the achievement of productivity gains through functional specialization are accompanied, however, by considerable disadvantages. These are fragmented work processes and departmental egotism, a lack of transterritorial coordination (especially with the increasing size of the enterprise, differentiation of the product range, and regional expansion), and slightly distinctive flexibility and customer orientation. Within the media sectors, functional organizational structures can be found primarily in regional enterprises that are focused on specific formats. This is clarified further in Fig. 4.10 with respect to a cable television enterprise.

Management board

Controlling

Accounting

Data processing

Advertising sales

Human resources

Technical operations

Marketing

Customer service

Fig. 4.10 Typical functional organization of a cable television enterprise. Source: Wirtz (2005, 2019b)

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On the positive side of this organizational structure is the bundling of the respective specialists and the avoidance of resource duplication. A criticism is the strengthening of the traditional rift between the business administrative and primarily journalistic motivated interests within a publishing house. Aside from inefficiencies in the work processes, these possible communication barriers between the editorial and advertising/sales departments can prevent an integrated customer orientation.

Object-Oriented Organization The difference between functional and object-oriented organization can usually be seen in the second level of hierarchy, although the decision for a performance or object structure can basically be made on each hierarchy level and neither organizational principle can mutually exclude the other. While the former is structured along the value creation chain according to the functions, the latter’s constituting criteria that shape the organization are products/ services, customers, regions, or markets. In contrast to functional organization, with which similar performances are pooled together, a bundling of all those (dissimilar) performances that are necessary for the realization of the respective object takes place in the consequent implementation of the object-oriented principle. The most prominent characteristic of the object-oriented structure is reflected in the establishment of independent business units as profit centers that lead the area of responsibility with a high degree of independence and with the goal of maximizing the profit or profit contribution. If the profit centers additionally become legally independent, an affiliated company is created. In this process, the profit centers themselves become subgroups if they spin off (legally independent) subsidiaries. The parent company then often assumes the function of a holding company, which is limited to mere leadership tasks and intervenes only indirectly in the operative business. The Walt Disney Company is an example of a management holding company that is organized as independent profit centers. The service program and the enterprise functions constitute the central structuring criteria. Only the corporate areas of human resources, global security, corporate strategy, corporate finance, and corporate communications are delineated according to functional criteria. Through this process, a globally uniform distribution of the products is achieved. A worldwide line responsibility on the business unit level results. The organizational structure of The Walt Disney Company is portrayed in Fig. 4.11.

4.4.2

Organizational Integration

The jobs and departments set up within the framework of organizational differentiation result in inevitable friction in the service process due to their human resources, temporal, geographical, and material separation. Therefore, it is not surprising that organizational integration is often seen as the more complex and more important task of organizational management. Three important mechanisms for the solution of

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101

President & Chief Executive Officer

ILLUSTRATIVE EXAMPLE

Senior Executive Vice President, General Counsel and Secretary

Parks, Resorts, Experiences and Consumer Products

Media networks

Studio entertainment

Direct-to-Consumer and International

Disney-ABC Television Group

Walt Disney World

Walt Disney (Animation) Studios

Disney Digital Network

ABC Daytime, Entertainment, News

Shanghai- and TokyoDisney Resort

PIXAR Animation Pictures

BAMTech Media

ESPN, Inc.

Disneyland Hong Kong and Paris

Disney Music Group, Disney Theatrical Group

Hulu

Buena Vista International

Disney Cruise Line and Adventures by Disney

DisneyToon Studios, DisneyNATURE

Walt Disney Studios Home Entertainment

A&E

Walt Disney Imagineering, Disney Publishing

MARVEL Studios

Disney Channels Worldwide

Freeform, ProdCo, Inc.

Disney Store

LUCASFILM Ltd.

Disney Media Distribution

Etc.

Etc.

Etc.

Etc.

Human resources

Global security

Corporate finance and Corporate strategy, real estate and business development treasurer and technology group

Corporate communications

Fig. 4.11 Profit center organization of The Walt Disney Company. Source: On the basis of own analyses and estimates as well as Disney (2018), and Wirtz (2019b)

organizational integration, namely, hierarchy, guidelines and plans, and selfdetermination in groups, are introduced below, whereupon the main focus shall be clearly directed at hierarchical coordination.

Integration Through Hierarchy The purpose of forming a hierarchy is to organize the jobs and departments, created through an asymmetrical division of power in the course of the organizational differentiation, into a system of superior, subordinate, and commensurate entities, with the aim of being better able to coordinate and control them. For meaningful task performance, the competencies (i.e., the rights and authorities of the job or department) should correspond to the respective tasks or responsibilities according to the congruence principle. The organizational hierarchy is usually portrayed in a line drawing, with lines representing the chain of command (running from up to down) and lines representing reporting, communication, and complaints (running from below to above). If a subordinate job is connected with only one line to only one superior job, it represents a so-called one-line system.

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However, if there are connections to several hierarchically subordinate jobs, one speaks of a multi-line system. The line-and-staff organization seeks to combine the advantages of a one-line system with a functional specialization. In this context, the line entity that is overburdened with daily business is supported by a staff position that concerns itself with conceptual and strategic tasks. However, the combination often proves to be extremely conflictual in practice due to the superior know-how and the lack of managerial authority in the staff unit.

Matrix Organization A matrix organization is a multi-line organization that combines the functional and object-oriented structural criteria. Even if arbitrary combinations are basically conceivable, the vertical dimension is usually functionally oriented, whereas the horizontal is object-oriented. Matrix organization can be applied as a general structural principle on each hierarchical level of an enterprise. However, one speaks of a tensor organization if the two-dimensional structure is supplemented by additional dimensions. The clear delineation of the decision-making and directive-issuing authorities has proved to be critical for the matrix organization. Advantages of shorter communication channels, consideration of various perspectives in problem-solving, and the precedence of professional expertise vis-à-vis the hierarchy are indeed attributed to the matrix organization. However, these advantages are countered by serious disadvantages, namely, a great potential for conflicts and power struggles, the lack of accountability for success or failure, a great need for communication, protracted decision-making processes, and the danger of the implementation of suboptimal compromises. In the media industry, the matrix organization is to some extent employed by book publishers, for which the editorial office acts as product management. A typical matrix organization in a book publishing house is shown in Fig. 4.12. Project Organization The formal organizational structure of enterprises, the so-called primary organization, is often superimposed from secondary organizational structures to handle new or time-limited issues. Precisely for the short-term concentration of activities and measures, project organization has proved its value for the process in which specialists from various fields are brought together in the organizational structure for the duration of the project. In the media industry, project organizations can be found as a secondary structural characteristic in a cross section of all media. However, project organizations, being primary organization, are typically applied for movies. In particular, major movie productions resort to numerous freelance workers and service providers for the duration of the project. This is because of the highly specific profile of requirements and the temporally limited action, aside from an infrastructure of administrative activities within the production enterprise.

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103

Business management

Product range

Productionmanagement

Distribution/ Sales

Customermanagement

Controlling

Book 1

Book 2

Book 3

…

Fig. 4.12 Typical matrix organization of a book publishing house. Source: Wirtz (2016b, 2019b)

Integration Through Guidelines and Plans Primarily in larger organizations, guidelines in the sense of rules and programs, as well as plans to help with integration, are additionally used aside from the hierarchy in order to guarantee homogeneous task performance and coordinated relief of the line organization. Thereby, it should be noted that rules and programs that have a long-term orientation and are recorded in writing, i.e., they do not require personal communication, can only be meaningfully used in the sense of support for if-then decisions for problems with a high degree of standardization. Aside from routine programs (predetermined reactions to specific initial situations) and aim-oriented programs (the aspired goal is declared binding), the literature distinguishes between so-called policies (principles and guidelines, e.g., for product or purchasing policy), procedures (detailed provisions for a subdivision, such as order processing), and rules (concrete directions for action in the form of allowed or prohibited). This division is made in dependence on the remaining scope of action. Guidelines and plans tend to be oriented to the enterprise or the sector. Thus, a particular connection to the media appears merely enterprise-specific, for example, regarding certain guidelines for the selection and production of movies (e.g., restrictive handling of adult content, etc.), the requirements of a certain political focus, and a narrow journalistic style for research and writing in a newspaper publishing house, or a predetermined quota of music titles for a radio broadcaster.

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Integration Through Self-Determination in Groups Self-determination has established itself as a third mechanism for integration in enterprises. It is primarily focused on the direct coordination of unforeseeable problems related to deadlines or functions between the involved departments and assumes a superiority of teamwork over line guidelines. While spontaneous (horizontal) self-determination does not manifest any institutional anchor, in the meantime there are numerous formally organized, horizontal self-determination efforts such as committees and workgroups, department leadership conferences, as well as coordination and integration units. A high degree of integrative power and qualitatively high-caliber decisionmaking, as well as efficient decision implementation, is attributed to selfdetermination by its proponents. Self-determination’s detractors, in contrast, designate it expensive and time-consuming. Moreover, they see the risk of disadvantageous compromises and rejection of minority opinions. In addition, it appears critical that self-determination subliminally imputes a high degree of autonomy to the coordinating parties and their goals, which in reality are found only infrequently. Furthermore, this integration mechanism requires a strong identification with the enterprise’s in-house goals and ideals, along with a pronounced willingness to cooperate in order to be able to override rules, programs, and hierarchical constraints. Knowledge Review Questions 1. What are the stages of the situation analysis? Explain this stages! 2. What sales policy instruments are important in the media sector? 3. Which factors do influence the procurement management?

5

Business Models and Value Creation in the Newspaper and Magazine Market

The print media industry is one of the most important branches of the media industry. Print products are media products that are distributed in printed form, such as newspapers, magazines, and books. All enterprises that create and/or distribute these products are regarded as print media enterprises. In this chapter the management of newspaper and magazine publishers is examined, using US-American media as examples. Newspaper and magazine publishers are facing intensified competitive pressure due to digitization and market entry of new competitors. Against this background, the following sections present the structure of the newspaper and magazine markets as well as the interactions of the market participants. Value creation structures, core competencies, and core assets are analyzed. The business models of newspaper and magazine publishers and the functions of newspaper and magazine management are illustrated.1

5.1

Range of Products and Services

The portfolio of a newspaper or magazine publishing house comprises all offered products and services. Based on the definitions of print media in Chap. 2.1, a further partitioning into various types of newspapers and magazines is possible. Figure 5.1 gives an overview of the entire range of products and services of newspaper and magazine publishing houses.

1

See also for the following chapter Wirtz (2011b, 2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_5

105

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5 Business Models and Value Creation in the Newspaper and Magazine Market

Products in the press sector

Newspapers

Daily newspapers

Weekly newspapers

• Subscription newspapers

• Weekly newspapers

• Purchase newspapers

• Sunday newspapers

Magazines

Popular magazines • General interest magazines • Special interest magazines

Trade magazines

Customer magazines

• Professionand branchrelated magazines

• Consumer information

Fig. 5.1 Product range in the press sector. Source: Wirtz (2001b, 2019b)

5.1.1

Newspapers

Newspapers are usually distinguished on the basis of three criteria: • Publication frequency (daily, on Sundays, weekly) • Distribution channels (subscription, newsstands) • Circulation area (local, regional, national) In contrast to free newspapers, the need for payment of the distribution is emphasized as another characteristic. Daily newspapers are classified into subscription papers, which are predominantly delivered by delivery boys or by mail and papers which are predominantly sold at newsstands or by other retailers. There are subscription newspapers with local and supra-regional content. Local newspapers are produced for a regionally limited market and usually predominantly distributed by subscription. Among the daily newspapers distributed by subscription only, a positive development can be observed for quality-oriented titles that focus on information and clearly distinguish themselves from the tabloids. Despite declining advertising revenues, the daily newspaper is still one of the most popular advertising media. However, its share in total volume of advertising expenditures has been decreasing since the mid-1980s. Examples of classical subscription newspapers are press titles with regional circulation areas such as “Standard Times” or “Herald News,” and supra-regional daily newspapers such as “The New York Times” or “United States Today.” Newsstand newspapers are also called tabloids, due to their special format. Just as subscription newspapers, they are present in both ways, as regional newspapers (“The Denver Post”) or as supra-regional newspapers (“New York Post”). According to their editorial concept, weekly newspapers may be classified into economic newspapers (e.g., “The Journal of Commerce”), confessional newspapers

5.1 Range of Products and Services

107

(e.g., “Catholic Sun”), and general weekly papers (e.g., “The Phoenix”). Another category is local and regional advertising newspapers which are distributed free of charge in the circulation area and are exclusively financed by advertising revenues (e.g., “Midweek”). Weekly and Sunday newspapers traditionally have a higher circulation than daily papers since many readers prefer to read a weekly rather than a daily newspaper. Also, Sunday newspapers cater to daily readers who do not want to spend the weekend without the newspaper reading they are accustomed to (Picard and Brody 1997).

5.1.2

Magazines

Magazines are generally categorized into popular, professional, and customer publications. Beyond that, confessional magazines, advertisement papers, official journals, and local gazettes may be mentioned. In the following, we primarily discuss popular magazines and professional magazines. Popular magazines usually address a broad spectrum of target groups. The editorial content predominantly consists of currents topics, easily comprehensible information, and entertaining elements. In the sector of popular magazines, general and special interest magazines may be distinguished. In contrast to special interest magazines, general interest titles fulfill the criterion of catholicity to a larger degree. They are conceived for broad audiences and offer the readers an extensive spectrum of information in the areas of politics, economics, current affairs, culture, and entertainment as well as sports. “Newsweek” and “Time” are probably the bestknown general interest titles in the United States. Special interest magazines address a defined reader market segment that is interested in informative and entertaining content on a certain topic. They provide the reader with information on the main topic in a generally comprehensible and entertaining way and are not mainly read out of professional interest as is the case with specialist journals. Special interest titles benefit from the continuous displacement competition among popular magazines since they apparently satisfy the readers’ need for information more appropriately than general interest pictorials. Apart from age- and gender-specific offers, such as women’s, family, or youth magazines, special interest titles cover a wide range of hobbies and interests, such as motor sports, computer/IT, travel, sports, health, or economics. Confessional magazines may also be categorized as special interest magazines. Professional magazines exhibit an extensively homogeneous target group structure and a content-wise emphasis due to this specialization. All periodic prints (including scientific journals) that indent a temporally unlimited distribution that are published at least four times a year and primarily deal with vocationally relevant contents are called professional magazines. Professional magazines essentially report on scientific, technical, and economic areas. In the United States there are more than 5000 press titles within the range of professional magazines. While some titles are also distributed via retail shops and paid subscriptions, the main channel of distribution is controlled circulation, with

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5 Business Models and Value Creation in the Newspaper and Magazine Market

which the magazine is sent free of charge to selected recipients in companies and the revenues are exclusively generated by advertisements.

5.2

Interactions of Market Participants

Despite the increased competitive pressure due to online journalism and various advertising crises, the restructuring process within the US newspaper and magazine market is not yet finished. At the center of the business model in the newspaper and magazine market, there are still publishing houses which arrange customer relations on two partial markets (Chyi and Sylvie 2000). On the one hand, they offer printed editorial content and advertisement space to private end customers. Thereby, in distribution it is distinguished between subscription, retail sale, and magazine-reading clubs. The distribution function is thereby taken over respectively by specialized delivery services and/or by wholesale and retail sellers. On the classical trade route of the retail sale, the risk of returns of unsold copies, so-called remittees, however, stays with the newspaper or magazine publishing house. On the other hand, the attention of the recipients to the advertising market is used as a resource for obtaining revenues. In this context, advertising companies can book available advertising space in the newspapers and magazines through agencies. The determination of the sold circulation as a basis for appropriate decision-making is accomplished by the ABC. Beyond that, companies try to gain access to the editorial part of newspapers and magazines through PR, such as special press events or press journeys. To increase the attractiveness of their products on the recipient and advertising markets, publishing houses conduct brand management and cross-media activities. Thus, for example, news magazines are frequently also marketed as TV spin-offs, which in addition allows the utilization of editorial synergies. In this context, the business magazine “Forbes” may be cited as an example. Figure 5.2 gives an overview of the substantial players and interactions in the newspaper and magazine market.

5.3

Value Creation Structures

The value chain of newspaper and magazine publishing houses can be presented on the basis of five stages, which need to be completed for press product production (see Fig. 5.3). • The first two stages of the value-creation chain comprise the content creation. First, information has to be gathered externally (e.g., from press agencies) or internally (e.g., by reporters). In a second stage, these “raw data” are editorially processed. Parallel to the compilation of content, advertisement acquisition and placement are executed.

5.3 Value Creation Structures

109

Brand management/cross-media

Attention/contacts

Audience

Retail

Reader circle

Newspaper trade

Subscription (physical/ online)

Book trade

Department stores

Gas stations etc.

Wholesale distribution/remission

Press wholesale Direct sales

Wholesale distribution/remission

Newspaper publisher Fee

Advertising booking

ABC¹ Feedback sales figures

Media planning/advertising agencies Fee

Strategic guidelines

PR

Feedback advertising success

Advertising companies ¹ Audit bureau of circulations

Fig. 5.2 Interactions in the newspaper and magazine market. Source: Wirtz (2011c, 2019b) a. Information Procurement b.Content Generation c. Advertising Acquisition Key tasks • Procurement and generation of content and advertising space services

a. Editorial office b. Advertising placement

Product packaging

Print

Distribution

• Creation of editorial content • Acceptance of advertisements

• Layout design, setting, graphical cover design

• Copying respectively print of the print products

• Sales via retail and wholesale • Direct sales

• Editorial offices • Advertising departments

• Art director • Graphic designer • Layout artist

• Printing houses

• Press wholesale • Kiosk, gas station, supermarket • Subscription • Reader circle

Reader

Provider • News and picture agencies • Authors, journalists • The publishers advertising departments

Fig. 5.3 Value chain of the newspaper and magazine industry. Source: Wirtz (2000c, 2019b)

• In the third stage, the content has to be packaged, i.e., advertisements and editorial contributions are brought together. In this stage the layout is created, thus determining the graphical design of the products.

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5 Business Models and Value Creation in the Newspaper and Magazine Market

• The fourth stage of the value creation chain refers to the physical production, i.e., the printing of the medium. Due to the progressive computerization, the pre-press stage is more and more being omitted. The processes of packaging and printing are progressively coalescing. This development allows for printing within a narrow time frame and later submission deadlines. • The last stage covers the distribution of the completed print products via wholesalers and retailers, by subscription or by other distribution channels, such as magazine-reading clubs. If the content is also distributed in the form of online issues, the articles either remain unchanged or they are specially processed by an online editorial office. Thus, the “The New York Times” has its own team of online editors. When producing online issues, the value creation chain shown in Fig. 5.3 is left behind after the second stage at the latest. Packaging and distribution occur in a separate online value.

5.4

Core Assets and Core Competencies

Core competencies are of substantial importance for media companies’ competitive success. The core assets of newspaper and magazine publishing houses include the specialist staff, the brand name, the contact network, and the rate of media penetration. The staff are know-how carriers that frequently have complementary abilities. They occupy a predominant role in service creation and marketing. The brand name provides the distinctiveness of the newspaper or magazine. The contact network consists of different sources of information through which the publishing house obtains input for content creation and market information for advertisement distribution. Four central core competencies are necessary to use the core assets: content sourcing, content creation (editorial competence), product development (format competence), and cross-media marketing. For newspaper and magazine publishing houses, the targeted combination of core assets and core competencies can provide substantial competitive advantages in the reader and advertisement markets (Wirtz et al. 2011). An example of the successful combination of core assets and core competencies is “Forbes magazine.” Brand and customer base are combined with the editorial competence of the “Forbes” editorial department and the format competence of the publishing house to publish several magazines which pursue a similar editorial concept but focus on specific topics (e.g., “ForbesLife” and “ForbesWomen”). Beyond that, the brand is also used for marketing in other media genres (e.g., “Forbes on Fox”).

5.5 Business Models

5.5

111

Business Models

During recent years, business models, being integrated management concepts, have become increasingly important. The business models of newspaper and magazine publishing houses are shown in the following sections, based on simplified business models as presented in the first chapter. Following general outlines of the revenue and service creation models, the characteristics of the business models of newspaper and magazine publishing houses are illustrated.

5.5.1

Revenue Models

Regarding the reader market, primarily revenues from media use are relevant. In this context, sales revenues at retail can essentially be regarded as transaction-dependent revenues. In contrast, transaction-independent revenues predominantly arise from subscriptions. Revenues from media access are not relevant in the print industry. Likewise, other revenues are limited to minor merchandising revenues and services on the reader market, e.g., archiving services. Revenue generation on the advertising markets is especially important for newspaper and magazine publishers. Advertising revenues, which amount to 65–85% of total revenues of newspaper and magazine publishers in the United States, form an important source of income. Considering free newspapers and advertisement supplements, revenues are exclusively generated in the advertising markets. The product offer of print media in the advertising market predominantly consists of traditional advertising space, such as ads and supplements. Finally, revenue generation on the rights markets also plays a role for newspaper and magazine publishers. Here, the focus frequently is on partial rights sale for geographically restricted issues, e.g., licensed editions in certain countries. The government being the fourth source of income of the revenue model is not relevant for the print sector.

5.5.2

Service Creation Model

Press products are published by newspaper or magazine publishing houses. Thereby, the emphasis of publishing activities is on production and distribution of the products. In the service creation model, the most important publisher’s activities are involved, which accrue in producing newspapers and magazines. Thereby, for the publishing management, the service creation’s cost structure is of special importance. A decrease of production costs may result in a competitive advantage in terms of cost advantage. However, due to the fact that publishing houses often operate in numerous business fields, it is difficult to clearly allocate service creation costs in the newspaper and magazine sector. Figure 5.4 gives an overview of the cost and revenue structure of service provision in newspaper and magazine publishing houses. The values stated are average values.

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5 Business Models and Value Creation in the Newspaper and Magazine Market 100 %

20 %

28 % Advertising revenues 62 %

20 %

12 % 10 % 38 %

10 %

Sales revenues Revenue per copy

Sales

Print

Production/distribution costs (48 %)

Editorial

Advertisement Administration acquisition

Profit

First copy costs (42 %)

Fig. 5.4 Cost and revenue structure of newspaper and magazine production (On the basis of own analysis and estimations). Source: Wirtz (2005, 2019b)

One of the most important cost drivers in newspaper and magazine publishing houses is the expenditures for paper. These costs are only partially controllable by the management since the purchase prices can be influenced by the individual publishing houses only to a small extent. With regard to the cost structure of the creation of editorial services, more freedom of design is available to the management. Here, the publishing houses try to undertake cost reduction measures. This includes, above all, the outsourcing of editorial services to freelancers or specialized suppliers.

5.5.3

Business Model for Newspaper Publishing

Newspapers and magazines each have different revenue models. To a large extent, both media are financed by advertising revenues. However, the advertising format and the structure of customers are heterogeneous. Therefore, both media types are considered separately. Advertising revenues are generated through ads and thirdparty inserts.

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113

Third-party inserts are usually inserted as a loose-leaf collection into newspapers. Beyond that, numerous newspaper publishers distribute advertisement supplements containing only a little editorial content in order to cover the local advertising market comprehensively. For nationally distributed newspapers, such as “The New York Post,” supraregional advertisements are another important source of revenues. Furthermore, many companies extend their service range on the recipient markets through new technologies. Besides traditional print products, they therefore increasingly offer videos, CD-ROMs, or online services. Figure 5.5 presents a simplified business model of newspaper publishing houses. The figure shows the service creation processes of the individual services as well as points of contact to external partners. It illustrates the five processes already presented in the context of the value chain. The service range of the presented business model is directed to the reader markets and advertising markets. On the advertising markets, the service range of the publishing group consists of a set of different services regarding advertising space: traditional print advertisements and supplements but also special advertising formats, such as sponsoring or promotions. In the context of online advertisement, the supply may differ regarding advertising formats, for example, advertisement in newsletters, banner ads, as well as advertisement via mobile Internet platforms.

5.5.4

Business Model for Magazine Publishing

The revenues of magazine publishing houses can be divided into three categories: revenues from the sale of advertising space, revenues from the sale of the magazines, and other revenues. The latter particularly cover revenues from other business activities of the publishing houses, such as printing revenues. Compared to newspapers, the share of advertising revenues in total turnover is lower for magazines. Therefore, magazines are generally less affected by fluctuations of the advertisement revenues than newspapers are. Due to the supra-regional distribution, magazines are more interesting for nationally advertising companies. Since most magazines are printed in color and on high-quality paper, manifold design possibilities are available to the advertising customers in comparison to newspapers. Considering the service creation model, the share of printing costs with regard to total costs for magazines has to be determined lower than for newspapers. Due to the nondaily publication frequency, there is no need to use a delivery service for maganzines, unlike for newspapers. In most cases magazines are delivered by mail. The business model of magazine publishing houses is presented in Fig. 5.6. Knowledge Review Questions 1. Describe the product range in the press sector! 2. Explain the interactions in the newspaper and magazine market! 3. Which stages does the value chain of newspapers and magazines comprise? Give examples!

• Advertisements • Supplements • Online advertisements (e.g. newsletter, banner, WAP, SMS etc. ) • Special types of advertising •…

Advertising space

• Online Service A • Online Service B •…

Online services

Print product

Access experts and correspondents Large and global customer base Preparation, systematizing, co llection and provision of data, Strong brand, deonymization Contextualizing competence Technological competence Content creation competence Competence of promoting advertising efforts

Competencies/Resources Model

Placing / Inclusion

User / expert Interaction

Packaging of editorial content

• Title A • Title B •…

Market Offer Model

Fig. 5.5 Business model of a newspaper publishing house. Source: Wirtz (2000c, 2019a)

• • • • • • • •

Management of advertising placements

Administration of communication

Editorial creation of own content

Strategic newspaper business model set-up Strategic coverage of all relevant areas Securing presence in relevant Points-Of-Sale Definition of target markets Securing competitive advantage Branding and identity strategies, sales and pricing strategies , formats and channel strategies •…

Strategy Model

Transfer of the advertising content

Offer of advertising placements

Payment

Services

Gratification of the content

Content Delivery

Collection, classification and finishing of external created content

Value Creation Model

Newspaper publishing house

Network Model

Target group contacts

Advertising revenues

Distribution revenue

• Presentation • Distribution

Performance

Revenue Model

Customer Relationship Management

Advertising customers

Reader/ recipient

Customer Model

• Formal and informal to news agencies • Access to key informants • Network to professional freelance correspondents and journalists • Member of key research and investigation consortiums • Access to rights and proprietary databases

Integrated Product/Service Offer

• • • • • •

Advertising customers

Expert forums

• Picture/news agencies • Companies’ press officers • ….

Information provider

Procurement Model

Finance Model

114 5 Business Models and Value Creation in the Newspaper and Magazine Market

• • • • • •

Licenses

Advertising space Advertisements Supplements Online advertisements Theme specials Reproductions for partners …

• License A • License B •…

Syndication • Marketing of text and photo productions (time licensing and syndication)

Online services • Online Service A • Online Service B •…

Print product

Strong brand, deonymization Access experts and correspondents Large and global customer base Preparation, systematizing, collection and provision of data, Contextualizing competence Technological competence Content creation competence Competence of promoting advertising efforts

Competencies/Resources Model

Placement/ integration

License management

Packaging of editorial content

• Title A • Title B •…

Market Offer Model

Fig. 5.6 Business model of a magazine publishing house. Source: Wirtz (2001b, 2019b)

• • • • • • • •

Management of advertising placements

Brand licenses rights

Collection, classification and fishing of external created content

Strategic magazine business model set-up Strategic focus areas Securing presence in relevant Points-Of-Sale Definition of target markets Securing competitive advantage Branding and identity strategies, sales and pricing strategies , formats and channel strategies •…

Strategy Model

Transfer of the advertising content

Offer of advertising placements

Payment

Services

Gratification of the content

Content Delivery

Editorial creation of own content

Value Creation Model

Magazine publishing house

Network Model

Advertising revenues

Target group contacts

License fees

License rights

Purchase price

Distribution

Distribution revenue

Distribution

Revenue Model

Customer Relationship Management

Advertising customers

Publishers, more buyers

Editorial departments advertisment

Reader/ recipient

Customer Model

• Formal and informal to news agencies • Network to professional freelance correspondents and journalists • Access to rights and proprietary databases • Member of key research and investigation consortiums • Cooperations

Integrated Product/Service Offer

• • • • • •

Advertising customers

• Picture/news agencies • Companies’ press officers • ….

Information provider

Procurement Model

Finance Model

5.5 Business Models 115

6

Business Models and Value Creation in the Book Market

The book as a medium has a special position in the media industry. It is the eldest mass medium and considered to be the medium with the highest cultural value. Despite this exceptional position, the book industry is simultaneously confronted with economic constraints. Therefore, the book industry management is facing a considerable contradiction between cultural value and economic activities. This chapter offers an overview of the economic environment of book publishers. It presents the unique characteristics of book publishing houses’ value creation chain, core assets and competencies, as well as the relevant business models.1

6.1

Range of Services

The service range offered by book publishers is complex. Book publications can be divided into different subject areas (Greco 2000). Moreover, they can be differentiated according to presentation types (formats). In this context, the standard formats are hardcover, paperback, audio book, and new media (e-book, CD-ROM, digital book available on the Internet). For briefly illustrating the service range, this section will use the following categories: general literature, reference books, and others (see Fig. 6.1). This categorization facilitates a distinction that captures the most important content-related and usage-related characteristics of the individual market segments. Fiction belongs to the category of general literature and constitutes the functional group with the highest number of titles. It is comprised of both narrative and entertaining literature. Further genres include non-fiction books, youth and children’s books, as well as story books.

1

See also for the following chapter Wirtz (2011b, 2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_6

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Products in the book sector

General literature

Text books

• Fiction book

• School books

• Non-fiction book

• Scientific text books

• Children’s books and books for young people

•…

•…

Others • Cartographical products • Notes • Lexicons, encyclopedias • New Media •…

Fig. 6.1 Product types in the book sector. Source: Wirtz (2001b, 2019b)

Regarding reference books, all literature that addresses scientific topics related to the disciplines of technology, nature, the humanities, and social sciences are included in this category. The distinction between reference books and non-fiction books, which to a small extent deal with scientific topics as well, is based on the reference books’ presentation of popular science. Textbooks and educational books also belong to the category of reference books. The category of other products includes all further publishing products that barely feature coherent text. These publications represent a considerable portion of the annual book production as they frequently need to be updated.

6.2

Interactions of Market Participants

In contrast to other media sectors, the players and the interaction structures in the book market can be easily classified. This is mainly due to the fact that advertising does not play an important role in the book market. Therefore, this branch can be analyzed based on a traditional unidirectional sales market. An overview of interactions in the book market is given in Fig. 6.2. Publishing houses being essential players regarding the business model of the book industry acquire content to produce books or ebooks and exploit the various distribution levels to offer the finished product to the recipients. Basically, content procurement can be subdivided into direct contact with authors and acquisition of licenses. Regarding the former, new content is developed whereby the selection and retention management is a decisive factor. Regarding the latter, inputs that already exist in other media or countries are adapted to the target market. Moreover, content from domestic authors can also be offered on the licensing market to generate additional returns.

E-book

Physical

Big online traders

Authors

Binding measures/fee

Book clubs Book trade

Online trading

Retail Department stores

Book publisher

License trading

License processing

Communication measures/wholesale distribution

Wholesale

Communication measures/retail distribution

Antiquarian bookshop

Fig. 6.2 Interactions in the book market. Source: Wirtz (2011c, 2019b)

Content

Lectorate

Printing

B2B direct sale

Fee

Audience/recipients

6.2 Interactions of Market Participants 119

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The commercial structure in the book market is much differentiated. Some important online stores, for example, Amazon, obtain their assortment directly from the publishers and share the intermediary trade margin as the final consumer price is legally standardized. In contrast, smaller online stores are supplied by wholesale. Due to significant market power of retail, direct distribution is only marginally relevant within the book market.

6.3

Value Creation Structures

The value creation for book publisher significantly differs from that for newspaper and magazine publishers. Book publishing houses have a considerably lower proportion of content production than other print companies. The value creation chain of book publishers can be illustrated based on five value-added steps (see Fig. 6.3). Within a book publishing company, the editorial office is responsible for the procurement and processing of manuscripts. Thereby, program and title planning is the starting point. Within the framework of a determinate program structure, content procurement, i.e., the acquisition of authors and manuscripts, as well as procurement of licenses for successful books occurs. Literary agents play an important role as intermediaries on the procurement market. They contract authors and offer the manuscripts to publishers. However, in addition to the acquisition of new authors, editorial activities are primarily characterized by reviewing manuscripts. In this context, content

Content procurement

Lectorate (editorial office)/ editorial department

Trade of licenses and rights

Print

Distribution

Key tasks • Manuscript procurement • Recruiting authors • Purchase of license

• Planning, controlling and completion of the production

• Utilization of rights and licenses

• Technical book production

• Direct sale • Sale via intermediaries, whole-sale and retail

• Editorial departments • Lectorates/ editorial office of publishers

• Publishers • Agents • Authors • Collective rights agencies

• Printing press • Bookbindery

• Publishers • Authors • Book wholesaler‘s, wholesaler, rack jobber • Book stores, department stores • Book club

Provider • Publishers • Agents

Fig. 6.3 Value chain of the book industry. Source: Wirtz (2000c, 2019b)

Reader

6.4 Core Assets and Core Competencies

121

production is limited to the revision of manuscripts (content and formal editing) and organizational management of the publications. Furthermore, the editorial office is also responsible for the assistance and support of authors acquired by the publishing house. In this view the content production of specialized publishers is disregarded. Nonetheless, it should be noted that their production capacity is significantly more comprehensive since raw version content is procured and refined into final products by the publisher’s own editorial department. For example, the content production of cartographic publishing houses also includes the purpose-oriented preparation of geographical material based on satellite photographs or official topographic maps. Publishers of schoolbooks and encyclopedia are other examples for book publishers with comprehensive editorial operations. Another value-added step is the utilization of rights for the manuscript being published, held by the author, agent, or publisher. For instance, licensing and rights trading includes the business unit of imprinting. In this context, a book publisher uses the name and logo of the editing publisher to achieve a higher amount of book sales. Here, cooperation between press and book publishers can be especially observed in this case. The trade of licensing for merchandising products, which by now achieve high profits, must also be mentioned. After the last editing phase, the editorial office approves printing: the imprimatur. The printing and binding comprise the physical production of the book medium. While book printing is comparable to newspaper and magazine printing, books are bound differently than magazines. Distribution largely includes the delivery of intermediary and wholesale trade. However, retail trade is also directly delivered in part. To a lesser extent, direct distribution to final customers is also carried out by publishers or authors, i.e., selfpublishers. Some publishers limited themselves to this form of distribution and distribute their books exclusively directly, especially small publishers. Though online bookstores offer publishers new opportunities for direct distribution, these can only be useful within limits due to the market power of retail bookstores. Another type of direct distribution is book clubs; in the United States, the “Book of the Month Club” by Najafi Companies is the most renowned. The book club business is, however, declining in the United States, while in China significant growth potential can be seen.

6.4

Core Assets and Core Competencies

Core assets and core competencies comprise the essential material, conceptual, and procedural resources of the business model. The core assets of book publishers include the staff, networks, brands, and customer base. Though a large portion of book publishers generate input applying external authors, the editorial offices of specialized publishers employ staff with very specialized skills, which improve the production of goods primarily through teamwork.

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Networks are a core asset as the contact with potential authors and agents is important in the procurement market to have competitive advantage by obtaining access to lucrative manuscripts. Furthermore, small publishers often use networks of specialized providers for services such as editing or layout in production and can achieve competitive advantages through flexible network design. Reference, scientific, and specialized publishers indicate a high standard of publication quality to potential buyers through their brand names and thus reduce the purchasing risk. Similar to brands, customer base is one of the core assets especially for reference, scientific, and specialized publishers since buyers not only take the author into account but also the publisher when making purchase decision. The core competencies of book publishers required to utilize core assets are content-sourcing competence, editorial office, and promotion competence. In the framework of content-sourcing competence, the goal of the publisher is to acquire lucrative manuscripts that are largely produced by external authors. The content creation competence of publishers is also called the editorial office competence and consists of two subcompetencies. On the one hand, it is the ability to edit manuscripts, which are appropriate for release (editing competence), that is a significant competence. On the other hand, the ability to get authors to give their long-term commitment to a publisher through comprehensive and individual assistance (support competence) is a crucial competence. The promotion competence of book publishers refers to the ability to generate public attention for a book through promotional activities (e.g., reading tours). In this way, the publishers shall make readers aware about an author and his/her book to convince him/her to a book purchase.

6.5

Business Models

Business models being integrated management tools exhibit great importance within the book sector as well. The following section offers a general characterization of the revenue and service creation models used by book publishers. Furthermore, a simplified business model will be developed and presented.

6.5.1

Revenue Models

Comparing revenue models of book publishers and newspaper/magazine publishers, certain clear differences are revealed. The generation of revenues in the book sector is mostly performed through the sale of books in the recipient markets. Services creation is essentially limited to information and entertainment services and barley includes advertising space. However, one exception is the book club business, which partly has subscription character. In contrast, other types of revenue are often of subordinate importance. Among these other types of revenues is revenue generated in the rights and licensing markets. This often involves the sale of fractional share for geographically limited

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123

book distribution as well as the granting of licensing in specific formats, e.g., paperbacks. Furthermore, utilization rights can also generate revenue outside of the printing sector. This primarily involves the utilization of successful manuscripts through movie, television, magazines, and merchandising. For example, for the movie rights of the bestseller “The Passage” by Justin Cronin, Ridley Scott paid US$1.75 million in 2010. Merchandising has also become an important revenue source for media companies. Warner Bros. purchased all merchandising rights for Harry Potter in 1998. In November 2001, Warner Bros. has already sold over 300 sublicenses and thus earned more than US$100 million. In this way, revenue can be achieved through the sale of rights or royalties for the use of rights. However, differences can be identified between the book genres when it comes to revenue earned in the rights and licensing market. Approximately 2% of revenue is generated by ancillary rights. Religious books and art books earn about twice as much. This difference is even more obvious when considering advertising revenue. For most book genres, this type of revenue does not exist. However, in the case of non-fiction books, advertising revenue accounts for approximately 17% of total revenue.

6.5.2

Service Creation Model

For book publishers, production and distribution are the focal points of the business activity. Especially important for publishing managements is the cost structure of service creation. Figure 6.4 offers an overview of cost and revenue structures in the US-American book sector. In the book market, revenues are mainly generated through book sales. Therefore, advertising revenues rarely occur (Wirtz et al. 2011). The cost structure is strongly marked by the fact that books’ carrier medium is paper and that the production and distribution are associated with significant costs. In the United States, books are distributed to customers according to a two-stage system, which has an average trade margin of 29%. Production and distribution, i.e., the printing and delivery to stores, account for 23% of total revenue. The amount of first copy costs in relation to total revenue is approximately 39%. The cost of content production especially includes the costs for manuscripts and utilization rights. Marketing costs are approximately 12% and administrative costs 10% in average. The profit margin of book publishers is about 9%. This cost structure shows that the essential starting points for cost reduction lie in production, marketing, and distribution. Direct distribution on the Internet is especially attractive for publishers as they can internalize the trade margin.

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6 Business Models and Value Creation in the Book Market 100 %

14 % 15 %

5%

18%

17 %

Sales revenues

12 % 10 % 9%

Revenue per book copy

Retail margin

Wholesale margin

Sales

Print

Trade margin (29 %) Production/distribution costs (23 %)

Content Marketing Adminisproduction tration

Profit

First copy costs (39 %)

Fig. 6.4 Costs and revenue structure of the manufacturing (on the basis of own analysis and estimations). Source: Wirtz (2005, 2019b)

6.5.3

Business Model of Book Publishing House

Book publishers are companies that are profit-oriented but also see themselves as part of the cultural industry. When making decisions, the management of book publishers has to take into consideration both the cultural mandate and market demand. Accordingly, book publishers can be differentiated according to cultural and economic dimension, which means that in some cases the release of a book is not only dependent on economic principles. “A book is published because an editor believes a title has a great literary merit, makes a convincing argument, has commercial potential, or needs to be published” (Greco 2005, p. 8). The cultural dimension of books is reflected in the special legal framework for books. A book publisher usually publishes titles that are produced by external authors and, to a lesser extent, editorial offices. Following the production, the final product is delivered via present distribution channels. In this process, new distribution channels other than bookstores have been developed due to the Internet. This enables, among other things, direct delivery to book consumers. The business model of a book publisher is illustrated in Fig. 6.5. The range of goods of the illustrated business model includes books in different genres and editions. First editions are usually published in hardcover, while the less expensive paperback editions supersede these after a certain period of time. Digital and electronic products make up another element of the service range including especially CD-ROMs, audio books, and e-books.

• • • •

Licenses and rights Paperback rights Country licenses Merchandising licenses …

Advertising space • Advertisements • Imprints •…

Digital/electronic products • CD-ROMs, audio books, eBooks

Other services • Reference books, modern antiquarian

Paperbacks/soft-cover

Strong brand, deonymization Large readership Contracts with well-known authors Marketing expertise Presentation skills …

Competencies/Resources Model

Integration to the publisher’s program resp. resale

Placement/ integration

Provision of literature

Market Offer Model Books/hard-cover • Fiction, non-fiction, books for children and teenager, guidebooks •…

Fig. 6.5 Business model of a book publishing house. Source: Wirtz (2000c, 2019b)

• • • • • •

Management of licenses and rights

Management of advertising placements

Editorial creation of own content

Strategic focus on content areas Selection and presence of relevant Points-Of-Sale Securing competitive advantage Digital transformation strategy Strategic positioning along respective genres Branding and identity strategie s, sales and pricing strategies , formats and channel strategies •…

Strategy Model

Fees

Licenses/rights

Transfer of the advertising content

Offer of advertising placement

Gratification of the content

Content Delivery

Screening and revision (lectorate) of external produced content

Value Creation Model

Book publishing house

• • • • • • •

Network Model

Fees

License rights

Advertising revenues

Advertising space performance

• e.g. via The Club

Direct sale

Distribution

Distribution revenue

Revenue Model

Customer Relationship Management

Publisher/ film production

Advertising partner

Reader/ recipient

Customer Model

Distribution network Network with writers, illustrators, translators and proofreaders Trade fair network Access to rights and priority databases Association membership Cooperation …

Integrated Product/Service Offer

• • • • • •

License/rights dealer

Advertising partner

• Authors • Literature agents • Publishers • ….

Manuscript provider

Procurement Model

Finance Model

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In the licensing and rights markets, the range of products is comprised of rights and licenses, for example, for the publication of paperbacks or the translation of manuscripts as well as merchandising. The range of licensing and rights products is coordinated for the entire group in a central department. Through international presence, it is possible for the publisher to assign intergroup licenses for various international subsidiaries. Knowledge Review Questions 1. What are the effects of changed consumer behavior on the development prospects of the book industry? 2. What different types of products exist in the book industry? 3. What are the core assets and core competencies that book publishers must have in order to secure long-term success? Put the value chain of book publishers into order! 4. What factors are crucial in the cost and revenue structure of the book industry? How are the first copy costs and distribution costs comprised?

7

Business Models and Value Creation in the Movie Market

Movies play a meaningful and multifaceted role in today’s society. A movie is simultaneously a cultural property, an entertainment medium, and an economic commodity. When examining the movie industry, the economic processes of production, distribution, and utilization are, in addition to the social, political, and historical parameters, of significant interest.1

7.1

Range of Services

The range of services offered to the end-consumer is not only determined by the main service provided by an individual company but also by the comprehensive range of services offered by the entire movie industry. At the first level, the range of services of the movie industry can be categorized into three divisions, namely, movie screening, home entertainment, and merchandising. At the second level, these three segments can be further differentiated according to distribution characteristics and product characteristics. The movie screening segment includes all public presentations of movies in movie theaters when the movie is in focus. Multiplexes, individual theaters, and event theaters are differentiated due to the different types of movie screenings. Feature movies played in movie theaters can also be differentiated according to various content-related characteristics. In addition to the classifications according to mainstream (large target group) or special interest, or rather original and dubbed versions, movies can be categorized according to genre. The second product segment includes the services of the home entertainment division that specifically focus on movies. The products offered in this segment can be differentiated according to limited and unlimited movie products. The use of 1

See also for the following chapter Wirtz (2011b) and Wirtz (2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_7

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movies is limited within the parameters of movie rental, pay-per-view, near-videoon-demand, and video-on-demand. On the one hand, limitations may exist in terms of time restrictions (e.g., movie rental). On the other hand manufacturer may define certain limitations and clear rights of use in the case of digital products. However, regarding movie sales, consumers purchase the permanent rights to the movie so they can watch it as much and as often as they want. The third product segment in the movie industry’s range of services is product merchandising. While soundtracks and in some cases the book upon which a movie is based can be directly related to a movie, licensing and merchandising consumer goods that are indirectly related aim to transfer the image of a movie or its individual characters to products. Especially in the case of movies for children and teenagers, the licensing of indirectly related products has been shown to be especially significant for profits (The Economist 2002). Figure 7.1 summarizes the range of services within the movie industry.

7.2

Interactions of Market Participations

The main player in the movie market is the production company or a network comprised of various movie production companies. Directly or indirectly—via distributors and rights traders—production companies interact with all other players in the movie industry. The most important production companies are part of profoundly vertically integrated corporations (especially the US-American major studios) that usually handle the distribution of movie rights to theaters and rights trading for the sale of ancillary rights under one roof. Together, these three components can therefore be considered as the core of the movie market. Traditional users, mainly movie theaters, retailers, and conferrer of Blu-rays/ DVDs, as well as TV broadcasters, purchase the legal rights to the content or rather copies of the movies in order to make them available to viewers. In this context, video-on-demand and streaming services such as Prime Video and Netflix are also becoming increasingly important. These services not only act as exploiters but also as producers on the market and market their own productions on a large scale, especially in the emerging series market. The distribution of content is carried out specifically according to the particular distribution channel. Other utilization companies, for example, video game publishers or merchandising companies, acquire legal rights in order to use components of a movie in the creation of third-party products (computer games, toy and action figures, etc.). Moreover, production companies establish direct contact with viewers through advertising and brand management. In turn, the production company gains the attention of the viewers, which can then be exploited in the advertising market. In the advertising market, production companies pursue profits by using this attention as a resource. The advertising companies or advertising agencies use

• Original version/ synchronization

• Multiplex facility • Individual theaters • Program theater (special interest or time-delayed film screening) • Events theaters (e. g. open air cinema, university cinema) • Unlimited movie consumption (film sales DVD/Blu-ray)

• Theater version of the TV movie

• Limited movie consumption (film rental DVD/Blu-ray, pay-per-view, near-video-ondemand, videoon-demand) • Alternative film material: several Movie versions (e.g. director‘s cut, alternative scenes, diversity of languages)

• Additional movie material (making-of documentation, interviews, program tips)

Contentional differentiation

Distributional differentiation

Home entertainment

Fig. 7.1 Products in the movie sector. Source: Wirtz (2003b, 2019b)

• Genre (action, thriller, horror, science-fiction, fantasy, western, eastern, drama, music film, cartoon, comedy, children‘s film, documentation and erotic film)

• Fiction/nonfiction

Contentional differentiation

Distributional differentation

Film screening

Products in the movie sector

• Other consumer goods

• Cosmetics and care (e. g. band-aid)

• Theme parks (e. g. Movie World)

• Foods (e. g. fast food restaurant chains)

• Textiles (t-shirts etc.)

• Game (video and computer games, board games, other games and toys )

• Print (book, magazine, film poster)

• Music (soundtrack, theme song)

Merchandising

7.2 Interactions of Market Participations 129

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movies as a medium for advertising messages. The most important form of advertising in this context is product placement. Product placement can even allow the advertising company to affect the shape of context within a movie. For procurement, production companies must also acquire the necessary input factors for movie productions. The most essential factors in this context are the legal rights (e.g., screenplays) and the talent of creative manpower. Creative talent for movie production is comprised of numerous different experts such as actors, writers, directors, animation experts, or a camera crew. Fees, salaries (e.g., actors’ pay), and in some cases profit shares make up the monetary counter flow to the talent and expertise and is one of the most important cash flows in movie production. Additional players on the movie market are governmental institutions. They are institutes for the promotion of movie that provide aid money to players at various levels of the value-added process but in return are financed by dues. Figure 7.2 shows an overview of the most essential players and interactions in the movie industry.

7.3

Value Creation Structures

The movie industry’s value chain can be divided into four steps: procurement/preproduction, production/post-production, rights trading, and utilization. In terms of content, the movie project planning, the initial (partial) financing and the establishment of the team make up the key aspects of the first step. In the actual movie production and post-production phase, the movie footage is produced, cut, edited, and combined with sound. While parts of the relevant legal rights are already sold for financing purposes, movie distribution and rights trading represent the crossover between movie production and movie utilization in the third level of the value chain. The fourth level is comprised of the utilization of the movie in theaters and the ancillary markets. The value chain of the movie industry is illustrated in Fig. 7.3.

7.4

Core Assets and Core Competencies

The core assets of companies within the areas of movie production, distribution, rights trading, and utilization include employees, networks, and brands. In movie production this means employees with a high level of creativity and technical knowhow, e.g., screenplay writers and movie cutters are necessary. Also, in movie distribution and rights trading, individual assets such as in-depth knowledge of the industry and the ability to gage the market potential of movies are crucial for business success. Especially in the movie production sector, networks are important. Networks comprise actors, directors, and the camera crew, as well as financers. For every movie production new teams are created by the producers and production

Advertising companies/ Advertising agencies Authors

Advertisement revenues

Fee

Directors

Actors

Talent/expertise

(Computer games, airlines, etc.)

Other users

Dues

Merchandising

Film makers

Other experts

Governmental institutions (film funds)

Aid money

Dues

Contributions/ rights

Ancillary utilization rights

Rights traders

Trade of rights and financial return

Free-TV

TV stations (TV/IP-TV) Pay-TV

Film rental (digital)

e.g. downloadand streaming services

Producer/production company/production network

Main utilization rights

Film rental (physical)

DVD/Blu-ray

Internet distribution

Fig. 7.2 Interactions in the movie market. Source: Wirtz (2011b, 2019b)

Attention

Advertising contacts (e. g. product placement)

Brand management

Distributor

Cinemas

Physical sale/ rental

Recipient/audience

7.4 Core Assets and Core Competencies 131

132

Procurement/ pre-production Key tasks • Production planning/project planning • Procurement of financial resources • Team configuration: director, actors, camera Provider • Major Hollywood studios • Producers • Film production companies

7 Movie production/ postproduction

Business Models and Value Creation in the Movie Market

Trade of rights/ movie rental

Utilization Recipient Theater

Ancillary markets

• Production • Post-production • Soundtrack • Special effects

• Movie rental • Trade with other rights (DVD/Bluray, TV, world rights) • Marketing

• Distribution to theaters • Marketing • Cinema presentations

• DVD/Blu-ray sales and rental • Video-ondemand and pay-per-view • Pay-TV and free-TV • Merchandising

• Film production companies • Special effects companies • Post-production companies • Recording studios

• Film distributors • Rights trader

• Film distributors • Multiplex theater chains • Individual theater operators

• DVD/Blu-ray producers • Retail • Video shop/ media center • Pay TV • Free TV

Fig. 7.3 Value chain of the movie industry. Source: Wirtz (2003b, 2019b)

companies, which are unique to each project. Contact to potential team members is frequently established through networks, which often touch upon personal relationships and act as determining factors in the realization of a movie project. Brands are also a core asset of production companies, e.g., Universal or Paramount. They are established through many years of experience and high levels of competence and are therefore especially important in the pre-production phase as they reflect a certain degree of project security to the investors and actors. With the establishment of movie theater chains and multiplex theaters, brands have also become more relevant in the movie utilization division for company success. Brand names like Regal or AMS imply to viewers that standards of comfort and technological quality are consistent. With respect to the use of core assets within the movie industry, content sourcing, content creation, technological competence, promotion competence, and cross-media utilization competence are all core competencies. The coordination of producer-director collaboration is important within the framework of the content creation competence of a production company. Content creation competence is closely related to technological competence, which includes the ability to employ modern technology in the production of movies. The availability of digital and three-dimensional movie production technologies is one factor that can create sustainable competitive advantages. The promotion competence is especially important for distribution companies since movie distributors are often responsible for the marketing of a movie. Moreover, cross-media utilization competence is also significant in movie distribution and rights trading. In the context of distribution, utilization competence refers to the ability to profitably market a movie through numerous channels.

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Because other channels are available in addition to movie theater utilization, e.g., home entertainment, online distribution, or Pay and Free TV, cross-media utilization competence demands expertise in effective utilization strategies.

7.5

Business Models

This section identifies and differentiates the various business models used in the movie industry according to the individual levels of the value chain. Separate business models are derived from the divisions of movie production, movie distribution, rights trading, movie theaters, and home entertainment. Due to the fact that companies in the movie industry are usually vertically integrated to a high degree, multiple of the business models mentioned above are frequently combined and executed within a single consolidated company. As an introduction, the general revenue and manufacturing models of the movie industry will be illustrated.

7.5.1

Revenue Model

This section will offer a small overview of the most important sources of revenue in the movie industry. These are mostly present within the viewer markets. Advertising markets only play a role in product placement, but this is only possible with blockbuster productions that catered to a target group that is relevant to the advertising. In the recipient markets, transaction-dependent revenue is earned for the use of media. In the context of movie utilization, revenue includes the entrance fees paid by moviegoers. At another level of the value chain, transaction-based payments are also procured through the sales or rental of DVDs and Blu-ray discs, as well as video-on-demand services (download and streaming). Revenue from these sources often exceeds revenue earned through the box office by several times over. Through merchandising, highly popular and profitable movies can generate additional revenue. In the movie production phase, the movie distributor can also play a major role as a source of revenue. Prior to the beginning of production, movie distributors may offer producers a so-called minimum guarantee. This means that the distributors are willing to provide advanced financing for the production independent of the actual revenue. However, movie distributors are not always willing to do so.

7.5.2

Service Creation Model

The manufacturing model changes according to which player is being considered. Regardless, a general overview of the cost and revenue structures of goods and services will be illustrated (see Fig. 7.4). For this illustration, only revenues of movie theater utilization were included. However, video utilization revenue has been left

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33 %

14 % 36 % Sales revenues

7% 6% 4% Revenue per ticket

Movietheater distribution

Rental

Distribution costs (47 %)

Content production

Marketing

Administration

Profit

First copy costs (49 %)

Fig. 7.4 Costs and revenue structure of service creation (on the basis of own analysis and estimations). Source: Wirtz (2005, 2019b)

out. Of the revenue earned at the box office, approximately 33% belongs to theater operators. Movie distributors receive approximately 14% of the earnings. The largest portion of total revenue (36%) usually account for the production of the movie. Marketing costs arise for about 7% and administration costs for 6%. Profit is on average at 4%.

7.5.3

Movie Production and Distribution

The business model for movie production is based on the creation of movies and the sales of the associated utilization rights. However, within the framework of service creation process, not just one product is manufactured but rather a complete movierelated product line made up of motion picture, trailer, DVD and TV specials, making-of documentaries, and potentially various movie versions according to censorship ratings (Wirtz et al. 2016a). At the procurement stage, the producers being responsible for the entire production procure both material (movie studio and technical equipment) and human resources since movie productions have a project-specific nature. As a complement,

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135

numerous third-party companies that concentrate on special niches (e.g., special effects) may also participate in production. During the production, these multiple parties create a network which center is the movie production company or rather the producer. Vertically integrated movie companies such as Warner Bros. maintain permanent movie production teams (Wirtz et al. 2016b). An additional business for movie production companies is the allocation of advertising opportunities in the form of product placements. Figure 7.5 shows the simplified business model of a movie production firm. Within the framework of the procurement model used in the movie distribution and right trading divisions, movie theater utilization rights are either acquired internally within a consolidated company or from an external holder of rights. Furthermore, collaboration with advertising agencies in respect to the identification, placement, and contractual commitment of advertising and sponsoring partners for the ad campaigns is also common. The service creation process of movie distribution and rights trading includes the physical or digital distribution of movies to theater operators according to a release plan, the optimum combination of rights for distribution, as well as sales to regional or distribution-channel-specific consumers. Simultaneously, movie distributors also plan, coordinate, and execute the marketing of movies. As in certain cases movie distributors are able to acquire distribution rights other than the screening rights, tasks may also include the selection and coordination of merchandising partners or the negotiation of additional utilization rights. Figure 7.6 shows the simplified business model of a movie utilization firm. Knowledge Review Questions 1. How can the process of movie utilization be described? 2. What trends can be seen in the movie theater, DVD, and Blu-ray segments? 3. Which various elements of the range of services are used in the movie industry? 4. Explain the value chain of the movie industry! What can you say about the twofold differentiation of the movie utilization?

• • • • • • • •

Advertising space

Competencies/Resources Model

Product placements

Content-Sourcing-Competence Content-Creation-Competence Promotion-Competence Rights to content and formats High resonance formats Strong brands, references such as awards and successful films Creative employee base …

Management of advertising cooperations

Own productions and co-productions Movies Trailer DVD-/Blu-ray-Specials …

Fig. 7.5 Business model of a movie production firm. Source: Wirtz (2003b, 2019b)

Demand driven production strategy Target group focus (geographic and milieu oriented) Emotion and curiosity triggering advertising strategy Trends sensitive market positioning Strategic selection of actors, producers and other relevant personnel •…

Strategy Model

Commission

Procurement

Pre-production

Teamwork & coordination with coproducers

• • • •

Network Model

Target group contatcs

Advertising revenues

Production funding

Utilization rights

Purchase price

Utilization rights

Purchase price

Utilization rights

Purchase price

Revenue Model

Customer Relationship Management

Advertising clients

Film funds

Investment/ finance company

Rights trader

Film distributors

Customer Model

• Integration into international co-production networks • Access to film distributors and licence dealers • Networking with actors, directors and cameramen, financial backers etc. •…

Integrated Product/Service Offer

• • • • •

Advertising agency

Gratification

Finishing

Gratification

Trends

Fee

Systems, technology

Gratification

Rights, contribution

Market Offer Model

7

Production/ postproduction service

Market research

Studio equipment, technical equipment

Authors, directors, actors, musicians

Value Creation Model

Production

Procurement Model

Movie production firm

Post-production

Finance Model

136 Business Models and Value Creation in the Movie Market

Purchase of film rights for movie theater utilization

• • • • • • • •

Marketing planning

Content-Sourcing-Competence Content-Creation-Competence Promotion-Competence Rights to content and formats High resonance formats Strong brands, references such as awards and successful films Creative employee base …

Competencies/Resources Model

Network Model

Target group contacts

Advertisement revenues

Partial rights

Purchase price

Partial rights

Purchase price

Film sales funding

Film copies

Revenue particaption

Revenue Model

Customer Relationship Management

Advertising clients

National rights traders

Distributions channels (TV, DVD, etc.)

Film funds

Movie theater operator

Customer Model

• Integration into international co-production networks • Access to film distributors and license dealers • Networking with actors, directors and cameramen, financial backers etc. •…

Advertising space • Cinema commercials • TV commercials (Addressable TV) • Cooperation with specialized advertising agencies

Trade of rights and licenses • Third party produced films • Own sales organization for the exploitation o f video rights

Marketing realization

Film distribution • Numerous films from home and abroad • Cinema distribution • Rental and sale of DVDs and blue-rays •…

Fig. 7.6 Business model of a movie exploitation firm. Source: Wirtz (2003b, 2019b)

Strategic market leadership Cross-medial exploitation strategies Strategic exclusiveness of content Integration strategy of development production and product placement • Strategic selection of media platforms (cinema, streaming, linear TV and content-bearing media) •…

Strategy Model

Commission

Intermediation

Gratification

Finishing

Gratification

Trends

Fee

Systems, technology

Gratification

Rights, contribution

Market Offer Model

Integrated Product/Service Offer

• • • •

Advertising agency

Production/ postproduction service

Market research

Studio equipment, technical equipment

Authors, directors, actors, musicians Release strategy

Value Creation Model

Purchase of movie rights for movie theater utilization Bundling

Procurement Model

Movie selection Screening

Movie utilization firm

Production and distribution of movie reels to movie theater operators/marketing Marketing

Finance Model

7.5 Business Models 137

8

Business Models and Value Creation in the TV Market

In past decades, the television has progressed to become one of the most important and most high-powered media (Wirtz and Schwarz 2001). The US-American TV market has assumed a leading position through the development of television into its modern journalistic, social, and economic meaning. Hence, the United States is considered the most important television market worldwide. Before the background of the advancing globalization and the converging industrial sectors, the television plays a central role, in particular in competition of the market-dominating multinational media groups (Wirtz and Elsäßer 2016).1

8.1

Range of Services

The products offered by television stations can be categorized according to a variety of criteria, e.g., public service broadcasters or private companies. Another more profound category would be the revenue achievement of the companies. Accordingly, it can be distinguished between the service range of free-TV and pay-TV providers. While advertising revenue and fees finance free-TV companies, the revenue model of the pay-TV companies aims at charges on the recipients markets. Teleshopping and call-in TV are in a unique position. Figure 8.1 provides an overview of the range of services of TV companies.

8.1.1

Free-TV

The free-TV model provides fees and advertising revenues for the financing of the enterprises. For the recipient the use of the TV offer is free of charge; the program 1

See also for the following chapter Wirtz (2011b) and Wirtz (2019b)

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_8

139

140

8

Business Models and Value Creation in the TV Market

Products in the TV sector

Free-TV

Teleshopping/ call-in-TV

Pay-TV

• Full programs

• Pay-per-channel

• Direct response TV

• Specialized programs

• Pay-per-view

• Infomercials/ documercials

• Local programs

• Pay-video-ondemand

• Free-video-ondemand

• Pay-near-video-ondemand

• Free-near-video-ondemand

• Pay-IP-TV

• Video-malls • Shopping shows • Interactive teleshopping • Call-in-shows

• Free-IP-TV

Fig. 8.1 Products in the TV sector. Source: Wirtz (2000c, 2019b)

provider generates his revenue with advertising. Ultimately, the advertisers pay for the attention of a specific target group. Free TV can be categorized by scope of the program: full, special-interest, and local channels. However, although this subdivision is basically independent from the companies’ revenue model, it does not make sense for pay-TV as it offers only special-interest programs. A full program is a channel with varied content, in which information as well as entertainment is an essential part of the offer. Full channels tailor their offers to a broad group of recipients. A specialization according to the interests of a predefined target group does not take place. Special-interest channels, however, are channels with similar content and focus. Examples of such special-interest channels are news television stations like Bloomberg TV or CNN, documentation channels like Discovery Channel or National Geographic, and sports channels like ESPN or CBS College Sports. Local programs are programs that are produced and distributed in a regionally limited broadcasting area. Local television traditionally plays a more important role in the United States than in other television markets. This is partly due to the size and structure of the nation’s population. Densely populated metropolitan areas like New York or Los Angeles are their own independent sub-markets, which even spread over different time zones. It also depends on the structure of the television station on the US television market. The large networks only provide the individual broadcasting stations with a framework program. The remaining broadcasting time is covered by the O&Os (especially in the big centers) and affiliates with their own, often local program contents. Hence, the local—or at least partially local—TV is firmly established in this basic structure. Additionally, there is a large number of smaller, more independent, and often also public (mostly organized in PBS) broadcasting stations that often only offer local content (Stein and Evans 2009).

8.1 Range of Services

8.1.2

141

Pay-TV

Pay-TV stations differ from other providers mainly through their way of financing. In contrast to free-TV stations that are mainly financed through the advertising markets, financing of pay-TV companies happens through the recipients markets. Viewers, who are not willing to pay, need to be excluded from consumption. Therefore, the television signal is initially encoded and decoded later on at the customers’ house using an appropriate decoder. Pay-TV stations’ offers need to be visibly different from that of free-TV stations and meet the customer requirements. Otherwise the recipients will not be willing to pay for the offers of the pay-TV stations. Pay-per-channel mostly charges the viewer a monthly charge for the right to receive all channels or programs of the according pay-TV station. This form of pay-TV is also called subscription television. The television company realizes transaction-independent media usage fees on the recipient markets. Pay-per-view is different since the viewer only pays for programs that he actually consumes. Payper-view is transaction-based. Hence, the television station realizes transactiondependent media usage fees. Video-on-demand (VoD) is a service that allows the viewers to select a desired program using their interactive television set respectively set-top box regardless of the scheduled time. Therefore, VoD enables the viewers to create their own television content and schedule their own viewing time. Additionally, VoD allows the programs’ interruption at any time and the repetition of individual passages. The technical aspect that facilitates these options is a reverse channel from the users’ receiver to the television provider. In that way, the customer commands the central computer, e.g., to order movies. Therefore, the customer needs a device that is equipped for digital reception. Internet capable personal computers may also be deployed as receivers. The Internet is capable of providing reverse channels and therefore already offers the possibility to use video-on-demand. Due to the prevalence of broadband Internet connections, many households have sufficient bandwidth to transmit high-quality TV contents through the Internet by now. For upcoming years, a continued increase is to be expected. It is assumed that the numbers of users for video-on-demand will increase significantly in the coming years. The concept of near-video-on-demand (NVoD) is another option to further personalize the TV program while considering the technical limitations of VoD. Near-video-on-demand broadcasts identical content on several transmission channels in a time-shifted manner. The viewer might not be able to freely choose the starting time of a program, but due to the broadcasting of the program on different channels (e.g., every 15 min), he nearly chooses his favorite broadcasting time. Near-video-on-demand therefore has the benefit to require significantly lower transmission capacities. It is not necessary to respond to a large amount of user queries individually since the transmitted content does not have to align with individual demands.

142

8.1.3

8

Business Models and Value Creation in the TV Market

Teleshopping and Call-in-TV

The companies that provide teleshopping and call-in-TV finance themselves entirely or partly through the recipients markets. Unlike pay-TV and similar to free-TV, the program is broadcasted free of charge. Contrary to traditional free-TV, however, the recipients are asked to purchase a product (teleshopping) or to actively participate in the current television action (call-in-TV). Financing is based on the revenues from shopping or the charge for the calls. The term teleshopping refers to the sales of products through the medium television. The initiation of business transactions between offering companies and the consumer is based on the medium television. The phase of concluding the contract is based on another, bidirectional medium (e.g., telephone) (Blumenthal and Goodenough 2006). With interactive TV this order can be concluded directly via the television without changing the medium. Beside the operation of a channel with full-time purchase offers, for example, through the leading shopping television station QVC, teleshopping stations may run sales windows on other channels. In both cases the company can resort to a broad service range that mainly differs in type and length of product presentation. Call-in-TV (also called “participatable television”) integrates the viewer into the actual television action. He is expected to participate actively in the course of the program via phone calls or text messaging against payment. The segment’s service range extends from individual TV programs that integrate call in actions into the format (e.g., American Idol), over TV stations whose programs are purely based on “participatable” shows. Call-in-TV integrates the viewer using a variety of instruments. In some cases, the viewer may vote for or against something and hereby influences the current and future action of the show. Another common format is Quiz programs, in which the recipient is asked to solve a riddle. Generally, both call-in-TV formats provide the viewer with a chance to win and therefore offer an incentive to encourage his participation.

8.2

Interactions of Market Participants

In the TV market a large number of different actors operate. These actors and their interactions are described below in an aggregated manner. Due to their importance to the entire TV markets, the program providers are the main actors. They either directly or indirectly interact with the remaining actors of the TV industry. There are two primary kinds of program providers: broadcasting networks and cable/ satellite networks. Additionally, these providers can be classified in regard to whether these providers offer their program as freely receivable (free-TV) or if the program contents need to be paid for separately (pay-TV). The broadcasting organizations often combine a variety of the TV market’s features under one umbrella. This may include program production and marketing

8.3 Value Creation Structures

143

as well as the creation of program packages. Today, many broadcasting organizations belong to strongly, vertically and horizontally, integrated enterprises that are also active in movie production and rights trading as well as other media markets. The program providers transmit their contents to the recipients. Thereby, so-called broadcasters do the technical distribution of signals. Nowadays, this is achieved by means of one of four transmission paths: cable (classical television cable network), satellite, terrestrial radio, or the Internet (e.g., DSL/VDSL via telephone line). Broadcast hosting is not necessarily done by an external provider. Large media enterprises usually own the necessary transmission technologies within the enterprise. The recipient market is the most important source of revenue for pay-TV stations. Pay-TV providers realize revenues directly from the recipient market. The recipients pay fees in the form of subscriptions or one-time payments (e.g., for VoD services) directly to the program provider. Beside the recipient market, the advertising market is of great importance in particular to free-TV. The television stations sell broadcasting time to the advertising companies, which they in return can use for commercials. Advertising companies may also sponsor individual program categories. The broadcasting stations get directly in touch with the recipients by means of advertising and brand management. Conversely, the television stations receive the recipients’ attention and contacts that they again may employ in the advertising market. The broadcasting stations can refer to three central procurement resources. This includes human resources (e.g., actors, authors, or editors) and program contents and rights. A further distinction is possible between external and internal procurement of resources. The extent, to which program content is produced independently or procured externally, depends largely on the structure and size of the individual broadcasting station, especially when creating program content. Broadcasting stations can also trade rights directly. Figure 8.2 shows the main actors and interactions in the TV industry.

8.3

Value Creation Structures

The value chain in TV companies can be divided into five steps. The first step is the procurement of required input factors. These consist, on the one hand, of content such as screenplays, broadcasts, and feature movies and, on the other hand, of the required technology and human resources. Here actors, hosts, and editors can be regarded as examples. Procurement is followed by program production as a second step, which is the production of single programs. With format, movie and sports rights program trading can be conducted based on the production layer. Trading these rights is part of the third step of the value chain. The fourth step of the value chain is the arrangement of single broadcasts and programs to create a program flow. Finally, the created program is broadcasted in the

Fee

Brand management

Attention/contacts

Resources

Program content (e. g. news material)

Procurement resources

Fee

Basic-cable (free of charge)

Fig. 8.2 Interactions in the TV market. Source: Wirtz (2011b, 2019b)

Human resources (e. g. actors, authors)

Premium-cable (additional fees)

Terrestrial broadcasting

Rights (e. g. film/sport rights)

Satellite provider (e. g. DirecTV)

Advertising revenues

Advertising companies/ advertising agencies

Advertising space

Broadcasting networks

Internet (e. g. DSLprovider)

8

Cable-/satellite TV-networks

Cable network provider (e .g. Comcast)

Technical distribution

Recipient/audience

144 Business Models and Value Creation in the TV Market

8.4 Core Assets and Core Competencies

Procurement

Key tasks • Procurement of screenplays, moderators, actors, editors, technology and other input factors as well as ad space Provider • News agencies • Authors • Actors (agencies) • Advertising agencies

Program production

Program trading

145

Program design/ packaging

Technical production and distribution

• Planning, control and execution of production

• Trading in movie or sports rights

• Program planning and prepackaging • Ad placement

• Transmission technology • Use of telecommunications infrastructure

• Editorial staff • Production firms

• Rights agents • Program traders

• Program director • Program editors

• Cable provider • Satellite provider

Recipient

Fig. 8.3 Value chain of the TV industry. Source: Wirtz (2003b, 2019b)

course of program distribution—step five. Here a specific feature of TV companies’ value creation can be seen. Program distribution and technical production of the media service coincide. For television stations, marketing is of high importance regarding their positioning in the viewer’s market (Blumenthal and Goodenough 2006). In contrast to print media, where technical production, i.e., the print, comes before distribution, the technical production in TV companies consists of program broadcasting, which is adequate with distribution. The value chain of TV companies is imaged in Fig. 8.3.

8.4

Core Assets and Core Competencies

The core assets of TV companies are employees, the brand, the networks, and the geographical scope. Concerning the employees, their creative potential and interaction patterns within the teams play an important role. The TV station signals a program profile through a TV brand to commit viewers to the TV station. For example, a network of efficient TV producers can secure the supply of attractive content. However, the procurement of exclusive information often takes place through personal contact networks as well. For advertising clients the geographical scope is an important criterion in advertising—the higher the reach, the higher the accessible advertising revenues by trend. In order to use core assets, the four core competencies—content sourcing competence, content creation competence, format competence, and cross-media

146

8

Business Models and Value Creation in the TV Market

marketing competence—are of superior importance for TV providers. Within the scope of the content sourcing competence, competitive edges in the TV markets can be reached by the procurement of attractive contents for TV programs. The content creation competence of TV suppliers consists of subcompetencies described in Chap. 3. A high content creation competency allows the creation of unique TV programs, which generate differentiation advantages toward competitors. Regarding product development competence that is also known as format competence, the integration of different revenue sources into the program formats is becoming increasingly important. Cross-media content utilization as a core competence of TV companies facilitates the utilization of programs and generation of revenue through different channels, e.g., utilization of shows and series via TV, Internet, as well as music and print products.

8.5

Business Models

The business models pursued in the television industry can be associated with two basic business models. In particular, these are advertising-financed television stations (free-TV), fee-financed television stations (pay-TV), or hybrid forms of both revenue models (pay-TV with commercials). This immediately affects the revenue model as well as the range of services offered by companies. Hence, this division of business models can create homogeneous groups with low overlapping. However prior to explaining the business model of a free-TV station, the TV market’s revenue and service creation model are presented first.

8.5.1

Revenue Models

Within the scope of the business model, different revenue forms can be distinguished. In the rights markets, revenues are primarily achieved from trading movie and sports rights. The advertising markets represent another source of revenue, which play a central role in particular in the business model of the freely receivable broadcasting stations. Besides the original advertising in the form of TV commercials (block advertising or split screen advertising) a series of other, younger revenue forms in the advertising markets exists. These are sponsorship, teleshopping commercial game shows and product placement. Together with advertising, they are the five main forms of offers in the TV advertising markets. Product placement also refers to revenue forms achieved in the advertising markets. In this context, advertising companies provide stage props or other goods to television companies for in-house productions free of charge for a certain period. In return the corresponding (branded) article is placed systematically within the program’s broadcast.

8.5 Business Models

147

TV network

TV advertising

Teleshopping

Sponsorship

Commercials

Advertising game shows

Product placement

Commercial block

Bartering

Cut-in commercial

Merchandising

Fig. 8.4 Forms of TV advertising. Source: Wirtz (1994, 2019b)

In addition to the main advertising forms, there are two forms of income, which are not directly connected to the TV advertising market. Firstly, bartering, at which the advertising demanders make program material available to the TV companies and receive advertising space in return. Secondly, TV suppliers can exploit rights by means of merchandising. Figure 8.4 gives an overview about the different forms of advertising, which provide the possibility of generating revenue in advertising markets. In the recipients markets revenues can be generated in the form of fees for media access and media use (pay-TV) as well as in the form of payments for T-commerce activities. In particular, the fees for the acquisition of decoders for the reception of pay-TV or installation costs for the access to such offers contribute to the fees for media access. Payments for media appear as transaction-dependent fees, such as payment per movie with the pay-per-view TV, or in forms of payments independent of transaction, e.g., for a pay-TV subscription. The T-commerce industry and in particular the TV stations’ own teleshopping offers and telephone services within the scope of call-in-TV gain importance for TV companies as a source of revenue. Meanwhile, especially the call-in-TV-formats play an important role in the TV sector.

8.5.2

Service Creation Model

The service creation structure in the TV industry is of particular importance to the management of TV companies. The main task of TV companies is the production and marketing of TV programs. Different processes must be defined, coordinated, and executed within the company.

148

8 100 %

Business Models and Value Creation in the TV Market

12 % 61 %

Advertising revenues

86 %

8% 9% 10 % Other 14 % revenues Revenue

Distribution

Contentproduction

Distribution costs (12 %)

Marketing/ sales

Administration

Earnings

First copy costs (78 %)

Fig. 8.5 Cost and revenue structure of manufacturing (free-TV) (on the basis of own analysis and estimates). Source: Wirtz (2006, 2019b)

The core processes, which are the drivers of service creation, are shown in the service creation model. Based on service creation model, starting points can be identified by the management for process improvements. The service creation model shown in Fig. 8.5 provides information about the fragmentation of revenue sources and cost structure of TV companies. The revenue mix of a TV network can be seen in the composition of revenues. About 86% of overall revenues are accounted for advertising revenues. About 14% of the revenues on average are earned by transactions and added value services like merchandising and call-in-programs. The distribution costs of TV suppliers are relatively low with 12%. The share of the first copy costs in the overall turnover amounts 78%, so that considerable economy of scales has to be achieved through high geographical scopes. 61% of the overall turnover account for content production, which amounts to the largest cost pool of TV companies. The profit is approximately 10%; however, there are distinct differences between the providers.

8.5 Business Models

8.5.3

149

Business Models

Commercial television stations dominating the TV scenery in the United States follow the aim of maximizing profits. The distinction between advertising-financed companies (free-TV) and payment-financed companies (pay-TV), whose revenue model is aimed at the advertising markets or recipient’s markets, is maintained. Due to the alignment of their revenue models, the offered services of commercial free-TV stations clearly depart from the offer of payment-financed television stations. For private free-TV stations, the attractiveness of the offer mainly depends on the (advertising-) relevant target group since only a mass appeal program offer manages to establish recipients’ contacts for the advertising industry. Concerning the payment-financed private TV providers, the significance of attractiveness of the program offer is immediately evident. The recipients are only willing to pay fees for a program offer which they consider attractive. Teleshopping stations and call-in-TV stations have a special status in the area of TV providers. The business model of teleshopping stations focuses on the sales of goods and services, whereas call-in-TV stations focus on the motivation of viewers to actively engage in the program by phone. Figure 8.6 shows a simplified version of an advertising-financed private television station. It becomes clear that the advertising space is a key component of the service range. This immediately results from the importance of the advertising markets for the revenue generation of the company. Nevertheless, the success in the advertising markets is decisively influenced by the success in the recipient markets. Hence, attention has to be paid to attractiveness and quality of content. The advertising returns are increasingly complemented by revenues from added value services with costs and transaction revenues. Through these additional revenue forms, the TV stations can reduce their dependence on the advertising revenues that are strongly susceptible to economic situation. Meanwhile, shows with telephone-based participation elements, in particular, have a large proportion of the entire program of the TV companies. Moreover, big media enterprises are increasingly involved in e-commerce to further upgrade their revenue basis. News Corporation (Fox) cooperates with Disney (ABC), Time Warner (CBS), and NBC Universal on the online video platform Hulu (2011c). Knowledge Review Questions 1. What are the TV industry’s product types? Give examples of pay-per-view and direct-response-television! 2. What are the TV suppliers’ cost structure and revenue structure? Give reasons for the high content production costs! 3. Explain the interactions in the TV market!

Strategy Model

Compensation

• • • • •

T-Commerce Teleshopping Merchandising Call-in TV Online service …

Advertising space • TV-spots • Sponsorship •…

Rights + Licenses

Content Information Movies/shows Live-events …

• Movies • Sports •…

• • • •

Competencies/Resources Model

Placement/ integration

Placement/ integration

Management of rights and licenses

Content packaging

Market Offer Model

• • • • •

Network Model

Products/services

Transaction revenue

Advertising space

Revenues

Distribution

Purchase

Content distribution

Revenue Model

Customer Relationship Management

Recipient

Advertising customer

Trader, channel

Recipient

Customer Model

Agency and advertising network Access to film distribution and licensing traders Good networking with production companies Good networking with actors, directors and cameramen etc. …

Fig. 8.6 Business model of an advertising-financed private television station. Source: Wirtz (2000c, 2019b)

Content-Sourcing-Competence Content-Creation-Competence Format-Competence Promotion-Competence Cross-media utilization competence Rights to content and formats Strong brands Strong broadcasting slots, high reach on the viewer market, and formats with high response rate •…

• • • • • • • •

Selection of external content

In house production

Management of advertising cooperations

In house production rights

Utilization of external productions

Selection of external content

In house production

Value Creation Model

Integrated Product/Service Offer

• Demand oriented content selection • Comprehensive promotion and target group strategy • Customer segmentation through multi channel and multi brand approaches • Careful digitization by offering platforms and streaming services •…

Telcocompanies

Infrastructure

Purchase

Goods

Advertising space

Brokerage

Advertising content

Purchase

Rights and content

Salary

Input

Compensation

Information

Finance Model

8

Suppliers, producers, content provider

Advertisers, agents

Producers, trader, other networks

Hosts, actors

Agencies, companies

Procurement Model

Advertising-financed private television station

150 Business Models and Value Creation in the TV Market

9

Business Models and Value Creation in the Radio Market

The literature on radio management is similar to the conceptual literature on TV management. So both can be subsumed under the general concept of broadcasting. In spite of similar technical foundations and a mutual historical origin, a separate chapter is dedicated to the management of radio enterprises. The radio markets, the management of radio enterprises, and the user behavior of the recipients are clearly different from the television market.1

9.1

Range of Services

Radio providers’ range of service can be differentiated according to various criteria. The differentiation between public and commercial stations and the classification of program content into entertainment and informational programs can be included as subdivisions. The scope of the program enables a further subdivision into full, special interest, window, and local programs. Window programs are made possible because several stations share a radio frequency (frequency division) and use this frequency in alternation. Here it is important to distinguish between two forms of windows. On the one hand, there is the full-time window, in which an entire broadcasting day is left to another station. On the other hand, there are window programs which allocate parts of the day to other stations. A further essential distinguishing criterion for the range of services in the radio sector is the radio format. A radio format is understood as the main components of a program (music, moderation/presentation, sound layout, news and service). With these various radio formats, target groups with differing listening needs should be reached. An important component of the radio format is the music format used. 1

See also for the following chapter Wirtz (2011b) and Wirtz (2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_9

151

152

9.2

9

Business Models and Value Creation in the Radio Market

Interactions of Market Participants

With respect to the interactions of the market participants, particularly the players in the advertising market count among the most important interaction partners for the commercial radio broadcaster. The radio stations offer broadcasting time, which, for corresponding remuneration, advertising enterprises can use for an advertising spot. Furthermore, individual program features (weather, traffic, etc.) can be supported by advertising enterprises in terms of sponsoring, or direct revenue can be generated in the context of subscription fees from the listeners of satellite radio. Furthermore, radio stations also have direct contact with the recipients through advertisement and brand management. Conversely, radio stations receive attention from and are contacted by the recipients, interactions which the stations can further use in the advertising market. Even public radio broadcasters are active in the advertising markets. A further popular variation of generating attention and contacts is the sponsoring of music festivals. Radio stations often sponsor music events and cooperate with the corresponding event organizers. Along with the attention garnered, sponsoring of music festivals is also an efficacious instrument for winning customer loyalty. On the procurement side, radio broadcasters work with players who, for corresponding remuneration, deliver content/rights to radio programming. In this process, completely elaborated radio programs (framework programs) or merely single contributions (sports input, news material) can be procured externally from agents or traders. Furthermore, copyright fees for playing legally protected music titles usually accrue. In America, with BMI (Broadcast Music Incorporated), ASCAP (American Society of Composers, Authors and Publishers), and SESAC, there exist three collecting societies, which represent the performing and duplication rights of publishers, composers, and lyricists and thus constitute essential interacting partners in the American radio sector (ASCAP 2011; Broadcast Music 2011; Sesac 2011). All the remaining content providers, such as comedy producers, are summed up as other content providers. Another important group of interaction partners in the radio sector are the employees. They are either employed externally or in-house. Thereby, specific talents and expertise play an essential role for the success of the radio station. Therefore, radio presenters are an important parameter, because their moderation style, voice, and speech are perceived as an essential part of a radio program. Finally, the provider of the technical distribution, who undertakes the transmission function of the radio program, must be taken into consideration. Today, the transmission takes place through four central methods: cable (traditional television/ radio cable network), satellite, terrestrial radio waves (digital, analog), or Internet (e.g., broadband). It is important to note that broadcast hosting does not necessarily have to be of an external nature. Precisely with larger networks, the requisite technical means and human resources are to some extent available in-house, especially for terrestrial broadcasting. Figure 9.1 provides an overview of the essential players and interactions in the radio industry.

Budget

Attention/contacts

Entertainment

Advertising revenues, Advertising content

Radio station

Sponsoring

Moderators

Salary

Rights, content

Fee

Content procurement

Editors

Internet provider (e. g. DSL provider)

Technicians

Other actors

Other content providers

BMI, ASCAP, SESAC

Agencies, traders

Framework program provider

Terrestrial broadcasting (digital, analog)

Talent/expertise (internal/external)

Performance

Commercial radio

Cable network operators

Technological distribution

Subscription fees

Satellite operators

Fig. 9.1 Interactions in the radio market. Source: Wirtz (2011c, 2019b)

Advertising companies, advertising agencies, advertising intermediaries

Advertising space, provision

Brand management

Public radio

Customer loyalty

State

Taxes

Concert festival operators

Entrance fee

Audience/recipients

9.2 Interactions of Market Participants 153

154

9.3

9

Business Models and Value Creation in the Radio Market

Value Creation Structures

Value creation in radio enterprises can be divided into five steps. In the first step, the necessary input factors are procured, which can essentially be subdivided into content, technology, and human resources. The content consists of news, radio drama, commentaries, and music. The requisite technology consists of recording studio equipment in particular and of all the other necessary technical devices. Human resources include radio presenters, speakers (for radio drama), musicians, editors, and correspondents. The second step covers the program production, which includes the production of news and radio drama but also commentaries on current political or societal events and short entertainment programs. In the third step, trading of the program formats is carried out. The importance of this step of the value chain can, in comparison to the other steps, be neglected, however, because the utilization of contract productions usually does not generate revenue worth mentioning. The fourth step of the value chain covers the composition of the individual program contributions in the program sequence, the packaging. This step is of considerable importance, because the cut edit of the program content has a profound influence on listener behavior. Finally, in the fifth step, the programs that were created are transmitted to the radio audience. The technical production and the airing of the programs usually coincide in the radio sector. The value chain of radio enterprises is shown in Fig. 9.2.

Procurement of the input factors Key tasks • Content procurement (including advertisement), technology and human resources) Provider • News agencies • Radio drama authors • Advertising marketing companies

Program production

• Planning, controlling and execution of the production

Program trade

• Trade with radio program licenses

Programming/ packaging

• Planning and compilation of the program sequences • Advertisement placements

• Editorial offices • Production companies • Choirs and orchestras • Local studios

• Program trade

• Program director • Program editor

Technological production and program distribution • Broadcast technology • Use of the telecommunication infrastructure

• Operator of terrestrial broadcasting stations • Cable network operator • Satellite operator • Internet

Fig. 9.2 Value chain of the radio industry. Source: Wirtz (2001b, 2019b)

Listener

9.5 Business Models

9.4

155

Core Assets and Core Competencies

The most important core assets of radio enterprises include the employees, the brand, networks, and the reach. Radio presenters shape the radio program through their style and are thus a component of the product offered by radio stations. They are often supported by employees who prepare the programs and contributions. Networks in the radio sector play an important role in the procurement of content. The components of the program, such as comedy or special reports, are frequently purchased from external producers and integrated into the program. Exclusive and innovative content can promote listener loyalty to a radio station and thus provide a competitive advantage. In the recipient market, the name of the radio station counts as the brand name. The audience associates the station name with positive expectations concerning the program content. Thus, a radio brand name can help increase customer loyalty in the recipient market. A broad reach in the radio sector is achieved through a long-term superior range of services, which in the end leads to higher advertising income. The core competencies of radio enterprises, which are necessary for using core assets, are content sourcing, content creation, and format. Especially with content sourcing, competence is an attractive entertainment content which can be obtained in the procurement market. The content creation competence is composed of two subcomponents: one is the ability to discover topics that interest the listener groups and to work them up within the daily radio program with appropriate audience adaption (trend competence) and the other is the ability to structure the radio program in chronology and content so that audience interest is maintained through the skilled combination of program content (structuring competence). In this manner, an “audience flow” is created that improves the listener-station loyalty. Furthermore, the format competence contributes to an increase in the reach. It corresponds to the product development competence and generally defines the main components of a radio program such as music, moderation and presentation, the sound layout, as well as information components and their combinations in terms of structure, content, and presentation.

9.5

Business Models

In the following section, the revenue and manufacturing models of radio enterprises are presented. This is followed by a description of the business models of private providers.

9.5.1

Revenue Models

The most important sources of revenue in the radio sector are the revenues of advertising markets as well as subscription fees. The advertising spot has special

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significance for radio. Sponsoring plays a role and offers the advertising industry the opportunity to appear as the presenter of shows/programs (e.g., weather, traffic, sports, and information about events) at attractive broadcasting slots outside of the traditional advertising blocks. Based on the provisions of the American advertising regulations, the opportunities for including references to sponsorship in radio programs is limited. Sweepstakes are also relevant as an advertising form for radio. They are frequently used in connection with events sponsored by the radio station. An example is a raffle for admission tickets for sponsored music concerts. In the recipient market, revenues from the sale of merchandising articles are especially worth mentioning. Other forms of revenue like fees for media access or media use are not relevant.

9.5.2

Manufacturing Model

Radio programs are produced by radio stations and broadcast to the listeners. Of particular significance to the management of radio stations is the structure of the manufacturing in the radio sector (see Fig. 9.3). This structure provides information about the breakdown of sources of revenue and the cost structure. For the composition of the revenue, the makeup of revenues from private radio stations is portrayed. Advertising income accounts for about 87% of the total 100 %

7% 61 %

Advertising 87 % revenues

12 % 7% 4% 9%

Other revenues 13 % Revenue Distribution per minute of broadcasting

Content production

Distribution costs (7 %)

Advertising acquisition

Marketing

Administration

Profit

First copy costs (84 %)

Fig. 9.3 Cost and revenue structure of manufacturing (on the basis of own analysis and estimates). Source: Wirtz (2005, 2019b)

9.5 Business Models

157

revenue; 13% comes from other sources. The costs of content production constitute the largest share of the total costs; their average share of the total turnover reaches about 61%. Advertising acquisition accounts for 12% of the total turnover, marketing for 7%, and administration for 4%. Advertising acquisition is primarily carried out by marketing companies for various stations. The profit margin in the radio sector is around 9%, but there are considerable differences in profits between the individual types of providers. The share of first copy costs to the total turnover amounts to 84% in the radio sector. With an increase of the broadcasting reach and constant production costs, considerable economy of scale effects result. Hence, the allocation of a far-reaching broadcasting license constitutes a considerable competitive advantage. For new providers, a certain minimum reach is necessary for a market entry in order to avoid cost disadvantages compared to competitors.

9.5.3

Business Model of Established Private Radio Providers

In contrast to public stations, commercial radio stations have a profit motive. Nearly 90% of all radio programs are oriented to the 14–49-year-old target group that is relevant to the advertising industry. In contrast to public broadcasting, the variety of formats with respect to the breadth of the programming is rather slight. With news/ talk/information, adult contemporary (AC), and the contemporary hit radio (CHR), three mainstream formats, used by more than one third of all private radio stations, dominate the private radio market. Against this background, only one business model is essentially present in privately financed radio. This is illustrated in Fig. 9.4. It is clear that the sale of advertising slots constitutes a considerable share of the range of services. Hence, success in the advertising market is essentially dependent on success in the recipient market; the provision of attractive content is significant for the range of services spectrum. Knowledge Review Questions 1. Describe the value chain of radio enterprises! What core functions must be taken into consideration in the area of program structuring and packaging? 2. Explain the manufacturing model of radio management! 3. Why is the advertising market so critical for the success of private radio stations?

• Radio spots • Sponsorship •…

Advertising space

• Music events • Local events •…

Rights + Licenses

Content News Music Entertainment …

Large audience High entertainment competence Content-Creation-Competence Content-Sourcing-Competence High-Trend-Competence …

Competencies/Resources Model

Placement/ integration

Management of rights and licenses

Content packaging

• • • •

Fig. 9.4 Business model of a privately financed radio station. Source: Wirtz (2001b, 2019b)

• • • • • •

Management of advertising cooperations

Own production rights

Utilization of external productions

Selection of external produced content

Production of own content

Network Model

Advertising space performance

Advertising revenue

Transfer

Purchase price

Content distribution

Merchandising

Merchandising revenues

Revenue Model

Customer Relationship Management

Advertising customers

Trader, station

Listener

Customer Model

• Network with publishers as well as radio stations and media associations • Access to film distribution and licensing traders •…

Integrated Product/Service Offer

• User and target group specific promotion and advertising • Linear (VHF, DAB, online radio, etc.) and non-linear broadcasting strategies (streaming, etc.) • Umbrella brand vs. product brand • Content vs. platform strategy • Cross-medial product strategies • Digitization from broadcast to personal-cast •…

Strategy Model

Advertising space

Comission

Advertising content

Purchase price

Rights and content

Salary

Contribution

Gratification

Information

Value Creation Model

Market Offer Model

Privately financed radio station

9

Advertising customers, intermediaries

Producers,, traders, stations, BMI, ASCAP, SESAC

Moderators, editors, other actors

Agencies, companies

Procurement Model

Finance Model

158 Business Models and Value Creation in the Radio Market

Business Models and Value Creation in the Music Market

10

Music is an important and diverse cultural heritage with a long history. Important milestones in the development of music industry were the invention of the gramophone in 1887, the beginning of sound media reproduction a few years later, and the development of radio at the end of the nineteenth century. These inventions contributed decisively to the mass consumption of music and abolished the nobility’s and clergy’s privilege of music consumption in the context of exclusive court music concerts. Since these times, the music industry has developed with different participants and interest groups that have gone through various phases of economic booms and recessions in the past (Vogel 2007). The revenue in the music industry has been in decline since 1998, following a period in the 1980s and 1990s that has been characterized by successes and steady increases in sales. As a whole, the music sector is in a state of flux that is reflected not only in the drop in sales but also in the entry of new market participants, the increase in music piracy, and changing business and revenue models. Especially the Internet has a decisive influence on these developments. Music management has to face these changes. Against this background, market structures, range of services, strategies, and management approaches in the music sector are major interests for media management.1

10.1

Range of Services

Record producers and music publishing houses are central players in the music market. Hence they have major economic significance in the music industry. Their range of services is an important part of the entire range of services of the music industry. In the following this will be analyzed in detail. The offer of music products 1

See also for the following chapter Wirtz (2011b, 2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_10

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Table 10.1 Overview of various music genres Genre Rock

Description Rock music is a music genre which emerged from rock’n roll; it captivates with heavy guitar music and its rock band characteristics

Interprets Linkin Park; Metallica; Rolling Stones; Guns N’ Roses; Iron Maiden; Red Hot Chili Peppers; Green Day, Nirvana; Korn

Pop

Pop music is deemed to be harmonious and melodic light music with considerable commercial success

Black music

Very rhythmical music genre with partial melodic influences—this music genre is characterized by a large proportion of “spoken” elements

Madonna; George Michael; Lenny Kravitz; Mariah Carey; Elton John; Michael Jackson; Gwen Stefani; Britney Spears Whitney Houston; Bob Marley; 50 Cent; Eminem; Sean Paul; Black Eyed Peas; Beyonce; Mary J. Blige; Rihanna

Electronic music

Electronic music refers to a music genre which is produced with the help of electronic equipment (computers, synthesizers, etc.) Characterized by the musical lore of a nation—the music genre combines classical folk music with dance music and also with theater music

Folklore

Global Deejays; David Guetta; Phats & Small; Lords of Acid; Milk & Sugar; Marshall Jefferson; DJ Tonka John Barden, Flogging Molly, Tommy Makem

Subcategories Rock’n roll; surf; glamrock; progressive rock; art rock; psychedelic rock; flower power; metal; heavy metal; death metal/gothic metal; thrash metal; black metal; hardcore metal; metal crossover; hard rock; new metal; grindcore; alternative rock; punk; independent; grunge; new wave; dark wave; melody core Pop international; Brit pop; pop instrumental soloists; pop instrumental bands; new age Spiritual/gospel; rhythm and blues; traditional R&B; blues; delta blues/ country blues; classic blues; city blues; blues rock; soul; Phillysound; motown; contemporary soul; funk; hip hop; int. hip hop/rap; int. hip hop mainstream; credible hip hop/hardcore; g-funk; reggae; mainstream reggae; roots reggae; dub; raggamuffin; ska; traditional jazz/swing; big band swing Disco; dance/dance-pop/ eurodance; techno; trance; acid; house; vocal house; drum and bass/ jungle; big beat; electro/ ambient March music; folk/ folklore; North American folk; Western European folk; Eastern European folklore; Russian folklore (continued)

10.1

Range of Services

161

Table 10.1 (continued) Genre Country

Description An American music genre which illustrates rural living conditions with distinct and in part very direct lyrics

Classical music/ orchestra

Classical music can be found in many epochs since the fifteenth century and is characterized by its demand concerning seriousness and specialty (particularly in contrast to popular music)

World music/ crossover

World music describes a music genre which occurred in the 1980s and which was developed by the crossover of popular music and traditional (mostly not occidental) music genres

Interprets Carter Family; Chet Atkins; Hank Williams; Johnny Cash; Dolly Parton; John Denver; Keith Urban; Shania Twain; Dixie Chicks Vienna Chamber Orchestra; Dresden Philharmonic; Johann Sebastian Bach; Johannes Brahms; Frédéric Chopin; Georg Friedrich Händel; Joseph Haydn; Felix Mendelssohn Bartholdy; Robert Schumann; Pjotr Iljitsch Tschaikowski Leo Fuld (Netherlands); Gjallarhorn (Finland); Level 42 (England); Lizzy Mercier Descloux (France); Loreena McKennitt (Canada); Mari Boine (Norway/ Lapland)

Subcategories Mainstream country; hillbilly/bluegrass; country rock; western swing; Tex-Mex; Cajun/ zydeco Symphonic/orchestral music; chamber music with harp; chamber music string quartet; solo instrument; choir; new music/contemporary music; noise/sound music; neo-classic; neo-romanticism

World music; worldbeat; Arabian world music; African world music; Asian world music; world music from the South Seas; tango; samba; salsa; calypso; flamenco/sevillanas; national anthems; classical rock crossover; classical jazz crossover; classical ethno crossover

Source: Wirtz (2006, 2019b)

can be classified according to various styles. An overview of these various genres is provided in Table 10.1.

10.1.1 Record Producers The range of services provided by record producers focuses essentially on music recordings. First, music recordings can be differentiated according to the type of storage media or distribution channel. The product range includes CDs, DVDs, audio/SACDs, MCs, and vinyl records, as well as streaming and download offers. A further distinction can be drawn according to the scales of the music recording, namely, between long-playing (LP) and single. These terms originated in the age of the vinyl records but are still in use. An LP is a production with several (at least five) titles. A single or maxi-single CD usually

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contains one song, often in various versions, or a small number of different songs (one to four titles). A further criterion for differentiation of the range of services of record producers is the type of production. Here a distinction is drawn between national and international productions, soundtracks and compilations. Finally, a further distinguishing criterion is the differing repertoire segments. Music videos complement the primary service of records as a small—in terms of sold items—but growing product segment of the record producers. Merchandising items (textiles, posters, etc.) and concerts are also included in the range of services provided by the record producers.

10.1.2 Music Publishing House In the past, music publishing houses have increasingly integrated new functions into their value creation to expand their range of services. The original service offer of music publishing houses consisted of the sale of music-related print media, especially the sale of sheet music publications. In the context of the wide prevalence of mechanical sound storage media reproduction since the beginning of the twentieth century, which today is clearly more significant for the prevalence of music than the public performance, the focus of the service of music publishing houses has shifted to the administration and licensing of rights (Anderton et al. 2012). Aside from the sale of sheet music publications and the utilization of rights, the range of services of music publishing houses also covers the area of other music services. This area includes, for example, music magazines, analysis of works, biographies, scores and libretti, or music encyclopedias.

10.2

Interactions of Market Participants

The music market is characterized by a multitude of players that have been involved in the value creation process of music. In the foreground are the music publishing houses and record producers, which identify successful artists through their A&R management and keep them loyal to the enterprise for as long as possible. Artist and repertoire managers monitor social media appearances and video platforms, evaluate demo tapes, detect music trends and their potential for commercialization, and are responsible for supervising the artists. In addition, the record companies provide know-how and infrastructure for marketing music. The production of the first copy in particular requires technical equipment and professional producers. The products are marketed in the form of physical records or sheet music publications via wholesale or retail trade. In this respect, music stores, as a sales platform, have lost market shares over the past few years. Conversely, online music services, such as last.fm, iTunes, or Amazon, have experienced significant growth in music distribution, so that in these sectors, separate and distinct contracts are

10.3

Value Creation Structures

163

concluded. Here a distinction is made between suppliers of downloads and streaming. The use of music in other media, such as radio, movie, or television, and the use in the context of events are transacted with licensing agreements with the collecting societies BMI and ASCAP. The requisite rights for such uses are directly transferred from the music enterprises or the artists. Live concerts constitute a further form of music distribution. They are usually carried out by specialized concert organizers, although a few record companies negotiate a percentage of the total revenue for live performances. Aside from the talent search, the long-term loyalty of the artists, and the identification of trends in the branch, the ability of integrated communication measures to increase sales constitutes a core competence of the record companies. In addition, strategic partnerships with enterprises from other media branches are being increasingly established, which facilitates a win-win situation in marketing. The most important actors and interactions in the music sector are portrayed in Fig. 10.1.

10.3

Value Creation Structures

The value creation process in the music industry can be basically divided into the five steps of composition, trade of rights, recording, record production, and distribution (see Fig. 10.2). In the first step of the value chain, a composition is written by a composer or song writer. In several cases the interpreters are the authors of the composition. The transformation of a composition into an audio track is undertaken by an individual or by several artists or by a band or orchestra. First a demo tape is produced. With this demo tape, the artists themselves usually apply to record labels and music publishing houses. The second step of the value chain covers the production or recording of the individual composition. The production belongs to the scope of the music labels’ responsibilities, because they provide the interpreters with a producer and the requisite resources for production of the so-called master recording. In the third step of the value chain, the rights of use transferred from the owners to the music publishing house are licensed for further use. In the fourth step of the value chain, the compositions which were produced are first assembled as albums or compilations or allocated as singles. Afterwards, the music records are physically manufactured. This process is not applicable if the music title is to be marketed exclusively online. The fifth and last step of the value creation chain covers the distribution of the records that were produced or the digital music files from the location of their manufacture to the recipient.

Musicvideo streaming platforms (e.g. Youtube, Vimeo, etc.)

Fee

Music Download platforms (e.g. iTunes, Google Play Music, etc.)

Artists/composers

Transfer of rights

Collaboration

Fee

Fig. 10.1 Interactions in the music market . Source: Wirtz (2011c, 2019b)

Producers

Transfer of rights

Communication measures

Music publisher/sound carrier manufacturer

Pressing plant

Audio streaming platforms (e.g. Spotify, Deezer, etc.)

Concert promoter

Transfer of rights/ fee

Wholesale distribution/r emission

Wholesale

Wholesale distribution/r emission

Retail (Specialist shops, department stores, other)

10

Collecting societies

Licensing/ fee

Media (TV, radio, print, film, internet)

Audience/recipients

164 Business Models and Value Creation in the Music Market

Live performances/fee

Communication/download offers

10.4

Core Assets and Core Competencies

Composition Key tasks • Writing of the song • Musical interpretation of the composition • Creation of demo tapes

Provider • Composers • Songwriters • Artists

Recording

Rights trading

165

Record production

Distribution

• Planning, controlling, and completion of the record production • Creation of master tapes

• Trade with rights of musical works

• Planning and compilation of records and albums • Physical production of records´

• Storage and transport • Online distribution • Sales via stationary retail, online retail, and music download platforms

• Music labels • Recording studios • Recording managers • Producers

• Music publishers

• Music labels • Manufacturers

• Distributors • Music labels • Wholesalers and retailers • Online retailers • Music download providers

Recipient

Fig. 10.2 Value chain of the music industry. Source: Wirtz (2001b, 2019b)

10.4

Core Assets and Core Competencies

Core assets and core competencies also constitute the basis for the lasting success of a business model in the music industry. They will be subsequently discussed with respect to record producers and music publishing houses. Core assets for record producers are primarily the employees, the artists under contract, and the brand name. In this context the employees of the artist and repertoire department are very important. Valuable A&R employees distinguish themselves with a good intuition for the market and trends. The employees are able to discover, promote, and use successful artists better than the competition, as well as better able to win the artists’ loyalty to the record label. The repertoire of the artists is the basis of the service creation, i.e., the production of music by the record producers. Successful musicians are characterized by loyal followers, who guarantee long-term sales of their music productions and who also are interested in fan articles and concerts. If the artists are contractually bound to the record producer, they cannot be easily acquired by another record label. Even the imitation of successful interpreters turns out to be very difficult because music is a refined service which is characterized by its uniqueness. The brand name of the record producer (e.g., Sony Music Entertainment) or the brand names of the manufacturer’s sub-labels (e.g., Sony Masterworks, Sony Music Nashville) imply an image of the services provided by this manufacturer or its

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sub-labels. The significance of such a brand lies less in the recipient market than in the market for artists and interpreters. A positive brand name of a record label facilitates the acquisition of new talent and is thus beneficial in the development of a valuable pool of successful interpreters. The central core asset of music publishing houses is the number and extent of exploitation rights which are available to the enterprise. These exploitation rights to lyrics, compositions, and/or recordings form the basis for the business activities of music publishing houses. Music publishing houses license to third parties (e.g., radio, TV, and movie) the rights transferred to them by the originator and demand royalties for them. Exploitation rights to successful music material are especially valuable; they guarantee the publishing houses lasting streams of revenue and can contribute to the long-term success of the enterprise. For music publishing houses, the core competencies which are necessary for obtaining and using core assets consist of the acquisition of exploitation rights and their associated contractual arrangements. For record producers, the most important competence is the music and artist sourcing competence. The music and artist sourcing competence consists of two subcompetencies. On the one hand, they cover the competency of a record producer to independently develop new music genres and artists. On the other hand, they include the competence to assess the existing supply of established and new artists with respect to their consumer attractiveness and market opportunities. Further important competencies include promotion competence, which primarily consists of the placement of the music to achieve mass appeal, cross-media exploitation competence, and contract drafting competence.

10.5

Business Models

Business models are highly relevant for the music industry as an integrated management concept. Therefore, the business models in the music industry are portrayed in this section. The business and revenue models of the two important players—record producers and music publishing houses—differ sharply and must be analyzed differently. Following a general presentation of the revenue and service creation models of music records, the details of the business and revenue models of music labels and publishing houses will be explained. For the record producers, the recipients or audience markets are the central source of revenue acquisition. Revenues in these markets are mostly generated by transaction-related payments which accrue through the purchase of music recordings or the download of music titles. Against this background, music publishing houses generate the majority of their revenue in the markets for rights. In these markets, the exploitation rights to music pieces are licensed and assigned to third parties. Revenue acquisition is always associated with a transaction that depends on the type and extent of the licensing rights. Music publishing houses also generate revenues in the print market. Therefore, music magazines pose a further revenue

10.5

Business Models 100 %

167

18 %

13 % 14 % 10 %

Sales revenues

7% 10 % 16 %

6% 6%

Revenue per sound storage medium

Trade margin

Trade margin (18%)

Distribution

BMI/ ASCAP/ SESAC

License fees (producer, artist)

Sound Marketing Music Adminisstorage production tration media (master production recording)

Production/distribution costs (44 %)

Profit

First copy costs (32 %)

Fig. 10.3 Costs and revenue structure of the manufacturing (on the basis of own analysis and estimates). Source: Wirtz (2005, 2019b)

source for the music publishing houses in the advertising markets. These revenues can be acquired through the placement or integration of advertising content in magazines. In the record industry, music titles are produced for distribution. The service creation model of the record industry correspondingly reflects important core processes that arise during the production and distribution of music. Of special importance in this context is the cost structure of the service creation. It provides evidence of the central cost factors in service creation. Through a reduction of the service creation costs, competition-related efficiency benefits in the form of cost benefits as opposed to the competition can be achieved. Figure 10.3 provides an overview of the cost and revenue structure of service creation in the record industry. In order to familiarize the public with newcomers there are higher promotion costs. Marketing expenses and music production costs can correspondingly be identified as the central cost drivers. Similar to the copy costs, the profit margin (on average 6%) varies as well. The participation in sales by producers, artists, and composers varies according to the contract and the amount of advance financing by the record label. The production costs of the physical duplication of the records and their accessories depend on the production volume. However, these production costs are comparatively low at an average share of 7%. The largest cost item is trade, at about 18%.

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10.5.1 Business Model of Record Producers The main issues of the business model of record producers are the creation of a local music repertoire and the marketing of the international music repertoire. The central tasks of the service creation process are the acquisition of artists and their supervision, product development, product management, marketing, and distribution. Here the physical manufacture of the recording media copies is usually not carried out by the record producers themselves. It is outsourced to the more than 200 CD production plants worldwide. However, in many cases these belong to the major entertainment conglomerates. Almost every major company has an in-house manufacturer (e.g., Sony DADC as a CD manufacturer and Sony subsidiary). A typical additional business of sound record producers is the production and distribution of music videos and music DVDs. Finally, the business model of the record producers also covers the area of merchandising. This is understood as the utilization of ancillary rights for artists or music products. An example is the manufacture and distribution of items such as posters and T-shirts with the name or image of the interpreter. Aside from traditional merchandising, revenue from the area of digital merchandising is increasingly important. The business model of a record producer is provided in Fig. 10.4.

10.5.2 Business Model of Music Publishing Houses The overwhelming majority of the activities of music publishing houses are concerned with the acquisition, administration, and licensing of rights. Music publishing houses demand royalties for the utilization of music titles (e.g., in TV, radio, concerts, and discotheques). These fees are seldom levied by the publishing houses themselves but rather are processed via collecting societies (e.g., ASCAP). Streams of revenue arise from payouts from collecting societies and from the direct exercise of rights of use and utilization of copyrights (licensing to third parties). A part of the income remains at the music publishing house, and the rest is transmitted to the author and/or interpreter. A clearly smaller part of the activities of music publishing houses involves the production and sale of sheet music and other music services, or the so-called print business. Figure 10.5 contains an example of a simplified business model of a music publishing house. Knowledge Review Questions 1. Of what is the value chain in the music industry composed? 2. How can the revenue model of the music industry be described? 3. Explain a few differences between the business models of the music publishing houses and the record producer.

Live recording

International repertoire

Creation of a national repertoire

Music videos

Compilation of records/ compilations and single releases

Merchandising products

• DVD • Blue Ray •…

Large number of licensed songs Large artist portfolio Access to resources and technologies Music- and artist-sourcing competence Cross-media utilization competence …

• • • •

Customer Relationship Management

• Recipients

• Video rental stores

• Recipients • Video rental stores

• Music portals • Internet shops

• Recipients

Customer Model

Contracts with a large number of international stars Cooperation with smaller music labels Access to an international distributor network …

Network Model

Merchandising revenues

Merchandising

Videos

Sales revenues

Videos

Sales revenues

Online songs

Sales revenues

Sound storage media

Sales revenues

Revenue Model

Business Models

Fig. 10.4 Business model of a record producer. Source: Wirtz (2001b, 2019b)

• • • • • •

MP3 CD Vinyl MC DVD-Audio SACD …

Music videos

• • • • • • •

Music production, sound storage media, sound files

Market Offer Model

Competencies/Resources Model

Creation of merchandising items

Music video clips

Strategic selection and promotion of musicians and stars Enhancing fan culture and star presence Comprehensive merchandise placement Carful selection of markets Multi brand portfolio strategies Sensitive trend analysis and exploitation International expansion strategy …

Strategy Model

Purchase price

Advertising material

Fees

Musical work

Salaries

Contribution

Fees

Musical work (right)

Salaries

Contribution

Fees

Internet platform

Value Creation Model

Record producer

Integrated Product/Service Offer

• • • • • • • •

• Advertising material commerce

• Rights

• Artists • Technology

• Composers • Lyricists • Music publishers

• Artists • Technology

• Technology • Platform

Procurement Model

Finance Model

10.5 169

Print of sheet music

Music Advertising Film TV Computer Games Live Events

• • • • •

Performing rights Authors/publishing rights Synchronisation rights Graphical rights Mechanical rights

Rights

• • • • • •

Utilization options

Sheets of music Music books Online sheets …

Sheet music • • • •

Fig. 10.5 Business model of a music publishing house. Source: Wirtz (2001b, 2019b)

• Large number of licensed songs • High attractiveness as one of the markets-leading music publishers • Access to all media channels • Good promotion competence • Cross-media utilization competence •…

Competencies/Resources Model

Administration and licensing of rights

Creation of new compositions

Compilation of music books

Market Offer Model

• • • •

Network Model

Rights

License fee

Videos

Sales revenues

Online-Songs

Sales revenues

Sheet music

Sales revenues

Revenue Model

Customer Relationship Management

• User • Label • Publishing house • Organizer

• Recipients • Video shop

• Music portals • Internetshop

• Recipients

Customer Model

Cooperation with international artists and stars Cooperation with television stations and radio stations Large number of partners …

Integrated Product/Service Offer

• Attraction and binding of actors, influencers, and other celebrities • Strategic exclusivity contracts • Selection and promotion of composers and producers • Cross-medial diversification strategy • Carful selection of markets • Sensitive trend analysis and exploitation • International expansion strategy •…

Strategy Model

Remuneration

Musical work

Remuneration

Musical work

Value Creation Model

Music publishing house

10

• Composers • Lyricists

• Composers • Lyricists

Procurement Model

Finance Model

170 Business Models and Value Creation in the Music Market

Business Models and Value Creation in the Video and Gaming Market

11

Since the end of the 1990s, it has been obvious that the video and computer game market has become an important entertainment and economy sector. Computer and video games have been established as a common means of entertainment in large parts of the society. In 2001 the US revenue of computer and video games, which amounted to 9.4 billion USD, exceeded the revenue of the US movie industry (8.1 billion USD) for the first time. In the year 2017, the worldwide revenue of the computer and video game industry amounted to approximately 108.4 billion USD. Despite these high revenues, the video and computer game industry is only hesitatingly becoming recognized as a serious part of the media industry. Among other reasons, this is due to its being classified as a niche market which has no mass appeal and only targets children, juveniles, and “nerds.”1

11.1

Range of Services

The range of services perceived by the video and computer game users includes additional services besides the main service (game platform and game software), meaning accessories, e. g., peripheral devices, merchandising articles, and services. Beyond the licensing of content which was developed by the game industry, the trade of these licenses is also within the range of services of the video and computer game industry. “Final Fantasy,” “Mortal Combat,” “Resident Evil,” and “Tomb Raider” are prominent examples of the fact that characters created by game developers are on the one hand successfully used for other media like print, TV, and motion pictures and on the other hand transferred to completely different service categories within 1

See also for the following chapter Wirtz (2011b) and Wirtz (2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_11

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the framework of merchandising (like toys, sweets, clothes, bed linen, etc.). Figure 11.1 provides an overview of the range of services of the video and computer game industry. In the following the range of services, strictly speaking of the game hardware and software industry, will be discussed in more detail. The hardware, i.e., the game platform, can be characterized by two substantial elements: mobility and compatibility. The computer, for example, is a stationary, compatible platform, whereas the Nintendo Switch is mobile and proprietary. With software, initially two levels – distribution and content – can be differentiated. Since video and computer games represent digital property, a distribution is possible via Internet-based technologies, besides the distribution on physical media (CD-ROM, DVD, Blu-ray, UMD, and flashcard). Thereby it can be differentiated between download and application hosting. The consumer downloads the game from a server of the download provider to his personal game platform, i.e., the consumer saves the game, for example, on their computer. However, with application hosting, the game stays on the server of the application hosting provider. Hence, the player only acquires the right to use the game but does not save the game software on his platform. The user has to maintain a connection with the server for the entire duration of the game. Meanwhile, hybrid forms are developing which combine offline and online elements. The game manufacturer Ubisoft, for example, distributes its current games “Far Cry 5” and “Assassin’s Creed Origins” on DVD-ROMs. However, the games can only be started if an Internet connection is active, because scores are saved on the servers of the company. Thus, the manufacturer realizes a new form of copy protection. Hence, the acceptance by the players is currently very low for singleplayer games because in case of a failure of the host server, the games can no longer be used, for example. Regarding the form of content, video and computer games can basically be distinguished by genre. There is a multitude of game types like action, strategy, role-playing, sports, adventure, simulation, shooter, racing games, and children’s games. The possible number of players is also closely connected to the type of the game. At this point there is a distinction between single player, multiplayer, and mass-multiplayer games. Single player games, for example, include classical jump-and-run games which are designed for one player. Usually, players have to compete by the score but not interactively. Multiplayer games are characterized by the fact that several players, on- or offline, can play together or against each other. Mass-multiplayer online games like “Fortnite” or “World of Warcraft” are online games in which several thousand players play together or against each other via Internet. Most suitable for this game segment are genres such as role-playing games, fantasy, and shooters. Figure 11.2 displays the perceived range of services of the game hardware and software industry by the customer. Both the game platforms and the game titles may be distinguished by their single player and multiplayer characteristics, their online and offline ability, as well as their degree of mobility.

Content • Genre (e.g. action, strategy, jump ‘n‘ run, racing games) • Number of players (e.g. single-player or multiplayer, mass-multiplayer)

Distribution

• Offline (e.g. CDRom, DVD, Blu-ray, UMD, flashcard)

• Online (download, application hosting)

Software

• Magazines • Articles of clothing

• Steering wheel • Eye toy/camera

• ...

• ...

• Soundtrack

• Wiimote

• Toys

• TV comic series

• VR Gear

• Adapter/cable

• movies

• Karaoke microphones

e.g.

Licensing/ merchandising

• Gamepad

Peripherals

Services

• ...

• Forums

• Game events (LAN party, tournament)

• Game portals

e.g.

Range of services in the broader sense

e.g.

Fig. 11.1 Products in the video and computer game sector. Source: Wirtz (2003b, 2019b)

• Compatibility: proprietary (e.g. console) vs. compatible platform (e.g. PC)

• Mobility: stationary (e.g. console, PC) vs. mobile game platform (PDA, handheld, mobile phone)

Hardware

Range of services in the narrower sense

Products in the video and computer gaming sector

11.1 Range of Services 173

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Single player

Multi player

Online

Stationary

Mobile

Stationary

Mobile

• Classical single game on the PC, console or set-top box

• Gaming on mobile platforms, e.g. classic Game Boy game and smartphone games

• Gaming on the PC, console, or set-top box via applicationhosting

• Gaming of online smartphone games/ laptop/ tablet PC

• Gaming on a stationary platform using several gamepads or LAN

• Gaming on connected mobile platforms, e.g. via WLAN (Nintendo DS, Playstation Portable) or smartphone games via Bluetooth

• Playing of online, multiplayer and mass-multiplayer games on the PC, console, or set-topbox

• Playing of online multiplayer games on the smartphone/ laptop/ tablet PC

Fig. 11.2 Video and computer game range of services. Source: Wirtz (2003b, 2019b)

11.2

Interactions of Market Participants

To a large extent, the video and computer game market can be called stable. Two substantial groups of participants can be essentially distinguished: on the one hand, the hardware manufacturers who produce the consoles/computers and the accessories and, on the other hand, the game developers or rather publishers who develop and distribute the games for the respective platforms. The hardware and console manufacturers, respectively, develop their individual platforms. However, they partially obtain components such as graphic chips or disc drives from technology suppliers. The manufacturing of the actual hardware is mostly outsourced and managed by system suppliers. Revenues of the console manufacturers are generated on the one hand by the hardware sold to the final customers and on the other hand by royalties of the publishers or rather game developers. The developers or rather publishers are responsible for the production, respectively, distribution, of the games, in which a rising number of enterprises are found that merge both functions. For example, Nintendo develops and distributes consoles but also games under its own direction. In the console sector, the developers need a license of the hardware manufacturers and licenses or rights of content suppliers and franchise providers before they may develop a game. Revenues are obtained by the sale of the finished product to the customer as well as advertising in the form of in-game advertising. The customer can acquire the game hardware through the retailer or the rental shops. A further distribution channel is available to the game software industry via Internet game platforms and online distribution, a channel that is constantly gaining significance. Figure 11.3 displays an overview of the essential participants and interactions within the video and computer game market.

License

Content suppliers

Fee

Software

Developer Rights

Franchisors

Fee

Software

Advertising companies

Fee

Feedback advertising effectiveness

Software

Online distribution (internet gaming platform)

Revenues

Publisher

Game shops, etc.

Purchase price

Interactions of Market Participants

Fig. 11.3 Interactions in the video and computer game market. Source: Wirtz (2011c, 2019b)

Technology suppliers

System suppliers

Know-how

License fees

License

Hardware

Department stores

Fee

Hardware components

Hardware manufacturer

Revenues

Software

Online shops

Software/hardware

Retail

Purchase price

Fee

Hardware

Rental

Purchase price

Software/ hardware

User

11.2 175

176

11.3

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Value Creation Structures

When investigating the value creation structures in the video and computer game industry, the value chain of the hardware and software industry needs to be considered separately. Due to the system product character of the video and computer games, these are interdependent. Regarding the hardware market, the focus shall be directed at the game console industry, as in the preceding chapters.

11.3.1 Game Hardware Industry The value chain in the game hardware industry can be roughly divided into four stages: development, production, software/license management, and distribution. The development of an actual game platform with its technical characteristics represents the focus of the first stage of the value chain. In this framework the development of a new game console generation and/or additional features for a current console generation is accomplished. The research and development is executed on the one hand by platform manufacturers and on the other hand by system suppliers. Different console system parts, such as processors, storage media, and graphic cards are standard modules which are modified for the special needs of the platform and are manufactured for the respective system distributor. The physical production of a game platform represents the second stage of the value chain. It is either done in-house at the platform producer or outsourced to a contract manufacturer. Microsoft, for example, has outsourced the production of the Xbox One to Flex (former Flextronics). The software and license management represents the central stage of the value chain in the business and revenue model of the console manufacturers. In this context, the game politics and strategies are specified and implemented. Against this background, models and contracts have to be sketched and software developers and publishers have to be selected and contracted to develop and manage the game portfolio. In the final stage of the value chain, the games platform is delivered to intermediaries, wholesalers, and retailers and then sold or rented to the user. Figure 11.4 displays the four primary stages of the value chain in the game console industry.

11.3.2 Game Software Industry The value chain in the game software industry can be subdivided into three central stages: development, publishing, and distribution/trade. The development of an actual game takes place in the first stage of the value chain. In this stage the game is conceived, programmed, and tested. The game development is the responsibility of independent game developers or development departments of publishers or rather console manufacturers.

11.4

Core Assets and Core Competencies

Development

Key tasks • Research & development

Provider • Platform manufacturers • System suppliers

Production

177

Software/license management

Distribution/ trade

• Physical production

• License/software policy/strategy • Selection, human relations among developers and publishers • License management

• Storage and delivery • Stationary sale/ rental • Online sale

• Platform manufacturers • Contract manufacturers

• Platform manufacturers

• Platform manufacturers • Wholesale and retail • Video rental stores/ media libraries

User

Fig. 11.4 Value chain of the game console hardware industry. Source: Wirtz (2003b, 2019b)

The stage of publishing within the value chain covers specifically the financing, the content procurement, respectively, and/or the license management, the hard copy reproduction, the packaging, and especially the marketing. These tasks are usually all executed by the game publisher. An exception is the reproduction of the hard copies for consoles; this task is a responsibility of the platform manufacturers. The disc or rather flash card production may only be done by producers authorized by the game console manufacturer and/or is accomplished by the game manufacturers themselves. For example, for Microsoft’s consoles Xbox 360 and Xbox One, the European company Arvato, a subsidiary of Bertelsmann AG, is authorized for replication. However, Sony takes care of the CD, DVD, and Blu-ray production of all PlayStation games in six central production locations in Japan, the United States, Australia, India, Asia, and Europe. Reproduction, labeling, and packing of all PlayStation games for Europe and South Africa is executed by Sony DADC Europe at the sites of Anif and Thalgau (both Austria) as well as Southwater (Great Britain) (DADC 2010). In the last stage of the value chain – distribution/trade – the physical or digital distribution to the user takes place. The three central stages of the value chain in the game software industry are shown in Fig. 11.5.

11.4

Core Assets and Core Competencies

Due to the higher media specificity, the following discussion of the core assets and core competencies in the video and computer game industry is focused on the game software market, in particular developers and programmers who work on game

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Development Key tasks • Financing • Conception of games • Programming of games • Tests

Provider • Independent developers • Publishers • Platform manufacturers

Publishing

Distribution/ trade

• Financing • Content procurement • License management • Hard copy reproduction (CD/DVD/Blu-ray/HDDVD/UMD/flashcard) • Packaging • Marketing

• Hard copy: • Storage and delivery • Stationary sale/rental • Online sale • Digital copy: • Aggregation • Download • Application hosting

• Publishers • Platform manufacturers

• Publishers • Wholesale and retail • Game portals • Download- or rather application hosting provider

User

Fig. 11.5 Value chain on the game software industry. Source: Wirtz (2003b, 2019b)

development and programming with complementary abilities. Furthermore, development teams which are meant to push creative and innovative solutions play a vital role in the context of the core asset employees. Moreover, the designations of successful game series on the video and computer game market represent brands, e.g., “Call of Duty” or “Grand Theft Auto.” In addition, the names of well-known game manufacturers like Electronic Arts have to be considered as brands. Franchising content rights are likewise a core asset of game manufacturers. Franchising content right is the right to use well-known fictional or real persons and stories (e.g., “Batman,” “Tony Hawk”) as the basis for the development of a new game. Franchising content rights can contribute to a successful conversion of an attractive service offer as well as an improved image with consumers. Beyond this, a comprehensive network of cooperative partners is a core asset of enterprises in the video and computer game industry. The development and programming, the financing, as well as the marketing of video and computer games are arrays of tasks for which not all enterprises possess sufficient competencies. These competencies are often made available by cooperating enterprises. To use the core assets, core competencies are necessary. Important core competencies of developers or rather publishers in the video and computer game industry are content sourcing, the content creation, and the promotion. The content sourcing competence includes the ability of game developers and/or publishers to identify content and/or games with a high potential for success and to acquire those contents exclusively, if

11.5

Business Models

179

possible. This depends in particular on the feeling for trends, the know-how, and the contact network. The content creation competence can be divided into two subcompetencies: the story and the conversion. The story competence describes the ability to develop interesting and exciting storylines and characters which are the basis of the game. This is of high importance for the development of role-playing games. The conversion competence covers the relevant abilities which are needed to program a game. The promotion competence covers the ability to address the target group comprehensively and is based on the know-how, the creativity, and the advertising partner contact network of the enterprise.

11.5

Business Models

Business models of the computer and video game industry are very heterogeneous. Hence, the business models of the console hardware market are rather homogeneous; the business models pursued by the individual market participants of the software market differ strongly according to the service range and depth. In this section, the revenue models of the video and computer game industry and the service creation model of the game software industry are discussed. In the following, an exemplary business model of the game hardware industry will be displayed.

11.5.1 Revenue Model The sales of video game consoles and the sales of offline distributed games in the user markets are the primary source for achieving revenues. Here the users pay a transaction-dependent fee when buying a game console or rather a hard copy of a video or computer game. With online distributed on- and offline games, various revenue models are available. Thus, besides the recipients, advertising companies are available as a source of revenues. Computer games, in particular in simple, browser-based form, are frequently used and are a popular promotion instrument for enterprises. The game “Chicken Hunter,” for example, was commissioned by the beverage manufacturer Diageo and used purposefully to improve the prominence and image of the whiskey brand “Johnnie Walker.” Such promotional games are developed as commissioned products for enterprises. Most of the time these advertising games are offered to the user free of charge on the homepage of the advertising enterprise. In the user markets, transaction-dependent (payment per game, per download or utilization unit, or per transferred data set) and transaction-independent revenue models (gaming subscription for the use of a defined quantity of games within a certain period) can be found. Another revenue model that is becoming increasingly common, especially in the mobile gaming sector, is the free-to-play model. Here the respective software is provided online and free of charge by the manufacturer. The player can play all the

180

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standard content of the game by simply investing time. In the game itself, additional content can also be purchased for real money. These so-called “microtransactions” can unlock, otherwise not provided, in-game services, embellishments, extra features, or even game-influencing virtual objects and are often the only source of income for free-to-play games. In the computer games market, free-to-play games account for about 69% of total worldwide PC games sales. This corresponds to a turnover of 22.8 billion USD in 2017 through microtransactions alone (cf. Super Data 2018). Free-to-play is also one of the most successful business models in the field of mobile games. On average, players spend around 87 USD on additional content per mobile game (cf. Stanton 2018). Due to the high reach of mobile games, this represents a very significant source of revenue for game developers.

11.5.2 Manufacturing Model Considerations of the manufacturing model are focused on the game software market, since the manufacturing model exhibits only few media-specific characteristics during the console production. The manufacturing model of the game software industry shows important core processes which occur during the development, the production, and the distribution of video and computer games. The costs of the manufacturing are of special interest. Upon investigation of the cost structure, central cost drivers of the production of goods and services can be identified. Figure 11.6 gives an overview of the average manufacturing costs in the computer game software market in the case of offline distribution by means of physical media. The cost structure, which is represented in Fig. 11.6, is typical for an average computer game. The portion of the fixed costs, i.e., of the first copy costs, is approximately 44% and added thereto are administrative or rather overhead costs (approx. 7%), the licensing fees (approx. 4%), the costs of the game development and programming (approx. 21%), as well as the expenditures for marketing (approx. 12%). Depending on the project, individual cost positions can vary substantially. The costs of the licenses, for example, vary dependent on the extent of the use of franchising content. The costs of the actual game development depend considerably on the quality and novelty of the game. The marketing costs are affected by the size of the area of distribution and the desired market positioning. Just like the first copy costs, the profit margin also varies and is on average 16%. Production and distribution costs account for about 13% of total sales. The production costs for the production of computer game copies and accessories vary depending on the production volume and are on average 6%. With a console game, the costs of the physical copying are about four to five times the cost of a computer game. The reason is the royalty payment obligations to the console manufacturers. The costs of the localization (consideration of regional characteristics, e.g., language and regulations for the protection of children and

11.5

Business Models 100 %

181

27 %

7% 6% 12 % Sales revenues

21 %

4%

7% 16 %

Revenue Trade per game margin

Gross margin (27 %)

Distribution

Production of game copies

Costs of production/ distribution (13 %)

Marketing Game License development fees

Administration

Profit

First copy costs (44 %)

Fig. 11.6 Costs and revenue structure of the manufacturing (on the basis of own analysis and estimates). Source: Wirtz (2005, 2019b)

teenagers) only amount to 1% of the production costs. The largest pool of costs within the range of the variable costs is due to the trade, which amounts to 27%. With online distribution of games, the costs of the physical copying are omitted. The distribution and commercial costs are also reduced if the game is not offered by a stationary retailer and the transport of the game media and the storage are omitted. In contrast, other costs like technical online distribution costs, payment and accounting system costs, and costs for the deployment rise.

11.5.3 Business Model of a Console Manufacturer The business model of a console manufacturer is based on the development, production, and the sale of game consoles as well as the sale of licenses for the production of game software for this console. External resources which flow into the system are mostly the individual console system components (graphic card, storage medium, processor, etc.), which, if necessary, are then modified in the context of the manufacturing process of the enterprise in order to be integrated into the overall system console. The in-house manufacturing process primarily covers R&D, production, and marketing, as well as the game portfolio and license management. The business models of current market participants, Sony, Microsoft, and Nintendo, individually differ in the following aspects:

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• To what extent the research and development takes place in-house and/or is outsourced to the system suppliers • To what extent the physical manufacturing process of the console is accomplished in-house and/or outsourced to contract manufacturers • How restrictively the software license management is designed • How strongly the manufacturers are integrated, i.e., to what extent the game development and proceeding is executed by the manufacturers themselves. Microsoft, for example, falls back on open computer standards for the individual console components as much as possible. Furthermore, Microsoft has outsourced the console production completely, pursues an open, competitive software policy, and develops its own games to a much smaller extent than Nintendo (Metacritic 2018). As a further aspect of the console manufacturer business model, the control of the copying of the game software media needs to be mentioned. Most of the time, the developer and/or publisher sells the finished game to the console manufacturer or the producer authorized by the console manufacturer, who then takes over the CD-ROM, DVD, Blu-ray, and/or flashcard production and often also the packaging. The publisher then may reacquire the produced game in order to take over the distribution himself or rather to pass it on to a distributor. In Fig. 11.7 a possible business model of a console manufacturer is displayed. The revenue model of the console manufacturers is based on the already mentioned “shaver razor-blade model” (Beeson 2002). This is done with the intention to create a large base of the game console hardware as quickly as possible. The proceeds of the sale cannot cover the costs of the development, production, and marketing of the console. At the beginning, Microsoft, for example, reckoned the loss for each sold Xbox at 150 USD. Cost recovery and profits are only generated by software license incomes and profit shares of the sales of the game software. The exact license profit share model is variable and dependent on numerous influential factors, e.g., whether the game title is a platform-exclusive title or if it is also produced for other consoles and the computer. Such a license revenue model does not exist for the computer market. As new ways of business and revenue forms, online business and revenue models of the console manufacturers are often mentioned. Microsoft, Sony, and Nintendo offer online access through their consoles. Sony and Nintendo differ from Microsoft fundamentally in respect to their online business and revenue models. Sony and Nintendo pursue a decentralized, open online business model and Microsoft a closed, central online business model. As far as possible, Sony and Nintendo leave the aggregation, the distribution, the player networking, the supply of server capacities, and the billing of online games to the game manufacturer or rather independent third parties (e.g., gaming portals). In contrast, Microsoft has established an individual network and gaming portal (Xbox Live) within the framework of a two billion USD project. Xbox Live is financed by direct revenues in the form of transaction-independent subscription fees.

Strategy Model

License

License fees

Development

Purchase price

Engines, Middleware

License fees

Franchise richts Internal software production

Large community of players Player retention through console sales Own player community High content creation competence Promotion competence …

Competencies/Resources Model

Microtransactions • Extensions/DLC • Enhancements • Premium content • Embellishments

Customer Relationship Management

• Publisher • Distributor

User/ player

Customer Model

• Cooperation with many developer studios for international software development • Cooperation with international publishers and distributors • License partner for many game developers •…

Network Model

Revenue share

License

Revenues

Software

Merchandising

Merchandise revenues

Console

Revenue

Revenue Model

Business Models

Fig. 11.7 Business model of a console manufacturer. Source: Wirtz (2003b, 2019b)

• • • • • •

External software production

Computer and video games • Online trading • Hard-copy sales • Rental

Merchandising • Meeples • Clothing • Stuffed animals •…

Hardware • Consoles • Accessoires •…

Market Offer Model

Hard- and software offer

• Target group orientation (offers for individual group and casual players) • Expansion of game activity sphere (from keyboard, joystick, console to movement sensors and virtual reality technologies) • Market presence in selected global markets • Syndication strategy for game characters in order to exploit merchandise opportunities • Freemium strategies to lower players’ entry barriers •…

• Developers • Publishers

• Technology suppliers

• Content suppliers

Purchase price

R&D R&D/ market research Selection

• System suppliers

Hardware production

Content selection

Hardware components

Value Creation Model

Marketing

Procurement Model

Console manufacturer

Tests

Finance Model

Production Programming Granting of licenses

Marketing Regulation/ controlling

11.5 183

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Knowledge Review Questions 1. Point out the range of services by means of an example of the video and computer game industry! Also distinguish between the online and offline range of services! 2. The value chains in the game software and game console hardware industry have certain things in common. Which ones are relevant for a cooperative or rather integrated success? 3. Do differences in profitability exist within the different business models in the video game industry? State possible reasons!

Business Models and Value Creation in the Internet Market

12

The Internet is increasingly important in the media sector. In the context of Internet management and social media, the following section will therefore focus in particular on the management of companies whose business activities focus on the creation or sale of digital media content via the Internet.1

12.1

Range of Services

A number of different products and services are offered in the Internet sector. These offers can be categorized based on the participating actors—the private consumers (consumer), firms (business), and public institutions (administration). This is shown in Fig. 12.1. Economically relevant are the areas of business-to-business (B2B) and business-to-consumer (B2C), because high revenues are generated. In the business-to-business sector, companies focus their Internet offers on other companies. The goal is to optimize the business processes and to reduce the transaction costs as well as to increase potential sales. One example of this is the procurement of marketplaces in which companies can be brought together independent of their size and respective sector. The objective of the participating companies is an enhancement of procurement productivity, a global procurement and sales marketing and a reduction in distribution costs. The buyers receive the possibility to procure a fair comparison of a large number of suppliers and products. Business-tobusiness transactions are highly relevant to the Internet media sector in the context of content syndication. If a company’s Internet offering is aimed at consumers, this is referred to as business-to-consumer offerings. During a service exchange sequence, it is quite possible that the constellation of providers and recipients alternates. When users, 1

See also for the following chapter Wirtz (2011b) and Wirtz (2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_12

185

Service exchange provider

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Business Models and Value Creation in the Internet Market

Administration to business

Administration to consumer

Administration to administration

Consumer

Consumer to business

Consumer to consumer

Consumer to administration

Business

Business to business

Business to consumer

Business to administration

Intrabusiness

Business

Consumer

Administration

Intra

Administration

Intraadministration

Service exchange receiver

Fig. 12.1 Actor structures on the Internet. Source: Wirtz (2001a, 2019b)

for example, download a piece of music from an online music portal, they are initially the recipients and the company, on the other hand, the provider in a business-to-consumer relationship. Should the users subsequently place their subjective assessment of the music piece at the disposal of the company in the form of user-generated content, the roles are switched. The company is now the recipient, while the users take on the role of the provider. A relevant feature for the Internet media industry manifests itself in the otherwise characteristically relatively weak consumer-to-consumer sector in the form of peerto-peer computing (P2P). For example, the P2P network BitTorrent offers private users the possibility to share data files like music or videos with each other. It is assumed that 13% of all PCs have programs installed which enable the access to the BitTorrent network (Torrent Freak 2007). Even if they are not attributed to the commercial sector, consumer-to-consumer offers (such as BitTorrent) nevertheless have to be regarded as a competitor to commercial music portals. The consumer-to-business sector at the moment is still classified as rather insignificant. Two very significant offers hereby are, on the one hand, the databases with job applications, in which private people offer their labor to companies and, on the other hand, the databases with private offers for car sales. Such offers have had a strong impact on the market for job ads as well as on ads for private car sales in the newspapers.

12.3

12.2

Value Creation Structures

187

Interactions of Market Participants

The ubiquity of the Internet leads to the interaction of the most diverse actors with each other, in which complex interaction patterns in part prevail. The subsequent discussion will focus on the relevant actors in the media industry and will therefore in particular closely address the content providers and their interaction patterns. The Internet service providers as well as the associated infrastructure provider are market participants that are of central importance. The Internet service provider (ISP) is the interface between the user and the Internet. A stationary or mobile Internet access is hereby made available to the customer and is billed either on a time or use basis. The Internet service providers for their part work closely with the infrastructure providers to ensure that the various ISPs are connected across continents by means of fast backbone networks. Both players offer the Internet media providers the hosting of their application and/or the technical infrastructure for the distribution of their services. Depending on their size, the companies reserve for themselves the necessary know-how or procure it on the market from external technology providers or software developers/ programmers. The Internet media providers place various contents at the disposal of the user. The Internet offers usually have a specific orientation, whereby the focus can, for example, be placed on information, education, or entertainment content. Mixed forms like infotainment are also frequently encountered, whereby the goal of the broader design of the offer is to attain the highest possible number of Internet users. The content is not always domestically produced. The offers are rather often either complemented by or based on external content. This external content is among others contributed by content providers or franchisers. However, some of the business models of the Internet media providers are based on a direct revenue model. Most frequently encountered are business models which are based on indirect revenue models, whereby great importance is attributed to advertising in general and to the advertisers in particular. A further significant aspect is the focus of the services provider on the user, since the highest possible acceptance increases the spread of their own services. It is particularly within the framework of content procurement that the user can be integrated through user-generated content and by a high involvement, in the offer created by the service provider. Figure 12.2 presents an overview of the main actors and interactions on the Internet market.

12.3

Value Creation Structures

The value creation of media products in the Internet sector is a five-stage value chain (Baubin and Wirtz 1996). In the first stage, finished content of any kind as well as information for the generation of domestic content is externally procured. Domestic content is then internally domestically produced in the second stage. The content that is now available is processed and compiled in the third stage (packaging).

Advertising companies

Feedback/ advertising effectiveness

Rights

Fee

Fee Fee

Fee

Technical infrastructure

Fee

Users

Software developers/ programmers

Know-how/ hardware

• Information providers • Entertainment providers • Education providers • Infotainment providers •…

Internet media providers

Information/products/ services

Fig. 12.2 Interactions in the Internet media market. Source: Wirtz (2011c, 2019b)

Franchisors

Rights

License

Fee

Fee (optional)

Internet access

Access to backbone networks

Know-how/ hardware

Technology providers

Fee

Infrastructure providers

Fee

Internet service providers

Fee

12

Fee

Content providers

User-generated content

Users

188 Business Models and Value Creation in the Internet Market

12.4

Core Assets and Core Competencies

Procurement of online content Key tasks • Generation of content/services

Provider • Traditional content providers such as news agencies, newspapers, music publisher, TV stations

Creation of online content

Packaging of content and services

189

Technical production

Distribution

• Production of input

• Aggregation and bundling of content/ services

• Programming of websites

• Content distribution via internet

• Editorial departments

• Editorial departments

• Graphic artists, programmer, web designer

• Web hosting service provider

Recipient

Fig. 12.3 Value chain of the Internet media industry. Source: Denger and Wirtz (1995), and Wirtz (1999, 2019b)

The packaging increasingly often becomes personalized, i.e., it is tailored to the individual needs of the customer. One example is the offer of the web browser Mozilla Firefox. This entails an option for the registered user to specify preferences, content, and services that are of particular interest to him. The corresponding offers are then displayed in a prominent position on the personalized start page of the browser. The provider has to define subject-specific packages in order to be able to offer such a personalization feature. The fourth stage covers the technical production. This is the programming of the websites, over which the content will be made available in the fifth stage. In this last phase the contents are protected against unauthorized access during transport, which is of high importance. Internet media companies typically do not adopt all the stages of the value chain. Besides the external procurement of content, the technical implementation of the content management system is often outsourced. The main focus of Internet media companies is typically on the compilation and above all on the packaging of content. Figure 12.3 provides an overview of the entire value chain.

12.4

Core Assets and Core Competencies

The employees, the brand, the networks, and the customer base count as part of the core assets of the Internet media companies. Employees are a core asset particularly in the content compilation sector, since the content constitutes the central core of the service. The brand is a core asset on the Internet, since it indicates to the users a trustful and efficient provider of the diversity offers provided over the Internet and as such reduces the perceived risk associated with the acquisition and use of online content.

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Networks are important for the Internet media companies at each stage of the value chain. A part of the content, for example, cannot be created domestically, but rather procured from other providers through content syndication, for which a network for the procurement of exclusive content is required. Networks are often also used in the production and distribution of content and as such represent a core asset. Due to the network effects, the customer value of digital goods is enhanced by an increase in the customer base. The range of the customer base therefore has a positive effect on customer loyalty and thus represents a core asset. The core competencies conducive for the use of the core assets by Internet companies are the content sourcing, the content creation, the format, and the technology. Content sourcing competence is the ability to procure input goods not only in the form of data and information for domestic content production but also in the form of attractive, pre-compiled content for further exploitation. Content creation competence is the ability to select the content in accordance with the needs of the target group (trend competence), whereby input such as the compilation of appropriate information for the target groups and the conversion of this information into content (cultivation skills) as well as the structuring of the content in a manner that is comprehensible for the user (structuring competence) is of decisive importance. Format competence is of great importance in regard to positioning in the user market. It describes the ability to develop new and attractive content formats. An important part of the format competence is the access to content formats in terms of their market appeal and refinancing potential. Thus, format competence is of great importance for the product policy of the Internet media companies. The technological competence is of great importance to Internet media companies in the highly technology-driven Internet sector. Convenience benefits for the user and efficiency gains in the companies can be achieved through superior use of technology in content management or by the billing. It is as one of the most important core competencies of the Internet media companies.

12.5

Business Models

The service offer of the companies will be used as a delineation criterion for the different business models. The business models of the Internet industry in the business-to-consumer sector can be classified on the basis of the 4-C model into segments: content, commerce, context, and connection (see Fig. 12.4). Hereby the content segment covers the range of digital content like online news or music downloads, whereas the initiation, negotiation, and/or settlement of transactions on the Internet takes center stage in the commerce segment. The marketplaces for companies (e.g., Covisint), auction houses (e.g., eBay), shopping mall providers (e.g., Amazon), and the Internet presence of manufacturers (e.g., Varian Medical Systems) are highlighted in this context. The context segment entails the classification and systematization of the information that is available over

12.5

Business Models

Content • Compilation (packaging) • Depiction and provision of content on a domestic platform

191

Commerce • Initiation and/or settlement of business transactions

Context

Connection

• Classification and systematization of information available on the internet

• Creation of the possibility to exchange information in networks

Fig. 12.4 Basis of the classification of business models on the Internet. Source: Wirtz (2000c, 2019b)

the Internet. This pertains in particular to search engines and web directories. The connection segment, in conclusion, pertains to providers of products that bring about the possibility of an information exchange. This includes Internet-based communication offers as well as the access to the Internet itself. The services of Internet media companies thereby limit themselves traditionally to the content business model, which places the creation or else provision of digital content over the Internet at its forefront. Over the last few years, a trend to an integrated business model across all the 4-Cs can be observed as a result of the convergence within this industrial sector (Wirtz 2018). A former pure player, whose web directory offers originally focused only on the context segment, is Yahoo!. Meanwhile Yahoo! offers connection products such as “Yahoo! DSL” and Content products such as financial market information “Yahoo! Finance.” Due to this development toward integrated offerings, all four basic business models on the Internet will now subsequently be explained in broader terms, whereby the focus will be placed on the content business model. In the following, the revenue and service provision models in the Content segment will be portrayed before the special features of the business models; content, commerce, context, and connection are individually discussed in detail. The revenue model of the content companies has several special features. The different forms of revenue can be differentiated based on the criteria: direct versus indirect revenue generation, as well as transaction-based versus transactionindependent revenue generation (see Table 12.1). Whereas the direct transaction-based revenues of content companies pertain to user fees for the number of downloads or the time use, subsumed under the direct transaction-independent revenue are the base fees that are levied for the provision of a regular, potential use of Internet content. The importance of the respective forms of revenue varies significantly across the individual Internet media companies. An

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Table 12.1 Revenue scheme in the content segment Transaction-based

Direct revenue generation Transaction revenues in the narrow sense of user fees Royalties

Transactionindependent

Setup fees Basic fees

Indirect revenue generation Commissions Big-data/data-mining revenues Content syndication Ad sales (e.g., banner advertising) Content syndication Ad sales (e.g., banner advertising) Sponsorship

Source: Wirtz and Lihotzky (2001), and Wirtz (2019b)

isolated use of the revenue models is rarely encountered. The case is rather that several different forms of revenue are combined. An important business decision of Internet media companies is the combination and weighting of the different forms of revenue in order to optimize the source of revenue stream. The focal points of the service provision of content companies are the procurement, production, and distribution of content. Of particular relevance for the management are the cost and revenue structure of service provision. They allow for the identification of potential savings and revenue increases. An ideal type of cost and revenue structure is very difficult to define, because the individual content providers vary extremely. Thus, the cost and revenue structure is, for example, subject to the format of the content and the life cycle of the company. An above-average share of direct revenues can, for example, be assumed for technically complex formats such as online video and audio, since the willingness of the users to pay for such products tends to be classified higher. The cost structure of companies in an early life-cycle phase is often characterized by a high share of research and development costs. Another characteristic of young companies is that they often report negative profits. Figure 12.5 provides an overview of the cost and revenue structure of the manufacturing in Internet media companies, whereby the provided values pertain to averages. The share of the total advertising revenues is, at about 82%, the highest. The remaining revenues are derived from Internet services that are subject to a fee, such as broadband services, music downloads, premium mail, etc. The costs of the content providers are almost exclusively comprised of first copy costs. This is mainly attributed to the fact that no physical media (like paper) are used for the service distribution in the content segment. The easy reproducibility of the digital content therefore leads to the above-described first copy costs effect that is accountable for the reduction in the unit costs due to rising sales figures. The cost of the content production that also entails the costs of the content procurement can, at about 42%, be seen to represent the largest cost block.

12.5

Business Models 100 %

Advertising revenues

193 42 %

26 %

82 %

7% 25 %

Sales

18 % Revenues

Content production

Marketing/ sales

Administration costs

Profit

First copy costs (75 %)

Fig. 12.5 Costs and revenue structure of the manufacturing (on the basis of own analysis and estimates). Source: Wirtz (2009, 2019b)

12.5.1 Content The content business model consists of the collection, selection, systemization, compilation (packaging), and delivery of content on a domestic platform. The aim of the business model approach is to make the content accessible to the user over the Internet in an easy, convenient, and visually pleasing form. The offered content can be informative, educational, or of an entertaining nature. The content business model is accordingly further subcategorized into the business models subcategories E-information, E-entertainment, and E-education. A fourth subcategory is E-infotainment, with an emphasis on a hybrid of informational and entertainment content. Figure 12.6 shows the entire content business model. E-information providers place the informative character of the content at the forefront of the value proposition. Content is informative for the users when it entails information for the solution of a problem or covers a general or socially relevant area. Politicians, for example, are very keen on using the Internet to transfer information in order to win voters or to in general spread party-political information. An increased demand for problem-solving information is, for example, information which is derived from the economic sector, in the event that a credit or investment decision has to be made.

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• Compilation (Packaging) • Depiction and provision of content on a domestic platform

Content

Ee-Entertainment

e-Information

Ee-Education

• e-Politics

• e-Games

• Virtual university

• e-Society

• e-Movies

• Public education

 state.gov

 partypoker.com

 thesun.co.uk

 gutenberg.us  movies.go.com • e-Prints  worldlibrary.net • e-Music  apple.com/iTunes • ...

• e-Economics

 wsj.com • ...

 vu.org

• ...

 onlinelearning.com  salto-youth.net

e-Infotainment  nba.com  sportsline.com  ...

Fig. 12.6 The content business model. Source: Wirtz (2001a, 2019a)

Entertainment content serves the users as a form of pastime as well as for diversion and relaxation, and as a means of distraction from everyday situations, and represents the core of the service offer of the E-entertainment business model. The delineation to the informative content pertains to the fact that the multimedia data recorded by the user cannot directly be used to solve a problem or accomplish a task beyond the scope of the media use. The integration of entertainment and information aspects is realized through the E-infotainment business model. The summary of relevant information with multimedia aspects of entertainment value is for the most part attributed to the aforementioned trend, whereby media companies prefer to diversify their service offers rather than take on the role of a niche provider in order to increase the number of active users. This strategy is further attributed to the revenue model conventionally used by the content provider that is for the most part indirectly based on the advertising revenue in order to make the offered content freely available. Overall, educational content can, of course, be stimulating and entertaining. However, electronic educational content (e-education) has one distinguishing characteristic in common, i.e., that it works specifically toward a learning process

12.5

Business Models

195

through didactic preparation and confirms that a user has gone through this learning process through a document, such as a certificate of participation. E-education can be further differentiated into virtual universities and adult education (public education), such as Vu.org or Onlinelearning.com. In summary, it can be stated that the content areas e-information, e-entertainment, e-infotainment, and e-education described above are characterized by different content objectives and represent subcategories or business model variants of the higher-level content business model. Figure 12.7 shows an example of a content business model.

12.5.2 Commerce The commerce business model entails the initiation, negotiation, and/or settlement of transactions over the Internet. The business model can accordingly be further subcategorized into the business model subcategories E-attraction, E-bargaining/Enegotiation, and E-transaction. E-tailing as a further subcategory covers the entire process of selling goods and services to consumers over the Internet. Figure 12.8 provides an illustration of the commerce business model. The business model subcategory E-attraction refers to all measures that support the initiation of transactions. These factors can, for example, include the banner placement and the provision of marketplaces. Hence, other commerce business models are in turn possible in these marketplaces. The sector that pertains to the business relationship among the consumers, so-called C2C-relationships, is hereby becoming increasingly relevant. These arise, for example, over the eBay platform, when a private provider sells to a private bidder. Since the eBay platform is in the meantime also used by a large number of professional providers, B2C transactions are also handled and, where appropriate, even B2B transactions. The business model subcategory E-bargaining/E-negotiation focuses on the negotiation of the terms and conditions. An important parameter that often remains to be negotiated for a given product or service is often only the price or else conditions of purchase. Auctions represent a pricing service which is frequently used in this context. The provider of the service must not necessarily moderate or have to take on the role of conducting the negotiations in such business models. The well-known example of the auction house eBay shows that the subject of the business model can already pertain to the provision of the technical platform, on which the providers and buyers then conduct their negotiations. Price-seeking is another business model subcategory in the E-bargaining/E-negotiation sector. The customer in price-seeking makes his offer known for the desired product. Then, the company determines the fairest offer for the product selected. Price-seeking offers have gained increasing relevance in recent years. An example of this business model subcategory is pricegrabber.com. The business model subcategory E-transaction is devoted to the settlement of transactions conducted over the Internet. The E-transaction subcategory in turn can

• • • • • • • •

…

Banner Advertising

Advertising Space

…

Recommendation Services

Expert Forums

Connection

…

Databases

Live-Ticker

Special Interest Content

Competencies/Resources Model

Placing / Inclusion

Content Public Interest Content

Access experts and correspondents Large and global customer base Preparation, systematizing, collection and provision of data Strong brand, deonymization Contextualizing competence Technological competence Content creation competence Competence of promoting advertising efforts

Management of Web-Based Cooperation

User / Expert Interaction

Offering of Content

Fig. 12.7 Illustrative content business model. Source: Wirtz (2000c, 2019a)

Strategic identification of valuable content Editorial work and selection of key information Refinement of publicly available data Strategic exclusivity of relevant information Presentation of brands and experts Trust and confidence positioning Offering exclusive access to key information Global presence and time critical content provision

Strategy Model

Payment / Fees

Provision of Content

Administration of Communication

Editorial Creation of Own Online Content

Collection, Selection, Systematization and Compilation of Content

Market Offer Model

Network Model

Advert-Revenue

Interaction

Subscriptive Payments

• Presentation • Distribution

Performance

Revenue Model

Customer Relationship Management

Bank of America

Private Consumers

Customer Model

• Formal and informal to news agencies • Access to key informants • Network to professional freelance correspondents and journalists • Member of key research and investigation consortiums • Access to rights and proprietary databases

Integrated Product/Service Offer

• • • • • • • •

• Bank of America •…

Advertising Clients

Payment

Services

Compensations

Accepting Content

Report of Content

Value Creation Model

Content business model

12

Expert Forums

• Reuters • Bloomberg • ….

News Agencies

Procurement Model

Finance Model

196 Business Models and Value Creation in the Internet Market

12.5

Business Models

197 • Initiation, negotiation and/or settlement of business transactions

Commerce

E -Bargaining/ E-bargaining/ e-Bargaining/ E-negotiation E -Negotiation e-Negotiation

E-attraction e-Attraction • Online advertising – google.com/adsense • Market place – shopping.com •…

• Auction – ebay.com – marmaladeskies.com • Price-seeking – Pricegrabber.com •…

e-Transaction • Payment – paypal.com – paybox.net • Delivery – fedex.com – ups.com •…

e-Tailing  amazon.com

-amazon.com … - ...

Fig. 12.8 The commerce business model. Source: Wirtz (2001a, 2019a)

be subcategorized into payment cultivation and delivery. A payment system that is specifically designed for the settlement of transactions over the Internet is, for example, PayPal. It is hereby possible for Internet users to send and receive money in over 200 countries. The delivery can in addition to the payment cultivation also be counted as a subcategory of the transaction sector of the business model. The distribution of information-based products such as software can be conducted directly over the Internet. Physical products in contrast are shipped by traditional means to the customer. Insofar as the domestic distribution capacities of the manufacturer or else dealer are not used, the assumption of the shipping services is borne by external service providers such as FedEx or United Parcel Service (UPS). Electronic retailing (also referred to as E-tailing) covers the entire process of the selling of goods and services to consumers over the Internet. Online retailers therefore often offer an integrated offering comprised of multiple commerce services—from the presentation of the offer, up to the settlement of the transaction. Some major online retailers in the meantime go on to even take on E-bargaining offers. Amazon.com can be cited as an example of a successful online retailer. After the products or services have been delivered by the various manufacturers, they are collected and then systematically presented to the customer. Incoming customer orders are received. Subsequent to payment (e.g., direct debit or bank

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transfer), the orders are then internally routed further and the products packed and shipped.

12.5.3 Context The focus of the context business model is the classification and systematization of the information that is available over the Internet. This function can be subcategorized into search engines, web directories, and bookmarking services (see Fig. 12.9). The use of context offers has thereby been increasing for years, whereby studies show that 5.6 billion search queries were made daily worldwide in 2017, of which about 92% were processed only by Google (Live-Counter.com 2018). Context providers in the E-business sector can be further distinguished in that they primarily do not offer their own content, but rather offer navigation aids, and increasingly take on the role of an aggregator on the Internet. The users consequently often set a context page as their home page, from where information, interaction, or transaction offers of other providers are accessed by the respective user. Complexity reduction is also a major task of the context provider in addition to the essential navigation aid for the user. The information is compiled by the context provider according to specific criteria and clearly presented to the user in a context-specific manner. The objective is to Classification and systematization of information available on the Internet

Context

Search Engines • General Search - Google.com - Live.com - Yahoo.com - Ask.com

Web Directories • Web Directories/ Lists - Yellow.com - Yahoo.com - Sharelook.com - ...

Bookmarking Services • Social Tagging - Del.icio.us - Dmoz.org - Citeulike.org - ...

• Special Search - Technorati.com - ... • Meta Search - Dogpile.com - ... • Desktop Search - Google Desktop - Yahoo! Desktop - Windows Search - ...

Fig. 12.9 The context business model. Source: Wirtz (2001a, 2019a)

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Business Models

199

improve market transparency and to achieve a continuous improvement of the returned search results. Internet search engines are generally represented by the E-search business model which can further be subcategorized into general search, special search, meta search, and desktop search. Thereby, the basic function of a search engine relates back to the information retrieval system. Search queries are submitted to the search provider and return search results of the indexed inventory of the collected information sorted according to the frequency of use. The returned information is sorted based on the use frequency of other users. In contrast, web directories as well as the offline versions, such as the yellow pages, are in most cases subject to editorial control and allow a better average quality or relevance of search queries compared to the traditional search engines. Bookmarking, as a further subcategory in the context sector of the business model, has only gained special prominence pursuant to the developments within the framework of Web 2.0 or social media. E-bookmarking describes the collaborative indexing of Internet-based information by the users. Therefore, keywords can be assigned in the web browsers through Web 2.0 applications, so that other users with similar search queries can find the information faster. This type of indexing is particular successful with respect to well-defined user groups since the information can be efficiently filtered according to the target group relevance. Furthermore, the decentralized storage of bookmarks facilitates an independent use apart from the private device.

12.5.4 Connection The connection business model addresses the establishment of options for information exchange in networks. Thus, the services of the connection business model often enable the interaction of actors in virtual networks that would not be possible in the physical world due to the prohibitively high transaction costs or due to communication barriers. The connection business model can be subcategorized into an intra-connection subcategory and an inter-connection subcategory. Figure 12.10 provides an illustration of the connection business model. The intra-connection subcategory of the business model describes the offer of commercial or communication services within the Internet. This includes, for example, the community sector, which can be subcategorized into social networks, social messages, customer exchanges, as well as customer opinion portals. In all these subcategories, a platform is offered to the users in order to establish contact with peers or friends and to further share information, knowledge, opinions, or also data files. Due to the hype about new Web 2.0 and social media applications, the platforms of the social networks are currently attracting the most attention, achieving strong growth in number of users. Aside from the community subcategory of the business model, mailing services such as gmail.com is another subcategory of the intraconnection. Email or greeting cards can be sent via these providers. Mailing services

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• Creation of the possibility to exchange information in networks

Connection

Intra-Connection • Community  Social networks - facebook.com - LinkedIn.com  User messages  skype.com  icq.com  twitter.com  File exchanges  rapidshare.com  flickr.com  monster.com  Customer opinion portal  yelp.com  epinions.com

Inter-Connection • Fix connection -earthlink.net -sonic.net • M-connection - att.com -t- mobile.com • ...

• Mailing services  gmail.com • ...

Fig. 12.10 The connection business model. Source: Wirtz (2001a, 2019a)

are mainly financed through advertisements attached to emails sent, through banner advertising, or the provision of so-called premium accounts with extra features such as increased storage space. Providers in the inter-connection subcategory do not offer communication opportunities within the Internet but supply access to the physical networks. This includes, for example, the Internet service provider (ISP), which enables customers technological access to the Internet. While using a fixed connection the user is locally bound, i.e., there is only a wired dial-in option into the network at a fixed location, the M-connection user in contrast is not bound to a specific location and can, for example, dial mobile into the Internet via smartphone. With regard to the physical connectors, direct revenue models dominate. They are usually represented as transaction-independent setup and/or basic fees as well as in the form of transaction-based connections and/or usage fees. Due to the high usage intensity and the related attractiveness as advertising

12.5

Business Models

201

media and transaction agents, the companies often also pursue indirect revenue models.

12.5.5 Business Models in Social Media Due to the increasing acceptance and growing commercial use and dissemination of the Internet, online marketing and digital business models have become a key success factors for companies. Social media plays an important role in this context (Aral et al. 2013; Wirtz and Ullrich 2008), consisting of innovative platforms and applications with high potential to shape the future of the Internet. Users and providers collectively define and shape the content through collaborative participation and thus determine the development of social networks (Turban et al. 2015). The aim of social media applications is the distribution of content and the networking between users (Laudon and Traver 2017). The development of information and communication technologies is shaped by a fundamental increase in users of social media applications. Both customer and corporate side have significantly contributed to the increase in attention on social media in recent years (Laudon and Traver 2017). Given the widespread dissemination of social media, it has become increasingly relevant in the context of media management and with regard to respective digital business models. Since the year 2005, social media has significantly changed the Internet economy, giving rise to a variety of hybrid business models and leading to a particularly strong hybridization of “traditional” Internet companies. When investigating social media, one often comes across the term Web 2.0. Since both social media and Web 2.0 are relatively young fields of research, there is no clear demarcation between these two terms. In the academic literature, both terms are frequently used with similar meaning. Most definitions of social media and Web 2.0 combine characteristics such as interaction, dialogue, networking, and usergenerated content. The focus of interest within social media and Web 2.0 is the exchange of information, experience, and perspectives in online communities (Wirtz and Elsäßer 2012). Against this background, this section first discusses the differences between Web 2.0 and social media. The heart of Web 2.0 is the communication or interaction between Internet users (O’Reilly 2005; Little 2007). It uses basic functions that allow the user to continuously contribute and modify web content. Web 2.0 technologies are, for example, (Kaplan and Haenlein 2010): • Adobe Flash: Common method for programming and displaying multimedia and interactive content, such as animations, audio, and video streams • RSS (Really Simple Syndication): A web feed format for simple and structured publication of consecutive changes on websites • AJAX (Asynchronous JavaScript): A technique for obtaining data on web servers to update web content without altering the layout and operation of the website

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Web 2.0

Social Media

Characteristics

• Users can continuously contribute and modify web content

• Group of Internet applications based on Web 2.0

• Diverse basic functions allow the use of the Web 2.0 (see examples)

• Allows creating and exchanging user-generated content

• Ideological and technological basis for social media

• Adobe Flash

Examples

• RSS (Really Simple Syndication) • AJAX (Asynchronous Java Script)

• Social networking (e.g., Facebook) • Video sharing platforms (e.g., YouTube) • Wikis (e.g., Wikipedia)

Fig. 12.11 Web 2.0 vs. social media. Source: Kaplan and Haenlein (2010), and Wirtz (2019b)

Social media, by contrast, is a group of Internet applications, technically and ideologically based on Web 2.0. They allow to post and exchange user-generated content. Hallmarks of user-generated content are: • Publishing on social media platforms • A degree of creative personal contribution • Contributions outside of professional routines and practices (Kaplan and Haenlein 2010) Figure 12.11 compares the characteristics used in the literature and gives respective examples. Against this background, the term social media comprises different features and aspects and is thus defined as follows: Definition Social Media Social media refers to applications, services, and platforms on the Internet with high, mostly interactive, and personalized creative potential. These are characterized by the active creation and design of diverse content through cooperative participation of the users. User-generated content constitutes in conjunction with platform services social networks that enable a communicative and content-based networking among the users (Wirtz and Ullrich 2008; Wirtz 2019b).

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Business Models

203

Social media offers companies a variety of applications to communicate with customers and other stakeholders (Dahnil et al. 2014). From a channel perspective, there are several social media applications that have to be taken into account (Scott 2015). Table 12.2 provides an overview of current social media applications, using an exploratory classification of business models, service offers, and the delivered user value. Social networking refers to platforms that use computer-mediated communication to link individuals in groups or communities, so-called social networks (Laudon and Traver 2017). Examples of social networking sites are Facebook, Twitter, or Instagram. The business model of social networking includes the compilation and provision of user-generated content on a single platform, generating revenue based on ad sales and data mining. The service offer provides the opportunity of self-presentation for the users, as well as networking among users and between users and content. Thus, users can basically present their profiles on the web and interact or network with other users. In particular, the mediation of social contacts through digital interaction and the high suitability for use in the mobile environment provides value to the user. These social media applications can be quickly and easily set up to start interaction and thus are highly relevant within an e-business setting (Scott 2015). Due to their scope and growth in recent years, social networks are among the most popular applications in the social media business (Beynon-Davies 2013; Wamba and Carter 2014). One of the world’s most popular social media applications is WhatsApp with around 1.5 billion users in January 2018 (Statista 2019a). With approximately 2.38 billion users, Facebook, the company that owns WhatsApp, had even a larger user group in March 2019 (Facebook 2019). But also Instagram with around 1 billion (Statista 2019c) and Snapchat with 3.5 million have high user numbers (Buggisch 2017). The business network LinkedIn has approximately 546 million users (LinkedIn 2019). Blogs and RSS feeds provide online publishing opportunities for businesses and organizations and enable visual presentation of content (Laudon and Traver 2017). These technologies reside more or less between traditional print and broadcast media and mainly serve information purposes. Some of the most popular blogging platforms include Blogger.com and Jimdo.com. The business model of blogs and RSS feeds involves the systematization and compilation of online diaries and generates revenue based on ad sales, usage or subscription fees, and data mining. Its service offer entails the provision of an authoring tool for creating blogs, as well as the hosting and categorization of blogs. The opportunity of publishing and visually presenting unfiltered and personal content represents the core user value. Overall, these applications are quickly and easily set up and thus reflect helpful tools to keep customers informed. Microblogs represent a more specific type of blogging through which users can publish short messages that often have less than 140 characters and that can be made accessible to the public or a selected group of people. Twitter is the world’s leading and by far most frequently used microblogging service.

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Table 12.2 Overview of current social media applications Application Social networks e.g., facebook.com

Business model • Compilation and provision of user-generated content on a single platform • Revenues through ad sales/data mining

Service offer • Self-presentation of the user • Networking among users • Connection between users and content

Blogs and RSS feeds e.g., blogger. com

• Systematization and compilation of online diaries • Revenues through ad sales/usage or subscription fees/data mining • Compilation and provision of user-generated content on a single platform • Revenues through ad sales/data mining • Archiving and systematization of usergenerated content (e.g., videos) • Revenues through ad sales/data mining • Aggregation and systematization of productand service-related information • Revenues from agency commissions and through ad sales/data mining

• Provision of an authoring tool for the creation of blogs • Hosting of blogs • Categorization of blogs • Special type of blogging to quickly publish short messages

Microblogs e.g., twitter. com

File exchange and sharing e.g., youtube. com

Rating portals e.g., yelp.com

Instant messengers e.g., whatsapp. com

Podcasts e.g., podcasts.com

Wikis e.g., wikipedia. com

• Exchange of text, audio, and video messages and content • Revenues through subscription fees, in cooperation with companies and data mining • Provision of audio or video content • Revenues through pay-per-use, subscription, and ad sales • Collection, systematization, and further development of

• Provision of online storage • Systematization of content, e.g., through categorization and ratings • Aggregation of product and service information • User-generated reviews of products and services • Price comparisons with links to online stores • Instant exchange of push messages • Support of data, audio, and video streams

User value • Mediation of social contacts through digital interaction • High suitability for use in the mobile context (mobile networking) • Unfiltered personal publishing for “everyone” • Visual presentation of content • Fast and convenient opportunity to publish • High suitability for use in the mobile context • Broadcasting for “everyone” • Access to a large number of users/ audience • Independent product/service reviews from users • Simplifying and supporting decisionmaking and the buying process

• Fast and convenient exchange of messages • High suitability for use in the mobile context

• Topic-specific audio and video content • Possibility of subscription

• Location and timeindependent use of content

• Tools for creating and editing content by users

• Aggregation of subject-specific information (continued)

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Table 12.2 (continued) Application

Business model

Service offer

User value

information • Revenues from donations

• Provision of a platform for searching and presenting information/ knowledge • Central archiving and ubiquitous availability of bookmarks • Tagging of bookmarks • Access to link collections of other users • Exchange and archiving of thoughts, opinions, and experiences

• Freedom concerning content and authors • Users as a collective editorial • Individual editorial workup of the Internet

Social tagging/ bookmarking e.g., delicious.com

• Classification and systematization of Internet offers • Revenues, e.g., from the sale of click streams to data mining purposes

Online forums e.g., topix.com

• Compilation, classification, and provision of user-generated content on a single platform • Revenues through ad sales/data mining • Combination of multiple online software products/ API services • Revenues through ad sales and/or membership fees

Mashups e.g., parkingcarma. com

• Creation of new media content by recombining already existing content

• Increase in knowledge • Problem-solving through community • Structured documentation of topics and opinions • Exploitation of synergies between different social media applications • Time savings

Source: Enderle and Wirtz (2008), Wirtz (2019b)

The business model of microblogs includes the compilation and provision of user-generated content on a single platform and generates revenue based on ad sales and data mining. In particular, the fast and convenient opportunity to publish and the high suitability for the mobile context provides value to the user. For companies such a service may be an important mean to approach the general public, bind customers, and advertise their own brands and products. In addition to blogs and social networks, file exchange and sharing is another type of social media. Among the most popular file exchange and sharing websites on the Internet are, for instance, YouTube, Flickr, and SlideShare. These platforms spread multimedia content like photos or videos usually uploaded by users. File exchange and sharing applications allow users to share media content, which here primarily refers to file transfer and content distribution. Accordingly, the business model of file exchange and sharing contains the archiving and systematization of user-generated content (e.g., videos), generating revenue based on ad sales and data mining. The service offer entails the provision of online storage and the systematization of content, for instance, through categorization and ratings. The opportunity of broadcasting for “everyone” and the access to a large number of users or audience represents the core user value. These services also offer their members social

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features. For instance, users can watch, rate, and comment on videos published by companies on YouTube. The comment feature also allows companies to communicate with users. However, many users of these websites do not have a membership but only visit them to look at photos and videos. If companies have an own channel on YouTube, users can subscribe to this channel to obtain information on a regular basis and to be able to directly access further video posts of the company. These posts, for instance, may also contain product and service offers, as well as information with regard to discount promotions or new products. Overall, these applications can provide a lot of potential for businesses by informing users through additional media channels. Unfortunately, professional and sustainable file exchange or sharing communication usually requires expensive and complex preparation, like video shootings, photographers, etc. (Sheldon 2015). Rating portals such as yelp.com are further important social media applications that foster independent product and service reviews. This creates market transparency, supporting and influencing decision-making processes of users. Especially this characteristic makes rating portals a double-edged sword. Digital word-of-mouth recommendations enjoy considerable trust among users and negative impressions may hinder e-business service provision. Hence, companies have to care for objective online feedback and actively manage associated web content (Yoo et al. 2015). The business model of rating portals involves the aggregation and systematization of product and service-related information, generating revenue based on agency commissions, ad sales, and data mining. The service offer comprises the aggregation of product and service information, the provision of user-generated reviews of products and services, as well as price comparisons with links to online stores. In particular, the independency of reviews from other users, as well as the simplification and support in the decision-making and buying process provides value to the user. Instant messengers such as WhatsApp or Viber are social media applications that allow users to quickly and conveniently exchange messages. More specifically, their business model includes the exchange of text, audio, and video messages and content, generating revenue based on subscription fees, cooperation with companies, and data mining. The service offer accordingly includes the instant exchange of push messages, as well as support of data, audio, and video streams. The value for the user lies particularly in the speed and convenience of exchange and the high suitability for use in the mobile context. The most famous example of an instant messenger is the mobile messaging app WhatsApp that has pretty much replaced the function of SMS use on mobile devices. Beyond normal text messaging as well as audio and video calls, WhatsApp users can create groups and send each other images, video, and audio files without limit. Companies are increasingly using WhatsApp to communicate directly with their customers and to inform them about company news. Podcasts are helpful tools that enable users to consume online content at any place and at any time. Popular podcast providers are, for instance, Libsyn or podcast.com. Similar to blogs and RSS feeds, podcasts allow a quick and easy setup of an

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additional online information application. Users can subscribe to these podcasts and stay informed about the respective content. The business model of podcasts contains the provision of audio or video content, generating revenue through pay-per-use and subscription fees, as well as ad sales. The service offer not only comprises topic-specific audio and video content, but also the possibility to subscribe to respective offers. In particular, the location and timeindependent use of content provide value to the user. Wikis are collaborative platforms that serve as community-based knowledge creation and sharing exchange stations. Users aggregate subject-specific information and participate as collective editorial team, creating extensive knowledge encyclopedias. Thus, wikis provide an excellent opportunity for collaborative knowledge creation between users and firms in an e-business setting. The business model of wikis entails the collection, systematization, and further development of information, generating revenue from donations. The service offer comprises tools for creating and editing content, as well as the provision of a platform for searching and presenting information or knowledge. The value for the user lies particularly in the aggregation of subject-specific information, the freedom with regard to content and authors, as well as the collective creation process among users with regard to editorial work. Tagging and social bookmarking applications such as delicious.com classify and systematize Internet offers through the individual editorial workup of bookmarks. Accordingly, the business model of tagging and social bookmarking services consists of the classification and systematization of Internet offers, generating revenue based on the sale of click streams for data mining purposes. The service offer comprises the central archiving and ubiquitous availability of bookmarks, as well as the tagging of bookmarks and the access to link collections of other users. Thus, users can also share their links with other users and create common collections. While the individual editorial workup of the Internet provides value to the user, service providers can market their portal by creating the possibility to tag their service offer. Apart from that, companies should seek to be present on tagging platforms to create user awareness and actively market own bookmarks. Online forums such as topix.com are technology-based and topic-oriented discussion platforms on the Internet, where users can publish content and share their thoughts, opinions, and experiences with other users. The exchange of information follows the principle of a bulletin board or starts with an initial user post to which other users respond. The resulting thread is mostly presented in chronological order. Moreover, moderators or administrators usually monitor online forums. The business model of online forums includes the compilation, classification, and provision of user-generated content on a single platform, generating revenue based on ad sales and data mining. The service offer refers to the exchange of archiving of thoughts, opinions, and experiences. In particular, the increase in knowledge, the problem-solving through the community, as well as the structured documentation of topics and opinions provides value to the user. Mashups such as parkincarma.com describe the creation of new content based on combinations of already existing content. In the context of e-business, the business

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model involves the combination of different online software products or API services, generating revenue through ad sales and membership fees. The service offer contains the creation of new media content by recombining already existing content. The value for the user particularly results from the synergies between the diverse social media applications and the associated time saving. Given these social media application characteristics, social media can be generally expected to become more and more important for B2C communication and interaction (Huang and Benyoucef 2013). Against this background, social media adoption will constantly increase, making it a top priority on every e-business agenda (Wirtz and Göttel 2016). Furthermore, microtargeting increasingly plays a significant role in the context of social media. In this context, microtargeting refers to gathering data or information about individuals via social media and using it to target and approach specific target groups with personalized messages. For example, microtargeting is regarded a crucial driver of President Trump’s success in the US presidential election 2016. More specifically, Trump’s election campaign was supported by a company that created personal profiles of potential voters based on their likes on Facebook and then targeted them with personalized marketing messages (Forbes 2016). However, it is essential to consider carefully the desired social media purposes with their respective benefit potential. Against this background, blogs and content communities should be mainly used for information purposes, while social networking sites are rather suitable for B2C interaction. Apart from that, wikis and podcasts are helpful tools to build up knowledge-creation platforms, as well as file exchange and sharing platforms that support information diffusion through respective applications (Sheldon 2015). It is characteristic of social media that almost all tools can be linked to each other or integrated. This represents an important feature of social media, since most members of a particular social network are often active in other platforms as well. Examples of integration (or mashups) are: • The Facebook page of a company can be linked to its Twitter account to present tweets outside of Twitter. • YouTube videos can be embedded in the company’s blog or Facebook page. • If a company links bookmarks on delicious.com, other blogs can automatically publish their posts. Altogether, the abovementioned deliberations suggest that social media have specific characteristics that distinguish them from other media. However, the literature lacks a systematic analysis of the broad characteristics and trends associated with social media, even though such a framework would clearly be useful for Internet firms by offering a clearer picture of the new challenges and opportunities involved, as well as indicating ways in which their current business models should be strategically adapted (Wirtz and Göttel 2016). A suitable approach to explain the characteristics and the opportunities in media management through social media is the Social Media Four Factors Model (Wirtz

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et al. 2010). This is one of the few integrated models of social media, which is empirically validated (Wirtz et al. 2013a). The four dimensions of the model are: • “Social Networking”: Networking of groups and individuals via Internet platforms and applications • “Interaction Orientation”: Interactions between companies and users on social media applications • “Customization and Personalization”: Segment-specific alignment and adjustment of the market offers to the needs of users or user groups • “User-Added Value”: Value created for and by users on social media platforms The four dimensions of the Social Media Four Factors Model are each composed of several components. Figure 12.12 illustrates these dimensions and their components. Interaction orientation represents the ability to effectively manage the demand of the general public for more intense and more authentic two-way communication businesses (Rayport et al. 2005). This factor manifests itself in four important subfactors: customer centricity, interaction configuration, customer response, and cooperative value generation. Customer centricity puts users at the center of attention and orients the business activities toward the users. This brings along a major paradigm shift for many businesses, which requires a strategic and operative reorientation toward the customer. Interaction configuration particularly refers to the structure of the interaction process, focusing on the content of the information exchanged and the interaction partners involved, as well as the reasons and motives underlying the interaction. Customer response describes a company’s capacity to manage the dialogue with the customer, especially referring to its ability to react appropriately to user requests or feedback in order to establish sustainable relationships to users and thus to achieve customer loyalty in the long run. Cooperative value generation is closely connected to this component and reflects a company’s ability to integrate the users into the respective business processes in order to cooperatively create value. For instance, the company may improve products or services according to the respective user feedback (Wirtz et al. 2010). The factor customization and personalization refers to the possibility for users to customize websites, applications, and online offers to their needs and preferences. It is composed of the subfactors personal customization, group customization, and social customization. Personal customization gives users the opportunity to reconfigure a portal or website to their particular needs and preferences. For instance, Facebook users can select whether they would like to receive email notification when there is a status change or a new post on a Facebook fan page. Group customization enables a group of individuals connected through the Internet to design, build, or reconfigure platforms, products, services, and so on. Businesses, for example, may consult customers for the naming of new products. Their suggestions are subject to ratings by other users and an official jury that finally

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Interaction Orientation Cooperative value generation

User-generated innovation

User-generated revenue/ contacts

Digital word of mouth Social identity Social trust

Social customization

User-generated content

Group customization

Social Networking

Personal customization

Social Media

User-generated creativity

Customization/Personalization

Customer response

Interaction configuration

Customer power

Customer centricity

User-Added Value Fig. 12.12 Social Media Four Factors Model. Source: Wirtz et al. (2010), and Wirtz (2019b)

decides. Social customization refers to customized products or services that are primarily offered to distinct social layers. User-added value is concerned with value creation through involvement of users that contribute content, creativity, innovation, and contacts and thus add value through new information and innovation. Accordingly, this concept comprises various phenomena, including user-generated content, user-generated activity, as well as user-generated innovations and revenue/contacts. User-generated content covers various content types including profiles, video or audio files, as well as other website content (e.g., recommendations or reviews). In the same way, users can participate through user-generated creativity, contributing a completely new perspective and bringing in innovative ideas for the further development of companies.

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In the context of user-generated innovation, this is how they become a critical part of product and process innovations. This kind of user involvement has been strongly facilitated through open-source programs and APIs (application programming interfaces) (Wirtz et al. 2010). The component of user-generated revenue/contacts describes the possibility of expanding the range of service offers through user contacts, as well as the resulting added value (Goh et al. 2013). Companies can benefit from active users in various ways, for instance, through user recommendations of interesting fan pages on Facebook. This kind of ability to attract and benefit from new users has become an important value driver for companies in the field of e-business. Social networking describes structures of online interactions among individuals and consists of the four subfactors social identity, social trust, digital word-of-mouth, and increasing customer power. Its underlying concept is the connection of individuals and social groups via online applications and platforms that are often based on certain topics (Beynon-Davies 2013). User participation in social networks is mainly driven by the search for social approval and the desire for group membership. Social networks are of vital importance since the information put online in these networks becomes a trusted source of knowledge for various personal decisions. The subfactor social identity refers to the users’ desire to belong to a specific social group and to manage their image in particular online environments. These can be fulfilled, for instance, by means of specific company channels on YouTube. Social trust is similar to social identity as it builds upon the behavior of people, who believe that beneficial behavior in their interactions with others will conversely lead to beneficial behavior from their side. This underlying belief creates confidence in the information provided by other users. Examples are wiki projects and collaboration projects. Digital word-of-mouth is also closely related to the two abovementioned subfactors but rather refers to informal information exchange between users through email, blogs, and review websites and so on. Increasing user power is a result of rising interaction through social media, since it creates transparency and user opinions become ubiquitously available. In this connection, users act as multipliers, for instance, by sharing and linking a company’s fan page on Facebook they have liked (Wirtz et al. 2014b). Summing up, the Social Media Four Factors Model provides a clear conceptual guidance as well as the key characteristics for using and adapting suitable social media applications. The performance of social media business is based on various social media applications that involve social media users. These applications enable the fulfillment of the respective challenges regarding the factors of the different dimensions of the Social Media Four Factor Model to meet the requirements of the users involved. Apart from the systematic analysis of the broad characteristics of social media by means of the Social Media Four Factors Model presented above, a systematic

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analysis of trends associated with social media reveals two major developments the social media landscape has been undergoing recently. On the one hand, social media services are becoming increasingly concentrated within a few companies through strategic acquisitions. Facebook, for example, has acquired more than 50 companies since its formation in 2004. Among its most famous takeovers are the photo-sharing application Instagram for 1 billion USD in 2012 and the mobile instant messenger WhatsApp for 19 billion USD in 2014. Moreover, Facebook also tried to buy the image messaging service Snapchat in 2013 but the 3 billion USD acquisition offer was turned down by Snap Inc. On the other hand, social media offers are increasingly assimilating or converging in terms of their set of features. Facebook and Twitter, for instance, have repeatedly imitated certain features of each other in the past. While Facebook adopted the so-called hashtag feature from Twitter, the latter introduced a title picture in addition to the profile picture, shortly after Facebook had launched this feature. Other social media providers pursue a similar strategy. Snapchat, for example, was originally a messenger app through which users could send each other pictures that were automatically deleted after a short period. In the meantime, it has developed more and more into a service like WhatsApp, which is more suitable for the mass. Just like with WhatsApp, Snapchat users can now also send each other videos as well as text and audio messages or make phone and video calls. This convergence of social media offers or emergence of me-too products especially results if an acquisition is not possible. If a company cannot take over its competitors, it needs to imitate their products or create similar ones in order to cannibalize their success and prevent them from maximizing their market shares. Moreover, companies seek to keep their users in their own product world and prevent user churn particularly to those competitors with similar value propositions. From a strategic point of view, a main reason why Facebook acquired Instagram and tried to take over Snapchat was not only because both companies were innovative start-up players with similar value propositions but also in response to user churn with regard to younger users who increasingly prefer to use Instagram and Snapchat (iTech Post 2016). Another significant reason for such strategic acquisitions is user growth. For instance, when Facebook took over WhatsApp, it acquired about 500 million active WhatsApp users. From a strategic perspective, companies aim to achieve a high user base to use it as a strategic barrier to market entry and thus to increase their market power. Finally, the abovementioned acquisition and convergence strategies also represent measures for companies to achieve their goal of an integrated product or service portfolio. If companies accomplish to cover and satisfy the full range of user needs, the user is likely to have no reason or desire to leave. Knowledge Review Questions 1. What constitutes the value chain of the Internet media? Please state examples for each stage!

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2. What are the basic business models on the Internet and how are their revenues systematized on the Internet? 3. Which basic business model does the E-entertainment special business model pertain to? 4. The connection basic business model is increasingly gaining in importance! Which are the major social media platforms that you can hereby mention as examples?

International Media Management

13

In recent years, one could observe strong concentration and internationalization tendencies in the media markets. The Bertelsmann group is considered to be “the world’s most international media company” (Bertelsmann 2015, p. 81). In 2018, Bertelsmann obtained the following revenue distribution: 22% in the United States, 33.2% in Germany, 38.6% in Europe (without Germany), and 6.2% in other countries (Bertelsmann SE and Co. KGaA 2019). Overall the media landscape is characterized by complex international and intermediate interrelations. For media companies thereby the challenge arises to overcome the borders with other nations and thus other societies, laws, and further environmental factors besides bridging the gap between journalism, economics, and technology.1

13.1

Introduction

Despite its obviously high relevance, from a practical point of view, the international management in media companies garnered only little attention in scientific literature, so that the state of knowledge is thus relatively small to date. For this reason, the following considerations serve to develop a fundamental understanding of the international management in media companies. Apart from specifying the internationalization characteristics of media companies, the emphasis will be specifically on internationalization strategies as well as selected operational subareas of international management in media companies. The following considerations primarily serve to define and delineate the term “international media management.” Building upon this definition, characteristics of media companies and their influence on internationalization will be subsequently examined. 1

See also for the following chapter Wirtz (2011b) and Wirtz (2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_13

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13.1.1 Definition and Characteristics of International Media Management Within economic literature, the term “internationalization” is analyzed regarding two aspects. The institutional approach, which has been pursued since the 1960s, links the phenomenon of internationalization to the respective company. In one of the first definitions of multinational companies, Lilienthal names “corporations which have their home in one country but which operate and live under the laws and customs of other countries as well” (Lilienthal 1975, p. 119). The procedural or functional approach, however, builds on the functional ranges of a company when defining the term. The spectrum of possible definition approaches of internationalization ranges from certain forms of market entry and foreign markets to the operation of foreign subsidiaries and an abstract equating of internationalization with transnational foreign activity. Limiting international management to only specific problems of one or a few functional ranges, for example, to the marketing of the company, does not appear to be reasonable. In this context, it is ignored that almost all the functional ranges of the company are affected by a commitment to foreign markets. Thus, also financing, procurement, production, or research and development can expand across boundaries (Makhija et al. 1997). Internationalization can be regarded as a phenomenon which encompasses the entire company. Therefore, the following considerations will be made on the basis of an international management view which on the one hand builds on the company’s functional ranges, but in doing so also regards the company as a whole, on the other hand. Thus, the definition also contains aspects of an institutional perspective on the term. Definition International Media Management (Wirtz 2003b) International media management designates the strategic and functional operation of media companies in the international context. Thereby internationalization can in principle extend to all functional ranges of the company.

13.1.2 Specifics of International Media Management Media companies always act in international markets and intercultural environments. Thus, supplying completely international products and services does not always have to represent the best strategy option, since consumers as well as other internal and external stakeholders differ in their values, mindset, and behavior. The “cultural discount theory” offers one approach to explaining the effects of cultural predispositions on media companies. According to this theory, the value that a customer attributes to cultural products decreases in relationship to the distance of their origin. Due to this, reduced international usability of locally dominated

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contents can be deducted. This also corresponds to the results from research efforts concerning advantages of a stronger globalization or localization in different sectors. Here, a high potential in localization advantages together with a low potential in globalization advantages could be found for traditional publishing houses as a specific group of media companies. However, integrated media companies were classified due to their high globalization and localization advantage, corresponding to the increasing convergence of hardware, software, entertainment electronics, telecommunications, and content industry (Meffert 1989). The companies have to succeed in gaining advantages from the globalization of business processes as well as the local differentiation of products and services. Against this background, media companies would not be successful by selling culturally limited content. Media companies would rather be successful if they can offer locally adequate products, which are oriented to the cultures of the respective target groups. The continuously increasing tendencies of internationalization in the media sector during the last years can be attributed to a number of reasons. Deregulation tendencies play a special role as well as a change of economic parameters. Thus, within the last years, there has been a strong rise in supply in the media area, leading to an intensification of competition. Media companies counter this competition pressure often with considerable investments into the quality of their supply, which increases production costs. With distribution possibilities remaining consistent, however, this would mean a reduction of profits. For this reason, media companies strive to extend their distribution capabilities. Therefore, media companies usually have two complementary possibilities. One possibility is to create an integrated media enterprise. Besides this, another option is to access additional (international) sales markets. This strategy is supported by extensive deregulation tendencies in numerous national media markets, which allow the entry of international suppliers into local markets. The possibility to realize scale and synergy effects is especially addressed here. Due to the discovery of additional sales markets and an additional application of already created content companies, unit costs per sold media unit can be lowered and scale effects realized. Economies of scope arise from the possession of flexibly usable potentials, especially as a result from an internationally active media enterprise’s ability to react flexibly to changes in the market surroundings of a specific national market, which is made possible by international presence.

13.2

Internationalization Strategies of Media Companies

The internationalization of a company is a complex task which requires the creation of a conceptual framework of action. From this framework of action, concrete action goals can be derived regarding the subordinate ranges. The development of an action framework includes an internationalization strategy. This is built on competition advantages that are relevant to a successful planning of foreign activities.

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The definition of an internationalization strategy covers a variety of aspects (Oviatt and McDougall 2005). The aspect probably most frequently discussed in the literature is the way in which the international commitment of the company is carried out. In the following this aspect will be called market entry and market cultivation strategy. Another aspect is the target market strategy. This refers to the decisions of the company for presence in, selection of, and segmenting of a national market. In addition, a successful entry into relevant target markets requires a precise timing of the commitment. This can be summarized by the term “timing strategy.” In the following, different partial strategies of the internationalization strategy are presented.

13.2.1 Market Entry and Market Cultivation Strategies In the following section, an overview of the market entry and market cultivation strategies is given. The first entry into a new (international) market is called market entry. However, market cultivation also covers the cultivation of markets that a company has already entered. In this context, the form of market cultivation and the form of market entry do not necessarily have to correspond to each other. Companies have fundamentally different possibilities for market entry and market cultivation, as far as the commitment in international markets is concerned. Accordingly, also a variety of systematization approaches of market entry and market processing strategies exist. Here, the systematization by Meissner and Gerber (1980) will serve as the basis to differentiate the essential market entry and market cultivation strategies, which is based on the rendered capital and management performances and thus the transfer of resources within the home country and the host country (Meissner and Gerber 1980). This systematization form of market entry and market cultivation strategies is depicted in Fig. 13.1. In the following, franchising is not regarded, due to its small relevance for media companies.

Export Export, as a form of market entry and market cultivation, provides that all capital and management performances are completely generated within the home country. One can distinguish between indirect and direct export. Indirect export is characterized by the domestic engagement of trade intermediaries. Trade intermediaries are usually external trade companies or export houses. In contrast to indirect export, direct export does not contain domestically engaged trade intermediaries. Therefore, direct contact between the exporting enterprise and the foreign business partner is established. Depending on the kind of foreign business partner, two forms of direct export can be distinguished: direct export without engaging an intermediary in the host country and direct export with engagement of an intermediary in the host country, for example, trade representatives who are independent and not bound by instructions, commissionaires, trade brokers, or general importers.

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219

Capital benefits and management performance in the home country 100 %

Export Licensing Franchising Joint venture Foreign branch Company Subsidiaries 100 %

Capital benefits and management performance in the host country

Fig. 13.1 Systematization of market entry and market cultivation strategies. Source: Meissner and Gerber (1980), and Wirtz (2019b)

Compared to indirect export, the employment of resources for market entry is very high for direct export. This can be especially attributed to the creation of the required network of relationships to customers and business partners. Additionally, indirect export only poses a limited risk for the exporting company because the trade intermediaries market the acquired products and services at their own risk. Even though indirect export only causes low resource consumption at market entry, it is comparatively rather cost-intensive in the course of a longer-term market cultivation, since the trade intermediaries usually demand a significant margin between purchase and sales price. Moreover, a company does not build up any experience or relationships with the foreign market when choosing indirect export. A substantial advantage of direct export over indirect export refers to the possibility to more strongly regulate and control sales as well as the possibility to directly intervene in the foreign business. Beyond this, the costs which arise from long-term market cultivation are usually lower with regard to direct export than to indirect export. A fundamental disadvantage of a market entry and market cultivation strategy in the form of exports is the missing presence abroad. This may lead to acceptance problems in the relevant foreign market. Additionally, due to the physical distance, it can lead to a delayed reaction to changed demands of the foreign markets. For media companies direct and indirect export represent potential strategy alternatives for market entry and market cultivation. However, the specific kinds of media are suited for export to different degrees. For example, the export of print media products is fairly common. Direct export especially pertains to foreign subscriptions. Here, the respective print media products are usually directly sent

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by the publishing house via mail or other distribution services to the respective recipient. Even foreign retailers can be supplied with the product by way of direct export. Finally, the involvement of domestic trade intermediaries and thus an indirect export for print products can also be considered. A similar picture pertains to book publishing houses. Here, the export to geographical regions which are frequently visited by domestic travelers is a reasonable strategy alternative. Book publishers essentially have access to the same export channels as press publishers. A direct export without engaging trade intermediaries is usually the exception. Since time sensibility is less of an issue for book products than for press products, export over larger distances can also be a reasonable strategy alternative. In the music industry, export represents a reasonable strategy, especially for smaller labels which do not have access to the resources necessary for direct investment. Here, direct and indirect export channels are open to the company. However, export as a market entry and market cultivation strategy for international markets is rather suited for small labels with a low foreign volume, because of the high variable transport costs or the payment for potential trade intermediaries.

Licensing In the context of licensing abroad, there is a larger transfer of resources created than in the context of export. The term “licensing” refers to contractual agreements in which domestic licensers make intangible assets available to foreign licensees under specific conditions. Here, especially patents, registered designs, trademarks, design patents, technical know-how, commercial know-how, and copyrights are viable for licensing. Licenses to foreign business partners are usually constrained by certain restrictions that limit their use. In this context, temporal and physical restrictions as well as restrictions regarding the number of license partners are addressed. Spatial restrictions refer to the fact that licenses are usually not given worldwide but rather are restricted to certain geographical regions. In the framework of temporal restriction, the maximum duration of a licensing contract usually coincides with the term of protection of the licensed object. Physical restrictions pertain to the fact that licenses are usually not given for all forms of usage. Finally, restrictions regarding the number of license partners refer to licenses that are often not given exclusively but rather may be available to multiple foreign license partners. Licensing fees can be distinguished as overall licensing fees (lump sums), these being one-time or recurrent payments, and running licensing fees (royalties) as variations of acquisition-, sales-, turnover-, or profit-oriented amounts. A special advantage of licensing is that financial and human resources are only needed to a small extent. Expenditure arises solely in connection with choosing the licensees, the elaboration of the license contract, and the compliance supervision of the license contract. Another advantage of the granting of licenses is the possibility to multiply utilized intangible assets, both spatially and temporally. Spatial license agreements allow to utilize intangible assets in foreign countries simultaneously without a lot of

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additional effort. However, also a sequential utilization of the respective assets may take place if those are already domestically at the end of their life cycle and licensing to a foreign partner is possible to ensure further utilization. Disadvantages of licensing are the limited possibilities to control and influence the activities of the licensee. This can lead to quality and image problems with foreign customers, which in the worst case could also have repercussions on the domestic market in the form of a negative image transfer. Closely connected to this is the problem that in spite of secrecy clauses, a transfer of sensitive know-how by the licensee to third companies can occur. Licensing is one of the most important market entry and market cultivation strategies on international markets within the media sector. In the print sector, licensing is especially used by book publishers. They sell licenses to local enterprises, which allow them to translate the respective works into the appropriate language. Occasionally these are manufacturing and distribution licenses. Here, the licenses can be valid for individual countries or also for a language area. In the movie sector, licensing is also one of the crucial internationalization forms. Regarding this, the producer sends out so-called master copies of the movies to (foreign) movie distributors. These obtain the license to copy the master and lend the copy to the cinemas. These licenses are usually restricted to certain movies and geographical regions. In the television sector, licenses are also a relevant market entry and market cultivation strategy on international markets. In television, there is a difference between program licenses and format licenses. Program licenses cover the right to synchronize and air a show. Examples are the broadcasting of American TV shows like “How I Met Your Mother” or “Two and a Half Men” on non-American television. Format licenses, however, cover the right for local adaptation of program formats.

Joint Ventures and Strategic Alliances In recent years, cooperative market entry and market cultivation forms have gained considerably in importance. Thereby, a cooperation means the collaboration of two or more legally and usually also economically independent companies. The cooperating companies presume that they can reach their goals more easily together than they could alone. In the following, joint ventures and strategic alliances will be considered as cooperations in a narrower context. Joint ventures refer to joint companies involving two or more partners. This means that a new and jointly supported company with an own legal personality is created. If a joint venture is used as a market entry and market cultivation strategy in international markets, the newly created company will be respectively settled abroad. The cooperative alignment of a joint venture can be horizontal as well as vertical or diagonal. Regarding the temporal horizon of the cooperation, limited and unlimited joint ventures may be distinguished. Moreover, equally led joint ventures, in which all partners participate in equal part, can be distinguished from joint ventures with unequal partner participation.

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The advantages are a reduced need for capital for the respective activities and risk allocation. Beyond that, joint ventures often allow to realize economies of scale and economies of scope. Economies of scale can be specifically realized with horizontal joint ventures. Economies of scope result from the bundling of complementary resources, abilities, and competencies. Disadvantages of joint ventures can be particularly found in a high coordination effort, which especially results from the large geographical distances. This is additionally increased through the opportunistic behaviors by the partners, which have to be taken into account. Moreover, cultural differences also add to the increased coordination effort. An additional, closely connected problem is that it is hard for joint ventures to pursue a consistent strategy across national markets, since the demands of the respective partners have to be considered in the respective countries. A strategic alliance refers to a strategic cooperation of two or more companies in precisely defined areas. The substantial distinction criterion of a joint venture is that within the framework of strategic alliances, the creation of a legally autonomous company is disclaimed. Advantages and disadvantages of strategic alliances correspond widely to those already described for joint ventures. However, strategic alliances allow for a far greater flexibility in comparison to joint ventures, since no new company is created and thus decisions can be more easily reversed. Strategic alliances and joint ventures create an equally suited market entry and market cultivation strategy for all types of media in the international markets. Thus, in the print area, the forming of alliances and joint ventures is possible in both the editorial and the printing sectors. In the editorial sector, creating locally specific content in the respective national language needs to be considered within the framework of an alliance or joint venture, together with the respective foreign partners. In the movie sector, international co-productions are also common. A joint production of a movie with foreign partners is performed and the movie is designed for international cinema utilization. The reasons for international co-productions of movies are mainly the high production costs of internationally marketable movies. Similar to the movie sector, the TV sector also creates formats in international co-productions. This is especially common for TV movies or TV shows. For suppliers within the music sector, cooperative arrangements in the framework of internationalization are most beneficial in the area of physical creation of audio media. In this context, foreign pressing plants can be set up within the scope of a joint venture. In this regard, development and production alliances as a market entry and market cultivation strategy on international markets are also suited for the manufacturers of video and computer games. Here, especially the high development costs of new games promote cooperation.

Direct Investment-Related Solo Efforts As a last alternative for international market entry and market cultivation strategy, a company can pursue a direct investment-related solo effort. Here, different possibilities of direct investments arise, which will be explained in the following section. Basically, minority participation and the establishment of lawfully

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dependent foreign commitments, as well as the establishment of subsidiaries, may be distinguished. In the context of minority participation, a domestic company acquires shares of a foreign company, without being able to exercise control (maximum financial participation of 49.9%). A maximum share of 25% is defined as a simple or genuine minority participation. In the case of a share between 25 and 50%, the term block minority participation applies. However, other limits may be relevant depending on the respective national law. Legally dependent foreign commitments are associated with a set of problems. Thus, the occurrence of commitments within the international legal systems is not hassle-free since the commitments do not consist of an individual legal personality. Additionally, acceptance problems with (potential) business partners arise under legally dependent commitments, due to liability issues. For this reason, the better alternative for many companies is to establish legally independent entities, which are subsidiaries. Subsidiaries can exhibit a majority participation (between 50.1 and 99.9% capital participation) or testify a fully controlled subsidiary (100% capital participation). Advantages of establishing subsidiaries are especially seen in the direct and independent presence in the host country. This presence not only ensures a high degree of independence and thus the implementation of its own strategies, but it also contributes to the acceptance by the customers. The substantial disadvantage of the establishment of subsidiaries can be seen in the associated high expenditure of resources. The risk connected with the investment has to be carried by the company alone and cannot, as, for instance, with joint ventures, be distributed among partners. The establishment of subsidiaries as an internationalization strategy basically forms a way that is feasible for all types of media. However, the distribution strongly varies between the individual media. Thus, foreign corporations are often found in the print media sector. Within the book sector, the establishment of subsidiaries is also relevant. Especially here, it is reasonable to establish independent proofreading and printing companies abroad. In the movie industry, for example, companies can establish independent production corporations. Within the TV and radio sector, the founding of subsidiaries is not a common strategy. In particular, this is because of the high investment volume that is needed in these sectors. However, in the music sector as well as in the video and computer games production, the establishment of legally independent pressing plants abroad may be an option. Furthermore, independent international recording studios are a strategic alternative for music companies. However, for big integrated media corporations, the establishment of subsidiaries is of greatest importance, especially concerning acquisition.

Mergers A last strategy alternative for market entry and market cultivation in international markets which needs to be presented is the merger. As described above, the

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distinction between a merger and an acquisition is usually blurred. Strictly differentiated, a merger is the combination of previously legally and economically independent companies under one common roof. Thereby, the distribution of power among the partners should be fairly equal. If, however, there is a distinct unequal power distribution in favor of one partner, the term acquisition would be more appropriate from an economic point of view. In the international context, in which a domestic and a foreign company merge, the term “cross-border merger” is applied. Due to the similarity between mergers and acquisitions, both have equal advantages and disadvantages.

13.2.2 Target Market Strategies Beside the decision for a suitable strategy for market entry and market cultivation, a business has to make a decision regarding its target markets in the course of internationalization. This is accomplished within the context of formulating strategies for the target market, which may be divided into market presence strategies, market selection strategies, as well as market segmentation strategies. Detailed information on the relevant foreign markets serves as an essential prerequisite for the formulation of the respective strategy. Therefore, the first step in formulating a target market strategy is the acquisition of information. The acquisition of information aims at supporting the business in its decision to formulate a target market strategy. Based on the acquisition of information, the target market strategy may be developed. In the following, an overview of the major target market strategies and their implementation in the media sector is provided.

Market Presence Strategies Market presence strategies determine the number and selection of the markets to be targeted. Basal, geographical, appeal-oriented, and balance-oriented market presence strategies may be distinguished (Ayal and Zif 1979). Basal market strategies are divided into two fundamental alternatives of market presence: the concentration strategy and the diversification strategy. The concentration strategy promotes a sequential market entry or market cultivation, in a few, strictly selected foreign markets. This allows to concentrate resources on a restricted number of national markets. In contrast, the diversification strategy promotes market entry or market cultivation in a multitude of national markets within a relatively short period of time. For reasons of risk diversification, resources are, inter alia, dispensed on various national markets. Discussing basal strategies, Ayal and Zif (1979) take the view that there is an ideal number of processed national markets. From this assumption they conclude that, in the long run, both within the concentration strategy and the diversification strategy, the number of markets to be processed converges against the ideal number of national markets to be processed. The geographical market presence strategy determines the geographical markets on which a company will operate. A single market strategy, a multiple single market

13.2

Internationalization Strategies of Media Companies

Criteria

Basal market presence strategies

Geographical market presence strategy

Balance-orientated market presence strategies

• Number of national markets being operated

• Geographical dimension of the market presence

• Attractiveness of the national markets

• Cooperation between the national markets being operated in terms of balance

• Concentration strategy

• Single market strategy

• Markets to focus

• Balancing of risks

• Diversification strategy

• Multi single market strategy

• Presence markets • Occasion markets

• Adjustment of profits

• Regional market strategy

Forms

Attractivenessorientated market presence strategies

225

• Multi regional market strategy • Global market strategy

• Abstinence markets

• Balancing of investments • Balancing of resources • Balancing of knowhow • Balancing of competition • ...

Fig. 13.2 Varieties of market presence strategies. Source: Wirtz (2003b, 2019b)

strategy, a regional market strategy, a multiregional market strategy, and a global market strategy may be distinguished. A single market strategy aims at only one additional market besides the domestic market, whereas a multiple single market strategy aims at a commitment to multiple single national markets. In contrast, a regional market strategy aims at running companies in all countries of a region. The division of regions mainly follows geographical criteria. The decision of a company to be present in multiple regions is called a multiregional market strategy. Finally, a global market strategy is a commitment in all countries worldwide. This can be characterized as an ideal typical market presence strategy. The economic calculus of the market presence develops along with the appealoriented market presence strategies. Here, companies try to rate national markets according to their current and future appeal. Emphasis markets, presence markets, opportunity markets, and abstinence markets may be distinguished. Beyond that, foreign markets are also rated according to the interactions of the national markets. Here, especially compensation-oriented criteria are applied. Risk compensation can be named in this context; this means a combination of national markets with more and fewer risks. Furthermore, already established and profitable markets can offer compensation for new markets that have not yet been established and do not yet offer profits. The different variants of market presence strategies are summarized in Fig. 13.2. The use of market presence strategies on media markets can be clarified particularly by the example of the music TV station MTV. This station, which only acted on

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the US-American market in the beginning, started its internationalization originally restricted to the English-speaking area. This was especially achieved by the establishment of MTV Europe with its head office in London. After a dissemination phase of the English-language program, produced in London, to further European countries, MTV is now active on the major European media markets with respective specific supplies. MTV pursues a concentration strategy which calls for a sequential expansion of the business activities to international markets. A regional market strategy was first selected according to geographical criteria, in which the regions were defined by linguistic areas. In the meantime, a multiregional market strategy can be observed, in which markets from different regions, divided into language areas, are processed.

Market Selection Strategies According to the market presence strategy described above, after which the number of markets in which a company wants to become active is determined, subsequently the relevant foreign markets need to be selected. This happens within the framework of the definition of the market selection strategy. The selection of relevant national markets is achieved on the basis of multiple criteria. In this context, the national market attractiveness, the national market risks, as well as the national market entry barriers play a focal role. The national market attractiveness describes the utilization potential available for the company. This, however, is dependent on different sub-criteria, such as market structure, volume, and growth as well as price and cost structure or infrastructure. The potential dangers of the respective national markets which are present for the company are defined as national market risks. Among these are, for example, currency risks, safety risks, legal risks, political risks, or inflation risks. Finally, national market entry barriers are designated as barriers which a company has to overcome to enter a certain national market. Regarding this, institutional, market-behavior-specific, and company-behavior-specific market entry barriers may be distinguished. Institutional barriers are all tariff and non-tariff barriers in a specific country. Therein, all institutional market entry barriers originate in state regulations (e.g., customs). From a market perspective, there might be behavior-specific entry barriers, for example, in a competitive situation, a consumer behavior that significantly deviates from the domestic market, language and cultural differences, or a problematic entry to distribution systems and resources. Company-behavior-specific market entry barriers are mostly of cognitive nature and are based on inadequate information about foreign markets. Building on the mentioned criteria, different procedures of market selection can be utilized, which are mainly distinguishable into single- or multi-step sequential procedures. Especially checklist procedures, score rating procedures, aspect elimination procedures, investment calculation procedures, and portfolio procedures are prime examples of the single-step procedure. Multi-step procedures consist of a combination of multiple single-step procedures.

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Apart from general national market risks and national market entry barriers that are also valid for other industries, media companies encounter multiple special, media-specific market entry barriers, as in some countries the dissemination of specific content is prohibited. These special national market entry barriers can be of an institutional as well as of a behavior-specific nature. Among the institutional market entry barriers are especially censorship regulations. In this context, an appropriate example is the political censorship in China prohibiting the dissemination of certain political contents. Behavior-specific market entry barriers in the media sector are caused from a market perspective especially by language and cultural differences.

Market Segmentation Strategies A last step in the context of the target market strategies is the segmentation of the national markets that were identified in terms of the aforementioned steps. Therein, a market segment should be as homogenous as possible but at the same time differentiate itself distinctively from other market segments according to the traditional definition of market segments. In the context of international market cultivation, there are two basic possibilities of market segmentation: intranational market segmentation as well as integral market segmentation. In the framework of an intranational market segmentation, market segments are identified within a specific national market, while integral market segmentation provides an identification of segments which transgress the individual national markets. Intranational market segmentation is nearly always necessary for media companies. Only this allows to consider the existing national market-specific characteristics and cultural and language differences. If the market segmentation is achieved by observing the characteristics of the media utilization behavior, an intranational market segmentation has to be done in any case since a culture-specific media utilization behavior can be assumed. Therefore, it can be expected that segments created like this are, to a large degree, national-market-specific and the segmentation cannot be applied to other national markets. The same is valid for the case of segmentation by purchase-, behavior-, or communication-specific characteristics, as those are also mainly determined by language and cultural conditions.

13.2.3 Timing Strategies One last important part of internationalization strategies is represented by the so-called timing strategies. These are strategies for selecting the right point in time to enter a particular national market, as well as several national markets. In line with the determination of national market-specific timing strategies, two varieties may be distinguished: first mover strategies, respectively, pioneer strategies and follower strategies. In the literature, there are sometimes additional distinctions that refine this dichotomy.

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First mover strategy Advantages • Development of market entry barriers adverse to competitors through:

Disadvantages • Possibility of free rider effects • High costs of market development

- Lead in awareness/ • Difficult image assessment of the market - Lead in experience - Implementation of standards

International Media Management

Follower strategy Advantages

Disadvantages

• Avoidance of common pitfalls in a new market

• Overcoming of the market entry barriers which have been built by the pioneer

• Stable environment • Precise information about (foreign) markets

• Majority of sales potential already exhausted

• High risk of failure

- Monopoly-caused pioneer profits - Creation of a loyal customer base - Employee recruitment

Fig. 13.3 First mover and follower strategy. Source: Wirtz (2003b, 2019b)

A major advantage of the first mover strategy is that market entry barriers can be built for potential competitors. Among the disadvantages of the first mover strategy are potential free rider effects because of the fact that competitors who enter the market later benefit from certain investments of the pioneer. Furthermore, high costs of market development as well as possibly difficult assessment of the market potential, which increases the risk of failure, promote the free ride intention. In the case of the follower strategy, in contrast to the first mover strategy, a company makes the decision to enter a certain national market only after it has already been processed by competitors. Hence, when entering the relevant national market, generally both local and international competitors are already active. A major advantage of the follower strategy is that the follower often has the opportunity to learn from the pioneer’s mistakes and therefore can avoid some common pitfalls. In addition, the follower often acts in a much more stable environment. Opposite to this is the major disadvantage that the follower has to overcome possible market entry barriers that have been built by the pioneer. Advantages and disadvantages of each alternative strategy are summarized in Fig. 13.3. Beside the selection of the point in time to enter a certain national market, the internationalizing company also must define the temporal coordination of the market entry into the different national markets. This is done in line with the definition of a transnational timing strategy. It can be discerned between three ideal types of strategies: the waterfall strategy, the sprinkler strategy, and the combination of both strategy types.

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The waterfall strategy pursues a successive entry into the single national markets. This means that initially only one single national market is processed. Subsequently, the step-by-step entry into further foreign markets is carried out. An obvious advantage of this successive approach within the waterfall strategy can be seen in the fact that consequently a time-shifted demand of resources is created. A further advantage of the waterfall strategy is that the life cycles of certain technologies and products can be prolonged. Technologies and products can be utilized time shifted in the different national markets. Finally, the waterfall strategy also enables a generally country-specific appearance of the company. Due to the successive entry into the single national markets, particularly good response to the individual national characteristics is possible. On the other hand, there are some important disadvantages contrasting with the described advantages of the waterfall strategy. In this context, the danger of a delayed market entry must be mentioned. This danger is especially imminent in the case of short product life cycles, similar need, and demand patterns in the foreign markets, as well as cross-border transparency. Another disadvantage of the waterfall strategy is an early warning of competitors who themselves occupy foreign markets which the company intended to enter later on. An alternative to the waterfall strategy is the sprinkler strategy. Here, all or several of the intended target markets are processed simultaneously or within a short period of time. The possibility of a rapid market entry into the single markets and thus the realization of first mover advantages are seen as considerable advantages of this alternative strategy. In such a manner, global network effects can be realized by simultaneous market entries. The sprinkler strategy finally also leads to a fast amortization of fixed costs in areas such as development and production by generating cash flows in several national markets. Disadvantages of the sprinkler strategy are found especially within the high resources expense if entering several national markets simultaneously. A further disadvantage exists in a far-reaching waiver of compensation options in terms of financial aspects as well as risk. In applying the sprinkler strategy, there is no possibility to draw consequences from the mistakes or insufficiencies in one national market for the market entry into other national markets. In extreme cases, this can lead to a failure in all the processed national markets. Eventually, within the sprinkler strategy, national market-specific conditions usually cannot be considered to the necessary extent because of the high speed of market entry, resulting in a maladjusted performance in the individual national markets. Criteria, advantages, and disadvantages of the two strategy alternatives are shown in Fig. 13.4. In addition to a pure application of the waterfall or sprinkler strategy, elements of both strategy forms can be combined. Thus, companies could, for example, start to proceed accordingly to the waterfall strategy, then switch to the sprinkler strategy, and finally return to the waterfall strategy. Such an approach is particularly appropriate if some of the national markets are perceived as similar and if the market entry into these national clusters is to be implemented at the same time, while the entry into other national markets with different characteristics is to be made at different times.

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Criteria

Waterfall strategy • Successive entry into single national markets • Internationalization ranges over a longer period • Time-shifted demand of resources, i. e. scarce resources being concentrated on a specific national market

Advantages

• Financial compensation • Balancing of risks • In time possibility of correction and termination

International Media Management

Sprinkler strategy • Simultaneous entry in all targeted national markets • No temporal differentiation with regard to the time of market entry • Rapid market entry • Realization of first mover advantages • Realization of network effects through setting of standards • Fast amortization of fixed costs

• Prolongation of technology and product lifecycles • Use of time slots • Option of national-market-specific appearance • Danger of a delayed market entry • Early warning of competitors

Disadvantages

• Danger of missing trends

• High resources expenses if entering several national markets simultaneously • Difficult organization and control • Lacking consideration of possible interdependencies between the national markets • Waiving of financial compensation and risk compensation • Lacking consideration of national-marketspecific characteristics • Lacking possibility to draw consequences from mistakes in a market

Fig. 13.4 Waterfall and sprinkler strategy. Source: Wirtz (2003b, 2019b)

In the context of the internationalization of media companies, a combined waterfall-sprinkler strategy is usually used. Starting from the domestic market, a single national market or a very small number of markets, which are similar to it in terms of language and culture, are processed at first. In the course of further internationalization, media companies often switch to the sprinkler strategy and thereby enter into several media markets perceived as being similar.

13.3

Sections of International Media Management

After presenting the main strategy alternatives in the context of internationalization of media companies in the previous sections, in the following, the impact of internationalization on the management within the functional areas of media companies will be analyzed. This section addresses the functional areas of procurement as well as production and marketing, since significant changes from internationalization are to be expected especially in these areas.

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13.3.1 Procurement Management of International Media Companies In the course of procurement management of international businesses, three different alternatives may be distinguished: the procurement from the respective local markets, the purchase from third countries in which the country lacks its own production facility, and the purchase from an affiliated group. In media companies basically all of the mentioned varieties can be applied. In this context, the procurement of content is paramount. If a media company is present with products or services in a foreign market, it will often have to rely on local content, especially due to cultural differences to the domestic market. In this case, the procurement of content is carried out at the respective local procurement markets. Besides adapting local contents to the particular market, media companies also must widely refer to contents and information from third countries in which they may possibly not be present with production facilities or their service supply. An example of this is television stations that often acquire broadcasting rights for successful foreign cinema or TV movies and shows. After all, particularly in the case of large, integrated media groups, purchasing from the affiliated group is conceivable as well. Here, contents produced at one international location are used at another international location. In this context, foreign group-integrated news agencies may serve as example, which supply other group members such as television stations with content. The selection of international procurement sources must meet some specific criteria in the media sector. Especially time sensitivity of many media products plays an important role. Time sensitivity of content is particularly imminent in the news area. However, the attractiveness of other media products is also highly dependent on their timeliness. A recent movie, for instance, offers a greater attractiveness to TV recipients than a rerun. Besides that, quality of procured content plays another important role for international success. Internationally procured content should preferably provide a quality that is consistent and tailored to suit a market demand.

13.3.2 Production Management of International Media Companies Within the scope of the following description of production management of international media companies, the production of content will take priority, as this is the central task of media companies. Furthermore, the production of content is connected to a number of industry-specific characteristics. However, the technical production is influenced to a much lesser degree by industry-specific characteristics. Decisions by the international production management especially concern internal vs. external procurement, as well as the choice of the international production location. As criteria for the systematization of the types of production location allocation, the respective literature in many cases refers to the international allocation of production stages, as well as to the number of international locations included in

International Media Management

Single country

13

National compound production

National parallel production

Global market brand

Several countries

Number of countries

232

International production compound

International parallel production

-

Splitting up the production stages

Splitting up the production locations

Centralization of the production

Fragmentation of the production

Fig. 13.5 International location configuration. Source: Wirtz (2003b, 2019b)

the production process. As it comes to the allocation of production stages, it can be distinguished between a split-up of the production stages to different locations and a split-up of integrated production facilities to different locations. From this results the systematization matrix of international location configurations, shown in Fig. 13.5. From a classical viewpoint, particularly potential experience curve effects and synergetic effects support a substantial centralization of the production. In contrast, there is an improved spread of risk in decentralized productions and a lower transport effort (Root 1998). In the context of media production, these arguments may only be transferred to the technical part of production. However, because of the special characteristics of media production, a similar transfer to the content production is not possible. With regard to the production content component of media products, there are other criteria determining the selection of a location. These have to be particularly sought in linguistic and cultural dimensions and therefore ultimately in the interfaces to the relevant markets. In this context, it should be mentioned that local content production in the respective host countries enables an improved consideration of linguistic and cultural conditions. Another argument for the production allocation to several international locations is the time sensitivity of many media products. Local production allows to avoid potentially necessary protracted adjustment processes, which would endanger the content’s timeliness. So-called country-of-origin effects in the media sector as well as in industrial sectors can disfavor local production. This means that having its origin in a particular country may positively impact a customer’s judgment of product quality. Such an effect, for instance, can be observed in the media sector for movies. Especially US-American movies are assessed a priori particularly positively by their recipients.

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13.3.3 Marketing Management of International Media Companies In the following section, essential marketing management action parameters of international media companies are described. Analogous to the procedure in the previous sector-specific chapters, marketing management, or rather its parameters of action, is presented according to the classification of marketing into the four “p’s” (product, price, place, and promotion).

Product Policy of International Media Companies Concerning the product policy of international media companies, the first aspect to be discussed is the product selection. This starts with identifying its internationalization potential for the corresponding media products. Here, especially aspects such as language and culture are crucial. It has to be checked whether transferring each media product into another language and cultural area is generally possible and which expenses are associated with this. Language barriers tend to be easier to overcome than cultural barriers. Overcoming cultural barriers often requires a reconfiguration of content and/or formats and is thus associated with significantly higher expenditures. If a sufficiently high internationalization potential is present, in a further step the following questions should be answered with the help of international market research (Root 1998): • Who are the buyers/users of the products abroad? • What does the usage of these products abroad look like? • Where, how, why, and when are the products to be bought abroad? Based on the answers to these questions, the international media company can decide whether a standardized or a differentiated product policy should be pursued abroad. In this context, the optimum degree of standardization or differentiation arises as the maximum yield response to the effects of demand and supplier-related feedback. First of all, in terms of demand-related feedback, a rather low degree of standardization is to be considered reasonable. Consequently, this may prevent or reduce arbitrage. In this way, country-specific market requirements of customers for the relevant media products can additionally be taken into account, whereas in the case of a supplier-related feedback a rather high degree of standardization appears advantageous. Thus, by realizing economies of scale and experience curve effects, cost effects can be achieved, which as a rule reach far beyond the single national markets and concern the whole company. Fundamentally, there are different basic types that can be distinguished by means of the degree of product standardization: differentiated products manifest a high degree of country-specific adjustment. In this case, for nearly every national market, a specific version of the respective product is offered. Such a type of product policy is particularly required by companies in the print media sector. Here, the products usually must be adapted to the requirements of the respective national markets, both linguistically and with regard to the content.

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A modular product design is applied when customers in different countries generally have the same demands on a product and only certain components must be specifically modified for the countries. In this case, an already existing core product on other markets can be relatively easily adapted by altering the respective components to meet the requirements of the newly to be developed national markets. This version of international product policy is quite popular in media management. For instance, book publishers basically provide the same product in every developed national market by merely varying the language in accordance with the requirements of each national market. The same applies to movies, which are also subject to linguistic adaption via dubbing or subtitling and are utilized internationally afterwards. Also in the area of computer and video games, usually only a linguistic adaption is applied. This often includes only the game instructions for a certain game. In some cases, the language of the game itself is adapted in addition. Finally, there is a complete standardization when the whole product, in all the different national markets, is utilized in the exactly identical version. There is no adaption realized to country-specific requirements. Such a product policy implies that the specific media products will be accepted in the different language and cultural areas in the same way. This is more often the case with products of the music sector. Especially songs in English are accepted worldwide and therefore can be marketed globally in a standardized form.

Price Policy of International Media Companies As part of an international price policy, media companies must make decisions concerning charges for service offers, possible discounts, as well as delivery and payment conditions for their foreign activities. Here, one can distinguish between a strategy of international pricing standardization and a strategy of international pricing differentiation. Complete international pricing standardization is rather unusual in the media sector. In fact, international pricing differentiation is predominant. Within the frame of such a strategy, the company adapts itself in terms of pricing to the local market conditions. Pricing differentiation in international settings is mostly realized based on local criteria. For example, print media products are usually offered at higher prices in foreign markets than in the native market. This can be explained by the higher costs necessary for distribution of the print media products, which are passed on to the customer, so that eventually a cost-oriented international price policy can be supposed. In the area of TV providers, price policies particularly play a role in the context of granting format and program licenses as well as in the sale of productions. In such cases it is also common to apply pricing differentiation. The same applies to the movie sector. A geographical pricing differentiation occurs likewise in the music sector as well as in the case of video and computer game producers. In these media sectors, the international price policy particularly orients itself to the different levels of purchasing power of the individual target countries.

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Distribution Policy of International Media Companies Distribution policy in the context of international media companies is especially concerned with the selection of distribution channels and trade intermediaries in the host country. Regarding the distribution channels in the host country, there are three basic approaches available to international media companies: adaption to already existing distribution channels of the respective foreign market (adaption), modification of existing distribution channels (modification), and creation of proper distribution channels (innovation). For media companies, different direct and indirect international distribution channels are imaginable depending on the precise product to be marketed. In most cases, book publishers subscribe to the usage of already existing indirect distribution channels. Therefore, the local book trade system is used, which essentially has two stages and consists of book wholesale and retail. Besides that, a direct distribution channel to foreign countries is in principle available to the publishing companies. One may especially think of the foreign shipping of books. However, this version of international distribution policy plays a very minor role within the book sector. Newspaper and magazine publishers use both direct and indirect channels for the international distribution of their products. Particularly foreign subscription is considered a direct channel. However, distribution is mostly carried out by mail. The employment of self-owned suppliers abroad is usually not found due to often rather low sales volumes. More important, by contrast, is the indirect international distribution of print media products. Here, one usually resorts to already existing distribution channels in the host country, whereas again a two-stage system is predominant, consisting of print media wholesale and retail. Beside the traditional paths of international distribution of print media products, digital distribution is increasingly gaining in importance. Digital distribution allows print media content to be internationally distributed almost independent of time and place. The content is received by the users by means of an online PC or mobile devices, such as the Apple iPad. In the context of internationalization, especially the distribution of their broadcasting service via satellite is of interest to radio and television companies. Such a distribution ensures a cross-national propagation of the specific program range, though it should be noted that renting a satellite position is a serious cost factor. In addition to satellite distribution, the access to a cable network in the host country is a further possibility of international distribution for radio and television companies. However, the limited capacity of cable networks is a problem provoking acute competition for the scarce channels. Furthermore, these are usually already occupied by local radio and television providers, which is why there is a market entry barrier for foreign suppliers. The international distribution of movies is mostly carried out by local movie distributors abroad. Consequently, indirect international distribution is predominant. A direct alternative is to establish foreign distributors as subsidiaries or joint ventures. After being utilized in the cinemas, the movies can be marketed

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internationally as video or DVD versions as well. Again, both direct and indirect distribution channels lend themselves to this. The use of indirect distribution channels is usually based on the utilization of already existing structures in the host country, such as video stores and trading firms. Besides that, with an increasing prevalence of broadband Internet access, also an increase of movie distribution via online channels is to be expected, making the respective services available worldwide. For providers of music products, the usage of already existing distribution channels in the host country is suitable. Furthermore, indirect distribution channels are predominant within the sales sector of audio media, especially via commerce. In the course of internationalization of companies in the music industry, online distribution of music is also being increasingly established. One example to be named is the iTunes service of Apple. After a very successful launch in the United States, this digital music distributor has been gradually introduced into several countries worldwide. With regard to the international distribution of computer and video games, basically the same explanations as for producers of audio media apply.

Communication Policy of International Media Companies The communication policy of international media companies also faces the question whether communication policies should be designed uniformly worldwide or if they should be adapted to the requirements of each country. Particularly cost savings due to lower costs for conception, design, product, and dissemination therefore support standardization. Additionally, a more efficient use of the advertisement budget and improved allocation of the available advertising media in the different countries can be achieved. Finally, in doing so, a consistent product and company image is made available. In opposition to this, a communication policy that is so standardized cannot consider regionally different demand patterns. In the context of media products, it is important to observe that a standardized product policy requires identical expected benefits with regard to the product. It must be a so-called culture-free product. Especially with media products, however, the cultural disposition is often of prime importance. Thus, for the majority of media products or companies, a worldwide standardized communication policy is not desirable. Rather a communication policy is required that is differentiated according to countries or cultural areas. An exception to this is media products that are offered internationally with generally the same design and which are also identically adopted. Especially music products as well as computer and video games are to be mentioned here. Knowledge Review Question 1. Do different globalization and localization advantages exist for media companies? 2. What importance do strategic alliances in the media industry have? Name examples of successful alliances! 3. What are market presence strategies, and which can you name?

Integrated Media Conglomerates and Cross-Media

14

Due to the digital revolution, cross-media has become a new and important field of media management. Earlier within media management, this did not exist in such a way, because multiple utilization of channels was traditionally only used to a very small extent. In this digital age of convergence of media markets, cross-media marketing strategies are key success factors. In this context, cross-media is referred to as the lateral or even multilateral expansion of media distribution to various media channels or media submarkets. Cross-media management is the strategic foundation for integration efforts of companies in the media sector. Nowadays, hardly any media company can do without an adequate cross-media strategy and a focused cross-media management. This is particularly true for large integrated media companies that dominate the industry in many submarkets today. Therefore, to broaden the understanding of cross-media management this section deals with various forms of cross-media strategies in the media sector (for the following see Wirtz et al. 2014a).1

14.1

Introduction

The competitive landscape of the media industry is characterized by increasing penetration movement with innovative information and communication technologies and ongoing industry convergence. Two major processes determine the development of competition in the field of electronic media and communications. On the one hand, especially in the Internet sector, a greater number of enterprise formations in the sense of Schumpeterian pioneering companies are reported. Examples of this development are companies such as Facebook, eBay, and Google. 1

See also for the following chapter Wirtz (2011b) and Wirtz (2019b).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_14

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On the other hand, fundamental transformation processes of value chains in the information and communication sector can be observed. In this environment, there is a significant repositioning of established media companies, which is characterized by a change in the current value-added structures and competitive strategies (Wirtz 2000b). The repositioning and change of the valueadded structures let integrated media and Internet companies arise. By acquiring ownership interests, integrated media companies push vertically and laterally forward into new (media) product offering areas and merge economic activities in various media markets (Wirtz 1994). In this context, the lateral or even multilateral expansion of media distribution to various media channels or media market segments is referred to as cross-media. Cross-media management is the strategic foundation for integration efforts of companies in the media sector. Nowadays, hardly any media company can do without an adequate cross-media strategy and a focused cross-media management. This is particularly true for large integrated media companies that dominate the industry in many submarkets today. After the emergence of integrated media companies in the mid-1990s was particularly characterized by mega-mergers with vertical orientation or rather by the advance of telecommunications providers in the media industry in the late 1990s, one can observe in the light of the increasing commercialization of the Internet, especially the emergence of integrated media and Internet companies. On one side, traditional media companies are trying to increase their position in the Internet sector through corporate investments or the acquisition of ownership interests. For example, in 2000, Pearson plc acquired the National Computer Systems Inc. (NCS). This acquisition has enabled Pearson to become a leading integrated provider of educational materials and to distribute its own content on the various Internet-based systems of NCS as well as to create new personalized teaching courses (Business Wire 2000). On the other side, Internet companies advance into the realm of traditional media. The most prominent example in this context is the acquisition of Time Warner by AOL.

14.2

Fundamentals of Cross-Media Management

In recent years, the development and design of multi-channel strategies in the media sector has experienced an increasing importance (Lin et al. 2013). In the course of time, both in business practice and in the literature, the term cross-media has been established. Here, cross-media is primarily associated with generating competitive advantages in the context of convergence trends in the media industry. In particular, the future success of traditional media companies is often linked with the use of cross-media strategies to a high degree. Thereby, the terms cross-media and cross-media management are often used without being clearly defined. This heterogeneous understanding of the term has been reinforced, above all, by the fact that the term cross-media has acquired a high relevance in various media or business disciplines. Especially within integrated

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Fundamentals of Cross-Media Management

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media management, distribution marketing, and communication marketing, the concept of cross-media management plays an important role. Whereas media management has a significantly more nuanced understanding of the concept, within marketing the multi-channel use for various marketing activities is the focus of attention. In addition, interdisciplinarily speaking, in the literature and practice, it can be observed that cross-media is too often limited to the digitalization of media content for distribution via online channels. Although the modern information and communication technologies exercise a decisive influence on the cross-media concept, it also includes the integration of traditional media forms and channels outside of the emerging online media. It is therefore necessary for a cross-media analysis to take on the widest possible perspective of consideration. Cross-media as a comprehensive management approach therefore requires a unified understanding of the concept. In this context, cross-media should be defined as below: Definition cross-media (Wirtz 2013b) Cross-media refers to a concept for the use of at least two media channels for marketing media products. Moreover, the functional management term of the cross-media concept should be picked up and extended by the aspect of corporate management. Thereby, corporate management can be understood as a purposeful, formative intervention in the value creation process of companies. Thus, cross-media management has a particularly instrumental character, since it aims at monitoring the corporate long-term goals. Thereby, cross-media management covers both the strategic and the operational levels. Here, strategy is to be understood as “a planned set of measures of the company to achieve its long-term goals” (Chandler 1962, p. 23). In contrast, operational management is carried out under a short-term time horizon. Cross-media management is concerned, as the general media management, with the strategic and action-oriented options in respect of the sales of media products with special emphasis on the media-specific environment. Cross-media management can be defined as below: Definition cross-media management (Wirtz 2013b) Cross-media management encompasses all purposeful activities of planning, organization, implementation, and control in the marketing of media products through various media channels.

14.2.1 Manifestations of Cross-Media In the media sector, different growth strategies can be observed. Regarding a systematization of the concept, it makes sense to rely on established growth

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Equal Similar

Equal

Similar

Single Media Penetration

Single Media Differentiation

Lateral Crossmedia

New Single Media Diversification

Multilateral Crossmedia

New

Media channel expansion

Media product/media form

Fig. 14.1 Cross-media systematization. Source: Wirtz (2013a, 2019b)

approaches, since cross-media strategies are special cases of general growth strategies. An early and very popular approach to the systematization of such strategies was established by Ansoff (1965). This approach is very suitable for the present context, since the various strategy alternatives are presented in a product-market matrix. The so-called Ansoff Matrix differentiates between existing and new markets, as well as between existing and new products. Within cross-media systematization, it is necessary to extend the original matrix. Further, it can be distinguished whether the new media market or the new media product is similar to an existing market or product. Media markets, which can be described in this context also as a media industry or a distribution channel, are, for example, the book market and the TV or newspaper market. In this context, media products or media formats are understood as text contributions (book text or edited text), images, audio contributions, or audiovisual materials. Figure 14.1 shows a growth matrix adapted to the media context, from which two basic cross-media forms can be derived. In an existing media channel, with the same form of media, a higher market penetration can be achieved through single media penetration. A similar media product, such as a book text and an editorial text (but in the same medium), can be referred to as single media differentiation, based on the product policy. If the product expansion is an entirely new media format, for example, an audio contribution in regular textual online environment, one can speak of single media diversification. Here, it should be noted that each of these forms of growth only covers one media channel, and thus cannot be assigned to cross-media. If, in addition to an existing media channel, a new channel is used, this can be referred to as cross-media growth. When talking about the same or an equal media product, it can be referred to as lateral cross-media; in the case of a similar or new

14.2

Fundamentals of Cross-Media Management

241

Different product types One product type

Number of media products

Single media

I

Single media diversification

Cross-media

II

Multilateral cross-media

• Use of different media types in one media sector

• Use of different media types in different media sectors

• For example, illustrated text in a magazine

• For example, filming (audiovisual) of a book (text)

III

Single media penetration

IV

Lateral cross-media

• Use of one specific media type in one channel

• Use of one specific media type in different media sectors

• For example, only audiovisual contributions on TV

• For example, book texts on the internet

Single-channel

Multi-channel

Number of distribution channels Fig. 14.2 Manifestations of cross-media in dependence on the media channels. Source: Wirtz (2013a, 2019b)

media product, it can be referred to as multilateral cross-media. In this context, mainly the presence of several media distribution channels is crucial. Based on the multi-channel marketing, one can speak of a media multi-channel strategy. Figure 14.2 displays the different growth strategies, depending on the number of media products and the number of distribution channels. The various forms of cross-media and related strategies are presented in Sect. 14.2.3.

14.2.2 Causes and Catalysts of Cross-Media The causes and catalysts that have led to the development of cross-media marketing of content and still press ahead this trend can be divided into market- or environment-oriented and business-related aspects. Within the market- and environment-oriented causes, the already described industry convergence on the media, communications, and information markets as well as the growing penetration of the media markets with innovative information and communication technologies plays a central role.

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On this basis, three market-related drivers or catalysts can be derived: digitalization, the industry convergence, and the changing usage patterns of the recipients. With digitalization, which today encompasses all types of traditional media formats, particularly lower costs for porting of content to new media channels have emerged. This is mainly due to the much lower cost of adapting efforts for the cross-channel utilization of media formats. Thus, for example, a digital picture can be utilized in a book, a magazine article, and an online channel with little extra effort. Only the proceeding, fast-moving industry convergence and the possibilities of innovative information and communication technologies have led to the availability of new channels and to the absorption of these channels in integrated cross-media strategies. The pressure on traditional media companies to use new digital channels was significantly increased by new market entrants, especially from the electronic business sector. As an example, the online video platform Hulu can be cited, with which many traditional media companies have created an additional marketing channel on the Internet. The third market-related aspect is the change in recipient behavior. It can be observed that the user preferences have moved toward new marketing channels in many industries. To an increasing degree, this leads to substitution of traditional media channels through new media channels. Furthermore, it appears that nowadays users even expect additional content via online channels in traditional channels. Even within windowing (extension of value chains through the marketing on different distribution channels) and versioning (differentiation of media products), user preferences have changed so that recipients prefer a stronger multi-channel use. The central business-related drivers and catalysts are higher revenue opportunities, lower marketing costs, and a more efficient brand transfer. In this context, the higher revenue opportunities arise especially from multiple use of media content. Very often, these have very high first-copy costs but can be distributed through digitalization in a cost-effective way on different channels. Per additional media channel, there is additional revenue potential to cover the high first-copy costs. Decreasing marketing costs arise primarily from the economies of scale and interconnection/integration effects that integrated media companies can achieve through the use of cross-media. These interconnection effects or composite effects occur when there is a coordinated, cross-media channel use beyond the boundaries of individual marketing channels. This aspect plays an important role, especially in the distribution of media content as well as in product development. The third superordinate, business-related driver for cross-media marketing within the media management is the brand transfer. Branding is a very complicated and cost-intensive marketing activity. Within cross-media management an established brand can be expanded to new channels with relatively little adjustment and coordination needs. An example is the Harry Potter book series. The strong trademark Harry Potter allowed an efficient secondary use as a movie and furthermore as a computer game. In doing so, an established brand message could be reverted to. Figure 14.3 illustrates the market- and business-related drivers and catalysts of cross-media.

14.2

Fundamentals of Cross-Media Management

243

Market-related drivers and catalysts

Business-related drivers and catalysts

Digitalization

Higher revenue opportunities

 Lower switching costs for multiple use of media

 Multiple use of media content

 Lower adjustment costs for cross-media formats

 Lower adjustment costs

Industry convergence  Convergent integration of new technologies  Absorption and availability of new channels

Decreasing marketing costs

Cross -media

 Cross-channel media economies of scale and scope

 New competitors Brand transfer Change in user behavior  New user preferences regarding windowing and versioning  Substitution of old by new channels

 Brands can be transferred cost-effectively to new channels  Branding can be done across all channels

Fig. 14.3 Drivers and catalysts of cross-media. Source: Wirtz (2013a, 2019b)

14.2.3 Cross-Media Strategies, Processes, and Success Factors In recent years, with increasing importance of cross-media management, various cross-media strategies emerged. Basically, the strategy alternatives can be distinguished based on the number of used exploitation stages as well as the companyspecific coordination of media formats and channels. Using these cross-media strategies as well as general approaches to strategic management, key cross-media processes can be identified. Furthermore, strategic success factors can be derived and systematized. First of all, however, a fundamental understanding of the interaction between media channels and media formats and of the resulting cross-media potentials is necessary. Potentials of Cross-Media The systematization of cross-media approaches has shown that the combination of media format and media channel is one of the central challenges in cross-media management. Media channels (in the broadest sense also referred to as branch channels) are the book market, the market for newspapers and magazines, the radio market, the TV market, the movie market, and the online market. In the cross-media context, in terms of potential and adaptation effort estimates, it makes sense to differentiate between a stationary and a mobile online market. In this context media format is understood as text contributions, images, audio contributions, or audiovisual material. Due to the significant differences, in

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production and scope, among others, the text format is also to be subdivided into book texts and edited texts. Thereby, any combination of media formats and media channels has its specific characteristics that are of major importance for implementing a targeted cross-media management. Overall, a number of different combination possibilities emerge. For these characteristics the adaptation effort and the potential can be estimated. The adaptation effort can generally be ascribed to the similarity of the combination to the original exploitation combination, including classical exploitation combinations, such as “book text” in a book. The more alike the target channel of a media format to its original using channel, the lower is the adaptation effort. For example, a book contribution can easily be reprinted as a serial story in a daily newspaper. The movie version of the same work, such as a TV series, is considerably more elaborate and consequently associated with significantly higher costs. An exception in this context is online formats. In principle, all media formats can be adjusted to the online environment through digitalization. Since nowadays the majority of the content is already produced digitally, the adaptation effort required for these channels is often comparatively moderate. The potential of a combination of media format and media channel depends not only on the similarity of the channels but on other factors as well. Both development trends in the media industry (e.g., toward online channels) and media format-specific characteristics need to be noted. For example, the transmission of audio content on TV is possible without increased effort. Nevertheless, for this combination of pure audio format and audiovisual medium, no cross-media potential can be identified. Figure 14.4 shows possible combinations of media format and media channel and evaluates them according to their adaptation efforts and the cross-media potential. It should be noted that within the media channel, book, audio books, and also ebooks are subsumed. All other digital formats are assigned to the online distribution channels. It is apparent that in traditional media channels, beyond the original exploitation combinations, there is limited cross-media potential. The various text formats can be utilized within the print media channels relatively easily and with medium-to-high cross-media potential. Moreover, the book text has cross-media potential in terms of radio utilization (as a reading) and for the TV market or rather movie market (as a script for a movie or a series). However, the relatively high adaptation effort must be considered. The media format image has cross-media potential in the media channels TV and movie as an imagery for marketing purposes. However, both the stationary and the mobile online channel offer high-to-very high cross-media potential. All media formats, with restrictions regarding the book text format, can be perfectly transferred to the online channel. Cross-Media Strategies In the context of cross-media strategies, the number of used exploitation stages and the company-specific coordination of the media formats and channels are of special

14.2

Fundamentals of Cross-Media Management

245

Media channel Book

Newspaper/ magazine

Radio

TV

Film

Online

(stationary)

Online

(mobile)

Text

(book)

Media format

Text

(editorial text contribution)

Audio e-book

Image

X

Audiovisual

X enhanced e-book

Low adaptation effort Potential:

Very low

Moderate adaptation effort Low

Moderate

High adaptation effort High

Very high

Not useful adaptable

X No potential

Fig. 14.4 Cross-media adaptation effort and potential. Source: Wirtz (2013a, 2019b)

importance. Based on these criteria, various strategic alternatives can be identified. First, in this context, a distinction should be made based on the number of stages in the cross-media marketing chain. It should be noted that one can only speak of a cross-media strategy at a use of at least two different channels. Therefore, the simplest form represents the two-stage cross-media strategy. Through intelligent use of channels, integrated media companies can expand the multi-channel utilization up to five channels. This can be illustrated by the example of a book text as the original media format. The classical first utilization is the printed book, which can also include special formats such as audio books. Another utilization channel, and thus the basis for a two-stage cross-media strategy, is the movie. Herewith, a book text (or mostly a modified version in the form of a script) is used as a template for a movie adaptation. This is usually followed by a broadcast on TV, as a third utilization channel. As part of the windowing, the extension of the value chain for media content, the specification of the channel (e.g., pay TV and free TV), and the sequence and timing also play an important role. However, here it should be noted that the typical sequences of channels have experienced increasing changes in recent years. This mainly concerns the temporal dimension of the cross-media exploitation. The use of content in different channels is converging. So nowadays, very often there is less time between the broadcast of a movie in cinemas and broadcasting it on pay TV. With new channels in some cases, even the complete elimination of temporal utilization windows can be observed.

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Therefore, the cross-media exploitation does not need to be linear. The fourth exploitation stage, the online publication of the book text (e.g., on a website), is conceivable after the TV broadcast as well as together with the book publishing. Moreover, a book text can easily be utilized as a serial story in a magazine, and thus a fifth exploitation stage can be developed. In this case, a five-stage cross-media strategy is present. Figure 14.5 presents the different stages of cross-media strategies with the example of book text. Furthermore, cross-media strategies can be differentiated by the type of channel coordination. In principal, three different coordination forms are possible from which three types of strategies can be derived: the isolated cross-media strategy, the combined cross-media strategy, and the integrated cross-media strategy. The three types of strategies differ in terms of their design, their requirements toward the enterprise, and their coordination. The isolated cross-media strategy is characterized by the fact that the various media channels are completely independent of each other in terms of coordination and their control is channel-immanent. Therefore, a channel-specific management is required. Usually a lead channel structure is existent, that is, a media channel is superior to the other channels. The isolation of the channels in the context of this cross-media strategy can go as far as that competition between the channels exists. This is, for example, the case with a publishing company who markets digital versions through an online channel in addition to the classic book. Within the combined cross-media strategy, the various media channels are partially coordinated with each other, but the control is still channel-immanent. This leads to a situation in which the media channels mesh with each other and support each other in competition, a so-called coopetition among the channels. Within this strategy type, there is mostly a higher-level channel. However, the management is usually across the channels. In an integrated cross-media strategy, all media channels are fully coordinated with each other and controlled across channels. The media channels are usually managed in such a way that they complement each other and that no competition between the channels arises. This requires a high degree of central control of the activities. In recent years, a clear trend toward integration of different media channels in the sense of an integrated cross-media strategy can be observed. Especially international media groups such as Time Warner and News Corp use this strategy. The demands on the organization change in dependence on the cross-media strategy used. Whereas the isolated cross-media strategy requires a high empowerment of the individual channel management, there are high interdependencies between the various media channels within the integrated strategy. Also, the coordination effort and the degree of centralization increase with growing channel integration. Figure 14.6 illustrates the strategy types of cross-media management.

Book

Book

Book

Text (book)

Text (book)

Text (book) Film

Film

Newspaper

Online

Two-stage cross-media strategy

Fig. 14.5 Multi-stage cross-media strategies. Source: Wirtz (2013a, 2019b)

Book

Natural first use

Text (book)

Original media format

TV

TV

Online

Three-stage cross-media strategy

Target channel

Online

Online

Four-stage cross-media strategy

Magazine

Five-stage cross-media strategy

14.2 Fundamentals of Cross-Media Management 247

Fig. 14.6 Cross-media strategy types. Source: Wirtz (2013a, 2019b)

Organization

• Often lead-channel structure • Cross-channel management

• Lead-channel structure • Channel-specific management

• Strong self-reliance • Low coordination • Strong decentralization

• Partial coordination of media channels; channelimmanent management • Loosely coupled channel structure • Coopetition between channels

Combined cross-media strategy

• No coordination of crossmedia channels; channelimmanent management • Independent channel structure • Competition between channels

Isolated cross-media strategy

• Strong interdependence • High coordination • Strong centralization

•Centralized management

•Multi-channel structure

• Complete coordination; cross-channel management • Interdependent channel structure • No competition between channels

Integrated cross-media strategy

14

Configuration

Coordination

Aspects

Approach

248 Integrated Media Conglomerates and Cross-Media

14.2

Fundamentals of Cross-Media Management

249

Process of Cross-Media Management The process of cross-media management is divided into four areas that build on each other to show the entire course of an idealized development of medial multi-channel systems. The cross-media management process predominantly orients itself to the general procedure of the planning process in the context of strategic marketing. As a consequence, the initial strategic situation of the company, market segmentation, and the strategy definition in medial multi-channel systems result. Strategic decisions are long-term oriented and will help to secure or even expand a company’s competitive advantage. The planning process for the cross-media strategy development begins with a general business analysis to identify the company’s own strengths and weaknesses as well as the opportunities and threats of the environment and thereby to obtain a complete overview of the initial situation. This situation analysis is particularly important for a medial multi-channel strategy, in order to understand the specific requirements for the cross-media management and if necessary adapt the target definitions and planning processes. Building on the strategic initial situation, a segmentation of the market takes place, in order to achieve a target group-specific, successful handling of the market. For this purpose a variety of potential segmentation criteria (geographic, sociodemographic, behavioral, psychographic, and benefit-oriented) are used. On the basis of the market segmentation, the definition of the company’s individual cross-media strategy takes place. The process of cross-media management ends with the design of cross-media systems and is based on a four-step planning process. In the first step, potential media channels are identified based on the market segmentation strategy and the strategy definition. Following this, the form of the cross-media system is determined in order to differentiatingly develop the channels. Here, the core activities are the determination of the media stage number, the media positioning, and the determination of the medial degree of differentiation. The third step in the design process is concerned with the identification of requirements specific to the media channels, in order to carry out a specific channel selection on this basis. The design process is completed with the cross-media product positioning. In the course of this, the channel-dependent positioning planning for the media product is created. Furthermore, the media product needs to be adapted to the media channel. Figure 14.7 illustrates how the master planning process compresses to the design process of the cross-media system. Success Factors of Cross-Media Management The success of cross-media management depends on many factors. Many of these factors have been highlighted in the previous explanations. In the following, the key success factors of cross-media management are shown in an aggregated form. A basic prerequisite for the implementation of a cross-media strategy and thus a key to success of cross-media management is the availability of multiple channels. Although one can already speak of cross-media when there are two channels available, with each additional channel, new advantages arise that sometimes scale disproportionate to the number of channels (such as economies of scale).

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Analysis of company‘s drivers

Geographic market segmentation

Integrated Media Conglomerates and Cross-Media

SWOT analysis external Analysis of company‘s drivers

Benefit-oriented market segmentation

Sociodemographic market segmentation

internal

Psychographic market segmentation

• Identification of appropriate media channels • Media adaptation, avoidance, conflict, and cooperation strategy

Determination of the cross-media system‘s form

• Determination of the number of media stages • Determination of media positioning • Determination of the media degree of differentiation

Market segmentation

Behavior-oriented market segmentation Strategy definition to derive cross-media strategy

Definition of cross-media strategy

Identification of potential media channels

Analysis of strategic initial situation

Selection of the cross-media system‘s media channels

• Criteria for media channel selection • Qualitative and quantitative methods of media channel selection • Selection decision and consideration of media adaptation needs

Cross-media product positioning

• Positioning planning for media product • Adaptation of media product to specific media channel

Design of crossmedia system

Fig. 14.7 Processes of cross-media management. Source: Wirtz (2013a, 2019b)

However, each additional channel increases the coordination effort. Therefore, the channel coordination shall be identified as an additional important factor for a successful cross-media management. This is especially true for coordinated and integrated cross-media strategies. The success of cross-media management also crucially depends on the sharing of channels and resulting synergies. First, co-branding should be mentioned, which allows to transfer a trademark to another channel or rather to synchronously develop the brand for multiple channels. Since branding is a lengthy and often expensive process, co-branding, as part of the crossmedia management, is highly important for success or rather is a major success factor. The success factor cross selling/cross-promotion is closely related to co-branding. Here, a media channel is used for cross-media marketing of new media products. This results in considerable sales growth potentials. Further, various media channels can be bundled by companies for a joint marketing. The so-called bundling of services is an important success factor in establishing new channels and the enforcement of an integrated cross-media strategy. In the

14.3

Integrated Value-Added Structures and Business Models

251

Availability of multiple channels Media channel adjustment

Channel-customer fit

Multiple customer loyalty

Cross-media management success

Co-branding

Cross-selling/ cross-promotion

Windowing/versioning Bundling of services

Fig. 14.8 Success factors of cross-media management. Source: Wirtz (2013a, 2019b)

media bundling of services, different media formats are combined in media offer packages. Another success factor is called windowing, or versioning, of media products through various media channels. Properly designing exploitation windows and creating market- and segment-specific product versions is particularly important and critical to success when using many channels (up to five-stage cross-media strategy). Moreover, multiple customer loyalty can be identified as a key success factor of cross-media management. Only if customers can be tied to the company via the boundaries of singular channels can a cross-media marketing strategy be established. In this context, the channel-customer fit is considerably important. To plan the target group channel design is therefore an important step in the cross-media management process. Figure 14.8 illustrates the success factors of cross-media management.

14.3

Integrated Value-Added Structures and Business Models

The market-/business-oriented causes and catalysts result in the establishment of integrated value-added structures and integrated business models. The following section will first illustrate the dimensions of integration strategies. It will continue to present integration strategies at the value-added level as well as the business model level. In conclusion, these integration strategies will be evaluated in further detail.

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14.3.1 Dimensions of Integration Strategies In the United States, a significant increase in mergers and acquisitions can be observed within the media, communications, and Internet industries. The numerous takeovers and mergers in this general sector can qualify this trend. Integration strategies in the information and communication branches indicate that businesses are attempting to span multiple strategic development levels in order to broaden their activities to include all value-added levels and multimedia branches. This constitutes the foundation for cross-media marketing of content. When implementing cross-media marketing, companies will often pursue a dominant position in newly emerging markets. Companies in the media, communications, and Internet sectors execute integration strategies at two levels. At the value-added level, companies strengthen their position on already taken value-added stages through integration or incorporate upstream and/or downstream business areas. In this manner, they aim to penetrate all levels of the multimedia value-added chain. At the business model level, companies integrate separate models in order to build a multifunctional, hybrid business model.

14.3.2 Characteristics of Integration Strategies The following section illustrates integration at both the value-added level and the business model level. Thereby, we will draw on the previously described multimedia value-added chain and the business model classification. Figure 14.9 depicts these characteristics. Integration at the Value-Added Level Based on growing convergence, companies in the media, communications, and Internet branches implement integration strategies in the context of their valueadded structures and activities. Old value-added chains are dismantled and reconfigured via cooperation or merger with the value-added chain activities of other companies. Figure 14.10 illustrates the unbundling of value-added structures and the rebundling of previously separate value-added areas in the establishment of a single multimedia value-added chain. Integration at the value-added level • Describes the integration of upstream or downstream businesses • Aims to occupy all stages of the multimedia value chain

Integration at the business model level

Integration strategies

• Describes the inclusion of separate business models • Aims to build a hybrid and multifunctional business model

Fig. 14.9 Characteristics of integration strategies. Source: Wirtz (2000c, 2019b)

Value-added services

Basic services

Navigation/ interface

Logistics/ sales

Electronic commerce Customer Web design/ relationship management management

Content distribution

Transmission/ connection

Content aggregation

Media

Integrated Value-Added Structures and Business Models

Fig. 14.10 Establishment of multimedia value-added chains through reconfiguration and integration. Source: Wirtz (2000d, 2019b)

Reconfiguration via rebundling

Content generation

Sales/ service

Value-added services

Production of hardware/ software

Information technology Procurement of hardware/ software

CRM/ sales

Aggregation of content and services

Unbundling

Transmission

Creation of content and services

Network provision

Telecommunications

14.3 253

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14

Examples

Provider

Central tasks

Creation of content and services

Aggregation of content and services

Integrated Media Conglomerates and Cross-Media

Value-added services

Navigation/ surface

Transmission/ connection

• Content/ service generation

• Organization/ aggregation and bundling of content/ services

• Offer of billing systems and hosting systems • Offer of advisory services

• Offer of infrastructure • Transmission

• Provision of navigation tools for clients • Offer of interfaces/ devices

• • • • •

• TV stations • Online service provider • Communities • News agency

• Billing operators/ system operators and hosting operators • Consultancies and training companies

• IP-provider • PSTNinfrastructure provider • CATVinfrastructure provider

• Navigation provider (e. g. browser, Java, intelligent agents) • Devices provider (e. g. mobile phones, intelligent TV-, PC-, set-topboxes)

• Time Warner • MSNBC • ABC (Disney)

• • • •

• AT&T • Vodafone • SES Global

• • • •

Film studios TV producers Publishers Music publishers Retailers

• Disney • Bertelsmann • Washington Post Company • Viacom

AT&T IBM EDS Microsoft

Recipients

Microsoft Lenovo Sony Apple

Fig. 14.11 Central tasks, providers, and businesses within the multimedia value-added chain. Source: Wirtz (1999, 2019b)

Increasing integration efforts made by companies in the media, communications, and Internet sectors are creating a multimedia value-added chain, which can be divided into five value-added levels. The first level includes the production of content and offer of services. Media companies such as The Walt Disney Company or news agencies such as Reuters act as content providers and occupy a central role within the multimedia value-added chain. Players at the second level combine different content and services in segmentspecific packages or channels. These accumulators of content are customer-oriented and represent the point of contact between user markets, content procurement markets, and advertising markets. At the level of value-added services, different products and services are offered to support processes such as consultation, accounting systems, or the development, establishment, and operation of servers. The central tasks of the next level are the provision of access, the establishment of connection and transmission, as well as the management of networks. The final level of the multimedia value-added chain is the interface with end consumers. Here, the hardware and software components required for the reception of content, such as digital TVs, multimedia PCs, mobile telephones, browser software, or intelligent agents, are prepared. Figure 14.11 illustrates central tasks and providers and offers examples of businesses that occupy one or more levels in the value-added chain. Integration strategies at the value-added level aim to improve competition conditions in domestic markets, as well as to gain a competitive edge in new markets through integrated service bundles. In order to improve the situation in domestic markets, enterprises preferably implement integration strategies at the horizontal value-added level. The merger of Time Inc. and Warner Communications

14.3

Integrated Value-Added Structures and Business Models

255

exemplifies horizontal integration with a focus on content in relation to the valueadded chain. Following the merger, Time Warner almost covers the entire production of content. Additionally, vertical strategies were also adopted in order to dominate the complete multimedia value-added chain through the incorporation of upstream or downstream business sectors. In this context, the connection of previously separate services with cooperative, comprehensive value-creation systems is supposed to establish network and integration solutions. For this purpose, different levels of the multimedia supply chain are assembled through cooperation, alliances, and lately increasingly the acquisition of other companies. The acquisitions and mergers of the Australian media company, News Corporation (News Corp), provide an excellent example of horizontal and vertical integration strategies at the value-added level. The historical starting point for the company was Rupert Murdoch’s acquisition of Adelaide News from his father. A rapid expansion of the company by further acquisition within Australia followed. The international expansion of the printing business reached its peak during the 1960s and 1970s. News Corp, founded in 1979 by the Australian newspaper publisher, coordinated worldwide expansion into various media sectors. By the mid-1980s, the expansion focused on print media (newspapers and magazines). With the successful acquisition of the American movie studio, 20th Century Fox, in 1985, as well as seven American TV stations, the company finally found its footing in the movie and TV industry. This marks the beginning of the integration efforts focusing on horizontal crossmedia. In the year 1987, the acquisition of the publishing company Harper & Row signified entry into the book industry. In 1990, together with the publishing company William Collins, also acquired in 1989, HarperCollins Publishers, one of the world’s largest English-language publishing houses, was founded. Furthermore, the company maintains a major presence in the music industry by owning the labels Fox Music and Fox Music Publishing. It is additionally active with Fox Interactive Media in the area of Internet content production. In summary, News Corp covers the entire area of content production. With the acquisition of US-American TV stations, News Corp entered a new value-added level, content aggregation. In 1986, the company launched the fourth countrywide broadcasting network in the United States: the Fox Television Network. As a result, numerous cable TV channels in the United States as well as pay TV channels worldwide were added to the company’s service portfolio. The addition of these pay TV channels led the company to another business model level. Today, the company not only offers free TV and pay TV but also offers pay-per-view and video-on-demand services worldwide and therefore is in the position to further utilize and distribute its content internally. At the value-added level of transmission/connection, News Corp was able to establish platforms through own foundations and the acquisition of satellite TV platform providers. The goal of these vertical integration activities was to offer the production and distribution of content without outsourcing.

256

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Integrated Media Conglomerates and Cross-Media

The distribution of TV programs via satellite seemed to be the most appropriate entry strategy at this value-added level. In the target markets of the United States and Europe, already established, financially strong enterprises dominated the traditional transmission channels (cable and terrestrial transmitters). In other markets such as Southeast Asia or India, the development of traditional transmission platforms would have required too much time and investment. The first attempt made in 1983 to develop such a satellite system, namely, Skyband in the United States, failed (Martinson 2001). In 1989, Sky Television was founded in the United Kingdom. The company achieved a viewership of one million within 1 year. Just one year after it was founded, Sky Television merged with the second satellite provider in the British market, British Satellite Broadcasting. The merged British Sky Broadcasting (BSkyB) became one of the most successful pay-TV platforms in the world. In 1993, News Corp acquired the DBS provider, Star TV, which dominated the Asian market. Additional participants are in Australia (Foxtel), Japan (SKY PerfecTV!), the United States (DIRECTV), and Italy (Sky Italia). With the service of Star TV, News Corp is currently the only Western media corporation with a countrywide broadcasting license for all of China. Thus, the goal is to position “Sky” worldwide as the brand name in satellite television. The worldwide activities of News Corp in this sector not only enable it to utilize global economies of scale benefits but also allow the company to develop the first serious alternative to cable. The long-term goal of integration strategies at the value-added level is, therefore, to penetrate all levels of the multimedia value-added chain, so that customers establish a sustainable relationship with the company through integrated and individualized services. Integration at the Business Model Level The basic business models in the media and Internet sector – content, commerce, context, and connection – have already been described. Integration strategies adopted by media and Internet conglomerates can also be interpreted according to these business model classifications. The increase in intra- and intermarket competition intensifies competition in the media and Internet markets. The strategic reaction of companies exists in pursuing development strategies at the business model level. Existing business models are increasingly being supplemented with the characteristics of models not used to date. The nature of these implemented business models is becoming more hybrid and multifunctional. The goals of integration strategies at the business model level are thus based on the establishment of hybrid, multifunctional business models that can generate a so-called multi-revenue stream. The most central component of a company’s business model is the revenue model. It defines how the company generates its revenue to finance its services, on the basis of which services, which actors, and in what amount. In this context, multi-revenue stream refers to the fact that an integrated business model has access to multiple revenue streams. Multifunctionality resulting from a broad product and service spectrum increases the potential of attracting users.

14.3

Integrated Value-Added Structures and Business Models

257

Moreover, through the combination, adaption, and aggregation of basic business models into hybrid model, its economic foundations can be strengthened because old revenue models are optimized and new revenue streams are integrated (Wirtz and Daiser 2017).

14.3.3 Evaluation of Integration Strategies In order to evaluate the integration strategies of the media, communications, and Internet sector, the following section will present the potential advantages and risks of integration. The first advantage of integrated media and Internet conglomerates is the potential to increase sales that result from the extension of the value-added chain. Through windowing of media content and versioning of digital, media content, new consumer groups are targeted according to their preferences and variety of demand. A conglomerate’s sales can be significantly increased the more their offers cater to customers’ specific preferences and the actual multiple utilization. An additional advantage of integrated corporations is the potential for increased sales due to the cross-selling and cross-promotion of media offers under a singular established brand. Moreover, an integrated media and Internet conglomerate is in the position to offer its customers integrated and individualized media service bundles. Such firsthand service offers customers a convenience advantage and, at the same time, increases their switching costs, which generates a multiple customer loyalty toward integrated company. In the context of service bundling, an integrated company can more efficiently skim off a customer’s willingness to pay by executing price bundling strategies. Finally, integration strategies can also produce expansion potential. Through integrating new business sectors, a company can participate in growth potentials and areas with higher margins. Yet despite all these potential advantages, integration also poses significant risks. These are mostly a result of different business cultures, management approaches, or business systems. The merger of Time Inc. and Warner Communications, along with the associated fusion of content and distribution, is considered one of the first strategically reasonable mergers in the media industry. Nevertheless, “more than a decade later, the lack of a unified synergistic culture, a floundering stock price, unimpressive earnings, and continued reliance on debt have stood in the way of this union being termed a success” (Clemente and Greenspan 1998, p. 35). This example shows that even under conditions with high agreement about targets at the strategic level as well as complementary core competencies and business areas, significant integration risks exist at the operative level. Studies on post-merger integration prove the considerable risks of success for mergers. For example, one analysis of the consultancy, A. T. Kearney, revealed a failure rate of approximately 60% in major mergers (MacDonald and Traem 1999). Thereby, cultural differences represent a serious issue. Especially media companies are characterized by pronounced corporate cultures. In the merger of AOL and Time Warner, on the one hand, the rather aggressive corporate culture of the Internet

258

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Integrated Media Conglomerates and Cross-Media

start-up AOL and, on the other hand, the rather traditional and conservatively characterized corporate culture were opposing each other. The chairman of Time Warner addressed this in an interview as follows: “I was surprised by how challenging it would be to consolidate the new media culture of AOL with the old media culture of Time Warner.” Whether the potential advantages of integration can be implemented in the end depends heavily on the degree of harmonization between corporate cultures, management approaches, business operations, and the merging and development of core competencies in all strategically essential business sectors.

14.4

Development Prospects

It is difficult to predict the future development perspectives in the information and communications markets due to the significant complexity and dynamics of the sector. In 1943, Thomas J. Watson, the former chairman of IBM, made the following assertion about the development of the computer market: “I think there is a world market for about five computers.” In the year 1977, Ken Olsen, the former president of DEC, stated in respect to the prospects for the personal computer market: “There is no reason for any individual to have a computer in their home.” Both quotations reveal how troubling prognosis can be even for those directly involved in the market. Due to fundamental changes in competitive structures and the high degree of competitive drive, developments for market players in the media, communications, and information markets cannot be accurately estimated. The media sector has changed dramatically over the past several years, especially due to the establishment of the Internet as a fourth mass medium (in addition to television, radio, and print). The increased spread of broadband Internet will contribute further to the shift within the media markets. Thereby, the sector convergence of TIME-markets will still be very important. For example, Apple, Microsoft, Google, and Sony all confirm how corporations “new to the industry” can become serious competitors for established media companies. Branch convergence and digitalization will likely further propel the trend of integrated media conglomerates. This is mainly due to the fact that integrated media actors can achieve better content applicability within the various forms of media and channels and thus can better realize economies of scale and scope. In the media industry, integration is also gaining more significance from the consumer perspective. The following two essential changes in recipient behavior are particularly important. First, the role of the passive recipient is changing to a more active co-designer role, as suggested by the terms Web 2.0 and user-generated content. In the future, media companies will have to integrate content generated by users into their offers. Impressive examples for this strategic imperative for user integration are YouTube and MySpace. These cases increase the degree of customization in media services. This trend toward individualization and personalization, and thus the paradigm shift from push to pull, is fundamentally significant for the future of media companies.

14.4

Development Prospects

259

The necessity of increased flexibility and openness to innovation in the media industry will become even more pressing, besides the more active recipient role, also due to changes in consumer expectations and behavior. In this context, a major change in user preferences can be observed, especially among the younger generation of media users. The trend is moving toward electronic services such as Internet and online/PC/ console gaming. New-generation users want to interact and co-design to a much higher degree than in the traditional media sector of broadcasting. Overall, there will be significant changes taking place in the media industry during the next several years. These changes will affect all players and require a substantial amount of entrepreneurial creativity and drive. Knowledge Review Questions 1. What are the typical manifestations of cross-media and how do they depend on the media channels? 2. What are the drivers and catalysts of cross-media? Name six different drivers! 3. Name the characteristics of integration strategies! What does “reconfiguration” mean in this context?

Case Studies

15

Case studies are a very important education tool in media management. Against this background, this chapter addresses the role and application of media management within the media markets and discusses specific case studies for different media markets. In doing so, this chapter begins with a comprehensive case study of Google Inc.

15.1

Google/Alphabet Case Study

Google is a worldwide Internet software corporation and market leader in the area of online search and text-based online advertising. Headquartered in Mountain View, California, Google became well known through its self-named search engine Google. Nowadays, the search engine is available in 173 languages and has more than 180 domains. According to Google, their search engine covers three times the amount of information provided by other search engines. Section 15.1.1 highlights Google’s organizational history and development. Section 15.1.2 provides insights into Google’s integrated business model. Section 15.1.3 presents Google’s market environment and its most important competitors. Finally, concluding questions offer a deeper examination of the case study at hand and respective hints for solutions provide suitable guidance.1

15.1.1 Google’s Organizational History and Development In 1998, Lawrence Eduard Page and Sergej Michailowisch Brin founded the corporation Google while attending Stanford University. Initially, they participated in a 1

See also for the following chapter Wirtz (2013c) and Wirtz (2019a).

# The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8_15

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Case Studies

research project about data mining and developed a search engine called BackRub, the precursor of the search engine Google. At this time, BackRub was the only search engine that was capable of analyzing cross-references of a website. Despite receiving recognition from academic society, Page and Brin were not able to find an Internet portal that was willing to use the search engine. Therefore, Page and Brin founded Google Inc. on September 7, 1998. As seed capital, they resorted to 1.1 million USD collected from family and friends. In addition, they received venture capital funding from Andreas von Bechtolsheim, the co-founder of Sun Microsystems. On Google’s day of foundation, the corporation also launched the trial version called Google Beta. A few months later, the soon to be prospering organization moved its five employees into their first office in Palo Alto, Silicon Valley, close to Stanford University and their present headquarter. Already in February 1999, Google had 8 employees and 500,000 search requests per day. In September 1999, Google established a partnership with AOL and Netscape. As the number of search requests per day increased to three million, they finalized the testing phase. After officially finishing the test phase, Google concentrated on broadening its range of services. In June 2001, the Google search engine gained market leadership with one billion pages stored by the Google Index. Already by the end of the year 2001, Google recorded more than three billion page views. In the course of expanding their service chain, Google took over Blogger.com in February 2003. Moreover, in the year 2004, Google offered a free email service called Gmail. As part of its expansion strategy, Google acquired the world’s leading online video portal YouTube for 1.8 billion USD at the end of 2006. One year later, Google bought the company Double Click for 3.1 billion USD. With this acquisition, Google gained access to Double Click’s competency in graphic design of advertisement on websites and to its well-established and well-financed customer base. Ever since its foundation, Google has been expanding its operations and service spectrum continuously. The 4C-Net Business Model typology provides an analytical framework to classify Google’s services. This typology is used for classifying business models on the Internet, comprising the dimensions content (compilation, display, and provision of content on own platforms), commerce (initiation, negotiation, and/or settlement of business transactions), context (classification and systematization of the information that is available on the Internet), and connection (creation of information exchange in networks). Within the area of context, services such as Google Catalogs, Google Image Search, Google Toolbar, Google Book Search, and Google Scholar exist. Likewise, the services Google Mail, Google Talk, and Google Voice are part of the connection segment. Regarding the commerce segment, Google AdWords, Google Checkout, and Google Product Search constitute an important supplement to Google’s services. Lastly, Google Groups, Google News, Google Maps, and Google Earth represent services in the content area. Overarching this typology, there are services that correspond to more than one section like Picasa or YouTube. At the end of 2007, the Open Handset Alliance (OHA) was founded, aiming to develop open standards for mobile devices, especially Android, an open-source

15.1

Google/Alphabet Case Study

263

mobile phone platform. This alliance includes members from various network providers (T-Mobile, Telefonica), software companies (eBay), manufacturers (Samsung, LG), marketing service providers, and companies from the semiconductor industry (Texas Instruments, Broadcom, Nvidia). At the same time, Google expanded its operations in the mobile phone industry and was able to align already existing services with the upcoming mobile segment. Consequently, the Android market offers manifold mobile applications like those from Google but also from many other providers and software developers. The mobile market became increasingly more important for Google’s strategic positioning. Google’s acquisition of Motorola’s segment called Motorola Mobility for 12.5 billion USD in 2011 highlighted the importance of gaining access to the mobile market. This acquisition granted Google access to one of the largest portfolios of patents within the mobile sector, especially to capacities to produce smartphones based on Google’s operating system Android. In the third quarter of 2011, Android dominated the market with a market share of 52.3% and with approximately 180 million devices sold. At this point in time, Google had a broad range of services at its disposal. Nevertheless, changes took place in Google’s top management. In April 2011, Larry Page replaced Eric Schmidt and took over as Google’s CEO, while Eric Schmidt became executive chairman of the board of directors. Because of a simultaneous strategic modification, Google started to reduce its spectrum of services in order to focus on those segments most efficient in terms of costs and benefits. Hence, Google removed 20 services from their offers including, among others, Google Notebooks and Google Desktop. In this respect, Larry Page stated: “We have to make tough decisions about what to focus on.” Since Google’s initial public offering in 2004, it has tremendously grown and developed. Within a few years, Google evolved from a startup company to the largest Internet service provider worldwide. Nowadays, Google employs around 70,000 employees and is market leader in the areas of online search and text-based advertisement. Due to the high name recognition of its identically named search engine, Google has become an established worldwide brand. This development is reflected in Google’s increasing revenue and profit. The increasing diversification of its portfolio eventually led Google to found an umbrella company called Alphabet on October 2, 2015. Now, Alphabet serves as a multisector holding that allows its subsidiaries to act more freely than within one company, which was necessary for Google to stay fast and innovative. In 2018, Google generated a revenue of 113.76 billion USD and achieved a year-on-year increase in revenue of 29%. Figure 15.1 represents the development of Google’s revenue and net profit since the year 2004.

15.1.2 Google’s Integrated Business Model Even though the holding cooperation is called Alphabet, its core brand and most of its Internet-related ventures are keeping the name Google, which is why this case

0.4

2004

3.19

2005

6.14 1.47

2006

3.08

10.61

2007

4.2

16.59

2008

4.29

21.8

2009

6.48

23.64

2012

2013

12.92

59.24

10.78

51.41

Profit

10.25

2011

Revenue

2010

10.25

29.35

37.9

CAGR* 29%

2014

14.44

65.98

2016

21.49

2017

24.98

2018

28.71

113.76

* Compound Annual Growth Rate

2015

16.88

75.04

90.27

110.8

15

Fig. 15.1 Development of Google/Alphabet’s revenue from 2004 to 2018. Data source: GoogleWatchBlog (2019)

0

20

40

60

80

100

120

Revenues in billion USD

264 Case Studies

15.1

Google/Alphabet Case Study

265

study also uses this name, as it focuses on those areas of activity. In the context of e-business models, the classification of Google’s services with the help of the 4C-Net Business Model typology offers insight into the formal structure of the corporation. Although the search engine was previously associated with the context model, its broad service spectrum suggests a highly diversified business structure. Therefore, one may categorize Google’s business model as a hybrid business model, as its service range embraces all four dimension of the 4C-Net Business Model. In order to depict Google’s hybrid business model, a detailed overview of various business model components will be presented. Especially the market-supply (competitors, market structure, and value offering/product and services) and the revenue models (revenue streams and differentiation) serve as the foundation for analyzing the business model at hand. In general, Google strategically aims to provide, organize, and systematize existing information worldwide by means of the Internet. With this, Google formulates a clear mission that is an integral part of its corporate strategy and thus also of the respective strategy model (business model mission, strategic position and development paths, as well as business model value proposition). This way, Google grew to become an integrative Internet player and one of the most important gatekeepers of access to information throughout the Internet in recent years. In this context, the term “gatekeeper” describes the opportunity for the operator of a search engine to influence what information users find and can actually access (see Fig. 15.2). Due to the vast amount of existing information and the recent developments in user behavior, providers increasingly rely on the transparency of the Internet in order to be easily found by all users. Consequently, as one of the largest providers of a search engine, Google drew attention to its growing market power. Google’s value proposition mainly rests upon its gratuitous compilation, organization, and representation of the immense variety of information on the Internet. Importantly, the value proposition remained the same throughout Google’s organizational development and is characterized by a high recognition value and user friendliness. Google achieves a higher customer retention through their complementary service offerings. Private users can make free use of email, digital photo or image management, and text processing programs, and they will probably do so repeatedly. Moreover, the high coverage Google promises with regard to advertising purposes attracts business users. From a resource-based view, Google’s manifold competencies and resources are extensive. One major core asset emerges from Google’s highly specialized technological infrastructure that is characterized by its high amount of redundancy, efficient load balancing and a predominantly software-based system. Another core asset is Google’s corporate brand and simultaneous product brand, which have been manifested through the process of creating a generic trademark. This means it became common to use the term “Google” to search the Internet. One essential competence of the company is its comprehensive contextualizing competence. Notable in this respect is the criteria-specific localization, classification, and systematization of the search engine as well as Google’s extension of its services

User Demand

Traffic Data

Monetization of Traffic Data and Traffic Flows

Gatekeeper

Google

• Context • Content • Commerce • Connection •…

Efficient CRM Supply Side

Channel of Traffic Flows from the Demand Service to the Own Supply Services

Traffic Data

Efficient CRM Demand Side

•…

Google …

• Listing of Business Information • Local Photos, Opening Hours, etc.

Google MyBusiness

Google Wallet • Peer-to-Peer Payments Service • Only available in the US

• Tracking Traffic on Websites • Reporting Detailed Data

Google Analytics

• Customized Market Research • Generating Data for Firms

Google Surveys

• Product Catalog • Paid Listing Service

Google Products / Shopping

Google AdWords • Online Advertising • Major Revenue Stream

Google Supply

(Mainly Paid Services)

15

Fig. 15.2 Google Gatekeeper. Source: Wirtz (2010a, 2019a)

•…

Google …

• Free Mail Service • Call Service / Calendar

Google Mail/Hangouts/Calendar

• Video Plattform • Streaming of Media Content

YouTube

• News • Books/Academia

Google News / Books / Scholar

• Cloud Storage • Browser-Based Office Software

Google Drive / Docs / Translate

Google Maps/Street View/Earth • Local Mapping • Navigation Service

• General Search Engine • 130 Trillion Index Pages

Google Web Search

(Mainly Free Services)

Google as Internet Gatekeeper

266 Case Studies

15.1

Google/Alphabet Case Study

267

when it comes to illustrating context. Particularly after the year 2004, the company expanded its competencies in content- and connection-related areas. This was mainly possible by intensifying business relations and through acquisition activities. Further core competencies of the enterprise are its technological competence, competence at content creation and search, as well as a fully developed competence at promoting advertising efforts. The network model of Google is characterized by a far-reaching cooperation network, as well as an extensive business-to-business and business-to-customer network. The free supply of the Google search engine is particularly important. Google AdSense enables both companies and individuals to add a search box to their own website, giving them a share in profits when other Internet users click on one of the advertisements that appear on the search engine results page. Without an innovative network of business partners and profitable business-tobusiness cooperation, Google would not be as successful and powerful as it is today. Nevertheless, the company has established an extensive network and tremendous user base in the customer area, which especially profited from a digital word-ofmouth effect after the foundation of the company. Users that were happy with the search algorithms personally recommended them to family, friends, and acquaintances. Google’s creation of goods and services follows a clear and linear structure. The first step of creating content is to gather, systematize and classify information in order to save it as results for on-demand inquiries and make them available through the search engine. This content creation process is particularly based on the supply of information from third parties or oneself. In comparison, the connection supply is characterized by a strong interdependency between user interaction and communication management. The company receives most of its input from communities, content suppliers, and news agencies. Therefore, the transmission of information and interaction follows a simple process, i.e., Google checks websites and registered content and either adds them to the index and utilizes them or classifies them as irrelevant and therefore rejects them. Another partial model of Google’s business model is the revenue model. The AdSense partner program generates one of the most important revenue flows, which unlike the AdWords program places context-dependent advertising on an external website. Within this system, the owner of the website receives a certain amount of remuneration when a user clicks on the advertisement. Simultaneously, Google attains more traffic from partner websites. The fees or portion of ad revenues Google pays to such advertising partners that run Google ads or services on their websites are called traffic acquisition costs (TAC). Another fundamental subcomponent of Google’s business model is the market offer model that consists of context, content, and connection offers. The aspects of the company that matter most to industrial customers are the wide-ranging offers of well-developed technical functions and the high number of users. The latter is associated with the great recognition value and the high usage of the search engine.

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The free usage of various online services offered by Google is highly appealing to private customers. However, the foundation of Google’s business model is still its search engine that offers information via the Internet by means of an intuitive search tool. At this point, Page’s and Brin’s PageRank algorithm evaluates the relevance of the website according to the links it incorporates. The introduction of PageRank revolutionized those search engines that evaluated websites according to their search terms in texts and meta tags. Today, Google includes over 200 different evaluation criteria for the ranking of websites. With the recent update of the search algorithm called “mobilefriendly 2,” Google rolled out another ranking signal boost to benefit mobile-friendly sites on mobile search. In terms of the 4C-Net Business Model typology, the context model with the search engine as its core service builds the foundation of Google’s integrated business model. Due to a continuous and innovative revision and extension with specialized search services for images, news, and geographic information, Google is the most frequently used search engine worldwide. Further services within the context segment are, for example, Google Catalogs, Google Images, Google Toolbar, Google Book Search, Google Scholar, Google Reader, Google Blog Search, Google Now, and most recently Google Home. One of the first services besides the search engine was Google Catalogs that offers users the opportunity to look at different print catalogs online. However, Google turned down this service in August 2015. Google Images allows to search for distinct pictures online by means of special search criteria like color, format, or the right of use. Google Toolbar is a toolbar for the web browser that allows the user to quickly access the Google search engine and other Google services without changing to the main page. Figure 15.3 presents Google’s business model. The applications Google Book Search, Google Scholar, and Google Blog Search enable to search the Internet for books, academic publications, or blogs. Google Reader, a web-based feed reader, informs users automatically about new contributions to their favorite homepages. However, Google turned down this service in July 2013. With the takeover of the software producer ITA in 2007, Google expanded its context segment with the analysis of flight information. This feature presents airfares in a comparable way. The user benefits from these various context services in terms of time saving and information procurement. In 2012, Google introduced the service Google Now as an extension of the Google Search App. Google Now is an intelligent personal assistant with voice search and a command feature. In 2016, Google launched its smart speaker Google Home that is able to receive acoustic commands via an integrated microphone and serves the user as personal digital assistant at home. Basically, it transfers the functionalities of the personal assistant Google Now to the home environment and enables the user access to Google services such as Google Play Music, YouTube, or Chromecast via voice commands. Another major sector of the market supply is the content segment that is characterized by the provision, preparation, and aggregation of multimedia content.

Strategy Model

• Interest payments • Profit distribution • etc.

Returns

Financing

Reporting/Payments

Provision

Acceptance of Website

Reporting of Website

Google YouTube

…

Keyword Advertising

Ad Space

…

Google Allo

Hangouts

Connection Gmail or Google Mail

…

Google Translator

Competencies/Resources Model

Placement/ Integration

User interaction

Provision of Content

Content Google Maps

…

Google Shopping

Google News

Google Scholar

Performance

Network effects Virtual word of mouth Cooperation Partner programs

Network Model

• Advertisement • Usage of technologies

Revenue

• Customer input • Exchange

Interaction

• Presentation • Distribution

• AdWords customers • AdSense partners • Lettings •…

Business Customers

Private Customers

Customer Model

ILLUSTRATIVE EXAMPLE Revenue Model

Google/Alphabet Case Study

Fig. 15.3 Google’s business model. Source: Wirtz (2011a, 2019a) and own analyses and estimations

• • • •

Context Google Search Engine (Full-Text Search of Documents and Picture Files within the World Wide Web)

Market Offer Model

• Specialized technological infrastructure (redundancy ability, load balancing, superior software system) • Preparation, systematizing, collection and provision of data, • Strong brand, deonymization • Contextualizing competence • Technological competence • Content creation competence • Competence of promoting advertising efforts

Management of Advertising Partnerships

Platform Communication Services Management

Creation of Own Content

Collection and Selection of Content

On-Demand Provision of prompt results

Storage

Classification

Systematization of Information

Collection of Information

Value Creation Model

Google

Integrated Product/Service Offer

• Organizing and systematizing global presence of information on the Internet and making it accessible to all users

Investors

• News agencies • Content media companies •…

Commercial Content Providers

• Communities • Website operators •…

Private Content Providers

Procurement Model

Finance Model

Customer Relationship Management

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This sector contains services like Google Groups, Google News, Google Maps, Google Earth, Google Sketch Up, Google Text and Tables, iGoogle, Google Merchant Center, and YouTube. Google extended or merged many of the older services in order to offer the user a broader range of services. For example, Google Local was integrated into Google Earth and Google Maps. The first content service was Google Groups. This online service allows users to establish or to search for different groups of interest and to publish own content. Here, the connection aspect is also highly important because the service rests upon the Usenet and therefore offers a foundation for interactive communication. After introducing Google Groups, Google launched a news service called Google News, a platform that automatically creates content in over 35 languages. Google Earth presents a digital globe that uses satellite aerial views and geographical data to create a digital model of the earth. In doings so, it allows users to search for addresses or places and to calculate distances and routes. Moreover, Google Sketch Up is software to construct a three-dimensional model that allows to create pictures and animations. Google Text and Tables is another online service that offers online access to a word processing and table program. The successor to Google Base, Google Merchant Center, allows retailers to deliver product information to Google in order to integrate it into the Google Product Search. The most important content service today is the online video channel YouTube. YouTube enables users to watch, upload, and publish videos. To do so, they can make use of different channels or individual YouTube websites, through which they can use or offer other information besides those videos. The number of companies using this channel for marketing purposes is rapidly increasing. YouTube is the most popular platform for this kind of video material. In 2018, YouTube had over 1.8 billion users worldwide, who altogether uploaded more than 300 hours of video to YouTube every minute (Dogtiev 2019). Recent content offers of Google include Chromecast, a line of digital media players, as well as the virtual reality platform Google Daydream. The services belonging to the connection business model distinguish themselves by allowing to exchange network-based information. In this segment, Google presents itself with services like Blogger, Google Groups, Google Mail, Google Talk, Google Voice, Google Latitude, Google Plus (Google+), Google Drive, Google Hangouts, and most recently with the video chat app Google Duo. The social network Google+, for instance, is the consequent attempt to extend Google’s business model in the connection segment. Launched in September 2011, it counted more than 375 million active members in 2016 (Statistic Brain 2016). Google+ incorporates various old and new connection services and always struggled to compete with the largest social network Facebook. However, after several data incidents, Google+ was shut down in spring 2019. With regard to the initiation, negotiation, and settlement of business transactions of the commerce business model, the most important services Google offers are AdWords and AdSense. These two services will be presented later on in the context of Google’s revenue model. In the commerce segment, Google has rather few

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services to offer. Google’s payment service Google Checkout is primarily used for payment handling in the Android market, whereas its payment service Google Wallet allows users to pay via mobile phone with NFC (near-field communication). Google has been extending this segment by product search engines, product presentation, and price comparisons primarily for its services Google Product Search and Google Shopping. Moreover, Google is starting to compete with other classic online retailers, particularly through its service Google Merchant Center. Recently, Google has also acquired FameBit a leading marketing platform that connects brands to creators for branded content creation. Other services are part of more than one segment at once. For example, the photo community Picasa allows different users to share their photos worldwide and to interact with one another. According to this, Google combines both the content and connection segments in one service. Since 2008, Google has been following business units outside of the 4C-Net (content, commerce, context, and connection). For this purpose, it has developed information technologies like the mobile operating system Android, as well as own mobile consumer electronic devices, like the Google Nexus series and its nextgeneration Google Pixel. Recently, Google has also introduced its augmented reality glasses Google Glass and its virtual reality glasses Google Cardboard. Moreover, it has acquired Nest Labs, a producer of smart appliances for home automation, which now works with the Google Home. Figure 15.4 highlights the development of Google’s business model and service offers. Another central component of Google’s business model is the revenue model through which multiple income streams are introduced and analyzed. The most important revenue streams are advertising revenues generated through integrated advertising solutions and keyword advertising by AdWords. The customer chooses various keywords that describe the product or service advertised, so that these products or services appear in the search results. Furthermore, the client determines the maximum price that one has to pay for every click on the advertisement. Combining the cost per click (CPC) with the quality of the keyword or product provides a basis to assess the advertising and thus the priority with which Google advertises it. Moreover, the customer defines a monthly budget and is able to change some settings regarding the networks or languages. Besides the basic search page (google. com), possible advertising networks are Google Search Network and Google Display Network. The Google Search Network contains websites that have licensed Google’s search function as an independent toolbar. The Google Display Network comprises a large number of different websites that disseminate the display advertising. Nevertheless, considerably high costs in the form of traffic acquisition costs (TAC) emerge. Furthermore, Google has expanded keyword advertising also to other services such as Google Product Search and Google Mail. Besides the classic text display, other forms of multimedia like videos or images are also possible. In addition, location data can be integrated to combine the advertising with services like Google Earth or Google Maps.

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Content

Commerce

1998 2001

Google Groups

2002

Google News

Google AdWords

Froogle Google AdSense

2003 2004

Google Local

Picasa

2005

Google Maps

Google Earth

2006

You Google Google Tube Finance Trends

2007

Google Google Street iGoogle Docs View

2008 2009

Google Health Google Base

2010 2011 2012

Google Analytics Google Apps

Google Checkout

Google Product Search

Google Images

Google Toolbar

Google Search Appliance

Google Directory

Google Desktop

Blogger

Google Books

Google Scholar

GMail Google Orkut SMS

Google Reader

Google Blog Search

Google Talk

Google Notebook

Google Patent Search

Google Google Friend Google Chrome Connect Moderator Google Squared

Google Dashboard

Google TV

Google Goggles Google Wallet

Google Keep

2014

Chromecast

2015

Chromecast audio

2016

Google Daydream

Google SketchUp

Google Translate

Google Places

2013

Google Google Play Shopping

Google Voice

Google Google Wave Latitude

Google Buzz

Google Fiber*

Google+ Google Now

Google SItes

Android

Google Ventures* Nexus Chrome OS

Chromebook Google Google Drive Hangouts

Calico* CapitalG* Google Google Cardboard, Glass (i.E.)

Google Home

FameBit

Project Fi

Nexus Player

Google Google Allo Duo

Google Pixel

Nest Labs*

Google Assistant

2017 2018

Google Catalog Search

Google Calendar

Google Politics & Elections

Business Units Outside the 4C-Net: Information Technology

Connection

Google!

Knol

Google Merchant Centre Google Catalogs

Context

Case Studies

Google One

Active service

Google Discover Discontinued service

Google Pay

Google Lens

* Since 2015 managed by Alphabet

Fig. 15.4 Development of Google’s Hybrid Business Model. Source: Wirtz (2010b, 2019a)

Since the year 2007, Google has also generated considerable revenue from other income streams than advertising, which we will discuss later on. However, Google’s total revenue is mainly composed of advertising revenues that accounted for 85% of Google’s total revenue in 2018. Figure 15.5 shows the development of Google’s revenue.

2004

2005

2006

2008

2009

2010

2011

2012

2013

2014

Advertising Revenues Google Websites

Advertising Revenues Google Network Members' Websites

Licences and other Revenues

2007

Fig. 15.5 Development of Google Alphabet’s revenue. Data source: Alphabet (2019)

0 2003

20

40

60

80

100

120

140

160

Revenues in billion USD

2015

2016

2017

2018

Advertising Revenues 85%

Licensing & other Revenues 15%

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Direct Revenue Generation

TransactionBased

TransactionIndependent

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Indirect Revenue Generation

• Sale of hardware • Transaction charges on the Android apps‘ market: PlayStore

• Cost per click – Keyword advertising

• Royalties, for example, fees for using extended program packages • AdWords activation fee

• YouTube custom brand channel

• Cost per view – YouTube video ads

Fig. 15.6 Google’s revenue structure. Source: Based on Wirtz (2000e, 2019a)

Besides the huge amount of advertising revenues, the second revenue stream originates from royalties for the usage of software, as Google offers various software solutions in the form of fee-based versions with extended usability for professionals. Such programs are, for example, SketchUp Pro, Google Earth Plus, and Google Earth Pro. In this extended version, Google Earth Plus offers the integration of GPS and a program to virtually construct buildings. Moreover, Google sells the server hardware Search Appliance that companies can utilize for their document management and indexation. Google is also active in the mobile market with its smartphones (e.g., Nexus 5X and Nexus 6P) produced by LG and Huawei but only generates comparably low sales revenue in this market. However, according to Google, nexus devices are not primarily intended to drive revenue but are rather an experimental bearer for Google’s innovation for Android (Fortune 2015). Google also receives revenue over the Android market, where developers of fee-based applications earn a transaction fee of 30% on the sales price. According to the highly diversified service spectrum, Google’s revenue streams comprise transaction-based and transaction-independent revenues. Figure 15.6 presents these different forms of revenue, showing that Google has various revenue streams that are differently structured. Nevertheless, one always needs to acknowledge the importance of keyword advertising in this context.

15.1.3 Google’s Market Environment As one of the world’s leading Internet organizations with a broad service range, Google competes with numerous players in different markets. The following section identifies and presents various markets according to their strategic importance for Google. The most essential market for the company is the search engine market. This is not only the company’s origin and core business but also accounts for about 70%

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Google

62.5%

Bing

24.9%

Oath

11.6%

Ask

1.0%

0%

20%

40%

60%

80%

100%

Fig. 15.7 Market share of search engines in the United States in March 2019. Data source: comScore (2019)

(more than 90% including the network) of the revenue streams. A market share of 62.5% makes Google the most frequented search engine in the United States. Figure 15.7 depicts the four largest providers of search engines worldwide. One should also pay attention to the fact that the search engine market is part of the superordinate advertising market. Due to the effective search engine marketing, not only the communication quality is important but also the coverage respectively the number of site views. In this respect, Facebook emerged as one of the most important competitors, gaining more stake particularly in the areas of social advertising and display advertising. Another crucial market is the mobile Internet market in which Google operates as a provider of advertising services and a content provider. Just like in the classic markets, Google positioned itself with the search engine in the mobile segment so that location-dependent search and marketing, as well as services like Google Maps and Google Latitude, gained in importance. The market share of Google’s mobile search engine is even higher than that of the classic search engine, accounting for about 93% of the mobile search market in the United States in April 2019 (Statista 2019b). Consequently, Google occupies a strong position in the mobile market as well. However, due to different proprietary systems, the mobile market is highly competitive in terms of classic online advertising. Apple’s marketing platform iAd serves as an example. iAd is able to integrate advertising messages seamlessly into applications and thus operates in the same way as Google’s system AdMob.

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Moreover, other social networks like Foursquare and Facebook play an important role in the mobile segment and strongly focus on local social advertising offers. With regard to content provision, Apple launched its platform iTunes in 2003, which has quickly become the market leader in this segment and one of Google’s strongest competitors. Thus, iTunes serves as a model company for Google’s Android marketplace that distributes content for the operating system Android. Google further expanded its mobile offers with Google Music, a competitive platform to iTunes, using One Pass as a suitable operating system. Because of its high growth rate and market leadership, Android finds itself with 70.38% market share in mobile devices (mobile phones, smartphones, tablets) clearly ahead of Apple’s iOS with around 28.32% market share (Netmarketshare 2019). Besides these core markets, Google constantly aims to enter other markets and enhance its position in the Internet market. Google’s advancements in e-commerce are especially significant. By aggregating product information, Google is increasingly gaining importance as an intermediary in online retailing. Thus, competition among actors like Amazon, Google, and so on is rising. With regard to Google’s presence via YouTube in the classic and mobile Internet, Google competes, for example, with the content aggregator Hulu.

15.1.4 Case Analyses and Structure of Solutions Case studies have their origin in the so-called Harvard Case Studies and are nowadays a commonly applied and widely accepted scientific method within in the field of business administration and respective teaching. One particular characteristic of the case study analysis is that there is often no unique solution. Instead, one considers a specific problem and searches for an approximately optimal solution. This characteristic is at the same time the criterion to differentiate the case study analysis from normal exercises that are characterized by right and wrong solutions (e.g., in the field of law). This section defines the meaning of a case study and presents a methodological approach for handling and solving case studies. The case study analysis is a heuristic method and thus a method of self-regulated learning for the respective person that deals with the case study and works out conclusions by means of analyses. Within the scope of this strategy of investigation, one examines a certain phenomenon in the respective and real existing context by using one or multiple objects of study, like individuals, groups, and organizations. The persons dealing with the case study should not be bound by particular methods or limited to a single solution method. Looking at a case study from multiple perspectives generates different approaches to solving a problem but at the same time requires a broad spectrum of different approaches and solution methods. The case study analysis enables to achieve a variety of different goals of learning and teaching. However, the primary focus of interest refers to the connection of theory and practice. Here, one can distinguish, on the one hand, between

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approaches that apply theories to practice and, on the other hand, approaches that move from practical thinking and procedures to theories. Given the comprehensive approach to the research context and the inductive procedure of case study research, this approach generally refers to qualitative research. The following three characteristics of a case study clarify this closeness to qualitative research (Merriam 1998): • Context-related: The case study focuses on a group or an individual, a program, a phenomenon, or an event. • Descriptive: The final product or result of the case study contains a detailed and multilayered consideration of the object investigated. • Heuristic: The case study does not test already existing hypotheses but rather generates new insights into the object of study, for instance, conditions, consequences, and causal relationships. Since one should consider every case study individually, specific cases cannot be generalized. However, if underlying conditions or characteristics of the objects of study are similar, one can at least partially transfer them. Consequently, the case study approach is particularly suitable when the objective is to look at complex underexplored phenomena in a broad manner and against the background of their dependence on context. The following illustrates a methodological approach for handling and solving case studies. The procedure for approaching case studies usually comprises six steps that build on each other: (1) analysis of actual situation and SWOT analysis, (2) specification of problem, (3) deduction of strategic courses of action, (4) determination of crucial success factors, (5) decision on strategic alternatives, and (6) deduction of recommendations. The first step should aim to analyze the actual situation. A SWOT analysis considers internal characteristics (e.g., strategy, structure, and resources) of the business but also the external general conditions (e.g., market structure, customer, and supplier potential). The second step of the solution method of case studies involves specifying the respective problem. Potential issues, for instance, can trace back to the procurement, production, or the corporate strategy. Based on this elaboration of the problem, one can derive strategic courses of action in a third step, for instance, strategies of diversification, cooperation, and market entry. The fourth step of the solution method of case studies includes determining or defining crucial success factors, before subsequently deciding on the strategic alternatives in the fifth step. In this connection, one examines the courses of action identified, for instance, for specific advantages and disadvantages or their feasibility. The sixth and final step of this approach involves deducing or giving strategic and/or operational recommendations. Figure 15.8 presents an overview of the solution method of case studies.

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Steps for Solving Case Studies Internal Analysis

1

Analysis of Actual Situation & SWOT Analysis

• • • • •

External Analysis

Strategy Structure Resources & core competencies Strenghts/weaknesses Problems

• • • • • •

Market structure Competitive strategies Customers Suppliers and vendors Regulatory environment Opportunities/risks

Development of Problem Definition

2

Specification of Problem

• Procurement problem • Production problem • Sales problem

Potential Strategic Courses of Action

3

Deduction of Strategic Courses of Action

4

Determination of Crucial Success Factors

5

Decision on Strategic Alternatives

6

Deduction of Recommendations

• Organizational problem • Structural problem • Strategic problem

• Diversification strategy • Cooperation strategy • Internalization strategy

• Growth strategy • Market entry strategy • …

Derivation and Definition of Crucial Success Factors • CSF method

Analysis of Identified Courses of Action • Advantages • Disadvantages • General feasibility

• Financial feasibility • Contribution of problem solution and goal orientation

Recommendation • Strategic recommendations for action • Operational recommendations for implementation and realization

Fig. 15.8 Solution method of case studies. Source: Wirtz (2013b, 2019a)

Analysis of Actual Situation and SWOT Analysis Within the scope of a case study analysis, one can apply the systematics of strategy development to examine the actual situation of a company. An important part of strategy development is analyzing the situation by means of situation analysis (Wirtz 2013a), which comprises analyses of environment, market, competitors, as well as competencies and resources. The competitive analysis and competence-resources analysis merge into an analysis of strengths-weaknesses. This in turn combines with

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an environment analysis and market analysis to form an analysis of opportunities and risks. The following section explains this procedure. Within a situation analysis, one first examines the environment to describe the general conditions under which the respective company acts. In this connection, the sociopolitical, technical, regulatory, and economic environment plays an important role. After the environment analysis, it is necessary to analyze the industry and market in which the respective company operates particularly the market structure and behavior of the demanding actors. In the next step, one should perform a competitive analysis that aims to identify relevant actual and potential competitors and to examine their behavior on the market. Subsequently, one needs to consider the resources of the competitors. Along with this competitive analysis, one should also investigate the company’s own competencies and resources. This competence-resources analysis needs to take place in much more detail than the competitive analysis and distinguishes between core competencies, complementary competencies, and peripheral competencies (Wirtz 2000a). Core competencies are mandatory resources that the company requires in internalized form to provide products and services. Complementary competencies, by contrast, are necessary resources that can also be provided by cooperation partners. Peripheral competencies refer to resources that are not essential and thus may be acquired from the market. Based on the competitive analysis and the competence-resources analysis, one can analyze strength and weaknesses. Here, the aim is to identify advantages and disadvantages over the most important competitors and hence to derive the respective scope of action. The results of this strengths-weaknesses analysis together with those of the environment and market analysis jointly form an opportunities-risks analysis. In this connection, one compares the external situation with the internal situation of the respective company in order to identify development trends of the environment and the markets at an early stage and subsequently, to determine whether these future developments pertain to a strength or weakness of the business. On this basis, one can deduce indications of a potential strategic demand for action and use the results to develop the corporate strategy. Specification of Problem After analyzing the actual situation, one has to specify the respective problem of the case study. This step focuses on identifying all problematic issues of the case study. If, for instance, several problems occur, it is recommended to prioritize them or to form a processing sequence and describe their relationships among each other. When working out the basic problems, one may not make the mistake of identifying symptoms as indicators or consequences of an underlying problem as the actual problem, because otherwise it is not possible to achieve adequate proposals for solution. One needs to summarize the symptoms and investigate the reasons behind in order to reveal the causal main problem. In case there are several central issues, one should consolidate them and bring them in order according to their meaning and importance.

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Deduction of Strategic Courses of Action After analyzing the actual situation and specifying the problem, one needs to derive strategic courses of action. Based on the case study-specific problem, one first develops different alternative solution approaches, the so-called strategic courses of action. The following evaluation of these options takes place under uncertainty since case studies often do not provide complete information and thus require to make assumptions. Examples of strategic courses of action are strategies of market entry, diversification, growth, cooperation, and internalization. After deriving strategic courses of action, one can determine the key success factors of the business. The following section therefore discusses the procedure of identifying crucial success factors. Determination of Crucial Success Factors Crucial success factors (CSF) are a small number of characteristics that significantly influence the success of companies. They differ from business unit to business unit because they are affected by both internal and external conditions. CSF need to have a certain minimum characteristic in order to enable the desired degree of goal attainment. The procedure of determining CSF and their application not only includes identifying the CSF but also measuring the degree of goal attainment, as well as making an ongoing target-performance comparison. Besides creating a strategic frame of reference, the CSF method also involves analyzing own objectives in order to identify the CSF afterwards. In the following, one needs to develop measuring criteria and determine so-called critical thresholds as standards. Subsequently, one can identify the control quantities and capture occurring changes. Having determined the CSF, one needs to decide on the different strategic alternatives, which is described in more detail in the following section. Decision on Strategic Alternatives Within the scope of deciding on the strategic alternatives identified, one should first analyze and assess the degree of fulfillment of the CSF for every strategic course of action. Then, one should examine the congruency between business potentials and market-specific requirements by means of strategic fit analysis (e.g., SWOT analysis). Finally, the criteria of feasibility indicate whether the respective company possess the resources and skills necessary to realize the respective strategic option. The analysis of the individual aspects leads to a so-called strategic evaluation matrix that allows to select the best strategic alternative. Based on this evaluation and selection, one can deduce recommendations for action, which is explained in the following section. Deduction of Recommendations Deriving recommendations involves explicitly verbalizing and presenting the optimal strategic course of action selected with regard to the problem identified earlier. It is then necessary to operationalize the strategic decision and transfer it into specific recommendations for action in order to implement the decision. In this connection,

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one first needs to demonstrate the concrete measures and necessary consequences of the alternative selected, before adjusting operational action by means of operational measures (who, where, what, when). The last step involves planning the financial realization of the strategic option selected. For this purpose, one needs to plan a detailed budget not only to ensure the actual financing after having analyzed the general feasibility but also to show that the costs are justifiable with regard to the expected benefit.

15.1.5 Google Case: Questions and Solutions Question 1 Discuss Google’s initial situation by means of the SWOT analysis with regard to Google’s current financial circumstances. What kind of problem statement can be deduced? Question 2 Based on this analysis, derive strategic opportunities of action and critical success factors for the management of Google. Name present success factors of Google. Question 3 Reflect upon these potential strategic alternatives and choose the dominant one. Question 4 Discuss various opportunities for Google to differentiate itself in the context of revenue optimization. Which recommendation for action would you give Google? This section hints at solutions to the summarizing questions about the Google case study, following a step-by-step procedure. Against the background of Google’s present revenue situation, the SWOT analysis focuses on and presents Google’s current situation. Based on this analysis, a problem statement can be derived. Then, strategic alternatives and essential success factors are established and critically assessed. Subsequently, several opportunities for revenue differentiation and extension of the service range are discussed and evaluated, finally leading to recommendations for actions for Google. Figure 15.9 offers a schematic overview and describes core aspects, tasks, and hints for solutions with regard to the Google case study. Solution to Question 1 Question: Discuss Google’s initial situation by means of the SWOT analysis with regard to Google’s current financial circumstances. What kind of problem statement can be deduced? The SWOT analysis framework contains an internal and external dimension. While the internal dimension comprises the strengths and weakness of a business, the external dimension involves its opportunities and threats. Google’s strengths are

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Key aspects • Google is a successful company that offers a broad range of services

Current situation

Specification of the problem

Deduction of strategic alternatives for action

Illustration of critical success factors

• The main part of Googles revenues is based on advertising (especially search engine advertising)

• The low diversification of revenue streams is a central problem

• Google already uses multiple sources and forms of revenue • Besides advertising, Google generates only low revenue

Tasks SWOT analysis focusing on the present revenue situation

Hints for solution • Focus on the market offer mode and revenue model • Consideration of current market situation

Which alternative revenue streams can be further exploited?

Identification of strategic alternatives of action

• The broad range of services offers various opportunities for action • Google has numerous core competencies that are suitable for the revenue differentiation

Case Studies

Identification of essential success factors

• Analysis of different revenue forms sources • Awareness of most important competitors

• Inclusion of strategy model and resource model

• Google’s core business must not be influenced

Desicion about strategic alternatives

• Google remains unchallenged in its core business but has to diversify its revenue streams in order to diminish potential risks

Deduction of recommendations for action

• Google is already active on distinct future markets • Revenue generations needs to be optimized

Development and explanation of diverse diversification strategies

• Analysis of market and competitive situation • Market-based differentiation

Recommendations for actions and their justification

Fig. 15.9 Key aspects, tasks, and hints for solution in the Google case study. Source: Wirtz (2013c, 2019a)

particularly its dominant position in the online and mobile advertising market including a broad advertising network, as well as its strong position as online and mobile content provider. Further strengths are its very broad range of online services and technological leadership. Among Google’s weaknesses are its missing revenue differentiation and unclear range of services. Moreover, many services have no clear revenue purpose or unexploited revenue potential. Further weaknesses are Google’s varyingly strong positions in different geographic markets and its generally weak position in the social media market. Opportunities for Google lie in the introduction of new or the expansion of existing revenue streams for the current service range or in growing markets. In this connection, promising growing markets are particularly mobile business (e.g., Google Nexus, Google Pixel, Google Duo), Internet of things and automation (e.g., Google Home, acquisition of Nest Labs), augmented and virtual reality (e.g., Google Glass, Google Cardboard), artificial intelligence, machine learning, and big data. A further opportunity for Google is the expansion of their market leadership in online marketing.

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Threats to Google may be its vulnerable revenue monoculture that may pose a high risk through a decrease in advertising revenue (e.g., customer turnover to Facebook), a recession-driven decline or replacement through other search engine providers (e.g., Bing’s increase in market share). Moreover, Google could experience brand dilution through too many unsuccessful services. The combined consideration of the individual aspects of the internal and external dimensions results in four different basic strategies: SO strategies (strengthsopportunities combination), ST strategies (strengths-threats combination), WO strategies (weaknesses-opportunities combination), and WT strategies (weaknesses-threats combination). Figure 15.10 describes the specific elements of the SWOT analysis adapted to the Google case study. Based on the results of the SWOT analysis, the following problem statement can be derived: despite Google’s market leadership in online business, the company has not yet managed to extend its revenue basis through multiple income streams. The unsystematic and unclear extension of Google’s range of services offered through trial and error has not yielded sustainable revenue options. Solution to Question 2 Question: Based on this analysis, derive strategic opportunities of action and critical success factors for the management of Google. Name present success factors of Google. As mentioned earlier, there are four basic strategic opportunities of action according to the SWOT analysis. To begin with, Google can follow SO (strengthsopportunities) strategies, taking advantage of existing opportunities through own strengths. More specifically, it may use the existing service range for revenue differentiation or extend activities in growing markets in order to establish new forms of revenue and extend existing ones. These particularly include mobile business (e.g., Google Nexus, Google Pixel, Google Duo), Internet of things and automation (e.g., Google Home, acquisition of Nest Labs), augmented and virtual reality (e.g., Google Glass, Google Cardboard), artificial intelligence, machine learning, and big data. In addition, Google has also further opportunities through monetizing its broad range of services (especially its content offers). Google can also pursue ST (strengths-threats) strategies, using its own strengths to avert existing threats. In this connection, it can encounter risks by enhancing and extending the current service spectrum. Moreover, Google can utilize its dominant position in the search engine market and its technological leadership to outperform competitors. It may also focus on core markets to safeguard sustainable market positions. Furthermore, Google can follow WO (weaknesses-opportunities) strategies, eliminating own weaknesses to take advantage of opportunities. In this context, Google can encounter its weaknesses by exploiting existing revenue potential by streamlining its range of services and monetizing services with no or low revenue. In addition, Google can extend its market leadership in online marketing through market expansion.

Strong position as online and mobile content provider

Broad advertising network

Very broad range of online services

Technological leadership

•

•

•

•

Varyingly strong positions in different geographic markets

Social media position

•

•

Expansion of market leadership in online marketing

•

WO Strategies (Weaknesses-Opportunities Combination)

SO Strategies (Strengths-Opportunities Combination)

Introduction of new or extension of current revenue streams on growing markets, particularly the social media (Google+), mobile (Android Marketplace, Google Pixel, Google Allo, Google Duo), Internet of things and automation (smart home devices like Google Home, acquisition of Nest Labs), augmented reality (Google Glass), virtual reality (Google Cardboard), artificial intelligence, machine learning and big data markets

•

Brand dilution through too many unsuccessful services

•

WT Strategies (Weaknesses-Threats Combination)

ST Strategies (Strengths-Threats Combination)

Vulnerable revenue monoculture -> high risk through a decrease in advertising revenue (customer turnover to Facebook), recession-driven decline or replacement through other search engine providers (e.g., Bing’s increase in market share)

•

Threats

15

Fig. 15.10 Analysis of Google’s strengths, weaknesses, opportunities, and risks. Source: Wirtz (2013c, 2019a)

Unclear range of services

Numerous services without clear revenue purpose or unexploited revenue opportunities

•

•

Missing revenue differentiation (over 90% of revenue comes from advertising)

•

Weaknesses

Dominant position in the online and mobile advertising market (particularly through search engine advertising)

•

Strengths

Internal Dimensions

External Dimensions

Introduction of new revenue streams for the current service spectrum

•

Opportunities

284 Case Studies

15.1

Google/Alphabet Case Study

285

Finally, Google can engage in WT (weaknesses-threats) strategies, eliminating own weaknesses to be able to face threats. For the purposes of eliminating own weaknesses, Google can abandon those services that generate no or low revenue and refocus its market offer model. In addition, Google should not only define the revenue purpose of all services to extend its revenue basis but also expand its online marketing activities even in weak markets in order to prevent being driven completely out of the market by competitors. Figure 15.11 summarizes the strategic options for Google based on a SWOT analysis. Beyond these strategic opportunities for action, Google has the following core competencies at its disposal, which at the same time are critical success factors of Google: • An essential success factor of Google is its technologically cutting-edge search algorithm that is continuously enhanced. Thus, Google’s technology competence represents one of its key strengths. • For a long time and in contrast to other competitors (e.g., Yahoo), Google’s business model management has focused its core business on its search engine and search engine marketing. Google’s focus competence and business model management competence is another core asset. • Google created a huge network that generates a major amount of revenue today. Google’s ability to manage this diverse portfolio is its networking competence. • The high diffusion and acceptance of Google’s search engine leads to Google’s market leadership. With regard to its brand management, this market position allows Google to maintain a unique and differentiated corporate profile. Google has demonstrated its very strong brand management competence. Solution to Question 3 Question: Reflect upon these potential strategic alternatives and choose the dominant one. Given Google’s dominant position in the online business sector (especially in the advertising market) and its strong position in other markets, the SO strategy seems suitable, as opportunities can be exploited with own strengths. A crucial element of this strategy is revenue differentiation: • Utilization of the existing service spectrum for revenue differentiation • Extension of the mobile, social media, Internet of Things, and big data segments to establish new revenue flows and extend existing ones • Monetization of the broad range of service offers Solution to Question 4 Question: Discuss various opportunities for Google to differentiate itself in the context of revenue optimization. Which recommendation for action would you give Google? Google has a lot of potential for revenue differentiation resulting from various measures that generate revenue. These can be classified according to different revenue categories, comprising direct transaction-based, indirect transaction-based,

Eliminating own weaknesses to take advantage of opportunities • Exploitation of existing revenue potential through streamlining the range of services • Monetization of services with no or low revenue • Extension of market leadership in online marketing through market expansion

• Exploitation of existing revenue potential through streamlining the range of services • Monetization of services with no or low revenue • Extension of market leadership in online marketing through market expansion

• Focus on core markets to safeguard sustainable market positions

• Utilization of dominant position in the search engine market and of technological leadership to outperform competitors

• Enhancement and extension of the current service spectrum

Using own strengths to avert existing threats

Threats

Eliminating own weaknesses to take advantage of opportunities

• Monetization of broad range of services (especially of content services)

• Extension of the mobile business (e.g., Google Nexus, Google Pixel, Google Allo, Google Duo), social media (e.g., Google+), Internet of things and automation business (e.g., Google Home, acquisition of Nest Labs), augmented reality business (e.g., Google Glass), virtual reality business (e.g., Google Cardboard), artificial intelligence, machine learning and big data in order to establish new forms of revenue and to extend existing ones

• Use of existing service range for revenue differentiation

Taking advantage of existing opportunities through own strengths

Opportunities

15

Fig. 15.11 Strategic options for Google based on a SWOT analysis. Source: Wirtz (2013c, 2019a)

Weaknesses

Strengths

Internal Dimensions

External Dimensions

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Google/Alphabet Case Study

287

direct transaction-independent, and indirect transaction-independent revenues. Measures for generating direct transaction-based revenue include software sales, hardware offers for the mobile sector (e.g., smartphones or tablets), as well as extending the hardware offers in the server segment and range of payment service offers. Software sales have a low revenue potential because many products are based on open source and are therefore difficult to realize with the current structure of service offers. In addition, this carries a high risk due to the reduced coverage and negative impact on the core business (advertising). Consequently, software sales are not suitable for revenue differentiation. Hardware offers for the mobile sector show a very high revenue potential, but also a high risk of losing important network partners and risks with regard to competition law. Overall, this measure for revenue generation appears as highly suitable for revenue generation and differentiation. Extending hardware offers in the server segment has a low to medium revenue potential due to the highly competitive market and its special distribution structures. This measure only carries a medium risk due to Google’s high technological competence. Therefore, this measure of revenue generation appears to be moderately suitable for revenue generation and differentiation. Extending the range of payment service offers has a high revenue potential particularly in the mobile area. Although there is strong competition with providers like PayPal, this measure bears a low risk because Google already has an appropriate infrastructure, making it very highly suitable for revenue generation and differentiation. Extending the hardware and software offers in the field of Internet of Things, automation, artificial intelligence, and machine learning has a high revenue potential especially with regard to smart home appliances. There is a low risk due to Google’s technological leadership and moderate competition in the market. As a result, this measure is very highly suitable for revenue generation and differentiation. In addition, extending hardware offers in the field of augmented or virtual reality are characterized by a low to medium revenue potential and a medium risk due to the moderately to highly competitive market environment. Therefore, this measure is only moderately suitable for revenue differentiation. Moreover, measures for generating indirect transaction-independent revenues include commission fees that Google receives in its role as e-commerce intermediary (e.g., Google Product Search, Google Merchant Center, and Google Shopping). Here, Google has a high revenue potential due to its role as a gatekeeper in online shopping, but at the same time a medium to high risk of engaging in competition with current customers. Overall, this measure appears as highly suitable for revenue differentiation. Furthermore, measures for generating direct transaction-independent revenues comprise price differentiation for licenses of premium products or for business customers, as well as fee-based licenses and letting of server capacities (cloud computing). Price differentiation for licenses of premium products have a low to medium revenue potential, as only few services are suitable for this model. Given that it provides an added benefit, there is a relatively low risk, not least because it is

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an approved instrument (see Google Earth Plus). However, in view of the formerly free functions, such price differentiations also carry a high risk of user churn. Altogether, this measure is moderately suitable for revenue differentiation. Price differentiation for licenses for business customers has a medium revenue potential because the model is quite established but not suitable for all services. Similarly, there is a medium risk as it is an established model in online business, making it overall a moderately suitable measure for revenue differentiation. Fee-based licenses have a high revenue potential due to the high number of users. Yet, there is not only a very high risk of end user churn and a certain risk of brand erosion but also a medium risk in the business sector because here it is already partially established (Google Maps API). Accordingly, this measure is less suitable for revenue differentiation. The letting of server capacities (cloud computing) has a very high revenue potential for Google, as necessary structures are already established in the emerging market. While this measure is characterized by a medium to high risk in the private customer segment due to competing offers that are free of charge, it only carries a low risk in the business customer segment and thus is very highly suitable for revenue generation and differentiation. Finally, measures for generating indirect transaction-independent revenues particularly refer to the extension of revenues from data mining and big data analysis (selling user data). Here, Google has a high revenue potential due to its broad portfolio of diverse user data. However, this is also associated with a high risk due to problems of acceptance among users and potential user churn, thus negatively influencing Google’s core business. In addition, this also carries legal risks and therefore appears to be only moderately suitable for revenue differentiation. Figure 15.12 summarizes various measures of revenue generation and evaluates them in terms of their revenue potential and risk. Due to the great differentiation, not all kinds of advertising revenues are considered.

15.2

Market-Specific Case Studies

This section deals with eight market-specific case studies: Newspaper and magazine management (Craigslist), book management (Knopf Doubleday Publishing), movie management (Fox Filmed Entertainment), TV management (Hulu), radio management (Last.fm), music management (iTunes), video and computer game management (Wii), and international management (News Corporation).

15.2.1 Craigslist Case Study Craigslist established itself as the worldwide largest free classified advertisement website. Against the background of the culture of predominantly free online advertisements and the strong migration of classified advertisement markets from traditional print media to cheaper, more flexible online portals, Craigslist, as a

15.2

Market-Specific Case Studies Measures for revenue generation

Revenue potential

Risk

Low potential because a lot of products are based on open source and therefore difficult to realize with the current structure of service offers

High risk due to reduced coverage and negative impact on core business (advertising market)

Hardware offers for the mobile sector (smartphones, tablets, etc.)

Very high potential (see Apple)

High risk of losing important network partners, risks with regard to competition law

Extension of the hardware offers in the server segment

Low to medium potential due to highly competitive market and its special distribution structures

Medium risk due to high technology competence

Extension of the payment service range

High potential, especially in the mobile sector

Low due to existing infrastructure, but strong competition with other providers (e.g., PayPal)

Extension of hardware and software offers in the field of Internet of things, automation, artificial intelligence and machine learning

High potential, especially with regard to smart home appliances

Low due to technological leadership and moderate competition

Extension of hardware offers in the field of augmented or virtual reality (e.g., wearables)

Low to medium potential

Medium risk due to moderate to high competition

Commission fees as ecommerce intermediary (e.g., through Google Product Search, Google Merchant Center, and Google Shopping)

High potential due to Google’s role as gatekeeper in online shopping

Medium to high risk due to competition with current customers

Price differentiation for licenses (premium products)

Low to medium potential because only few services are suitable for this model

Relatively low risk as long as there is a recognizable added benefit, approved instrument (see Google Earth Plus), high risk of user churn in view of formerly free functions

Price differentiation for licenses (charged for business customers)

Medium potential because the model is quite established, but not suitable for all services

Medium risk because it is an established model in online business

License fees

High potential due to high number of users

Very high risk of end user churn, risk of brand erosion, medium risk in the business sector because here it is already partially established (Google Maps API)

Letting of server capacities (cloud computing)

Very high potential because necessary structures are already established in the emerging market

Medium to high risk in the private customer segment, low risk in the business customer segment

Extension of revenues from data mining and big data (sale of user data)

High potential due to Google’s broad portfolio of diverse user data

High risk due to problems of acceptance among users, resulting in user churn (impact on core business) and legal risks

Direct transaction-independent

Indirect transactiondependent

Direct transaction-dependent

Software sales

Indirect transactionindependent

289

Not suitable

Less suitable

Moderately suitable

Highly suitable

Rating

Very highly suitable

Fig. 15.12 Opportunities for differentiation with regard to revenue generation. Source: Wirtz (2013c, 2019a)

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pioneer of this trend, poses a major threat to traditional newspaper publishers. Craigslist is a central online marketplace on which city-relevant classified advertisements can be viewed and placed.2 In addition, it is possible to exchange opinions about different topics in forums. Craigslist does not supply offers on a national level but rather concentrates on local offers. Originally, Craigslist was created from an email distributor of the IT specialist, Craig Newmark in 1995. With the help of the distribution list, Newmark originally intended to tell friends and co-workers about interesting events in San Francisco. Quickly an Internet forum developed from this which also offered other categories besides events. In 2000, after Newmark hired the first co-workers and established the Internet forum as a company, the portal expanded to further cities. Today the offer of the portal is available for more than 700 cities, all over the world. Craigslist is financed by revenues from job offers as well as real estate advertisements, which, however, are only paid in a few cities, such as Chicago, Boston, or San Francisco. The costs of these classified advertisements, however, are far below the usual market prices and vary between 25 USD and 75 USD. In comparison, one must pay at least 500 USD for a job advertisement on the online platform Monster. In addition, Craigslist offers unlimited text for the respective advertisements. The annual turnover is not released by the company; however, it is estimated to 381 million USD (Business Wire 2016). What began rather as a private commitment developed over the years into one of the most visited Internet sites in the United States. In the Alexa ranking, Craigslist is ranked 19th among the most visited websites in America and 112th internationally (Alexa 2019). According to its own claims, the company registered 50 billion visits per month in 2018. With more than 60 million users per month solely from the United States, as well as 100 million new classified advertisements being placed each month, Craigslist can be called the most popular classified advertisement portal worldwide (Craigslist 2018). As one of the most successful Internet companies and largest online classified advertisement market in the world, Craigslist is often also called a newspaper advertisement killer. Contrary to the advertisement in newspapers, which is connected to costs, the user can advertise free of charge on the Craigslist platform, and the circle of potential customers is many times larger. A further important advantage of online classified advertisements is that they offer a higher transparency and comparability of the offers, due to individual search and finder functions. Therefore, the newspaper publishing houses perceive online classified advertisements as a substantial threat to one of their most important sources of turnover. The dynamics of this development are shown in Fig. 15.13. The newspaper publishing houses already have to fight a large migration of the revenues in column markets today. This migration is even strengthened by the online

2

See also for the following chapter Wirtz (2011b) and Wirtz (2019b).

15.2

Market-Specific Case Studies

Free advertising portal „Craigslist“

+

291

Increase of recipients and advertisements

+

Achieving the critical mass of recipients and advertisement objects

+

Migration of recipients and advertisers concerning providers liable to pay costs

+

+

Increase in demand

Fig. 15.13 Development structure of Craigslist in the area of online advertisements. Source: Wirtz (2011c, 2019b)

classified advertisement competition. The branch service Classified Intelligence Report showed in a study that Craigslist causes losses to the newspaper publishing houses of 50–65 million USD per annum in the periphery of San Francisco. These losses contributed to the collapse of the column markets in the San Francisco Bay Area. The success of the free competition makes clear that, in order to survive, the weakened newspaper publishing house market must commit itself to new business models in the future. Figure 15.14 shows an overview of the strategic adjustment of Craigslist.

15.2.2 Knopf Doubleday Publishing Case Study The traditional publishing company Doubleday was acquired by the Bertelsmann AG in 1986 and integrated into the proprietary company Random House in 1998. With a turnover of around 3.78 billion USD in 2017, Random House is the largest Anglophone publishing group in the world (Bertelsmann SE & Co. KGaA 2018). In the year 2009, Doubleday was part of the merger with the Knopf Publishing Group. The resulting publishing company Knopf Doubleday Publishing mainly focuses on

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Aspects

Strategy

Business model

• Online classified advertisement platform, mainly non-profit portal • Cost leadership in the online area of the job and real estate advertising segment • User-generated content strategy • No self-generated content, all advertisements are user-generated content • Transaction-based direct revenue generation (e.g. revenues from feebased job and real estate advertisements in conurbations)

Range of services

• Free online classified advertising with the exception of fee-based job and real estate advertisements • Making forum places available • Events calendar • Best-of-Craigslist (selection of the best postings)

Success factors

• High traffic volume on the platform • First mover and therefore high level of awareness as a community/ classified advertising website (mainly high popularity in the United States, the European market, however, is slowly being developed) • Continuous extension of the business model in new geographical areas • Altruistic concept

Fig. 15.14 Strategic alignment of Craigslist. Source: Wirtz (2009, 2019b)

the fiction market and has a number of star authors under contract, for example, Dan Brown and John Grisham.3 In this context, the publishing program includes both hardcover and paperback publications in order to cover various market and consumer segments. With a timestaggered release strategy, the maximum exploitation of the consumer’s surplus can be guaranteed. For quality-conscious customers, high-quality hardcover publications are offered, while price-conscious customers can wait for the later release of less expensive editions. In addition to print editions, ebooks are also being marketed for different platforms. Ebooks are of increasing relevance for Knopf Doubleday Publishing. For example, the ebook edition of Dan Brown’s “The Lost Symbol” sold better on Amazon than the printed version on its release date in the United States. Another source of income is the allocation of TV, movie, and performance licenses. In this way, the content of bestsellers can undergo cross-media marketing. In the recent past, considerable revenue was especially generated by the content of the “Da Vinci Code” series by Dan Brown and the “Millennium Trilogy” by Stieg Larsson. The core competencies of Knopf Doubleday especially include the longterm contractual signing of authors, retail and audience communication, as well as a 3

See also for the following chapter Wirtz (2011b) and Wirtz (2019b).

15.2

Market-Specific Case Studies

293

Aspects

Strategy

Business model

Range of services

Success factors

• • • •

Combination of focusing on quality and costs for different target groups Creating star authors Long-term commitment of established authors Use of Web 2.0 technologies to realize an active integration of the customers into the communication measures

• Content aspect: collection, selection, systematization, compiling (packaging) and provision of entertainment texts • Staggered revenue model systematization

• • • •

Wide range of fiction eBooks as an alternative for classic print products Licensing Search and research possibilities online

• Historical publishing brand • Long-term experience & know-how in the marketing of books • Long-term competencies and experiences in the communication with recipients

Fig. 15.15 Strategic alignment of Knopf Doubleday Publishing. Source: Wirtz (2011c, 2019b)

sound knowledge of market understanding. In this context, the communication activities are particularly important, as will be demonstrated in the following two examples. Knopf Doubleday Publishing throws events with the authors and uses personalized copies of their books to attract and bind readers. This form of customer communication strengthens the impression of authors as a family brand and can be used as an instrument to influence trade partners. Book tour dates are chosen in selected bookstores that can hence generate a high number of customers due to the author’s star status. To connect with the audience, Knopf Doubleday Publishing carries out Web 2.0 activities that are directly related to the publishing program. The stimulation of customer interactions with the content of the publisher is not only meant to bind customers but also to generate attention in the social networks. The Doubleday brand is used as a targeted instrument to win over and to bind authors. Therewith, the procurement components of the business model in relation to successful content are sustainably strengthened. Furthermore, the image and degree of familiarity of the signed author serve as differentiating features and as a brand in the recipient market. This double-sided branding policy is key to the success of Knopf Doubleday Publishing in the book industry. Figure 15.15 illustrates the strategic alignment of Knopf Doubleday Publishing.

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15.2.3 Fox Filmed Entertainment: The Blockbuster “Avatar” Case Study The most important companies in the movie industry worldwide, both for production and distribution, are traditionally the US-American major studios. The largest US-American major studios in past years, according to revenue and market share, are 20th Century Fox, Warner Bros. Pictures, Paramount Pictures, Walt Disney Pictures, and Universal Studios. The following section will use the example of 20th Century Fox to better illustrate the strategic approaches of these major studios.4 The movie “Avatar,” produced by 20th Century Fox, was not only the most successful movie in studio history but also the most successful movie of all time. Therefore, the main goals of movie management and the success factors of modern blockbuster productions will be illustrated by the example of “Avatar.” The US-American company 20th Century Fox was founded in 1943 through the merger of the Fox Movie Corporation and Twentieth Century Pictures in Los Angeles, California. This is also where the company’s headquarters are still located today. Following financial difficulties in the early 1960s, 20th Century Fox achieved a comeback in the 1960s and 1970s with popular hits (e.g., “The Sound of Music,” “Planet of the Apes”) and highly profitable productions (specifically “Star Wars”). In 1985, Australian media mogul Rupert Murdoch took over, restructured the company, and incorporated it into the Movieed Entertainment division of his media company, News Corporation. In 1994, the subsidiary, Fox Searchlight Pictures, was founded for the production/co-production and distribution of international and independent movies (Hoover’s Inc. 2013). The core brand 20th Century Fox still focuses exclusively on the creation of its own and other US-American productions. The production and marketing of movies with mass appeal (blockbusters) constitutes the central pillar of the business strategy and the most important revenue source. Therefore, 20th Century Fox follows a blockbuster strategy. However, from the perspective of the superior Fox Filmed Entertainment, it is more of a “tent pole strategy,” as blockbusters with high expected returns contribute to the financing of movies made by Fox Searchlight Pictures. The production of cost-intensive blockbusters puts high demands on a studio’s strategic project planning. Extensive market research on both the preferences of the relevant target group as well as on planned competing productions is extremely important. Moreover, the availability of modern technological possibilities is also crucial in the production of a blockbuster. In the past years, 20th Century Fox has proven a high level of competence in the production, distribution, and marketing of blockbusters such as “The Wolverine,” “Independence Day: Resurgence,” “War for the Planet of the Apes,” and “Kingsman: The Golden Circle.” In turn, the company is currently one of the major US-American movie studios. Its revenue has reached 1.3 billion USD, with a market share of around 12%

4

See also for the following chapter Wirtz (2011b) and Wirtz (2019b).

15.2

Market-Specific Case Studies

295

(Tartaglione 2018). One of the movies with the highest box-office earnings is the movie “Avatar.” From the time of its world premiere on December 17 and 18, 2009, up to March 31, 2010, the blockbuster “Avatar” brought in over 2.7 billion USD at the box office. Based on this, “Avatar” is the most successful movie of all time. However, this box-office figure was generated not only by the number of attendance (people who watched the movie in movie theaters) but also through increased movie ticket prices for 3D screenings. Within the framework of an extensive movie project like “Avatar,” numerous management tasks need to be carried out in addition to detailed strategic planning. These include the procurement of technical know-how and creative staff, as well as complex undertakings in movie production and marketing. “Avatar” set new benchmarks especially in these two subsegments of movie management which will be explored in the following section. Furthermore, the section will also quickly sketch utilization possibilities and additional types of revenue generation in the context of the movie, as well as analyze the relevance for the entire movie industry. The movie “Avatar” is complex at all levels of the production process. With an investment of around 237 million USD (industry experts have made claims over 300 million USD) strictly in production costs, the blockbuster also counts as one of the most expensive movies of all time (Reuters 2010). The preproduction phase goes back to 1995, the year in which the director, James Cameron, created the first draft of the screenplay. Preparations were intensified in 2006, following the completion of the final screenplay and the availability of the necessary technological means. The actual production and postproduction phases cannot be clearly differentiated in the case of “Avatar” (as is the case with most new blockbusters making extensive use of special effects). Because “Avatar” is a hybrid of real movie and computer animation, the special effects no longer play a secondary role but are rather equal to the classic movie productions featuring actors. The most important unique feature of the blockbuster “Avatar” is the digital 3D technology used. In order for the movie to materialize, technical innovations in both camera capability and animation were necessary. The stereoscopic camera system specifically developed for “Avatar” enabled the three-dimensional movieing of real scenes. Through motion-capture processes, characters could be rendered with photorealistic animation. Animated scenes could also be adapted with realistic camera movements through a virtual camera system. However, the classic postproduction activities such as cutting/editing and the inclusion of the movie credits remained the same. With around 150 million USD, “Avatar” is the movie with the largest marketing expenditure in the movie history. Strategies carried out within the communication policy played a major role, as no blockbuster had ever been advertised as intensively before. In addition to TV commercials, trailers, and printed ads, the advertising campaign also included a strong focus on the Internet. Besides the extensive homepage that compromised many interactive elements, “Avatar” also had its own YouTube channel with a wide selection of video footage (see Fig. 15.16). Moreover, intensively used community platforms such as Facebook were especially used to target specific groups. These interactive online communication options

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Avatar movie logo

Linking to film andsocial media websites

Subscription option Oo the channel

Channel suggestions from Youtube

Additional videos (e.g. trailer, making-of, interviews)

Fig. 15.16 YouTube channel for the movie “Avatar.” Source: YouTube (2018), Wirtz (2019b)

support and simplify the transfer of information through word-of-mouth. The success of such online communication activities is reflected by the exceptional success of the movie at the box office. With around 77 million USD, “Avatar” achieved merely the average box-office revenue for a blockbuster on the opening weekend. However, the usual collapse after the opening weekend did not occur and the number of viewers remained consistently high over a long period of time, reaching its highest box-office revenue 9 weeks after its opening weekend. In addition to production and marketing, Fox Filmed Entertainment also tends to distribution, as is common for a major studio. The company follows the usual windowing strategy for a blockbuster movie. The distribution channels (movie theater, DVD, pay TV, TV) were all used according to the general time delay. In April 2010, the “Avatar” DVD/Blu-ray discs were released and were just as much as successful as the screenings. The revenue model of Fox Filmed Entertainment focuses, to a large extent, on the utilization of rights of the movies produced. In the case of “Avatar,” a cross-media utilization strategy was followed. In addition to the main utilizations via movie theaters and DVD/Blu-ray (in the future also TV), rights for merchandising and a computer game were also sold, among others. Because the computer game was published 2 weeks prior to the release of the movie, revenue could be generated not

15.2

Market-Specific Case Studies

297

Aspects

Strategy

Business model

Range of services

Success factors

• Blockbusters as “tent pole strategy“ • Vertical integration via central value-added steps • International marketing • • • • •

Own production and co-production Trade of rights and licenses Film distribution Advertising space offers Film utilization

• • • •

Blockbuster production (20th Century Fox) Production of independent films and foreign films (Fox Searchlight) Rental and trade of rights Utilization within the affiliated group of the News Corporation (e.g. Fox Television)

• • • • •

Competencies in production and marketing of blockbusters Access to creative resources Focusing on the respective fields of business Covering important parts of the value chain Target group specific productions

Fig. 15.17 Strategic orientation of Fox Filmed Entertainment. Source: Wirtz (2011c, 2019b)

only through the sale of rights to the publisher Ubisoft but also through the advertising effects for the main product, namely, the movie itself. Existing utilization options for “Avatar” were further expanded through numerous product variations. Such product variation can be mainly achieved through movie versioning. As usual, DVD and Blu-ray discs were released featuring different versions. However, in the case of “Avatar,” even the movie theater version was varied. Both 3D and 2D versions were offered to movie theaters in order to cater to theaters lacking 3D projection technologies. As a result of the major success of the movie “Avatar,” it now counts as the main reference for digital three-dimensional blockbusters. Figure 15.17 shows an overview of the strategic orientation of Fox Filmed Entertainment, the production company of the movie Avatar. Both the advertising and the information sources independent from the production company, such as awards, movie reviews, and particularly word-of-mouth, contributed to the communication success of “Avatar.” It can be concluded that the creation, production, and marketing of future blockbusters in a similar genre will use Avatar for orientation. Two sequels are already being planned. Avatar 2 is scheduled to appear in December 2020.

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15.2.4 Hulu Case Study Classical media enterprises are involved in the high-growth Internet TV through the online video portal Hulu. Within the scope of this development, particularly the demand for multimedia contents has risen steadily. In 2010, the Internet replaced television for the first time as a main source of information within the below 30 age group (Marketingcharts 2010). In the same year, 84% of all US Internet users already viewed videos, especially through the big video portals of Google (YouTube), Yahoo!, or Microsoft.5 News Corporation (FOX) and NBC Universal (today a joint venture of Comcast and GE) announced Hulu for the first time in March 2007. The name can be derived from two Mandarin terms with the meanings “holder of precious things” and “interactive recording,” both terms, which should represent the core competencies of the company. Jason Kilar, a former Amazon executive, became CEO of Hulu in June 2007. After a closed (not public) beta test, the platform became accessible to the public a year later in March 2008. A costly marketing campaign on classical television followed the launch of the platform. The Disney group acquired shares in Hulu and joined the Hulu cooperation as the third major partner (in particular with the Network ABC) in April 2009 and thus further advanced the content basis of the service considerably. Today Hulu is one of the biggest video content providers on the Internet. The platform distinguishes itself in particular through a wide portfolio. Contents of nearly all important participants in the US television market, for example, FOX, NBC Universal, ABC, Lionsgate, MGM, National Geographic, Paramount, A&E Television Networks, PBS, or the Warner Bros. Television Group are to be found on the platform Hulu (Hulu 2011b). Hulu is usable via PC and TV, as well as on mobile end devices like smartphones or tablet PCs. Technically, the streaming tool flash is being used. The business model of Hulu is clearly aimed at the provision and aggregation of content (above all classical TV content) on the Internet (Wirtz and Lihotzky 2003). Hence, Hulu in particular is suited as an example of the reaction of the TV sector to the latest market developments and changes in the recipients’ behavior. In addition, Hulu impressively illustrates the convergence in the media sector. Classical TV, which distinguishes itself above all by professionally produced contents, at this point melts together with the interactive and individualizable Internet. For the users the added value arises from being able to retrieve high-quality content according to their own demands. Hence, the available content is to be seen as a key asset of the platform. At the beginning of the platform, Hulu owned 50 content providers. In September 2008, around half a year after the launch, this number had already grown to 100 content providers. Today more than 500 suppliers provide contents through Hulu (Hulu

5

See also for the following chapter Wirtz (2011b) and Wirtz (2017).

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Netflix

89.5

Hulu

86.6

Amazon Prime

85.0

YouTube TV

80.7

HBO Now

71.8

0

20

40

60

80

100

CX Score* *Customer Experience (CX) (scale: 0 „negative“ to 100 „positive“)

Fig. 15.18 Customer experience score for subscription of video-on-demand services. Data source: UserTesting Inc. (2018)

2014). Hulu provides contents through numerous other platforms, e.g., AOL, iMDB, MSN, Facebook, or Yahoo!. At the beginning, the basic service of Hulu was free of charge and required no registration on the part of the user. Hence, the platform generated revenue primarily (up to the launch of Hulu Plus in November, 2010 even exclusively) in the advertising market, intensively using the interactivity of the Internet. Since the year 2016 no free service has been available. There is currently a choice of three service options. The advertising-based basic offer (Hulu) costs 5.99 USD per month, with the first month being free. For 11.99 USD per month, you get at Hulu (No Ads) almost the entire offer without advertising, except for a few exclusive shows that contain advertising. The biggest offer is Hulu+ Live TV. In addition to the titles available in the library, you get access to more than 60 channels live and on-demand. This offer can be booked for 44.99 USD per month (Hulu 2019). Figure 15.18 depicts the success of the revenue model of Hulu. Today Hulu is the by far leading video site in the United States, measured in customer experience score (CX score) on a scale of 0 “negative” to 100 “positive.” Participants had to answer question after they completed tasks using each subscription video on-demand.

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Aspects

Strategy

Business model

Range of services

Success factors

• Integration and convergence strategy • Legal content • High quality online video experience • Content aggregation, allocation and syndication • Revenue model: generate revenue through subscription fees from recipients

• Professionally produced content from over 400 content providers • Clear and easy-to-use web design • High advertising effectiveness through interactive features (e.g. individualization) • Legal content • Strong partnerships with the most important content producers • Strong media and internet competencies

Fig. 15.19 Strategic alignment of Hulu. Source: Wirtz (2011b, 2017)

Hulu is currently only available in the United States (or for users with an US IP address). Although the company pursues a global strategy, the internationalization is difficult on account of numerous country-specific rules and market entry barriers (Hulu 2011b). However, Hulu has been one of the most successful e-businesses in the past years, which can be proven with awards such as “homepage of the year” of the Associated Press in 2008 or the third place in the Fast Company’s “most innovative companies” ranking of 2009 (Hulu 2011a). Figure 15.19 shows an overview of the strategic alignment of the video-platform Hulu.

15.2.5 Last.fm Case Study Last.fm is a personalized online radio station which, based on the music tastes of the respective users, generates their favorite music, new music, contact to other music fans, and concert information for the user. On the one hand, the service is understood as a radio and, on the other hand, as a social network of music aficionados which is being continuously expanded. Last.fm already belongs to one of the largest and most successful Web 2.0 communities in the European region.6 Last.fm was founded in 2002 as an Internet radio station and music community site, merged in 2005 with the Internet-based network service Audioscrobbler, and 6

See also for the following chapter Wirtz (2011b) and Wirtz (2019b).

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was sold on May 30, 2007, for 280 million USD to the American enterprise CBS Corporation (Havenstein 2007). The internationality is reflected in the worldwide availability, because the services of Last.fm can be accessed in 12 languages, including English, French, Spanish, Italian, and German. Last.fm is financed through website-based advertisements, paid music downloads, and contributions from subscribers. According to Last.fm, it is the world’s largest music community on the web and offers its users an almost unlimited selection of music titles, primarily through cooperation with the Internet services Spotify and YouTube. The increased demand for Internet radio with social software can be traced back to the changes in user preferences. Internet radio and the music portals strive to replace the mass audience-oriented and limited playlists of conventional radio stations with their program and thus emphasize individualized services tuned to the individual user. In this process, the user or listener is understood as the program director. On the basis of each individual user’s listening habits, a respective music profile is created with special software. From this perspective, the software learns from the users which playlist fits to which type of listener. Last.fm can therefore be understood as a radio that offers every listener a music offer tailored to their needs. The personalization can be further developed by the user through setting up a user profile in which special preferences can be refined. The software gets to know the user quite personally, figuratively speaking, and can thus elaborate on the user’s wishes more precisely. Moreover, the function of “musical neighbors” is integrated into the user profile. Musical neighbors are understood as persons with a similar taste in music. Thus, an interaction process can be accessed at the users’ discretion that goes above and beyond the mere personalized Internet radio and generates a social network. Last.fm continually works on expanding its services. In this process, the provider emphasizes the participation or inclusion of its users. Already since 2003, Last.fm had access to open APIs (application programming interfaces), which allow any provider to write their own programs and integrate their respective service into their offer. As an expansion of its services, Last.fm is emphasizing mobile applications and game consoles for the future. In the meantime, subscribers can transfer their personal music profile to almost all web platforms and end devices and thus use it anywhere. In summary, Last.fm represents an interesting alternative to mainstream radio. By responding individually to the user’s needs, Last.fm can be understood as a radio in personalized form. In April 2014, Last.fm completely shuts down its own radio streaming service for its subscribers and has ever since concentrated primarily on the compilation and provision of customer-specific music and audio media (Trenholm 2014). Through cooperations with providers such as YouTube and Spotify, Last.fm now serves the growing market of on-demand services with its business model. An overview of the strategic orientation of Last.fm is shown in Fig. 15.20.

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Case Studies

Aspects

Strategy

Business model

Range of services

Success factors

• Individualized social web portal • Personalized music and music video portal • Differentiated segment • Leadership in quality • Hybrid business model • Content aspect: collection, selection, systematization, compilation (packaging) and procurement of music, videos and concert information on an own platform • Community aspect: creating the possibility to exchange information in the field of audiovisual entertainment via social web applications • Commerce aspect: initiation, negotiation and handling of transactions through fee-based subscriptions and redirection to other portals trading with fee-based music downloads and CD sales • Transaction-independent direct (e.g. subscription revenue) and indirect revenue (e.g. revenue from transaction arrangements for third party companies) • • • • •

Access to all artists available at Spotify/Youtube Free and chargeable MP3 downloads Extensive music video offer Event finder Large user community

• Cooperation and alliance strategy • Individualized service offering according to personal needs and preferences in the field of audiovisual entertainment • Connecting music offer and community offer

Fig. 15.20 Strategic orientation of Last.fm. Source: Wirtz (2009, 2019b)

15.2.6 iTunes Case Study The free computer program iTunes from Apple is one of the most popular programs for the playback, organization, and purchase of music, movies, and video games. Especially the integrated iTunes store, in which an audiovisual assortment of downloads is available, mostly subject to charge but to some extent free of charge, is one of the largest online media shops worldwide.7 In its original form, iTunes primarily served to facilitate the import, maintenance, and playback of music. The iTunes software was gradually expanded into an extensive online store. Apple is also one of the pioneers in copyright management for the iTunes platform and has demonstrated its technical expertise by realizing an easy-to-handle transfer of media files to the portable player.

7

See also for the following chapter Wirtz (2011b) and Wirtz (2019b).

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Apple accomplished an integration of value proposition innovation and value creation innovation with its music software iTunes. Apple created a new value proposition with iTunes by allowing users to legally download a wide range of music. Especially in combination with the hardware offered by Apple (iPod, iPhone, iPad), this means a unique value proposition. In addition, Apple changed the value chain in the music market by establishing the Internet as a direct distribution channel for digital music. Today, Apple iTunes is one of the world’s largest and best-selling music platforms. With the introduction of the iPhone, the iTunes store was expanded to include apps and the App Store. Apple’s App Store offers the option of downloading application programs (apps) to mobile devices for free or for a small fee. The application software is marketed directly to the customer in the context of mobile distribution, with Apple acting as an intermediary between the end customer and the software manufacturer. The App Store can be accessed either stationary via a PC using the iTunes software or mobile via the iPhone/iPad. If the stationary version is used and an app is purchased, a bidirectional synchronization process is automatically started within the framework of mobile distribution, transferring the purchased software to the mobile device without further user interaction. The combination of iPhone/iPad and direct app download enables targeted mobile marketing and ensures considerable success. The system was quickly copied by Apple’s competitors Google (Play Store) and Microsoft (Microsoft Store). With its App Store and iTunes as an integrated offer in the mobile business area, Apple has created a strategic alignment that binds customers in the long term and enables high returns. Moreover, with the iPhone, Apple has succeeded in launching a technologically advanced smartphone series that still leads the market in terms of ease of use, mobile browsing, as well as the display of photos, videos, and streams. A further competitive advantage is created by the App Store platform, which serves third-party providers as a marketplace and enables them to offer additional functionalities as downloads. In this context, the price for the respective app is set by the third-party providers and Apple receives a 30% commission on every unit sold. Customers can rate the apps they have purchased and thus contribute to the corresponding rankings. The community elements increase customer loyalty and trust in the platform. The iTunes Match function contributed significantly to the success of iTunes. This program compares the personal music collection with the songs from the iTunes Store and downloads all found songs in optimal quality to Apple’s iCloud. Up to ten devices can access a cloud and make the music collection available everywhere via the Internet. While the music purchased from the iTunes Store can be downloaded to the iCloud in unlimited quantities, it is also possible to transfer up to 100,000 own songs to the iCloud via iTunes Match. At the same time, the iCloud serves as a convenient backup for the user’s own music collection and offers the user the option of accessing his or her own music collection online at any time.

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Case Studies

Aspects

Strategy

• First mover and innovation leader in the online distribution in the audiovisual segment • Convergence strategy (product bundling: software, content, hardware) • Integration of media (convergence of media content to a deep and broad product portfolio)

Business model

• Commerce aspect: initiation, negotiating, and handling of transactions in the form of fee-based music, video, and other audiovisual entertainment downloads • Transaction-dependent direct generation of revenues (e.g. download revenues)

Range of services

• Approximately 45 million songs from all big music companies and most independent labels • Over 20,000 music videos • Approximately 27,000 audio books • 2.33 million apps for iPad, iPhone, iPod, PC and Mac • More than 112,000 films (many of them in 4K HDR resolution) • A variety of TV series

Success factors

• Large entertainment offer in the audiovisual field • Innovative end user devices (e.g. iPod, iPhone, iPod etc.) precisely adapted to the software • Product bundling of software (e.g. iTunes) and hardware (e.g. iPod, iPhone, iPad) • Deep and broad product portfolio

Fig. 15.21 Strategic alignment of iTunes. Source: Wirtz (2009, 2019b)

However, the large music conglomerates, which to date mostly distributed music through the traditional form of CD sales, suffered enormous drops in past sales, due to the development of Internet downloads. The IFPI Global Music Report 2016 proclaims that the revenue generated from Internet downloads exceeded that of CD sales (IFPI 2016). As a result of its success, Apple had a leading position in the music segment with iTunes in the segment of Internet downloads, but its numerous competitors such as Amazon, Google Play, Spotify, and Samsung’s “Music Hub” have caught up. Hence, Apple is being forced to face this competition and counter it by innovative ideas in order to defend its leading position in online distribution in the audiovisual sector. An overview of the strategic orientation of iTunes is shown in Fig. 15.21.

15.2.7 Xbox One X Case Study The development path of the console games market is cyclically dominated by so-called console generations, which correspond to an ideal model of the product life cycle. Within the eighth generation, the three major game console manufacturers

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Market-Specific Case Studies

305

Nintendo, Sony, and Microsoft are competing for customers with their respective new products Nintendo Switch, PlayStation 4 Pro, and Xbox One X.8 While the Nintendo Switch, released on November 3, 2017, achieved significantly higher sales figures than the WiiU, the new and improved Sony PlayStation 4 Pro (November 10, 2016) and Microsoft Xbox One X (November 7, 2017) are also expected to contribute to a highly competitive console gaming market. The sales figures for the corresponding predecessor model for Sony and Microsoft were around 85 million units each (VG Chartz 2018a). Like the Wii and the WiiU, the Nintendo Switch mainly address families (casual gaming), while the new consoles from Sony and Microsoft are designed for more ambitious gamers with high expectations with regard to graphics and game quality. The pure gaming experience is the main interest of this target group especially with regard to the PlayStation 4 Pro. The Xbox One X from Microsoft also promises high quality gaming and offers additional services. The Xbox One X is regarded as an entertainment center for the living room, which for the first time enables the display of 4K among all consoles. Microsoft describes the new console as the most powerful console in the world (Xbox 2018). For example, gamers can receive high-definition movies and music by quickly connecting the console to the Internet. In addition, it is even possible to receive movies and TV programs during gaming. Moreover, the Xbox One X enables the use of the Internet telephony service provider Skype via the TV screen during gaming. The so-called OneGuide ensures personalized instant access to entertainment apps and preferred TV programs. Another feature of the Xbox One X is the cloud connection, through which the console and its settings as well as the games develop depending on the gaming performance and the personal preferences of the user. The basis of many of these console specifics is the most reliable online service in the console sector. The console’s excellent connectivity to the Internet and the ability to purchase Xbox Live Gold membership allows gamers to be part of the “largest gaming community in the outstanding multiplayer network” (Microsoft 2018a). Members can compete online against other players that are selected based on their skills, reputation, and language skills by means of advanced algorithms (SmartMatch). The integrated Xbox Live community makes it easy for gamers to exchange information among each other. Overall, Microsoft uses very efficient hardware and high-quality electronic components for the Xbox One X, which is, however, correspondingly expensive. The entry price for the Microsoft Xbox One X is 499 USD, while the competitor platforms Sony PlayStation 4 Pro with 399 USD and the Nintendo Switch with 299 USD are considerably cheaper. However, the respective price can increase through appropriate accessories such as headsets, more ergonomic controllers with additional functions, or special loudspeaker systems. The standard version of the Microsoft Xbox One X includes the

8

See also for the following chapter Wirtz (2019b).

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Case Studies

Aspects

Strategy

Business model

Range of services

Success factors

• Differentiation strategy • Addressing a large target group • Further technical development • Network effects due to a strong community: providing the possibility to link with other players, to exchange information, or to play against each other • Transaction-dependent direct revenue generation (e.g. revenues from selling consoles or games) • Indirect generation of revenues through licenses etc. • • • •

Use of state-of-the-art technology (4K capability) Multiplicity of different games System updates Linking, exchanging, and playing with other real players within a network

• Sophisticated gaming • Extensive target group approach, broad spectrum of players for gamers • Technical top performance

Fig. 15.22 Strategic alignment of the Xbox One X. Source: Wirtz (2013a, 2019b)

games console itself, a game pad, an HDMI cable, two batteries, a power cord, and a brief instruction (Microsoft 2018b). The equipment delivered with the earlier Xbox One version initially included the Kinect system, which enabled gamers to interactively participate in the game and control the game software by means of body movements and speech. This Microsoft system does not require a controller and represents a further development of the motion control of the Wii originally introduced by Nintendo. Due to the low usage by players and game developers, Microsoft stopped the development and production of Kinect at the end of 2017. In addition, the Xbox One X no longer has any connection options for Kinect, and also the adapter provided for it is no longer available in stores. Together with their corresponding basic versions, the PlayStation 4 and Play Station 4 Pro have sold 81.06 million copies since their launch. Microsoft’s Xbox One/Xbox One X has sold around 38.15 million copies to date (VG Chartz 2018b). Figure 15.22 shows an overview of the Xbox One X’s strategic orientation.

15.2.8 21st Century Fox Case Study 21st Century Fox, headquartered in New York, is one of the world’s largest media conglomerates. The international company employs around 21,500 people and is listed on the New York and London stock exchanges as well as on the Australian stock exchange. The company’s origins lie in the News Corporation, a media

15.2

Market-Specific Case Studies

307

conglomerate that split into 21st Century Fox and News Corp. in 2013. The origins of the founder and CEO Rupert Murdoch lie in the newspaper industry, on which he has built a globally active billion-dollar empire by expanding the business areas and applying a targeted internationalization strategy. Since its demerger from News Corporation, 21st Century Fox has focused primarily on the media areas of movie and television.9 In 2017, 21st Century Fox had a turnover of 28.5 billion USD (21st Century Fox 2017). The company also ranks 109th on the FORTUNE 500 list (Fortune 2018). 21st Century Fox competes in two major industries: the media industry that includes movie and video and accounts for the bulk of the business and the leisure industry that includes entertainment and telecommunications services, especially cable and satellite services. The branches of industry can be subdivided into four industrial segments: cable network programming, movieed entertainment, television, and others/corporate. Figure 15.23 gives an overview of the companies of 21st Century Fox in each industry segment. The origin of 21st Century Fox, the News Corporation, began with Rupert Murdoch the chairman and founder of the News Corporation, who inherited the estate from his father in 1952, including the Australian daily newspapers News and Sunday News. After Murdoch reorganized the beleaguered daily newspapers with a concept of boulevard offers focusing on sex, crime, and human interest topics as well as aggressive marketing measures and price reductions, he successfully repeated his partially modified strategy in other media areas as well. After founding more newspapers in Australia, Murdoch bought the Adelaide TV channel, Channel 9, and expanded its business to other continents. Pursuing a successive international concentration strategy (waterfall strategy) as a market presence strategy, Murdoch took over the print titles News of the World and Sun in the late 1960s and early 1970s in Great Britain, which at the time were rather moderately successful. After acquiring the largest US magazine publisher Triangle Publications in the 1980s, Murdoch took over major magazines such as the New York Post and expanded the presence in the TV market through the acquisitions of the 20th Century Fox movie studios in 1985 and the Metromedia television chain 1 year later, now known as Fox TV. The company strengthened its market presence in the TV market in particular by expanding the Metromedia television chain as the fourth national US network Fox TV and by establishing the Fox News Channel in 1996, a 24-hour news channel on cable television. A major strategic shift from the print sector to electronic media took place in the early 1990s. In 1990, Murdoch acquired the previously unsuccessful satellite channels Sky TV and British Satellite Broadcasting, which he merged into BSkyB.

9

See also for the following chapter Wirtz (2019b).

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Case Studies

21 st Century Fox Cable Network Programming

Filmed Entertainment

• FOX News

• 20th Century Fox

• FOX Business Network

• 20th Century Fox Espanol

• Fox Sports Net

• 20th Century Fox Home Entertainment

• Fox Sports 1,2 • Fox Sports Racing • Big Ten Network • FOX Movie Channel • FOX College Sports • FOX Sports Enterprises

• 20th Century Fox International • 20th Century Fox Television

• Fox Studios LA • Fox Television Studios

• FX

• FOX Television Stations • MyNetworkTV

• Sky • Hulu • Endemol Shine Group • Tata Sky • Vice Holding Inc. • DraftKings Inc.

• Fox Studios Australia

• FOX Network Group • Fuel TV

• FOX Broadcasting Company

Other/Corporate

• Fox Searchlight Pictures

• FOX Deportes • FOX Soccer

Television

• Fox Libary • Blue Sky Studios

• Nat Geo Wild • National Geographic Channel United States • National Geographic Worldwide

Fig. 15.23 21st Century Fox corporate structure. Data source: 21st Century Fox (2017)

Other satellite stations followed, such as Start TV, Sky Brazil, America SkyB, and Japan SkyB, which also established the successful concept on the international market. In addition, special emphasis was placed on pay TV. For example, 21st Century Fox holds 39% of the pay-TV channel Sky (21st Century Fox 2017). Since News Corporation had no strategically valuable investments in the converging telecommunications and information technology industries for a long time, Murdoch initially targeted the Internet at the beginning of 2000. News Corporation’s Internet portfolio included the computer games website of IGN Entertainment, the online photo album Photobucket, and the web community MySpace. In order to further expand this portfolio, the company announced its interest in acquiring Yahoo for the first time at the end of 2007 in the form of a merger with the Internet platform MySpace, which belongs to News Corporation. However, the talks failed in 2008 after Microsoft had also shown interest. Despite changes in media preferences, the majority of 21st Century Fox’s media generated stable profits.

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Market-Specific Case Studies

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Aspects

Strategy

• Internationalization strategy, external growth and multinational orientation on foreign markets • Economy of scale • Convergence in terms of an extension of new internet assets

Business model

• Hybrid business model, depending on the segment • Content aspect: collection, selection, systematization, compilation (packaging) and provision of information, e.g. FoxSports.com • Community aspect: making information exchange in the field of audiovisual entertainment possible • Commerce aspect: part of many business areas • Depending on the segment: transaction-independent direct (e.g. subscription revenues) and indirect (e.g. advertisement revenues) revenue generation as well as transaction-dependent indirect (e.g. revenues from transactions procurement for third party partner companies) and direct (e.g. direct sales revenues) revenue generation

Range of services

• • • •

Filmed entertainment (e.g. 20th Century Fox etc.) Television (e.g. Fox Broadcasting Company etc.) Cable programming (e.g. Fox Movie Channel, Fox News Channel etc.) Other assets (e.g. Pay TV like Skyetc.)

Success factors

• • • • •

Strategically smart orientation on almost all media markets International networking Business greatness Full-fledged media portfolio Strategically optimized M & A strategy

Fig. 15.24 Strategic alignment of 21st Century Fox. Source: Wirtz (2019b)

For example, the successful productions of the Hollywood studios 20th Century Fox such as the movies Deadpool and Ice Age generated high profits. The cable television division Fox also reported steady profits. Due to the losses and weak sales figures of News Corporation’s print media shares, it was split into two companies with different focal points in 2013. While the new News Corp. received the print media shares, 21st Century Fox retained all movie and television company shares. Since then, 21st Century Fox has focused on enriching its traditional core business through international investments or takeovers in innovative multimedia business segments. The strategy behind these activities is to provide distribution via many media channels, for instance, by making classic TV content available on the Internet and mobile devices. Figure 15.24 shows an overview of the strategic orientation of 21st Century Fox. In December 2017, Disney announced the acquisition of large parts of 21st Century Fox. After a counter offer by Comcast for the same shares, Disney increased its offer to 71.3 billion USD and received shareholder approval in July 2018. This means that the main business segments for movie, entertainment, and television, excluding sports and news, have been transferred to Disney (The Wall Street Journal 2018).

References

21st Century Fox. (2017). Annual report 2017. Accessed August 10, 2018, form https://www.21cf. com/wp-content/uploads/2017/10/21cf_full_final_ar_2017.pdf. Albarran, A. (2010). Management of electronic media (4th ed.). Belmont, CA: Wadsworth Cengage. Albarran, A., Chan-Olmsted, S. M., & Wirth, M. O. (Eds.). (2006). Handbook of media management and economics. New York: Free Press. Alexa. (2019). craigslist.org traffic statistics: Monthly unique visitor metrics past 30 days—Last updated June 25, 2018. Accessed July 10, 2019, from https://www.alexa.com/siteinfo/craigslist. org. Alphabet. (2019). Annual report 2018. Accessed July 10, 2019, from https://abc.xyz/investor/static/ pdf/20180204_alphabet_10K.pdf?cache¼11336e3. Anderton, C., Dubber, A., & James, M. (2012). Understanding the music industries. London: Sage. Ansoff, I. H. (1965). Corporate strategy: An analytic approach to business policy for growth and expansion. New York: McGraw Hill. Aral, S., Dellarocas, C., & Godes, D. (2013). Introduction to the special issue—Social media and business transformation: A framework for research. Information Systems Research, 24(1), 3–13. ARD. (2016). Mediennutzung und Freizeitbeschäftigung 2016. Accessed June 04, 2018, from http://www.ard.de/home/die-ard/fakten/ard-mediendaten/Mediennutzung_und_ Freizeitbeschaeftigung/408808/index.html. ASCAP. (2011). About the american society of composers, authors and publishers. https://www. ascap.com/. Ayal, I., & Zif, J. (1979). Market expansion strategies in multinational marketing. Journal of Marketing, 43(2), 84–94. Bakos, Y., & Brynjolfsson, E. (2000). Aggregation and disaggregation of information goods: Implications for bundling, site licensing and micropayments systems. In B. Kahin & H. Varian (Eds.), The economics of digital information and intellectual property (pp. 114–137). Cambridge: MIT Press. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120. Baubin, T., & Wirtz, B. W. (1996). Strategic management and transformation in converging industries – towards the information society. In W. Brenner & L. Kolbe (Eds.), The information superhighway and private households (pp. 363–377). Berlin: Harvard Business School Press. Baumol, W., Panzar, J., & Willig, R. (1988). Contestable markets and the theory of industry structure (2nd ed.). New York: Harcourt Brace Jovanovich. Beeson, G. (2002). Games software exhibition, who’s got what it takes to make it through to the next round? London. Berlson, W. A. (1961). Effects of television on the reading and buying of newspapers and magazines. Public Opinion Quarterly, 25, 366–381. # The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 B. W. Wirtz, Media Management, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-47913-8

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