این فصل را با ذکر تمام تیترهایش به انگلیسی روان خلاصه کن   Chapter 1
The Centrality of Media Firms
Robert G. Picard
Turku School of Economics and Business Administration
à firms are central to questions involving media economics, yet limited Media fir research in the field has actually focused on the company level since scholarly inquiry in the field began to flourish three decades ago. The literature of media economics is replete with studies at the industry level and with thecretica examinations of companies and their behaviour, but only a small portion explores media from the perspective of real farms and reat choices.
ss has perhaps resulted from an overreliance on industrial This narrowness organisation studies focused on industry structures, national market analyses, and local market studies that asked broader questions about consumer and advertiser demand, industry performance, and competition issues. It has also heen influenced by the fact that much rearch has concentrated on identifying conditions that exist in media industries and markets and providing evidence about the structures and forces at work in media and communications industries. These approaches have been appropriate because the research of past years has been building a foundation of understanding of media economics and media was intended to provide evidence of
and much mearch as business entities, and industry conditions for policy purposes.
The dominant approaches, however, are limited and do not effectively explain how and why individual media companies behave as they do and how their choices and decisions create or respond to the conditions and fees found in the industry. Increasing interest in questions about these issues is a consequence of the foundations laid by industry and market-oriented research of past decades and the interest they have generated in understanding company options and choices
Questions about individual companies are important because they provide a clear picture of market dynamics and the pressures that lead company executives to make economic choices and choices about the ways their companies will be structured, the activities they will undertake, and the performance
Picard-The Centrality of Media Firms subsequently produced. They also help explain why certain market structures emerge and why media and communications industries exist in various forms and produce different results.
brough
Analyses at the market or industry levels, then, provide collective pictures of media be ia but they h their focus on the overall situation miss the pressures constraints, and choices faced by individual firms. Analyses at the company level reveal how managers wrestling with these factors pursue different was in company cuES, organisations, and resources produce different choices, and why there is such a wide range of performance among firms
COMPANY STUDIES EXPLORE DIFFERENCES IN FIRMS
Companies are central to media economic study because they invay raise capital, create facilities, employ personnel, create media products and services. sell them in the market, and grow or wither. Together, these companies create the media and communications industries, which have some common inte and issues, but they operate individually, facing individual economic and managerial challenges, making individual choices, and pursuing individual strategies.
interests
The theory of the firm asserts that the primary goals of commercial firms are maximising profit and company value (Williamson & Winter, 1993; Demsetz, 1997). These goals and the pursuit of these goals have been explored and developed by economists during the past three centuries (An excellent collection of classic works in the development of the theory of the firm is for in Putterman & Kroszner, 1996).
excellent
A weak understanding of the theory of the firm has led numerous media observers who do not take a company perspective to make ping generalisations about how media companies operate, without discriminating between companies that make very different choices in pursuing profit and company values. These ignore many of the complexities of company organisation and governance (Jenson, 2001), assume a
simplicity in in firm structure, operation, and performance, and present a deterministic view of the ability of managers to fully control firms and their performance.
At a very basic level, firms differ widely in the ways they balance the desires to produce profit and to increase company value. Companies rarely attempt to purse both simultaneously with equal vigour. Decisions of which to pursue more strongly at a given time are driven by company goals, resources, operational needs, and environmental factors. A company r y place an may emphasis on short-term profit, for example, and do linle or nothing to enhance
Picard The Centrality of Media Firms
overall company value. Conversely, a company's managers may seek to increase value by sacrificing profit in the short term.
Companies thus differ in terms of their goals, in the expectations of owners managers, and employees, and in the means by which choices are made
internally. These issues are at the basis of what has been called a behavioural theory of the firm (March & Cyert, 1992)
How company executives make choices and guide company behaviour is also affected by wide differences among companies that are often ignored when industry-level analyses are made. These differences are critical, however, and constrain or direct the choices made for companies and the ways that they are structured and operate. At At the broadest level, issues of size, ownership, and location produce important differences among companies.
Large and small firms-whether measured by income or number of employees-pursue different missions and goals, have different organisational structures, operate with different levels of resources, face different opportunities and threats, and encounter different sets of economic and financial pressures. As a result, one has to take size into consideration when attempting to understand company choices.
Similarly, the type of ownership makes a difference. Privately owned and publicly owned companies typically encounter different types of goals and pressures from their owners, have different financial resources available, and are able to undertake different levels of business risk.
Geographic location creates significant differences among firms. Metropolitan and small town media, for example, face unique levels of competition, operate differently, typically receive mo e most of their income from separate sources, and encounter varying levels of performance expectations from their owners.
In the end, however, one cannot be deterministic about companies based solely on factors such as size, ownership, or location. The philosophies, strategies, and goals of owners and managers produce widely differing choices among media firms of similar size, ownership, and geography.
These factors result in media firms choosing different patterns of diversification, selecting different business models for products or services in the same medium, and pursuing divergent approaches to company growth (Penrose, 1995). The factors lead to companies creating individual modes of horizontal and vertical integration, implementing separate levels of specialisation, and coordinating and cooperating with others firms to varying degrees 0 compelled and constr These choices 1 constrained by economic factors (Besanko, Dranove, & 1999; Baye, 1999) and a variety of internal and market factors (Jenster & Hussey, 2001).
Gaustad Joint Product Analysis publishers, record companies and others is required to get popular musical products on the market (Caves, 2000)
When two or more companies or business entities located at different levels in a products' value-added chain collaborate to create joint products, their success and thus the joint joint value o e of their inputs and efforts is dependent on the crucial transactions between the parties. The structure within which these transactions are organised may play a significant part in the success or failure of any media and entertainment product's performance, and the possibility to organise the transactions in a desired structure may prove critical in establishing a climate that encourages production and distribution of specific types of media products.
Drawing primarily on New Institutional ronomics, and then particularly 1985) an
on transaction cost reasoning (Williamson, 1 and its extension into
transaction and governance value analysis (Zajac & Olson. 1993; Ghosh & John, 1999), this chapter proposes a mode of analysis for media and entertainment production where focus is set on these crucial transactions and the joint product created by the transaction parties. It is argued that understanding the basic economic properties of such joint products and the structure of the crucial transactions is is essential f for implementing a supply-side s of media and
entertainment products into a broader economic meat of media and
entertainment markets.
The empirical focus of this chapter is on the motion picture sector, and data is drawn from a Norwegian pilot study of production-distribution relations. However, reference is also made to three other media and entertainment industries: music, publishing and television sports. Limiting the references to four sectors or industries does not imply that the analytical framework of joint product analysis is
s is restricted to these. On the contrary, it should be applicable to almost any media or entertainment industry and even to creative production in the-for traditional economists-outlandish" areas of the art world (Frey. 2000). The limitation to the four sectors selected here is primarily a practical one enabling the author to draw on the same coherent empirical references throughout the chapter
First the motion picture industry is discussed in a joint product view. Transaction attributes and se and some key economic properties of significance to these attributes are then identified and analysed, before findings from the Norwegian pilot study are presented and discussed. Finally, turning to music, publishing and revision sporis, by diy jou pro actions for each the outp of each transaction partner and the partner's joint product, and discuss structures of the joint product transactions in a transaction cost perspective.
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CRUCIAL TRANSACTIONS AND JOINT PRODUCTS IN THE MOTION PICTURE SECTOR Identifying crucial transactions for joint product analysis starts with detecting tractions between parties se different levels in a vertical value-added chain that together produce some joint product. One may argue that any two parties in a value-added chain do produce a joint product and that a joint product analysis could be applied to any product. Such analysis is, however, most valuable in those cases where each transaction partner is dependent on the other to a non- trivial degree, and when the value of each party's output is tied to the value of the joint product. Such transactions are frequently referred to as non-standard transactions and in this chapter the label crucial transactions will be used for transactions where the value of each party's output is heavily dependent on the value of the joint product.
In the motion picture industry joint product relationships exist between put associated with each producers and distributors. Table 2.1 shows the output as vertical sector in this industry. The product columns specify both the output of the particular sector and the cumulative output produced up to each stage. For the first stage, the production sector, where the first copy of the actual movie is assembled combining cast, crew, direction, music and so forth before recording and editing the performance-the product is the film itself or the first y movie materialised in the film negative and the bundle of contracts that follows it. The distribution ution sector adds m s marketing and circulation by licensing copies of the movie to different media in the exhibition sector. The cumulative product of the film itself and these distribution efforts may best be described as the movie's image, as this term is used by Boorstin (1992). A movie's image is the audience's pre-consumption perception of the movie, which determines its attractiveness. The image is dependent on production factors such as star cast and director, technical quality, exotic locations, etc. and distribution elements such as advertising intensity, the width of the release, etc. Finally, in the exhibition sector, presentation of the movie to the audience is added through cinemas, different formats of home video, and through television or online broadcasting. The cumulative product at this final stage is the audience's movie experience, and that is what the audience consumes.
The focus of this chapter is on the cumulative product of the production and
distribution sectors, since investments made in these two sectors are primarily tied to each specific movie project-the investments are transaction specific. Investments in the exhibition sector, on the other hand, are mostly transaction non-specific since they are usually not tied to any specific movie. Investments
Gaustad-Joint Product Analysis into, for example, sound, picture and comfortable seats for a first-class cinema presentation benefits all movies shown in the theatre, and the added value is thus not limited to any specific movie. For such investments an exhibitor is therefore not dependent on any one distributor beyond a non-trivial degree.
Table 2.1.Product and cumulative product by sector (motion picture industry)
Vertical Sector
Production
Distribution
Exhibition
Product Film Negative (first copy) Awareness/Circulation Presentation
Cumulative Product
First Copy Movie
The M
M's Image
he Movie Experience
Transaction Cost Analyses of Joint Products and Crucial Transactions
For the parties to joint product transactions. the value of each party's output is dependent on the value of the joint product. The parties therefore have strong incentives to devise joint value maximising exchanges, and by minimising the transaction costs they get closer to the desired goal of joint value maximisation Since transaction cost analysis (TCA) offers powerful analytical tools for aligning cost-minimising governance structures with transaction attributes, it provides important guidance to transaction partners on how to maximise joint
value.
Transaction cost economics holds that the degree to which transactions along the value-added chain are governed by fully vertically integrated structures (such as organisations), semi-integrated structures (such as joint ventures) or left as market transactions (where the parties have an arms-length buyer-seller relationship) is largely determined by three key transaction and frequency (Williamson, 1985). A attributes: asser specificity, uncertainty
major strength of TCA is its ability to determine cost minimising and thus joint value maximising-transaction governance modes based on exactly these three key attributes
Transaction Specific Investments (Asset Specificity) in Motion Pictures Transaction specific investments or asset specificity is the principal dimension with which transaction cost economics explains transaction governance structure, and is also the main focus of the joint production transaction cost analysis in this chapter. The level of asset specificity refers to the level of
Picard-The Centrality of Media Firms
The results of the range of choices made by companies and their success in the market produce differences in the ability of firms to
respond to market changes, and to sustain themselves Telerate wealth,
This occurs because some
media firms operate with lower costs and higher efficiency than others and because some firms produce low-cost products for large numbers of consumers, whereas others produce high-cost products for small numbers of consumers. It occurs because some produce more successful products and services than others and because some enterprises choose to regularly reinvest profits in their firm while others choose to remove pr profits from the company.
Media firms differ widely in their abilities to generate the resources they need, and the organisation of the firms and their behaviour is in great part dictated by their need to gain and utilise resources from outside the company. No company is independent of such pressures, and each is dependent and interdependent on outsiders for capital, supplies, and revenue to varying degrees.
Asaltof mental factor and the range of choices that are made are alike
within firms, now Media firms are social o
and most involve complex structures that govery of activities ch
be organised and controlled in order to produce their communication products
and services and implement the business models that support those activities.
Firms are also important because their existence (especially in telecommunications, broadcasting and cablecasting), industry structures, ownership, and operations are directly tied to issues of policy decisions and regulation. This state intervention is an important economic force affecting results from activities and initiatives of firms media firms worldwide and of
themselves.
A FOCUS ON MEDIA AND COMMUNICATION FIRMS
This book presents studies applying the company-level approach to media and communications firms. It explores differences among missions, strategies, organisational choices, and other business decisions. It reviews economic factors and pressures on media and communications companies and seeks to improve understanding of how these affect market and company structures, operations, and performance of firms.
The chapters were selected from papers on the
presented at the 5th World Media Economics Cone of media firm
held in Finland in May, 2002, hosted by the Turku School of Economics and Business Administration and The Journal of Media Economics.
The chapters, by leading scholars worldwide, address questions about how the introduction of new products and services has changed the dynamics of
Picard-The Centrality of Media Firms
markets and industry structures, how strategic choices and business strategies have affected the ability of firms to compete and have altered industry, market,
and company structures and performance, and how various economics and business analysis methods can be used to understand the activities and performance of media and communications companies.
Terje Gaustad presents a model for analysing the production and distribution activities of media firms and how transaction costs influence the structure and governance of companies and industries.
Allan Brown discusses the introduction of digital television in Australia and
how leading media firms influenced policy decisions implementing this new
form of broadcasting. He explores the impact of these processes on the television market, industry structures, and media companies.
How the number, types, and strategies of professional information providers
are affecting that industry is explored by Richard van der Wurff. He reveals how prices, product differentiation, and innovation are influenced by the structural changes.
Angel Arrese and Mercedes Medina investigate how the development of new media opportunities changed the competitive environment of financial news
and information providers and the strategies that have emerged as major players have responded to the new economic environment.
How the appearance of free daily newspapers has affected the industry. markets, and traditional publishers is studied by Phet Bakker. He reviews the strategies of market industry and the responses of existing publishers, and he suggests models of short- and long-term effects from the introduction of these competing publications
Marina Pavlikova reveals the strategies and forces behind the development of the Internet in Russia, showing how economic forces, business concerns, and the interests of major media companies have influenced the scale and scope of Runet content.
Alan Albarran and Terry Moellinger explore the world's leading media firms, reviewing differences in how they developed, the types of products and services they provide. how they have structured themselves, and how they perform.
The forces and strategies that lead newspaper firms to internationalise their activities are explored by Jan Helgesen. He explores the economic and business reasons behind newspaper companies' choices to transform themselves into international entities, the methods that are used, and their implications for companies and the industry.
Li-Chuan Mai studies how differences in ownership, size, company structure, and costs and price strategies have affected satellite television firms in
Picard-The Centrality of Media Firms
Taiwan and the implications of these findings for traditional strategic analysis.
methods.
David Goff focuses on the development and siraiegies of four major European telecommunications companies, showing how their choices have been influenced by their economic environments and technological changes and how these strategies have altered their environments, potential, and performance.
Aldo van Woezel explores how issues of journalistic quality and productivity quire managerial attention as competition increases. He reviews methods for monitoring these factors and how company managers in Chile view the need to do so.
The requirements of human capital for cross-media publishing are explored by Tasos Points, who discusses how workflow changes created by digitalisation and cross-media activities affect companies and their employees. He then studies the Greek publishing market to determine the extent to which they are able to compete in cross-media publishing
Finally, Mikko Gronlund focuses on issues of customer satisfaction in the
graphic arts industry, discussing its influences on customer choices of firms onships with firms, and the financial performance of those firms. Using relationships t data from the Finnish industry, he examines the factors that influence demand and perceptions of firms and how these should influence strategic choices of firms.
The studies collected in this book provide an overview of economic and related managerial issues affecting the structures of markets in which firms
, the operations of media and communications firms, and their financial performance. It thus expands the discussion of economic issues traditionally
associated with the field because of the narrows of books media
economics, and it is hoped that it will induce additional avenues of inquiry regarding such issues.
REFERENCES
Baye, Michael R. (1999) Managerial economics and business strategy, 3rd ed. New York: McGraw-Hill.
Besanko, David, David Dranove, and Mark Shanley, eds. (1999) Economics of strategy, 2nd ed. New York: John Wiley and Sons.
Demsetz, Harold (1997) The economics of the business firm: Seven critical commentaries Cambridge: Cambridge University Press
Gaustad Joint Product Analysis
transaction specific investments undertaken by the transaction parties. If the assets, which a are created or acquired through producer distributor's investments, are redeployable outside the context of the transaction they reduce asset specificity; if not, they increase asset specificity.
In the motion picture industry, production companies do not require much in the form of endurable assets and can even be managed on a one-off project basis. Most investments in the production sector are thus allocated directly to specific movie projects, and since they therefore can they therefore cannot easily be reallocated to other movie projects they are transaction specific and create asset specificity. Distribution companies, however, require substantial investments in an endurable overhead to aiminisier their network of man, disc, and international offices (Corts, 1999). These are transaction nonspecific distribution assets-not tied to any specific movie transactions. The distribution companies" marketing investments (advertising, publicity, etc.) as well as the print copying and distribution for specific movies are, however, transaction specific distribution costs. These are sunk and nonsalvageable. Advertising investments sunk into one movie cannot be redeployed to another. Such transaction specific distribution investments are investments into a specific movie's image, and correspond best with what Williamson (1991) labels brand name capital. Producer's asset specificity therefore tends always to be high, while distributor's transaction specific inv cific investments may vary from slight to significant. Transaction cost theory holds that markets are favoured as governance structure where asset specificity is slight due to lower governance costs and potential scale economy benefits. Accordingly, one would expect a shared variance between low distribution investments in particular movies and market- based production-distribution transactions since distributors would seek market- based governance structures when they only intend to put in small specific investments. In such cases of sof low asset specificity, the distribution company spends little on advertising and promoting the movie, but rather just feeds the film into its distribution or circulation system, utilising the existing network. For movies handled in this manner distribution costs are nonspecific and the distribution resources allocated to the movie-mainly the use of overhead-can easily be redeployed to other movies.
Where asset specificity is substantial, hierarchy or internal organisation is the preferred governance structure. A transaction party that undertakes significant transaction-specific investments will seek to safeguard this transaction through more integrated structures and higher control-mode
coating. Se ese investments are savageable outside the cou the transaction, they create "lock-in" problems that makes market governance structures hazardous (Williamson, 1985) Une would thus expect that distribution companies that are prepared to invest substantially into marketing
Gaustad-Joint Product Analysis
and distribution of a specific movie will seek integrated structures or high control-mode contracting for the production-distribution transaction.
Key Economic Properties of Transaction Specific Investment in the Movie Industry
Transaction specific investments in th movie industry, and the other media and entertainment sectors discussed in this chapter, share some key economic properties that need to be taken into consideration to fully understand the implications of the asset specificity they create.
First, products created in these industries usually have strong public good characteristics that create significant scale economies. They are typically marketable public goods, which means that they are non-rival but excludable (Adams & McCormick, 1993). Most media and entertainment joint products, including movies, fit this category, as one person's consumption of the product does not reduce the amount of it that may be consumed by others, and sit and since it is feasible to exclude non-paying customers from consuming it. A person who refuses to pay is not let into a cinema and is not given a home video cassette. A television channel that refuses to pay a license fee is not given the right to broadcast a movie. Unlike pure public goods, marketable public goods are well suited for commercial trade since the free-rider problem is solved by the excludabley
Since the joiner created by producer and distributor is a marketable public good, more paying consumers means obtaining lower per-consumer costs without reducing the utility each consumer gains from consuming the product. The marginal returns on both producer and distributor's investments are thus increasing with salca, and even with declining prices for additional consumers through price discrimination schemes producer and distributor earn marginal profits and increase total profits as long as each new paying consumer pays price above the marginal distribution cost, which is low for most media and close to zero for electronic media.
Furthermore, transaction specific production and distribution investments are, to some degree, interchangeable. In the absence of transaction costs the value of a joint product (IPV) will be determined by the sum of production and distribution investments.
JPV=I+Ilo
Media economic research carried out on the motion picture industry confirms that there is a positive correlation between both production and distribution investments and performance. This research has been carried out in
Gaustad Joint Product Analysis
within two branches. First, extensive regression analyses carried out by Litman and others have established a positive relationship between both production and distribution investment variables and market performance (Litman, 1983, 1998; Lima A 1000, W, 1001 and S1004) Another branch of research carried out to explain the American dominance in the international market for audiovisual products also gives empirical support to the proposition of a positive relationship between production investments and market performance (Wildman & Siwe Siwek, 1988, 1993; Waterman & P & Rogers, 1994: Dupagne & Waterman, 1997; and Jayakar & Waterman, 1999). There is no reason to believe that this is different for other media and entertainment joint products.
This means that the same joint product value can be achieved with different combinations of production and distribution investments. The contribution of investments into superstar actors (a production sector element) in the motion picture industry illustrates this effect. As argued by Houcken (1999), such investments consist of both a production cost element (performance value) and a distribution cost element (brand value): An actor that is paid $20 million for a role in a movie could likely be substituted-for artistic or performance purposes by another highly talented but less known or less popular actor charging $5 million. The $15 million premium for the superstar is thus an investment made for that star's brand value, which contributes substantially to the value of the movie's image (the actor's face and name on posters and in other advertising, publicity centred around the actor's participation in the movie etc.). Reallocating the $15 million brand value premium from the production budget to the marketing budget by settling with a less known actor but hiking the general advertising intensity would in principle result in the same joint product value.
Finally, as noted by Caves (2000), creative products, such as the media and entertainment joint products discussed ssed here, tend to have multiplicative production functions. For a normal production function it is assumed that the inputs are suitable, so that, for example, two units of labour and one unit of capital may give the same output as four units of labour and no capital. In multiplicative production functions, however, every input must be present and must perform at or above some threshold level of proficiency if any commercially ly valuable output is t to result
Production functions may be multiplicative within the production and distribution sectors. A motion picture produced without a good cinematographer will not be of much value despite the high quality all other cast and crew members may represent, and a great marketing campaign is of little value if the movie it promotes does not play in theatres. More important for the joint product analysis is a multiplicative production function between the production and
Picard-The Centrality of Media Firms
lenson, Michael C. (2001) The theory of the firm Governance, residual claims, and organizational forms. Cambridge, Mass.: Harvard University Press.
Jenster, Per, and David E. Hussey. (2001) Company analysis: Determining strategic capability. New York: John Wiley and Sons.
March, James G., and Richard M. Cyert. (1992) A behavioral theory of the firm. Oxford: Blackwell Publishers.
Penrose, E. T. (1995) The theory of the growth of the firm, 3rd ed. Oxford: Oxford University Press, 1995.
Puttermand, Louis, and Randall S. Kroszner, eds. (1996) The economic nature of the firm: A reader. Cambridge: Cambridge University Press.
Williamson, Oliver E., and Sidney G. Winter, eds. (1993) The nature of the firm Origins valution and development Oxford: Oxford University Press
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Chapter 2
Joint Product Analysis in the Media and Entertainment Industries:
Joint Value Creation in the Norwegian Film Sector
Norwegian School of Management BI
The process of creating and making media and entertainment products available to consumers usually relies on interaction and cooperation between two or more companies or business entities. In the media economic literature, such interfirm relations issues have so far only drawn modest interest despite the increasing attention it is receiving from scholars rooted in different branches of business studies. In the marketing literature, Webster noted already in 1992 that the (re)emergence of cooperation among firms is a fundamental reshaping of the gy scholars Brandenburger and Nalebuff (1997) observe that firms rarely create value in isolation, ion, particularly in advanced economies; and within the general framework of interfirm relations specialty fields have emerged studying such issues as foreign market entry and channel structure (Ghosh & John, 1999). An important contribution to the medial economic literature is given by Caves (2000), who adopts a similar approach to media industry studies. Drawing on analytical resources of industrial economics and contract theory, he explains some starkly different approaches to contracting found in the creative industries, where artistic inputs are combined with "humdrum" inputs in the process of creating joint products
field (Webster, 1992) CRY in is
Examples of crucial interfirm relations on which the supply of media and entertaiment products depend are plentiful. In the motion picture industry producers are dependent on distributors to market and circulate their products to audiences in different territories and media. In the publishing sector authors are dependent on publishers, but may also rely on other gatekeepers or middlemen such as literary agents, and in the music industry an intricate bundle of transactions involving composers, lyricists, musicians, managers, music
Gaustad-Joint Product Analysis
distribution sectors. This implies that if either producer or distributor only performs close to a minimum threshold level, the value of the joint product would be marginal even if the other party's performance and input should be considerable. A large number multiplied by zero is still zero.
It should be moved here that performing above a threshold level may not necessarily equal investing financially above a threshold level. A highly talented creative p performance may, to a large extent, substitute financial input. The movie "The Blair Witch Project", for example, was produced on a shoestring budget that normally would have been deemed below a threshold level for an American theatrical release, but due to its remarkably clever concept its production elements were still performing well above any such threshold level. It follows from there economic properties (the public good characteristics the interchangeable nature of production and distribution investments, and the at both production and distribution investments are both selfish and cooperative in nature. Transaction specific investments are said to be selfish if they only benefit the investor, but not the transaction partner. If they benefit only the transaction partner but not the investor they are cooperative. Finally, if they benefit both the investor and the transaction partner they are both selfish and cooperative (Che & Hausch, 1999). In the transaction relationship between producer and distributor, production investments increase the joon investment, and such investments therefore product's value and may also increase the distributor's marginal returs on
multiplicative production
clearly benefit both producer and distributor. Distribution investments have the same effect. The interdependence between producer and distributor is therefore significantly strengthened.
The multiplicative production function increases the interdependence between producer and distributor even more. Not only is the marginal retum of one party's investments dependent on the other party's investment level, but also, if the other party's investments fall close to or below this threshold level, hardly any valuable output will result and the marginal return approaches zero.
Effects of Uncertainty and Frequency on Crucial Joint Product Transactions Although the focus of the transaction cost analysis in this chapter is on transaction specific investments, the effects of the of the other two main transaction attributes, uncertainty and frequency, need to be discussed.
Will a new movie become a box-office success or not? Industry practitioners like to say "nobody knows" and causal estimates suggest that
William Goldman's much-quoted observation about the motion picture industry (quoted in Caves, 2000)
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roughly one out of ten movies earns substantial profits, three will break even, and six will end up with a deficit (Wyatt, 1994). Furthermore, for most media and entertainmen goods, preiesing has proven largely insecure because the product's success can seldom be explained even ex post by the satisfaction of some pre-existing needs (Caves, 2000). Uncertainty is therefore generally high, making transaction specific investment media and entertainment joint products a high-risk venture.
Transaction cost economics holds that uncertainty is important for transactions that involve transaction specific investments. The risk that follows from such investments makes it more imperative to organise the transaction under a governance structure that has the capacity to "work things our (Williamson, 1985). Where the specific investments are substantial, the high risk and uncertainty provide additional incentives for integrated transactions or high- control mode contracting.
Theatrical motion pictures usually represent large projects relative to the size of the production companies carrying out the production and the frequency of productions therefore tend to be tow. Accordingly, the frequency of transactions between a producer and distributor is also relatively low. In general, low frequency of transactions discourages hierarchical governance structures, since the governance costs associated with these will be more difficult to recoup from transaction cost savings. Producers with a high production rate are thus more likely to operate under integrated production-distribution structures than those with a low production frequency. The frequency should, however, be adjusted for size since larger transactions more easily can justify the costs of an organisational (or semi-organisational) structure than smaller transactions (Williamson, 1985) High-budgeted movies would therefore provide stronger incentives for production-distribution integration and high-control mode contracting than lower budgeted projects.
PRODUCTION-DISTRIBUTION RELATIONS IN NORWEGIAN FILM
released
A pilot study of production-distribution relations in the Norwegian feature film sector was carried out in the spring and summer of 2001. The study collected information about all Norwegian theatrical feature films that were first-time domestically in 2000. In addition to collecting various written documentation about the films (including production and marketing budgets, business and marketing plans, etc.), one representative of both the producer and distributor of each movie was interviewed about the production-distribution
Gaustad-Joint Product Analysis interaction. This data was supplemented by information from the Norwegian
Film Institute.
The study was an exploratory pilot study, and the main purpose here is not to draw decisive conclusions about production-distribution relations and joint product creation in the Norwegian film sector, but to illustrate how joint product transaction cost analysis may contribute to explaining certain problematic features the film sector is struggling to overcome. The study and its findings should therefore be seen in a context of discovery rather than a context of
justification
The Norwegian production sector is not untypical for most European countries. It is populated with a number of smaller companies, most with one or two permanent employees, which try to produce a feature film at least every second year. The distribution sector is dominated by foreign-controlled uple of independent Norwegian
es (owned by North American, Swedish or Danish corporations of
with increasing strengid dr
do handle a significant
and that this is
films every year, from which a box-office hit occasionally emerges (Aas, 2000). The Norwegian film sector is maybe most notably different from that of its neighbouring countries, Sweden and Denmark, in that it lacks a fully integrated corporation handling production, distribution and exhibition (Grønnestad, 1999). From some practitioners in the Norwegian film sector it has been argued hover the last few years that most Norwegian films are not given proper marketing a d distribution for domestic release and t one of the main reasons why they tend underperform compared to foreign movies (Svingen, 2000). If this is true, it means-in a joint product transaction cost framework-that the distribution sector is underperforming or underinvesting, and that the joint product value thus suffers even when the production sector performs well. Focus was thus set on the distributors" participation in the joint product creation, both through involvement in the collaboration and through transaction specific investments.
A total of nine Norwegian films had their first theatrical release in 2000, Even though all used market forms of contracting for the production- distribution relationship, there were some significant differences in the collaboration that took place under these coniracis. One therefore finds mances within the market based transactions, and some approach resemblance of semi- integrated structures even if formal contracting is market based. First, there were differences with regards to when the parties entered into a contract and started collaborating. With the exceptions of two movies this happened at an early stage, either during development or pre-production of the movies. Entering into a formal relationship at an early stage did not, however, always mean close collaboration between producers and distributors. Of the projects when producer and distributor had contracted already at the development stage, their