Thursday, May 19, 2016

From sandwich-makers to sitcoms -- more tales of monopsony

Continuing our abuse of economic power thread from yesterday, Ken Levine (the writer/director/producer associated with about half the classic television shows you can think of) has an excellent post on the annual upfronts. For those of you not from LA, here's a primer from Wikipedia:

In the North American television industry, an upfront is a group of gatherings hosted at the start of important advertising sales periods by television network executives, attended by the press and major advertisers. It is so named because of its main purpose, to allow marketers to buy television commercial airtime "up front", or several months before the television season begins.

The first upfront presentation was made by ABC in 1962, in an attempt to find out how advertisers felt about the network's new shows.

In the United States, the major broadcast networks' upfronts occur in New York City during the third week of May, the last full week of that month's sweeps period. The networks announce their fall primetime schedules, including tentative launch dates (i.e., fall or midseason) for new television programming, which may be "picked up" the week before. The programming announcements themselves are usually augmented with clips from the new television series, extravagant musical numbers, comedic scenes, and appearances by network stars, and take place at grand venues such as Lincoln Center, Radio City Music Hall, or Carnegie Hall. It is also the time when it is announced (by virtue of not being on the fall schedule) which shows are canceled for the next season. In recent years, the networks have mostly revealed this information to the public a few days before the actual presentation. Most cable networks present earlier in the spring since they usually program for the summer months; press attention to these announcements is usually much lighter.
Levine's whole post is worth reading but given some of our recent discussions, this part seemed particularly relevant.
Originally, before networks could own shows, the fights were with studios over number of episodes ordered and license fees. The license fee is what the network gives the studio to produce the show. The network was allowed two airings. If the cost of the show was more than the license fee then the studio paid the difference. The networks made their money by selling commercial time.

So if a series was cancelled after thirteen weeks and the studio shelled out a lot of additional costs it took a bath. But if the show was a hit, like say FRIENDS, then the studio owned it outright. At the time, syndication was the brass ring. Warner Brothers has made billions on FRIENDS. 20th continues to rake in money from MASH. It’s like a slot machine that just keeps paying out for over forty years.

Studios made so much money that the networks eventually cried poverty and lobbied the government to participate.  They won and were allowed to own studios and shows.  There was concern that the networks would then just pick up their own shows and squeeze out outside studios.  "Oh no," they promised, "Our goal is to get the highest ratings so we'll buy the best shows regardless of who produces it."   You know the result.  For the most part networks only picked up shows they owned. If they bought a show from an outside studio they usually required partnership.

If you had an ownership stake in a series (let's say you were the writer/creator/showrunner) you now had another partner. Sort of reminds you of the Sopranos,’ doesn’t it? And even the big syndication dollars were in jeopardy. Why? Because networks began buying cable networks and selling their shows essentially to themselves at reduced rates. The ownership partners were undercut again. The networks profited in that they had quality programming for their upstart networks and they alone profited on the advertising. This prompted several lawsuits by folks with ownership stakes, like Alan Alda.
As a bit of context, the television networks have spent more than half their lives under predictions of eminent demise. Go back to the late 70s and early 80s and you'll find columnists speculating that cable and the VCR would kill off at least one of the big three before 1990. These columns were recycled over the years  with the advent of digital cable, DVDs, video games, the internet, the boom in original programming, streaming services and probably a few other developments I can't think of at the moment.

All of these new sources of competition continued to erode (losing a monopoly will do that), but they remained one of the dominant forces in the media landscape and thanks to deregulation and industry consolidation, companies like NBC/Universal/Comcast have unprecedented freedom to abuse market power.

We're thirty-plus years into an experiment in  laissez-faire economics and certain conclusions are difficult to avoid.

1. Left unchecked, economic power tends to consolidate.

2. Once gained, that power is remarkably difficult to lose, even in the case of spectacularly incompetent management.

3. Inevitably, that power will be abused.

As a statistician, I know I'm always supposed to be calling for more data, but in this case, I think we have enough.


  1. What always entertains me in any discussion by leftists on monopoly or monopsony is that they conveniently leave out any discussion whatsoever of the role of gov't policy. That is, they see property rights in the classical liberal tradition as "inevitably" leading to concentration in a static model of the economy. They ignore critiques from economists like Alchian and Demsetz on the use of those models. They then conveniently ignore any gov't policy inconsistent with classical liberal property rights that may have lead to the concentration they bemoan. The nirvana fallacy lurks beneath all of this in a tragically hilarious way.

  2. Your observation about gov policy playing a role is correct. Its called using the consolidated power in the market, to capture government policy in ways which increase such power in market so that it is never lost and tends to be abused in the false name of "shareholder value".

  3. I'm curious. What was the role of the government in the concentration and consolidation of the networks' power? Is it because they dropped the rule prohibiting networks from owning shows? Was it because they regulated the use of the airways allowing only a handful of networks? I'm just curious what that common is apropos.

    1. The government actually forced the creation of the third of the big three when it forced NBC to spin off ABC. Fourth networks were tried going back to DuMont but they weren't viable until cable made lower powered UHF stations competitive.

      In general, as far as I can tell, from the 30s through the 70s, the government was much more aggressive in keeping players (studios, movie theaters, networks, TV stations) separate.

  4. If your ideology states that competition is proper way to run an economy, you will get what competition produces which is winners and losers. That's concentration. And those with power tend to keep it. To expect that power will be dissipated in a competitive regime is absurd.
    Furthermore, to blame "the government" for this is simply a red herring. The government provides the framework for the property rights regime. Business enterprise and government are not at the same level. Business property rights require and are dependent on the functioning of the government. In the US, the government is committed to the competitive capitalist property right and so, even if some government policy were perfectly "Libertarian", it would act to consolidate wealth and power in fewer and fewer hands over time.