Business Models 3:E - 1(55) Entertainment and Media: Markets and Economics Business Models for Online Entertainment

Business Models 3:E - 2(55) Elements of the Business Model Music, Movies, Books, News, Videos, Social Media  Generating Revenue: Selling Commodities: Amazon Selling or Creating Experiences: Copyrighted material, largely the advertising based providers  Claimants to the Revenue Variable inputs (labor, etc.) Capitalists Copyright owners

Business Models 3:E - 3(55) Pricing Models  Commodity Pricing Model – Demander pays Marginal pricing (iTunes) Per play - True marginal pricing  Subscription Model – Demander pays, but not at the margin  Advertising Model – Someone else pays Free internet radio stations – Spotify, Pandora, Slacker The price discrimination problem

Business Models 3:E - 4(55) Commodities A La Carte Pricing

Business Models 3:E - 5(55) Time of Purchase Another tactic implemented by the airline industry is changing prices based on the time of day. They do this using analytics to determine the time of day at which most of their customers are purchasing tickets and charge higher prices at those times. This allows them to increase revenue and tailor their prices to the demand on the site. It is a little known secret that Amazon uses similar techniques and changes their prices multiple times a day to match the demand for an item. This type of variable pricing is harder to use than the other two because it requires constant monitoring to determine the appropriate price. Amazon and others have developed algorithms that do this for them and as these algorithms improve it is likely that more businesses will use time based pricing. Manageable “Menu Costs” D ynamic pricing might also work for commodities priced on the internet. Low “Menu Costs” facilitate innovative price discrimination

Business Models 3:E - 6(55) Commodity Pricing MC to Apple is not really zero. Royalty = 70 cents per tune. Resource cost net of royalty is close to zero. A Highly Successful Business Model Priced as “downloads” Experience is reproducible.

Business Models 3:E - 7(55) Pricing Entertainment Raising Revenue Advertising Model

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Business Models 3:E - 9(55) Monetizing YouTube

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Business Models 3:E - 14(55) $200,000/day

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Business Models 3:E - 16(55) Advertising Models How does a website that receives revenue only from ads differ from traditional print media? From the seller’s point of view, it doesn’t.

Business Models 3:E - 17(55) Essentially a Newspaper

Business Models 3:E - 18(55) How Does Hulu Make Money? Company: Founded in March 2007, Hulu is co-owned by NBC Universal, News Corp. and Providence Equity Partners. It is operated independently by a dedicated management team with offices in Los Angeles, New York, Chicago and Beijing. Content: Hulu brings together a large selection of videos from more than 130 content providers, including FOX, NBC Universal, MGM, Sony Pictures Television, Warner Bros. and more. Users can choose from more than 1000 current primetime TV hits. Business Model: Hulu is free and legal through an advertising supported model. Videos are available for unlimited streaming; watch favorite shows and clips over and over, for free. Videos contain fewer ads than on TV. Advertisements appear during normal commercial breaks. Hulu acquires the rights to distribute its videos, making them available to users legally Advertising: Hulu gives advertisers an opportunity to associate their brands with premium online video content, connect with highly engaged consumers and extend their reach beyond Hulu.com to Hulu's distribution network. Additionally, Hulu offers and is committed to the continued development of innovative, new advertising experiences.

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Business Models 3:E - 20(55) Pricing Advertising  On a website  On television and radio Traditional TV New media:  Phone  Hulu, Veoh, Fancast  YouTube  Network’s own websites MSNBC.com

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Business Models 3:E - 22(55) Business Model: Ad Revenue  Websites resemble print media. Use traditional views of advertising  Websites differ from print in several respects that allow finer distinctions in pricing advertisements. Allows old fashioned price discrimination Allows spreading risk and pricing uncertainty in advertising effectiveness with different kinds of ads (banner, click through, affiliate) Allows finer (finest?) targeting of advertising

Business Models 3:E - 23(55) Economic Features of the Advertising Model  Consumer of the experience pays zero at the margin  Advertisers pay to place ads between the consumer and the experience How does the advertising space obtain value? How can the website price the advertising?  Essential separation of the demander (consumer) and the supplier (copyright holder).

Business Models 3:E - 24(55) Pricing Entertainment Subscription Model Price Discrimination

Business Models 3:E - 25(55) YouTube Paid Channels

Business Models 3:E - 26(55) Hulu Plus: Advertising Free for $7.99/mo

Business Models 3:E - 27(55) Tried price discrimination: 2010 Changed their minds: 2014

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Business Models 3:E - 29(55) Real.com Rhapsody Subscription Service, with Price Discrimination Rhapsody Subscription Service, Without Price Discrimination

Business Models 3:E - 30(55) Music Videos Produced and owned by the record labels: EMI, Universal, Sony (BMG), Warner Once free: Distributed free as advertising to VH1 and MTV Free no more – millions in royalties paid by users.

Business Models 3:E - 31(55) Music Video Distribution Advertising Revenue Model YouTube and Universal to Create a Hub for Music SAN FRANCISCO — YouTube, the most popular online video site, and Universal Music Group, the world’s largest music company, said on Thursday that they would create an online hub for music videos and related content, called Vevo.

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Business Models 3:E - 33(55) Pricing Entertainment Selling Music and Using Music as an Input

Business Models 3:E - 34(55) A Necessary Distinction for Pricing Digital Entertainment  Performance: Obtain (purchase) the experience (once) Triggers a performance royalty claim  Download: Obtain (purchase) the ability to produce the experience (more than once) Triggers a mechanical royalty claim  “A Download (of music) is not a performance.” (Judge William Connor, U.S. vs. ASCAP, April 25, 2007) Note: Even though a performance takes place during the download.

Business Models 3:E - 35(55) Yahoo Music Player Licensing Problems

Business Models 3:E - 36(55) Link to Spotify Yahoo music is a news site. Music provision is outsourced to Spotify. Still generates ad revenue for Yahoo. Yahoo Music Evolves: Outsourced

Business Models 3:E - 37(55) Yahoo Music Evolved: A Magazine About Music

Business Models 3:E - 38(55) Commodity Pricing MC to Apple is not really zero. Royalty = 70 cents per tune. Resource cost net of royalty is close to zero. A Highly Successful Business Model Priced as “downloads” $.091 Mechanical Royalty $.609 Master Recording $.290 Apple cost & profit Experience is reproducible.

Business Models 3:E - 39(55) CD Costs and Profits CD and Booklet Manufacturing Sales and Distribution Marketing and Promotion Cooperative advt. and Discounts Artist DevelopmentRoyalty to Recording ArtistRoyalty to Composer and Lyricist Overhead and Distribution Operating ProfitLaborDistributionRent (Shopping Mall)Operating Profit Record Label $10.80 Retailer $ Consumer Fixed Costs Variable Costs Sunk Costs Operating Profit

Business Models 3:E - 40(55) Commodity Pricing - Webcasting  In Between case. Performances generate per play royalties  CRB and Internet radio  Disconnect between listener and payer of the royalty  A bad model

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Business Models 3:E - 42(55) Transaction Costs for Webcasters. Pay Per Play. Noninteractive music distribution This is music as a factor of production. comparison-of-how-much-various-services-pay/ Broadcasters Per Performance Royalties 2011 – $.0017 per performance 2012 – $.0020 per performance 2013 – $.0022 per performance 2014 – $.0023 per performance 2015 – $.0025 per performance Statutory Webcasting Per Performance Royalty Rates 2011 – $.0019 per performance 2012 – $.0021 per performance 2013 – $.0021 per performance 2014 – $.0023 per performance 2015 – $.0023 per performance Pureplay Webcasters Per Performance Royalty Rates 2011 – $ per performance 2012 – $ per performance 2013 – $ per performance 2014 – $ per performance 2015 – $ per performance

Business Models 3:E - 43(55) CRB Casualty “Protecting the market, not the specific competitors”

Business Models 3:E - 44(55) Pricing Performances? Hedonic Pricing  Download Early distinction: tethered vs. untethered downloads  Stream = Performance?  Some pieces (in a class) are more “valuable” than others. More recent music Current movies Commercial TV clips vs. someone making faces at their dog or slipping on a banana peel Customizable internet radio stations vs. “internet radio”

Business Models 3:E - 45(55) Blanket License, zero marginal charge SUBSCRIPTION MODEL

Business Models 3:E - 46(55) Millions of songs

Business Models 3:E - 47(55) Two Proposed Pricing Models  Price Discrimination – Distortionary Price Model  Blanket Licensing – Nondistortionary Public Good Model

Business Models 3:E - 48(55) Price Discrimination  Pay different royalties based on the consumer’s value of the experience Advertisers do not pay differential rates on this basis Consumers have no idea this is going on. They pay zero. It is meaningless. Infinite variety of ways to game the system  Attempted to resolve in a landmark case U.S. vs. ASCAP, (Also against BMI in another case.)  Essentially unworkable:

Business Models 3:E - 49(55) Advertising Rate Discrimination Since the consumer of the music is not paying for it, think of music as a factor of production for the website, in this case, Yahoo! They use music in order to convince advertisers to use their site.

Business Models 3:E - 50(55) Yahoo Music (player): Triggers a performance royalty. Royalty is not play by play – it is a fixed yearly fee due because the website uses the music library.

Business Models 3:E - 51(55) The royalty is assessed as a tax on the advertising revenue generated by ads that show on the music page.

Business Models 3:E - 52(55) End Running the Royalty Tax on the Music Page: The Music “player” does not contain any ads.

Business Models 3:E - 53(55) Resides on the desktop. No ads, no ad revenue. No ad revenue, no royalties. Keeps the AOL name on the desktop. The desktop is much less valuable now than in years past.

Business Models 3:E - 54(55) Nondiscriminatory Advertising Model Yahoo gave up on customizable internet radio. (See Spotify, Pandoram, Slacker, etc.)

Business Models 3:E - 55(55) March Decision. (ASCAP won the argument over format but felt the rate was too low.)