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Thursday, April 26, 2007

Fractured Televison Tales

Austan Goolsbee explains why broadcast networks have downgraded their programming:

'American Idol' Is the Price We Pay for a Menu of So Many Channels, by Austan Goolsbee, Economic Scene, NY Times: Kinga Tompos, a graduate student at DePaul University, ... was ecstatic. “Sanjaya is gone,” she said. “Finally! I can’t stand him.”

Sanjaya, of course, is Sanjaya Malakar, by wide consensus the worst contestant ever to get into the final rounds of “American Idol.” And for those of you ... who never really got interested in the reality television fad, “American Idol” is a singing contest that runs on Fox. It also happens to be the most popular show on television. ...

I will admit the show is fun... Yet I can seldom get past the question of how we got here — how America lost interest in scripted shows and came to embrace all manner of reality television and its who-sang-what-song, who-ate-what-bug ethos.

Some say it’s just that people now lack the attention span for old-style television or that our tastes have changed. Most insiders point out that reality shows cost much less to make than scripted shows, and, they argue, this is just a profit play by the broadcast networks.

But that does not explain why reality shows did not take over television long ago... Surely the broadcast networks wanted to save money back then, too.

In his book “Switching Channels” ..., Richard E. Caves, the don of entertainment economics and professor emeritus at Harvard, blames (or credits, depending how old you are) cable and satellite providers and the way they have changed the broadcast networks’ incentives to invest in programming.

He points out that such incentives depend on the size of the potential market. The programming is a fixed cost — networks pay for the programs even if nobody watches. If paying an extra $1 million to get a star onto a show, for example, raises every customer’s love of the show by the equivalent of $1, the investment more than pays off if there are 10 million potential viewers. But the $1 million investment would be a terrible flop if there were 10,000 potential viewers.

You can see the mechanism at work in a comparison of the cable networks. The ... bigger the market, the more a cable network spends on programs. Not even counting sports juggernauts like ESPN (whose annual expenses on programming top $3 billion), industry analysts say that the average programming costs at networks with more than 90 million subscribers — networks like Discovery, Nickelodeon or MTV — average more than $250 million a year.

Networks like Bloomberg, Nicktoons, and National Geographic, with 40 million to 50 million subscribers, average less than $35 million in annual programming costs. Fledgling networks with 20 million to 25 million subscribers, like Boomerang, the Sleuth Channel or the Anime Network, average only about $12 million. ...

With the big shift to cable and satellite television (we now watch more cable than broadcast programs), cable networks have had a big incentive to upgrade their product, while the incentive for broadcast networks has moved in the opposite direction.

So the increase in reality programming is not just a matter of broadcasters wanting to save money. It’s that a shrinking potential market gives the networks less incentive to spend money. They can’t recoup it with enough viewers.

Nor is the shift to cable and satellite complete. It continues. And now, more and more people are also turning to the Internet and YouTube instead of broadcast television. So you can see how this ends.

You may be like Kinga Tompos, calling in and voting to give Sanjaya the boot. But remember the economist’s dictum: you don’t know what something costs until you have seen the alternative. Celebrate Sanjaya’s demise all you want. But just wait until you see what’s next.

Update (this is from comments): I thought about saying that this was good - more choice and competition in programming would enhance consumer welfare - but I kept coming up with special cases in my head where that wasn't necessarily true so I didn't make that point (too many qualifications needed to make the assertion). But even so, I still think more choice than that offered by three networks in an oligopoly structure likely enhances welfare.

    Posted by on Thursday, April 26, 2007 at 01:29 AM in Economics | Permalink  TrackBack (0)  Comments (19)


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