strategic considerations, such as how to present search results. In response to these changes, an emerg-
ing economics literature focuses on the allocative and welfare implications of this new media land-
scape. This chapter is an attempt to organize these contributions and provide a selective account
of novel economic mechanisms that shape market outcomes of Internet media. A large body of work
has focused on the advertising part of the industry, while some studies also look at content provision
and the interaction between the two.
Keywords
Internet, Media economics, Digital media, Targeting, News aggregation, Search advertising, Display
advertising, Two-sided markets
JEL Codes
L82, L86, M37, L13, D21, D22
10.1. INTRODUCTION
The Internet has changed the lives of most people, in both business and leisure activities.
It allows for a previously unknown immediacy of news coverage from a large number of
sources. In a sense, Internet media cover unexpected events in real time over the whole
world (see, e.g.,
Salaverrı
´
a, 2005).
1
Searching on Google, social networking on Face-
book, and video streaming on YouTube are ways to spread and receive such news.
The providers of these services have become increasingly important, affecting media
markets in general and Internet media in particular.
Due to technological progress, firms have new and unparalleled opportunities to
advertise their products to Internet users, through methods such as fine-tuned targeting.
Therefore, Internet companies use business models that are different from the ones used
in more traditional media markets and are often purely ad-financed. This raises questions
on the efficiency of media markets on the Internet and (potentially) their optimal
regulation.
2
These are two reasons why media on the Internet is an important topic for research. In
addition, we observe that Internet media influence political diversity and, in contrast to
traditional media, can quickly leverage the success (or failure) of civic movements to
attract public support. This chapter provides a guide to the recent literature on the eco-
nomics of Internet media. After reporting some facts in
Section 10.2, we provide four
themes along which Internet media markets can be analyzed.
1
This holds as long as governments and commercial providers (Internet Service Providers, search engines)
do not restrict the flow of information. In some countries, certain topics do not appear as search results
when using a search engine. To allow for a wide circulation of this article, we do not give concrete
examples.
2
For a survey on antitrust issues in Internet platforms industries, see Calvano and Jullien (2012).
446
Handbook of Media Economics
First, as covered in Section 10.3, Internet affects content provision of media players.
We note a tendency of different media to converge. For example, a user interested in
news may visit the website of a newspaper or the one of a television channel. This makes
it increasingly difficult to classify a media outlet on the Internet as belonging purely to one
of the traditional media formats.
3
In particular, the web presence of several newspapers
and television channels offer text and video. This is more than a labeling issue to the
extent that different types of media are subject to different legal rules and that different
traditions for media design may become closer substitutes on the Internet since they are
only one click away.
While traditional media businesses have built a presence on the Internet (e.g., BBC
and CNN) and some have adjusted their business models, new actors are appearing. Big
Internet players such as network operators and software platforms have become
“infomediaries” by aggregating information or signing specific contracts with content
providers. These aggregators do not have editorial policies but make content suggestions
based on algorithms and user feedback (e.g., Google and Facebook). Neither Google nor
Facebook started out as news aggregators, but they have evolved into them. For some
users, Facebook has become a personalized magazine, as they read the posts on Facebook
pages they have subscribed to. Given the reach of Facebook, this can have a fundamental
impact on media consumption.
4
Similarly, YouTube started out providing short amateur
videos, which could be considered pure entertainment and outside the media world.
However, nowadays, YouTube can be seen as a source of information that functions like
media. In addition to revamped old media and big Internet companies moving into
media, new media models and players, such as personal blogs and threads, have appeared.
These include new formats (e.g., messaging networks such as Twitter and blogs) and pure
Internet formats of newspapers (e.g., Huffington Post).
To qualify as media in our view, a website has to update information frequently and to
replace old content with new content (or to give more visibility to new than to old con-
tent).
5
This distinguishes media from, for example, an encyclopedia. Hence, we would
not call Wikipedia media, at least in its current form. However, if Wikipedia adjusted to
include news items or propose updated Wikipedia entries according to recent develop-
ments, Wikipedia could become Internet media.
6
Second, as covered in Section 10.4, the Internet affects user consumption of media
content. The Internet has attracted many users, and their behavior online may be differ-
ent compared to behavior documented in traditional media markets. We observe that for
3
Traditional media formats are newspapers, magazines, radio, and television. See Chapters 7–9 in this vol-
ume for details on these traditional media.
4
See Section 10.2, on some facts of Internet media consumption.
5
This is, among other things, driven by an inherent ephemerality in content value.
6
On user-generated content, see Chapter 12.
447
The Economics of Internet Media
many people in OECD countries, the Internet has become the main source of media
consumption. According to GlobalWebIndex, in a large number of countries, the aver-
age user spends more time consuming media online than offline (see
Section 10.2).
While it is true that paper has simply been replaced by a screen on a laptop, electronic
reader or smart phone, this change in technology, though noteworthy, may not change
the underlying economics of media markets. If this were the only change, the economics
of Internet media would probably not deserve a full chapter. Similarly, if people watch a
live sports event on their laptop via some streaming service instead of using a television
screen, this also constitutes a change of device but would not be a reason by itself to
reconsider television media. Finally, if somebody listens only to Internet radio instead
of relying on radio frequencies, this constitutes a change in habit, but for our purposes
is otherwise irrelevant.
However, users may act differently on the Internet compared to how they consume
linear television programming, radio broadcasting, and newspapers. While multi-homing
is also often a feature of consumer behavior for television programming, the ad-financed
media on the Internet are particularly prone to encountering multi-homing users who
click themselves through different websites. Thus, the impact of multi-homing on media
competition is particularly relevant on the Internet.
Users search for media content primarily via search engines. Thus, the functioning of
these search engines is likely to affect media consumption. In particular, an important
question is whether search engines bias their results to search queries and whether this
affects market outcomes.
In general, consumers play a more active part in media consumption. Media content
on the Internet can be subject to reader feedback, which affects the further diffusion of
content. This can take the form of comments and recommendations. These also play out
on social networks, where user decisions determine the spread of content (e.g., users can
share an article or video with their friends). Here, users become, in a sense, curators of the
media environment. In addition, they become creators by uploading their own images or
videos, which may have news content for small online communities and thus may con-
stitute “local” news. This relates to the observation that, in general, a key characteristic of
media, in contrast to communication, is that information moves in only one direction,
from one sender to many receivers; and this distinction becomes less clear-cut on the
Internet, as social networks have resulted in (interactive) user-generated content and
limits to exposure. The former implies that some Internet media have incorporated ele-
ments of interactions. The latter implies that only a select group (e.g., the Facebook
friends of a particular person or cause) obtains access to the available information.
Third, as covered in
Section 10.5, media on the Internet match advertising to con-
tent. Most Internet media are primarily and exclusively financed through advertising,
which can be display advertising or search advertising, among other forms. The former
is similar to advertising in traditional media. However, in traditional media, content and
448 Handbook of Media Economics
advertising tend to be unrelated (with the caveat that some media have narrow target
groups—in specialized magazines, for example—that allow for targeted advertising).
On the Internet, however, it is feasible to have context-specific ads that depend on
the requested content. Such tailoring of ads affects media competition. For example, tar-
geting allows firms with a potentially small customer group to actively participate in the
advertising market—a phenomenon known as the “long tail” hypothesis of Internet
advertising (
Anderson, 2006). This affects advertising prices and thus the advertising
intensity of big companies with a broad customer base. In addition, better targeting
has implications for the interaction between offline and online media.
Of particular relevance is keyword advertising, which consists of advertisements
linked to a specific word or phrase. Keyword advertising increases the precision with
which advertisers convey their “message” to the right audience, but the general welfare
consequences of this type of advertising are not obvious. Also, the incentive of a search
engine to offer the best match to consumers is not evident. The matching precision may
have consequences for competition between advertisers, thereby affecting the revenue
stream of the search engine. Another important question is the effectiveness of such key-
word advertising, measured by conversion and click-through rates (CTRs). Again, it is
not clear whether search engines are interested in displaying the results in the most effi-
cient rank order.
We note a great reduction in classified ads in print media. In many cases, their sub-
stitutes have become disconnected from media (as in the case of Craigslist) and thus are
outside the scope of this chapter.
7
Fourth, as covered in Section 10.6, media on the Internet match users to advertising
directly. With the increasing amount of data available about Internet users (including
information obtained from cookies), the Internet allows for tracking and individual ad
targeting, disconnecting advertising from media content. Again, this has implications
for the functioning of media markets. For example, holding ad and product prices con-
stant, better tracking should be beneficial to advertisers because their messages are wasted
with a lower probability. Thus, websites should be able to reap higher advertising rev-
enues. At the same time, better tracking may increase competition between advertisers
since consumers become better informed. This tension affects the outcome in media
markets and, in turn, has consequences for Internet users. An obvious one is that users
are less likely to block ads if ads, per se, provide a better match. At the same time, there
can be more subtle effects. For example, in order to reap more advertising revenues,
platforms have an incentive to prevent users from switching to other platforms.
A way to achieve this could be to offer higher-quality content so that, for example, a
user consuming news becomes fully informed on a single website and therefore has
7
Classified ads on the Internet are similar to ads in print yellow pages, but they allow for better tailoring and
search.
449
The Economics of Internet Media
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