7.5.2.1 Vertical Integration 323
7.5.2.2 Policy Responses 325
7.5.2.3 Vertical Merger Review 326
7.6. Online Video Markets 327
7.6.1 Online Video Facts 329
7.6.2 Net Neutrality and Foreclosure in Online Video Markets 331
7.6.2.1 Net Neutrality and Online Video 331
7.6.2.2 Foreclosure in Online Video Markets 332
7.7. Conclusions 333
Acknowledgments 334
References 334
Abstract
Television is the dominant entertainment medium for hundreds of millions. This chapter surveys the
economic forces that determine the production and consumption of this content. It presents recent
trends in television and online video markets, both in the US and internationally, and describes the state
of theoretical and empirical research on these industries. A number of distinct themes emerge, includ-
ing the growing importance of the pay-television sector, the role played by content providers (chan-
nels), distributors, and negotiations between them in determining market outcomes, and concerns
about the effects of market power throughout this vertical structure. It also covers important but unset-
tled topics including the purpose for and effects of both the old (Public Service Broadcasters) and the
new (online video markets). Open theoretical and empirical research questions are highlighted
throughout.
Keywords
Economics, Television, Online video, Public service broadcasting, Advertising, Pay television, Bundling,
Bargaining, Market power, Net neutrality, Foreclosure, Policy
JEL Codes
L82, L86, L32, M37, C72, D40, L40, L50
The need for images is universal.
Ernst Gombrich (1990), reviewing David Freedberg (1990), The Power of Images
Television: A medium—so called because it is neither rare nor well done.
Ernie Kovacs (1950s), comedian
7.1. INTROD UCTION
Television is special. It is special in its dominance of our leisure time.
1
It is special in its
impact on political participation, political debate, and political power.
2
It is special in its
1
Chapter 5 (this volume).
2
E.g., Gentzkow (2006) and Prat and Str€omberg (2011).
268
Handbook of Media Economics
impact on preferences, beliefs, and culture.
3
Television influences many aspects of life in
ways other products, even other media products, do not.
The goal of this chapter is to survey the economics of television and online video
markets. Of course, this focus on economics means I will cover only one narrow part
of the impact television has on individuals, firms, governments, and society. Entire books
have been written in fields as diverse as economics, marketing, and public policy; political
science; media and communications studies; and art and art history analyzing the impact
television has on contemporary life. The purpose here is to explain the mechanisms gen-
erating the programming and advertising which are the primary outputs of television
markets, mechanisms that I believe are essential for understanding television’s potential
impact in these other domains.
I therefore survey the demand and supply of television and online video markets. My
scope is both theoretical and empirical, with an eye on those economic issues that have
attracted the most attention of academics, regulators, and policymakers. In
Section 7.2,
I introduce the two main types of television commonly available to households (free and
pay), describe the vertical supply structure that delivers television programming (content
providers/channels and distributors/systems), and present those facts that best help
understand the current functioning of the industry.
4
In Section 7.3, I introduce a simple
model of two-sided television markets and assess the implications of this theory. In
Section 7.4, I describe the extensions to this simple model academics and policymakers
have used to understand specific features of television markets. I call these extensions
“The Four Bs”: (Public Service) Broadcasters, Barriers to Entry, Bargaining, and Bun-
dling. In
Section 7.5, I survey the highest profile current open policy issues in television
markets. In
Section 7.6, I present patterns of online video use and discuss related policy
issues at the intersection of television and online video markets.
Section 7.7 concludes
and provides directions for future research.
While the economics of television markets are largely common across countries, the
quality of data available to study the US market has made academic research more com-
mon there. This survey reflects this constraint, with the exception of my discussion of
Public Service Broadcasters (PSBs) (an issue more relevant outside than inside the US)
and mergers (where both US and European varieties have been important). Other chap-
ters in this volume also cover more thoroughly topics that could sensibly have been
included in my mandate.
Chapter 1 of this volume introduces the economic character-
istics common to all media products—high fixed costs, heterogeneous preferences, and
3
E.g., Gentzkow and Shapiro (2008) and Jensen and Oster (2009).
4
For most of the television industry’s history, the typical distinction drawn in both the institutional and
academic literatures has been between broadcast and pay television. The simultaneous development
and diffusion of encryption technologies and multichannel (pay) digital broadcast distribution of television
has weakened this distinction. I therefore choose to organize the chapter around the distinction between
free and pay television, with the imperfect but still useful link between free television and broadcast
television implicitly understood.
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The Economics of Television and Online Video Markets
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