advertiser support—and these characteristics also influence outcomes in television mar-
kets. Chapter 2 of this volume covers the theory of two-sided markets in more detail. The
implications of net neutrality for the delivery of online video are also covered in
Chapter 10 of this volume. I discuss the economic issues at the heart of recent (mostly
American) media mergers, complementing Foros, Kind, and Sorgard’s largely European
focus (Chapter 6 , this volume). Wilbur discusses recent developments in mass media,
including digitization and screen proliferation, two topics that are directly impacting tele-
vision markets (Chapter 5, this volume). Chapters 14 and 15 summarize the theory and
measurement of media bias. Early empirical applications were in newspaper markets, but
the concerns apply equally well to television.
5
Finally, a burgeoning literature in political
science and economics is analyzing both the effects of governments on television and the
effects of television on economic and social outcomes, including the election and activ-
ities of governments. Chapters 16 and 17 of this volume survey these topics in depth.
7.2. THE TELEVISION INDUSTRY
7.2.1 The Types of Television
7.2.1.1 Broadcast (Free) Television
“Broadcasting” conventionally covers the distribution of both radio and television signals
via electromagnetic waves, but my focus is on the television portion of this description.
6
Broadcast television in the US began in the 1930s, but gained widespread popularity and
household penetration in the 1950s.
7
While the specifics vary across countries, diffusion
in Western Europe followed a similar pattern, with Africa and parts of Asia starting
roughly 10 years later. Television stations are generally licensed by a national regulatory
authority because the electromagnetic spectrum used by broadcasters is a national
resource and licensing is required to prevent interference among broadcasters. In the
US, broadcast stations are licensed by the Federal Communications Commission (FCC).
There are a wide variety of station types in the US (with similar patterns internation-
ally), but the most important distinctions are between commercial and non-commercial
stations, full- and low-power stations, and analog and digital stations. The vast majority of
commercial stations support themselves through the sale of advertising, while non-
commercial stations rely on donations from viewers or similar sources of funding other
than advertising (
FCC, 2008).
8
The number of broadcast TV stations in the US has been
5
See, e.g., Martin and Yurukoglu (2014).
6
See Chapter 8 in this volume for a discussion of the broadcast radio industry.
7
Gentzkow (2006) provides a concise survey of the early evolution of the US broadcast television industry.
8
The US is an important exception. In the last 10 years in the US, broadcasters have successfully begun
negotiating payments from pay-television distributors under a regulatory rule called Retransmission Con-
sent. Even so, commercial broadcasters in the US still earn the majority of their revenue from sales of
advertising.
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Handbook of Media Economics
stable over time at roughly 1400 full-power stations, 28 per state, and just under 7 per TV
market (
FCC, 2013a).
Low-power stations are smaller, local, and are often community-oriented. They are
considered a secondary service and are not permitted to interfere with full-power broad-
casters and are at risk of interference from them. Analog stations transmit programming
using the continuous modulation of an uninterrupted sound wave, with different chan-
nels allocated to different portions of the electromagnetic spectrum, while digital signals
digitally process and multiplex programming. Digital broadcasting is more efficient in its
use of spectrum, freeing up spectrum previously used for analog broadcasting for other,
higher-value uses.
In the US, there is often a separation of ownership between content providers (broad-
cast networks) and distributors (broadcast stations). Since the early days of the industry,
the production of commercial broadcast programming has been organized and managed
by “television networks,” of which the largest are ABC, NBC, CBS, and Fox.
9
The left
side of the left panel of
Figure 7.1 shows the vertical structure associated with the broad-
cast television industry.
Table 7.1 reports aggregate statistics for US broadcast networks in 2012. Reported are
measures of network costs (programming expenditure), quantity (viewership), price
(advertising cost per thousand viewers, or CPM), and advertising revenue. I divide
US broadcast networks into two groups: the so-called “Big Four” broadcast networks
mentioned above and “minor” broadcast networks. Broadcast networks only earn adver-
tising revenue, with the Big Four receiving between 83% and 89% of the total broadcast
viewing (ratings) and revenue.
In the US, FCC regulations limit the number of stations television networks can own;
the remaining stations are owned by independent firms (that typically own many stations)
that negotiate with television networks to be the exclusive provider of that network’s
programming in a TV market. TV markets are based on geography: The Nielsen Com-
pany has divided the US into 210 mutually exclusive and exhaustive markets called Des-
ignated Market Areas that are widely used in the sale of advertising. Most network
programming is shown during “prime time” (7:00 p.m. to 11:00 p.m.). News local to
the station’s principal community is produced by individual stations and programming
in other parts of the day is either provided by the network or programmed independently
with syndicators or independent program producers.
7.2.1.1.1 Public Service Broadcasters
In many countries, some portion of broadcast television service is provided by “Public
Service Broadcasters” (PSBs). PSBs compete with commercial broadcasters in providing
9
See Owen and Wildman (1992, Chapter 5) for a valuable discussion of the economics of television
networks.
271
The Economics of Television and Online Video Markets
content free over the air. In the US, “the mission of public broadcasting is to advance a well-
educated, well-informed society capable of self-governing the world’s greatest democracy”
(
CPB, 2012). In the UK, the mission of the British Broadcasting Corporation (BBC) is
famously to “inform, educate and entertain.” In the broadest terms this captures the
role of public service broadcasting in many countries; it is hard to come up with a more
precise definition.
10
In practice, common aims of PSB policy are to ensure that diverse
Advertisers
Households
Pay-TV networks
Pay-TV distributorsTV stations
Broadcasters
Bundles
Channels
Audiences
Audiences
Subscription
fees
Channels
Affiliate fees
Channels
License fees /
donations
(PSBs only)
Figure 7.1 The two-sided TV market. Notes: Depicted is the two-sided nature of TV markets. In the left
panel is the free-to-air broadcasting market and in the right panel the pay-television market. In both
markets, there is a wholesale market for programming, in which content providers (broadcaster
networks, pay-TV networks) negotiate with distributors (broadcast stations, pay-TV distributors) for
the right to carry their content, and a retail market for distribution, in which distributors either
broadcast or set prices for access to that content to households. The majority of commercial
broadcasters only earn money through the sale of audiences to advertisers. Funding for Public
Service Broadcasters (PSBs) comes from mandatory household license fees, sales of advertising,
and/or donations from viewers. Funding for pay-television channels and distributors comes from a
mix of advertising sales and subscriber payments (see
Tables 7.1–7.3).
10
The UK’s Peacock Committee, discussed in Section 7.4.1, noted it had experienced difficulty obtaining a
definition even from the broadcasters themselves.
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Handbook of Media Economics
and high-quality programming is supplied which caters to all interests and communities. In
addition, programs that yield educational and other social benefits are to be encouraged,
including programs that might make the population more tolerant, and also more aware
of their regional and national identity. And in a related vein, there is often intervention
to ensure that sufficient locally produced content is available, and that the domestic
“ecology” of program production is protected.
11
These values and examples of the types
and providers of programming that support these values in the UK are shown in
Figure 7.2.
12
Table 7.1 US broadcast television networks, 2012
Program
expenditure
($ million)
Average
prime time
rating
Average
24-h
rating
Cost per
thousand
(CPM) ($)
Net
advertising
revenue
($ million)
Big-4 B/C networks
ABC 2763 3.9 2.4 17.6 3177
CBS 3303 5.2 2.8 16.2 4124
NBC 4041 4.7 2.6 18.5 3955
Fox 2120 3.5 3.8 33.8 2634
Total Big-4 12,226 17.4 11.6 21.5 13,891
Minor B/C networks
The CW 439 0.7 0.6 44.1 418
Univision 234 1.7 0.7 641
Telemundo 204 0.6 0.3 374
UniMa
´
s 83 0.3 0.2 160
Total minor 1129 3.6 2.0 1752
Total B/C networks 13,355 21.0 13.6 15,642
Weighted average
B/C networks
21.6
Big-4 share 91.5% 83.0% 85.5% 88.8%
Notes: Reported are aggregate statistics for US broadcast networks in 2012 (SNL Kagan, 2014a). Measures of network costs
(programming expenditure), quantity (viewership), price (advertising cost per thousand, or CPM), and net advertising
revenue are given. “Rating” is the average percentage of US households watching that channel across a set time interval.
US broadcast networks are divided into two groups: the “Big-Four” broadcast networks (ABC, NBC, CBS, and Fox) and
“minor” broadcast networks. Weighted average broadcast networks are weighted by the average 24-h rating. Big-4 share is
the share of the column spent/watched/earned by the Big-4 broadcast networks.
11
The UK’s 2003 Communications Act defined four basic objectives for PSBs: to promote social values,to
offer high-quality programming, to provide range and balance in its programming, and to provide diversity of
programming.
Section 7.4.1 discusses the rationale for and effects of PSBs in more detail.
12
This figure is taken from Ofcom (2004). Similar social purposes are found in PSB systems of other coun-
tries. The PSB Charter for Ireland’s Radio Telifis
Eireann (RT
E) includes among its guiding principles
“the democratic, social and cultural values of Irish society.” NZ On Air, the funding body for PSBs in
New Zealand, states as its mission, “to reflect and foster the development of New Zealand culture and
identity through broadcasting.”
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The Economics of Television and Online Video Markets
Funding for PSBs comes from a variety of sources that differ across countries and
across PSBs within countries, including mandatory household license fees, sales of adver-
tising, and/or donations from viewers. The right side of the left panel of
Figure 7.1 shows
the vertical structure and payment flows associated with PSBs. In the UK, the oldest and
largest PSB, the BBC, is the beneficiary of an annual license fee of £145.50 (approx. $20/
month) and sells no advertising, while the other commercial PSBs in the market—ITV,
Channel 4, and Channel 5—receive no license fee and only sell advertising. In the US,
public service broadcasting is provided by public (non-commercial) television stations
that provide a mix of locally and nationally produced programming. The majority of
the national programming is provided by the Public Broadcasting Service, a non-profit
public broadcaster jointly owned by over 350 member television stations. Funding for
public broadcasting comes from a mix of sources, with contributions from individuals
most important (22% on average across public television stations), followed by federal
government support (18%), state and local government support (17%), university and
foundation support (15%), and underwriting by businesses (13%) (
CPB, 2012).
Figure 7.3 reports the aggregate amount of public (government) funding for televi-
sion along with the per-household-per-month TV license paid for a selection of major
world economies.
13
It shows that most developed country governments provide between
• Programming reflecting
the needs and concerns
of different communities
• A significant number
of different genres
• Range within genres
(e.g., subgenres, format)
• Originality and innovation
• Acceptable standards
of taste and decency
• High production values
• Ambitious programe-making
(challenging, provoking,
stimulating audiences)
• The reflection of the UK
and its nations and regions
• The promotion of the
arts and national heritage
• The promotion of
social action campaigns
• Availability and impartiality
of news and current affairs
• Balanced investment
across genres
• Availability of programmes
at suitable times
• Programming targeted
at all audience types
• Representation of diverse
range of viewpoints
• Programming supplied by
variety of producers/writers
• Promotion of awareness
of different communities
• Original children’s
programming
Educated citizens
Informed democracy
Cultural identity
Quality
Social
values
Range and
balance
Diversity
• Specific educational
programming and content
• Variety of informative,
factual programming
Figure 7.2 Core purposes of UK PSBs. Notes: Depicted are the core purposes of the UK's Public Service
Broadcasters, including the BBC, and examples of the types of programming that support these
purposes, as indicated by the UK media regulator,
Ofcom (2004, p. 26).
13
See also Table 7.4.
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Handbook of Media Economics
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