The Economics and Financing of Media Companies: Second Edition

CHAPTER 3. Distribution and Retail Sales of Media

CHAPTER 3 Distribution and Retail Sales of Media Producing content is a fundamental activity of media firms, but that content must reach consumers before the firms can be considered as actually doing business. The processes of getting the content to customers are central and often-ignored aspects of media enterprises that are crucial to determining the success of the content. Media encounter differing degrees of distribution complexity because of dissimilarities in their nature, their geographical distribution areas, types of distributors involved, warehousing requirements for physical media products and the extent to which retail networks and retailers are involved. Media distribution environments are determined by whether physical or nonphysical products are involved and whether sales are made on the basis of a single-product purchase or a subscription. Distribution systems can be internal or external to the producer and can involve business-to-consumer sales—such as those for newspaper or cable systems—or business-to-business sales such as motion picture distributors selling rights to show films to theatres or television producers selling broadcasters the rights to broadcast their programming. Some media are based in retail store distribution, such as audio recordings, DVDs, magazines, and books. These distribution activities involve warehousing, transportation, wholesalers, and retail stores themselves. Physical distribution is highly influenced by unit cost economics whereas nonphysical distribution is influenced by transaction cost economics. Digitalization of content has made it possible for some products to change from physical to nonphysical distribution, to disintermediate the existing 59 60 d i st r i bu t i on a n d r e t ai l s al e s of m e di a distribution system by removing or creating mechanisms to bypass some intermediary players, or to reintermediate the system by reconstructing the system with different intermediaries and different cost structures. These changes can reduce the cost of distribution in nonphysical systems but may have the simultaneous effect of increasing average cost of products remaining in physical distribution. Nonphysical distribution includes broadcasts from a radio station, programming conveyed on a cable television system, content delivered over the Internet, and audio/video downloads. When nonphysical distribution is involved managers focus on fundamental activities such as ensuring system reliability and quality system capacity, ease of consumer use, and customer service. inventory and distribution challenges Multifaceted processes are involved in getting physical products from the production line to customers that involve warehousing, order fulfillment, and transportation to retail stores. But the processes do not merely involve getting the book, CD, or game from one point to the customer because multiple enterprises with different interests and different risks are involved. The media producer takes orders from retailers (or customers if direct sales are involved), coordinates these orders with accounting and payment systems , and then sends the orders to the fulfillment center to pull materials from inventory, package them, and ship them to retail shops or directly to customers. All these processes must also be coordinated with accounting and payment systems, inventory management systems, and production reordering systems. It is a dynamic process that must manage inventory on hand and the distribution activities themselves. Inventory management issues involve ensuring adequate supply of product , producing rapid turnover of inventory, avoiding overstocking, and coordinating production to ensure that sufficient supply exists to fill orders. The biggest challenges result from an inability to forecast demand, from high levels of inventory, and because of differences in preferences for products in different markets. Inventory turnover is necessary; it is expensive to have product sitting on the shelf because of financing of manufacturing and the costs of warehouse space. These factors force companies to make sales at discount prices to clear warehouses when inventories are too high. These inventory challenges are compounded because the only thing worse for a business than overstocking is understocking that leads to lost sales when the company can’t meet demand. Businesses attempt to overcome stocking challenges by constant monitoring of order and sales reports. Distribution management concerns focus on speed in fulfilling and delivering orders, effective shipment scheduling and routing, and costs created by small orders from many retailers. Because of the fact that the number, size, and locations of markets may require multiple distribution centers, clarity of responsibility for markets and coordination among distribution centers is mandatory. Media producers must be particularly concerned about their ability to gain access to markets and customers; the number...