The Economics and Financing of Media Companies: Second Edition

CHAPTER 1. Media Firms as Economic and Business Entities

CHAPTER 1 Media Firms as Economic and Business Entities To understand media industries, one must understand what drives media companies, how their markets work, and the pressures that lead executives to make choices about the ways their companies will be structured, the activities they will undertake, and the performance they require. Companies raise capital, create facilities, employ personnel, create media products and services, and sell these products and services in the market. Some companies are successful and survive in the market, some that were once highly successful cease to be successful, and some are never successful and disappear. In the aggregate, these companies create the broader media and communications industries, but they operate individually—facing individual economic and managerial challenges, making individual choices, pursuing individual strategies, and achieving different outcomes. Whether a media company is a commercial or a noncommercial operation , it faces a variety of economic and financial forces and must be operated as a business entity in order to respond to and manage those forces effectively. The forms of media companies include the range of types of firms that exist in any industry. At the simplest level are sole proprietorships and partnerships. Sole proprietorships are firms owned and operated by one person. This form is found primarily among smaller newspapers and magazines , Internet firms, and advertising firms. Partnerships are similar but, as the name suggests, involve ownership by more than one person. This business form, used when one person alone has insufficient capital or skills to operate independently, is most often found in small publications, design firms, and advertising agencies. 1 2 m e di a f ir m s as e c on o m ic a n d b u s in e s s e n t it i e s More complex company forms involve incorporation—that is, the creation of a firm as a legal entity independent of its owners. This reduces the legal responsibility of individual owners for the performance or actions of the firm. Simple corporations can be sole proprietorships or partnerships of any size. Most media companies are incorporated as private corporations and tend to be small and midsized enterprises, but privately owned media firms include larger companies such as the Bertelsmann AG, Tribune Company , and Hearst Corporation. A number of larger firms have chosen to become public corporations— firms whose shares are publicly traded on stock markets—typically to gain additional capital. Examples of public media firms are News Corporation, the New York Times Company, Pearson, and Viacom. Another form of ownership found in media involves noncommercial firms that are typically created as not-for-profit corporations. These include public service broadcasters worldwide such as the British Broadcasting Corporation (BBC) and the Australian Broadcasting Corporation (ABC) as well as publishers (or media firms) of such periodicals as the Christian Science Monitor and The Nation and online news sites such as MinnPost and ProPublica. All of these forms of media enterprises carry out the functions of acquiring and organizing resources to produce goods and services, just as firms in other industries do. The organizational forms of businesses exist because they are an efficient means of carrying out the various steps in the production and distribution of goods and services. Companies have evolved into their current forms because they create organizations that can enter into structured relationships with owners of capital, workers, and suppliers, and because the firm can provide the facilities, equipment, and management necessary to produce and distribute products effectively. In public service and other not-for-profit media, producing information and programming useful and interesting to audiences is the primary function . In commercial media, however, the primary function shifts to producing audiences for advertisers or making sales of media products to customers to obtain financial revenue for continued operation and profits. The differences in primary functions do not mean that commercial media necessarily must produce content of poorer quality, although some may in fact do so. The differences mean that commercial media managers’ content choices are based on the need to produce audiences desirable to specific advertisers or categories of advertisers and to maximize the profitability of the firm. Managers of public service and not-for-profit media, obviously, are not subject to these same pressures; however, they must make content choices based on the need to provide optimal service based on the goals outlined for their operations...