Monday Night Anomalies

| Gabriel |

The transformations of the television industry are an endlessly fascinating subject that I spend a lot of time ruminating on but haven’t ever, you know, actually published on. We can start with a few basic technological shifts, specifically the DVR and broadband internet. Both technologies have the effect that people are watching fewer commercials. From this we can infer that advertisers will have a pronounced preference for “DVR-proof” advertising.* One form of this is product shots, which are indeed a big deal nowadays, especially in the reality competition genre. Of course product shots are inherently cumbersome and are pretty much the antithesis of the scatter advertising market insofar as they require commitments during pre-production which is even more extreme than up-fronts and which is why we long ago got past the age of Texaco Star Theatre. So basically, the 30 second spot you will always have with you. Or rather, the demand for the 30 second spot you will always have with you and the question is can we find a type of programming where people watch the ads. (Note that the recent Laureate Jean Tirole did work on this issue, as explained by Alex Tabarrok at MR).

In practice getting people to watch spot advertising means programming that has to be watched live and in practice that in turn means sports.** Thus it is entirely predictable that advertisers will pay a premium for sports. It is also predictable that the cable industry will pay a premium for sports because must-watch ephemera is a good insurance policy against cord-cutting. Moreover, as a straight-forward Ricardian rent type issue, we would predict that this increased demand would accrue to the owners of factor inputs: athletes, team owners, and (in the short-run) the owners of cable channels with contracts to carry sports content. Indeed this has basically all happened. You’ve got ESPN being the cash cow of Disney, ESPN and TNT in turn signing a $24 billion deal with the NBA, an NBA team selling for $2 billion, and Kobe Bryant making $30 million in salary. Basically, there’s a ton of money in DVR-proof sports, both from advertising and from the ever-rising carriage fees that get passed on in the form of ever rising basic cable rates. (I imagine a Johnny Cash parody, “how high’s the carriage fees mama? 6 bucks per sub and rising.”).

Here’s something else that is entirely predictable from these premises: we should have declining viewership for sports. Think about it, you have widget A and widget B. Widget A has a user experience that’s the same as it’s always been (ie, you got to watch it when it’s on and sit through the ads) but the price is rapidly increasing (it used to be you could get it over broadcast or just from a basic cable package that was relatively cheap). In contrast you have widget B which has a dramatically improved user experience (you can watch every episode ever on-demand whenever you feel like it without ads and do so on your tv, tablet, or whatever) and a rapidly declining price (if you’re willing to wait for the previous season, scripted content is practically free). If you’re the marginal viewer who ex ante finds sports and scripted equally compelling, it seems like as sports get more expensive and you keep having to watch ads, whereas scripted gets dirt cheap, ad-free, and generally more convenient, the marginal viewer would give up sports, watch last season’s episodes of Breaking Bad on Netflix, be blissfully unaware of major advertising campaigns, and pocket the $50 difference between a basic cable package and a $10 Netflix subscription. Of course you wouldn’t predict that the kinds of guys who put body paint on their naked torsos would give up on sports just because Netflix has every season of Frasier, but you would predict that at the population level interest in sports would decline slightly to moderately.

The weird thing is that this latter prediction didn’t happen. During exactly the same period over which sports got more expensive in absolute terms and there was declining direct cost and hassle for close substitutes, viewership for sports increased. From 2003 to 2013, sports viewership was up 27%. Or rather, baseball isn’t doing so great and basketball is holding its own, but holy moly, people love football. If you look at both the top events and top series on tv, it’s basically football, football, some other crap, and more football. (Also note that football doesn’t appear in the “time-shifted” lists, meaning that people do watch the ads). And it’s not just that people have always liked football or that non-football content is weakening, but football is growing in absolute popularity.

That this would happen in an era of DVRs and streaming is nuts, and kind of goes contrary to the whole notion of substitutes. I mean, I just can’t understand how when one thing gets more expensive and something else that’s similar gets a lot cheaper and lower hassle, that you see people flocking to the thing that is more money in absolute terms and more hassle in relative terms.*** Maybe we just need to keep heightening the contradictions and then eventually the system will unravel, but this doesn’t explain why we’ve seen a medium-run fairly substantial rise in sports viewership instead of just stability with a bit of noise.

I’m sure one of my commenters is smarter than me and can explain why either my premises or logic is incorrect, but at least to me this looks like an anomaly. And even if we can ultimately find some auxiliary hypothesis that explains why of course we’d predict a rise in sports viewership if we only considered that [your brilliant ex post explanation goes here],**** let’s keep in mind that this is all ex post, and adjust down our confidence about making social scientific predictive inferences accordingly. A theory like decline in total cost of widget B will lead to substitution of widget B for widget A is a pretty good theory and if its predictions don’t hold in the face of something like bigger linebackers or more exciting editing for instant replay, then you have to wonder how much any theory can get us.

*If we’re a bit more creative we could also infer that the market information regime for audience ratings will see a lot of contentious changes.

**It is interesting that the tv networks aggressively promote Twitter in order to promote live viewing of scripted content and news, but at this point the idea that networks will hashtag their way to a higher “C3” ratings is pretty niche/speculative.

*** The closest parallel I can think of is that it’s the easy-going mainline Protestant churches that have seen especially steep declines in attendance/membership and the more personally demanding churches that are relatively strong. I may have to rethink this point though after I fully digest the new Hout & Fischer.

**** Your ex post explanation better speak to the (extensive) marginal fan and not just the intensity of hardcore fans, since my understanding is total number of football viewers is up, and so the explanation can’t be anything like the growth in fantasy leagues leads hardcore fans to watch 20 hours a week instead of 3 hours a week.

Bargaining With Assholes

| Gabriel |

Like many people I was influenced by Ronald Coase and thinking about him on the occasion of his passing at the age of 102. Coase himself wasn’t fond of certain applications of the Coase theorem because people read it as “you can bargain” and forgot just how big an if it is to add “if the transaction costs are low enough.”

Adam Ozimek had a great post on another problem with the Coase theorem, which is that it creates incentives to over-produce externalities in the hope of side-payments. That is, it leads to extortion. In a nutshell Adam argues that reframing things from unpriced conventions to priced exchanges makes a big difference, especially when you’re dealing with assholes. Go read Adam’s post, you’ll enjoy it and I’ll wait.

I mostly wanted to point towards Adam’s post because he said a lot of what I was thinking, but I might as well add a few related thoughts.

First, Coase himself recognized this issue in his analysis of payola (which heavily influenced my own analysis of that subject in Climbing the Charts). In particular he noted that record labels (and before them music publishers) are much better off if you can’t buy airplay (and before that, placement in set lists) since once you can it quickly becomes mandatory and indeed the music industry occasionally formed monopsonistic cartels to (ineffectually attempt to) suppress the practice.

Second, the film industry experiences problems very much like what Adam is describing. If I’m minding my own business vacuuming my house and a PA from the film shoot next door knocks on my door and asks me to do it tomorrow instead and offers me $100 for my trouble, that’s classic Coasian bargaining. But eventually this leads to people driving around town looking for film shoots and then getting out leaf blowers, air horns, or whatever and this became so common that the state legislature of California wrote a law against it, as summarized by the state senate analyst:

Film producers complain that they are increasingly beset by knowing and malicious disruption of film production by bystanders who extort cash payments in exchange for stopping the disruptive activity. Production companies often accede to the extortionate demands because it is cheaper to pay $1000 or more to be able to continue filming than to stop and set up the production for another day. Among the more common disruptive practices are: reflecting light at cameras during filming to ruin film exposure and blowing air horns, or using leafblowers to interfere with sound recording.

Theoretically, such disruptive activity could be considered extortion, but for extortion to be committed, the threat must be to do something unlawful. A lawful act, even if reprehensible, is not criminal, and the kinds of acts complained of are usually not criminal. While it may be rude to shine headlights on a set, or run a leafblower nearby, it is probably not punishable as extortion. AB 534 (Brulte), pending in the Senate, seeks to resolve the same problem as this bill by criminalizing specific disruptive activities, making the conduct misdemeanor disorderly conduct or disturbing the peace.

Third, even in the absence of strategic extortion attempts, reframing from courtesy to market can make big differences in how people behave. The cite for this is “A Fine Is a Price” which showed that parents were more likely to show up late at daycare when there was a fine for this than when it was merely prohibited. In principle you could solve this by making the fine bigger until the workers saw it as desirable overtime, but that would lead to resentment on the part of the parents. (I’ve previously discussed this article at Megan’s old place).

Cultural Learnings of Economics for Make Benefit Glorious Discipline of Sociology

| Gabriel |

[Note, if you subscribe by RSS or email you might have gotten an earlier and incomplete version of this that I posted by accident on 5/25/13]

A few weeks ago the political scientist Henry Farrell posted a point-by-point critique of an LA Review of Books essay that was smugly denouncing economics while getting pretty much all its facts about economics dead wrong. (Most notably it confused the difference between public choice and game theory in ways that are extremely funny if you have a working knowledge of both literatures). The thing that made me really cringe about the LARB article though, which was written by a non-academic journalist/ social critic, was how if you told me it was written by a sociologist and got through peer review at a soc journal, I would have believed you.

Sociologists love to talk about how obtuse and limited in vision economists are but we often do so with only a vague awareness of how they do things but a pervasive suspicion that whatever they’re doing, it’s probably nefarious. It’s kind of like hearing peasants describe Jews. At this point I wouldn’t be surprised to hear a sociologist claim that economist tears prevent AIDS, or at the very least that they have horns.

The main reason for this is that we tend not to study economics itself, at least not on any kind of systematic basis but rather learn about it by reading polemical criticisms of economics’ excesses and/or intrusions into sociological turf. Which is fair enough since it’s hard enough to learn your own discipline without getting another too, but it does give us a rather particular vantage point that’s not at all emic. So rather than reading stuff that economists tend to consider fundamental we might read specific works in economics that either seem to be internal criticisms that grope towards sociological enlightenment (e.g., Akerlof, Williamson) or we read stuff that tries to reconceptualize sociological phenomena as exchange (e.g., Becker or Posner on sex and the family) and which tends to involve bizarre epi-orbit type arguments (e.g., “rationally maximize bequests”) or simply make bad predictions we can debunk.

(Note though that Pierre Bourdieu is a lot closer to Gary Becker than you’d think based on the kind mood affiliation heuristic in which we’re supposed to love one and boo and hiss at the other. Not only are both of them known primarily for extending the metaphor of “capital” but Bourdieu’s theory of gifts is very Becker/Posner like in seeing gifts as ultimately a calculated exchange).

A slightly more charitable way to put it is that your average sociologist’s understanding of economics is a lot like learning about Gnosticism by reading Against Heresies. Iraneus had himself read Valentinius and knew enough about Gnosticism to intelligently critique it from the perspective of proto-orthodoxy, but most later Christians and historians knew gnosticism only through Iranaeus’s arguments against it. In this analogy actually learning and reading economics for yourself is like finding the Nag Hammadi library. Once you’ve translated AER and a Principles textbook out of Coptic, you’ll see that they do indeed say a lot of the things we attribute to them, others of their arguments we characterize uncharitably to the point of being barely recognizable, much of what we think they hold central is actually incidental in their own conception, there’s a lot of stuff they care about which we never noticed, and there’s actually a lot of overlap.

Now mind you, it’s not like economists have a clear understanding of what we do either, with their understanding generally falling into three categories:

• Homo sociologicus ordinarius – A politically correct ninny with more indignation than expertise
• Homo sociologicus reticularis – Social network analysts who make cool pictures and have mastered a technical expertise different from but on par with anything economists do
• Homo particularis sociologicus – A particular colleague or noteworthy scholar who happens to be a sociologist but with their identity and contribution being understood as idiosyncratic rather than disciplinary

On the other hand, the economic folklore about sociology is different in character from ours of them insofar as economists’ views of the other social sciences are like how Bukowski was asked what he thought about another poet would always reply “I don’t think about him.” In that sense econ’s ignorant understanding of soc is more like our understanding of anthro than our understanding of economics since there’s a big difference between having a vague understanding of a discipline that you’re dedicated to critiquing and a vague understanding of a discipline that you mostly just ignore.

It’s Not TV, It’s Coasian Bargaining

| Gabriel |

In a guest post for Megan last year I argued that the biggest barrier to a la carte HBO Go is that it would provoke a backlash from the cable operators, upon whom HBO is still reliant for most of its sales. (FWIW, I wanted to title that post “There is no word for `cord-cutter’ in Dothraki,” but the editor made it less elliptical). Just a year later, we have HBO floating a proposal to let you buy HBO Go without getting basic cable. At first glance it looks like I was just wrong, but check out the fine print (actually the headline), which is that you wouldn’t buy the service directly from HBO, but through your ISP.

Now this seems crazy. I pay for all sorts of content on the internet (e.g., Netflix) but it’s not a check-off on my broadband bill, rather it’s something I pay directly to the provider. The idea of adding premium content as a check-off to your telecom bill seems really 80s or early 90s, harking back to when the information superhighway was going to be a sort of Minitel en anglais rather than the internet we’re used to where your connection is a pure infrastructure service, most content is ad-supported, and premium content is something you either pay for directly or through a handful of platforms charging the rightsholder a 30% sales commission (e.g., iTunes, Google Play, Amazon Instant/MP3/AndroidApps) who are not directly connected to your ISP. And yet HBO wants to go through the telecom check-off model rather than just sell you their content directly (or through a “store” platform like iTunes). The question is why, and, no, the answer is not because they are too stupid to think about it any other way or too lazy to set up their own billing system.

As I argued before, HBO has to navigate the Scylla of “piracy is a customer service issue” and the Charybdis of “don’t antagonize the still-powerful incumbents.” My reading is that this otherwise cockamamie proposal of ISP-centric billing is a pretty solid strategy for accomplishing just that. Let’s think about the advantages, from the point of view of maintaining HBO’s relationship with the telecoms:

1. The ISPs get a cut. Traditionally, HBO retails for about a 100% markup. So if your cable company charges you $12 (on top of your basic cable) it’s paying HBO about $5 or $6. The proposed model would keep that going. Keep in mind that the ISP and the cable operators are usually the same companies. In this sense, making you buy HBO from Comcast or AT&T instead of directly from HBO is effectively a convoluted way for HBO to make a side payment to the telecoms to not retaliate in the core business model of selling HBO as part of a tv package. Note that if HBO were to settle the Coasian bargain by just to writing a check to the MSOs, this would be a lot simpler, but simple exchanges are often perceived as more morally objectionable than Rube Goldberg exchanges.
2. Each ISP gets control over pricing. About half the price of HBO through your tv is the cable operator’s markup (see above) and given that Amazon and Apple only charge 30% for billing and hosting, it’s conceivable that HBO Go a la carte could undercut cable HBO on price. The new proposal ensures this won’t happen.
3. Each ISP gets veto rights for its own customers. Suppose that your ISP isn’t happy with HBO’s offer to let it keep half the money from IP only HBO Go (which it would price at or above the price it charges tv customers) because it really wants to keep pushing you towards that “triple play” package its telemarketers keep harassing you with? Well, that ISP can just refuse to sell HBO GO to its broadband-only customers. And unlike Netflix, the ISP would actually be able to veto your purchase. It’s structurally very similar to car dealerships, where local brokers are terrified of (and can use their clout to prevent) translocal competition. This one is actually kind of scary. Imagine if you could only subscribe to the New York Times through your condo’s HOA, which would otherwise deny building access to the paperboy?

There are some ways in which this would still create problems for the cable operators, mostly in that it would undermine the two-part tariff aspect of their business model, but I think this is effectively obviated by the local veto aspect of the proposal. Moreover, cable operators are increasingly showing signs that they see the bundling aspect of their business model unraveling (mostly because carriage fees are out of control) and are willing to settle for a role of brokerage, without bundling. (Note that data caps, which don’t apply to content bought from your ISP, help enforce this brokerage role since they effectively let your ISP tax content bought on the open market).

So the good news is that you may be able to watch Girls without first having to also pay for a bunch of sports and reality shows about petulant alcoholics. The bad news is this represents yet another business model innovation against the open internet.

Do declining Hollywood revenues mean fewer movies or smaller mansions?

| Gabriel |

Matt Yglesias has a characteristically smart reply to my post on the effects of piracy in Hollywood vs music. Specifically, he notes that movie stars make a lot of money and we can expect losses to piracy to mostly affect them. That is, much as I argued that music piracy is not that big a deal because it mostly affects rent dissipation in the form of payola, Yglesias makes a parallel argument about elite labor compensation in film. I agree with this argument in part (in fact I anticipated it in my penultimate paragraph) but I think he goes a bit far in expecting that the cost will  primarily be felt in the form of reduced star compensation with little impact on the filmgoing experience.

Before quibbling, I should say that I totally agree that reducing the rewards to elite Hollywood workers will not greatly reduce the quality of our stars. If you think, as I do, that fame is endogenous and only very loosely coupled to native talent, then we might have some retirements in the short-run but in the long-run we can expect very little decline in movie star or screenwriter quality if the top movie stars and screenwriters take a pay cut. The real issue is not that cutting above-the-line costs will hurt quality but that above-the-line costs are a minority of all costs.

Since Yglesias brought up Tom Cruise, let’s use the example of Mission Impossible: Ghost Protocol. IMDb estimates the production budget at $145 million. For the sake of argument, let’s assume that Tom Cruise got paid $20 million, and maybe another $20 million spread between the other above-the-line talent like Brad Bird and Jeremy Renner.  (These are probably overestimates, but I’m trying to make a conservative argument). This still leaves at least $100 million for below-the-line costs. If the expected value of green-lightening MI4 were cut in half by piracy there’s no way this could fall entirely upon Tom Cruise and other elite labor, even if we assume they would work for free, because their total compensation was probably less than a third of the budget.

Making big tent-pole films is really expensive and not just because the director, screenwriters, and starring actors can bid up their compensation. In Hollywood accounting these people are known as “above-the-line” and their wages are, to a first approximation, equal to the expected value of their marginal contribution to the film’s revenues. Although the guilds set minimums, anyone you’ve heard of gets paid much more than union scale and in practice above-the-line wages are negotiated for each elite worker on each film. (This is why people need agents).

In addition to the marquee collaborators, there are lots of craft workers who contribute to films. To a first approximation their wages are set by unions and their cost is a multiple of the number of days on the shooting schedule. Spectacular shots take skilled labor and time. For instance the shooting for MI4‘s amazing hotel climbing sequence alone took eight days, all of them overseas where you have to fly in and put up the expensive union crew. Yes, they could do this more cheaply with digital but I think we’ve all learned that over-reliance on digital matte painting leads to terrible acting performances and a generally creepy uncanny valley feeling.

In much the same way that we can imagine cramming down the compensation of red carpet celebrities we can similarly imagine cutting the wages of below-the-line workers. However this is a much more difficult proposition, even if we put aside the “Hollywood craft workers are the salt of the Earth” talking point that Chris Dodd likes to use to pitch SOPA to left-wing audiences. Key grips are in some sense “overpaid,” but not by nearly so much as are movie stars. The fact is that if you want a master craftsman you need to pay a solid middle class living or that person will defect to another industry. We can imagine cutting celebrity wages by maybe 90% without much hurting labor quality but there’s not nearly as much fat to cut on the below-the-line side, maybe 30% or so. If you want to get below that it’s not going to come out of pay cuts but reduced labor utilization, and by extension lower production values. Contrast the flat lighting in Dawn of the Dead with the rich depths in Land of the Dead  and you’ll get a sense of why the latter film had a budget that was eight times higher in real dollars.

That’s in the long-run. There’s also an issue of what the transition would look like. As I mentioned above, movie star compensation is negotiated ad hoc for every film. If revenues drop appreciably the quote price for above-the-line workers will follow almost immediately. In contrast, getting a 20% or 30% clawback from both craft workers and non-name creative workers is a different procedural ball of wax. These wages are set by union contracts and would have to be renegotiated with SAG, WGA, and IATSE. Paring back the cost structure of an industry under threat is really hard and creates lots of resentment. Moreover the studios are notorious for their sketchy accounting which means that workers will understandably find it difficult to believe “we can’t afford it.” As such an attempt to clawback from union contracts would almost certainly provoke a series of strikes, which not only disrupts shooting during the strike itself but for any film that can’t be completed before a possible strike date.

So I agree that a lot of reduced revenues will be felt in lower star compensation, but a lot of it will cash out in terms of lower compensation for below-the-line workers and lower production values. And that’s after we suffer through a series of strikes to renegotiate the union contracts.

Sympathy for the IP Industry

| Gabriel|

[Cross-posted at NR‘s Agenda blog]

In the arguments over SOPA, I’ve seen a few arguments from people I respect that piracy basically doesn’t matter. These arguments strike me as somewhat plausible but probably wrong and grounded in wishful thinking that a solution being unpleasant means that the problem it addresses is nonexistent. This is not to say that I support SOPA, for I do not. My main intuition on this is that an industry that sponsored the Sonny Bono Copyright Term Extension Act has forfeited its claim to our sympathies. Thus even when it has a legitimate grievance, I am inclined to give it only mild weight. Thus I tentatively favor the Megaupload suit but I’m gonna say “sucks to be you” when the industry demands escalating the fight against piracy into the top priority of US trade diplomacy and a total war waged on the terrain of the internet’s low-level infrastructure. Nonetheless I think it’s important to clarify just how complicated estimating the effects of piracy are.

Much of the debate centers on first-order effects of immediately displaced sales. That is, at a micro-economic level how much does a pirated copy of work i substitute for a legitimate copy of work i. Early on the IP industries had some estimates premised on the idea that each pirated transfer represented a foregone retail sale, which implied the absurd counterfactual that absent piracy we would have seen a massive boom in sales. Critics have appropriately rebutted these studies with the reminder that demand curves slope downwards so quantity demanded at price $0 will be considerably higher than quantity demanded at price $14.99 (at least if we assume low search costs).

I would say that a more important issue is the second-order effects. This appears in some of the anti-anti-piracy arguments as some variation of “people won’t pirate if you make content available in a convenient format at a reasonable price” or “piracy is a customer service issue.” I think this is basically true as an empirical matter and it’s certainly a very parsimonious description of my own behavior. The trick is that you can rephrase the argument as “the threat of piracy has forced distributors to lower their price points and adopt formats that are less desirable to the producer.” As Kernfeld notes in Pop Music Piracy, this is a very old pattern. Basically, producers create some kind of format at a high price point and consumers buy it until a pirate comes along and both undercuts them on price and introduces format innovations. At this point the incumbents try for awhile to suppress it, before giving up by adopting the pirate’s format innovations and dropping their price point. That is, the incumbents ultimately realize that the only way to deal with piracy is a “convenient format at a reasonable price.” Kernfeld emphasizes mid-20th century pirated songbooks as competition for legitimate individual pieces of sheet music but he also applies it to the more familiar case that the music industry only gave in to low price (and eventually DRM free) digital singles to replace high price CDs as a desperate rearguard action against music file-sharing.

Recorded music revenues have dropped precipitously since the late 1990s but only a minority of this was the direct result of sales substituted by piracy. Rather the great bulk of the drop was from the shift from CD albums at a price point of $15 to digital singles at a price point of $1. We have in fact seen a large increase in units shipped, but mostly in digital singles at the low price point. You can see this clearly by looking at Census Statistical Abstract table 1140 and contrasting the unit sales in the top half with the dollar value in the bottom half. To fully make up retail sales we would’ve needed a 15-fold increase in volume and this has not happened. Even if we appreciate that there digital implies lower costs (no inventory) and think about wholesale rather than retail, we’d still need something like a 5-fold increase in sales to make up for lower revenues.

One important consideration of second-order effect is that it means you have to think at the macro rather than the micro and this makes analysis difficult. That is, many researchers have looked at how often a song is pirated and tried to estimate elasticities with legitimate sales. This is a good way to estimate the proximate effects of piracy but it misses the much more substantial second-order effects since the record industry has not dropped its price point only for heavily pirated songs, but for all songs. Let’s assume that lots of people would pirate Eminem but nobody would pirate Norah Jones. If the record industry switches to a digital downloads model to protect sales of Eminem, this will still decrease the dollar value of Jones’s sales. Conversely if higher concert revenue helps make up for declining recorded music revenue this shift applies in nontrivial ways at the micro level.

We also see second-order effect in the film industry. As Reihan has noted (in discussing Doctorow’s summary of Waldfogel and Danaher), one of the ways the movie industry has responded to piracy is by accelerated releases. It would be a mistake to claim that opening wide is driven entirely by piracy. The fact is that it’s a long-term trend since the mid-1970s and also has to do with supply side issues of promotion and a screen glut. However piracy is a part of opening wide, particularly in terms of major releases opening simultaneously world-wide. Dubbing, prints, and promotion on a global scale is extremely expensive and if studios had their druthers they’d rather postpone it until they had an estimate of how well the film does domestically. As you can see by looking at the breadth of release dates, they did in fact drag out foreign releases in the 1970s and 1980s, but in the 1990s and 2000s they’ve been getting increasingly close to a simultaneous world-wide release. This is not so much an issue of foregone sales as it is of increased expenses but it is a way that providing better customer service so as to avoid piracy does cost the industry. That’s not to say that this is conclusive, as Reihan and Doctorow observe it is probably more efficient and just to have Hollywood bear the private cost of accelerated release than to have governments (and private ISP companies) worldwide bear the costs of aggressive enforcement.

Now for the sake of argument let’s take as granted that direct costs of piracy and indirect costs in the form of better “customer service” are costly to the industry and ask what are the consequences for what gets made? We actually have some evidence that this has not much affected the quantity and quality of music but I find it difficult to be as optimistic about film.

The difference has to do with how money gets spent in both industries and in particular appreciating how promotion is the key resource in the entertainment industry. In the music industry the ratio of promotion to production costs is about 10:1. Some of this is about creating fame, but much of it is about allocating fame. This is important because to a first approximation fame is inherently scarce. As Ricardo argued in his analysis of the Corn Laws, when quantity is fixed any change in demand accrues to factor producers. That is, if the sales of pop music decline over the long-run this will cash out as increased consumer surplus and declining value prices for advertising. A very high proportion of music promotion costs does not occur in the general advertising market but in specialized markets, including payola. This means that over the long-run a drop in music revenues will in large part be felt by radio stations and others who specialize in promoting music.

In contrast, the promotion to production ratio in Hollywood is about 1:2. That is, the rule of thumb is that prints and promotion are about half again the cost of getting the film in the can. This means that decreased profits will mostly hit Hollywood itself rather than a related industry. Since stars are residual claimants and below-the-line workers make solid middle class livings, some of the pain will hit in the form of lower labor compensation, however you can’t lower production costs without eventually hurting production values. [Update: Also see Yglesias and my own follow-up on this issue].

More broadly, I think we need to be skeptical of free lunch thinking that if a policy has undesirable consequences this doesn’t mean we have to pretend there is no real problem it is addressing. It’s a common position to say “I don’t like bullying tactics, bad faith arguments, and rent-seeking of the IP industry, therefore piracy is not a problem.” I sympathize with this frustration but it’s more intellectually honest to take seriously that there might be a problem that we decide it is better to leave unsolved.

How is a Textbook Like an MRI? [updated]

| Gabriel |

[update 1/30/2012, added a reply from Sage and my further comments]

Yesterday I got the “Sociology” and “Research Methods, Statistics, & Evaluation” catalogs from Sage and I noticed something interesting about them. Let’s take a look at a page together and see if you notice what interested me. (click to get a full-size pdf)

Here’s a hint, they starts with “$” and they ain’t there. The vast majority of the titles in the catalog don’t have any prices. This is odd. Generally one of the most salient pieces of information about any market commodity is the price and that includes books. If you search Amazon for these same titles you will see that Amazon makes the prices pretty conspicuous. Nor is there some unique delicacy of academics that Amazon is boorishly overlooking. If you look at the sociology catalogs for PUP or UC you’ll see that there are prices throughout. So why doesn’t Sage provide prices?

If you understand the book market you may be able to guess, but let’s take a look at another page from the Sage catalog for really conclusive proof.

This page has prices. As you may have noticed the tab on the edge helpfully notes that these are books “For Your Bookshelf.” In contrast, the (much more numerous) books that are described as “Recommend to Your Students” or “Textbooks” do not have prices. We can fit PUP and UC into this pattern insofar as they’re academic presses, not textbook publishers, meaning that in Sage’s terminology every book offered by PUP or UC is “For Your Bookshelf” and thus deserves to have a price attached. (Academic presses like PUP and UC certainly don’t object to course adoption, but the books are primarily written for an audience of colleagues and course adoption is a valuable crossover market).

Generally, the pattern is that when somebody else is paying you don’t care about the price. When I adopt a book for course adoption it’s my students who pay. Of course it’s almost inevitable that I’m going to be less price sensitive when choosing a book for course adoption than if I were buying 120 copies out of pocket. What amazes me is how brazen Sage is in not even putting the price in the catalog when my students are paying but doing so when I pay, a not so subtle hint that I should be completely indifferent to how much my students pay although obviously I’ll care when I pay. This is not unlike the critique of health insurance underlying HSAs: third party payment in medicine, as in textbooks, discourages price sensitivity and by extension leads to cost creep. This is sometimes taken to the extreme that doctors never quote patients the price of an MRI (or whatever it is they are referring/prescribing) and often can’t provide price information even if the patient asks. Even if the third party payment problem is intrinsic (I can hardly imagine the pedagogical nightmare of students choosing their own textbooks), we can at least hope for the people making allocation decisions to be responsible proxies. It doesn’t help when the sellers don’t even reveal the price and the proxies evidently don’t care that this information is absent.

Update, Sage Publications sent the following reply, which I am reproducing with their permission:

SAGE is actually very happy to tell our story on pricing. In terms of the market, we are actually on average 10-30 percent lower than our competitors. We listen when our professors meet with us and say that one of the first things they look at is price when deciding what books to adopt.

So, why aren’t the prices included throughout the catalog?

SAGE designs its catalog for multiple markets—including international markets like Canada and South America. The only sections of these catalogs that we typically customize for specific markets are our recommendations for professors’ personal library—which as you mentioned include the pricing. To help us maintain consistency and keep costs down, we like to only design one catalogue for multiple markets.

Additionally, you’ll find that we try to drive professors to our websites where they can not only sees the prices, but also reviews from other professors about their experiences with each book.

We understand your concern and certainly don’t want to appear to be hiding our prices. We’re actually quite proud of them! In the mean time, we’re taking your arguments into account as we start working on our newest catalogues.

Here’s my reaction to their (very thoughtful) reply. First, I haven’t systematically compared their prices to rivals but my general impression is that their prices are indeed on the low side so good for them. Second, they provide a plausible explanation for the absence of prices, which is that it allows them to share materials across markets. This may have to do with price discrimination or it may have to do with menu costs of multiple currencies but in either case the multiple markets thing doesn’t bother me. Nonetheless, it does show that pricing is a relatively low priority. That is, let’s give them the benefit of the doubt and accept an explanation other than deliberate obfuscation, even so this shows the issue to be one of relative indifference easily swamped by other concerns. I am glad to hear that they’re open-minded about this and I hope that in the future they include prices in the catalog itself, or if it is unfeasible to customize multiple versions, a price sheet insert.

Misc Links

| Gabriel |

• The first three seasons of Breaking Bad are now on Netflix streaming so you now have no excuse not to watch it.
• Speaking of Netflix, Megan McArdle has the most interesting thoughts on the company’s recent series of debacles and in particular explains why it doesn’t scale
• Q: How many French anti-racism activists does it take to screw in a lightbulb?
  A: That’s not funny.
  (Also, I’m gonna guess Adam Sandler’s “Chanuka Song” wasn’t a big hit with this crowd.)
• I recently discovered Naxos Music Library, which is basically Spotify for classical music. Here’s the UCLA link, those of you elsewhere should check if your school has a site license
• Very interesting discussion of the contrast between Smith’s prediction of barter and actual fieldwork demonstrating that primitive societies work on gift exchange. This is fascinating primarily for the economic anthropology itself and secondarily for the science studies type point that some economists are so stubborn about replacing their traditional model (which is based on nothing but armchair theorizing) with a well-established finding from comparative ethnography. It’s especially funny to me because I think it’s about as easy to see how monetary exchange emerged from gift exchange as it would be to see how it emerged from barter. This should be rather obvious given that (as discussed in Social Structures among other places) the monetization of feudal obligations is a familiar example from our own culture that had only recently been completed in Europe when Smith was writing. In any case stuff like this makes me think that at its core econ is less as a positive science than applied utilitarian moral philosophy. (That sounds like I’m knocking econ, but my candid descriptions of soc and anthro are even worse).
• Hipsters of the world unite, you have nothing to lose but your regulatory barriers to Korean taco trucks! (h/t Tyler @ MR). Also on the libertarian lawsuit front, Cato is taking on business method and software patents. To paraphrase Plutarch on the actual Cato during Sulla’s reign of terror, “Why, then, did you not give me a sword test case, that I might stab him reverse bad precedents, and free my country from this slavery patent thicket?”
• Anyone ever told you this is the faculty club of the Satan’s Helpers?

We’ve Got it All on VHF

| Gabriel |

The Obama administration recently demonstrated that it knows the Coase theorem through a proposal for “incentivized” spectrum auctions to get buy-in from incumbent television licensees. I’m not completely sure why this proposal is part of the jobs bill but it strikes me as a great idea, albeit one that is aimed at a pragmatic solution to the long-standing terrible idea that is spectrum licensing.

The fundamental problem is that spectrum is a scarce resource that is currently allocated in a highly inefficient way. The best spectrum, VHF, is allocated to television, even though most people have cable or satellite and some of those who don’t may not watch broadcast tv. (My own digital tuner broke a few months ago and I haven’t bothered spending $30 to replace it since I mostly watch Amazon and Netflix on my Roku and Hulu on my Mac).

In contrast, there is a real scarcity of spectrum allocated to wireless telecom. This is the root cause of why people hated AT&T’s now defunct iPhone exclusivity and why a voice and data phone plan costs upwards of $60 a month. So basically, you’ve got a scarce resource being allocated to an activity which (because of good substitutes) is low valued and a real demand for the resource in another activity. In a free market the price signal would cause resources to flow from the low value activity to the high value activity and the problem would solve itself. Similarly, an efficient regulator would also strive to maximize welfare by this reallocation. The problem is that spectrum is subject to neither a free market nor an efficient regulator but a mixed regime of regulated allocation whose incumbent stakeholders have effective veto power and this provides the worst of both worlds.

Since the Radio Act of 1927, we’ve had a licensing regime for broadcasting. In principle this means that spectrum is public property that is licensed to private actors so long as they use it to serve the “public interest.” Although the licenses are theoretically short-term, they are habitually renewed except in extreme circumstances. In practice our regime is that the broadcaster has a restricted but perpetual property right to spectrum that grants the right to use the spectrum for a particular purpose but not to use it for other purposes nor to sell it to others who would use it for new purposes. This means that broadcasters can derive value from their spectrum but only so long as it is used for broadcasting as they have no right to sell it to telecoms.

Broadcasters thus have an incentive to squat on it no matter how much over-the-air viewership declines or how much cell phone rates go up, because, hey, why not?* Certainly the National Association of Broadcasters has taken an approach of kicking and screaming about any allocation of VHF to wireless telecom, while hinting that they do have a price at which they’d be willing to sell their spectrum if allowed to do so. Most notably, NAB raised hell about “interference” when the FCC proposed using “whitespace” between broadcasting signals. Given that such interference is likely to be minimal this is insane from the perspective of maximizing social welfare, but why would the broadcasters care about a massive opportunity cost given that the value created by utilizing whitespace goes to telecom providers and consumers and not to them?

Hence the administration’s recognition that the broadcasters need to be bought off in order to move forward. The administration’s understanding was effectively confirmed when the National Association of Broadcasters commented that “NAB does not oppose incentive auctions that are truly voluntary.” In other words, NAB supports a proposal that lets them alienate their property but would oppose a policy that merely revoked licenses to allow the state to reallocate them. Hence incentivized auctions, which effectively split the difference between the de jure “licensee” and de facto “property” understandings of what spectrum is. This grand bargain is exactly what law and economics folks have been proposing for decades and we’re now seeing it come into play.

Personally, I’m just hoping that we radically deregulate spectrum allocation one way or another and if compensating the incumbent stakeholders is what it takes, then I’m fine with that, especially since I never believed that they were just “licensees” rather than de facto property owners in the first place. More broadly, let this be a lesson as to why feudalism sucks. We’re only in this mess in the first place because since 1927 we’ve treated spectrum as public property to which broadcasters are granted contingent but effectively perpetual usage rights, much like a hereditary fief granted to a vassal. This is roughly equivalent to private ownership except that it makes medium (as compared to content) innovation illegal. If we’d auctioned off VHF as freehold property in the first place, a free market would have reallocated much of it to wireless voice and data usage ten or twenty years ago.

The reallocation of VHF to wireless would be a very good thing. In the short-term, it would mean cheaper cell phone bills and better cell phone reception, particularly indoors, which means that in a few years I will cease to be the last person in America who has good credit and is not a drug dealer but nonetheless uses a $20 pre-paid cell phone. But me personally finally getting a phone that can play Plants vs Zombies is less important to me than my country permanently shifting to a fully private property regime in spectrum. First, this means that the next time an innovative technical application for it comes along we won’t have to go through this nonsense again. Second it means the end to a few pernicious legal doctrines. One of the issues with a licensing regime is that  it provides a pretext for censorship. Do a Google search for the phrase “public airwaves” and almost every search result is somebody attacking freedom of speech, usually with some variation along the lines of “I believe in the first amendment, but we shouldn’t be effectively subsidizing lies/stereotypes/immorality through allowing them on the public airwaves.” This is such a familiar rhetorical trope that you sometimes see idiots people applying it to cable, which is private property and so isn’t relevant to the “public airwaves” argument on its own terms. I would love to see us make Red Lion a dead letter, and radical spectrum deregulation would accomplish this.

Moreover, VHF deregulation would solve the same problems as net neutrality but to do so with less potential for abuse by an overreaching and/or captured state. I have mixed feelings about net neutrality. On the one hand, I am extremely sympathetic to its goals of supporting content provider business model innovation and I’m a great cynic about Comcast’s long-term strategy to suppress this innovation. On the other hand, I worry a lot about this being the camel’s nose under the tent for an intrusive and/or cumbersome regulatory regime and in particular the structural problems with the FCC that Wu articulates in The Master Switch. (The first two-thirds of the book is a rather Stigler-esque history of how during the 20th century NBC and AT&T captured the FCC and used it to create barriers to entry, then in the last third of the book he argues that this same regulatory agency should expand its scope to regulate the internet. WTF Professor Wu, did you read your own book?) However I think we can have the upside of net neutrality without the downside simply through having more viable options for broadband such that if you don’t like your ISP screwing around with your access to Skype or Netflix then you can change ISPs. The reason this would work is that the broadband market is characterized by a last mile problem, which means natural monopoly (actually duopoly for largely historical reasons), which means telecom market power over consumers, which in turn provides the rationale for net neutrality. However abundant wireless spectrum solves the last mile problem which cascades through the argument to mean that net neutrality is superfluous in a world where ISPs on VHF compete with those on coax and fiber optic.

Cheaper cell phones, undermining dangerous extant and developing legal doctrines, and long-run openness to efficient resource allocation — what’s not to like?

———–

* You can get even more cynical and say that broadcasters are opposed to ubiquitous broadband because they worry that streaming video is a disruptive innovation, but I’m not sure if they’re thinking that far ahead and in any case such a supposition isn’t necessary to see why they’d want to hold out for a better deal.

Peak screens

| Gabriel |

Apparently Creature , a god-awful exploitation monster film, opened on 1,500 screens with no marketing and made no money whatsoever (h/t Jonathan Last). My initial reaction was (and I apologize if you can’t follow the abstruse technical jargon) what the fuck?

1,500 screens is no Spiderman 2, but it’s still a reasonably wide opening. When Jaws (which as coincidence would have it was also produced by Sid Sheinberg) opened on 409 screens in 1975 that was considered “opening wide” on an unprecedented scale for a highly anticipated major studio film which was based on a novel that had been on the NYT bestseller list for almost a year. And yet here we are with an obscure turd of a film opening on over three times the scale of one of the biggest films in Hollywood history.

This seems like the kind of thing that simply can not happen, but I checked Variety, and yup:

Monster movie “Creature” also bellyflopped. The film, self-distributed by Sid and Jon Sheinberg’s Bubble Releasing, had an unusually aggressive rollout for an indie title but a paltry per-screen average of just $220 from 1,507 locations. Total was an estimated $331,000.

At least I can take some comfort in the collective sanity of Hollywood in knowing that neither the majors nor LionsGate were involved in this fiasco but there’s still the puzzle of what the exhibitors were thinking.

Most likely they were thinking in terms of vacancy chain / opportunity cost issue. September is something of a dumping release date. For instance, Fox notoriously buried the brilliant satire Idiocracy in September of 2006. We can see this more formally in Figure 1 from Sorenson and Waguespack ASQ 2006 (emphasis added).

Big movies tend to open on big weekends. This wasn’t a big weekend and so it’s not surprising that weren’t a lot of big movies opening this weekend. To a first approximation, we can say that exhibitors probably played Creature because it was that or keep dark. (Though at $220 per screen they probably would have been better off staying dark).

Another interesting thing is that opening wide isn’t cheap (which is why until the blockbuster era studios preferred to make just a few prints). It costs about $2,000 to make a print of a film, which (if we assume prints rather than digital) implies about $3 million for prints for Creature , which is about the same amount as the production budget. The rule of thumb is that prints and promotion cost about half again the production budget, but Creature seems to have economized on this through the simple expedient of not having any marketing. This doesn’t really make sense though since marketing and prints are complements, which is why they are usually budgeted together. If I had a crappy movie and only $3 million to self-distribute it, I’d probably spend less than a million on prints and the rest on promotion. So we’ve got to figure out what was going on with the (self) distributor. Here are a few non-mutually exclusive speculations as to what was going on with the distributors:

1. They’re idiots (more specifically, they drank the “social media” Kool-Aid)
2. They planned on marketing the film but ran out of money
3. They relied on digital projection
4. They offered exhibitors better points on box office than the industry standard

Note that any of these stories are bad news for exhibitors. #1 implies that exhibitors didn’t think to check if the distributor understood the film industry. #2 implies that the distributor booked the exhibitors with an explicit or implicit expectation of a certain level of marketing then didn’t follow through and the exhibitors didn’t notice this. #3 is one of many issues in the film industry where distributors have a conflict of interests against exhibitors. Digital projection implies large fixed costs for theaters but allows distributors to radically lower their marginal costs, which (Coase theorem notwithstanding) is not a good recipe for a happy outcome. The conflict is especially acute when you realize that digital projection makes it easier to open wide which means most of the box is in opening weekend when the theaters get very little of the ticket sales and basically only make money on popcorn. (On the other hand, digital does open up some pretty cool possibilities for using theaters for things other than movies.) That leads us to possibility #4, which is that the distributors might have gotten creative and offered the exhibitors an unusually good deal, like an 80/20 split on opening weekend box or something like that, so as to treat the theatrical release as a publicity-generating loss leader for ancillary revenue streams (DVD, tv, streaming, etc.). If we also assume digital distribution this largesse wouldn’t have even cost the distributor much up-front. This would have been a good precedent for the exhibitors if it worked, but it didn’t and so they’re stuck with back-loaded revenue sharing models that were worked out back when there were fewer screens and movies stayed in theaters for more than two weekends.

Long story short, I’m putting this in my “theatrical exhibitors are fucked” file, along with 3D fatigue and the Comcast/Universal merger.