The Economic Implications of New Technology on the Entertainment Industry
The distribution system and format for the entertainment industry has evolved as technology
has. As digital media has allowed entertainment products to be consumed individually through nonunique copies, the entertainment industry has been accordingly transformed. Consumers have more
options in terms of alternate means of viewing besides basic cable television sources, like illegal
downloading online, free legal sites, or other subscription based online viewing sites that do require
compensation. As a result of this proliferation of options, content is now more specific to consumer
needs and desires. Recently, companies like Hulu and Netflix have specialized in Internet streaming in
response to consumers’ need for instant gratification. Though many are hesitant to admit that such
drastic change could be positive, the affects of the industry’s adaptation to this technology allow the
consumer more control on a cheaper product, and the producers at least as much profit; and is
therefore a positive change.
Media streaming websites have developed as a reaction to the strong presence of Internet
piracy and its negative affect on revenue. Internet piracy has, “Led to an overall decline in box office
revenue in 2005 with a drop of 7%, which amounted to a loss of 240 million dollars” (Fritz 1).
Internet piracy’s appeal comes largely because it is free and its ease of access. As media streaming
websites like Netflix and Hulu have begun to offer a greater variety of the content that consumers
want, conveniently, and for cheaper prices, they have grown more popular and profitable. Because of
the success of streaming media websites that charge money to view content, movie production
companies and broadcasting networks have seen a rise in their general revenue. The creation of such
websites has benefited both the large broadcasting companies and the media-streaming website
companies in combatting the loss of revenue that resulted from the proliferation of media accessibility
on the Internet.
Consumers are eager to utilize the Internet as a source of cheap and convenient entertainment
if it has the variety of content that they desire. The economic success of Internet accessible media is
largely based on the strength of the contracts between broadcasting networks that own the content to
the websites to distribute it. Major players in the broadcasting field have recently begun signing
contracts that will ensure the success of television databases such as Netflix and Hulu. As seen in an
article in the New York Times, “The contract signed between the Starz network and Netflix singlehandedly raised the number of subscribers by millions” (Stetler). Broadcasting stations like CBS or
NBC have been willing to enter into contracts to release their content onto these websites because they
have also seen revenue increases, “The entertainment division-comprised of CBS...saw revenue
increases grow 1.2% to $1.9 billion” (Goldsmith). In due time the combination of convenience and
growing profits of both the websites and the broadcasting networks will likely make consumption of
media via subscription sites such as these a very common avenue, perhaps as common as the cable
television packages that are in most households in America.
The increase in subscribers to websites that offer streaming media has led to a decline in the
sales of DVDs and movie rentals. This is due to the online-streaming companies’ ability to license the
re-airing of shows and create new content at a lower price than the broadcasting networks. An expert
on the media, Rapp explains the economic implications for the future of the entertainment industry,
“...demand for our movie collections may decrease, as low-cost monthly subscriptions take the place
of borrowing DVDs.... If overall demand for DVDs/Blu-ray tanks, we may also see the cost of the
physical item going up” (Rapp 1). While the disappearance of DVD’s and other physical
representations of media may be seen as negative for the sake of nostalgia, economically and in terms
of benefits to the consumer and producer, their disappearance is not a loss.
Competition between economic factors and the quality and variety of content offered has led
to changes throughout the industry. These economic forces are evident in the history of the
subscription television industry. The incorporation of business-based collaboration through contracts
has led to increased profits for the broadcasting networks and the newly evolved subscription
websites. In his article about the economic effects of subscription television networks and their battle
against customary cable networks, Chu asks:
“To what extent has entry led to lower prices as opposed to higher-quality packages for
cable? How would the effect of competition differ if the firms only competed over price as
opposed to also being able to adjust quality?”(Chu)
Chu explores the economic affects of pricing packages in all types of media, both subscription and
cable, and the differing content packages and how these affect the consumers’ behavior. Competition
over price but also quality meant that consumers got cheaper packages with higher quality material.
Many questions have been raised about these changes to the market and whether they benefit the
consumer or producer. Some experts wonder if it stifles the producer’s ability to create a quality
product and if the lower prices translate to lower quality. Chu believes that consumers do
economically benefit from this type of competition and do retain product differentiation in the content
they receive because they prioritize it accordingly along with price. The present success of online
media has forced some alliances between broadcasting networks and the Internet companies.
Economically, this has benefited all of the parties involved: the consumer, the online company and the
network corporation.
There has been much discussion recently in the entertainment industry because of the recent
movement by companies like Netflix and Hulu to create their own original series specifically for their
websites. If successful, this could lead to increasing amount of content available only on these
websites, with no producing network that the material is being licensed and bought from. This
transition would be a drastic one in terms of production within the industry, but is not likely to happen
very soon. However, a gradual shift to production by the distribution companies, and away from
products in the physical DVD format and into the digital is likely. The creation of new content by
these distribution companies is indicative of the new direction that the industry may be going in and
the changes that the digital technologies have produced in the format of production in the industry.
The evolution of technology into digital media and the corresponding changes to distribution
have of course affected the economy and products offered. The consumer has benefited from these
developments because prices have dropped due to competition from legal and illegal sources. Online
companies are responding to consumers’ need for instant gratification with more convenient products.
Whether the consumers are satisfied with the offerings is based on the contracts made with
broadcasting networks which control availability of content. For the most part, consumers are
satisfied because they prioritize price as well as content and the resulting product reflects these
priorities. Producers are also reaping large rewards from this new change in the system. The changes
affected by digital technology to the entertainment industry are inevitable and will continue to evolve
as these digital streaming databases start to make their own content, and may eventually render the
broadcasting services obsolete. To the consumers and producers these changes are for the most part
positive; they should not and cannot be avoided.
Works Cited
Chu, Chenghuan Sean. "The Effect of Satellite Entry on Cable Television Prices and Product Quality."
The Rand Journal of Economics [Blackwell] 41.4 (2010): 730+. Academic OneFile. Web. 6 Mar.
2012.
Document URL
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&p=AONE&sw=w
Fritz, Benjamin. “Study Finds Hollywood Hurt by Internet Piracy.” The Los Angeles Times. October
2011. Page 5.
Rapp, David. "Tennant: The Post DVD World and Libraries." Library Journal 16.17 (2011): 14-15.
Academic OneFile. Web. 5 Mar. 2012. <http://0go.galegroup.com.libcat.lafayette.edu/ps/retrieve.do?sgHitCountType=None&sort=DASORT&inPS=t
rue&prodId=AONE&userGroupName=east55695&tabID=T002&searchId=R4&resultListType=RES
ULT_LIST&contentSegment=&searchType=BasicSearchForm¤tPosition=2&contentSet=GALE|A26
9338557&&docId=GALE|A269338557&docType=GALE&role=>.
Stetler, Mark. “CBS to Sign Contracts.” The New York Times. May 2010. Page 7.