• • • Economies of Scale
    • Monopoly, oligopoly, limited competition
    • Vertical Integration and "synergy"
    • The Consumer Economy and the shift from production to distribution
    • Shorter Hours, Higher Wages: Fordism

Is it bad that media corporations are so big? How big is too big? How do you know? Do companies encourage people to buy too much stuff? There are no easy answers, but there are some concepts that help clarify the discussion.

Economies of Scale

Mass media businesses, from the printed book to satellite TV, tend to have what economists call "economies of scale." When economies of scale exist, bigness can be its own reward. To understand the concept, it helps to start with a type of business that does not have economies of scale, for example, hand-knit sweaters. If you start a business making hand-knit sweaters, you can only make so many yourself; say, two sweaters a week. If you wanted to sell more, you would have to hire someone else to also make sweaters; another person would double your output of sweaters, but you'd also have to pay that person to do the work. So the more sweaters you make, the more costs go up at almost the same rate that income goes up. Because making four sweaters a week costs twice as much as making two sweaters a week, there's low economies of scale and thus no big advantage to being a big company in the hand-knit sweaters market.

In some businesses, however, the more you make, the lower the costs per unit made. Making one car by hand is so expensive that basically nobody does it. Making hundreds of cars per year in a small factory is much less expensive per car than making one by hand, but it is still very expensive and only very exotic and expensive cars get made that way. Making hundreds of thousands of cars per year in a giant global factory system, though, is much less expensive per car again, so that's how most cars get made. But that's also why cars are almost all made by giant multinational corporations; the economies of scale are such that you simply can't make money selling cars from a small business.

The economic peculiarity of mass media is that it is all based on cheap reproduction. Writing an original book may take you a year's work; making copies of that book will cost you only a couple of dollars. Making a Hollywood movie could cost more than $100,000,000; making a DVD copy of that movie can cost less than 50 cents. Mass media have enormous economies of scale. As a consequence, bigness in mass media is very much its own reward. The pressures to be giant in mass media are therefore immense.

Monopoly, oligopoly, limited competition

People throw around the term "monopoly" a lot in debates over commercial media; critics denounce media corporations as "media monopolies," whereas defenders sometimes act as though Disney and Time/Warner are no different from small businesses like the corner store. It helps in this debate to get a little more specific. There's no consensus definition of an economic monopoly, but generally monopoly means that there is one overwhelmingly dominant firm in a particular market. Microsoft comes pretty close to that with the Windows operating system, because roughly 95% of all desktop computers run it.

But situations like that are actually rare. In the media, a more typical situation is a handful of huge corporations sharing a single market. There are only five big broadcast television networks in the US, for example, and three of those (ABC, CBS, and NBC) are much bigger than the others (Fox and WB). Situations like this are more properly called oligopolies, i.e., situations where only a handful of firms dominate. This situation is a little more complicated than simple monopolies: oligopoly firms have a lot of power, but they also do compete, with each other, and sometimes with smaller companies. The relations between oligopolies are sometimes characterized by kinds of limited competition, i.e., competition that falls short of the wide-open, completely free-market kind.

One way of understanding the way media tend to get organized over time is in a "center-periphery" structure like this chart, with a few, large, stable, dominant firms at the center and more, smaller, and competitive firms at the periphery. In this example, the big television networks dominate at the center, and tend to last over time (the big three networks date back to the 1920s, which makes them older than the average nation-state). But they are surrounded by, and dependent upon, lots of smaller production houses, equipment manufacturers, and the like; these smaller firms are more flexible and creative, and less stable and permanent.

Vertical Integration and "synergy"

Mass media have another peculiarity that acts at least a little bit as a countervailing pressure against the economic rewards of bigness. Mass media, remember, are forms of communication where people are physically and (often) temporally separated from their audience. As a result, mass media are faced with higher uncertainty than most industries about what will sell or not. If General Motors makes a minivan, they know that a good number of them will sell, though not exactly how many. Media, on the other hand, are faced with the entire range of possibility, from total, money-loosing flops to enormous blockbusters. For every smash hit like the first Star Wars, there are lots of disasters.

Because of this uncertainty, media executives spend a lot of time looking for ways to increase "market power" (which is kind of the same as decreasing competition). They want to reduce uncertainty by finding ways to ensure that the products they are the products that get bought. One of the strategies executives use for this is often called "synergy." Synergy is a buzzword (and therefore does not have a precise definition) but it generally means bringing different products together under one roof so that they reinforce each other. One of Walt Disney's major contributions to the media was the discovery of this process (though he didn't call it synergy): in the 1950s, Disney discovered that he could coordinate movies (e.g., Snow White), TV shows (The Wonderful World of Disney, the Mickey Mouse Show), a theme park (Disneyland), and consumer products for children (e.g., Mickey Mouse hats). Each element in the Disney system could be used to promote and reinforce the other; The Wonderful World of Disney regularly ran "making of" shorts about upcoming Disney movies, Disneyland would add rides based on movies, and so forth.

Since the 1950s, and with explosive intensity beginning in the 1980s, "synergy" strategies have become the norm in most of the media. Every major Hollywood movie now routinely pays for a pop group to make a song and a music video, so that when the video is played on MTV or the song on the radio it becomes an advertisement for the movie; pop groups do this because then the movie becomes an advertisement for their group. In children's media in particular, people no longer make a movie or a cartoon or a book; they develop an integrated merchandising scheme involving all of these and tied in to consumer products like Happy Meals or action figures ("tie-ins"). The results are sometimes good, sometimes not, but in any case they are done in the hope of reducing uncertainty and risk.

A more precise way of understanding what's going on can be found in the economic concept of "vertical integration." Vertical integration is when a firm takes many different parts of a process of manufacturing and distribution and puts it all under one corporate roof. If buying up all the gas stations in one market is "horizontal integration," buying some gas stations, an oil distribution company, an oil refinery, and some oil wells is vertical integration. Media corporations generally like vertical integration because it reduces their uncertainty; this is why a company like Sony or Time/Warner will buy TV stations, production studios, theater chains, and consumer product manufacturers -- because they like to bring all different parts of the chain from producer to consumer under one roof, so as to better coordinate them.

Reducing uncertainty is also a way to reduce competition, however, and limiting competition seems to fly in the face of the ideal of the competitive marketplace that capitalism is supposed to be all about. Antitrust law exists basically to keep the marketplace competitive. In the 1930s, the big Hollywood movie studios (e.g., Paramount and Columbia) bought up theater chains across the country so that they could ensure that the movies they made in Hollywood would be shown throughout the country (and so that movies not made in Hollywood would not be shown anywhere). This "studio system" produced a lot of popular movies like Gone with the Wind and The Wizard of Oz, but it also struck many people as unfair, so in 1948, the government won an antitrust suit against the movie studios in the "Paramount Movie Studio case." The studios were forced to sell off their local theater chains; this is why there are still a lot of old "Paramount" movie theaters in downtowns across the U.S. that are not owned by Paramount.

Since the Paramount decision, antitrust law has been applied irregularly to the media industries. In the 1980s, the media industries began to vertically integrate again, and the government has not done much about it, although there are occasionally calls that they should.

The Consumer Economy and the shift from production to distribution

To understand the role of media in the larger economic system, it helps to consider the macro-economic pattern some call "the consumer economy" or "Fordism." We like to think that the way a marketplace works is that someone comes up with a good idea -- the proverbial "better mousetrap" -- that person then invests some time, effort, and money in implementing that idea, people buy the resulting "better mousetrap," and the person gets rich.

Now consider the tale of one Henry P. Crowell, who in 1879 tried to follow exactly this path: he built a machine for processing raw oats into oatmeal very efficiently in great quantities. To his dismay, however, Mr. Crowell then discovered that hardly anyone was interested in oatmeal. In 1879, it was known as "gruel" and the only people who ate it were people recently immigrated from Scotland. His machine was indeed very efficient, but it produced something that not many people wanted. In fact, by building his machine, he had doubled the U.S. productive capacity in oatmeal overnight. Henry P. Crowell had stumbled into a classic economic problem, the problem of "overcapacity" or an industrial system in which supply exceeds demand. (Marxist economists like to call this "the crisis of overproduction." Same idea, more or less.) Crowell had made a better mousetrap, but it was in a sense too much better: if he didn't do something, he would soon be bankrupt and up to his ears in unwanted oatmeal.

Crowell's solution to his problem was revolutionary: he decided he had to do something to make people want to eat more oatmeal, and so he shifted his focus from production to distribution and consumption. He was one of the first industrialists to systematically look beyond the factory door and seek organized ways to keep his products moving into the distribution chain and on into the hands of consumers.  How did he accomplish this magic? First, he invented another machine that put the oatmeal in small, round, cardboard boxes, and put a distinctive picture on the boxes. Second, he developed entirely new ways of selling his product. Instead of sending out his oatmeal in huge burlap bags to storekeepers who would then sell it by the pound the same way they sold wheat, nails, and pickles, stores would have shelves full of boxes of oatmeal, and buyers would pick out a box for themselves, and pay for it at a fixed price. (In those days, prices were generally set by haggling with storekeepers.) They wouldn't buy just so much oatmeal, in other words, they would buy a recognizable box -- a brand.

The picture Crowell put on the box was of an old-fashioned Quaker, a religious group known for its scrupulous honesty and fairness. The hope was that, by way of association with the image, people would become familiar with, trust, and therefore buy more of Crowell's oatmeal. Crowell -- who you might realize by now founded the Quaker Oats corporation -- did not stop there, however. He found doctors who would make testimonials about the healthful qualities of eating oatmeal, especially for breakfast. He created mini-boxes of Quaker Oats that would be given out for free in order to get people interested in his product: the first free samples. And in the wake of this effort, sales of Quaker Oats soared, and Americans began a major transformation of their eating habits; instead of hearty breakfasts of meat and potatoes -- the traditional 19th century way to start your day -- people began eating packaged cereal. Crowell went on to develop another trend-setting brand: Aunt Jemima's pancake mix, the first packaged mix and the introduction of racist imagery into modern advertising techniques.

Crowell's new techniques of packaging, distribution, and using brands and other forms of advertising were eventually widely copied and became the norm in American business -- as any trip to the local supermarket makes clear. But the moral of this story is not just in the specific techniques. Crowell, in dealing with the problem of overcapacity, shifted his focus from making things efficiently, from production, to controlling products' movements into the consumer's hands, to distribution. From this shift in focus, the entire modern practice of "marketing" came into being. Marketing is much more than just hawking one's wares. Marketing is about keeping products moving out the factory door, about doing everything one can to reduce the uncertainty of the traditional marketplace and induce people to reliably buy and consume products. Since the early 1900s, when Crowell's techniques began to spread in the business world, one of the most common ways to the top in business has been through marketing. Much of the cost of many consumer products today is not for the product itself, but for all the marketing that goes to keep it moving into the hands of consumers.

Shorter Hours, Higher Wages: Fordism

If Henry P. Crowell developed many of the techniques that became common to the consumer economy, Henry Ford, the founder of Ford Motor Company, developed and promoted a grand synthesis of those techniques. Henry Ford was not the first person to build automobiles, nor the first person to use an assembly line in a factory. But he was the first person to propose that his workers, the people who built his cars, should also be able to buy the products that they built. The Model T, Ford's first car, was much cheaper than other cars of its day. But Henry Ford also raised wages at his factory and shortened his workers' hours -- so that they could buy more things. In the early 20th century, this was a radical idea: back then the norm was that a factory owner should pay his workers as little money as possible and make them work as long as possible in order to maximize profits (kind of like what happens in many third world countries today). Ford paid his workers more and had them work less, not just because he wanted to be a nice guy, but because he realized that this practice would increase the size of the market for his products. Ford, like Crowell, was focusing not just on production, but on consumption, and making a concern for consumption central to the way he organized his business.

In a consumer economy, products are thus produced with a constant concern for distribution and consumption; business interests have an organized concern for the larger population, not necessarily as citizens, but as consumers. This is where media and advertising come in: when the Ford Motor Company was revolutionizing the automobile industry in the 1920s and the Quaker Oats Company was revolutionizing the way products were distributed, the new communications technology of radio appeared, and soon became key to broad advertising strategy -- and advertising soon became the way American radio broadcasters made money. Advertising-supported media, then, became a linchpin in the system of the consumer economy. And that has structured them ever since.

It is only in the last twenty years or so that much of the world's mass media outside the U.S. has shifted to advertising support for funding. It is crucial, though, that this shift has happened, not just because broadcasters want more money, but because countries have come to adopt the consumer economy as a model for economic development. Good or bad, it is a matter of deliberate economic strategy that kids in Somalia can be seen wearing Nike caps, that young men in China worship Michael Jordan, and that Coca Cola and McDonald's advertising can be seen in some the most remote parts of the world.