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A Study of the Internet Revolution Through the Smartphones

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Introduction

“The so-called digital revolution is transforming media and communications industries worldwide”. (Doyle, 2002) This statement clearly suggests that the Internet represents a threat to traditional media such as newspapers, radio and television. In fact, the volume of Internet usage has increased significantly since 2011. According to the Adults media use and attitudes report 2013, the overall estimated volume of Internet usage has increased to an average of 17 hours per week. Moreover, smartphones allow people to connect to the Internet and carry out online activities very easily, which is why the smartphone industry currently accounts for over 50% of the cell-phone market. Therefore, it can be inferred that smartphones have contributed to making the Internet more accessible.

Although surfing the Internet has surpassed activities involving traditional media, such as listening to the radio and reading newspapers, watching TV still remains the most popular activity as can be seen in the graph below.

Figure 1

In order to develop a strategy aimed at preserving traditional media’s competitiveness, consumers’ preferences and the factors affecting them should be examined first.

There are several factors affecting the development of traditional media firms, including government regulations, household microeconomic and psychological conditions. With regards to government intervention, the ruling party has recently made recommendations to regulatory bodies, encouraging them to impose significant fines on UK publishers and demand upfront apologies from them when necessary.

Actions like this have restricted the range and type of news available in newspapers and on TV, which has caused a shift towards the Internet, where users can find a wider range of information from multiple sources.

As for the economics of convergence and concentration in the UK media sector, Gillian Doyle (2002) reported that the volume and scale of mergers and alliances among media players has increased as a result of market globalisation and the erosion of traditional boundaries surrounding media markets. Considering that media represent a significant economic sector, economic policies should be developed to promote competition as well as efficiency.

In view of these considerations, this paper will analyse the current business environment in which UK traditional media operate and examine the strategies that firms have adopted to remain competitive.

Background

Status Quo and trends in the UK traditional media industry

In this section, the circumstances under which traditional media firms operate will be described.

To begin with, traditional media consist of conventional means of communication which were used before the advent of the Internet, such as newspapers, magazines, radio and television, just to name a few. Traditional media have been regarded as the primary source of news and information which has affected people’s daily life for several decades. Newspapers and Television are the main media being studied in this paper.

“The newspaper market is forecast to generate revenue of £101.4 billion in 2013, down 2.2% compared with 2012. The main type of printed newspaper is the paid-for daily newspaper, and there are about 12,500 of these newspapers published in the world. Every day, more than 500 million people buy a newspaper and about 2 billion people read a paid-for newspaper. ” (King, 2013) In the UK, there are serious-minded newspapers and less serious ones, which are known as “the quality press” like The Times and “the popular press”, such as tabloids like The Sun.

According to the IBIS 2014 World’s Newspaper Publishing market research report, the British newspaper industry, including businesses that produce articles to publish in print and electronic editions, generated £5 billion in 2013. The British newspaper field is dominated by a limited number of players, such as News Corporation, Trinity Mirror, Daily Mail and General Trust, Johnston Press and Telegraph Media Group. Between 2012 and 2013, the country’s top four companies contributed to approximately 54.1% of the entire industry’s revenue, which indicates a medium level of market share concentration. However, the profits generated by the newspaper industry are expected to decline at a compound annual rate of 7.3% between 2013 and 2014.

Furthermore, the table below shows a falling circulation trend as well as a decrease in demand for print media.

Figure 2

The above table provides circulation data collected every year in January. Only newspapers whose 2009 circulation exceeded 100,000 copies per day are listed.

As a matter of fact, most major British newspapers currently have websites, some of which provide free access, which is one of the reasons why paper-free reading is surpassing traditional print media to some extent. Specifically, PriceWaterhouseCoopers’s (2013) latest Global Entertainment & Media Outlook report reveals that the fleet digitisation of the UK newspaper industry has already seen digital revenues grow from £175 million in 2008 to £390 million in 2012, and points out that profits may even reach £940 million by 2017.

The TV industry, on the other hand, hasn’t encountered significant difficulties in keeping its position within the modern media industry. According to the Ofcom, which is the independent regulator and competition authority for British communications industries, as of 2013 97% of UK homes had digital TVs, 39% of homes had free view on their main set and the average time on watching TV was 241 minutes per day.

Another study on the British television industry conducted by the Deloitte Company and the Royal Television Society in 2013, provides an overview of national television consumption patterns.

Figure 3

Figure 4

As can be seen in Figure 4, the revenues generated by the British television industry went from £700 million in 2007 to £17.5 billion in 2012, with pay TV being the largest and most profitable market. In other words, pay TV can be said to be the growth engine of the entire TV industry.

Moreover, Britain’s total expenditure on TV is around 1% of GDP, and this figure remained stable during the 5-year period in analysis. Although in 2009 an economic recession led to a contraction of the national economy, subscription revenues rose by 7.5% in 2011 compared to 2008. The reason behind this surprisingly positive result is that people tend to stay at home more often when consumer confidence is low and subscribe to pay TV, which is an excellent source of entertainment, as well as an affordable alternative to going out. Moreover, Deloitte’s study revealed that personal video recorders and a greater choice of channels are two very convenient features which appeal to subscribers. In this regard, Deloitte stated that “The pay TV revolution has not yet come to an end, it’s entering another phase, with more suppliers, types of content, delivery options, price points and underlying business models.” This means that Pay TV is highly likely to keep growing in the UK, as consumers’ requirement and demand for television products and services have not yet been fully met.

To be more precise, Deloitte has mapped each sector’s revenue flows in order to analyse the total value of the British television industry. With regards to the industry’s value chain, Deloitte also reported that audience and advertisers provide base funding to platform owners through recurring payments (such as subscriptions and ad-rates); at this point, generated profits enable channel owners to pay content creators. Lastly, content creators use a part of the funds that they received to pay content actors.

Comparison between traditional and new media

In the 1980’s, Ron Rice (1984) defined new media as ‘those communication technologies, typically involving computer capabilities that allow or facilitate interactivity among users or between users and information’. In other words, Rice (1984) argued that the evolution of the Internet would have led to a generation of digital, networked information and communication technologies in the form of blogs, Facebook, YouTube and Twitter, also known as social media.

As previously mentioned, the growth of the Internet has been constant and stable since the beginning of the 21st century. A study conducted by Ofcom British adults’ media use and attitudes showed that 75% of adults have broadband, 55% of adults with home internet connectivity use social networking websites and that the number of home broadband connections and mobile broadband subscriptions are 21.7 million and 4.92 million respectively. Furthermore, in 2013 the overall estimated weekly volume of Internet usage was 16.8 hours. Users’ willingness and readiness to switch to new media technologies are very remarkable, in comparison to other kinds of media.

Kornetzk (2013) states that “There is a considerable difference between online media and conventional sources. The Internet offers the opportunity to navigate and search for the particular information needed, which print media cannot provide.” Besides, the immediate availability of social media can be deemed as a key innovation as it eliminates time and space constraints when looking for ‘breaking news’ via print media. (Kornetzk, 2013). Therefore, unlike traditional media’s one-way flow of information, social media are flexible and interactive, allowing users to share and obtain up-to-date news whenever and wherever they want, rather than having to wait for a specific TV programme or reading newspapers which only offer a limited number of articles. Moreover, social media enables users to interact with each other. However, due to their dynamic and ever-evolving nature, new media technologies are not easy to analyse, which is why experts find it difficult to collect data and make predictions about users’ characteristics and future usage. (Patrick, 2013)

Although structural restrictions on traditional media have certainly contributed to making consumers see new communication media as more popular and convenient, several concerns have arisen about the potential effects of social media. In fact, new media technologies have been found to stimulate the erosion of shared public space, as well as the fragmentation of political discourse. “For instance, news services geared toward satisfying the demands of smaller and more specialised audiences have proliferated on the World Wide Web”. (Althaus, 2000) This indicates that users of traditional news media are fragmented. “If audiences for new information delivery systems also continue to use traditional news media, then the extent of their exposure to these traditional media would probably limit whatever potential the new technologies have to isolate individuals in customized information environments.” (Althaus, 2000)

Sharon Meraz’s (2009) study on the impact of traditional media and social media revealed that traditional media’s agenda-setting power is no longer universal or singular within citizens’ media outlets, and that there were insignificant differences in traditional-to-citizen media links. “Traditional media’s loss of agenda setting monopoly power in the political blogosphere can be well explained by shared status homophile. The independent political bloggers’ outside status from “beltway” or “mainstream” media has afforded them greater freedom to utilise other citizen media sources when building critiques of traditional media’s news reports”. (Meraz, 2008).

In general, time and money are limited resources on the basis of which customers assess the convenience of various means of communication, which is why their overall spending on traditional media is expected to fall and shift towards new media if new technologies succeed in meeting the audience’s needs.

To some extent, media economy is a form of “attention economy”, as both traditional media and social media need to grab consumers’ attention in order to be competitive. According to Michael H. Goldhaber, compared to excessive information, people’s attention is the only scarce source nowadays. (The Attention Economy, 1997) Media industry has become one of the most profitable industries because it relies on consumers’ attention to generate revenues.

Government Policies

3.1 Restrictions on traditional media

Need for information and desire for control are among the main factors that affect consumers’ preferences and, therefore, media consumption. As for the Internet, it allows almost unlimited storage and distribution of information, thanks to which users can follow news events and find additional information about them. “Rather than relying on the tastes and gatekeeping preferences of editors and producers of the traditional media, Internet users are able to pick and choose among content options, thus personalizing their news consumption”. (Althaus, 2000) The information provided by traditional media, on the other hand, is much more limited and restricted.

That is why an increasing number of individuals believe that TV and radio contents are more strictly regulated than new media technologies.

Figure 5

Figure 6

It is universally acknowledged that traditional media have been coerced and controlled by the government and political parties. In the past, mass media used to be treated as a tool for political propaganda. “Political bias has been a feature of the mass media since its birth with the invention of the printing press.” (Heinrichs, 2005) In the 1980’s, the New Right led by Mrs. Thatcher decided to exert political pressure on BBC, by eliminating the Independent Broadcasting Authority and nullifying media union power.

After being an appendage of political power for a long time, media started promoting their own interests. With the international commercialisation of media technologies, the media industry became just like any other industry whose main goal is to generate profits. As a result of that, it started being affected by various interest groups, such as press barons, interventionist proprietors and advertisers. Media moguls get to choose their papers’ political line, pick political allies and decide what views their newspapers or channels should support and promote. Therefore, it can be inferred that media outputs reflect their owners and interest groups’ views and needs, rather than those of their audience. Nowadays, as a result of the high concentration level that characterises the media industry, a very small number of individuals have the power to make very important decisions which may affect numerous stakeholders.

To be more detailed on the extent to which traditional media are regulated, particular regulations related to print media were introduced by Evan Ruth (n.d.), the legal officer who is behind Article 19. In the United Kingdom, print media are essentially self-regulated. This is because there have been public complaints about the impact of external forces on press media, which have encouraged the British Government to propose the establishment of either high standards of ethical journalism by a new voluntary body or a statutory press council. After that, a committee of various press organs formed the Press Complaints Commission (PCC) in 1991, whose main goal is to set high standards for the practice of press journalism, to spread and promote those standards by training journalists, to receive and evaluate complaints about press organs. The aforementioned PCC uses a Code of Practice which was published to deal with a wide range of issues, such as accuracy, privacy, harassment, intrusion, impact on children, discrimination, confidential sources and payment for articles. This code covers a vast array of aspects which should be taken into consideration when releasing any piece of news. For instance, all allegations should be accurate and supported by evidence, which makes traditional media much more reliable than the Internet, which is not subject to such strict rules. Nevertheless, public interest may “override” the aforementioned rules, which may even be modified if it is in the public interest to do so. However, the public interest override rule allows the PCC to offer various convenient interpretations when clarifying the Code. (Ruth, n.d.)

On the contrary, regulations related to television in the UK are based on legislation and are more complicated than the ones that apply to newspapers. Private television is regulated by the Independent Television Commission (ITC), whose members are appointed by the government; also it has expansive licensing powers and the governing statute requires it to set certain rules which must be followed and obeyed by licensees. If a TV firm fails to meet the aforementioned license conditions, the ITC could impose various sanctions, including license suspension or revocation. Owing to the more immediate and powerful nature of television, the rules that have been set to regulate it are much stricter than the ones set by the PCC. On the other hand, the well-known British Broadcasting Corporation (BBC) is a public service broadcaster established by the Royal Charter in 1926, and it is not under the control of the ITC, which has an internal monitoring system. However, both private and public sectors are subject to the jurisdiction of the Broadcasting Standards Commission (BSC).

According to the Broadcasting Act 1990 promoted by the ITC, private television stations must ensure that their content does not involve:

• any programme which offends good taste or decency;

• material which incites crime or disorder;

• matters which are offensive to public feelings;

• news which is not impartial or accurate;

• religious programmes which are not responsible; and

• any illegal content, such as obscene or racially inflammatory material. (Broadcasting Act 1990)

When news and information are not reviewed before being broadcast, the ITC can take action and impose sanctions in case the public submits complaints. (Ruth, n.d.)

With regards to BBC, the content relayed through its channels is formally guaranteed in a detailed agreement between the corporation and the government. The particular codes developed by BBC are known as “Producers’ Guidelines”, which are similar to the rules set by the ITC as they also consist of a wide range of categories.

In view of the above considerations, it is evident that the government is keeping media technologies under strict control. The impact of the government on media products is embodied in overt and covert censorship, funding control and some high-pressure policies or laws, such as national security-related laws.

In conclusion, protection against inappropriate media content is necessary, which is why regulations have been set which prevent harmful, illegal or undesirable content being transmitted. However, such a regulatory system should not diminish media companies’ freedom of expression or enable public officials to interfere with the information transmitted through media technologies. “ Any system for regulating the content of what may be printed or broadcast in the media must balance two sets of competing interests.” (Ruth, n.d.)

Taxation

In fact, the majority of countries are either imposing low indirect taxes or giving tax exemptions to newspapers in order to reduce prices and attract investors. This is because newspapers are an important medium which provides information and knowledge and media pluralism leads to socially desirable outcomes. (Kind, 2012)

In the UK, taxes on newspapers were initially introduced in 1712 and restricted the consumption of newspapers to high-income-households. Later in 1794, Lord Castlereagh, the leader of the House of Commons, and Home Secretary Lord Sidmouth encouraged the launch of the Six Acts, which stated that stamp duty was necessary for journals whose contents were considered to be radical. Nevertheless, some radicals ignored the law and published newspapers containing radical articles, whose sales exceeded those of mainstream newspapers; they also launched a campaign to eliminate the aforementioned stamp duty, even though they could have been sentenced to imprisonment or to pay significant fines. The newspaper stamp duty was finally annulled in 1855. (Simkin, 1997)

Being the media industry a dual market, advertising revenue is one of media firms’ top priorities. To be more specific, the media industry consists of a content market which supplies certain products and services (such as newspaper articles) to consumers, and another market which allows advertisers to communicate with the public through newspaper column inches. (Mehta, 2008) Therefore the sale of newspaper can be considered to be a value-added process. In this regard, Hans Jarle Kind, Guttorm Schjelderup and Frank Stähler (2012) conducted a study on newspaper differentiation and investments, using a standard Hotelling model with two competing media firms, each selling a newspaper to readers and ad-inserts to advertisers. Findings revealed that “A reduction in value added taxes for newspapers implies that the profitability of selling newspapers increases relative to the profitability of selling advertisements.” (Kind et al., 2012) Therefore, it can be inferred that newspapers would rather differentiate themselves from their competitors and attract readers, rather than selling advertising space as well as fetching attention from the advertisers. Furthermore, differentiation is associated with increasing market power and gives firms the opportunity to charge higher prices. With regards to the television industry, one has to have a TV license in order to be able to watch or record live TV programmes in the UK. In January 2006, The Office of National Statistics categorised license fees as a form of taxation. Profits deriving from license sales are mainly used to finance BBC’s television, radio and online services.

Figure 7

The above table shows BBC 2012/13 financial statements and reveals that the annual license fees for colour and monochrome TV sets are £145.5 and £49 respectively; as for profits, BBC’s license fee income reached £3,656.2 million in 2013. In addition, if one or more individuals aged at least 75 years live in the primary residence of a household, they could be eligible for exemptions on their license fees, and payments would be made by the relevant government department.

However, the drawbacks of TV license fees are raising various concerns, which is why BBC is in the process of deciding whether to continue using the existing system in its next ten years. According to the “Review of the BBC’s Royal Charter (Green Paper) published by the Department for Culture, Media, and Sport in 2005, critics regard licence fees as a regressive form of taxation since the difference in income, the frequency of watching general and specific BBC services are not taken into account and the same flat rate is charged among all households. However, the expansion of devices like computers and smartphones which allow users to receive visual media, has resulted in a decline in the number of people viewing TV via their TV sets, thus reducing revenues deriving from TV ownership-related fees. In response to these arguments, the government asserts that “The collection of a fixed charge based on television ownership may therefore become difficult to sustain in the longer term. Planning should start ahead of time to establish whether any alternative funding models, particularly subscription, may need to be reconsidered after 2016.” (Department for Culture, Media and Sport, 2005b)

Theory of The Market

Features of media products

Generally speaking, criticism of government intervention in the media market is mainly based on the belief that deregulation would promote competition and give motivation to media owners to operate efficiently. However, several characteristics of media products might distort the expected outcomes from a free market.

Firstly, media products are quite similar to public goods to some extent. In fact, when a TV programme is released, all individuals can watch it simultaneously without reducing its availability to others, which can be associated with the non-rivalry that characterises any public good. However, non-excludability may not be met at a finite cost by scrambling the signal. (Hinderiks, 2006) On the contrary, under perfect competition market price equals the marginal cost as well as the average cost. With regards to the media market, Edwin (2001) asserts that “Charging the average cost excludes people who would pay more for the story of broadcast that it actually costs to include them among the recipient. Alternatively, setting the price at the marginal cost, that is, the cost supplying it to the last purchaser, creates insufficient incentives to produce the media product.”

Secondly, as mentioned previously, the media industry shares several characteristics with any other dual market, which is why advertising revenue is very important to media firms and selling to both consumers and advertisers seems more complicated than it is in other markets. On the basis of consumers’ purchasing behaviour, media products are sold by utilising content to trigger people’s attention. Nevertheless, the attention of households is the source of advertisers’ interest.

That is why the sale of media products is achieved by selling audience’s attention to advertisers. As a result of that, it is hard to determine the proper level of television programming and firms may be discouraged from promoting quality contents if their advertising revenues contribute to a great percentage of their total revenues. In addition, having multiple purchasers means that media firms must deal with different interests, which may lead to conflicts as to what kind of media content should be chosen.

Substitutes and new entrants

Obviously, competition in an industry affects firms’ profits, as well as prices, costs and investment. According to Michael Porter (1980), the five basic competitive forces are bargaining power of suppliers, bargaining power of customers, threat of new entrants, threat of substitute products and rivalry among existing firms. (as shown in Figure:8). In coping with these forces, overall cost leadership, differentiation and focus are introduced as three generic strategies (Porter, 1980).

Figure 8

To some extent, threats associated with substitutes and new entrants significantly affect the price of a product in competitive markets. With regards to the media industry, if we consider traditional media types as existing players and emerging online media services as substitutes, firms operating within the traditional media sector are new entrants.

Advertising plays a key role in the media industry, which provides an effective platform to deliver persuasive messages and convey factual information. It also benefits media producers by establishing brand loyalty, reinforcing competitiveness, reducing risks and building entry barriers. Therefore, new media are excellent tools for both consumers and advertisers. In fact, online advertising is experiencing a drastic increase and undoubtedly challenging traditional print advertising, especially in terms of revenues. (Figure: 9)a

Figure 9

Furthermore, the graph below demonstrates that although print media firms have managed to increase their recruitment-classified revenues since 2004, newspapers’ presence in the advertising market is still too weak, compared to that of the Internet.

Figure 10

Hence, print media profits have come to rely on circulation, which shows an unoptimistic trend owing to the availability of free information online and a growing number of Internet users.

Similarly, advertising revenues within the television industry have been declining. According to a report published by Ofcom (2013), the profit generated by the advertising sector dropped by 2% in 2012. In addition, the total TV industry revenue went up by only 0.8% in 2012, in contrast with 5.7% and 4.5% in 2010 and 2011 respectively. The growth in subscription revenue has slowed down as well. This is because households are now able to use various internet-enabled instruments, such as laptops/PCs, smartphones and smart TVs, to watch TV programmes online.

On the other hand, entry barriers are quite strict for both newspapers and television due to existing firms’established reputation and economies of scale.

British Sky Broadcasting Group plc. (BSkyB), for example, is the largest pay-tv broadcaster in the UK and Ireland and has so much market power that it almost monopolises the national pay-tv market. According to Sweney (2012), from the perspective of the Competition Commission, BSkyB’s dominant power on rivals associated with its huge number of subscribers is a form of unfair and ineffective competition. Therefore new entrants don’t represent a significant threat in this case.

Competitive Rivalry

“Competitive advantage comes from the value that firms create for their customers that exceeds the cost of producing that value.” (Porter, 2004) This clearly suggests that the online media sector has successfully reduced costs associated with printing and delivering information. In other words, the Internet is an alternative choice for both advertisers and audiences, which has made the media industry very competitive. In response to emergence of new media, some existing traditional media firms have started using online platforms. Mainstream newspapers that have established their official websites are an excellent example of this new trend.

According to Chris Marsden and DamianTambini (2005), the present consensus on competition within the media industry is based on a ‘shared vision of contemporary market and technological developments’, and there is an increasing number of loose regulatory policies aiming to promote competition in order to achieve efficient allocation of resources, optimal level of social welfare and motivation for traditional media towards digital dimensions.

In relation to the newspaper market, firms are competing on both contents and prices, and a trade-off occurs when making decisions on whether focusing on particular groups of readers by providing high quality information or delivering less deep news to all consumers. By investigating this problem through econometric methods which allow for a comparison between monopoly and duopoly, it is found that competition results in cheaper price and unsymmetrical readership (Kwike, 2010). In this regard Maksymilian Kwiek(2010) claimed that “the more specialized newspaper would be able to capture some of the readers of the more popular and low quality newspapers and still extract a high enough price.” Meanwhile, competition may also raise concerns about the accuracy of newspapers’ contents as stories may be reported in such a way to grab readers’ attention, at the expense of truthfulness.

As for the television market, the emerging digital era has blurred the boundaries between competition and cooperation as even though Internet-based television programmes are becoming increasingly popular, numerous television producers are shifting towards smart-TVs. On the other hand, multifunctional devices that integrate computer, television, and entertainment tools such as gaming consoles and MP3 players seem more tempting and worth buying than a television, which can only be used to watch a limited number of channels. Features such as mobility and interactivity have made the Internet more inexpensive than any other means of communication; moreover, the Internet allows individuals to interact, which is a very attractive feature that has extracted numerous consumers from the traditional media market, whilst generating huge profits.

As a matter of fact, watching television still remains the most popular form of entertainment in most households worldwide, with sports games being the most popular events. Television is still consumers’ top choice due to its stable performance in receiving signal compared to connectivity problems which may make it difficult for many Internet users to watch television online at the same time.

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