wharton talk: media transformation
DESCRIPTION
Joel Waldfogel (Chair, Business and Public Policy, The Wharton School) at Supernova2008TRANSCRIPT
![Page 1: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/1.jpg)
Threats and Opportunities in Media: Piracy and Pricing
Joel WaldfogelThe Wharton SchoolUniversity of Pennsylvania
Supernova 2008June 18, 2008
![Page 2: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/2.jpg)
New Challenges and Opportunities for Media Products
! Piracy as threat to appropriability! Pricing to the rescue?
![Page 3: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/3.jpg)
New Technologies
! Service flow from media at all-time high! But it’s hard to control distribution
! Music, movies,TV, games,…! How can sellers appropriate consumers’
valuation?! Threats to all media
![Page 4: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/4.jpg)
Unauthorized Distribution and Sales
! Not obvious whether “file sharing” is a friend or a foe! Substitution or stimulation
! Interesting differences across media! Music! Movies! Television
![Page 5: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/5.jpg)
Conceptual Framework
Prior to unauthorized access, single-price monopolists:
High-valuation situations produce “bonus” for consumers
Each point represents somebody’s willingness to pay for something
Low-valuation situations are lost opportunities
Rectangle is revenue
![Page 6: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/6.jpg)
Unauthorized use segments demand
! "#$%&#$'()*+,#$-! $.',.()'/*0*$1*! 2.$(13*/('-*)'45')6*7'&.1,8'6+0*'(9#::*8
One possibility: unauth’d users are low-value demanders
![Page 7: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/7.jpg)
Or maybe:unauth’d users are high-valuation demanders
Then CS increases, and revenue and deadweight loss decrease
Key point: effects of unauthorized use hinge on whether materialwould have been used through authorized channelsabsent the unauthorized use
![Page 8: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/8.jpg)
But: Sharing Might Simulate Buying
! Collectively we might buy stuff we wouldn’t buy alone
! Sampling as inducement to buy
! Plausibility of mechanisms varies across media
![Page 9: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/9.jpg)
Differences across Media
! Music! Close substitute, quick and easy to get! Divided attention
! Movies! Web offers poor substitute, DVD copying better! Undivided attention
! TV different?! Episodes complements! Demand stimulation plausible
![Page 10: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/10.jpg)
CD Shipments
300400500600700800900
1000
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
year
Uni
ts (m
il
totalcertifications
Music industry in crisis
Source: RIAA
Is downloading the cause?
Pressure from Events
![Page 11: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/11.jpg)
YouTube Growth
We’ve been living through an “experiment”
![Page 12: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/12.jpg)
Networks huffy about unauthorized content
![Page 13: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/13.jpg)
Hard to get data, so survey-based micro data on movies, music, TV
! How much do you consume through authorizedchannels?! CDs purchased! Movie rental, purchase! Watching traditional TV (or authorized)
! How much do you consume through unauthorizedchannels?! Unpaid song downloading! DVD copying! Unauthorized web viewing
! Same questions retrospectively to create panel
![Page 14: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/14.jpg)
Findings Differ across Media
![Page 15: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/15.jpg)
Music Findings
! Lots of unpaid consumption! Significant sales displacement, but far
less than 1:1! Consumers download low-value music
! Downloading’s benefit to consumers! 1/3 from sellers! 2/3 from heaven (reduced DWL)
![Page 16: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/16.jpg)
Movies: Hollywood Ending
! Amount of unpaid consumption low, but rate of displacement high
! Large, almost 1:1! Gains to consumers are mostly transfers from
sellers rather than reduced DWL, as in music ! Why so high?
! Copying still cumbersome! Even when faster, movies require undivided attention
! Ominous, as copying gets easier
![Page 17: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/17.jpg)
TV Results
! Overall, TV viewing almost flat, web viewing up 4 hours per week
! Implied change in weekly hours! Half authorized, half unauthorized
! Effect on networks depends on value of viewers on TV vs authorized web
! Less displacement than in movies and music ! Movies (1:1) … music (less) …TV ( none?)
![Page 18: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/18.jpg)
Pricing to the Rescue?
![Page 19: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/19.jpg)
Pricing to the Rescue?
! How much revenue is foregone by uniform pricing at $0.99, relative to other pricing schemes:! another uniform price, component pricing,
pure bundling, (& more) ! Person-specific pricing (“3rd degree”)
! How much of surplus is appropriable with “fancy pricing”?
![Page 20: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/20.jpg)
Managerial Motivation
! Could sellers make more money?! Important Aside:
! Apple sells songs and hardware! 2007 iTunes revenue = $1.7 billion! 2007 iPod revenue ! $8 billion
! More on this later! Could sellers make more money, holding
consumers harmless?
![Page 21: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/21.jpg)
Direct Elicitation
! Ask 500 students how highly they value 50 songs! Top songs at iTunes, early January 2008
! “You can observe a lot just by watching”
(Yogi Berra, Yankee catcher and philosopher)
![Page 22: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/22.jpg)
Survey Songs and their Valuations
$1.93$0.88$0.11$1.60Low (feat. T-Pain) - Flo Rida
$1.07$0.37$0.05$1.02Love Song - Sara Bareilles
$1.06$0.43$0.06$1.04Love Like This - Natasha Bedingfield
$1.70$0.85$0.12$1.45Kiss Kiss (feat. T-Pain) - Chris Brown
$1.53$0.71$0.09$1.49Into the Night (feat. Chad Kroeger) - Santana
$1.20$0.47$0.06$1.06I Don't Wanna Be In Love (Dance Floor Anthem) - Good Charlotte
$1.12$0.48$0.06$1.15Hypnotized (feat. Akon) - Plies
$1.47$0.69$0.10$1.41How Far We've Come - Matchbox Twenty
$2.02$0.94$0.15$2.02Hey There Delilah - Plain White T's
$1.00$0.26$0.02$0.77Hero/Heroine (Tom Lord-Alge Mix) - Boys Like Girls
$1.47$0.55$0.10$1.30Hate That I Love You (feat. Ne-Yo) - Rihanna
$0.57$0.11$0.01$0.63Feedback - Janet
$1.44$0.63$0.11$1.40Don't Stop the Music - Rihanna
$1.45$0.56$0.08$1.29Cyclone (feat. T-Pain) - Baby Bash
$0.71$0.13$0.01$0.58Crushcrushcrush - Paramore
$2.10$1.01$0.28$2.00Crank That (Soulja Boy) - Soulja Boy Tell 'Em
$1.01$0.29$0.04$0.78Clumsy - Fergie
$1.73$0.68$0.08$1.47Bubbly - Colbie Caillat
$1.22$0.53$0.08$1.16Big Girls Don't Cry (Personal) – Fergie
$2.67$1.39$0.59$2.37Apologize (feat. OneRepublic) - Timbaland
75th pctilemedian25th pctilemeanSong name
variation
![Page 23: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/23.jpg)
Variation across songs and respondents
020
4060
80
0 10 20 30 40 50Songs
25th Percentile 50th Percentile75th Percentile
Distribution of Cumulative Valuations, Smoothed (0.25)
Related fact: songs explain 4 percent of variation, individuals explain 40 percent
Median respondent is willing to pay $20 for his/her top 10 songs.vs $40 for 75th p’ctile, and $12 for 25th p’ctile
![Page 24: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/24.jpg)
Correlation of Valuations 0
12
3D
en
sity
0 .2 .4 .6 .8Correlation
Smoothed Data .25Correlations of Song Valuations
Relevant to whether bundling will enhance revenue: Less so as song valuations are more positively correlated
![Page 25: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/25.jpg)
Resulting demand curve
! …ordering valuations from highest to lowest
05
1015
20
Val
uat
ion
0 5000 10000 15000 20000 25000Quantity
Demand Curve, Smoothed (0.25)
![Page 26: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/26.jpg)
Revenue Function
! Find revenue-maximum, associated price, etc. (MC=0)
![Page 27: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/27.jpg)
Revenue Maximizing Uniform Pricing
! Current: 99 cents! (revenue = $7,364 in sample)
! Revenue maximizing: $1.87! (revenue = $8,158)! 12 percent increase
![Page 28: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/28.jpg)
Revenue relative to current pricing
0.94
0.96
0.98
1
1.02
1.04
1.06
1.08
1.1
1.12
Uniform (0.99) Uniform (1.87) Song-specific Bundle
rela
tive
to $
0.99
![Page 29: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/29.jpg)
Song-Specific (Component) Pricing
! Calculate demand curve for each song! Currently in use at
! Amazon (a little)! Amie Street
![Page 30: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/30.jpg)
Song-Specific Pricing
0.5
11
.52
2.5
De
nsi
ty
1 2 3 4 5price
Smoothed data 0.25Song-Specific PS-Maximizing Prices
![Page 31: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/31.jpg)
Revenue relative to current pricing
0.9
0.95
1
1.05
1.1
1.15
1.2
Uniform (0.99) Uniform (1.87) Song-specific Bundle
rela
tive
to u
nifo
rm ($
0.99
)
![Page 32: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/32.jpg)
Selling songs as a bundle
! Can increase revenue even when correlations are positive
! Should increase revenue more as bundle size increases
! Optimal price for these 50 songs is $36.08.
![Page 33: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/33.jpg)
Revenue relative to current pricing
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Uniform (0.99) Uniform (1.87) Song-specific Bundle
rela
tive
to u
nifo
rm ($
0.99
)
![Page 34: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/34.jpg)
…and little surplus is appropriated
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
Uni f or m (0.99) Uni f or m (1.87) Song-speci f ic Bundle
![Page 35: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/35.jpg)
Consumers Fare Worse under Alternatives to Uniform 99
0
0.2
0.4
0.6
0.8
1
1.2
Uniform (0.99) Uniform (1.87) Song-specific Bundle
CS
rela
tive
to u
nifo
rm ($
0.99
)
Series1
![Page 36: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/36.jpg)
But it’s possible
! …to raise revenue, holding consumers harmless
! Can keep CS at its 99 cent level, raise revenue by 10 percent
! (Keep the hardware valuable)
![Page 37: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/37.jpg)
So Far…
! We’ve raised revenue by nearly 10 percent! …but not above 1/3 of surplus
! We haven’t tried the heavy artillery –mixed bundling – yet
! MB does better, but still delivers only a third of surplus as revenue
![Page 38: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/38.jpg)
Discriminatory Pricing
! So far, we’ve gotten PS only up to 1/3.! How about 3rd degree?
Person-specific pricing raises revenue substantially
But more feasible discriminationdoes little.
0
0.5
1
1.5
2
2.5
uniform(0.99)
gender ethnicity residentalien
age person-specific
![Page 39: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/39.jpg)
Summing up fancy pricing
! Is the glass half empty or half full?
![Page 40: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/40.jpg)
Summing up fancy pricing
! Glass half full:! More revenue is available
! Even holding consumers harmless
Hey Steve –$1.8 bil x 9 pct=$162 mil.Best, Joel
![Page 41: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/41.jpg)
Summing up fancy pricing
! Glass half full:! More revenue is available (10 percent)
! Even holding consumers harmless
! Glass half empty:! Relatively small share of surplus available
as revenue, even with feasible fancy pricing schemes
![Page 42: Wharton Talk: Media Transformation](https://reader033.vdocuments.mx/reader033/viewer/2022060106/5549425cb4c9050f4d8b5216/html5/thumbnails/42.jpg)
Finally
! Music industry hurting from piracy even as service stream historically high! need clever ways to appropriate value
! It’s happening! Nokia and Apple (reportedly) currently
contemplating bundling! Additional challenge:
! How to share revenue with bundle pricing