Economies of Scale and Media

Let me provide some further explanation on Economies of Scale in relation to media:

Basically an Economy of Scale says that the more units you buy the less you will have to pay for each unit.

For Example:
     10 units cost $50 each
     100 units cost $40 each
     1000 units cost $35 each
     10000 units cost $30 each
     100000 units cost $20 each, and
     1000000 units cost $10 each

Therefore if I can buy more units I can sell them for less but since I have more units I can make lots more money.  This means that someone who has only one store can only buy a few units and must pay more for each unit and must sell each for a high price.  Someone who has a 10 stores can buy more units and buy for less and therefore sell for less.  And it goes on and on up the ladder so that the biggest group of stores can buy and sell for less and essentially put the smaller stores out of business because consumers want to pay less for the same thing.

Now in film or music or television or video games the greatest amount of cost is associated with production or creation of the unit, while with normal goods the greatest amount of cost is associated with manufacturing (there is always a cost associated with each unit sold).  So, once the cost of content creation is met through ticket sales, song downloads or game unit sales then each additional ticket, download or game is nearly pure profit.  The scale is actually a cliff where once costs are met then there is only profit (this is not true in manufacturing).  When you add to this the impact of popularity then there is added momentum created by the buyers who helped you meet your costs, they inspire others to pay for the experience too.

The industry impact if the focus on blockbusters.  If I can spend lots and lots of money and people think that will make a good movie and go see it then I will only want to make the movies that are going to make lots and lots of money.  The logic is that spending money makes people want to see the movie and it will make money.  The truth is that good stories make good movies, good singers and songwriters make good records and good stories and experiences make good games.  It has nothing to do with how much it cost to make.  But the attitude persists and it makes it more difficult for smaller projects to break through.  The people who make hits get to try and make more hits but the untested are left out unless they get unusually lucky or are tremendously persistent and resilient.

Internationally this means that these media from large media producing countries, e.g. USA and India, can be sold for any price at all anywhere in the world.  Remember, it is a near pure profit transaction.  So, the guy in HK with a great idea for a TV show for HK people can be easily undersold by the foreigners because he still has to pay for production.  The question the manager asks is do I go with a show with a proven track record from abroad that I got for cheap or do I pay for a new show, even from an experienced producer, that has to get made and has an uncertain level of success.  So, the manager balances uncertainties and goes with the cheaper product because both shows probably have the same chance for success or failure.

This goes beyond a simple explanation of Economies of Scale but the Economies of Scale in Media are unnatural.  They are attractive because of the potential for profit beyond the break even point (the place where revenues meet cost) but the opportunities to make a hit are limited by the people who control access to the audience and in the Internet world the opportunities to make a hit are limited by access to people attention in an environment that is overwhelmed with content, good and bad.