Financial Managementof Media Firm Report 2006

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The Financial Management of Media Firms - Key Issues, Theories, and Case
Evidence
Book · May 2006
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Media XXI, FormalPress, Lda.,
Rua Prof. Vitor Fontes, 1600-670 Lisbon
director@mediaxxi.com
Special Issue Research Report
Financial Management of Media Firms – Key

Issues, Theories, and Case Evidence
Prof.Dr. Paul Murschetz, MSc.

Murschetz Media Consulting Salzburg / Cologne
1 May 2006
Interim Report
Trends in Labour Market in the Media Sector in EU 25
Acknowledgements
This report was prepared by Paul Murschetz on behalf of FormalPress, Lda., Lisbon.
Contact
For further information about this Report please contact:
Paul Murschetz Paulo Faustino

Research consultant General Manager
Murschetz consulting, Salzburg/Austria Media XXI, FormalPress, Lda.,
Pillweinstr. 4, 5020 Salzburg, Austria Rua Prof. Vitor Fontes, 1600-670 Lisbon
paul.murschetz@ish.de
Rights Restrictions
Material from this report can be freely used and reproduced but not commercially resold and, if quoted, the exact
source must be clearly acknowledged.
Lisbon, May 2006
1 May 2006 2
Table of Contents
Executive Summary ................................................................................................................................ 4

1 Introduction to Financial Management of the Media .................................................................... 6
Study objectives and research questions ................................................................................ 9
Methodology and study organization ................................................................................... 10
2 Financial Management of Media Organizations – Key Issues.................................................... 12
2.1 General issues – The impact of competition on firm performance .......................... 12
2.2 Specific issues of financial media management ......................................................... 19
2.3 Further theoretical approaches to financial media management ............................ 25
2.4 Financial indicators and measures of firm performance ......................................... 27
2.5 Strategic responses of media companies .................................................................... 30
3 Financial Management in Media Practice – Case Evidence ....................................................... 37
Case Study A: http://DerStandard.at – The Internet success for quality news publishing
........................................................................................................................................ 37
Case Study B: ORF – The Austrian Broadcasting Corporation exploiting cross-media
financial strategies........................................................................................................ 42
4 Conclusions ................................................................................................................................. 47
3 Interim Report, 1 May 2006

Executive Summary
Research background and objective

The research study project “Financial Management of Media Firms – Key Issues, Theories, and Case
Evidence” (in the following abbreviated as ‘the study’) will research and analyse key issues of
financial economics and financial management of the media sector. It will introduce fundamental
concepts of financial economics and financial management of the media sector, present the vocabulary
of financial economics and financial management and as applied to the media sector, present key
issues and main principles of financial management of media organizations, and offer analytical
reasoning for the impacts of general socio-economic forces on firm performance in the media sector.
Further, this study will present two best-practice case studies in the media sector in order to test
theoretical issues discussed against empirical evidence.
The study must be regarded as an exploratory pilot study of mapping thematic issues regarding
financial management in general and the media in particular. Main objective is to introduce key
theoretical issues of financial economics and financial management of the media sector and to test
these issues against two selected best-practice case studies in the media sector. By this, this study
provides theoretical and empirical analysis of financial economics and financial management of the
media sector in order to understand the following multi-levelled key issues in more detail:
(a) Impacts of competition on media firm performance as viewed from an Industrial Organisation
theory perspective
(b) Potential behavioural responses of media firms as viewed from a media economics perspective
(c) Sources of finance of off-line and online media firms in selected industry sectors as possible
responses to require sufficient funding for their operations
(d) Specific theoretical issues of financial media management
(e) Background theories to explain issues of financial media economics and media management
(f) Indicators and measures of firm performance as adapted for the media sector, and
(g) Issues of strategic management in general and marketing management in particular
Results
This study defines financial management in a broad sense. This means that while financial
management theory in general is concerned with the “acquisition, financing, and management of
assets with some overall goal in mind” (Van Horne & Wachowicz 2001, p. 2), this study proposes the
view that financial management of media firms needs to be defined more broadly. A proper definition
needs to include issues of governance, marketing, and competitive strategy. This said, the decision
function of financial management can not only be broken down into three major areas: the investment,
financing, and asset management decisions, but, following the American Marketing Association, may
view financial management in a broader way as an “organizational function and a set of processes for
creating, communicating, and delivering value to customers and for managing customer relationships
1 May 2006 4
in ways that benefit the organization and its stakeholders” (American Marketing Association,
website).
Only few scholars in media economics and media management research offer analytical reasoning and
explanations for issues of investment, financing, asset management, governance and firm value
creation processes for media firms. This study has laid the groundwork for analysing theoretical issues
in financial media management. It looked into the theoretical offers of the theory of the firm and the
Industrial Organisation model of competition to set-up a theoretical framework for effects of financial
media management on competition. Further, it identified a set of other theoretical approaches well
applicable to the field of financial media management such as theories of ownership control and its
effects on media performance, financial commitment and financial control, resource dependence
theory, and corporate governance theory. Case studies on the financial management practices of
mass media firms revealed that, in fact, print and broadcasting media apply various sets of
management and marketing practices to become economically and financially viable
organizations.
This study showed that able to show that the Internet’s impact on the content utilization chains of a
traditional print media publisher manifests itself in various ways. It identified a set of new revenue-
generation practices, whereby the media firm studied exploited its content wealth and unique selling
propositions (USPs) for its online representations. As for the second best-practice case study, the
ORF’s positive economics is mainly accounted for by well accepted informational programming,
programming of low-cost US-feature films and series, exclusive sports transmissions and an overall
successful ‘Austrification’ of programmes. Further, Internet strategies, cross-media marketing
strategies, and digitization as innovation strategy make for a strong Public Service Broadcaster in the
future.

1 Introduction to Financial Management of the Media
• Chapter overview
The following chapter will:
• Introduce fundamental concepts of financial economics and financial management of the media
sector.
• Present the vocabulary of financial economics and financial management and as applied to the
media sector.
• Define objectives and selected methods for the present study.
• Offer a set of research questions which will guide this study and will be answered in the concluding
chapter.
• Give a brief overview of the organisation of this present study.
The economics and financing of media companies is a central issue in media management research
and practice. According to Picard (2002, p. xi), “the economics and financing of media companies are
the foundations upon which all media activity takes place. Regardless of cultural, political, and social
roles and expectations for media, media must cover their costs and create returns, just as any other
business, or they will wither and disappear. The forces that require effective operation are the same
for both private media and non-commercial media such as public service broadcasting”.
The financial requirements of varying types of media operations affect the forms and structures of
media firms, as do the scale and scope of their operations (see, Picard 2002, p. 2-3). The three most
common legal forms of business organization are sole proprietorship, the partnerships, and the
corporation. Sole proprietorship is a form of business owned by one person and operated for his or her
own profit. A partnership is a business owned by two or more people and operated for profit. A
corporation is an artificial being created by law (often called a “legal entity”) (see, Gitman 2003).
Because the needs of media differ and because of the organizational requirements to create media
goods and services vary depending upon their markets, the sizes of media organizations cover the
range from small to large.
Media organizations are guided by specific goals-sets. These goals include cultural goals, as well as
economic goals such as efficiency, effective organization of resources and processes, profit
maximization, economic growth, and economic stability.
Profit maximization as primary firms goal: The traditional ‘Theory of the Firm’ which studies the
behaviour of firms with respect to the inputs they buy, the production techniques they adopt, the
quantity they produce, and the price at which they sell their output, asserts that the development and
operations of firms is guided by the primary goal of maximizing profit and the value of the firm
(Coase 1937, Crew 1975, Jensen & Meckling 1973). The purpose of the creation and operation of
commercial media firms is thus to produce the most profit and the highest value for the firm. The
former tends to be a short-term annual perspective, while the latter is a longer-term goal. If resources
1 May 2006 6
and the processes by which they are transformed into goods and services are efficiently and effectively
organized and managed, the ability to achieve these goals becomes possible.1
What is profit? Profit is a primary goal of firms. Profit is defined as a “measure of surplus by a
company from some activity or project over some time period” (Bannock et al. 2002). Bannock et al.
(2002, p. 293) continue as follows: “While simple at first sight, profit has a number of definitions, and
is far from simple in practice. In an accounting sense of the term, two important concepts of profit are:
(a) net profit before tax (or pretax profit), which is the residual after reduction of all money costs, i.e.
sales revenue minus wages, salaries, rent, raw materials, interest payments on loan, and depreciation,
and (b) gross profit, which is net profit before depreciation and interest. In other words, economic
profits are equal to total revenue minus total cost”. Thus, a profit-maximizing firm chooses to produce
at an output level or price that maximizes the difference between total revenue and total cost (Hoskins
et al. 2004).
For commercial firms, profit creates the money available to pay their owners or investors, make
capital expenditures, and pay debts. For non-commercial media, ownership/investor do not receive the
profit, but it provides funds to improve the company through capital investments, make additional
expenditures on content and other items, and pay debts (Picard 2002). To investors, revenue is less
important than profit (which in US business, somewhat confusingly, often is called income), which is
the amount of money the business has earned after deducting all the business’s expenses.
There is a difference between economic profit and accounting profit. Economic profit is different from
the profit that a business might declare in its accounts, which might typically exist of some economic
rent plus normal profit, i.e. a return that just compensates the producer for the opportunity cost of the
capital and entrepreneurship that it provides.2
The role of profit: Profit measures the return to risk when making an investment. The role of profit in
capital investment decisions is explained by the risk theory of profit (Knight 1921). This argues that
the potential for high economic profits is necessary to induce investment, especially in industries with
higher risk. As a result, firms operating in these industries require above-average returns, or the capital
will move to other more profitable investments (Picard 2002).
The role of profit in the media sector: The media sector is not “naturally” profit-driven. Some
industries in the sector are regulated by law to operate as not-for-profit firms. For example,
broadcasting law imposes specific income restrictions on media companies. In addition, media
companies have to pursue other goals than profit maximisation such as cultural and social goals as part
of their public remit.
Financial economics: Financial economics is the branch of economics studying the interrelation of
financial variables, such as prices, interest rates and shares as opposed to those concerning the real
economy. Besides studying financial market and instruments, financial economics is concerned with
issues of asset valuation, i.e. the determination of the fair value of firm assets (cash, bank deposits,
bills receivable; land buildings, plant, machinery; intangible assets such as patents, goodwill). This
asset valuation involves questions such as: ‘How risky is the asset?’ (identification of the asset
appropriate discount rate), ‘What cash flows will it produce?’ (discounting of relevant cash flows),
1Some critics of this theory have argued that the rise of modern corporations and the separation of management and
ownership may lead to objectives other than profit maximization such as firm growth, or management utility (Klein 1998).
2 Opportunity cost is a ubiquitous concept and can be translated as the value that has to be given up – a lost opportunity – as a
result of a decision. It ensures that the price of every input to production is charged at the price equal to its value in its best
alternative use.

‘How does the market price compare to similar assets?’ (relative valuation), and ‘Are the cash flows
dependent on some other asset or event?’ (derivatives, contingent claim valuation).
Financial management: Financial management is concerned with the acquisition, financing, and
management of assets with some overall goal in mind (Van Horne & Wachowitz 1997). According to
Picard (2002), “financing involves meeting the monetary needs of a firm so that it may be established,
operated, and developed. Issues of financing range from creating sufficient funds to establish a firm,
to obtaining money to pay for operations, to gathering funds to fund growth” (p. 154). The essential
objective of financial management can be categorized into two broad functional categories: recurring
finance functions and non-recurring or episodic finance functions, defining the functional role of a
financial manager. This time-perspective gives financing issues a specific note: they need to
understand the financial flow in the firm. In this context, critical issues are cash flow management,
credit management, investment decisions, and financing decisions (Alexander et al. 1993).
According to Bradley (cited in: Gitman 1999, p. 8), “financial management is the area of business
management, devoted to a judicious use of capital and a careful selection of sources of capital, in
order to enable a spending unit to move in the direction of reaching its goals”. This definition points
to the four essential aspects of financial management:
• Financial management is a distinct area of business management, i.e. financial manager has a
key role in overall business management.
• Prudent or rational use of capital resources, i.e. proper allocation and utilization of funds.
• Careful selection of the source of capital, i.e. determining the debt equity ratio and designing a
proper capital structure for the corporate.
• Goal achievement, i.e. ensuring the achievement of business objectives viz. wealth or profit
maximization.
Academic reasoning in financial management for the media is sparse. Discipline development could
be undertaken alongside traditional topic heading such as (Van Horne & Wachowitz 1997):
• Introduction to financial management for the media
• Valuation of assets
• Tools of financial analysis and planning of media operations
• Working capital management
• Investment in capital assets
• The cost of capital, capital structure, and dividend policy
• Intermediate and long-term financing of media operations
• Special areas of financial management for the media
The role of a financial manager: The role of a financial manager can be best understood by
analyzing the definition of financial management. Following (Gitman 2003, p. 3), “financial managers
actively manage the financial affairs of any type of businesses – financial and non-financial, private
and public, large and small, profit-seeking and not-for-profit. They perform such varied financial
tasks as planning, extending credit to customers, evaluating proposed large expenditures, and raising
money to fund the firm’s operations. In recent years, the changing economic and regulatory
1 May 2006 8
environments have increased the importance and complexity of the financial manager’s duties. As a
result, many top executives have come from the finance area”.
Treasurer and controller: Corporate organizations differ between treasurer and controller. The
treasurer is the firm’s chief financial manager, who is responsible for the firm’s financial activities,
such as financial planning and fund raising, making capital expenditure decisions, and managing cash,
credit, the pension fund, and foreign exchange. The controller is the firm’s chief accountant, who is
responsible for the firm’s accounting activities such as corporate accounting, tax management,
financial accounting, and cost accounting.
Relationship to accounting: The firm’s finance (treasurer) and accounting (controller) activities are
closely related and generally overlap. Indeed, managerial finance and accounting are not often easily
distinguishable. In small firms the controller often carries out the finance function, and in large firms
many accountants are closely involved in various finance activities. However, there is one major
difference between finance and accounting: the accountant’s primary function is to develop and report
data for measuring the performance of the firm, and the financial manager’s primary function is to
evaluate the accounting statements and make decisions on the basis of their assessment of the
associated returns and risks.
The financial manager must understand the economic environment and relies heavily on the economic
principle of marginal analysis to make financial decisions. The marginal analysis is a principle in
economics that states that financial decisions should be made and actions taken only when the added
benefits exceed the added costs. Financial managers use accounting but concentrate on cash flows and
decision making.
In addition, managerial finance involves separate further types of positions and functions within a
business firm: (a) the financial analyst, who primarily prepares the firm’s financial plan’s and budgets.
Other duties include financial forecasting, performing financial comparisons, and working closely
with accounting; (b) the capital expenditures manager, who evaluates and recommends proposed asset
investments and may be involved in the financial aspects of implementing approved investments; (c)
the project finance manager, who arranges financing for approved asset investments, coordinates
consultants, investment bankers, and legal counsel in large firms; (d) the cash manager, who maintains
and controls the firm’s daily cash balances; (e) the credit analyst, who administers the firm’s credit
policy and evaluates credit applications, extending credit, and monitoring and collecting accounts
receivable; (f) the pension fund manager, who oversees or manages the assets and liabilities of the
employees’ pension fund; and (g) the foreign exchange manager, who manages specific foreign
operations and the firm’s exposure to fluctuations in exchange rates (Gitman 2003).
Study objectives and research questions

Main objective: Main objective of this study is to introduce key theoretical issues of financial
economics and financial management of the media sector and to test these theoretical issues against
two selected best-practice case studies in the media sector.
By this, this study provides theoretical and empirical analysis of financial economics and financial
management of the media sector in order to understand the following multi-levelled key issues in more
detail:

(h) Impacts of competition on media firm performance as viewed from an Industrial Organisation
theory perspective
(i) Potential behavioural responses of media firms as viewed from a media economics perspective
(j) Sources of finance of off-line and online media firms in selected industry sectors as possible
responses to require sufficient funding for their operations
(k) Specific theoretical issues of financial media management
(l) Background theories to explain issues of financial media economics and media management
(m) Indicators and measures of firm performance as adapted for the media sector, and
(n) Issues of strategic management in general and marketing management in particular
Research Questions: The following general research questions guide this study:
1. RQ1: Which socio-economic forces influence firm performance in the media sector?
2. RQ2: Do new information and communication technologies have an impact on firm
performance?
3. RQ 3: Which sources of finance are vital for viability and sustainability of operations?
4. RQ4: Which specific fields may guarantee financial viability and sustainability?
5. RQ4: What background theories do explain the relations between structure, firm conduct, and
performance of firms in the media sector and the impact of these factors on financial
management?
6. RQ 5: Which indicators and measures are used to show the financial performance of media
firms?
7. RQ6: What role does strategy play in market positioning of firms in the media sector?
8. RQ7: What role does marketing strategy play in strengthening the financial position of firms
in the media sector?
Methodology and study organization
Selected research methods: The analysis will apply a set of theoretical and empirical methods:
scientific literature review, study of business reports and industry data, and case study research.
• Literature review: We apply a scientific literature review, i.e. a documentation of a

comprehensive review of the published academic and practitioner’s work from secondary
sources of data in the areas of interest.
• Study of other written material: We will study other data sources to include published and
unpublished documents, expert reports, industry data, company reports, memos, letters, and
newspaper articles.
1 May 2006 10
• Case Study research: We explore particular cases by applying the case study method.
Single-case studies of financial management in media organization are analyzed as an
empirical validation of our approach.
Study organisation: This study is organized alongside the following three main chapters, according
sub-chapters, and a reference section:
Chapter 1 Introduction – Fundamentals, study objective, methodology
Chapter 2 Financial Management of Media Organisations – Key issues
Chapter 3 Financial Management of Media Organisations – Case Evidence
Appendix References

2 Financial Management of Media Organizations – Key

Issues
• Present key issues and main principles of financial management of media organizations.
• Offer analytical reasoning for the impacts of general socio-economic forces on firm performance
in the media sector including competition, market forces, cost forces, regulatory forces, and
barriers to entry and mobility.
• Analyse specific issues of financial media management such as sources of revenue, start-up
financing management, cash flow and credit management, and investment management
• Discuss background theories of financial media management, and
• Present key indicators and measure of firm performance
• Introduce theories and key issues of strategic responses of firms to market challenges and
opportunities, and
• Depict marketing strategies as specific firm responses to market pressures
2.1 General issues – The impact of competition on firm performance
According to Picard (2002), four major drivers of change are affecting media operations and put
pressure on choices of managers of media firms to develop appropriate responses to them: (1) market
forces, (2) cost forces, (3) regulatory forces, and (4) barriers to entry and mobility. Picard (2002, p. 48)
defines “market forces as external forces based on structures and choices in the marketplace. Cost
forces are internal pressures based on operating expenses of firms. Regulatory forces represent the
legal, political, and self-regulatory forces that constrain and direct operations of media firms.
Barriers represent factors that make it difficult for new firms to enter and successfully compete in a
market”.
In the following paragraph, these four categories of market forces will be described and impacts for
financial media management will be introduced and discussed. Additionally, this chapter will
introduce the impact of technology as main driver of market changes and its potential impacts in
financial management of the media.
• Market forces
Competition: The theory of the firm forms the basis of the industrial organization (IO) model that
provides an analytical framework for examining competition in the media and other industries. Most
media economics texts follow the IO model using the SCP-paradigm. This paradigm posits a causal
1 May 2006 12
relationship between market structure, conduct and performance. Market structure determines the
conduct of firms, which in turn determines industry performance.
Exhibit 2-1: The Structure-Conduct-Performance paradigm, variables and relationships
Micro data Market structure Macro data

Legal form Number of sellers and buyers
Organization structure Market shares
Leadership Product differentiation

Competition policy
Economies of scale
Market phase Business cycle policy
Entry and exit barriers

Technology policy
Market conduct
Price and product policy
Marketing
Innovation
Market result
Allocative efficiency
Productive efficiency
Diversity of opinion
Source: Berg 1999.
Factors of competition: Of the factors that determine competition, market structure usually takes
precedent. It involves three characteristics: (1) the number of sellers, (2) the nature of the product, and
(3) barriers to entry (Picard 1989). The number of sellers can range from many, as in models of pure
competition, to one, the condition of monopoly.
Economic theory states that competition exists when buyers can substitute one product for another.
This willingness to substitute depends on several factors, such as price, price of substitutes, quality of
products, income and degree to which various products provide the consumer with equivalent services.
With news media, few products are perfect substitutes because readers add to the meaning by
interpreting content and develop preferences for specific bundles of information, such as particular
newspapers. Because of these preferences and the utility they provide, newspapers and all media do
not fit well the assumptions of classic economic theories of perfect competition (Lacy 2004).

Classic models of competition suggest there are many firms in a market, each selling an identical
product. Each firm also pays identical costs to produce its product. Consumers want to buy the product
at the lowest possible price, and it doesn’t matter which firm produces the product. Any firm that
increases its price loses customers who switch to another firm selling the same product at a lower
price. Each firm’s product is a perfect substitute for any other firm’s product. Firms cannot influence
competitors and are forced to sell at a price that just covers their costs. Market conditions must change
before firms can increase prices without losing all of their customers. If only a few firms compete,
each individual firm’s actions will influence the response from other firms. In oligopolistic markets
firms might agree to raise prices above production costs, earning excess profits. Explicit pricing
agreements are illegal, so oligopolists must depend on tacit understandings to maintain pricing
discipline. However, such agreements are unstable, and individual firms will violate these
understandings if they believe they can gain an advantage.
Newspaper markets tend to be either oligopolistic or monopolistically competitive. The nature of the
product refers to its substitutability. While products under pure competition differ only in price,
competition under monopolistic competition is based on product differentiation and advertising.
Barriers to entry can take on several forms, from technology to regulation to illegal behavior of firms.
Lacy (2004) has studied the relationhsip of competition, circulation, and advertising on the
performance of daily newspapers. According to Lacy, economic theory and research provide evidence
that intense newspaper competition among newspapers will result in increases in newsroom budget,
changes in content and decreases in advertising cost per thousand. However, empirical evidence is less
storng that competition decreases subscription prices. Considerable variations across newspapers can
be found with all these relationships, which represent a variety of managerial decisions.
However, the following general statements are supported by Lacy’s (2004) research:
• Intense newspaper competition increases expenditures in the newsroom and improves
journalism performance.
• The increased expenditure and performance translates into changes in content and
improvements in quality aimed at attracting readers.
• The relationship between these content changes and circulation growth is not perfect.
However, evidence suggests quality content can attract readers and that failure to provide
acceptable levels of quality and content will lead to declines in circulation and penetration.
• Competition for advertising decreases the cost per thousand that advertisers pay newspapers
for at least some forms of advertising. At least some advertisers see other media as substitutes
for some forms of newspaper advertising, especially retail advertising. The number of
advertisers who accept this seems to be growing. At some point, rising cost per thousand
probably leads to businesses moving their advertising to other media, although this is just one
factor in the substitution.
• Clustering reduces competition and affects content and advertising prices.
As a result, market performance is impacted by these relationships and dynamics. As put forward by
Lacy (2004, p. 33), “as readership declines and the cost per thousand increases, advertisers will be
more likely to switch to imperfect substitutes. If ad lineage declines, newspapers that want to maintain
profit margins will either have to increase ad prices or maintain revenue or cut newsroom and other
expenses to control costs. In the former case, the probability of advertisers’ seeking substitutes
1 May 2006 14
increases. In the latter, quality declines will cause readers to leave, increasing the cost per thousand.
As cost per thousand increases, businesses are more likely to substitute other forms of advertising”.
Lacy (2004, p. 34) continues as follows: “Newspapers often take advantage of declining competition
to enhance short-term profits. However, this is a strategic choice. According to economic theory,
businesses that cut quality and pursue aggressive pricing policies can invite competition. A recent
study of the relationship between type of daily ownership and existence of weekly competition in a
county found that counties with publicly owned dailies or no dailies averaged about one more weekly
newspaper than did counties with privately owned dailies. Because publicly owned dailies tend to cut
newsroom budgets and price aggressively, this exploratory study suggests that dailies might be
inviting weekly competition through short-run pricing and content strategies”.
Changes in consumer demand: There is a multitude of factors for change in consumer demand in
printed products. Lifestyle changes and the focus individuals place on their leisure time have changed.
There has also been a reduction in the number of younger people reading newspapers as new
communications channels continue to proliferate. Individual working patterns continue to change
either. Further, there are visible demands for higher performance from media products, through higher
quality, personalisation of services or other means. To leverage consumer trust, media publishers are
advised to build on their potential strengths in branding and customer relationship management in
print and new online markets.
Changes in the value chain: The media publishing value chain is informed by a variety of different
market players who contribute to adding value to information-based products and services under
specific competitive and environmental conditions. A set of new access, service and technology
providers have entered the scene in the media sector. These new providers put pressure on incumbents,
some forward-integrate their businesses and thus increase horizontal supplier market power while
others become vertically integrated and differentiate-out into key specialists in niche markets. On the
other hand, these challenges open ways for new supply chain partnerships.
Changes in customer relations: Today, a new business model is emerging: electronic networks and
markets allow the break-up of what previously thought to be firmly controlled value chains. The value
chain looses its chain attributes, and is replaced by flexible relations, so-called ‘value webs’
(Reichwald et al. 2004). By integrating customers into market research and product development
activities, companies can get efficient support to improve products for more customer satisfaction as
well as to identify new sources of revenue. Equally, the role of the customer is changing from a pure
consumer of products or services to a coequal partner in a process of adding value - consumers are
becoming co-producers and co-designers. Both e-business partners are tied together in these value
webs. Mass customisation as pre-condition of customer integration may result in economies of
integration which may lead to product innovation, lower transaction costs, more precise information
about market demands, and increase in brand loyalty by directly interacting with each customer. In
practice, the Publishing and Printing industry sector needs to improve supplier-customer relations in
order to strengthen market position in an increasingly dynamic market environment. Individualisation,
personalisation, and customer integration are achieved by integration of CRM-system solutions and
direct marketing tools.
Competitive pressures: Publishers are facing increased pressures from competition through market
players within the sector (e.g., in publishing through the increasing number of ‘free sheets’ in major
cities) and from other sectors moving into the industry. These new competitors apply new ICTs to
enter core publishing fields to distribute their content. To counter customer churn, branding is an
effective counter measure and strengthens customer loyalty. Additionally, the general macro-economic

situation greatly affects the media industry (Picard 2002). A bad economic situation triggers a
decrease on advertising spend on print products as well as on direct consumer sales and the level of
circulation. Particularly the job, housing, and car advertisement markets are increasingly read online
and mostly for free. Overall, there is potentially increased competition in shrinking markets.
• Cost forces
A variety of forces related to the costs of operations play important roles in the economics of media.
These include input costs such as costs for newsprint or personnel, production costs, and distribution,
marketing and advertising costs of media goods and services. Total costs of production can be divided
into fixed and variable costs, the former being those costs that are incurred regardless of the volume of
production, the latter varying with output. As Picard (2002, p. 56) has put it: “Television stations have
basic expenses for facilities, studios, and transmitters that do change significantly whether the station
broadcast sixteen hours per day or twenty-four hours a day”. And: “A magazine that increases its
press run from 100,000 to 125,000 will incur additional variable cost for paper, ink, production time,
and distribution because of the added production. Conversely, if it reduces its press run, those costs
will be reduced” (ibid.). Transaction cost theory would assume that a major source of market failure is
found in the fact that transactions which would need to occur for the sake of economic efficiency
simply do not occur because transaction costs interfere with or discourage the process of transacting.
Examples include the cost of writing contracts, or the cost of finding partners with whom to trade. The
costs of enforcing agreements, and the costs of bargaining (Coase 1937, Coase 1960, Williamson
1985).
Economies of scale and scope: As with other business functions, large enterprises tend to profit from
economies of scale, i.e. cost savings to cause the average cost of producing a commodity to fall as
output of the commodity rises. This generally results from technological factors which ensure optimal
size of production is large. With high fixed costs in plant and machinery, the larger the production the
lower the costs per unit of the fixed inputs. Large companies can afford to implement
disproportionately more powerful IT solutions in printing and publishing and achieve higher EoS.
Economies of scope are cost savings that make it cheaper to produce a range of related products by
one single firm than to produce each of the individual products by a single firm. In addition, larger
companies need to employ relatively fewer IT people (measured as % of the total staff) than small
enterprises, even if the architecture of their ICT networks is much more complex. SMEs face barriers
to entry into new markets which result from a lack of EoS, limitations in access to high-quality
printing, an inability to offer suitable packages to advertisers and an inability to obtain finance at rates
available to larger publishers.
• Regulatory forces
According to Picard (2002, p. 69), “regulatory forces involve approvals for media operations or
requirements placed on media to avoid or to behave in certain ways”. Regulatory forces may differ in
degree, object, goal, and effects of regulation.
1 May 2006 16
Market failure: Market failure or market imperfections are viewed as a necessary but not sufficient
condition for government intervention. Hoskins et al. (2004) discussed theories of government
intervention as applicable to the media industries: public interest theory (Posner 1974) and capture
theory (Stigler 1971). The public interest theory of regulation explains, in general terms, that
regulation seeks the protection and benefit of the public at large. This will maximize wealth and,
hence, the size of the pie to be shared. The capture theory is that government intervention is provided
to further the economic interests of specific groups, such as producers and labour unions. The theory
has been particularly applied to intervention in the form of regulation, where it claims regulators are
“captured” by the industry they are regulating and intervene in ways demanded by industry.
Additionally, the regulatory game involves information asymmetry. Since the state does not run the
firm, it does not have the full information on how well or badly the firm is performing.
Government failure: Government failure is the case when intervention is undertaken when the costs
of intervention are greater than the benefits. This type of failure may occur because it is too costly to
set up and operate the subsidy scheme, regulation, or other form of intervention proposed.
• Barriers to entry and mobility
Barriers are defined as factors that make it possible for established firms in an industry to enjoy supra-
normal profits without attracting new entry (McAfee et al. 2004, Bain, 1956). Without entry barriers
there can be no long-run market power (Schmalensee 1988). Additionally, industrial organization (IO)
theory has identified strategic behaviours working as entry barriers such as exclusive dealing and long-
term contracts with retailers (Tirole 1988). Further, government regulation, patents, predatory pricing,
economies of scale, customer loyalty, and investment requirements can act as barriers to entry too.
The movie industry is a best-practice example for the existence of barriers to entry. There, the most
obvious barrier for independents to entry is the high cost of acquisition. Larger studios owe their
survival to ample resources, which afford them the ability to weather box office disasters. Small
studios would not necessarily be able to survive box office failures. Major studios also have an
advantage in their ability to maintain distribution networks across the country and in foreign markets.
This ensures that their films get to theatres and television screens. Further, barriers to entry exist in
huge marketing expenditures in opening a film in several theatres simultaneously, particularly on a
national or world-wide basis. Importantly, intellectual property rights create apparently strong barriers
to entry.
Mobility barriers, on the other hand, are factors which impede the ability of firms to exit an industry,
or to move from one segment of an industry to another.
The following Exhibit 2-2 shows a typical industry analysis and the factors impacting on the industry
competitors as conceptualized by Harvard Business Professor Michael Porter (1980).

Exhibit 2-2: Industry Analysis following Michael Porter (1980)
Source: Porter 1980
As shown in exhibit 2-2 above, Porter (1980) identifies five forces that drive competition within an
industry:
(1) The threat of entry by new competitors.
(2) The intensity of rivalry among existing competitors.
(3) Pressure from substitute products.
(4) The bargaining power of buyers.
(5) The bargaining power of suppliers.
One obvious application of all this is to would-be entrants and the problem of entering new markets.
Another is to the current competitors and the ongoing task of staying competitive in markets where
they already operate. Perhaps the most important thing to keep in mind is the inverse relationship
between profit margins or returns and the intensity of competition: as the intensity of competition goes
1 May 2006 18
up, margins and returns are driven down. This can require changes in competitive strategy to remain
in an industry and, under some circumstances, it can occasion the decision to exit a business or an
industry (Nichols 2000).
• Technology as market driver
Digitization is currently having sustainable impact on the media industry sector. The sector is
undergoing structural changes both in terms of organizational processes and with respect to the type of
products and services which are produced, delivered, and consumed.
Publishing has become a complex, multi-channel, rich-media content delivery business. Adoption and
use of Internet-based and other ICTs causes companies to embrace new strategies, platforms, and
infrastructure and value chains. Publishers can place their strategic development and business
modelling on content as their core competence. However, to fulfil changing customer expectations and
requirements, Internet offers need to be more complex as opposed to the printed version and offer
value added to consumers. The ‘content’-business model can be supplemented by the ‘community’-
business model whose viability is based on user loyalty. Further, publishers have been able to develop
innovative business models for financing their Internet presence and other online activities, thus
strengthening the third pillar of business modelling ‘commerce’. As shown in one of our case studies,
traditional publishers can benefit from the Internet business model. Online advertising and online
classifieds can be a definite business opportunity for newspaper publishers.
Investment in information technology (IT): There is a sizeable stream of research examining the
domain of the business value of IT investments (Melville et al. 2004). Early studies failed to find the
expected link between enormous increases in IT capital investments on the one hand and productivity
improvement on the other, leading to the so-called “productivity paradox” (Brynjolfsson 1993).
However, subsequent studies established that, in general, investments in IT capital do produce net
efficiency benefits, although this varies depending on other factors such as management practices, and
organizational and industry structure (Bresnahan et al. 2002). Also there is no assurance the investing
firm, rather than customers or competitors, will capture the value of those efficiency improvements
(Hitt & Brynjolfsson 1996).
2.2 Specific issues of financial media management
• Sources of finance
Sources of finance: Most generally, media firms collect revenues from sales in circulation of items
sold or from sales in advertising space. Circulation is defined as the number of copies issued of an
advertising medium in print; by extension, the audience reached by other advertising media, outdoor
posters, radio, and television programs. Circulation sales in the print media can be made on the basis
of single-copy sales or on the basis of subscription. Single-copy sales are “newsstand sales” sold to
customers at retail. Print media can also be sold on a subscription basis. Most single-copy sales are
made in supermarkets and other mass retail outlets. Many publishers also distribute through specialty
stores.

As for advertising sales, media companies such as TV channels, cable networks or radio stations
collect most of their revenues from selling “eye-balls” through advertisement space during various
programmes. Similarly, print media companies sell advertising space to be filled in their outlets to
readers and, accordingly, advertisers. Media work on dual markets: information/ideas markets and
advertising markets (Picard 1989). How these two markets are interlinked is explained by the theory of
the circulation spiral, originally proposed by the media scholar Lars Furhoff (1973). The main point of
this theory as applied to newspaper competition is well synthesized by the following quotation by
Gustafsson (1978, p. 1): “The larger of two competing newspapers is favoured by a process of mutual
reinforcement between circulation and advertising, as a larger circulation attracts advertisements,
which in turn attracts more advertising and again more readers. In contrast, the smaller of two
competing newspapers is caught in a vicious circle; its circulation has less appeal for the advertisers,
and it loses readers if the newspaper does not contain attractive advertising. A decreasing circulation
again aggravates the problems of selling advertising space, so that finally the smaller newspaper will
have to close down”.
Under this perspective, the key objective of the media revenue management problem is to optimally
allocate advertising space across upfront and scatter markets to hedge against audience uncertainty,
honor client contracts and maximize short-term profits. Scatter markets are the remnants of TV
network markets of unsold commercial time that remain after preseason upfront buying has been
completed.
New ICTs and e-business solutions have introduced a variety of new online business models which are
well applicable to newspaper publishers. Prof. Rappa from North Carolina State University has
systematized online business models as follows (see, http://digitalenterprise.org/models/models.html):
• Brokerage: Brokers are market-makers: they bring buyers and sellers together and
facilitate transactions. Brokers play a frequent role in business-to-business (B2B),
business-to-consumer (B2C), or consumer-to-consumer (C2C) markets. Usually a broker
charges a fee or commission for each transaction it enables. The formula for fees can vary.
• Advertising: The web advertising model is an extension of the traditional media
broadcast model. The broadcaster, in this case, a web site, provides content (usually, but
not necessarily, for free) and services (like e-mail, chat, forums) mixed with advertising
messages in the form of banner ads. The banner ads may be the major or sole source of
revenue for the broadcaster. The broadcaster may be a content creator or a distributor of
content created elsewhere. The advertising model only works when the volume of viewer
traffic is large or highly specialized.
• Infomediary: Data about consumers and their consumption habits are valuable, especially
when that information is carefully analyzed and used to target marketing campaigns.
Independently collected data about producers and their products are useful to consumers
when considering a purchase. Some firms function as infomediaries (information
intermediaries) assisting buyers and/or sellers understand a given market.
• Merchant: Wholesalers and retailers of goods and services. Sales may be made based on
list prices or through auction.
• Manufacturer: The manufacturer or ‘direct model’, it is predicated on the power of the
web to allow a manufacturer (i.e., a company that creates a product or service) to reach
buyers directly and thereby compress the distribution channel. The manufacturer model
1 May 2006 20
can be based on efficiency, improved customer service, and a better understanding of
customer preferences.
• Affiliate: In contrast to the generalized portal, which seeks to drive a high volume of
traffic to one site, the affiliate model provides purchase opportunities wherever people
may be surfing. It does this by offering financial incentives (in the form of a percentage of
revenue) to affiliated partner sites. The affiliates provide purchase-point click-through to
the merchant. It is a pay-for-performance model -- if an affiliate does not generate sales, it
represents no cost to the merchant. The affiliate model is inherently well-suited to the
web, which explains its popularity. Variations include banner exchange, pay-per-click,
and revenue sharing programs.
• Community: The viability of the community model is based on user loyalty. Users have a
high investment in both time and emotion. Revenue can be based on the sale of ancillary
products and services or voluntary contributions.
• Subscription: Users are charged a periodic - daily, monthly or annual - fee to subscribe to
a service. It is not uncommon for sites to combine free content with ‘premium’ (i.e.,
subscriber- or member-only) content. Subscription fees are incurred irrespective of actual
usage rates. Subscription and advertising models are frequently combined.
• Utility: The utility or ‘on-demand’ model is based on metering usage, or a ‘pay as you go’
approach. Unlike subscriber services, metered services are based on actual usage rates.
Traditionally, metering has been used for essential services (e.g., electricity water, long-
distance telephone services). Internet service providers (ISPs) in some parts of the world
operate as utilities, charging customers for connection minutes, as opposed to the
subscriber model common in the U.S.A.
Media firms may apply a range and combination of these business models. In practice, publishing
companies, for example, may benefit from leasing software use as ASP (application service
provider) on a subscription basis rather than selling software and maintenance to companies (the
‘subscription’-model). Or they may profit from models of selling archived newspaper articles to
users on a per-use or subscription basis (the ‘utility’-model). Or they may try to improve customer
satisfaction through leverage of customer loyalty programmes (the ‘Community-model). Overall,
publishers try to achieve business growth coming from incremental business expansion through
new online selling channels.
• Start-up financing management
Financing issues of new companies and products is very important, because in the research and
development stages there is no income from consumers, and income begins slowly in the introduction
stage but is generally insufficient to cover costs.
Financing is one of the most critical obstacles of new firm growth (Moore 1994, Berger & Udell
1998). Binks and Ennew (1996) show that younger and growing firms suffer more from credit
constraints than older and non-growing firms. New firm’s equity position is very weak and debt
financing is often impossible or restricted (Stiglitz & Weiß 1981). The higher risk of failure of young

innovative firms and missing tangible assets as collateral leads to credit rationing by lenders with the
result of a funding gap.3
Media firms overall are not the most attractive for start-up and development financing because
traditional media industries are not perceived as having the potential for growth. Most tend to be
relatively unexciting to investors compared to high technology, bio-technology, and other industries
that are perceived as modern and rising industries. The most attractive media-related firms today are
those involved in online and other new media activities, despite problems in their current finance
(Picard 2002).
The film production and distribution (i.e. movie) industry is particularly strongly affected by issues of
start-up finance. In brief, film productions are projects whose net value is not predictable at the time of
planning and production. Vogel has put this relationship in simple words: “There is truly little, if any,
correlation between the cost of a picture and the returns it might generate” (Vogel 1998, p. 110). The
film producer can not automatically sell his finished product at a price which covers his costs and
calculated return due to the fact that film exploitation and sales at the box office are highly uncertain.
This makes the financial flow a very complicated matter. Producers, distributors and exhibitors have
thus to agree on risk-sharing financing arrangement procedures affecting all three parties at an agreed,
albeit different share (Eggers 2003). Instruments on offer are debt financing (e.g. credit financing, pre-
sales contracts, completion bonds, gap financing and shortfall guarantees), internal financing means
(e.g. film funds, co-productions), and further means of revenue (e.g., product placement,
merchandising, blocked funds and debt equity, film subsidy) (Eggers 2003, Hoskins et al. 2004, Vogel
1998).
Sustainable finance in the film industry: According to Hahn and Schierse (2004), as licensee film
distributors are prime taker of the price risk. Due to the uncertainty of the film’s theatre performance,
there is no guarantee that the license sum paid in advance will amortize at the box offices. If a film
does not find a cinema audience, it will thus be the distributor hit hardest. Selling rights to TV
channels is no licence guarantee either even if rights were pricey. This is because the TV channels
may have to safe money and would not be able to afford the rights. Further, the distributor carries the
risk of terms of film delivery. He is dependent on the producer to deliver in time. Similarly, he carries
the quality risk if he buys the film ‘blind’ prior to completion, only relying on a good script or simple
treatment. Moreover, the distributor carries the credit risk to deliver theatres with copies and
advertising materials before the exhibitor may achieve any turnover at the box office. Building costs
for new houses or high rents may cause exhibitors to stop paying their film rentals. Although the
distributor may find a perfect release date, he also carries the risk of competing movies which were
released earlier and became unexpectedly strong at the box office. Finally, film success is dependent
on exogenous factors such as the overall economic trend or weather conditions. In times of a
recession, for example, audiences may not attend the cinema. This will have obvious negative effects
on possible value flows to the exhibitor and up-stream distributor. Dally et al. (2002, p. 412) explain
the business practices in film financing as follows: “Within a so-called “net profit deal” agreement, in
which the distributor charges a fixed or graduated percentage of rentals (on average 30% in the U.S.
domestic theatrical market) as a distribution fee and then advances the funds for other distribution
costs, including those for prints, trailers, and national advertising. The distributor commonly recovers
3 These lenders may be venture capital investors. Venture capital is private equity financing of companies by aggressive
investors who seek substantially above average returns and accept correspondingly high risks (Gastineau & Kritzman 1992,
p. 294).
1 May 2006 22
these expenses before making any payments to the producer and would normally, before arriving at a
definition of ‘net profit’, prioritize recoupment by taking distribution fees and expenses first, then
interest on negative costs, then negative costs, and finally deferments and various participations.
Although this net deal predominates, there is also a so-called “gross deal” wherein the distributor
(usually of low-budgeted independently made and independently distributed films), is not separately
reimbursed for distribution expenses, but instead retains a distribution fee (e.g., 50-70%) that is
considerably higher than normal. Distribution expenses are then recouped out of this higher fee, while
the producer receives the remaining unencumbered portion of gross rentals”.
• Cash flow and credit management
“Once a firm is established and cash flow has developed, it is still not unusual fro revenue from sales
to be insufficient to meet all financial needs of the firm. This occurs because the firm may need to
invest in expensive equipment or purchase buildings, because the firm may experience seasonal
fluctuations in income that do not provide sufficient revenue during some parts of the year to cover
operating expenses, or because it may obtain an order that requires making a large initial expenditure
that will be recouped only when the order is completed” (Picard 2002, p. 161).
For example, a magazine company may find that it obtains the bulk of its advertising revenue in two
months during the spring and two months during the fall. If it has not reserved sufficient income from
those months for the lean months, it may need to seek financing to pay expenses during some of the
other eight months of the year.
Picard (2002, p. 167) further: “In addition to the capital and debt issues faced by companies, they also
encounter issues involving cash that the firm receives from investors and operations. Capital and
revenue must be controlled to ensure its availability to pay for assets and future expense payments.
Cash management involves the control of this cash in a firm’s account in such a way that it produces
the best possible results for the company”. This involves making choices about cash availability
(liquidity) and interest income and choices about when to use the funds and for what purposes.
Decisions are made regarding cash coming into a firm, cash leaving a firm, and cash held or invested.
Picard defines credit management as follows: “Credit management involves deciding whether to issue
sales or service credit, controlling the use of that credit, and collecting the accounts” (Picard 2002, p.
161). Credit management in media firms involves controlling sales credit for customer purchases of
advertising space and time, and service credit for purchases of subscriptions for media products by
audiences. Credit management issues involve credit evaluation, credit risk management, collection,
bad debt, and credit reporting (Picard 2002).
• Investment management
In addition to ongoing involvement in financial analysis and planning, the financial manager’s primary
activities are making investment decisions and making financing decisions. Investment decisions
determine both the mix and type of assets held by the firm. Financing decisions determine both the

mix and type of financing used by the firm (Gitman 2003). The sorts of decisions can be conveniently
viewed in terms of the firm’s balance sheet.
Current Asset Management: Assets are partitioned into two primary categories: current assets and
fixed assets. With current assets, the key decisions relate to day-to-day management, including
frequent decisions regarding the level and efficient management of cash, inventory, and receivables.
Because these decisions are recurring, the use of financial models that employ standardized techniques
of analysis is typical. These models often have their origin in management science, the application of
mathematical techniques to management problems. The importance of physical inventory varies across
the respective media industries. For book publishers, inventory decisions are important, and the size of
press runs for particular titles is a significant issue. In contrast, broadcast media have relatively little
physical inventory and this is a minor decision area (Alexander et al. 1993).
Fixed asset management – Capital budgeting: In contrast to the day-to-day focus in the
management of current assets, fixed assets financial management is not involved on an ongoing basis.
With fixed assets, the day-to-day management is the responsibility of operations management.
Financial management becomes involved periodically to contribute toward making major decisions
regarding the acquisition and disposal of divisions/units/plants. The decision techniques require the
comparison of costs with expected benefits. Because the stream of expected benefits occurs over a
future time horizon, the interest factor (“time value for money”) must be taken into account. In this
context, Hoskins et al. (2004) have shown that the net present value criterion is a valuable and
important decision tool in media management. The net present value is defined as the present values of
future cash flows minus the initial cost or principal invested. The net cash flow in any year is the
incremental cash inflow (revenue) in the year minus the incremental cash outflow (cost) in the year.
The general formulation is as follows:
Exhibit 2-3: The Net Present Value (NPV) formulation
NPV = B1/(1 + i) + B2/(1 + i)2 + B2/(1 + i)3 + … + Bn/(1 + i)n – C
Legend:
NPV = Net present value C = Cost outlay or investment (assumed immediate)
B1 = Net cash flow at end of year one i = return available elsewhere at similar risk
B2 = Net cash flow at end of year two
Source: Hoskins et al. 2004, p. 123.
Importantly, present capital investment decision are based on estimated future cash flows and relevant
interest rates must be taken into account to arrive at the value today of the anticipated flows. If the
benefits (in value of money) exceed the costs (discounted in today’s value of money), then
quantitatively the investment project is acceptable. Of course, quantitative analysis is only part of the
total decision analysis. Particularly in the management of media properties, qualitative factors are
important in coming to a final conclusion.
Capital budgeting is defined as the process of evaluating and selecting long-term investments that are
consistent with the firm’s goal of maximizing owner wealth (Gitman 2003).
Capital budgeting decisions can be focused on new assets and increasing the size of the firm or
reducing the set of assets employed and shrinking the firm. Alexander et al. (1993, p. 283) explain that
capital budgeting tools and techniques has actually been strongly affecting investment decisions in the
1 May 2006 24
U.S. as follows: “Much of the restructuring activity that occurred in the media industries during the
1980s resulted from a capital-budgeting analysis of existing products/divisions/units. Many firms
found that for various reasons, some existing operations were worth more sold than they could
generate as part of the firm. There was a net benefit to selling some operations rather than continuing
to operate them. This awareness is the analysis behind much of the sell-off activity that has been
widespread in recent years”.
2.3 Further theoretical approaches to financial media management
Ownership and financial performance: The impact of ownership has received a great deal of
scholarly attention during the last forty years, but early research was often non-theoretical,
concentrating on the decline of family-owned newspapers and the growth of newspaper groups.
Recent studies have found limited differences in performance between independent and group
newspapers. Compaine and Gomery (2000) concluded that corporate-owned newspapers were as good
or bad as independently owned newspapers. However, their review did not include more recent
research about the impact of public ownership on newspapers’ financial performance.
During the 1990s, Demers (1996) integrated organizational and ownership variables in examining the
‘corporate newspaper’. He said the claim that corporate newspapers negatively affect journalism is
overstated. He emphasized corporate structure but did not consider variations that might be connected
to public versus private ownership. In a follow-up, he found that the structural complexity of a daily
newspaper had a moderate correlation with use of content perceived as critical by city officials. Public
ownership was included as one measure of Demers’ ownership structure variable, but it only
correlated slightly with two of the other four measures of a corporate newspaper.
Blankenburg and Ozanich (1993) looked at the influence of outside control of stock in newspaper
corporations and found the degree of outside ownership affected financial performance. For example,
as outside ownership increased, profit margins increased. The study was replicated in 1996 with
similar results. Again, increased public ownership was positively correlated with increased profit
margins. A study by Martin found similar results for 1988 and 1998. As outside control of publicly
held groups increased, profit margins increased. In a 2001 book, Cranberg, Bezanson, and Soloski (p.
9) presented a long list of potential effects of public ownership on newspaper performance. They state:
“For public companies (with but few exceptions), the business of news is business, not news. Their
papers are managed and controlled for financial performance, not news quality”. Though based on
extensive data about publicly held newspapers, the book proceeds from a limited foundation of
economic and managerial theory and did not adequately consider the impact of some constraining
variables, such as competition from other newspapers for readership. The impact of ownership stems
from the relationship of organizational goals to performance. Lacy and Simon (1997) explained that
organizational goals could vary within type of newspaper (private versus public ownership, and group
versus non-group) and that environmental factors can constrain organizational goals. The relationship
between public ownership and newspaper performance reflects the scattered and decentralized nature
of public ownership. Newspaper company goals must reflect the expectation of the stock market,
where investors are interested in financial performance such as stock prices and profit margins. This
reasoning is consistent with research that found profit margins of publicly held newspaper
corporations increased as the amount of outside control increased.

Financial commitment theory: The basis for the financial commitment model, which has been
supported by research, is that newspapers faced with competition must differentiate themselves
through their coverage. Efforts to differentiate coverage could result in increases in number of
newsroom employees.4
Research into the impact of competition on newspaper performance began in the 1940s, but it was
1986 before mass communication scholars developed a theoretical basis for its impact. Two studies
examining national samples found a relationship between intra-city daily competition and amount of
money spent on the newsroom. Called the “financial commitment theory” by Litman and Bridges
(1986), this relationship was formalized by Lacy (1992). Lacy concluded that the bulk of research
supported the hypothesis that intense competition resulted in greater expenditures on the newsroom for
intra-city newspaper competition, intercity newspaper competition, and local television news
competition. More recently, Martin (2001) found that clustering was associated with reduced
newsroom spending. Cranberg, Bezanson, and Soloski (2001, p. 13) concluded that competition has
little impact on news quality: “Because of increasing concentration of newspapers in the hands of
large companies, competition among newspapers based on the quality of news is diminishing. The
terms of competition have little or nothing to do with news quality – the quality of the product
produced by the firm – in most markets today”.
Resource dependence theory: An and Jin (2005) have used resource dependence theory to explain
the relationship between the interlocking of newspapers with financial resources and profitability.
Here, interlocking is defined as a financing strategy of publicly traded newspaper companies with
financial institutions. The resource dependence perspective (Selznick 1949, Pfeffer & Salancik 1978)
views interlocking as a critical link to the external environment. It contends that financial interlocking
will provide access to critical resources and information and facilitate inter-firm commitments which
in turn enhance a firm’s profitability.
Financial control theory: Financial control theory, however, holds a very different view on
interlocking with financial institutions. It begins with the assumption that financial institutions seek to
profit from debt financing, which leads bank-controlled companies to carry heavy debt loads. In order
to protect these loans, financial institutions require those corporations to operate more conservatively
and thus less profitably (Kotz 1978). Viewing the degree of interlocking with financial institutions as
an indicator of financial control, such a presence is expected to be negatively associated with a firm’s
profitability (Mariolis 1975).
Corporate governance: Picard (2002, p. 2) defines corporate governance as follows: “Corporate
governance is concerned with the owner and management relationships, distribution of power, and
accountability in corporations. Governance structures and processes are inextricably linked to the
environments in which corporations are created and operate. Corporations are legally created entities
with specific rights and responsibilities, and these differ depending upon the nation in which they were
established, their structures, and whether shares are privately held or publicly traded”.
Corporate governance theory assumes that higher transparency and trust between firms, investors and
then public can be achieved through the establishment of principles, policies and practices (CalPERS
2004, OECD 2004, Carlsson 2001) which, in turn, may result into better financial performance. With
regard to specific issues of financial media economics and media management, corporate governance
4 The financial commitment theory may be rooted on Selznick’s (1949) wider concept of organizational commitment.
1 May 2006 26
theory particularly the rising significance of institutional investment in media firm ownership (An &
Jin 2005).
2.4 Financial indicators and measures of firm performance

It is important for media managers to review the financial health of their firms regularly because
financial data provide the key indicator of whether a firm is becoming or remaining a viable business
entity. Basic indicators that need to be reviewed regularly involve sales and cash flow, profitability,
the status of working capital, and the condition of the balance sheet.
As noted in the introduction of this study, monetary profit alone does not indicate the efficiency with
which a firm produces the monetary results. To gain the broader picture one can use the concept of
return (Picard 2002).
Financial statements: There are four key financial statements: (1) The income statement; (2) The
balance sheet; (3) The statement of retained earnings, and (4) the statement of cash flows (Gitman
2003).
In the following, financial indicators and measures will be listed alphabetically:
Balance sheet: The balance sheet reports the financial condition at a point in time and is a statement
of levels (stocks). The income statement reports the financial performance over an interval of time
(most frequently, a year) and is a statement of flows. The balance sheet has two sides. On the left side
are uses of funds and on the right side, sources. Uses are assets and sources can be liabilities (debt) or
equity.
Exhibit 2-4: Major components of a Balance Sheet
Major Components of the Balance Sheet
Assets Sources
Current Assets Current Liabilities
Cash Bank loans – short term
Accounts receivable Accounts Payable
Inventory Accrued Payable
Investments Term Liabilities
Financial investments Bank loans (bonds and debentures)
Fixed assets Equity
Plant, equipment Par (stated) value
At historical cost Paid-in surplus (over par)
Less accumulated depreciation Retained Earnings
Source: Alexander et al. 1992, 276.
Capitalisation ratio: Analysis of a company’s capital structure showing what percentage is debt,
preferred stock, common stock, and other equity (Alexander et al. 1993, p. 288).

Cash flow: In finance, cash flow refers to the amounts of cash being received and spent by a business
during a defined period of time, sometimes tied to a specific project. It is generally defined as net
profit plus depreciation (net cash flow) but may be used more loosely to include all cash movements
(Bannock et al. 2002).
Cost per thousand: In advertising performance analysis, CPT is determined by dividing the cost of a
print or broadcast advertisement or of a total advertising campaign by the total estimated audience,
computing the total audience on a base of thousands.
Economic rent: Excess over a competitive rate of return attributable to owning an asset or resource
whose supply is limited, at least in the short run (Gastineau & Kritzmann 1992).
EBIT: Earnings before interest and taxes; a measure of firm cash flow, largely replaced in recent
finance literature by EBITDA.
EBITDA: Earnings before depreciation, amortization, interest, and taxes paid; a measure if enterprise
cash flow.
EPS: Share indicator of publicly traded media firms. EPS represent the amount earned during the
period on behalf of each outstanding share of common stock. EPS is measured as total earnings
divided by the number of shares outstanding. Companies often use a weighted average of shares
outstanding over the reporting term. EPS can be calculated for the previous year (“trailing EPS”), for
the current year (“current EPS”), or for the coming year (“forward EPS”). Note that last year's EPS
would be actual, while current year and forward year EPS would be estimates.
Equity: Amount of capital invested in an enterprise. It represents a participative share of ownership,
and in an accounting sense is calculated by subtracting the liabilities of an enterprise from its assets.
Gross margin: Profitability indicator; generally in finance, “the gross margin defined as the is the
difference between the price at which something is bought and the price at which it is sold” (Bannock
et al. 2002, p. 209). In other words, gross margin is commonly defined as net selling price less cost of
merchandise. A more accurate estimate of gross margin is adjusted to include trade promotion
allowances. The magazine industry, for example, typically provides allowances to support retail
display space, front end racks and new title introduction incentives.
Market share: Further important measures of firm performance are market share, and gross margin.
Market share, in strategic management and marketing, is defined as the percentage or proportion of the
total available market or market segment that is being serviced by a company. It can be expressed as a
company’s sales revenue (from that market) divided by the total sales revenue available in that market.
It can also be expressed as a company’s unit sales volume (in a market) divided by the total volume of
units sold in that market. As explained by Picard (2002, p. 231), “by considering the market share of
the market for a particular good or service, one gains an understanding of its position in the market
and whether that position is being maintained, improved, or degraded. Changes in market share
indicate that competitiveness has been maintained, improved, or lost by firms or that the market
structure is being affected by entry or exit or better competitiveness on the parts of other firms” (p.
230). Picard continues that “in the past a media firm was evaluated as healthy if its market share was
growing. Today, with the proliferation of media, health tends to be evidenced in maintaining market
share or growth wihtin a small niche in which the firm operates” (ibid.).
Market value: The calculate market value (market capitalization), the total number of shares is
multiplied by the share price at the close of the period. Market value does not include any company
shares held by the company itself. The importance of market value lies in the fact that, according to
1 May 2006 28
current financial theory, the most important goal for the company’s top management is to maximize
shareholder value. Shareholder value is generated by increasing market value and by the payment of
dividends.
Net present value: If a decision has implications for the cash flows of a company over a year or more,
the time value of money must be taken into account. The comparison of the present value of the future
cash inflow with the current investment is taken care of by the net present value (NPV) criterion. It is
defined as the present value (sales price attainable) of future cash flows (expected cash flows if
retained) minus the initial cost or principal invested.
Net sales growth: Net sales growth (%) is one of the most common indicators of volume growth and
companies use it as a daily indicator of their success at various levels of the organization. Apart from n
increase or decrease in organic growth, it can also be affected by other factors such as acquisitions.
Operating cash flow (OCF): The cash flow a firm generates from ordinary activities. OCF is
calculated as EBIT minus taxes plus depreciation.
P/E ratio: The P/E (price/earnings) figure (market value divided by net income, or share price divided
by EPS to give a per share figure) describes the market value in relation to net income over the most
recent 12 months. When calculating the P/E ratio any minority interest is subtracted from net income.
Hence the P/E ratio describes the number of years needed by the company to earn its market value, i.e.
pay itself back to its investors, assuming net income remains unchanged. With a P/E of 10, for
example, the company would earn net revenue equivalent to its value in ten years (current level of net
income unchanged). The lower the P/E ratio, the cheaper the share price is considered to be.
Price elasticity of demand: The notion that income, prices of substitutes and complementary goods,
consumer preferences and tastes, and consumer expectations in a given market are economic factors
which impact on the consumer demand of services in the performing arts industries is hardly new
(Marshall 1922/1890). Changes in demand are typically indicated by price changes. Elasticity is
defined as the relative response of one variable to a small percentage change in another variable. In
standard economic theory, price elasticity of demand is a measure of sensitivity of demand for a
product to changes in its price. Demand elasticity is measured by the percentange change in quantity
demanded for an item divided by the corresponding percentage change in price that generated the
change in demand. An elasticity of -1 would indicate that a 1% increase in price leads to a 1% fall in
demand. The theorem of price elasticity of demand has impacts on the sales and advertising revenues
of media companies. As far as advertising revenues are concerned, research on the relationship
between competition and advertising has shown that the derived demand by sellers of goods and
services for advertising in a medium will be more price inelastic: (a) The weaker is the substitutability
with other media; (b) the more inelastic is consumer demand for information about products and
services; (c) the more inelastic is the supply of other advertising media; and (d) the smaller is the share
of total costs accounted for expenditures on the advertising medium (Bagwell 2005).
Profitability: Profitability can be described using three indicators: operating margin, return on capital
employed and net income. The operating margin shows operating income as a percentage of net sales.
Operating income, roughly speaking, is what remains below the line before financial items and taxes.
As the name suggests the operating margin measures how the company’s result of operations is
formed but its level varies is different business sectors depending on margins and capital employed.
Return on capital employed describes the annual return to the company from the capital it has tied up,
for example in machinery, equipment and stocks. To calculate it, operating income less financial costs
and taxes is divided by the total of shareholders’ equity and interest-bearing debt. Return on capital

employed should be clearly higher than the risk-free interest level. Ten percent can be considered a
rough satisfactory level. Net income describes the absolute net revenue left to the owner after interest
expenses and taxes as well as any extraordinary or other items unrelated to the company’s business
operations.
Return: Theorists commonly use Return on Sales (ROS), Return on Assets (ROA) and Return on
Equity (ROE), and ROI (return on investment) ratios in order to measure financial efficiency of a
corporation (Tallman & Li, 1996). ROS is defined as “net income divided by sales” (Gastineau &
Kritzmann 1992), ROA as “net income divided by total assets, expressed as a percent” (ibid.), ROE as
“net income divided by net worth” (ibid.)
Sales: Income from sales of goods and services.
Working capital: Current assets minus current liabilities; working capital measures how much in
liquid assets a company has available to build its business. The number can be positive or negative,
depending on how much debt the company is carrying. In general, companies that have a lot of
working capital will be more successful since they can expand and improve their operations.
Companies with negative working capital may lack the funds necessary for growth.
2.5 Strategic responses of media companies
• Definition strategy
The modern use of the term ‘strategy’ derives from games theory and may be defined as a “complete
plan to offer the right choices for all possible situations” (Welge & Al-Laham 1999, p. 12). It is the
process of specifying an organization’s objectives, developing policies and plans to achieve these
objectives, and allocating resources so as to implement the plans. The process involves matching the
companies’ strategic advantages to the business environment the organization faces.
Mintzberg (1994) assumes that strategy can be defined in a number of ways. He argues that strategy is
one of those words that we inevitably define in one way, yet often use in another. As a consequence it
turns out that strategy can be seen as a plan, i.e. a direction or course of action into the future, or more
“softly” as a pattern, that is as consistency of behaviour over time. Porter found strategy to be a
position (Porter 1996). Simply put, a strategy is an integrated set of decisions and actions made in
order to meet the business objectives.
• Strategic Management
Strategic management is the process of specifying an organization’s objectives, developing policies
and plans to achieve these objectives, and allocating resources so as to implement the plans. It is the
highest level of managerial activity, usually performed by the company’s Chief Executive Officer
(CEO) and executive team. It provides overall direction to the whole enterprise. An organization’s
strategy must be appropriate for its resources, circumstances, and objectives. The process involves
matching the company’s strategic advantages to the business environment the organization faces. One
1 May 2006 30
objective of an overall corporate strategy is to put the organization into a position to carry out its
mission effectively and efficiently. A good corporate strategy should integrate an organization’s goals,
policies, and action sequences (tactics) into a cohesive whole.
Strategic management can be seen as a combination of strategy formulation and strategy
implementation.
Strategy formulation involves:
• Doing a situation analysis: both internal and external; both micro-environmental and
macro-environmental.
• Concurrent with this assessment, objectives are set. This involves crafting vision
statements (long term view of a possible future), mission statements (the role that the
organization gives itself in society), overall corporate objectives (both financial and
strategic), strategic business unit objectives (both financial and strategic), and tactical
objectives.
• These objectives should, in the light of the situation analysis, suggest a strategic plan. The
plan provides the details of how to achieve these objectives.
This three-step strategy formation process is sometimes referred to as determining where you are now,
determining where you want to go, and then determining how to get there. These three questions are
the essence of strategic planning. Analytical tools to help this planning are: SWOT (analysis of
strengths and weaknesses, and opportunities and threats) or IO economics (i.e. Industrial Organisation
analysis) for the external factors, and the resource-based view of strategy (Wernerfelt 1984) for the
internal factors.
Strategy implementation involves:
• Allocation of sufficient resources (financial, personnel, time, computer system support).
• Establishing a chain of command or some alternative structure (such as cross functional
teams).
• Assigning responsibility of specific tasks or processes to specific individuals or groups .
• It also involves managing the process. This includes monitoring results, comparing to
benchmarks and best practices, evaluating the efficacy and efficiency of the process,
controlling for variances, and making adjustments to the process as necessary.
• When implementing specific programs, this involves acquiring the requisite resources,
developing the process, training, process testing, documentation, and integration with (and/or
conversion from) legacy processes.
Types of strategies: Porter (1985) has described a category scheme consisting of three general types
of strategies that are commonly used by businesses (see, below). These three generic strategies are
defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand-side
dimension (Porter was originally an economist before he specialized in strategy) and looks at the size
and composition of the market you intend to target. Strategic strength is a supply-side dimension and
looks at the strength or core competency of the firm. In particular he identified two competencies that
he felt were most important: product differentiation and product cost (efficiency).

Porter (1980) has suggested cost leadership, product differentiation, and market segmentation (or
focus) as the three generic managerial strategies to achieve competitive advantage and firm growth.
Cost leadership: The cost leadership strategy emphasizes efficiency. By producing high volumes of
standardized products, the firm hopes to take advantage of economies of scale and experience curve
effects. The product is often a basic no-frills product that is produced at a relatively low cost and made
available to a very large customer base. Maintaining this strategy requires a continuous search for cost
reductions in all aspects of the business. The associated distribution strategy is to obtain the most
extensive distribution possible. Promotional strategy often involves trying to make a virtue out of low
cost product features. To be successful, this strategy usually requires a considerable market share
advantage or preferential access to raw materials, components, labour, or some other important input.
Without one or more of these advantages, the strategy can easily be mimicked by competitors.
Successful implementation also benefits from: process engineering skills, products designed for ease
of manufacture, sustained access to inexpensive capital, close supervision of labour, tight cost control,
and incentives based on quantitative targets.
Differentiation: The product differentiation strategy involves creating a product that is perceived as
unique. The unique features or benefits should provide superior value for the customer if this strategy
is to be successful. Because customers see the product as unrivaled and unequaled, the price elasticity
of demand tends to be reduced and customers tend to be more brand loyal. This can provide
considerable insulation from competition. However there are usually additional costs associated with
the differentiating product features and this could require a premium pricing strategy. To maintain this
strategy the firm should have: strong research and development skills, strong product engineering
skills, strong creativity skills, good cooperation with distribution channels, strong marketing skills,
incentives based largely on subjective measures, be able to communicate the importance of the
differentiating product characteristics, stress continuous improvement and innovation, attract highly
skilled and creative people.
Market segmentation: In the market segmentation strategy the firm concentrates on a select few
target markets. It is also called a focus strategy or niche strategy. It is hoped that by focusing your
marketing efforts on one or two narrow market segments and tailoring your marketing mix to these
specialized markets, you can better meet the needs of that target market. The firm typically looks to
gain a competitive advantage through effectiveness rather than efficiency. It is most suitable for
relatively small firms but can be used by any company.As a focus strategy it may used to select targets
that are less vulnerable to substitutes or where a competiotion is weakest to earn above-average return
on investments.
Impact dimensions: Further, the following core impact dimensions on managerial strategy are
frequently discussed in competition theory and strategic management (Bain 1956, Porter 1980, Scherer
and Ross 1990):
• Size and number of suppliers and buyers indicating the degree of concentration
• Elasticity of supply and demand signalling the suppliers’ ability to adapt to market changes in
demand and structures of production and the buyers’ willingness to change product or service
• Barriers to market entry which are based on cost advantages (economies of scale) of dominant
firms
• Current stage of market development to serve as indicator of intensity of competition
1 May 2006 32
Strategies of media firms: As put forward by Picard (2004, p. 1), strategic planning of media firms is
influenced by four main types of influence that are external and internal to media firms:
“Environmental influences represented the broadest changes in the nature of society and environment
for all businesses. Media specific policy influences represent changes in way media are regarded and
controlled in society. Market specific influences related to factors changing specific markets of firms.
Firm-specific influences relate to factors within firms that are inducing changes”. According to this
typology, all four types of forces influence strategic company behavior.
The strategic options for media firms are related to the institutional setting in which they operated
(Loube 1991), to their resources (Wernerfelt 1984), and to their capabilities (Eisenhardt & Martin
2000) and competencies (Prahalad & Hamel 1990, Barney 1991). Thus, strategy needs to be
individually constructed and regularly reappraised.
The kinds of strategies media firms develop and which are most often evident involve integration,
diversification, niche products, and internationalization.
Integration: Media companies are using horizontal and some vertical integration as a means of
achieving cost efficiencies and company growth (Compaine & Gomery 2000, Picard 2004, Picard et
al. 1988).Integration is a strategy used by a business that seeks to sell a type of product in numerous
markets. To get this market coverage, several small subsidiary companies are created. Vertically
integrated companies are united through a hierarchy and share a common owner. Usually each
member of the hierarchy produces a different product or service, and the products combine to satisfy a
common need.
Diversification: Because of the market growth and market share problems in individual media, many
firms have begun diversification into other media and are creating of media product portfolios. The
choice to stay within media has typically occurred because there are some similarities in the types of
business activities. Both large and mid-sized firms now have holdings in multiple media.
There are many possible motives behind diversification strategies (Amit & Livnat 1988, Jung 2003,
Montgomery 1994). Montgomery (1994) has identified three categories of motives: (a) the market
power view, (b) the agency view, and (c) the resource view. Lindgren & Persson (2005) have added
the financial and the synergetic view.
Niche marketing: A trend affecting media firms is the growth of niche media products. The increase
in media and media units is having a significant impact on the types of titles, channels, and other
products being created by media firms. Although firms have traditionally sought to create media
products that appeal to large general audiences, significant product differentiation efforts are being
made in the new, more competitive environment. Company product choices are focusing primarily on
creating niche media products that can survive in highly competitive media environment (Dimmick
2003).
Internationalization: Internationalization to overcome saturated domestic markets or competition
regulations that limited growth is also an option for firms. Globalization, of course, increases the
complexity of strategy by requiring firms to make choices involving resource allocation between
domestic and international operations and between different international operations (Daniels &
Bracker 1989, Toyne & Walters 1989) and to maintain complex organizations to coordinate
international activities. Nevertheless, the global business option becoming increasingly attractive to
media firms (Gershon 1997). Innovation strategies with the firm’s rate of new product development
and business model innovation. It asks whether the company is on the cutting edge of technology and

business innovation. There are three types: (a) pioneers, (b) close followers, and (c) late followers or
laggards.
• Marketing strategies
Marketing strategy: A marketing strategy serves as the foundation of a marketing plan. A marketing
plan contains a list of specific actions required to successfully implement a specific marketing
strategy.
A strategy is different than a tactic. While it is possible to write a tactical marketing plan without a
sound, well-considered strategy, it is not recommended. Without a sound marketing strategy, a
marketing plan has no foundation. Marketing strategies serve as the fundamental underpinning of
marketing plans designed to reach marketing objectives. It is important that these objectives have
measurable results.
A good marketing strategy should integrate an organization’s marketing goals, policies, and action
sequences (tactics) into a cohesive whole. The objective of a marketing strategy is to provide a
foundation from which a tactical plan is developed. This allows the organization to carry out its
mission effectively and efficiently.
Every marketing strategy is unique, but if we abstract from the individualizing details, each can be
reduced into a generic marketing strategy. There are a number of ways of categorizing these generic
strategies. A brief description of the most common categorizing schemes is presented below:
Market dominance strategies: Strategies can also typologized based on market dominance. Market
dominance strategies are marketing strategies which classify businesses by reference to their market
share or dominance of an industry (Dolan 1981, Woo and Cooper 1982, Hamermesh et al. 1978).
Typically there are four types of market dominance strategies:
• Market leader
• Market challenger
• Market follower
• Market nicher
Market leader: The market leader is dominant in its industry. It has substantial market share and
often extensive distribution arrangements with retailers. It typically is the industry leader in
developing innovative new business models and new products (although not always). It tends to be on
the cutting edge of new technologies and new production processes. It sometimes has some market
power in determining either price or output. Of the four dominance strategies, it has the most
flexibility in crafting strategy. There are few options not open to it. However it is in a very visible
position and can be the target of competitive threats and government anti-combines actions.
The main options available to market leaders are:
• Expand the total market by finding
o new users of the product
o new uses of the product
1 May 2006 34
o more usage on each use occasion
• Protect your existing market share by:
o developing new product ideas
o improve customer service
o improve distribution effectiveness
o reduce costs
• Expand your market share:
o by targeting one or more competitor
o without being noticed by government regulators
Market challenger: A market challenger is a firm in a strong, but not dominant position that is
following an aggressive strategy of trying to gain market share. It typically targets the industry leader
(for example, Pepsi targets Coke), but it could also target smaller, more vulnerable competitors. The
fundamental principles involved are:
• Assess the strength of the target competitor. Consider the amount of support that the target
might muster from allies.
• Choose only one target at a time.
• Find a weakness in the target’s position. Attack at this point. Consider how long it will take
for the target to realign their resources so as to reinforce this weak spot.
• Launch the attack on as narrow a front as possible. Whereas a defender must defend all their
borders, an attacker has the advantage of being able to concentrate their forces at one place.
• Launch the attack quickly, then consolidate.
Some of the options open to a market challenger are:
• price discounts or price cutting
• line extensions
• introduce new products
• reduce product quality
• increase product quality
• improve service
• change distribution
• cost reductions
• intensify promotional activity
Market follower: A market follower is a firm in a strong, but not dominant position that is content to
stay at that position. The rationale is that by developing strategies that are parallel to those of the
market leader, they will gain much of the market from the leader while being exposed to very little
risk. This ‘play-it-safe’ strategy is how Burger King retains its position behind McDonalds. The
advantages of this strategy are:

• no expensive R&D failures

• no risk of bad business model
• best practices are already established
• able to capitalize on the promotional activities of the market leader
• no risk of government anti-combines actions
• minimal risk of competitive attacks
• don’t waste money in a head-on battle with the market leader
Market nicher: In this niche strategy the firm concentrates on a select few target markets. It is also
called a focus strategy. It is hoped that by focusing ones marketing efforts on one or two narrow
market segments and tailoring your marketing mix to these specialized markets, you can better meet
the needs of that target market. The niche should be large enough to be profitable, but small enough to
be ignored by the major industry players. Profit margins are emphasized rather than revenue or market
share. The firm typically looks to gain a competitive advantage through effectiveness rather than
efficiency. It is most suitable for relatively small firms and has much in common with guerrilla
marketing warfare strategies. The most successful nichers tend to have the following characteristics:
• They tend to be in high value added industries and are able to obtain high margins.
• They tend to be highly focussed on a specific market segment.
• They tend to market high end products or services, and are able to use a premium pricing
strategy.
• They tend to keep their operating expenses down by spending less on R&D, advertising, and
personal selling.
1 May 2006 36
3 Financial Management in Media Practice – Case Evidence
• Present two best-practice case studies in the media sector
• Deliver general company facts and background information of both cases
• Look into the financial situations and financial activities of both cases
• Test theoretical issues against the empirical evidence collected through both cases
• Discuss impacts of financial matters of both cases on firm performance and competition
C ASE S TUDY A: HTTP ://D ER S TANDARD . AT – THE I NTERNET

SUCCESS FOR QUALITY NEWS PUBLISHING
Case Characteristics
Full name of the company Bronner Online AG
Location Vienna, Austria
Sector Publishing
Year of foundation 1995
No. of employees 70
Turnover in last financial year € 4.1 Mio
Primary customers 919.000 unique users (Quelle: ÖWA März 2004)
Most significant market Online advertising and online classifieds
Full name of the company Bronner Online AG
Financial Management Focus
Online advertising and classifieds 
Content management solutions 
 = in implementation stage;  = used in day-to-day business;  = critical business
function
• Background and objectives

Austria’s daily quality newspapers with nation-wide distribution is represented by four
newspapers: Der Standard, Die Presse, and the Wiener Zeitung, all of them published in
Vienna, as well as the Salzburger Nachrichten, which is published in the region of Salzburg.
It is the traditional media who dominate Austria’s web community. The Internet presence of the
quality daily of Der Standard, http://derStandard.at, is the leading online quality media and its

constantly developing website has set standards in Austria. Second to move was the ORF, who
created ORF-ON as their web brand, which is now the most visited online media in Austria.
http://derStandard.at started back in 1995 as first German-speaking newspaper on the Internet.
In 2003, the printed version reached 5,8% of the Austrian reading population, i.e. 390.000
people (Austrian Media Analysis, 2003). Its online version could attract more than 919.000
unique users, 4.6 million visits and 32.3 million page impressions (Austrian Web Analysis -
ÖWA, 2005) in January 2005. Meanwhile, derStandard.at is constituent part of the Austrian
digital information culture landscape, offering a broad scale of services. DerStandard/Web is
visited most frequently, with the channels derStandard/Politik (politics), /Panorama (chronicle),
and /Investor (economy) following up. The sectors sport, media/advertising, culture, and science
follow neck and neck.
• Financial activity
Value propositions in the advertising market
70 employees of http://derStandard.at have achieved a turnover of € 4.1 million in 2004. Ten
years ago, 230,000 people were using the Internet in Austria on a regular basis. Today, it is
more than 3.1 million users making the internet increasingly important for advertisers. Having a
broad and attractive user base, derStandard.at can benefit directly from the growth of online
advertising and online classifieds markets.
Exhibit 3-1: http://DerStandard.at, share of turnover in 2004
From revenues of €
4.1 million, online Share of turnover in 2004
advertising
accounted for 60%
of overall turnover,
online classifieds Content solutions: 12%
(mainly job
advertisements) acc-
ounted for 28%, and
the business field
Online classifieds: 28%
‘Content solutions’ Online advertising: 60%
for 12% (see
below).
derStandard.at
employs the whole
range of online
advertising forms
such as dynamically
placed banners, sky-
scrapers, rectangle,
big-size banner, and
pop-ups, static
buttons, advert-
orials, site link,
content ad,
1 May 2006 38
newsletter, or topic
add-ons. Ad place-
ment allows for
optimal spread of its
campaigns and
perfect target-
marketing to
achieve optimal
media effects.
In the classifieds market, DerStandard.at/ Karriere (career) has a leading position in the online
job market. Targeting the upper end of the market, it is one of only a few newspapers
internationally which is able to compete successfully with pure online plays in the job market.
Furthermore, DerStandard.at operates in real estate (DerStandard.at/Immobilien), automobiles
(DerStandard.at/Autos) and dating (DerStandard.at/ ZuZweit).
Content solutions
In terms of content, DerStandard.at offers two channels: the ‘Newsroom’ channel A: Politik
(politics), Investor (investment), Web, Sport, Panorama (weather, miscellaneous), Etat (media),
Kultur (culture), Wissenschaft (science), and the ‘Livingroom’-channel B, offering LeichtSinn
(fashion, literature), Reise (travel), Karriere (jobs), Immobilien (housing), automobiles, chat,
and ZuZweit (dating). Further, this kind of contextual advertising can be used to track an
individual user’s surfing behaviour. All advertising forms are smoothly integrated with the
editorial content provided.
DerStandard.at/ContentSolutions started in 1999. In the beginning, this business field dealt with
selling web content from DerStandard.at to commercial customers such as banks, insurance
companies, telecommunication companies and Internet service providers. Today,
DerStandard.at/ContentSolutions also exclusively produces prime content for business
customers and offers its mature web experience as Application Service Provider (ASP) to third
party customers on a licence basis. DerStandard.at thus offers long-term know how in web
publishing, applications developed over time, generated content, and technical infrastructure.
There are three components of its ASP solution: (1) Content Management System; (2) Content
Presentation System; (3) Content Hosting System. Data input and content management is
achieved by a web-based editorial system with a reporting and statistics tool, content
presentation runs via a web-based database to generate content dynamically. Hosting runs via a
SQL database and webservers. Successful examples for ASP content solutions of
DerStandard.at are www.cyberschool.at and www.ecaustria.at.
Mobile services: DerStandard.at offers PDA and WAP versions, both of which comprise the
newsroom channels of DerStandard.at. Additionally, DerStandard.at offers SMS and MMS
news, supported by increased internet and mobile media bandwidth to deliver multimedia
content. These services are offered for a subscription fee. The fee is payable with the monthly
invoice from the mobile carrier.
DerStandarddigital.at: is a product bundle consisting of an archive (ca. 250,000 articles since
October 1996), the newspaper web edition, the e-paper edition and the Avantgo-version, the last
three of which are different digital newspaper versions. Subscription is only open for the entire
product bundle. E-paper, the web edition and the Avantgo-version use advanced processing

software by Comyan. Newspaper data is taken directly from the editorial system and converted
into these three editions. The presentation of the web edition and the archive are self developed
systems.
Email services: DerStandard.at posts a variety of email newsletter versions. There are some
100,000 newsletter subscribers, receiving some 150,000 newsletters. In total, the service
comprises three weekly newsletters, eight daily newsletters (containing a news overview of all
news channels) and an ad-hoc breaking news service. The newsletters also contain advertising
(part of online advertising).
Forum: Here, DerStandard.at was highly innovative and attached in 1999 forums right to the
article where the users could post their comments and opinions. This resulted in total postings of
700,000 in 2004. Another technical innovation concerns an automat for the classification of
postings. This project has been developed co-operatively with the Austrian Institute for
Artificial Intelligence. DerStandard.at moderates the chat rooms to keep editorial quality on
high levels and to avoid legal problems. Formerly, the moderation was done manually – i.e.
each posting was red by the editorial staff and then published or cancelled. Now, the automat
pre-selects the postings and only 30% of all postings have to be processed manually. This saves
time for the editorial staff. Furthermore, 70% of all postings are published immediately.
• Impacts and lessons learned

The annual result of http://derStandard.at has turned positive for the first time in 2004. It is one
of the first online media to achieve a positive result. Defying the economic crisis battering the
newspaper industry, DerStandard.at could improve revenues from € 1.7 million in 2000 to 4.1
million in 2004.
Georg Zachhuber, Board Member of DerStandard.at, concludes as follows:
• “well established and well managed online media are profitable,
• due to the increasing market share of online advertising and online classifieds, online
media can achieve double digit growth rates for at least the next few years,
• fears that online would cannibalize print have not come true as both media cover
distinctive users demands, and
• being an independent company was a prerequisite for DerStandard.at to unleash its full
innovative power”.
The findings of this case study need to be seen in contrast to the general view that Internet-based
content utilization windows hardly generate extra revenues or cannibalize existing ones. Based on the
results of this present case study, it can be concluded that the Internet has an impact on the
composition of publishers’ content utilization chains and its strategic positioning. Although traditional
print publishers’ revenue models have not changed significantly so far through new online business
models, the present case has shown new trajectories for innovative revenue generation in new fields of
online journalism and e-commerce.
1 May 2006 40
• References and acknowledgements
This case study was conducted by Paul Murschetz on behalf of the EC funded project e-
Business W@tch (empirica/Bonn, Germany)
References
• Interview conducted with Georg Zachhuber, Board Member of DerStandard,
http://derStandard.at, as interviewed on February, 25, 2005.

C ASE S TUDY B: ORF –T HE A USTRIAN B ROADCASTING

C ORPORATION EXPLOITING CROSS - MEDIA FINANCIAL STRATEGIES
Case Characteristics
Full name of the company ORF – Austrian Broadcasting Corporation
Location Austria, A-1136 Vienna
Sector Media, full-scale portfolio
Year of foundation 1955
No. of employees 3.655 (2005)
Turnover in last financial year € 882.7m
Primary customers National cross-media advertisers
Most significant business market TV advertising, radio advertising, Internet
Full name of the company Österreichischer Rundfunk und Fernsehen
Financial Management Focus
Broadcasting advertising and classifieds 
Investment in digital technology 
 = in implementation stage;  = used in day-to-day business;  = critical business
function
The present case study describes the financial situation of the ORF in the context of its surrounding
competitive situations and structures. Further, it discusses corporate strategies in general and as
responses to market changes induced by higher competition and digitization.
• Background information
Television in Austria has long been synonymous with public service broadcasting organised by the
PSB, the Austrian Broadcasting Corporation (ORF). Under the technical conditions of limited
frequency, the ORF was granted the only licence for radio and television broadcasting over two
national frequencies chains for analogue terrestrial television in 1955: ORF1 and ORF2. Insufficient
frequencies of terrestrial airwaves were the initial significant entry barrier to a free television market
and allowed the design for a monopoly in public television to appear appropriate. It took until 1997
when the Cable and Satellite Broadcasting Act of 1997 created the legal basis for active cable and
satellite broadcasting.
Although the ORF has enjoyed a long-term monopoly from a supply-side perspective, it has been
facing increasing competition from extensive overspill of German TV programmes. Today, 85.6% (as
of 2004) of all Austrian TV households are equipped either with satellite or cable TV and the average
TV household receives 35 channels. These programmes compete against ORF for audience shares, and
– increasingly – for advertising budgets. Despite this, the ORF has managed to keep both the German
competitors and the Austrian newcomer ATV at bay. ATV, which started as low-scale regional cable
station Wien1, soon developed into the ORF’s biggest competitor. Today, it technically reaches some
30% of Austrian cable-TV viewers and 3% of digital satellite households. Content on offer is a full-
1 May 2006 42
programme mix of local entertainment, news, business, talk shows, sports, light entertainment, and
sex. Two programme reforms in 1995 and 1998 could successfully win back primarily younger
viewers who have been lost to foreign competition, enlarge the distance to its competitors, and
increase market share with primarily Austrian-specific programming.
As for Austrian TV households, more than 80% of are equipped with cable and satellite, with many
terrestrial households having switched to (analogue) satellite reception. However, there is still some
20% of households receiving programmes only terrestrially, statistically notwithstanding those who
dually use satellite dishes but are still equipped with roof aerials to receive ORF1 and ORF2 which are
not transmitted via analogue satellite.
In 2004, the ORF (51%) is uncontested market leader with an overall market share of 51% in multi-
channel homes (adults aged 12plus). This comes to the debit of its big German private competitors
RTL (7%), Pro7 (6%), SAT.1 (6%), and the public stations ARD (3.6%) and ZDF (3.4%) (ORF 2004).
In addition, the ORF is domestic market leader in three electronic media segments: television, radio
and the Internet. ORF-Enterprise customers benefit from this enormous competitive advantage by way
of highly efficient communication solutions. In the TV sector in particular, what ORF-Enterprise
offers is unique in the European market. A peculiar feature of the Austrian television landscape is its
unbeatable audience figures and market shares, which, unlike many other countries, are achieved by a
public service broadcaster, not a private provider, and also the possibility of broadcasting the same
commercial on two channels at the same time, thereby acquiring a market share that cannot be beaten.
ORF’s wholly subsidiary ORF Enterprise who ORF-Enterprise exclusively markets the advertising
times and offers of all ORF media and brands could thus proudly present the following results: “ORF
is streets ahead of any competition - from private Austrian broadcasters as well as from German
channels that can be received throughout the country. The Austrian television landscape is simply
unique. In other European countries, private providers lead the market, but in Austria, no other
broadcaster is able to come close to ORF. Via the two ORF channels, around half of all Austrians can
be reached on a daily basis! We also have our USP – simultaneous showings. By broadcasting
commercial slots simultaneously on both channels around the most popular “Zeit im Bild 1” news
program at prime time, we can help you reach up to more than 1 million viewers! As the two television
channels are positioned very differently in the market, advertising customers also have the opportunity
to place their brands in such a way as to accurately address their target groups – all through a single
contact, and with top audience figures!” (http://enterprise.orf.at).
• Finance
The ORF receives revenues from three sources: licence fee revenues, advertising revenues, and other
revenues. In 2005, the ORF could meet its financial objectives. It could raise its annual turnover from
€ 876.5m in 2004 to € 882.7m in 2005. Turnover in licence fee revenues could be increased from €
444.5m in 2004 to € 450.8m in 2005. After increasing licence fees by 8.2% in 2004, the turnover
improvements in 2005 could be achieved without an additional increase in licence fees. 3.25m radio
listeners and TV viewers brought the ORF to its highest user level at all times in its history.
In 2005, advertising revenues could be held at the satisfactory level of 300.8m EUR (2004: € 312.1m).
Advertising revenues in radio could be slightly improved while TV ad revenues dipped due to ad price
decreases. Other revenues such programme sales and licence revenues accounted for by ca. 13% of

overall revenues in 2005. Competition for advertising revenues became fiercer in 2005: ATVplus,
ORF’s competitor in national analogue television broadcasting could further enlarge its share on
national ad spent. Further, a new advertising window from Germany (VOX) dragged away advertising
from the Austrian market in analogue broadcasting whereas, in addition, digital TV advertising
windows started cutting away revenues from the ORF as well.
Exhibit 3-2: ORF Business data in 2004 (in million EUR)
No. of employees (FTE in yearly average) 3.700 (2004)

Revenues 966.8
• Licence fees 444.5
• Advertising (net) 312.1 (TV: 230.8; Radio: 81.3)
• Other 212.2
Expenditures 965.5
• Material 401.5
• Personnel 345.5
• Other 20.6
OCF (Operating Cash Flow) + 1.2
Source: ORF 2004
In 2005, biggest cost item were expenditures on material. They accounted for by 401.5m EUR (41,6%
of total). This was an increase in 36m EUR. Second largest cost item is personnel which fell in 2005
by 8.7m EUR to 345.5m EUR. Operative costs for personnel could thus be trimmed, mainly by
reducing stock.
In 2005, the ORF could generate an annual result of € 3.5m, thus operating in the black and achieving
some further plus against 2004 (€ 1.2m). This positive annual result is surprising considering the
overall economic situation is still curbed and the competitive situation is getting fiercer.
• Strategies
The strategic path of the ORF management can be broken down into the following strands: (a) stable
financial management building on core strengths of domination in market share and audience reach;
(b) Keeping German competitors at bay through special Austrian programming in culture, society, and
sports; (c) strict savings policy targets as imposed by regulation; (d) Augmenting licence fee revenues
where possible, e.g. by progressive policies on detection of free-riders; (e) Intensification of
advertising revenues through cross-media syndication of contents and detection of new advertising
channels (radio, Internet), and (f) following innovation strategies in terms of digitization with a view
to broadening future revenue bases.
1 May 2006 44
• Impacts and lessons learned
Latest annual result: In 2005, the ORF could generate an annual result of € 3.5m, thus operating in
the black and achieving some further plus against 2004 (€ 1.2m). This positive annual result is
surprising considering the overall economic situation is still curbed and the competitive situation is
getting fiercer.
Turnover and revenues: The ORF could improve its overall turnover. It could upgrade its licence fee
in 2004 and could hold steady its traditional sources of revenue from advertising. In addition, it could
find new sources of revenue from extra services such as commercial revenues from game shows and
privatisation revenues (selling infrastructure). There is also a peak in listeners and viewers of ORF
programmes in radio and television. This is another plus.
Commercial revenues: The ORF has accelerated growth of its commercial services which conflict
with its role as public service broadcaster and its legal mandate. For example, ORF TV entertainment
shows are supplemented by special ORF Internet service offers. Users can play games or visit micro
sites, and are, additionally, offered e-commerce platforms. These new services are critical because the
ORF is obliged to offer not-for-profit programming services under its legal mandate. In addition, full
transparency of sources of revenues is not guaranteed.
Digital technology: The future of television broadcasting will be digital and this means noise and
loss-free transmission of pictures, higher capacity of broadcasting channels and a substantially larger
programme palette with additional television services. But even if the attraction of digitisation is as
strong as widely promised, does it really mean better television?
Acceptance of innovation strategy: Audience acceptance of digital television programmes offered by
the ORF will also depend on a tangible added content value as compared with private provision. Only
this would increase the ORF’s chance of market penetration in a fragmented digital TV audience
environment. Above all, consumers should derive advantages from new technology and content. Email
and interactive applications should supplement TV and help compensate for the loss in social
integration that is said be aggravated by digitisation (digital divide).
Financial strategies: Apart from its strong position in advertising and viewer markets, the ORF
embarks on strategies to widen its financial portfolio through Internet and commercial advertising
revenues, and sales revenues from divestiture of infrastructure transmission technology. Besides the
ORF has a solid and healthy liquidity and equity base.
Programming strategies: The ORF’s positive economics is mainly accounted for by well accepted
informational programming, low-cost US-feature films and series, exclusive sports transmissions and
an overall successful ‘Austrification’ of programmes, that is a stress on innovative in-house
productions aiming at the preservation of Austrian culture. In 2000, ORF relaunched its TV design to
reflect the different market positions of its two analogue channels. ORF1 is the dynamic entertainment
and events channel for the younger urban target groups. ORF1 programming features sports, movies,
international serials, comedy, entertainment and children’s programmes. ORF2 is the more traditional
Austrian general interest channel, offering information, cultural and educational programmes, arts,
Austrian traditional culture shows and more traditional fiction.
Internet strategies: The ORF follows a programming diversification strategy in the Internet realm.
There is sixteen Internet channel to place advertising.
Regulation: In some areas, regulation regarding permitted advertising and sponsoring activities are
framed more restrictively since the last change in broadcasting regulation. Possibilities of interstitials

are limited and product placement outwith cinema films, TV films and TV series is prohibited. In the
future, cross-promotion of ORF radio programmes and television is forbidden. Intended limitations are
said to be necessary in order to offer private TV providers sufficient possibilities of finance.
• References and acknowledgements

This case study was conducted by Paul Murschetz (Murschetz Media Consulting Salzburg / Cologne).
An earlier version of this case study was published by the author in JMM – International Journal on
Media Management (see, Reference below).
References
• Murschetz, P. (2002). Public Service Television at the Digital Crossroads – The Case of
Austria, JMM – International Journal of Media Management, 4(2), 24-33.
• Murschetz, P. (2003). Abkassiererei oder Notwendigkeit? Ein Plädoyer gegen die ORF-
Gebührenerhöhung aus Sicht der Rundfunkökonomie, Wiener Zeitung, June 12, 2003.
• ORF (2004). The Business Year 2004 [Das Geschäftsjahr 2004], Annual Business
Report 2004, Vienna.
1 May 2006 46
4 Conclusions
• Chapter 1: Introduction to Financial Media Management
The economics and financing of media companies is a central issue in media management
research and practice.
Investment decisions are the most important of the firm’s three major decisions when it comes to
value creation. It begins with the determination of the total amount of assets needed to be held by
the firm. For example, how many total assets of the firm should be devoted to cash or to
inventory? Also, the flip side of investment – disinvestment – must not be ignored. Assets that
can no longer be economically justified may need to be reduced, eliminated, or replaced.
Financing decisions are the second major decisions of the firm. Here, the financial manager is
concerned with the makeup of the right hand side of the balance sheet. Some firms, for example,
have relatively large amount of debts, whereas others are almost debt free. Does the type of
financing employed make a difference? If so, why? And, in some sense, can a certain mix of
financing be thought of as best?
The third important decision of the firm is the asset management decision. Once assets have
been acquired and appropriate financing provided, these assets must still be managed efficiently.
The financial manager is charged with varying degrees of operating responsibility over existing
assets. These responsibilities require that the financial manager be more concerned with the
management of current assets than with that of fixed assets. A large share of the responsibility for
the management of fixed assets would reside with the operating managers who employ these
assets.
The financial requirements of varying types of media operations affect the forms and structures
of media firms, as do the scale and scope of their operations.
Media organizations are guided by specific goals-sets. These goals include cultural goals, as well
as economic goals such as efficiency, effective organization of resources and processes, profit
maximization, economic growth, and economic stability.
Profit maximization may not always be a reasonable goal of the firm. It may fail for a number of
reasons: It ignores (a) the timing of returns, (b) cash flow available to stockholders, and (c) risk
(i.e. the chance that actual outcomes may differ from those expected). The media sector is
regulated with respect to opportunities for making profits. For example, broadcasting law imposes
specific income restrictions on media companies. In addition, media companies have to pursue
other goals than profit maximisation such as cultural and social goals as part of their public remit.
Financial management is an academic field with financial economics which is concerned with the
acquisition, financing, and management of assets with some overall goal in mind.
The essential objective of financial management can be categorized into two broad functional
categories: recurring finance functions and non-recurring or episodic finance functions. The
overall goal of financial management is to guarantee a stable liquidity and equity base of the firm
over time.

The role of financial managers is to organize: (a) the prudent or rational use of capital resources,
i.e. proper allocation and utilization of funds; (b) careful selection of the source of capital, i.e.
determining the debt equity ratio and designing a proper capital structure for the corporation; and
(c) goal achievement, i.e. ensuring the achievement of business objectives viz. wealth or profit
maximization.
The financial manager must understand the economic environment and relies heavily on the
economic principle of marginal analysis to make financial decisions. The marginal analysis is a
principle in economics that states that financial decisions should be made and actions taken only
when the added benefits exceed the added costs. Financial managers use accounting but
concentrate on cash flows and decision making.
Managerial finance and accounting are not often easily distinguishable but basically differ in
that the financial manager is the decision-maker whereas the accountant’s (i.e. controller) primary
function is to develop and report data for measuring the performance of the firm. This data often
supports the financial manager’s decision.
Question raised in this report and in connection with financial management in general include:
(a) Which socio-economic forces influence firm performance in the media sector?; (b) Do new
information and communication technologies have an impact on firm performance?; (c) Which
sources of finance are vital for viability and sustainability of operations?; (d) Which specific fields
may guarantee financial viability and sustainability?; (e) What background theories do explain the
relations between structure, firm conduct, and performance of firms in the media sector and the
impact of these factors on financial management?; (f) Which indicators and measures are used to
show the financial performance of media firms?; (g) What role does strategy play in market
positioning of firms in the media sector; and (h) What role does marketing strategy play in
strengthening the financial position of firms in the media sector?
• Chapter 2: Financial Management of Media Firms – Key Issues
Issues of financial management of organisations or firms in the media sector are broad and
dynamic. They range from general issues of impact of environmental forces on the financial
operations of media firms (such as regulation and general macro-economic climate), to market-
driven forces (such as competition, market availability of capital, audience and consumer demand,
advertiser demand), to cost forces (i.e. economies of scale and scope, transaction costs), specific
characteristics of the media products and services themselves, to technology as main driver of
change.
Scholars in media economics and media management offer analytical reasoning and explanations
for the impact relations and the effects of these mutually dependent and impacting forces. The
theory of the firm, for example, forms the basis of the industrial organization (IO) model which
provides a valuable analytical framework for examining competition in the media and other
industries. Most media economics texts follow the IO model using the SCP-paradigm.
The Industrial Organisation model of industry competition shows factors of impact as
determined by the structure, conduct, and performance of the firm operating in an industry sector.
Theoretical and empirical analyses of the media sector have shown that industry structure (i.e. the
number of buyers and sellers in the market, their market shares, their product and service specifics
1 May 2006 48
offered, the market phase, the existence of economies of scale and scope, and barriers of entry and
exit) determines the behaviour of firms (i.e. product and price policies, marketing policies,
innovation policies) which, in effect, determine the performance (i.e. efficiency) of the market
players. In practice, Lacy (2004), for example, has studied the relationhsip of competition,
circulation, and advertising on the performance of daily newspapers. According to Lacy, economic
theory and research provide evidence that intense newspaper competition among newspapers will
result in increases in newsroom budget, changes in content and decreases in advertising cost per
thousand. However, empirical evidence is less storng that competition decreases subscription
prices. Considerable variations across newspapers can be found with all these relationships, which
represent a variety of managerial decisions.
This said, the financial media manager may decide upon which pricing strategy to pursue. As
put forward by Lacy (2004, p. 33), “as readership declines and the cost per thousand increases,
advertisers will be more likely to switch to imperfect substitutes. If ad lineage declines,
newspapers that want to maintain profit margins will either have to increase ad prices or maintain
revenue or cut newsroom and other expenses to control costs. In the former case, the probability
of advertisers’ seeking substitutes increases. In the latter, quality declines will cause readers to
leave, increasing the cost per thousand. As cost per thousand increases, businesses are more likely
to substitute other forms of advertising”.
The media industry sector continues to go through major change. New technologies offer new
revenue opportunities, channels to market, and possibilities for more efficient workflows and
reuse of information. However, they also provide the threat of declining revenues from more
traditional products, and the challenge of new competitors, new business models and major
organizational change. Meeting these opportunities and facing these challenges requires strategic
vision backed up by a clear knowledge of the marketplace, competitor activity, workable business
models, effective delivery channels and available technologies.
Further, a variety of forces related to the costs of operations play important roles in the economics
of media. These include input costs such as costs for newsprint or personnel, production costs, and
distribution, marketing and advertising costs of media goods and services. Cost economies can
also be achieved through raising the scale and scope of business. In addition, as markets may fail
regulatory forces may set rules for business behaviour and thus financial performance. Barriers to
entry and mobility exert further constraints on market competition.
Technology is another prominent market driver for change. Information and communication
technologies (ICT) have driven change in the graphics and media industries in the areas of
competitiveness, work organisation, industry performance, and employment in the last decades.
Research studies established that, in general, investments in IT capital do produce net efficiency
benefits, although this varies depending on other factors such as management practices, and
organizational and industry structure.
Sources of finance for media operation are multiple: Generally, they come from internal or
external sources. For newspaper companies, internal revenue sources are circulation sales and
advertising sales. Media work on dual markets: information/ideas markets and advertising
markets. How these two markets are interlinked is explained by the theory of the circulation spiral.
This has implications on the financial management of media organizations. Under this perspective,
the key objective of the media revenue management problem is to optimally allocate advertising
space across upfront and scatter markets to hedge against audience uncertainty, honour client
contracts and maximize short-term profits.

Media managers can choose from a set of traditional business models to achieve viability of their
operations: The ‘content’-business model builds on the basic strengths of media, to produce high-
quality content for targeted audiences. This model can be supplemented by the ‘community’-
business model whose viability is based on user loyalty. Further, publishers have been able to
develop innovative business models for financing their Internet presence and other online
activities, thus strengthening the third pillar of business modelling ‘commerce’.
As traditional media businesses move into the digital era, new revenue opportunities emerge.
Online business models include revenue generation from brokerage, web advertising, and
affiliate activities.
More specific issues of financial media management concern start-up financing, credit and cash
flow management, and investment management. Importantly, present capital investment decision
are based on estimated future cash flows and relevant interest rates must be taken into account to
arrive at the value today of the anticipated flows. Financial media managers can rely on the
formula of Net Present Value to take into consideration this aspect of financing.
Theories of ownership control and its effects on media performance, financial commitment
and financial control, resource dependence theory, as well as corporate governance theories have
been applied to media economics and media management. They offer theoretical explanations for
various variable relations concerning financial media operations and strategies.
There are a number of indicators and measures of firm performance applied in the media
sector. These indicators and measures may grossly be differentiated into indicators of profitability,
market value (or market capitalization), and share indicators.
Strategies are processes of specifying an organization’s objectives, developing policies and plans
to achieve these objectives, and allocating resources so as to implement the plans. Media
management may apply a set of strategies in order safeguard financial viability and health, and to
maximize profit or market growth respectively. Strategic management can be seen as a
combination of strategy formulation and strategy implementation.
The doyen of competitive strategy theory, Michael Porter (1980), has suggested cost leadership,
product differentiation, and market segmentation (or focus) as the three generic managerial
strategies to achieve competitive advantage and firm growth. Besides these general managerial
strategies, the kinds of strategies media firms regularly develop and apply and which are most
often evident involve market integration, diversification, niche marketing, and internationalization.
Marketing is defined by the American Marketing Association (AMA) as “an organizational
function and a set of processes for creating, communicating, and delivering value to customers
and for managing customer relationships in ways that benefit the organization and its
stakeholders” (www.marketingpower.com). Marketing can thus be seen as an integral element of
financial management theory and practice.
Marketing strategies are partially derived from broader corporate strategies, corporate missions,
and corporate goals. They should flow from the firm’s mission statement. They are also influenced
by a range of microenvironmental factors.
Market dominance strategies may be categorized as marketing strategies which classify
businesses by reference to their market share or dominance of an industry. Typically there are four
types of market dominance strategies: (a) market leader, (b) market challenger, (c) market
follower, and (d) market nicher.
1 May 2006 50
• Chapter 3: Financial Management in Media Practice – Case Evidence
Two best-practice cases in the media industry sector show that financial management plays an
important role in media practice. The cases delivered general company facts and background
information, looked into the financial situation and financial activities of both players, enabled
testing of theoretical issues developed in the chapter 2 and 3 of this study against empirical
evidence from media practice, and discussed impacts of financial matters on firm performance and
the competitive behaviour.
Case study A refers to a financially successful online web-portal for quality news in the print
media. Case study B refers to the difficult path of a European Public Service Broadcaster in
redefining its role in the digital era. Financial management is crucial for both media firms.
Evidence from the first case study A, the online version of the quality daily ‘Der Standard’,
http://DerStandard.at, suggests that print media can offer online news economically and
financially successfully. Starting back in 1995, DerStandard.at was the first German speaking
newspaper on the Internet. Its constantly developing website has set standards in Austria.
Incorporated in 1999 as a separate entity, it became profitable in 2004 with revenues of € 4.1
million annually. Online advertising and online classifieds are most important and represent
almost 90% of total turnover. Given the increasing market shares of online in advertising and
classifieds, further growth with double digit rates is assured for the next few years.
Evidence form case study B suggests that the Austrian PSB, the Austrian Broadcasting
Corporation (ORF), will retain a central role in the provision of public service broadcasting in the
next years to come. This is due to its well established market position, leaving room for
competitors to establish only very hesitantly (the market was only liberalized in 1997), and its
overall business clout. However, in order accomplish and reaffirm this, the ORF will have to
improve its overall service portfolio on analogue and digital platforms somewhat faster and more
critically approved than it has during the 1990s. Overall, the Austrian television broadcasting
market is currently in a state of flux. This is because private national analogue television has
finally been granted a licence, and public service broadcasting and cable-TV are currently
switching over to digital distribution. Already facing strong competition from private cross-border
analogue television, Austria’s public service broadcasting station ORF is facing fiercer
competition on many fronts and on many levels. In this context, the ORF content offers converge
towards private commercial television. By this, it has embarked on a set of cross-media
marketing strategies to exploit traditional revenue bases and invent new ones. This is to
safeguard the economic viability of its operations.

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Special Issue Research Report

Financial Management of Media Firms – Key

Prof.Dr. Paul Murschetz, MSc.

Paul Murschetz Paulo Faustino

Lisbon, May 2006

Executive Summary ................................................................................................................................ 4

3 Interim Report, 1 May 2006

Research background and objective

5 Interim Report, 1 May 2006

1 Introduction to Financial Management of the Media

7 Interim Report, 1 May 2006

Study objectives and research questions

9 Interim Report, 1 May 2006

Methodology and study organization

• Literature review: We apply a scientific literature review, i.e. a documentation of a

Chapter 1 Introduction – Fundamentals, study objective, methodology

Chapter 2 Financial Management of Media Organisations – Key issues

Chapter 3 Financial Management of Media Organisations – Case Evidence

11 Interim Report, 1 May 2006

2 Financial Management of Media Organizations – Key

2.1 General issues – The impact of competition on firm performance

Exhibit 2-1: The Structure-Conduct-Performance paradigm, variables and relationships

Micro data Market structure Macro data

Organization structure Market shares

Leadership Product differentiation

Market phase Business cycle policy

Entry and exit barriers

Source: Berg 1999.

13 Interim Report, 1 May 2006

15 Interim Report, 1 May 2006

• Barriers to entry and mobility

17 Interim Report, 1 May 2006

Exhibit 2-2: Industry Analysis following Michael Porter (1980)

Source: Porter 1980

• Technology as market driver

2.2 Specific issues of financial media management

19 Interim Report, 1 May 2006

• Start-up financing management

21 Interim Report, 1 May 2006

• Cash flow and credit management

23 Interim Report, 1 May 2006

Exhibit 2-3: The Net Present Value (NPV) formulation

NPV = B1/(1 + i) + B2/(1 + i)2 + B2/(1 + i)3 + … + Bn/(1 + i)n – C

Source: Hoskins et al. 2004, p. 123.

2.3 Further theoretical approaches to financial media management

25 Interim Report, 1 May 2006

2.4 Financial indicators and measures of firm performance

Major Components of the Balance Sheet

Current Assets Current Liabilities

Cash Bank loans – short term

Accounts receivable Accounts Payable

Inventory Accrued Payable

Investments Term Liabilities

Financial investments Bank loans (bonds and debentures)

Fixed assets Equity

Plant, equipment Par (stated) value

At historical cost Paid-in surplus (over par)

Less accumulated depreciation Retained Earnings

Source: Alexander et al. 1992, 276.

27 Interim Report, 1 May 2006