Cost Structure of Content

S. Masiclat
ICC 606 | Applied Research in Content Management
Fall 2012

Basic Definition: Cost Structure

The expenses that a firm must take into account when
manufacturing a product or providing a service.
Types of cost structures include transaction costs, sunk
costs, marginal costs and fixed costs.
Those costs are distributed through the system of
production and distribution.
The Cost Structure must be measured against the
Revenue Structure to get a complete picture of content
value.

Basic Definition: Transaction costs

The costs associated with participating in a market, and
supporting buying and selling.
Examples of transaction costs:
Administering low-fee payouts from rights pools (ASCAP)
Subscription management and fulfillment
Accounting associated with fee collections

Bringing these operations in-house creates a costcenter, but being the first to create such a payment
management system and then selling it to other media
companies makes it a profit center. (billing & devices)

Transaction Costs in Media

In single content sales systems, for example, the cost of
making transactions takes up the bulk of the price. In the sale
of mobile telephone ringtones, for example, the composer,
arranger, and performer get only about 20% of the price. For
digital song downloads everyone associated with the content-songwriter, arranger performers, and record company--receive
less than half. This occurs because merchant and financial
transaction costs are very high. The cost for using a credit
card adds 5 to 7 percent to merchant costs and the expense
for bank processing of each transaction is a minimum of about
25 cents. Even electronic fund transfers between bank
accounts incurs about 30 cents in transaction costs.
Robert G. Picard, The Media Business

Basic Definition: Sunk costs

Costs associated with your business that have been incurred,
and cannot be recovered.
Best Example: Research & Development
Sunk costs are the source of a particular dilemma and a
strong fallacy:
Dilemma; Choosing between continuing a project of uncertain
prospects already involving considerable sunk costs, or
discontinuing the project.
Given a choice between the certain loss of the sunk costs when
stopping the project versus possible (even if unlikely) long-term
profitability from continuing, policy makers tend to favour
uncertain success over certain loss.

The sunk costs problem

Many people have strong misgivings about "wasting" resources.
This is loss aversion has its roots in perception of sunk costs.
The standard example involves a non-refundable movie ticket.
Many people would feel obliged to go to the movie despite not
really wanting to because doing otherwise would be wasting the
ticket price; they feel theyve passed the point of no return.
Economists would label this behavior irrational because it
misallocates resources (opportunity cost of doing something
more fun) by predicating action on information that is
irrelevant to the decision being made (money spent on a movie
ticket).

Basic Definition: Fixed costs

The cost of producing one unit of a good.
The costs of doing business.
Salaries
Infrastructure (like factories and parking lots)
Operations (heating and lighting the factory, plowing the lot)
Insurance
Equipment

Government licenses and regulatory compliance

http://www.wisegeek.com/whatis-a-cost-structure.htm
When attempting to create a reasonable picture of the cost
structure associated with the production of any type of good
or service, the first step is to understand each individual
step that occurs. This begins with the development of the
idea for the product, the acquisition of raw materials, and
the creation of production facilities that are used to create
the end product. At the same time, a cost structure will
address all labor costs associated with each step. This will
include not only the expense of wages and salaries, but also
ancillary benefits offered to employees, such as vacation,
retirement, and health benefits. Essentially, any expense
that is incurred to ensure all the necessary components for
production are in place will be part of the cost structure.

Basic Definition: Marginal costs

The cost of producing one additional unit of a good.
For electronic media, marginal costs are essentially zero.
With a marginal cost of zero, a business must account for
opportunity costs of innovative operations such as content
individuation.
If a business incurs zero cost for a marginal increase, then every
customer they forgo is lost revenuea massive opportunity cost
for doing nothing.
Media businesses forgo customers by not offering individuation of
content, not making content widely available, not making
content granular for re-packaging or bundling through partner or
third-party distributors.

The Outsourcing Imperative

Media businesses are production intensive, and very
early in their evolution, outsourcing became the
predominant tactic for cost control. Corporate media
power resides almost solely in distribution.
Hollywood
Newspapers
Publishers
Game Developers

Discussion: Cost Structure and

CMS Value

Opportunity cost of no CMS

No data thrown off by transactions means no infrastructure
for capturing customers, and no valuable business insight
for B2B.

Discussion: Cost-recovery
opportunities
What partner service(s) can be converted from a cost
center to a profit center?

Cost Structure Case Study1: Social Media

How to monetize :
Facebook presence
Tweets
E-media mentions

What is the cost of being social and what mechanisms

are in place to recover those costs?
Is there an opportunity cost to not being present in a
social media network?
Is there a model that helps us make decisions about social
media costs?

Nobody understands social media

Approximtely 1,000,000,000 are on facebook
A tweeted links half life degrades on an NBD curve.*
My klout score is 34!

S(g)= didj
(I,j) [e]

Cost Structure Case Study2: Advance Publications

Revenues are dropping
Incentive-structure is print-centric
Fixed costs are rising
Newsprint
Salaries/benefits
Operating costs

Recommended Reading
The Media Business, Robert G. Picard
themediabusiness.blogspot.com
Six Degrees; The Science of a Connected Age