Will New Media Destroy The Local Media?

Will New Media Destroy the Local Media?

Susan Athey, Emilio Calvano, Joshua Gans Monash University Seminar October, 2009

Tuesday, 10 November 2009

Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

Media is under pressure

Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

Media is under pressure

Fall in advertising revenue

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

Media is under pressure

Fall in advertising revenue Fall in news share of ad revenue

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

Media is under pressure

Fall in advertising revenue Fall in news share of ad revenue Web-ads less effective than print

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

Media is under pressure

Fall in advertising revenue

Loss of ‘good’ journalism

Fall in news share of ad revenue Web-ads less effective than print

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

Media is under pressure

Fall in advertising revenue

Loss of ‘good’ journalism

Fall in news share of ad revenue

Local newspaper bankruptcies

Web-ads less effective than print

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

Media is under pressure

Fall in advertising revenue

Loss of ‘good’ journalism

Fall in news share of ad revenue

Local newspaper bankruptcies

Web-ads less effective than print

Rise of aggregators/blogs

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

New Media has ...

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

New Media has ... increased content variety

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

New Media has ... increased content variety allowed consumers to choose their own content bundles

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

New Media has ... increased content variety allowed consumers to choose their own content bundles reduced advertising effectiveness

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

New Media has ... increased content variety allowed consumers to choose their own content bundles reduced advertising effectiveness allowed new consumer targeting technologies

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

New Media has ... increased content variety allowed consumers to choose their own content bundles reduced advertising effectiveness allowed new consumer targeting technologies

Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

New Media has ... increased content variety

Competition

allowed consumers to choose their own content bundles reduced advertising effectiveness allowed new consumer targeting technologies

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

New Media has ... increased content variety

Competition

allowed consumers to choose their own content bundles reduced advertising effectiveness allowed new consumer targeting technologies

Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

New Media has ... increased content variety

Competition

allowed consumers to choose their own content bundles reduced advertising effectiveness

Efficiency

allowed new consumer targeting technologies

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

... but the fundamentals are unchanged

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

... but the fundamentals are unchanged “… in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence, a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.”

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

... but the fundamentals are unchanged “… in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence, a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.” (Herbert Simon, 1971, pp.40-41)

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

... but the fundamentals are unchanged “… in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence, a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.” (Herbert Simon, 1971, pp.40-41)

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

... but the fundamentals are unchanged “… in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence, a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.” (Herbert Simon, 1971, pp.40-41) “I know that half of my advertising dollars are wasted … I just don’t know which half.”

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

... but the fundamentals are unchanged “… in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence, a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.” (Herbert Simon, 1971, pp.40-41) “I know that half of my advertising dollars are wasted … I just don’t know which half.” (John Wanamaker)

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

... but the fundamentals are unchanged “… in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence, a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.” (Herbert Simon, 1971, pp.40-41) “I know that half of my advertising dollars are wasted … I just don’t know which half.” (John Wanamaker)

Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

... but the fundamentals are unchanged “… in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence, a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.” (Herbert Simon, 1971, pp.40-41) “I know that half of my advertising dollars are wasted … I just don’t know which half.” (John Wanamaker) “Newspaper readers are ‘better’ than Web visitors. Online readers are a notoriously fickle bunch, and apparently are getting more so by the day. Web visitors barely stick around, yet they are counted in broad traffic statistics as if they were the same as the reader who lingers over his Sunday paper.”

Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

... but the fundamentals are unchanged “… in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence, a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.” (Herbert Simon, 1971, pp.40-41) “I know that half of my advertising dollars are wasted … I just don’t know which half.” (John Wanamaker) “Newspaper readers are ‘better’ than Web visitors. Online readers are a notoriously fickle bunch, and apparently are getting more so by the day. Web visitors barely stick around, yet they are counted in broad traffic statistics as if they were the same as the reader who lingers over his Sunday paper.” (Paul Farhi, Washington Post)

Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

... but the fundamentals are unchanged “… in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence, a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.” (Herbert Simon, 1971, pp.40-41) “I know that half of my advertising dollars are wasted … I just don’t know which half.” (John Wanamaker) “Newspaper readers are ‘better’ than Web visitors. Online readers are a notoriously fickle bunch, and apparently are getting more so by the day. Web visitors barely stick around, yet they are counted in broad traffic statistics as if they were the same as the reader who lingers over his Sunday paper.” (Paul Farhi, Washington Post)

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

The news for local media is mixed

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

The news for local media is mixed

Local media’s tailored content allowed consumer self-selection

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

The news for local media is mixed

Local media’s tailored content allowed consumer self-selection ... threatened by geographic targeting

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

The news for local media is mixed

Local media’s tailored content allowed consumer self-selection ... threatened by geographic targeting The Internet is allowing consumers to switch between outlets and unbundle content

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

The news for local media is mixed

Local media’s tailored content allowed consumer self-selection ... threatened by geographic targeting The Internet is allowing consumers to switch between outlets and unbundle content ... remove local media bundling rents vs hyper-local opportunities

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

The news for local media is mixed

Local media’s tailored content allowed consumer self-selection ... threatened by geographic targeting The Internet is allowing consumers to switch between outlets and unbundle content ... remove local media bundling rents vs hyper-local opportunities The Internet is competing for consumer attention

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Introduction Baseline Model Extensions Conclusion

Issues Research Questions Literature Outline

The news for local media is mixed

Local media’s tailored content allowed consumer self-selection ... threatened by geographic targeting The Internet is allowing consumers to switch between outlets and unbundle content ... remove local media bundling rents vs hyper-local opportunities The Internet is competing for consumer attention ... so there is less share to traditional media

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Research Questions

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Research Questions

What is the impact of consumer switching and geographic targeting on local media?

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Research Questions

What is the impact of consumer switching and geographic targeting on local media? Provide a full equilibrium analysis

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Existing Approaches

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Existing Approaches Two-Sided Markets Rochet & Tirole, Armstrong: use prices to different sides of the market to maximise platform profits Armstrong & Wright: competitive bottlenecks can arise when one side single-homes while the other multi-homes. Rents to single-homers.

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Existing Approaches Two-Sided Markets Rochet & Tirole, Armstrong: use prices to different sides of the market to maximise platform profits Armstrong & Wright: competitive bottlenecks can arise when one side single-homes while the other multi-homes. Rents to single-homers. Traditional Media Economics Anderson & Coate (2005): broadcasters compete for viewers and then sell advertising according to a revenue function Consumers are assumed to single-home while advertisers (implicitly) are assumed to multi-home Charge monopoly price for access to viewers Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Outline

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Outline Start with traditional media economics environment (i.e., single-homing consumers) and examine local versus general outlet competition

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Outline Start with traditional media economics environment (i.e., single-homing consumers) and examine local versus general outlet competition The impact of geographic targeting

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Outline Start with traditional media economics environment (i.e., single-homing consumers) and examine local versus general outlet competition The impact of geographic targeting The impact of blogs

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Outline Start with traditional media economics environment (i.e., single-homing consumers) and examine local versus general outlet competition The impact of geographic targeting The impact of blogs Extensions (generate competition for advertisers)

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Outline Start with traditional media economics environment (i.e., single-homing consumers) and examine local versus general outlet competition The impact of geographic targeting The impact of blogs Extensions (generate competition for advertisers) Capacity constrained advertisers

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Outline Start with traditional media economics environment (i.e., single-homing consumers) and examine local versus general outlet competition The impact of geographic targeting The impact of blogs Extensions (generate competition for advertisers) Capacity constrained advertisers Consumers who switch between outlets

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Introduction Baseline Model Extensions Conclusion

Policy Issue Research Questions Literature Outline

Outline Start with traditional media economics environment (i.e., single-homing consumers) and examine local versus general outlet competition The impact of geographic targeting The impact of blogs Extensions (generate competition for advertisers) Capacity constrained advertisers Consumers who switch between outlets Perfect tracking

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Consumers Consumers (readers) Endowed with T periods of attention Live (and make purchases) in local market, m (there are M local markets) Outlet choices Case C-SH: single-homing Case C-VS: variety seeking Case C-SB: stochastic browsing

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Advertisers Advertisers Are located in a specific local market, m Symmetric Only one impression per consumer from a given advertiser is valuable over T periods of attention Value of impressing a consumer, v, distributed F(v) (special case, U[0,1]) Advertiser valuations Case A-CV: constant valuations (unlimited demand) Case A-CC: capacity constrained (desired limited ‘conversions) Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Outlets An outlet, i, has advertising capacity of ai per unit of attention. The outlet can ensure that each consumer is reached just once (e.g. ads on the sports page) Thus, if they capture a consumer’s attention for t periods, the total number of advertisers they can supply to is tai. Advertising effectiveness: θi,m: the probability that an impression is on the ‘right’ consumer for an advertiser from market m. Depends on the mix of consumers served by the outlet Local outlets (lm) only attracts consumers from market m General outlet’s (g) readers are from all markets. Let xm be the share of consumers from market m served by the local outlet, and 1-xm be the share served by the general outlet Start with this exogenous, then endogenize through quality investments qi Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Tailoring Advertisements in local outlets are more effective than those in general ones An advertiser in location m’s expected return for a general outlet impression is:

θ g, m

1 − xm = M − ∑ m ′ ≠ m xm ′

More localities implies higher wasted impressions on general outlet For symmetric local markets:

1 θg = M Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Advertising demand (C-SH, A-CV)

pi,m: impression price for outlet i in location m Demand: advertisers with valuations, v > pi,m Because consumers single-home, advertisers multi-home (if there is capacity)

Di, m ( pi, m ) = 1 − F( pi, m / θ i, m ) Pi, m (ai ) = θ i, m F −1 (1 − ai )

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Advertising supply (C-SH, A-CV) Consumers choose one outlet for all attention periods Each advertiser will be supplied one impression per consumer per outlet How many impressions can a local outlet supply? For each consumer, it can supply Tai impressions How many impressions can a general outlet supply to advertisers in m?

Tag − ∑ m ′ ≠ m Dg, m ′

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Advertising supply (C-SH, A-CV) Consumers choose one outlet for all attention periods Each advertiser will be supplied one impression per consumer per outlet How many impressions can a local outlet supply? For each consumer, it can supply Tai impressions How many impressions can a general outlet supply to advertisers in m?

Tag − ∑ m ′ ≠ m Dg, m ′

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Advertising supply (C-SH, A-CV) Consumers choose one outlet for all attention periods Each advertiser will be supplied one impression per consumer per outlet How many impressions can a local outlet supply? For each consumer, it can supply Tai impressions How many impressions can a general outlet supply to advertisers in m?

Tag − ∑ m ′ ≠ m Dg, m ′ Impressions to consumers in all localities Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Advertising supply (C-SH, A-CV) Consumers choose one outlet for all attention periods Each advertiser will be supplied one impression per consumer per outlet How many impressions can a local outlet supply? For each consumer, it can supply Tai impressions How many impressions can a general outlet supply to advertisers in m?

Tag − ∑ m ′ ≠ m Dg, m ′ Impressions to consumers in all localities Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Advertising supply (C-SH, A-CV) Consumers choose one outlet for all attention periods Each advertiser will be supplied one impression per consumer per outlet How many impressions can a local outlet supply? For each consumer, it can supply Tai impressions How many impressions can a general outlet supply to advertisers in m?

Tag − ∑ m ′ ≠ m Dg, m ′ Impressions to consumers in all localities Will New Media Destroy the Local Media? Tuesday, 10 November 2009

Impressions supplied to advertisers outside of m 14/36

Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Example Suppose that ag = alm = 1, T = 2 and M = 2 Suppose that in each locality there are two advertisers with values V and v (V > v) What will the general outlet earn? As the general outlet cannot tell the location of the consumer, its capacity will be sold only to the higher value advertisers with value V Note, however, that these advertisers will pay for impressions in each locality and so the value of those impressions will be V/2 Thus, the general outlet can charge pg = V/2 and will earn per consumer profits of:

π g = pgTag = V What will local outlets earn? Can supply both advertisers in the locality. Can earn a price of v So its profits will be:

π lm = plmTal = 2v Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Market Clearing Prices Local outlet:

D( pl, m ) = Tal, m ⇒ pl, m = P(Tal, m ) General outlet:

∑ D( p

g

θ g, m ) = Tag

m

with symmetry:

D( pg θ g ) = Tag M ⇒ pg = (1 M )P(Tag M )

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

What happens with Geo Targeting?

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

What happens with Geo Targeting?

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

What happens with Geo Targeting?

UK website

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

What happens with Geo Targeting? Australian ad UK website

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

What happens to prices/profits? How do prices compare if al,m = ag = a?

pl, m > pg ⇒ P(Ta) >

1 M

P( M1 Ta)

Intuition: General outlets sell less to each advertising market, which pushes up prices, while inefficiency pushes them down. Shape of the demand function matters, i.e., is P(a) > αP(αa)? Trade-off between inefficiency and market thickness hinges on whether reducing demand to an Mth of its current level increase prices by more than a factor of M If advertiser demand is uniform, the comparison becomes:

pl, m > pg ⇒ M (M + 1) > Ta Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Endogenous Advertising Capacity Local outlet’s problem:

max al ,m Tal, m P(Tal, m ) General outlet’s problem:

max ag

1 M

Tag P( M1 Tag )

Note that the general outlet’s problem is the same as the local outlet’s problem except for the scaling factor (1/M). So we will get: * l, m

a

=

1 M

a

* g

* l, m

p

= Mp

* g

Profit comparison per consumer: equal profits! Each type of outlet can sell its own consumers’ attention for the same amount. Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Summing up Impact of Geo Targeting Case (i): exogenous ad capacity (e.g., page constraints)

• Targeting may make general outlet better or worse off, depending on slope of demand curve; if worse off, general outlet won’t adopt technology

• If targeting makes general outlet better off, local outlets are not directly impacted, but are indirectly impacted through quality investment

• Then ‘local news media’ may stop investing in quality • Social value of Geo Targeting greater than private value (more advertisers supplied)

Case (ii): endogenous ad capacity

• Targeting does not affect profits: local and general make same profits per consumer with and without geo targeting

• General has higher investment incentives with and without targeting Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Elements Equilibrium Impact of Targeting Impact of Blogs

Entry of Blogs

• Blogs may or may not be able to sell advertising • Since outlets do not compete for advertising, blogs do not affect advertising prices

• Blogs capture attention from traditional outlets and reduce incentives to invest

• The outlets that lose most consumers to blogs will lose further consumer share from the investment effect

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Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Diminishing value for consumers • Capacity constrained advertisers -- looking to hold expected “conversions” fixed

• General impressions yield 1/M of local conversions • M will not be the optimal number of impressions for a general outlet but we start by assuming advertisers buy M general for every local impression

• With C-SH and A-CC, the outlets do directly compete for advertisers • Generates single quality-adjusted price in the market • One unit of supply from the general outlet counts as 1/M • Market clearing quality-adjusted price (in units for local): pl = P(T (al + Will New Media Destroy the Local Media? Tuesday, 10 November 2009

1 M

ag ))

pg =

1 M

pl 22/36

Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Impact of Geo Targeting • Local outlet profits per consumer Tal P(T (al +

1 M

ag ))

• General outlet profits per consumer Tag

1 M

P(T (al +

1 M

ag ))

• With fixed advertising capacity • General gets an Mth the local profit per consumer • With endogenous advertising capacity • General selects the same effective capacity as local and gets the same profit per consumer

• So introduction of targeting does not matter Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Optimal Choice of General Impressions Advertisers on general outlet choose their impression budget (n) to solve:

(

n (v; pg ) = arg max n 1 − ( *

)

) v − npg

M −1 n M

n* will differ from M and is decreasing in v. Expected surplus from advertising on local outlet always higher (for equal impression prices) than advertising on general outlet. This implies that pl will exceed pg. High value advertisers sort onto local outlet with price constraints:

(

vl − pl = 1 − ( Will New Media Destroy the Local Media? Tuesday, 10 November 2009

* M −1 n (vl ; pg ) M

)

)

vl − n* (vl ; pg )pg 24/36

Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Preliminary Results (C-SH, A-CC) Supply-side: marginal advertisers on each outlet

1 − F(vl ) = xlTal vl

M ∫ n* (v; pg )dF(v) = xgTag vg

Implications: • Advertisers are segmented by quality • Outlets compete for advertisers at the margin • Difference in profits depends on M • Increased share of non-advertising blogs increases pl and pg prices

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Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Targeting Impact (C-SH, A-CC) • Case (i): exogenous ad capacity • Targeting makes general outlets better in proportion to the efficiency

gain (unlike A-CV, this is unambiguous and substantial) • Case (ii): endogenous ad capacity (same as A-CV) • General outlets do worse than local outlets without targeting, due to declining market value of non-targeted consumers • Both cases • General outlets have greatly enhanced incentives to invest in quality as a result of targeting

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Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Blog Impact (C-SH, A-CC) • Blogs may or may not be able to sell advertising • Unlike A-CV, outlets do compete for advertising • If Blogs capture consumer attention and do not provide advertising (due to

choice or friction in advertising market), they increase equilibrium prices but decrease scale for existing outlets. • If blogs do have advertising, they increase supply and lower equilibrium prices • Blogs are likely to be price takers, so will put up as much advertising as consumers will watch • Blog advertising may be inefficient since advertisers don’t know the audience, so their contribution to total supply may not be as great as it appears • Innovation in ad platforms may make it more efficient in the future • Like A-CV, blogs take attention away from traditional outlets and reduce incentives to invest • YouTube: lots of attention, few ads Will New Media Destroy the Local Media? Tuesday, 10 November 2009

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Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Multi-homing consumers (C-VS, A-CV)

• Suppose now that consumers switch between outlets • This is a proxy for what might arise if they used web sites rather than

traditional media • Assume in C-VS that consumers visit each outlet half the time. • The demand from advertisers does not change overall but they now choose to advertise on just one outlet (single-home) • Outlets service twice the consumers but have half the attention from each. • Expositional ease: suppose that T = 2

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Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Market-clearing impression prices •vi: marginal advertiser on i • Assortative matching between advertiser value and effectiveness

means that the highest value advertisers will place ads on the local outlet and the next tranche on the general outlet • Two critical values; one that is indifference between local and general; and one that is indifferent between general and nothing • Local vs. general: vl –pl = vl /M - pg • General vs. none: vg/M= pg • Market clearing:

1 − F(vl ) = al Will New Media Destroy the Local Media? Tuesday, 10 November 2009

(

)

M F(vl ) − F(vg ) = ag

⇒ 1 − F(vg ) = al +

1 M

ag 29/36

Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Outlet profits •Comparing prices

pl =

M −1 M

pg =

1 M

P(al ) + pg =

1 M

P(al +

1 M

ag )

((M − 1)P(a ) + P(a + l

l

1 M

ag )

)

• Local price is determined by indifference between local and general,

where marginal advertiser gets greater value (M-1)/M from local • General price set by aggregate supply of advertising and discounted for low effectiveness • Local outlet serves high-value advertisers and gets a greater price

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Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Impact of Geo Targeting •Profits per consumers: πg =

πl =

1 M

1 M

P(al +

1 M

ag )ag

((M − 1)P(a ) + P(a + l

l

1 M

)

ag ) al

• Local always earns higher prices, gets higher profits • With uniform distribution, local outlet produces more effective advertising space • Targeting removes asymmetry in effectiveness • General outlet benefits and local outlet is harmed

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Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Endogenous Ad Capacity (Example) •Uniform values, M = 2 1 π g = 4 (2 − ag − al1 − al 2 )ag

π l1 =

(

1 2

)

(1 − al1 ) + (2 − ag − al1 − al 2 ) al1 1 4

• Competitive externalities between localities due to impact on general

outlet impressions • Equilibrium: each outlet supplies 1/2; pg = 1/8 and pl1 = 3/8. Local outlets earn 3 times profit per consumer • With targeting each supplies 1/3 and impression price is 1/3 • Profits now 1/9 per consumer

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Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Summary • If the Internet allows consumers to bundle more diverse news outlets together (through switching) ... • Increases the local advantage in competition with general outlets for advertisers • Merit to the hyper-local push

• If the Internet allows for geographic (or specialised) consumer tracking • Increases the effectiveness of general outlet advertising • Decreases the local advantage in competition for advertisers with general outlets • Suggests hyper-local moves may be misplaced.

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Introduction Baseline Model Extensions Conclusion

Capacity Constrained Advertisers Variety Seeking Consumers Perfect Ad Tracking

Perfect Ad-Tracking • Suppose that there exists a price-taking ad platform that can perfectly track

consumers: they can say to advertisers, “I will place an impression in front of a consumer and charge you p for it.” • Advertisers need only contract with the platform for p per impression. • Suppose that ad capacity is symmetric and fixed at a • The total supply of advertising space to a consumer is: 2a • why? the platform tracks the consumer and so wherever they are places ads in front of them. The most they can place is 2a. • The total demand for advertising space is: v = p • Therefore: 2a = 1 - F(v) implying that p = P(2a) • Outlet profits:

π i = xi P(2a)2a

• This is the same as under traditional media with single-homing consumers; thus, even a local outlet earns the same as before.

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Introduction Baseline Model Extensions Conclusion

Conclusions Future Directions

Conclusions • Closed model of supply and demand for advertising • Models with fixed conversions can be used to account for the fact that proliferation of ad space and ad impressions does not necessarily dry up the residual demand for advertising

• New technologies for targeting only hurt local news media in cases where

advertisers compete, and then only under certain conditions • Competition is induced by the internet, when consumers begin browsing multiple sites • Competition also induced by capacity constrained advertisers

• Blogs can be good for an outlet if they steal attention from someone else • Forces for consolidation: big outlets invest more in quality to grab attention • High quality general content, low-quality/blog-based local content

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Introduction Baseline Model Extensions Conclusion

Conclusions Future Directions

Future Directions

• Model with mixture of single and multi-homing consumers • Wasted impressions • Frequency capping technologies • Examine perfect ad tracking under more general conditions • Examine content provision • Bundling • Average versus marginal content quality

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