Communication requires the distribution of information from its creator to audiences, through some medium. This may occur in simple ways, such as talking, through broadcast networks, or through the production and physical distributions of fixed forms such as newspapers or books. Distribution systems can be thought of as networks connecting senders and receivers, with structural limitations that can impact on what information can be sent, and to whom. It is the “channel” in Shannon and Weaver’s information theory model (1963). While the concept of distributing information can be broadly applied, the characteristics and economics of distribution are of particular importance to mass communication, where the economic and technological features of distribution systems influence the definition of media and their markets. Media can be defined and differentiated, in fact, as specific distribution technologies for information. Media markets can be defined in part by the reach and scope of a particular distribution system for a media good or service. And the viability and function of media and markets depend on the economics of particular distribution systems.
The economics of distribution systems impact on media operations and organizational structures. Networks are designed or developed to take advantage of particular cost structures of their various components. Changes in technology and component markets can change costs and contribute to shifts in network structures, and have contributed to market convergence and globalization.
Economics Of Distribution
Media markets distribute information goods. Information goods have some interesting and distinctive characteristics, and are often identified as public goods. One feature is that the information good combines the idea (or information) with the distribution systems, and while duplication of the idea is essentially costless, distribution of that content is not. Moreover, the costs of distribution depend more on the nature of the particular distribution network than on the nature of the information (although the nature of the information may constrain which networks can be used for distribution).
Distribution systems can incorporate a wide range of structures. While the particular technologies and structures employed have important implications for the specific economics of that network, there are a few general features that can be identified. First, before distribution can occur, the distribution network structure must be in place. As such, networks require an initial investment in developing, designing, and building an infrastructure, mandating at least some degree of fixed, or sunk, costs. The degree of sunk costs can depend on the costs of technology, the size and scope of the infrastructure required for distribution, and the costs of fixing information goods and services in the appropriate formats that can be handled by the system. In addition, actual distribution of goods and services may incur variable costs tied to the particular amount distributed. These costs can change depending on the overall amount of goods distributed, the degree of duplication costs, and the costs of operating the network. If variable costs decline as production and distribution increases, the system is said to exhibit positive scale and scope economies. If variable costs rise as supply increases, negative economies (or diseconomies) result.
Another important characteristic, from a distribution perspective, is that information goods and distribution systems can exhibit consumption externalities. Consuming information goods and services takes time and attention, and may require access to costly equipment or networks, and acquisition of relevant literacy skills. Information goods may also have complements (other products used in conjunction with the information good) and substitutes (products used instead of the information good), which can influence demand levels.
Networks can exhibit what are termed network, or adoption, economies. This occurs for many types of networks (particularly interactive networks), when the value of the network increases with its reach. On the other hand, networks can also experience congestion effects (diseconomies), if the amount of information to be distributed approaches or exceeds the capacity of the network. Here, the value of the network is reduced due to the inability to deliver content effectively.
As distribution systems, or networks, develop, they encounter various design decisions involving tradeoffs among a variety of costs. Certain types of information products and services may require different types of distribution technologies and systems in order to be effective. Higher quality makes production and reproduction more costly and can incur higher distribution costs; the size of scale economies versus delivery costs impacts on network structure and centralization; policy can favor localism or national markets; balances must be sought between distributor costs and related consumption costs faced by audiences (time, receivers, etc.). While some older distribution systems evolved as a consequence of market forces, many were designed to achieve specific capabilities through the setting of standards and policy. In both cases, distribution systems tend to be tied to media and market characteristics, making it difficult to generalize.
In considering how distribution systems function, it is important to differentiate between systems that distribute physical copies of information goods, and those that do not distribute information in a physical form. There tend to be very different cost structures at work, in large part due to the different nature of, and cost structures for, physical goods, telecommunications-based networks, and information itself.
Distribution Systems For Physical Information Goods And Services
Distribution of physical products constrains networks in several ways. In other ways they can be more flexible. A key distinction is that producing physical goods is inherently costly. Once the information is produced in a fixed form in a particular medium, raw materials must be consumed in the production of physical copies. Production of physical goods also tends to exhibit limited scale economies, as the physical components are ruled by scarcity. And once produced, those physical goods must be distributed. Distribution of physical goods requires physical transport and delivery, tying costs to distance and product characteristics such as size, weight, and susceptibility to damage. Physical distribution costs are distance-sensitive, which tends to limit geographical markets. Physical distribution also takes time. For products that are time-sensitive (perishable), where their value declines over time, the time required for distribution can dictate the limits of the market. Of course, the use of multiple production sites can reduce distribution costs at the expense of added fixed costs and possible loss of scale efficiencies.
As a general rule, physical distribution networks seek to achieve a balance between minimizing production costs by taking advantage of scale economies and holding distribution costs to a level that keeps the product affordable. One advantage of physical distribution systems is that they can often “rebalance” and adapt to changes in production and distribution costs or shift to different systems without disturbing the basic product. Similarly, the distribution network can fairly easily adapt to variations in the physical characteristics of media products. Another advantage to using physical forms for information products is that having physical copies provides a degree of exclusivity for media products, as they are costly to duplicate. This can make it easier to restrict access, and to charge for access to, or acquisition of, the physical good.
Another “balance” issue facing physical distribution networks is estimating product demand. As producing copies is expensive, and must occur before they can be distributed and consumed, losses can occur if copies are overproduced and remain unsold. On the other hand, under producing copies also results in lost potential sales. The perishability of the content can minimize potential losses, as unsold copies can be shifted to secondary markets, and new production runs can provide additional copies.
A recent development is the rise of on-demand production and distribution systems, where the production of the physical copy occurs at the point of sale or acquisition, in response to a purchase. This solves the problems related to estimating demand, and by using nonphysical networks to distribute the fixed form to the production site, can also reduce distribution costs to the site of production. However, economies of scale have yet to reach the point where on-demand production is competitive for mainstream distribution.
Distribution Systems For Nonphysical (Electronic) Information Goods And Services
Unlike physical goods, duplication of information in nonphysical forms is essentially costless. This type of information must still be distributed, and in some fixed form, which does impose some cost. While nonphysical forms can include media such as speech and signing, the idea of distribution systems and networks is more often associated with electronic forms such as broadcasting and telephony, i.e., telecommunications systems or networks. In telecommunications networks, the information or content is translated (fixed) as a particular type of electronic signal.
To distribute these effectively requires standardization of the translation process so that transmitting and receiving equipment can be produced, and the development of a system designed for the purpose of distributing just that type of electronic signal. This entails a generally greater level of development costs, and perhaps more importantly, tends to fix the resulting system to the initial design standard. Policy often plays a role in setting standards, or defining markets and goals for telecommunications networks. Since systems are generally designed to deal with a particular level of service, telecommunications networks are more likely to experience congestion effects as demand and use increases. In addition, design limits restrict the ability to adapt to significant changes in the market or the product without replacing some or all of the infrastructure. For example, the shift from analog to digital television mandates the replacement of transmission and reception equipment.
There are two basic types of telecommunications systems, wired and wireless. Wired systems distribute signals through physical networks. They require the construction of a physical network (infrastructure), which can be very costly. While wired networks generally exhibit high fixed costs, operating and other variable costs tend to be low. In fact, average costs tend to decline over the range of the network, at least until congestion sets in. The high sunk costs also act as a significant barrier to entry. Between high economies of scale and barriers to entry, wired networks were often perceived of as natural monopolies. Natural monopolies occur when the scope of scale economies is such that a single firm can satisfy market demand more cheaply than multiple suppliers. Natural or not, monopolies were still viewed negatively, and as a result, wired telecommunications systems were generally regulated, or owned and operated by the state.
Wireless networks utilize broadcast spectrum to distribute signals. This still requires the development and deployment of an infrastructure, but infrastructure costs tend to be significantly less than those of wired networks. Partly this results from the shifting of some infrastructure costs (receiving equipment) to potential consumers. While spectrum is theoretically infinite, the usable spectrum is limited and systems must compete for space. Spectrum use is therefore regulated, and policy, along with spectrum limits and characteristics, tends to define distribution reach.
If the spectrum is used only for distribution, wireless networks epitomize the public good properties of nonexcludability and nonrivalrous consumption. As such, operating costs are constant, regardless of how many in the market acquire the signal, making marginal costs zero. A classic example of “market failure,” wireless broadcast systems often need to develop funding sources not based on consumer sales. On the other hand, interactive wireless systems are rivalrous, and subject to congestion. While it remains difficult to prevent signal reception, interactive network operators do control one side of the system, and can exclude on that basis.
Emerging Issues Linked To Distribution
There are several emerging issues related to distribution systems. The most dramatic is the emergence of the Internet as a digital global distribution system. This network is flexible and expandable by design, accommodating both wired and wireless networks and any form of information good or service that can be digitized; it threatens to radically transform distribution. It exhibits fairly low barriers to entry (sunk costs), nearly costless distribution costs, and permits users to contribute to both supply and demand. It is a system that is potentially global in scope, although there is still limited diffusion in some areas and among some groups. Its cost structures are at least competitive with most other distribution systems, and significantly lower than others. Further, the history of the digital computing and telecommunications markets on which it is based is one of constantly declining costs. The global digital network has the potential to disrupt and possibly usurp other distribution systems. On the bright side, the emerging global digital network also has the potential to open up new markets and content creation strategies, even challenging the basis of traditional economic approaches, i.e., the idea of scarcity (see Benkler 2006, among others).
The emergence of the network has also made copying and distribution of content cheap and easy, contributing to the rise of content piracy. This has contributed to a scramble to develop mechanisms to restrict the ability of users to copy and use content in ways not explicitly authorized by the distributor. Imposing such mechanisms is inherently costly, creating some broader social concerns. In addition, many of the proposed mechanisms would appear to threaten existing rights of use and, to the extent that they involve tracking mechanisms, this also raises privacy issues.
- Bates, B. J., & Albright, K. (2006). Network and distribution economics. In A. Albarran, S. M. Chan-Olmsted, & M. O. Wirth (eds.), Handbook of media management and economics. Hillsdale, NJ: Lawrence Erlbaum, pp. 417– 443.
- Benkler, Y. (2006). The wealth of networks: How social production transforms markets and freedom. New Haven, CT: Yale University Press.
- Shannon, C. E., & Weaver, W. (1963). The mathematical theory of communication. Urbana, IL: University of Illinois Press.
- Shy, O. (2001). The economics of network industries. Cambridge: Cambridge University Press.