[Research] The efficiency analysis of media companies: An application of DEA and Malmquist indices

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The efficiency analysis of media companies_SSCI

 

Highlights

Introduction

The media industry has faced a dramatic transformation with new players. For example, over-the-top (OTT) media services, also referred to as video streaming, have changed the competitive landscape of the media and entertainment industry. Consumers can access a variety of content from global production studios and publishers in one place more quickly with OTT media services, such as Netflix and Amazon Prime Video. OTT services provide more personalized content with recommendation functions and better viewing time and location flexibility than traditional networks. Also, in general, the subscription fees of OTT services are lower than those of conventional networks, and OTTs offer diverse pricing options for subscriptions (e.g., Netflix Ad-supported Plans). With these advantages of OTT over traditional media players (e.g., cable firms and TV networks), more and more traditional TV viewing users have switched to OTT services. According to a report from Statista (Statista, 2023), the market share of OTT firms in the media industry has increased at a fast pace, is projected to reach $ 294.9 billion, is expected to surpass traditional TV companies’ aggregated market shares in 2025 and be $397.2 billion by 2027. In addition, households subscribing to the conventional liner (wired) cable are below 40% (from 59.8%) for the first time in almost 20 years (Nielsen, 2023b).

The competition in the media industry has gotten stiffer and more severe for several reasons. First, the existing firms in the media industry have transformed their business models to respond to the threats from OTT firms. For example, traditional players, such as media companies, media production, and news channels in the media industry (e.g., Discovery, HBO, CNN), have launched their own OTT services by themselves or through partnerships. In addition, new entrants from diverse areas, such as Amazon, offer OTT to enter the market and provide OTT service. To achieve a better competitive advantage over competitors in the market, firms implement aggressive strategic actions with diverse patterns (Grimm, Lee, & Smith, 2006).

Also, both new and established players execute diverse strategies, for instance, mergers and acquisitions, releasing new products, and partnerships. Of course, the objective of implementing all these strategic actions must be achieving competitive advantages over competitors, thereby surviving in the market. However, in terms of detailed plans, most firms in the media industry heavily invest in content to win the battle of viewership. For example, Amazon in 2022 acquired MGM movie studio to strengthen its’ OTT service, with MGM’s more than 4000 films and 17,000 TV series. In 2018, just right before Disney launched its OTT service, Disney +, Netflix spent more than $12 billion on content proactively to deal with the challenges caused by new entrants with their own content (Statista, 2020).

Content providers, among other media companies, provide customers with content, such as TV, movies, sports games, and news. Content providers continue spending resources to create or buy content, and almost all players of small and large sizes seem to expand their investment to retain global and regional content. However, the effectiveness of investments varies for the firms in the media industry. The huge investment pays back for some firms but does not work for others. For instance, according to a report from Nielsen in 2023, Netflix dominated the top 15 streaming rankings (for both 15 streaming programs and 15 streaming original programs) in Nielsen’s year-end rankings, while Amazon only put two of its original series (Nielsen, 2023a). In addition, although ‘Lord of the Rings: The Rings of Power,’ a streaming program from Amazon Prime, has surpassed ‘Stranger Things,’ the most streamed program for 2022, to become the most expensive TV show, spending $58.1 million per episode, the viewership of the Amazon streaming program is much lower than Netflix’s original series in Nielsen’s year-end rankings. Meanwhile, according to an article from Bloomberg, the case of Squid Game, one of the most-watched Netflix content of all time, generated $891.1 million in impact value. The show costs only $21.4 million per episode, or $2.4 million¹.

Likewise, media companies spend a lot of resources, especially on content, but the investment outputs seem inconsistent. This situation leads us to question the effectiveness of media companies’ investment. Thus, in this study, our primary objective is to answer the question: which content providers in the media industry have effectively exploited their resources to achieve better productivity, and how does it change along with the industry dynamics (i.e., before and after the pandemic)? We are mainly interested in the content providers’ efficiency among other media companies since the content is the critical resource to win the battle of viewership, and all players heavily invest in the content.

With the recent data about local and global content providers from 2019 to 2022, we use a DEA-based methodology and the Malmquist method to measure firms’ productivity and efficiencies from diverse perspectives. Our work differs from earlier research on the efficiency of media companies because the prior studies in the stream could not consider the significant change in the TV-watching behavior of consumers and the change in the productivity of content providers caused by the COVID-19 pandemic. The pandemic has changed every aspect of our lives, especially how consumers consume entertainment and media. Global streaming consumption soared after the pandemic. The safety restrictions made people stay home, and consumers turned to online video streaming services to fill their void. In the fourth quarter of 2020, Americans watched streaming programs 44% longer than they did in the fourth quarter of 2019, according to a report from Conviva, a streaming media intelligence company. Parallel to the pandemic, many new players, such as Disney+, Hulu, and Warner Bros, launched the streaming video service in the market (Vlassis, 2021). Streaming companies heavily invested in the content to lure increasing subscribers globally. For example, Disney + spent $27.8 billion in 2019, $28.6 billion in 202, and $25 billion in 2021 on content. Especially in 2022, Disney + spent $33 billion on content investment, almost double Neflix’s $17 billion spending (Statista, 2022).

In addition, the performances of the media companies were different before and after the pandemic. Although the global OTT market size has dramatically expanded during the pandemic, more people are now cutting their streaming services. People are tired of watching TV and movies too much since the world entered the endemic era, and they answered that they are planning to spend less time watching TV or videos. Netflix, the biggest video streaming service, has curbed its content spending growth in 2023 and raised prices. Other streaming companies, such as Warner Bros. Discovery and Disney+, announced thousands of layoffs, cutting billions of dollars in content spending in 2023.

Likewise, the prior objective of content providers in the media industry is an effective use of resources for better profitability, not just simply the growth of subscribers and revenue. Thus, we believe that studying content provider firms’ efficiency, especially the productivity change within the time window (i.e., from 2019 to 2022), is needed to understand the recent transformation in the industry’s competitive landscape. We can learn which strategy content providers use to achieve better efficiency, given their position in the market and what they possess. This study will contribute to the extant literature on competition in media companies and provide several practical implications.

 

Section snippets

Data and measurement

We chose the global media industry as the research context, where the competition has recently gotten stiffer and more severe after the COVID-19 pandemic. Our sample includes 25 prominent local and global content providers in the industry available from 2019 to 2022. Data from multiple sources were employed, and Statista and S&P Global offered financial data of content providers.

There are many prior studies estimating efficiency in the media industry. For example, one paper (Rahman,

Productivity changes of the total sample from 2019 to 2022

Table 3 and Fig. 1 below show the productivity changes in the total sample from 2019 to 2022. Productivity from 2019 to 2020 shows a decreasing trend overall, rebounding sharply in 2021 and then falling again in 2022. Technological change rose modestly from 2019 to 2021 but decreased rapidly between 2021 and 2022. Conversely, the change in pure efficiency is similar to technological change, but it appears more rapid. The change in scale efficiency shows the opposite pattern of the change in

Discussion

This study estimated productivity changes through four-year data from 2019 to 2022 for 25 major content provider companies, including OTT firms and major broadcasters. To measure the productivity changes, we ran DEA and MPI. This study offers several theoretical contributions and practical implications, as listed below.

First, utilizing the recent data set, this study allows us to compare several productivity index changes for firms in the media industry before and after the COVID-19 pandemic.