On the dynamics of media markets: Professor Karl Erik Gustafsson in memoriam

ABSTRACT

Media and advertising markets have a number of characteristics that affect how firms are competing and collaborating, how new firms enter the markets, and how new products are created. Throughout a research career in media management and media economics that started in the 1960s and stretched over more than five decades, Karl Erik Gustafsson kept exploring these topics, and their implications for both business strategy, regulation, and policy. His work formed early building blocks, both for media management as an academic field, and for the design, operationalisation, and governance of media policy, especially concerning newspaper development, in the Nordic countries. This article provides an introduction to his work.

KEYWORDS:

• Market dynamics
• media policy
• newspapers
• advertising media
• barriers to entry
• media history

Introduction

Although scholars like Herald Ray and noble prize winner Ronald Coase had started to explore media market dynamics and policy implications in the 1950s (Coase, 1950; Ray, 1951, 1952), there are a handful of academics who were the pioneers and forerunners in establishing studies of the media business, management, and economics as a research discipline in its own rights. Alongside names like Bruce Owen in the USA, Nadine Toussaint Desmoulins in France, and Alfonso Nieto in Spain, Karl Erik Gustafsson in Sweden started to provide studies in the late 1960s and early 1970s that would lay the foundation for what we today know as media management and economics.

In memory of Karl Erik Gustafsson, who passed away in the summer of 2018 at the age of 79, this article wants to highlight some of his key contributions to the field. Gustafsson was first and foremost a builder, establishing one of Europe’s first mass media economics research groups at University of Gothenburg in 1978, being the commentator to the transition of the industry through hundreds (if not thousands) of media appearances and trade press columns, and influencing the design of Swedish and Scandinavian press policies over four decades. For these contributions and more, he received the 2011 Emma Award of Excellence by the European Media Management Association. Throughout his career, his research explored media markets with a special focus on its structural dynamics, including aspects of competition and collaboration, strategy, market entry and market exit, business models, advertising innovation, and their overall implications for both business leaders and policymakers.

The article is divided in four sections covering different aspects of Karl Erik Gustafsson’s work: i) insights into competitive dynamics of media markets and their policy implications, ii) media entrepreneurship and barriers to entry, iii) comparative and historical work, and iv) the interdependence between media and advertising.

Competitive dynamics on local media markets and their policy implications

Sweden is traditionally known as a country with a strong newspaper market. Since public service radio and television were not permitted to carry advertising until the early 1990s, the newspaper industry had almost an advertising monopoly. Due to economic problems for a number of newspapers in the late 1960s, a press subsidy system was introduced. The subsidy model attracted significant international interest. In developing this system, Karl Erik Gustafsson’s work has had direct impact on media policy designs and their operative governance in Sweden and beyond.

When Gustafsson started his pioneering work in the Royal Commission (its final report was published in 1975), there existed several rivalling theories claiming to explain the competitive interplay between the market leading newspaper and its challengers in a specific geographic area. Some of the central questions asked were: Which factors decide which of the newspapers will become the largest and most successful? Is the competitive power balance stable or fluctuating? Which media policy tools could be used to moderate these dynamics?

The predominant theory on media competition, which had been established in the early 1960s, was called “the circulation spiral”. This theory implied that the market leading newspapers, in power of its market position, would capture a majority of the local advertising revenues. This financial advantage would then be used to enhance for instance editorial content, sales force, and other qualities, which would further increase the circulation, and consequent advertising sales, in a steady upwards spiral.

Gustafsson disputed this theory and its usefulness as a realistic analytical tool and argued for a different set of variables to analyse the competitive dynamics of geographic media markets. He called established advertising spiral-theory “mechanistic” and that it was unable to explain why competitive positions de facto changed in real life. In response, Gustafsson launched a dynamic theory of competition based on the household coverage in the primary geographical market. In 1974, Karl Erik Gustafsson presented his empirical analysis in a government report (Gustafsson, 1974). In that, he demonstrated that the important factor behind local market success of individual newspapers was not, as at the time was generally believed, circulation per se but the household coverage. He could show that the level of household coverage in the city of publication was the most decisive factor, since it was strongly correlated with the volume of the most profitable, local display advertising. Papers with a regional, or topical character, were at a disadvantage despite high overall circulation figures, since they were more spread out, and had lower household coverage on the relevant market for advertisers.

In his article The Circulation Spiral and the Principle of Household Coverage (1978), Gustafsson also tested the hypothesis in a detailed analysis of the newspaper development in three Swedish metropolitan markets for several decades. He concluded that both cross-sectional and longitudinal data demonstrate “the close relation between household coverage and the value of a newspaper as an advertising medium” (p. 12).

Subsequent studies supported the conclusion that a household coverage of 50% was the critical limit for success as this would ensure lasting profitability. Whereas the adjustment may not seem dramatic at a first glance, it had far-reaching implications for media management and competitive strategy, suggesting that marketing and other activities such as editorial work should focus entirely on increasing the media penetration in the primary local market. A high coverage would perpetuate the leading role of a newspaper and more or less make the second largest newspaper redundant from an advertiser’s perspective. The coverage theory enabled research to understand and explain why power dynamics in a specific market could change (Gustafsson, 1980a, Gustafsson, 1995, 2006b).

Another interesting consequence of the theory of household as applied by Gustafsson is that it also throws new light on the strategic measures that challengers in specific markets often implement to enhance their competitive position vis-à-vis the market leaders. The focus by these players to increase the circulation at all costs, usually outside the primary market, is according to Gustafsson entirely wrong. Another finding in this context is that papers affiliated with organisations, mostly political parties, are often less successful than non-affiliated papers since their subscribers tend to be more geographically dispersed without specific primary area that the newspaper can dominate.

This work by Karl Erik Gustafsson remains the foundation for analysing local and regional newspaper markets particularly in Scandinavia, where subscriptions continues to dominate also in the era of digitisation. The conclusion resulted in important changes in the Swedish press subsidy system (see e.g. Gustafsson & Hadenius, 1976; Gustafsson, Örnebring, & Levy, 2009). In calculations of the press subsidies, circulation figures were replaced by levels of household coverage. Of course, calculations have been altered as a consequence of the developments of the media market, but even today – four decades later – household coverage is still a factor in the subsidy system.

Implications for two-sided market theory

Gustafsson’s analytical method concerning the household coverage model is embryonic in its exploration of two-sided markets. He elaborates the implications of the interdependency between the reader and advertising markets and the modes of action for a newspaper management, including editorial quality, in order to stay competitive on both markets. In more recent years, the interest in two-sided markets (particularly media markets) has grown (e.g. Gabszewicz, Garella, & Sonnac, 2007; Manduchi & Picard, 2009). Several of these studies draw inspiration from Gustafsson’s critique of the spiral theory but tend to emphasise a slightly different set of variables and analytical approaches. Compared for instance with Manduchi and Picard (2009), Gustafsson’s treatment of the dual market situation is deeply embedded in his thorough insights into the specific contextual setting of the Swedish newspaper market. As a consequence, subscription-based, regional, and local newspapers were the focus of his studies. The notable differences are:

• His analytical units are “household coverage” and “local penetration” not “circulation” or “readership” which is frequent in the two-sided market approach. Gustafsson found these variables particularly useful since they were better indicators of a firm’s local and regional strength, which in turn was considered central for advertising buyers’ decisions at the time.

• His proposed set of managerial actions in order to improve a newspaper’s competitiveness focuses on increasing subscriptions and accomplishing higher household coverage.

• He also elucidates how household penetration in the local market can explain how two circulation-wise equally large newspapers can differ in their advertising revenues.

The interdependence of media and advertising

Throughout his career, Gustafsson had a genuine interest in the advertising markets, their societal role, evolution, and dynamics. Particularly he noted that existing advertising research paradigm was missing on some central dimensions, and he consequently identified an important role for media management research to fill in this void.

As Gustafsson (2005) maintained, advertising is generally studied by focusing either a) on advertisers – i.e. how advertising decisions are made and how advertising agencies are run or b) on consumers – i.e. how advertising messages are received, processed, and their residual effects on behaviour.

However, he argued that there is a third and equally important perspective – the media perspective. Advertising, and its practical, financial, and creative limitations and developments are deeply intertwined with the development of mass media. In his book Reklamens makt över medierna (Advertising power and the media), the emergence and growth of mass media – radio, TV – are explained largely as consequences of the evolving advertising markets. Programme formats as well as advertising formats have been adjusted to fit to the commercial breaks. Product placement, native advertising, and other forms of hybrid contents are consequences of the collaboration between the two markets. Advertising is in fact described as the key driving force in the innovation of newspaper business models moving newspapers from being a nineteenth century elite medium to a twentieth century mass medium. Advertising revenues (around 50% of total advertising industry turnover has historically been channelled to the media industry) incentivised newspaper owners to produce content that appealed to yet broader and broader reader groups, to build reach by lowering the consumer prices, and develop formats that were more convenient, portable, and practical. From a societal perspective, we can thereby conclude that advertising has subsidised news for the masses and made it accessible to larger audiences.

Therefore, research should be more interested in the relationship and symbiosis between the media and advertising industries and how they enable each other. Those (particularly in the field of journalism) who regarded advertising as a potential risk of compromising editorial decision-making, were, according to Gustafsson, therefore, missing an important point – that “without advertising, there will be less of mass media and media diversity” (2006a, p. 19).

Though published in academic outlets first after 2005, these ideas were not new. As an expert member of the 7-year long Swedish parliamentary inquiry on advertising which was launched in 1967, Gustafsson had dissected issues regarding the role of advertising in the welfare state, and its positive and negative effects on the societal level, ultimately in order to make recommendations about whether to allow broadcast advertising in Sweden. As mentioned earlier in this article, Gustafsson had also investigated and theorised how advertising resources influences the competitive dynamics and power relations on local media markets.

In today’s advertising landscape when traditional news media are fighting declining audience figures, when mere geographic penetration and reach is no longer enough to satisfy advertising customers and when advertising revenues are migrating to tech-giants in social media and search, the historical perspective is important. This process of being more reliant on consumer revenues is likely to set pressure on newspapers to reverse back to increasingly being an elite medium consumed by a limited group of well-informed citizens.

Barriers to entry in media markets

Moving on from local competition, Gustafsson started to explore how new media companies were established. A central objective was to better understand how entrepreneurship and new venture creation in the news industry could be promoted. His research was based on Michael Porter (e.g. Competitive Strategy, 1980) but applied very thoroughly to the newspaper market. Gustafsson noted that the barriers to entry in the newspaper industry seemed to be interrelated with general business cycle fluctuations, particularly since these cycles caused major alternations in media industry advertising revenues. However, the cyclical fluctuations were not the sole explanation, and Gustafsson further suggested that the high barriers of entry were also projections of general structural problems in the media industry (Gustafsson, 1993).

Despite governmental policies to remove and ease the barriers of entry and increase the mobility, including joint distribution support, selective subsidies, and establishment aid, he noted that the industry remained more or less intact overtime.

The main reasons for this stagnant situation was according to his conclusions

• The newspaper industry revenue structure in which a newspaper’s survival capacity is determined primarily by its capability to generate advertising income. As the coverage theory had explained, these conditions were difficult to change for a new market entrant.

• Economies of scale in production, distribution, and purchasing where the most difficult obstacle is access to cost-effective distribution channels.

• Capital requirements are usually formidable when it comes to establish a new newspaper.

• Inertia of the market. Readers and advertisers have well-established consumption and behavioural patterns that make them less interested in new options or alternatives.

These theses were elaborated in a report to a later Royal commission especially the stagnant nature of the industry and the revenue problems that emerge when a new entrant is trying to get a foothold in the market (Gustafsson, 2009, 2010a).

Gustafsson presented this work before the large effects of digitisation were as apparent as they are today. The proposition that survival capacity is based on the capability to raise advertising revenues (among other things) is still valid, though the importance of generating revenues from the reader-market has become increasingly evident. Economies of scale are still important, affecting mostly the print part of a legacy newspaper, but today’s digital media operating with insignificant marginal costs was something theoretically unthinkable in the past. The capital requirements of establishing digital newspapers are still formidable but for different reasons. The heavy dependence on advertising revenues of these “new” media means a negative cash flow for a long period of time after the launching. Financial restraints are the most common reason why many starts-ups in the media industry fail and fold. The last point “the inertia” has become somewhat obsolete with the introduction of digital media. Audience behaviours and media consumption patterns have changed, though certain differences between age groups appear to be stable in the adaption of new media.

Comparative and historical analyses

After having developed his economic model of the newspaper market, Karl Erik Gustafsson also started an annual follow-up on the economic development of the Swedish press. During almost four decades, he presented analyses based on the annual economic reports of the individual newspapers, where he also studied the market consequences of the subsidies. One important effect of his work is that Sweden today has an internationally unique time series of the economics of newspaper development, where Karl Erik Gustafsson set standards for future analyses. Since he was assigned as an expert also in later government commissions, his studies resulted in later refinements of the subsidy system (Gustafsson, 2010b, 2012). His interest in press structure also resulted in a comparative analysis of European newspaper markets with focus on economic, political, and cultural differences (Gustafsson & Weibull, 2007, 2004; Gustafsson & Weibull, 1997).

The basic research that Karl Erik Gustafsson carried out concerning newspaper competition was originally focusing on the specific mechanisms of the local market, particularly the role of advertising. However, his studies of individual newspapers increased his interest in strategic issues. He began to ask questions of why newspapers acted as they did – how they planned for the future, and what factors influenced them. Here his focus was on the single copy sold tabloid papers, which were less dependent of advertising and more of attracting regular buyers. In these studies, he used his knowledge of distribution economics, but the most intriguing character is his excellence in telling the story. He combined the social context with the structure of the media market as well as decision-making by the publishers. His approach which resulted in a deeper understanding of media development was also used in studies of local papers (Gustafsson, 1980b, Gustafsson, 1984, 2008).

From these studies of newspaper development, it is just a short step to the impressive undertaking to write the history of the Swedish press. Together with Per Rydén, professor of literature, Karl Erik Gustafsson formed a research programme on Swedish newspaper history and recruited experts to cover different periods. It resulted in four volumes with total 1600 pages published between 2000 and 2002 (e.g. Gustafsson & Rydén, 2000). Even though a considerable number of researchers were involved in the work, it is evident that the approach to a large extent was reflected in Gustafsson programme for his chair of media economics and influenced by the broad perspectives that characterised his earlier writings. He had stressed the importance of analysing media in a wider context (Gustafsson, 1992) – that newspapers are not only economic entities but social actors that must be analysed in their political, economic, and cultural context. The latter perspective is also demonstrated in the report series that Karl Erik Gustafsson and Per Rydén edited after the four main volumes had been published, where specific cases of theoretical or methodological were focused (e. g., Gustafsson & Rydén, 2010, 2003, 2009).

It is true that Karl Erik Gustafsson devoted most of his media analyses to newspapers, but it is important to note that his media interest was broader than that. He was early with studies on what was then called new media, including the technological development. One important contribution is this field is his book Televisioner (Tele-visions) where he draws the lines from early telephone systems to the television of today, analysing technological and economic conditions (Gustafsson, 1987).

Final words

In this article, we have provided an attempt to summarise a few of the extensive scientific writings and contributions of Karl Erik Gustafsson. Overall, his research philosophy was based on a firm belief that academic studies should be empirically grounded and practically useful. He wanted the data to speak rather than engaging in theoretical disputes.

Furthermore, it is important to stress Karl Erik Gustafsson’s contribution as a builder. During the 1990s, he established mass media economics as a research area at The School of Business Economics and Law, University of Gothenburg, including a pioneering theoretical platform. In the early 2000s, he developed The Media Management and Transformation Centre at the Jönköping University, where he laid the basis for international and comparative media research. He also was an important builder of bridges between different academic disciplines as well as between the academic and the professional world, always stressing the importance of cooperation.

Finally, we want to acknowledge Karl Erik Gustafsson’s open personality. Being a master of social contacts, he had an extensive network and he was adored among students for his positive persona and engaging lectures. He had a strong interest in culture, not least music, and he often played the piano at the nights after a long conference day. We believe that his approach to research as being at the same time practical, social, and fun is something we all could learn from.

Additional information

Notes on contributors

Mart Ots

Mart Ots is an Associate Professor of Business Administration at Jönköping University and a former doctoral student of Karl Erik Gustafsson. Several of his research interests were inspired by his supervisor, including marketing planning, advertising markets, and various aspects of national and international media policy. His current research projects involve the application of artificial intelligence in both business innovation and public sector management.

Lennart Weibull

Lennart Weibull is a Senior Professor at the Department of Journalism, Media and Communication, University of Gothenburg (JMG) and affiliated to The SOM Institute, University of Gothenburg. His research interests are among others, media policy, media consumption, currently the development of newspaper readership, and media history. In these areas, he has often worked in close contact with Karl Erik Gustafsson, including also some common projects.

Stefan Melesko

Stefan Melesko is an Associate Professor of Media Economics at Jönköping University. After a long and successful career as executive in the Media Industry, he was enticed going back to the academic world by Karl Erik Gustafsson who also acted as his supervisor during his doctoral work and was supportive in the selection of some of his specific research subjects. His current research focus is on mergers and acquisitions and different ownership structures in the media industry.