COMMUNICATIONS INDUSTRY

COMMUNICATIONS INDUSTRY in the United States is best understood as a rapidly changing industrial sector that is engaged in the production and distribution of content designed to inform and entertain. When characterized more generally as the "core copyright industries," this industry is estimated to have contributed more than $457 billion to the U.S. economy in 1999.

Background

Traditional distinctions between sectors of this industry have become blurred through a process of convergence enabled by the production, storage, and transmission of more and more information goods and services in digital form. While primarily technological, this process of convergence also includes an accelerating trend toward integration and consolidation within the industry through mergers and acquisitions. Changes in regulatory philosophy that began to take shape in the late 1960s have also broken down the distinctions between organizations primarily engaged in the production of information and those that specialize in its distribution and sale.

Characterization of the communications industry in the United States is challenged further by a process of globalization that has been marked by dramatic growth in the size and scope of transnational media corporations. This growth has been enabled by reduction of regulatory barriers to foreign ownership and participation in domestic communications markets. Although direct investment and participation in the domestic market by foreign firms is relatively small, exports from this industry exceeded those of all other industrial sectors, including motor vehicles in 1999.

The history of the communications industry in the United States has been marked by the emergence and maturation of its component sectors at different points in time. Economists and historians of technology have attempted to associate the emergence of different technological systems with specific changes in social and economic relationships in society. James Beniger's important book The Control Revolution (1986) goes a long way toward describing the ways in which chains of innovation move through organizations specializing in production, distribution, and consumption management in responses to crises in each sphere of economic activity. The characterization of the United States as an "information economy" reflects the centrality of this industry to the economy as a whole, although the production of information goods for the consumer market has been secondary to the production of information for business and industry.

Communications media are now best defined in terms of their technological forms, rather than by their content. The emergence of print-based media—newspapers, magazines, and books—predates the birth of the United States as an independent nation. While printing technology has changed considerably since then, the fundamental character of text and graphic representation has not. The motion picture industry has also been transformed marginally by the addition of sound, color, and increasingly sophisticated special effects, but its thematic core has remained essentially the same. It has been transformed more substantially, however, by the development of alternative means of distribution. Broadcast, cable, and satellite television systems have extended the reach of the Hollywood production centers at the same time that videotape and DVD technology have made it easier for consumers to access this content in accordance with their individual schedules, tastes, and preferences. Similarly, the music industry has been transformed by advances in production and distribution technology as well as by devices designed for the convenience of household consumers.

Since the late twentieth century, the Internet has represented potentially the most dramatic influence on the character of the communications industry. Its initial impact centered on text-based news and information segments of the industry. This narrow focus reflects limitations on the amount of information, or bandwidth, that can be transmitted over the telecommunications network and displayed on computer screens. Improvements in the capacity of digital media systems to process, capture, store, and distribute information are said to follow "Moore's law" (named for Gordon Moore, cofounder of Intel), and double approximately every eighteen months. However, changes in the fundamental character of the audiovisual content accessed through the Internet will depend upon more widely distributed access to broadband, or high-capacity telecommunications systems.

Perhaps the most important challenge facing the communications industry is the development of appropriate business plans and a regulatory regime that will ensure that an expanded technological capacity is put to its most socially and economically productive use. Adjustments in the regulations governing the management of intellectual property will be necessary to ensure that sufficient incentives can be provided as rewards to support effort and creativity, and at the same time that prices offered to consumers will make these goods and services attractive. Conflicts between the commercial interests of intellectual-property owners and the privacy interests of consumers are expected to move to the center stage of regulatory policy debates. The impact of these policy struggles will vary across the different sectors of the communications industry, in part reflecting their distinct histories of development.

Newspapers

As one of the oldest sectors of the communications industry in the United States, the newspaper business has reached maturity, and in terms of circulation it has actually begun to decline in relation to its potential market. The high point in daily circulation was reached in 1990 at around 62.3 million, although this plateau had essentially been established by 1970. Despite this decline in circulation, the industry remains highly profitable, with a median return on revenues that was exceeded only by pharmaceuticals in 1997. The income of the industry is derived primarily from advertising, and because of newspapers' access to a highly desirable group of consumers, they are still able to claim approximately one-fifth of total advertising revenues. It is primarily through the elimination of direct competition that firms within the industry have been able to maintain such high profits from advertising and circulation. The proportion of cities in the United States with directly competing daily newspapers declined from nearly 40 percent in 1923 to less than 2 percent by 1985. This proportion continues to fall.

Television and Radio

Television and radio broadcasting are the principal alternatives to newspapers for advertisers hoping to reach desirable targets. With nearly 98 percent of U.S. households having access to television, broadcasters have increased their share of advertising revenues. At the same time, however, firms in the industry have had to divide those revenues among an expanded network of claimants. The number of television signals available to the average household increased in critical stages, beginning with the emergence of successful independent UHF stations. The number of these stations tripled during the 1980s, and they provided a basis for the establishment of additional networks such as Fox, introduced in 1987. A more powerful challenge came from the distribution of imported signals from other markets by CATV (cable) systems. This expansion continued with an increasing supply of original programming from cable networks. The distribution of theatrical motion pictures, and later original programming, by Home Box Office (HBO) in 1975 marked a critical takeoff point for the cable industry. By the year 2000 there were more than 175 basic television networks being delivered via satellite to cable systems.

Additional competition for traditional broadcasters emerged with the spread of satellite direct broadcasting services (DBS) such as DirecTV. While approximately 67 percent of television households had cable service in 2000, satellite distribution nearly tripled between 1995 and 2000, moving from 3.3 million to 9.6 million households. By the turn of the century, almost all television households had access to more than thirty different channels.

With so many sources of content for consumers to view through their television screens, it is not surprising that the average number of hours of television usage has increased steadily over the years, from 6 hours and 43 minutes per day in 1980–1981 to 7 hours and 24 minutes per day in 1999–2000. However, the share of television viewers' attention captured by the three major networks (ABC, CBS, and NBC) slipped from 84 percent in 1980–1981 to 41 percent in 1999–2000.

Broadcast and cable television networks split in excess of $20 billion in advertising revenues in 1997–1998. However, unlike newspapers and broadcasters, cable and satellite distributors derive most of their revenue from subscription and carriage fees rather than from advertising. Although cable and satellite distribution technology was initially a resource that increased the revenue of broadcast networks, each of these distribution technologies supported the development of powerful competitors once the new firms won the right to distribute information and entertainment directly to the consumer.

Although radio broadcasters, such as the Westinghouse station KDKA in Pittsburgh, initially used music, drama, and informational programming in the 1920s as "loss leaders" that they hoped would stimulate demand for receivers, they eventually developed highly specialized programming to capture the attention of desirable listeners throughout the day. Radio's adoption of a specialized, magazine-like approach to programming was in response to the competition for general-interest audiences that television represented for both media after it emerged in the 1950s. The greater fidelity of its signals made the FM band a natural home for specialized musical formats, while sports, news, and all-talk formats were concentrated on the AM band.

Today nearly two-thirds of radio listening takes place outside the home. Of the more than 600 million radios in use in the United States in 2000, nearly 25 percent were in automobiles, and some 30 percent of radio listening took place there. There are, however, many other opportunities for radio listening throughout the day. Lightweight portable radios have even become essential gear for joggers and others who fit exercise into their busy schedules.

With so many opportunities to reach desirable consumers, the radio industry as a whole remains profitable, although independent stations have continued to struggle. Unlike newspapers, however, the number of radio stations has increased somewhat dramatically following decisions by the Federal Communications Commission to liberalize its multiple station and cross-media ownership regulations in the 1980s. This process of consolidation accelerated following the passage of the Telecommunications Act of 1996.

Recorded Music

Just as the motion picture industry had established a close working relationship with the broadcast-, cable-, and satellite-distributed television industry, radio broadcasters evolved a mutually beneficial relationship with the recorded music industry. With the total retail value of music shipments exceeding $12.7 billion in 2000, and with recorded music becoming the dominant source of content broadcast by the nation's radio stations, the demand for recorded music is generated to a large degree through the unpaid advertising that music programming provides.

The music industry in the United States is highly concentrated, with five global corporations controlling nearly 90 percent of the industry's revenue. While firms based in the United States no longer dominate the industry, the domestic market continues to be the largest in the world. The fortunes of the music industry have changed several times in response to improvements in consumer technology. The introduction of compact discs in the 1980s marked a dramatic expansion in the market for recorded music. However, at the turn of the century, the introduction of digital compression techniques (MP3) and the sharing of music over the Internet through services such as Napster were seen by many in the industry as a threat to its survival. The fact that in 2001 more than 20 million music lovers used Napster or one of its imitators to download near-perfect copies of their favorite performers' music without compensation to the copyright holders was enough to mobilize a powerful, and initially successful, legal challenge to the practice.

Book Publishing

Like the music industry, book publishing depends primarily upon circulation, or sales to consumers, rather than advertising revenue. While newspaper circulation has declined, and the number of daily papers has shrunk rather dramatically, book publishing is a thriving industry with an increasing number of publishers. Book sales in the United States in 1998 topped $23 billion, with estimates of the number of new titles published each year exceeding 60,000. The nature of the industry is difficult to describe in part because it is composed of quite distinct sub markets or specialties, which include professional and educational books as well as mass-market paperbacks. The book publishing industry is more competitive than many other segments of the communications industry, and it is especially noteworthy that two of the most dominant firms in the domestic industry in 2001 were foreign owned, and Bertlesmann AG, a German firm, headed the list of major publishers.

Some concerns were expressed in 2000 about the consequences that a changing population profile would have for the publishing industry. The same decline in readership that threatened the survival of the newspaper industry seemed likely to affect the demand for mass-market paperbacks, although other segments of the publishing industry seemed poised for continued growth.

Motion Pictures

Theatrical motion pictures are part of another communications industry that depends on circulation, rather than advertising, for its revenue. These movies have continued to capture a substantial share of recreational dollars in North America. From modest beginnings as a novel amusement called the nickelodeon, introduced in the United States around 1896, motion pictures have remained at the core of the entertainment industry in the United States. Domestic box-office receipts exceeded $7.6 billion in the United States and Canada in 2000, rising sharply after a plateau had been established at around $5 billion in 1993. The number of theatrical films released in the United States has varied from year to year, reflecting the state of the economy and the nature of competition. A high point was reached in the 1950s with the release of 483 films, but only 248 were released in 1960, and output dropped to a low of 233 in 1980. The industry later climbed to a new peak of 510 films in 1997. The number of screens in the United States increased steadily from around 17,500 in 1980 to nearly 37,400 in 2000.

The financial success of the motion picture industry is no longer dependent, however, upon revenue from movie theaters. Videotape and DVD distribution has become a reliable source of revenue as well. The number of homes with VCRs increased at a spectacular rate, from 27 percent in 1985 to 70 percent by 1990, and it leveled out at around 85 percent of households by 1998. This installed base of VCRs and a network of video distributors provides consumers with the opportunity to rent or purchase cassettes. The number of cassettes sold for the rental market in the United States grew from 15.2 million in 1985 to in excess of 78 million by 2000. The number of DVD players in U.S. households in 2000 was estimated at around 14 million, and the number of movies and music video titles available in that format was expected to exceed 8,500 by the end of the year.

Online Communications

Developments in computers and telecommunications networks have enabled still other firms in the United States to create a vibrant market in remote access to information goods and services. An online information industry emerged in the 1960s to supply businesses with scientific and technical information. Traditional database publishers like Reed Elsevier and Thomson Corporation earned upwards of 30 percent of their revenue from electronic publishing by 1998. The firms that created the on-line information industry in the 1980s were joined in the 1990s by a new group of information providers. These newcomers included Internet portal services such as America Online (AOL) and the Microsoft Network (MSN).

A market for consumer-oriented data services could not develop, however, until there was a substantial installed base of personal computers equipped with modems. The number of U.S. households with computers increased from approximately 34 million in 1994 to approximately 57 million by 2000. Although the Internet was not capable of delivering competitive video programming at the end of the twentieth century, the percentage of households with access to the Internet from home was expected to exceed 50 percent by 2002.

One measure of the Internet's growth is the number of computers with a standardized network address (or host). The number of hosts around the world grew from 213 in 1981 to more than 110 million in 2001. The most spectacular growth in Internet hosts occurred following the introduction of a graphical Web browser (Mosaic) in 1993. With the development of the World Wide Web and the subsequent commercialization of the Internet, the "gift economy" that had characterized the computer based network when it served the scientific and technical community was replaced by a "new economy" oriented toward information entrepreneurs.

As the number of informational resources available through the World Wide Web increased exponentially, several indexing and searching services emerged to help users find the information they were seeking. Firms like Yahoo, Excite, and Info seek struggled to survive in a business environment that was still being defined. By 1999 advertising revenues captured by Internet publishers were only a fraction of the total spent on advertising that year. The most optimistic projections for online advertising in the United States were that it would capture 3.2 percent of advertising expenditures by 2002.

The acquisition of the traditional media conglomerate Time Warner by the Internet newcomer AOL, which was announced in 2000, marked the beginning of the Internet era in the U.S. communications industry. Although the early days of 2001 were marked by a spectacular failure of many Internet businesses, the development of online marketers and distributors of information commodities, such as Amazon.com, represented an important change in the ways in which consumers might acquire information and entertainment in the future. Although the company had not yet realized a profit, Amazon.com increased its sales from $16 million in 1996 to $610 million by 1998, primarily on the basis of sales of books, CDs, and videotapes.

Conclusion

The future of the communications industry will continue to be shaped by innovations in technology, adjustments in regulatory policy and social norms, and, more critically, the continued elaboration of demand for information goods and services. Although the structural character of the industry will surely change, there is little doubt that its economic importance will grow in the coming years.

BIBLIOGRAPHY

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Oscar H.GandyJr.

See alsoComputers and Computer Industry ; Internet ; Music Industry ; Publishing Industry ; Radio ; Television: Programming and Influence .