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On Media

Nobel Mechanism Theory Relevant To Media's Future

by Diane Mermigas, Wednesday, Oct 17, 2007 7:45 AM ET

THIS YEAR'S NOBEL PRIZE IN Economics, awarded to a trio of academicians for their work in "mechanism design theory," has everything to do with the way media-related businesses must reinvent themselves and their financial models for the digital age. At its core, mechanism design theory encourages systematic thinking about how a new playing field and new rules of play can be modified to improve outcomes. In the nearly 50 years since it was developed, the theory has been broadly applied to business matters as far-ranging as valuing software patents, matching donated kidneys to recipients, calculating taxes, and setting up complex auctions. Application of the theory to the Federal Communications Commission's sale of radio spectrum assured the government the funds it sought, while assuring public and small business access. It has also been applied to the regulation of subscription television and the bundling and pricing of channels. The initial objectives, per the economists, included the ability "to easily compare different models for selling goods" and provide enough economic incentives to ensure a win-win for all. Much of what the economists devised is relevant to media conundrums. Those include the redefining and re-pricing of advertising; content and services from static to interactive digital platforms; and recalculating the value of advertiser connections from mass eyeballs to individually targeted consumers with whom they can transact online. The social networking, blogging and instant messaging are a means to a commercial end for those hoping to profit from the Internet. What is needed are new metrics, pricing mechanisms and standards across which values can be transferred in the digital world. We also need a more equitable distribution of income and technical innovation that takes into account public and private goals. These considerations are similar to what drove the economists to analyze economic institutions and the interaction of buyers and sellers, and devise new allocation mechanisms. The Nobel Prize-winning American economists are Leonid Hurwicz, professor emeritus at University of Minnesota; Roger Myerson, a professor at the University of Chicago; and Eric Maskin, a professor at the Institute for Advanced Study in Princeton, N.J. Many glassy-eyed folks in Hollywood and Silicon Valley, as well as Madison Avenue and Wall Street, would prefer to dismiss such talk as being too complex and irrelevant. But ask executives in those key geographic hubs about their new digital business models, formulas and values, and the usual response is: "We're working on it." To be fair, there are some occasional glimmers of hope. The mechanism design theory (a branch of game theory, or what psychologists refer to as the theory of social situations) represents only one framework for constructing the new financial infrastructure needed to support media's evolving digital economy. The theory and its application underscore what we need: the creation of broad new frameworks for revaluing, reformulating and reassessing all aspects of media, entertainment and telecommunications in a nascent interactive market. That would include the value of TV and radio stations, advertising spots and page inches, and all forms of content and services. Mostly, it is about how to value, monetize and extend connections between target consumers and marketers, producers and distributors. It is the cog in the digital wheel that moves everything forward. It is required to reap any of the new wealth that's yet to be fully tapped. For the most part, media-related players have transferred their existing business models, structures and products to new digital platforms, with modest results. There generally is minimal finance-related interactivity involved, other than consumers ordering goods and services online, trading stocks, and banking. Interactive wealth creation has barely begun. Relatively few companies and individuals are researching, constructing, testing and launching truly new business models. This process must occur while old business models chug along and eventually are replaced. There is historical precedence in the Industrial Revolution and the computer age. Interactive commerce, creativity and communications likewise demand a completely new economic infrastructure to mine and manage digital wealth. Companies can begin this daunting task by setting up grids to compare the pricing, income and cost of their products or services across the media spectrum. They can profile the existing and projected growth characteristics of each media sector, from print and billboards, to mobile phones and the Internet. They can establish an electronic system for tracking changes in forecasts for key metrics, such as consumer behavior, e-commerce and broadband use. This real-time contextual analysis must be accompanied by other exercises, such as creating models for product creation and services that utilize new technology and phase out legacy mechanics. By pulling more new levers--and eliminating the old ones--a steady and certain digital infrastructure change will occur. The process of building new economic templates, processes and structures for digital media requires a brand of brainpower, patience and commitment that have become scarce. It would be a mistake not to meet the challenge and allow digital transformation to unfold in undercapitalized bits and pieces. Here are some suggestions for immediate action: Mandate the process as part of corporate 2008 budgets now being planned. Devise a new baseline and definition for fundamental values. Create new formulas for calculating and assigning prices, and play with them. Create new metrics. Experiment with bundling niche services and products in ways facilitated by new technology. Study and cater to consumers' shifting priorities: What they want and how much they will pay. Integrate new models and considerations into existing models. Focus on the digital prize that cannot be attained without making the journey. Diane Mermigas is editor-at-large at MediaPost. She can be reached at dmermigas@mediapost.com, or 708-352-5849.