Sunday, April 6, 2014

Coordination costs can make it difficult to create synergies at media firms

Media firms have for years tried to reduce their costs by centralizing the production and marketing of a variety of content. But the cost of coordinating centralized activities can be considerable, large enough in some cases to offset the savings that firms hope to realize.
For example, firms that own multiple newspapers have for decades tried to reduce costs by centralizing the production of news or centralizing administrative tasks. Efforts to centralize news production have also been extended to newspaper websites and mobile editions.
However, centralization can be difficult to coordinate if individual newspapers use different computer systems or software to manage and publish their digital editions.
Technically, these companies are trying to create economies of scope, colloquially known as “synergies.” Economies of scope exist when the joint production of two or more products is cheaper than producing the products separately. 
Technically, it’s also much easier to say you are creating economies of scope than it is to actually reduce costs this way. The successful creation of economies of scope often requires that a firm re-arrange details of the production process.
If, for example, a multi-media news story is distributed to multiple papers with different publishing software, the story might have to be re-formatted for compatibility with each individual paper’s software.
Media firms are also trying to collect and analyze data about how audiences interact with the firms' web sites and mobile applications. This kind of analysis might also be expensive to coordinate if different websites use different measurements or data collection techniques. Trying to reconcile differences in the ways that numbers are collected can be a lengthy, frustrating and sometimes impossible task.
Firms might have to make significant capital expenditures to eliminate inconsistent software or other internal barriers to coordination. Some newspaper companies are buying or creating new software platforms for distributing digital news and advertising. Some of these initiatives may be intended to resolve coordination issues, if so that is a hopeful sign.
Problems coordinating activities inside a media firm are not likely to draw much attention outside these firms. But there is a reason multiple economists have won Nobel Prizes for examining coordination costs (here, here and here).
Media firms that centralize internal activities to save time and money will find it worthwhile to include coordination costs in their analysis of what it takes to make those efforts work.

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