9 Mar

The US media industry: A three-tiered system

WRITTEN BY Ray Sheffer

Media and entertainment

The media and entertainment sector includes companies engaged in radio, television, print, and film, to name a few. It also includes companies that provide entertainment through theme parks, theater, music, and online media content.

The value chain for the US media industry is made up mainly of companies that create, aggregate, and distribute media content. Media content includes audio and video. Some examples of audio content are recorded and live music and radio programs. Video content includes movies, documentaries, and television programs.

The US media industry: A three-tiered system

Content producers

The media value chain starts with content makers such as television producers, film studios, and news houses and agencies. They create original content and sometimes participate in its production. They make money by selling rights to this content to aggregators. Film studios also earn money by exhibitions in movie theaters.

Aggregators

Aggregators such as broadcasters and cable networks buy rights of content produced by third parties. Examples of networks are The Walt Disney Company’s (DIS) ESPN network and Time Warner Cable’s (TWX) HBO network. The networks pack up the acquired content into programming services often called channels for scheduled transmission. An example of a channel is 21st Century Fox’s (FOXA) Fox News Channel.

Networks usually enter into long duration contracts with distributors who pay a predetermined fee to the networks for channel bundles, often based on the number of subscribers. They also make money through advertisements aired during the channel broadcast. Additionally, they sell content directly to consumers in various forms including DVDs, downloadable media, and Internet platforms.

Distributors

Distributors provide the infrastructure through which media content reaches consumers. In television and radio, distributors include cable and satellite TV operators and telecommunication companies (or telecoms). They sell bundled channels to consumers for a monthly subscription fee. Cable companies and telecoms often bundle media content with other offerings such as voice telephony and broadband.

Participating in the media industry

You can gain exposure to the US media industry by investing in the Consumer Discretionary Select Sector SPDR Fund (XLY). As of March 2, 2015, this ETF held ~30% of the industry, including Netflix (NFLX).

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