Subject Module - Elective CIAKL II - Class 02

EUROPEAN COURSE IN ENTREPRENEURSHIP FOR THE CREATIVE INDUSTRIES

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THE
ENTERTAINMENT
ECONOMY


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The entertainment economy
Sources:
 Michael J. Wolf, “The Entertainment Economy – How Mega‐Media Forces are
Transforming our Lives”, Three Rivers Press, New York, 1999
 Michael R. Solomon et al., “Consumer Behaviour – a European Perspective”,
Prentice Hall, 2010
 The Economist, “The lazy medium, How people really watch television”, a
special report on television”, April 29th 2010
 The Economist, “The international film industry: Avatar 2 Made in China?”,
April 24th 2012
 The Economist, “The film industry: China’s film market is proving tough for
foreign studios to crack”, April 28th
2012
 Financial Times, “Iroko Partners: Demand proves insatiable for Nollywood on
the net” November 22 2011
 Broadband TV News, “NCIS was Europe’s top drama show in 2011”, May 30
2012
 Richard Broughton, Daniel Knapp, “A Future for TV: IP‐delivered video
advertising in a connected world”, IHS Screen Digest, 2012
 Ofcom, “TV‐Like qualitative research report”, 2009

Screen Digest Insight Report

Entertainment – not autos, not steel, not financial services – is fast becoming
the driving wheel of the new world economy
                                                                                                                                                           Wolf
(1999)


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The great influencer

Entertainment is increasingly influencing every choice that each of us makes every day.
Multiply that by the billions of choices that, collectively, all of us make each day and
you have a portrait of a society in which entertainment is one of its leading
institutions. The United Kingdom now employs more workers in entertainment (films,
music, video games, television, software, theater, etc…) than it ever did in its coal
mines in the heyday of its empire.

Entertainment as an act Every year, people spend billions of hours on legal forms of
entertainment. Globally, total annual spending is approaching $1 trillion (Vogel, 2007).
Entertainment is the act of diverting, amusing, or causing someone´s time to pass
agreeably. Or entertainment can be defined as anything that stimulates, encourages or
generates a condition of pleasurable diversion. “But entertainment can be much more
than mere diversion. It is something that is so universally interest and appealing
because, when it does what it is intended to do, it moves you emotionally (…) It
touches your soul.” (Vogel, 2007)

Entertainment as an effect Entertainment is also defined through its effect: a satisfied
and happy psychological state. Entertainment means so many different things to so
many different people that an analysis of entertainment industry makes us look to
many different topics. From movies, television, music, cable industry and all the pay
services that are related, multimedia, toys and games, live entertainment (horse
racing, lotteries, casinos, different sports, …), performing arts and culture (orchestras,
opera, dance,…) to amusement theme parks, all this is entertainment. A sharper
analysis of entertainment industry requires classifying entertainment activities into
industry segments, that is, enterprises or organizations of significant size that have
similar technological structures of production and that produce or supply goods,
services or sources of income that are substitutable.

Economic forces The study of entertainment, media and communication has
traditionally been dominated by non‐economic disciplines. Analysis of entertainment
content, for example, can provide a means of understanding the societies we live in
and our value systems. But economics is also a valuable subject area for entertainment
students. Most of the decisions taken by those who run entertainment organizations
are, to a greater or lesser extent, influenced by resource and financial issues (Doyle,
2003). Economic forces and profit motives are always behind the entertainment
industry. Those are the forces that shape the relative popularity and growth patterns
of competing, usually interdependent, entertainment activities and products. So


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economics, as a discipline, is highly relevant to understanding how entertainment
industry operates.

Entertainment economics. Combines the study of economics with the study of
entertainment. It is concerned with the changing economic forces that direct and
constrain the choices of managers, practitioners and other decision‐makers across the
industry. Entertainment economics is concerned with how entertainment operators
meet the informational and entertainment wants and needs of audiences, advertisers
and society with available resources or, using a definition of media economics: “how
media industries use scare resources to produce content (…) to satisfy various wants
and needs.” (Albarran, 1996)1

Macro and micro Economics is traditionally studied in terms of macroeconomic and
microeconomics perspectives. The field of entertainment industry has tended to follow
suit. The distinction between macro and microeconomics is about whether that which
is being studied involves large groups and broad economic aggregates or small well‐
defined groups and individual firms and sectors. Macroeconomics examines the whole
economic system, and is usually studied at a national or a global level. It includes topics
such as economic growth indices, political economy, and national production and
consumption measures by gross domestic product (GDP) and gross national product
(GNP). Microeconomics takes a more narrow view by examining the activities of
specific aspects of the economic system, such as individual markets, firms or
consumers. It examines topics like market structure, and firm conduct and behavior.

Types of firms Entertainment firms represent individual companies or entities that are
incorporated through their respective domestic country, that operate for a profit. They
can be publicly held firms (owned by stockholders or shareholders) or privately held
firms (also owned by stakeholders but not listed on any stock exchange). Examples of
publicly held media firms include large conglomerates such as Time Warner, Disney,
Sony and News Corporation, or companies that operate in only one or two media
markets such as Gannet (publishing and television) or Saga Communications (radio).
Privately held media firms include such companies as Bertelsmann (book publishing,
Univision, and Clear Channel (Albarran, 2010).

Industries Economists define an industry as a group of sellers offering the same or
similar products. Companies that are engaged in cable television, like Comcast, Time
Warner, and Cablevision, are members of the cable television industry. Direct TV and

1
Albarran, A.B., & Dimmck, J. (1996). Concentration and economies of multiformity in the
communication industries. Journal of Media Economics, 9(4), 41‐50.


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Echostar (owner of the Dish Network) compete in the satellite industry. AT&T and
Verizon are two leaders in the telecommunications industry, and also offer
multichannel television services similar to cable and satellite known as IPTV (Internet
Protocol Television). A unique feature of the evolving media industries is the changing
nature of their markets and industries. Companies now compete with one another
across markets and in different industries in the media economy.

Competition levels An important aspect of the media economy is the concept of levels,
used to describe where activity among media firms and industries actually takes place
(Albarran, 2010). Competing on a global level, offering their media products and
services throughout the world, are many large companies like Viacom, Disney, Time
Warners, News Corporation, Bertelsmann and Sony. At the national level, companies
focus on their domestic boundaries, and attempt to cover the entire country.

Examples at the national level include the broadcast networks, satellite delivered
channels and magazines. At a household level, households have access to multiple
devices or platforms capable of receiving content from a number of media firms and
industries. These devices include television and radio receivers, DVD and DVR players
desktop and laptop computers, and wired and wireless household networks.

This level is important for tracking not only household media usage but also media –
related expenditures and various subscriptions for media content. Finally, the
individual level is becoming even more important in the media economy. In a nuclear
family household there are differences in the way parents use the media in
comparison to their youngsters. How we choose to spend our time in media‐related
activities represents an economic action: allocation.

These levels of activity are constantly ongoing in the media economy and in all the
entertainment industry. A big challenge for media firms is how to develop as multi‐
platform entities that can reach consumers at all levels of activity (see figure 3.1).
Figure 3.1.
Multiple Levels of Analysis


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Source: Albarran (2010).

Shaping forces The media economy, and more generally the entertainment industry, is
shaped by other forces as well. Albarran (2010) refers these forces as being
globalization, regulation, technology and social aspects.

 Globalization This is a critical driver in the media economy. For media firms and
industries, the act of globalization – a word with many different meanings –
occurs when companies reach beyond domestic borders to engage consumers
in other nations or markets. Originally, media globalization meant selling
content around the world, a practice that first started with Hollywood films and
expanded later to television programming. The US is the largest exporter of
media content in the world, leading to many concerns about the influence of
America abroad and the notion of “cultural imperialism” (Jayakar & Waterman,
2000) 2
. Globalization also occurs when companies acquire other properties in
other countries. News Corporation began as an Australian newspaper
company, acquiring newspapers in the United Kingdom and the United States,
and later on purchasing a group of television station that would eventually
become the Fox TV Network. Sony entered the film industry by first acquiring
Columbia Tristar and later MGM. Another form of globalization occurs when a
company establishes multiple locations in other nations. For example, Disney
operates theme parks in several global cities. Bertelsmann, the global leader in
book publishing, has operations around the world through its various
publishing entities.


2
Jayakar, K., & Waterman, D. (2000). The Economics of American theatrical movie exports: An empirical
analysis. Journal of Media Economics, 13(3), 153‐169.


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 Regulation Another predominant force is regulation and regulatory practices
that differ from country to country. Through policy and regulation, business
and industry are required to follow certain rules and guidelines. Regulation is
important in establishing and maintaining competition, to protect workers and
consumers, and to generate government revenues through taxation.

 Technology Has both enhanced and disrupted the media economy. Innovations
in technology with distribution and reception technologies continue at a rapid
pace. The wide range of technological advances has forced media companies to
try to keep up with one another. The digital environment has disrupted
traditional business models (Downes, 2009)3
. For media companies, finding
new business models and revenue streams is a major priority. For consumers,
today´s technological device is likely to be either limited or obsolete in just a
few months, replaced by another innovation.

 Social aspects Are also important in the media economy. The audience is no
longer a mass entity, but an aggregate of many different demographic groups
and lifestyles with different interests that evolve through the life cycle
(Albarran, 2010). The composition of the audience is changing almost on a daily
basis: societies are becoming much more ethnically diverse and multicultural;
people are living longer and working longer; younger people are more
technologically savvy and prefer to access content differently than adults.

Market structures Accordingly to Microeconomic theory, industries can be categorized
according to how firms make price and output decisions in response to prevailing
market conditions. In the model assuming perfect competition, firms all make identical
products, and each firm is so small in relation to total industry output that its
operations have a negligible effect on price or on quantity supplied. At the other
idealized extreme is a monopoly structure, in which there are no close substitutes for
the single firm´s output, the firm sets prices, and there are barriers that prevent
potential competitors from entry.

In the real world, however, the structure of most industries cannot be characterized as
being perfectly competitive or as monopolistic but as somewhere in between. One of
those in‐between structures is known as monopolistic competition, in which there are
many sellers of somewhat differentiated products and in which some control of pricing
and competition through advertising is seen. In an oligopoly structure there are close
substitutes and pricing decisions may affect the pricing and output decisions of other

3
Downes, L. (2009). The laws of disruption: Harnessing the new forces that govern life and business in the digital age. New York:
Basic Books.

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Locally, globally, internationally, we
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economy

The Hollywood Studio System under challenge At the heart of the economic structure
of the film business lie the Hollywood Studios. These are the six major distributors,
based in Los Angeles but with worldwide exploitation systems that consistently hold
the greatest share of the world film market. However, only two of the Studios are
today wholly owned by American interests. This means that the business is truly
global. The Studios utilize the vertical economic approach by releasing the films
theatrically first, and ensuring increased revenues and profits through creating a
system of “windows” where the film is not released onto the next form of media until
the exploitation in its previous one has been exhausted. They also strategically apply
the horizontal approach acquiring rights to any possible territories in which a film
could be exploited. Increasingly, over the last decade the Studios have seen their
dominance over both conduits of exploitation under increasing pressure and, in certain
cases, market erosion. This model is being challenged by the Internet. New
technologies have shrunk and opened up the vertical chain model. Increasingly, films
are distributed at different stages of the old value chain, and move on from there. The
windows system is breaking up.

Sturm und CSI However, Europeans still love American television series, albeit not at
prime‐time. The value of imported drama series for European broadcasters was $5,990
million in 2011, with the top 200 titles supplying 81% ($4,829 million) of that total. The
Imported Drama Series in Europe report estimated that the top 10 titles accounted for
23 per cent ($1,400 million) of the 2011 total value, with the top 50 taking 55% ($3,268
million). CBS distributed the top three titles in 2011, with NCIS leading the pack by
generating $210 million. The three CSI franchises appear in the top 10. Only one of the
top 10 titles (Sturm der Liebe) originated from outside the US. Only 22% of the hours
screened for the top 200 titles appeared in primetime [20,507 hours from 94,638 in
total]. However, 69 per cent [$3,337 million] of the value created for these titles was in
primetime.
The top six US distributors dominate the top 200, creating nearly three‐quarters of the
value and 56 per cent of the titles. CBS is the clear leader, with second‐placed Warner
Bros some way behind. However, these six companies are probably not as dominant as


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many people would have guessed. Indeed, seventh‐placed ZDF [$183 million, 12 titles]
was pretty close to Sony in 2011. ITV was next with $116 million [9 titles]. Ninth place
(and the only other distributor to record more than $100 million from Europe’s top
200 titles) went to Bavaria Media [$113 million], but this was solely for Sturm der
Liebe.
The Internet renaissance The wider entertainment industry is growing at a rapid pace
(contrary to doom & gloom messages). Furthermore, more content creators are
producing more content than ever before ‐‐ and are more able to make money of their
content than ever before. On top of that, consumers are living in a time of absolute
abundance and choice ‐‐ a time where content is plentiful in mass quantities, leading
to a true renaissance for them. This does present a unique challenge for some
companies used to a very different market, but it’s a challenge filled with opportunity:
the overall market continues to grow, and smart businesses are snapping up pieces of
this larger market. The danger is in standing still or pretending the market is shrinking.

Don’t miss the opportunity Data from PricewaterhouseCoopers (PwC) and iDATE show
that from 1998 to 2010 the value of the worldwide entertainment industry grew from
$449 billion to $745 billion. That’s quite a leap for a market supposedly being
decimated by technological change. Of course, the world economy grew over this
period of time, but a particularly compelling bit of data shows that, in the US
specifically, consumer spending on entertainment as a percentage of income has
continued to rise significantly over the last decade. According to the Bureau of Labor
Statistics, in 2000, 4.9 per cent of total household spending went to entertainment.
That number gradually increased over the decade ‐‐ and by 2008, it was up to 5.62 per
cent, an increase of nearly 15 per cent in the same decade as the internet went
mainstream.

More independent jobs Similarly, reports of job losses in the sector are equally hard to
square with reality. Once again, looking at the Bureau of Labor Statistics data,
employment in the entertainment sector grew nicely in the decade from 1998 to 2008
‐‐ rising by nearly 20% over that decade. The BLS continues to predict similar growth
for the next decade as well. Perhaps even more importantly, during that same period
of time, BLS data shows that the number of people who were independent artists grew
at an even faster rate – over 43 per cent growth in that same decade. In fact, this may
be a strong hint as to why you hear reports of industry "demise" from certain legacy
players: because new technologies and services have made it much easier for content
creators to find success without going through the traditional gatekeepers.


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Massive output The amount of new content being produced has grown at a
tremendous rate. In 2002, less than a quarter of a million new books were available on
the market. By 2010 that number was over 3 million. In 2001, the Gracenote database
had data showing just about 11 million song tracks. By 2010, that number had passed
100 million. According to the UN, in 1995, there were about 1,700 films produced
worldwide. By 2009, it was more than 7,000. Meanwhile, during this same period of
time, the video game industry ballooned massively, leaving its niche status behind, and
becoming a major part of the wider entertainment industry. By any measure, it
appears that we are living in a true Renaissance era for content. More money is being
spent overall. Households are spending more on entertainment. And a lot more works
are being created.

European flavour Leading European film production and distribution companies offer
significant challenge to the Hollywood Studios’ traditional hegemony. On the last
decade, the change across Europe is most marked in domestic films attracting local
audiences. Often times one local blockbuster is enough to tip the balance in favour of
the local film. However, the American television products have conquered the lion’s
share of the European audiences taste for series.

Key cinema data in European countries 2010 – 2011 (provisional)

News source: Press release – European Audiovisual Observatory


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Bollywood to the next level India is the largest producer of films in the world by
quantity. But Bollywood’s low revenues reflect the shortage of screens in India relative
to the huge population; and low ticket prices, on average less than a $1 a seat. Yet the
industry has reason for optimism: prices are rising, with the development of urban
multiplexes that charge about $3 for a seat and up to $7 at weekends. KPMG forecasts
revenues will rise by about 30 per cent by 2015, buoyed by higher ticket sales and
more expensive television rights, amid an insatiable demand for entertainment from
an increasingly affluent population. Yet foreign sales remain a tempting target.

“Ra.One” costing more than $30m is by far the most expensive Bollywood picture ever
made. Packed with slick, high‐technology visual effects of a quality never before seen
in an Indian film, the film is a classic Hindi tale of good versus evil. Bollywood and other
Indian regional cinema appeals to audiences in many countries outside the west,
where it is already a competitor with Hollywood. “Indian films have as much of a
chance there as anyone else, as long as we make films that have some universal truths
and compelling characters,” Indian film makers say. Most insiders,  owever, are more
cautious on whether Bollywood can make serious inroads into western markets.

As Bollywood evolves, its assault on Hollywood’s hegemony will intensify. Reliance
plans an English version of its forthcoming film Kites, about a conman in Las Vegas. In
recent years, Bollywood films have found favour in eastern Europe, Germany, east Asia
and other non‐English‐speaking countries where audiences are already accustomed to
watching dubbed Hollywood movies. Among mainstream audiences in the Anglophone
world, however, success has been elusive. India’s emerging middle‐class enjoys
watching its favourite beautiful stars cavort in exotic locales such as Thailand,
Singapore, Australia, the US and Europe. That trend has been facilitated by tax breaks
and other production incentives from foreign countries, which see Bollywood films as a
way to grab a slice of the fast‐growing Indian outbound tourism market. This year’s
coming‐of‐age movie, Zindagi Na Milegi Dobara, about three friends on a pre‐marriage
road trip, was produced in close collaboration with the Spanish tourism promotion
agency.


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Nollywood goes to the Internet The Nigerian film industry turns out more than 2,000
films a year, making it the world’s second‐biggest film industry by output after India’s
Bollywood. Nollywood sprang up in the 1990s as home video cameras allowed films to
be produced at lower cost. A typical budget is only $30,000. In 2006 Nigeria made 872
films (in video format, with about half of them in English), about 200 less than
Bollywood and roughly 400 more than Hollywood. Already massive in Africa,
Nollywood is now gaining a reputation elsewhere. Copies of the movies are on offer at
markets throughout the continent. Most of these are illegal copies, however, meaning
most Nigerian film‐makers derive little financial benefit from their international
popularity. Most of these are illegal copies, however, meaning most Nigerian film‐
makers derive little financial benefit from their international popularity.

Yet the internet is beginning to change that, says Jason Njoku, a London‐born web
entrepreneur who has attracted a worldwide monthly audience of more than 1m to his
Nollywood streaming service.  His company, Iroko Partners, is racing to keep up: it has
bought the online distribution rights to 1,600 films since November 2010. The
fragmented nature of the industry, with more than 500 production businesses, is a
boon for the digital distribution business, whose experience has been unlike that of
Netflix, the US film streaming site, which has faced tough negotiations with five or six
big Hollywood studios. Much of this demand from the Nigerian diaspora has been filled
by pirate videos. New York authorities, for instance, seized more than 10,000 bootleg
Nollywood films in November 2010. While slow download speeds and limited internet
penetration meant online distribution in Africa was restricted, there is a vast,
untapped market among African Nollywood fans in North America, Europe and other
developed regions. The proposition was also bound to be attractive to the film
producers, who had previously gained almost no income from foreign sales of their
films.

China’s pull The Middle Kingdom is now the world’s second‐biggest film market after
America. It has a booming home‐grown film industry, making historical dramas and
romantic comedies, but foreign blockbusters are the big money‐earners. Although
most films are pirated on release and viewed online and on dodgy DVDs, the rising
middle classes are increasingly willing to fork out for a night at the cinema. In 2011
China’s box‐office take rose by more than 30 per cent, to over $2 billion, according to
the Motion Picture Association of America. The number of cinema screens in China has
doubled in five years, to nearly 11,000 —again, second only to America.

The gravitational pull of the Chinese movie market, nonexistent less than a generation
ago, is now an undeniable force, sucking in all Hollywood blockbusters (and lesser


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projects) that venture within its event horizon. Hollywood studios, independent
producers and directors regularly cycle through Beijing in search of partnerships with
Chinese production houses—often seeking money to finance their movies, as well as
access to a suddenly lucrative market. In 2012 China will surpass Japan as the world’s
second‐largest movie market, after America. Chinese box‐office takings totalled 13
billion yuan ($2.06 billion) in 2011, an increase of 30 per cent from 2010, which in turn
had been more than 60% higher than in 2009. The number of movie screens has
doubled in five years to more than 10,000 (and is projected to reach 15,000 in speedy
fashion), and the new screens are mostly digital and 3D‐capable. Meanwhile America’s
market is stagnating. Takings in North America (America and Canada combined)
declined by 4% in 2011, to $10.2 billion. China’s box‐office revenues may overtake
America’s by 2020.

Brand Empires

Disney is not animation In today´s environment, mind share – how well the public
knows your brand and cares about it – often precedes market share. A brand that has
the trust and allegiance of the consumer and that puts forward a simple, direct “high
concept” idea, is positioned to survive in an increasingly crowded marketplace. To cut
through the daily clutter of messages and products, a brand needs to do more than
identify a product, it must give it a personality. By our allegiance to certain brands, we
say something about ourselves. Brands transcend particular products and carry with
them a whole cultural statement.

Entertainment companies, whose products are purely cultural, have long recognized
this trend and, acting on it, have not merely created strong brands; they have built
brand empires.  They have carved out pieces of our collective psyche that transcend
any single product. We have a relationship with these companies that disposes us to
accepting, or at least giving a courtesy look at, any product with their brand on it.
Disney doesn´t simply mean animated features or theme parks anymore: it means
family. Bloomberg is not just a terminal on a trader´s desk; it is instantaneous financial
news and analysis. The NBA isn´t about watching tall men put the ball in the basket
with a high degree of accuracy; it´s about a fast, urban, street lifestyle, whit all the glitz
and glamour of showbiz.

Through brands, consumers can gain entrance to a world that embodies a simple,
powerful idea: family, taste, money, or fun. The old definition of a brand carrying a
product´s attributes has become secondary to the way a brand makes a lifestyle


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statement. Consumption of a brand´s products empowers the consumer with the
qualities of the brand. The base principle remains the same: consume and become.

Entertainment franchises Consumers like the endorsement of a company name they
recognize, but the new offerings of the brand have to fill a need or supply a distinct
pleasure of their own. Entertainment brands have had to compete in an increasingly
crowded marketplace, where, though the pie keeps growing, the slices are getting
smaller as more products compete for audiences. It is no longer sufficient merely to
turn out a hit movie, television show, magazine, or book, because in many cases these
products cannot be profitable on their own. A hit must become a franchise and, in so
doing, become the hub from which a wide‐reaching variety of products emanates. Hits
and, even more so, phenomena, behave like brands. By occupying every available
niche in popular culture, hits become long‐lived, wide‐reaching brands.

Multiple revenue streams The choice is not whether or not a hit should be leveraged;
a hit product that doesn´t move out into the wider economy and cultural realm is
doomed to be a flash in the pan. For the period of time that The X‐Files occupied its
favored place in the cultural spectrum, it was as a real brand like many others. As a
television show, books, movies, a traveling road show, home videos, hats, t‐shirts, and
other merchandising, we watched a brand with revenues in excess of more than $1
billion. And what about Lara Croft? She wasn´t a TV show, she became by being a
heavily armed digital figure who was the main character in the Tomb Raider video
games. With millions games sold, several books, a best‐selling action figure, high‐
priced fashion gear, and films where she became Angelina Jolie, her revenues were
tremendous. Jurassic Park was a hit book, but Universal and Steven Spielberg built a
brand empire. Jurassic Park became a brand that meant dinosaurs. The big cultural
concept is that we are all fascinated by dinosaurs.

Granted, all this marketing and leveraging is a far cry from the primal entertainment
experience of sitting in a darkened room and watching a projected image, but
increasingly, without multiple revenue streams there would ultimately be no profit,
and no profit means no long‐term business.

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CONSUMER
BEHAVIOUR

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Consumer behaviour
Sources:
 Nuno Cintra Torres, “A Model to Improve Pay TV Subscriber and Viewer
Experience, The seamless integration of complex technologies, processes and
contents are the key to achieve customer satisfaction and improve loyalty”,
University of Liverpool, 2006
 The Economist, “The lazy medium, how people really watch television”, a
special report, April 29, 2010
 Michael J. Wolf, “The Entertainment Economy – How Mega‐Media Forces are
Transforming our Lives”, Three Rivers Press, New York, 1999

«Although life is full of constraints and disciplines, responsibilities and chores,
and a host of things disagreeable, entertainment, in contrast, encompasses activities
that people enjoy and look forward to doing, hearing, or seeing. This is the basis for
the demand for – or the consumption of entertainment of products and services».
Vogel (2001)

Experimental possession

Audiovisual entertainment: non‐goods services Audiovisual entertainment falls within
the experimental possession type of non‐goods services. In the case of pay TV, the
subscriber pays a monthly fee for the right to “experimental possession” of television
programming, a non‐goods service. When consumers go to the movies they “own” the
film for the performance’s duration. A (re)definion of services is provided by Judd
(1964):

 The right to possess and use a product (Rented Goods Services)
 The customer creation of, repair, or improvement of a product (Owned Goods
Services)
 No product element but rather an experience or what might be termed
experimental possession (Non‐Goods Services)

Intangibility Grönroos (1978) addresses the difficulty in developing a concrete,
tangible service offering because «the most important characteristic of a service is its
intangibility». In fact, the service concept is itself confusing: the customer does not
own anything when a service is purchased, but is only given the right to use. The lack

3

of ownership and transaction of ownership when dealing with services results from the
intangibility of services.

Service is all Some authors, like Chase et al. (1973‐2006), argue that the emerging
model is that every organization is, in fact, in the service business. Services encompass
manufacturing and the services provided to the firm’s internal customers.
Parasumaran et. al (1985) define three characteristics of services that must be
acknowledged for a full understanding of service quality.
 Intangibility: they are performances rather than objects
 Heterogeneity: their performance often varies from producer to producer, from
customer to customer, and from day to day; consistency of behaviour from
service personnel (i.e., uniform quality) is difficult to assure
 Inseparability: production and consumption of many services are inseparable

Expectations/performance According to Parasumaran et al. (1985) «quality is a
comparison between expectations and performance». Lewis and Booms (1983)
describe service quality as «a measure of how well the service level delivered matches
customer expectations. Delivering quality service means conforming to customer
expectations on a consistent basis». Other authors (Gronröos 1982) contend that
consumers compare the service they expect with perceptions of the service they
receive in evaluating service quality. Parasumaran et al. recall that much the same
reasoning was developed by Smith and Houston (1982) who claimed that satisfaction
with services is related to confirmation or disconfirmation of expectations.

Types of customer satisfaction Anderson et al. (1994) conceptualize customer
satisfaction as transaction‐specific or cumulative. From the behaviour transaction‐
specific perspective, it is viewed as a post‐choice evaluative judgment of a specific
purchase occasion. Cumulative satisfaction is an overall evaluation based on the total
purchase and consumption experience with a good or service over time. The
cumulative satisfaction is a more fundamental indicator of the firm’s past, current, and
future performance. In fact, these authors argue that «it is cumulative satisfaction that
motivates a firm’s investment in customer satisfaction».

Quality/Satisfaction conceptualisations A review by Johnson et al. (2002) of relevant
literature establishing the difference between quality and customer satisfaction
produced the following conceptualisations:
 Behaviour: Perceived quality is the consumer’s judgement about a product’s
overall excellence or superiority
 Marketing and economics: Quality as dependent on the level of product
attributes

4

 Operations management: Quality is defined as having two primary dimensions:
Fitness for use and Reliability
 Services: Quality is an overall assessment; service quality in this context is
believed to depend on gaps between delivered and desired service on certain
dimensions.

Price and value Often, in the absence of tangible evidence on which to evaluate
quality, consumers must depend on other cues. Price becomes a pivotal quality
indicator. However, some authors, like Rhodes (2001), consider that the new
consumer is not driven by price. It is just one early filter that may not be decisive.
Modern consumers demand better value for their money. Other product
characteristics then gain greater relevance and provide a basis for real differentiation
based on delivering emotional benefits. Marn et al. (2002) argue that marketers view
pricing in the context of determining the overall price premium that the product
deserves in the market place. Thus, these authors claim, «the primary force in play is
customer perception, or, more to the point, how customers weigh their product’s
benefits against a competitor’s offerings». In fact, when a supplier is better at meeting
the needs of a particular market segment, they become the preferred alternative for
which customers will pay some premium, as noted by Johnson et al. (2002). Some
authors, like Kotler and Anderson (1994), claim that «there is ample empirical support
for quality as an antecedent of customer satisfaction».

The “new consumer” The prevailing understanding today is that nobody owns the
customer, rather, the customer owns the firm. Customers no longer are seen just as
consumers. They are now also experience seekers. Furthermore, the customer is no
longer “king”. According to some, like McKinsey and Company (2006), at a time of
exigent customers, fragmenting segments, burgeoning products and services the
customer has become a tyrant. The nature of the consumer as the key protagonist was
highlighted by Braudillard (1971) in works like «The Consumer Society». According to
this view, from a production‐driven we’ve moved to a consumption‐led economy in
which value is created not at the point of value exchange but during consumption,
thereby defining not only the nature of what has to be produced but also the identity
of the consumer. The experience‐seeking consumer is an important notion according
to Holbrook and Hirschman (1982), quoted by Stuart‐Menteth, Wilson and Baker
(2006), who define the consumption experience as «a personal occurrence, often with
important emotional significance, founded on the interaction with stimuli which are
the products or services consumed».

5

These authors provide the following “new consumer” classifications based on several
authors:
 Cynical → Integrity
 Knowledgeable → Meaningfulness
 Time Constrained → Relevance
 Tribal → Tribal valida on
 Individual → Customisa on
 Demandingness → Excellence in Expecta on
 Active → Par cipa on

Design, deliver, develop To achieve an integrated consumer experience, Allen et al.
(2005) consider the adoption of three necessary steps, the “The Three D’s of Customer
Experience”:
 Design the right offers and experiences for the right customers
 Deliver these propositions by focusing the entire company on them with an
emphasis on cross‐functional collaboration
 Develop capabilities to repeatedly please customers by revamping the planning
process, training people in how to create new customer propositions, and
establishing direct accountability for the customer experience

A new differentiator In a world of commoditizing, customer experience is the new
differentiator. Shaw et al. (2002) reveal that 85 per cent of senior business leaders
agree that differentiating solely on the traditional physical elements such as price,
delivery, availability and lead times is no longer a sustainable business strategy. These
authors define customer experience as an interaction between an organization and a
customer. It is a blend of an organization’s physical performance, the senses
stimulated and emotions evoked, each intuitively measured against customer
expectations across all moments of contact. Five stages of customer experience can be
considered:
 Expectations setting: brand image, advertising, what people say, own
experience with similar company, own experience with similar markets, own
imagination
 Pre‐purchase interactions: information gathering, environment and local
assessment
 Purchase interactions: starts with decision to buy, the heart of customer
experience
 Product or service consumption: may occur in minutes or in years
 Post‐experience review: Intuitive review of performance against expectations

6

The experience value chain To address the introduction of an organizational culture
and process for consistently delivering superior customer experiences, Forrester
proposes that firms develop what it calls the Customer Experience Value Chain (CxVC)
that combines two major components:
 Customer‐centric DNA, consisting of two elements:

 Customer familiarity, to design a persona, a composite description of real
people who represent a primary customer segment
 Organizational engagement to create the change necessary across the
company and to engage in companywide efforts that demonstrate a clear
commitment to serving customer needs
 Experience design process, to enable interactions that connect emotionally with
target customers at key moments
 Define interaction personality to bridge the chasm that exists between
marketing messages and the interactive experiences delivered by the rest of
the firm
 Identify high‐impact moments, companies need to identify which interactions
have the largest impact on users
 Enable the experience by creating a feeling of excitement
 Measure and refine

The experience economy Experiences provide sensory, emotional, cognitive,
behavioural and relational values that replace functional values, leading to what Pine
and Gilmore (1998) define as the “experience economy”. The implications of this
experience‐seeking consumer reinforces the necessity of a coordinated or integrated
set of actions, including brand communication and delivery, to highlight what is unique
about the product.
These are considered the primary tools for building emotional ties.
Furthermore, as argued by Coyles et al. (2005), the importance of emotion is relevant
in the context of loyalty, because, of three basic customer attitudes – emotive, inertial,
and deliberative – emotive customers are the most loyal. Feeling strongly that their
current purchases are right for them and that their chosen product is the best, emotive
customers, rarely reassess purchasing decisions. Deliberative and inertial customers
represent, on average, more than half the total. But the Coyles et al. study argues that,
although emotionally loyal customers often constitute a relatively small segment,
«building emotional ties should be a long‐term goal for most companies». Emotionally
loyal customers are the most valuable because of their higher spending and lower rate
of downward migration.

7

Emotions lead to loyalty Loyalty is an emotion that addresses the fundamental human
need of belonging – to a family, a tribe, a social group, argue Shaw et al. This feeling
provides a sense of security because people like to be loyal to winners as a result of
the association with success it brings. Reichheld (2006) considers emotions as one of
the two conditions necessary for customers to make a personal referral. Not only they
must believe that the company offers superior value (price, features, quality,
functionality, ease of use, and all the other practical factors), but they also must feel
good about their relationship with the company. On the first dimension, a company is
engaging the customer’s head. On the second, it is engaging the heart.

Promoters, passives, detractors The business goal isn’t merely to delight customers
but to turn them into promoters, argues Reichheld (2006). These customers are loyal
enthusiasts who keep buying from a company and urge their friends to do the same.
They account for 80 per cent of the referrals. Passives are satisfied but unenthusiastic
customers who can be easily wooed by the competition. Referrals are 50 per cent
lower than those from promoters. For the average firm, more than two thirds of
customers are passives, bored, or detractors. The latter are unhappy, angry customers
trapped in a bad relationship. Together they account for 80 per cent or more of
negative word‐of‐mouth comments. In The Ultimate Question (2006) Reichheld
proposes asking “How likely is it that you would recommend this company to a friend
or colleague?” and correlate it to the number of years the customer has been with the
firm. The equation will provide a reliable customer satisfaction score. This single
question purportedly allows companies to track promoters and detractors, producing a
clear measure of an organization’s performance through its customers’ eyes — the Net
Promoter® Score.

Segmentation, malleability and collaboration Today, different customers want to do
business differently, and being profitable means having the capabilities that allow for
malleability. The key is to understand that a value proposition is not merely a product
or service; it includes the entire customer experience. The psychographic and
behavioural variables are particularly relevant to provide the data necessary to target
each segment by a different and appropriate experiential marketing mix. To create
unique customer experiences for selected segments or to respond quickly to shifts in a
segment's value becomes the objective. But most companies lack the planning systems
necessary to establish the pertinent roles and processes, argue Collins et al. (2006).
Understanding and acting on segment‐ or customer‐level information often requires
collaboration among a number of functions that interact with customers across the
organization, something that may prove to be difficult to achieve. In fact, according to
Temkin (2004), only 24 per cent of American firms have a single person responsible for
customer experience.

8

The emotional consumer of the emotive industry Audiovisuals operate in a strongly
motivated emotional environment. During the last decades TV and pay TV became
central to the way of life of hundreds of millions of persons. Furthermore, the pay TV
subscriber is a multifaceted persona: as a passive viewer, as an active participant, as a
user of technologies, as a paying customer of a subscription service, as an individual, as
a family member, as a member of an interest group.

The E‐factor The means of distributing television are now ubiquitous. «It's TV that
people want, however it is delivered», writes journalist Chris Forrester (2006).
However, just as any other industry, television is not entertaining per se. It is
entertainment that must remain entertaining in order to capture audiences and
subscribers, an ever more complex congregation. Companies need to provide
entertainment experiences that engage the consumers, what Wolf (1999) calls the E‐
Factor, that is, entertainment contents and experiences. The personalization of the
contents, either via the internet or the DVR, should provide a tool to differentiate, at
least temporarily. But the most effective instrument to improve loyalty should reside
in service personalization, according to Ball et al. (2006) who studied its effects in the
banking sector. The authors argue that personalized services may encourage the
customer to believe that the firm is benevolent, increasing trust, which is an
antecedent of loyalty. The extra effort involved in personalization may thus be
attributed to benevolent motives to the firm. Besides, the consumers show a tendency
to view personalized services as difficult to replace with another provider. In fact,
while service differentiation is hard to copy, price differentiation is short lived and
product differentiation is quickly copied.

Passives and anytime, anywhere consumers IBM (2006) argues that the television
market evolution hinges on two key market drivers: openness of access channels and
levels of consumer involvement with media. In the near future, there will be a
coexistence of two types of users with disparate channel requirements. The IBM study
“The End of Television as We Know It” argues that while one consumer segment
remains largely passive in the living room, the other will force radical change in
business models in a search for anytime, anywhere content through multiple channels.
The tech‐ and fashion‐forward consumer segment will lead us to a world of platform‐
agnostic content, fluid mobility of media experiences, individualized pricing schemes
and an end to the traditional concept of release windows. With the advent of video‐
on‐demand and the possibility to personalize the consumption of television through
the DVR, the TV channel is now being remodelled around the concept of the channel‐
as‐show window of a main brand supported by several sub‐ and sub‐sub‐brands. These
brands are no longer confined to a specific medium.

9

High involvement Cinema and television can be classified as high‐involvement
categories, according to the Fishbein and Ajzen theory of reasoned action for
predicting purchase behaviour, cited by Jobber (2004). The theory postulates that
«consumers are highly involved in the purchase to the extent that they evaluate the
consequence of the purchase and what others will think about it».
The decision to
subscribe is in general taken within the family. Applying the Blackwell, Miniard and
Engel (2006) five roles in the purchase decision‐making process (initiator, influencer,
decider, buyer, user), the home is the buying centre, dominated by the mother, who is
in general the final decider, with the husband acting as buyer and, together with the
children, as initiator and influencer and the whole family is the user.

The central role of the family and of family centred entertainment has been reinforced
in recent years. Forrester research by Charron et al. (2006), from 1998 to 2003,
revealed that family and entertainment motivations jumped in 2000. American
consumers are more likely to agree with the statements “Family is the most important
thing in my life” and “I am always looking for ways to entertain myself” than with
career motivations. Three years later the trend continued. The September 11, 2001
terrorist attacks led many consumers to re‐evaluate their priorities, pledging to focus
more on family and friends.

Television, still the ultimate unifier

The lure of the sofa A change in expectations is not quite the same as a change in
behaviour. Although It may seem dated, but the image of the family clustered around
the living‐room set is an accurate depiction of how most people watch television in
most countries. Live television is not just the most popular way of watching video; it
also influences the way people watch shows on all devices. It is easier than ever to
watch programmes at a time and on a device of one’s choosing, and people expect to
be able to do so, nearly all TV is nonetheless watched live on a television set. Even in
British homes with a Sky+ box, which allows for easy recording of programmes, almost
85 per cent of television shows are viewed at the time the broadcasters see fit to air
them.
“People want to watch ‘Pop Idol’ when everyone else is watching it,” says Mike Darcey
of BSkyB. If that is not possible, they watch it as soon as they can afterwards. Some
60% of all shows recorded on Sky+ boxes are viewed within a day. Often the delay is
only a few minutes—just enough to finish the washing up or to make a phone call.

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11

study found that broadly, any example that had been previously broadcast via a linear
TV schedule was thought to be “TV‐like”. The example of Dr Who shown via Virgin
Media on a TV platform was consistently regarded as the most “TV‐like” of the
examples shown. In contrast, the examples of user‐generated content on the YouTube
website and a promotional video located on the Audi TV website were considered the
least “TV‐like”.

Anyone can become a professional publisher of video content Migration of
advertising brand spend to online video and changing conceptions of audience result in
a fundamental change to advertisers: The ability to convey audio‐visual brand
narratives is not confined to the linear broadcast environment anymore, but
decoupled from a single media platform in an age of IP‐delivered content. The old
industry wisdom that ‘TV is the worst form of advertising except all others that have
been tried’ may still hold true today, but the nature of what constitutes TV is changing.
The age of IP‐delivered video also is an age of reduced access barriers. Broadcasters
will face new entrants as the dissemination of professional video content is
democratized. Not only are traditional print publishers ramping up their stake in online
video (competing with the digital assets of news broadcasters, amongst others), but
potentially anyone can now become a publisher of professional video content.

The fragmentation of free time

Hedonomics Culture, demography, and technology are all pushing us towards one
goal: extracting the last drop of fun out of every experience. First, demography. After
years of workaholism, there is a generation that is now returning to its hedonistic, fun‐
seeking roots. Wolf (1999) calls hedonomics the science of understanding the fun‐
focused consumer. Nowadays, approximately 20 per cent of European are 62 or older.
Not only this “grey market” is growing and living longer, but have large amounts of
discretionary income, since they typically have paid off their mortgage and have no
longer the expense of raising and educating children (Solomon, 2010). They have
made their major life purchases already.

The demand for leisure goods and services can also be significantly affected by
changes in the relative growth of different age. Age can affect demand and
demographic factors are very important. For instance, teenagers tend to be important
purchasers of recorded music; people under the age of 30 are the most avid
moviegoers. As this generation matures past its years of family formation and into

12

years of peak earnings power and then retirement, spending may be naturally
expected to collectively shift to areas as casinos, cultural events, and tourism and
travel, and away from areas that are usually of the greatest interest to people in their
teens or early twenties. This is part of a larger cultural shift in the perception of time:
how we conceptualize it, commoditize it, quantify it, and deal with it.

A multitasking generation Whereas the older generations grew up with television, the
actual new generations are growing up with television, computer, smart phones, the
internet, the Facebook, etc. Young people become acculturated and socialized through
the internet, or at least entertainment content, on their computers. Eyeballs glued to a
screen are audiences; where there are audiences, there is advertising; and where there
is advertising, there is commerce. As children of the media, actually multimedia, this
generation more than any other has learned to multitask, its media experience. In the
same way that their computers can be opened to multiple applications, today´s young
consumers can be watching something on TV, have a CD playing in the background,
texting in a smart phone, and be surfing the Net. While it is true that all young
consumers still have the same number of hours in the day that their parents, they are
learning to divide them up in new ways. Furthermore, as entertainment content
becomes more and more integral to none entertainment business, time is
paradigmatically of the essence.

Paying for free time Nowadays, it seems that there´s not enough time to do things.
Even though we have the same hours per week, we feel busier, with less time. This
subjective reality is the basis of the push for more entertainment product. For a
minute, five minutes, two days, whatever time is allotted, it help us escape from the
pressures of the daily grind.
Consumers are willing to spend money to gain free time. Once people start buying
time with money, they are going to demand more intense, more concentrated, more
satisfying returns on their entertainment investment. Entertainment can be seen as
commercial leisure time. All consumers need to buy food. We want to buy
entertainment, so we make our entertainment choices on the basis of how they excite
our desires. Furthermore, modern life creates emotional needs that the marketplace
can best help assuage through entertainment or entertainment‐enhanced products.
Fulfilling our wants and desires has become an emotional necessity. Are people more
emotionally needy than they were in the past? Probably not. What is true is that
modern life has piled on a number of emotional stress factors that have, in recent
decades, reached a cultural critical mass and, in doing so, have rewritten the rules of
the economy.

13

Reorientation of leisure patterns Fundamental to this is the notion that society´s
concept of time has changed. The pressure of work, family, social obligations, etc. have
forced us to compartmentalize our lives into a series of highly segmented boxes of
time. So we turn to entertainment to fill those boxes, the unscheduled portions of our
day. This societal change and all the technological innovations have fuelled the growth
of the entertainment industry.

Time fragmentation and the resulting reorientation of leisure patterns are leading
consumers to choose recreation that can be enjoyed intermittently. In the past, leisure
time meant big blocks of free time, free in the sense that you could choose to do it for
an extended period of time and free in the sense that it cost nothing, or next to
nothing. You could work in the garden, go bird‐watching, catch a fish, read a book.
Enjoying leisure did not mean paying every time you did something. That has changed.
As time has become segmented and broken into variable‐length blocks, it has become
commoditized.

The entertainment marketplace allows us to recapture some of the pleasure
associated with free time by offering fun in big and small doses, as stand‐alone fun, or
as part of a more utilitarian activity, and it charges us as it does so. Furthermore, once
people get used to treating the enjoyment of free time as a commodity, not only will
they spend their money on video games, movies, theme parks, and so on; Formerly
low‐cost or no‐cost activities such as gardening, flower arranging, or riding a bicycle
now come with an attendant range of goods and services that you pay for: do‐it‐
yourself kits, rose‐pruning lessons, bicycle tours, cooking schools, etc.

A shift to quality People are compressing fun into more concentrated doses whether
short vacations or short internet sessions. Furthermore, they are showing a willingness
to spend money to ensure that those concentrated doses are of the highest quality.
Increasingly, consumers must plan their free time. Not only a bad movie perceived as a
waste of time, it also represents a major opportunity cost in terms of other fun one
might have had. The value of each leisure moment is increasing, and with it the
consumer´s demand that time spent be high‐quality time.

These shifts in consumer behavior are responsible for the tremendous glut of
information and products vying for our attention. Businesses now understand that
consumers are seeking out fun and engagement in just about every buying decision
and, furthermore, that they are seeking guidance in finding the products that meet
their needs most enjoyably. The result is more products clamoring for their attention,
more advertising touting those products, more internet pages. It´s hard to know which
way to turn or how to focus on anything long enough to make an informed decision.

14

Diffusion of innovations
Innovation is an idea, practice, or object that is perceived as new by an individual or
unit of adoption. Everett Rogers formulated an explanation of the process by which
innovations are adopted and implemented within a society. Diffusion is the process in
which an innovation is communicated through certain channels over time among the
members of a social system. This type of communication is concerned with new ideas.
This involves uncertainty, information that seeks to reduce the uncertainty, and social
change. He proposed that the characteristics of an innovation, as perceived by
members of a society, determine its rate of adoption. The five attributes of an
innovation are: (1) relative advantage, (2) compatibility, (3) complexity, (4) reliability,
and (5) observability.

The identification and courting of potential early adopters is essential to the overall
marketing strategy for any new consumer product or service. Early adopters are the
people who enjoy being first on the block with a new gadget, perceive immediate uses
for something new, and are willing to take risks. They have a high degree of tolerance
for initial limitations and inconveniences, provided that the innovation imparts some
measure of status, respect, or attention. Early adopters convince the opinion leaders in
their companies, institutions, or communities to adopt an innovation through word‐of‐
mouth evangelizing. The opinion leaders, in turn, convince those in their interpersonal
networks to become adopters. All diffusion curves for new ideas are S‐shaped, with
the rate of adoption accelerating rapidly when a product or service has diffused into 10
to 25 percent of its potential market.

15

Bridges of familiarity Modern forms of communication media have demonstrated
similar patterns. Photography was readily adopted because it was based on familiar
ways of seeing and of representing vision.  More creative uses had to wait until the
bridge of familiarity had been crossed. Silent films owed their quick acceptance to
familiarity with photography and vaudeville shows. The recording of images and
mechanical music boxes provided the familiar bridges for the phonograph and
recorded sound. Radio and audio recordings, in turn, provided the connections for
rapid acceptance of the "talkies". Television was anticipated and quickly accepted as
radio with moving pictures.

Complex, adaptive systems Over time, each new form of communication has evolved
from its origins as a recognizable extension of an earlier form into a distinct form all its
own. This continuum of transformations and adaptations is actually a complex process
comparable in  many ways to the evolution of species. Successful forms of new media,
just as new species, do not emerge spontaneously from nowhere. They have all
required links with the past. Scientists studied the behavior of complex systems and
discovered that the richness of the interactions that occur within living systems allows
them to undergo spontaneous self‐organization in response to changing conditions.
Complex systems are adaptive in that they don't just passively respond to events the
way a rock might roll around in an earthquake. They actively try to turn whatever
happens to their advantage.
By recognizing that the human communication system is, in fact, a complex, adaptive
system, we can see that all forms of media live in a dynamic, interdependent universe.
When external pressures are applied and new innovations are introduced, each form
of communication is affected by an intrinsic self‐organizing process that spontaneously
occurs within the system. Just as species evolve for better survival in a changing
environment, so do forms of communication and established media enterprises.

Supervening social necessities Social, political, and economic forces play powerful
roles in the development of new technologies. Inventions and innovation are not
widely adopted on the merits of a technology alone. There must always be an
opportunity as well as a motivating social, political, or economic reason for a new
technology to be developed. The accelerators that push the development of new
media technologies are supervening social necessities, the interfaces between society
and technology. They derive from the needs of companies, requirements of other
technologies, regulatory or legal actions, and general social forces. On the other hand,
the law of suppression of radical potential applies the brakes that slow the disruptive
impact of a new technology upon the social or corporate status quo. Brakes arise from
the same four broad categories identified with supervening social necessity.

16

Convergence In 1979, when Nicholas Negroponte began popularizing the concept of
convergence few people had any comprehension of the notion. Audiences were often
astonished by Negroponte's revelation that all communication technologies are
suffering a joint metamorphosis, which can only be understood properly if treated as a
single subject. He drew three overlapping circles labeled "broadcast and motion
picture industry," "computer industry," and "print and publishing industry". Since then,
the notion that these industries are coming together to create new forms of
communication has shaped much of the thinking about the future of mass media and
human communications.

1

CLUSTERS &
ENTREPRENEURIAL
ECOSYSTEMS

2

Entrepreneurial ecosystems
Sources:
 Michael Porter, “Clusters and the New Economics of Competition”, Harvard Business
Review, 1998
 Marco Ansiti and Roy Levin, “Strategy as ecology”, Harvard Business Review, 2004
 Richard Florida, “Who’s Your City? How the Creative Economy Is Making Where to Live
the Most Important Decision of Your Life”, Basic Books, 2008
 Martin Prosperity Institute, “Creative Potential, Straddling Two Mega Regions”, Rotman
School of Management, University of Toronto, 2010
http//martinprosperity.org/media/Southwestern_Ontario_Report.pdf
 Ivan Turok, “Cities, Clusters and Creative Industries: The Case of Film and Television in
Scotland”, European Planning Studies, Vol. 11, No. 5, July 2003, Carfax Publishing
http://nknu.pbworks.com/f/Cities,%2BClusters%2Band%2BCreative%2BIndustries.pdf
 Christina Kukenshoner et. Al, “Bollywood – Maharashtra and India’s Film Cluster”, 2008

Clusters

What Is a Cluster? Clusters are geographic concentrations of interconnected companies and
institutions in a particular field. Clusters encompass an array of linked industries and other entities
important to competition. They include, for example, suppliers of specialized inputs such as
components, machinery, and services, and providers of specialized infrastructure. Clusters also
often extend downstream to channels and customers and laterally to manufacturers of
complementary products and to companies in industries related by skills, technologies, or
common inputs. Finally, many clusters include governmental and other institutions – such as
universities, standards‐setting agencies, think tanks, vocational training providers, and trade
associations – that provide specialized training, education, information, research, and technical
support.

Why Clusters Are Critical to Competition Modern competition depends on productivity, not on
access to inputs or the scale of individual enterprises. Productivity rests on how companies
compete, not on the particular fields they compete in. Clusters affect competition in three broad
ways: first, by increasing the productivity of companies based in the area; second, by driving the
direction and pace of innovation, which underpins future productivity growth; and third, by
stimulating the formation of new businesses, which expands and strengthens the cluster itself. A
cluster allows each member to benefit as if it had greater scale or as if it had joined with others
formally – without requiring it to sacrifice its flexibility.

3

Clusters and Innovation In addition to enhancing productivity, clusters play a vital role in a
company’s ongoing ability to innovate. Some of the same characteristics that enhance current
productivity have an even more dramatic effect on innovation and productivity growth. Because
sophisticated buyers are often part of a cluster, companies inside clusters usually have a better
window on the market than isolated competitors do. Computer companies based in Silicon Valley
and Austin, Texas, for example, plug into customer needs and trends with a speed difficult to
match by companies located elsewhere. The ongoing relationships with other entities within the
cluster also help companies to learn early about evolving technology, component and machinery
availability, service and marketing concepts, and so on. Such learning is facilitated by the ease of
making site visits and frequent face‐to‐face contact. Clusters do more than make opportunities for
innovation more visible. They also provide the capacity and the flexibility to act rapidly. A company
within a cluster often can source what it needs to implement innovations more quickly. Local
suppliers and partners can and do get closely involved in the innovation process, thus ensuring a
better match with customers’ requirements.

Clusters and New Business Formation It is not surprising, then, that many new companies grow
up within an existing cluster rather than at isolated locations. New suppliers, for example,
proliferate within a cluster because a concentrated customer base lowers their risks and makes it
easier for them to spot market opportunities. Moreover, because developed clusters comprise
related industries that normally draw on common or very similar inputs, suppliers enjoy expanded
opportunities. Clusters are conducive to new business formation for a variety of reasons.
Individuals working within a cluster can more easily perceive gaps in products or services around
which they can build businesses. Beyond that, barriers to entry are lower than elsewhere. Needed
assets, skills, inputs, and staff are often readily available at the cluster location, waiting to be
assembled into a new enterprise.

Regions with clusters are innovative leaders The basic coherence between cluster existence and
economic advantages can be derived from the “Redbook” by the European Cluster Observatory:
“Today, there is substantial evidence that suggests that innovation and economic growth is heavily
geographically concentrated. Clusters provide an environment that is conducive to innovation and
knowledge creation. Regions with strong cluster portfolios are innovative leaders, while regions
with no clusters or isolated research facilities fall behind.” The cluster policy has to address all
clusters and has therefore a national, international and sectoral focus.

EUROPEA

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