When examining the modern theory of the information economy, the insights articulated by Carl Shapiro, an economics professor at the University of California, Berkeley, and Hal Varian, now chief economist at Google, in their 1998 publication Information Rules: A Strategic Guide to the Network Economy, remain remarkably prescient. Their profound yet straightforward argument, that “Technology changes. Economic laws do not,” continues to mirror a fundamental truth that underpins today’s digital landscape (Shapiro & Varian, 1998).

While the underlying economic laws are constant, the operational fundamentals of an information business diverge significantly from those of most traditional enterprises. For instance, the cost of producing a single sandwich remains relatively consistent, per unit, whether one makes one or a thousand. Information, however, operates on a different cost structure. Consider a piece of software, a streaming movie, or an online news article: the initial costs for research, development, content creation, and platform infrastructure far exceed the negligible marginal costs of producing and distributing each additional copy. This characteristic of high first costs and near-zero marginal costs contributes heavily to the potential for large corporations to achieve immense market dominance. The confluence of these two cost dynamics creates a robust economy of scale, inherently favoring larger competitors who can leverage their initial investment across a vast user base.

Furthermore, economists refer to information as an experience good, meaning that consumers must directly engage with the product or service to ascertain its value fully. This presents a unique challenge: how can individuals truly know, for example, that a movie features high-quality acting and an engaging plot before they have watched it? As discussed before, branding is a crucial solution to this dilemma. While judging a movie before viewing it may not seem very easy, a consumer’s perception of its value is significantly enhanced by knowing a renowned director made it or features popular performers. Marketers adeptly use movie trailers, extensive press coverage, social media buzz, influencer reviews, and personalized recommendations on streaming platforms to communicate this branding message, hoping to persuade audiences to engage with the films they promote.

Audiences and businesses alike heavily consider the associated switching costs when evaluating the value of information technology. When economists analyze switching costs, they account for the difference in the total cost of transitioning from one technology or platform to another. If this difference—which for information technology can include the effort and expense of migrating all relevant data, learning new interfaces, or losing established network effects—is less than the perceived benefits of the new system, then switching makes economic sense. A classic example involves the shift in music consumption: many people moved their music collections from vinyl LPs to compact discs starting in the 1980s. For consumers to switch systems, which involved purchasing a CD player and stereo equipment, they also faced the significant task of rebuilding their entire music collection in the new format. Fortunately for the CD player, the substantial increase in convenience and audio quality motivated a mass consumer migration. However, as anyone who frequents thrift stores or garage sales can attest, those older technologies often persist, and the enduring appeal of the media compelled some people to keep them around, especially given the modern resurgence of vinyl, which now, in fact, outsells CDs in some markets. In contemporary terms, similar switching costs are evident when users consider moving between cloud storage providers, operating systems, or even deeply integrated social media platforms, where the effort of transferring digital assets and social connections can be a considerable deterrent.

Regulation of the Information Economy

When examining the modern information economy, a basic understanding of the interaction between government and media over time provides an essential breakdown of the system. Public policy and governmental intervention often add layers of complexity to information economics, but for compelling reasons. Unlike typical goods and services, the information economy has many significant side effects, or externalities. For example, while the consequences of one hamburger chain outcompeting or acquiring all other hamburger chains would certainly be drastic for hamburger enthusiasts, it would not be altogether disastrous; having only one type of hamburger harms few people, and the public would still have many other fast-food options. On the contrary, the consequences of monopolization by a single media company could cause profound damage. Because widely distributed information can directly influence public policy and public opinion, those in charge of the government have a vested interest in ensuring its fair distribution and preventing undue concentration of power.

The Federal Communications Commission (FCC) is the primary body enforcing the regulation of media in America. Established by the Communications Act of 1934, the FCC is charged with “regulating interstate and international communications” across nearly every medium, including radio, television, wire, satellite, and cable, with the notable exception of print. The FCC aims to maintain a nonpartisan, or at least bipartisan, outlook, with a maximum of three of its five commissioners belonging to the same political party. While the FCC controls many crucial aspects of communication—such as ensuring electronic devices do not emit radio waves that interfere with other essential tools—some of its most important and contentious responsibilities relate directly to the media landscape.

As the guardian of the public interest, the FCC consistently advocates for more competition among media companies. For instance, in the contemporary digital age, concerns often revolve around the power of major broadband providers and streaming platforms. The public good is not served if consumers lose their ability to choose when a service provider restricts access only to content that the provider owns, especially if the consumer has no other viable options. In other words, actions serving to protect the public good do not show concern with the result of competition, but rather with its process. The FCC protects consumers’ ability to choose from a wide variety of media products, and the competition among media producers hopefully results in better products for consumers because the FCC enforces and regulates policies that provide fair circumstances for all content to succeed and reach audiences. This includes ongoing debates and potential regulatory actions concerning issues like net neutrality, ensuring open access to internet content, and scrutinizing large mergers that could significantly reduce consumer choice or stifle innovation in the evolving digital media ecosystem.

A Brief History of Antitrust Legislation

The government employs antitrust legislation to maintain healthy competition in the information marketplace. The seminal Sherman Antitrust Act of 1890 helped establish modern U.S. antitrust law. Although initially intended to dissolve the monopolistic enterprises of late-19th-century industrialists such as Andrew Carnegie and John D. Rockefeller, the law’s basic principles have consistently applied to media and technology companies throughout history and into the present day. The antitrust enforcement framework has also evolved since the original Sherman Act. At the same time, the Office of the Attorney General initially brought antitrust lawsuits after the act’s passage; this responsibility shifted to its own dedicated Antitrust Division within the Department of Justice in 1933 under President Franklin D. Roosevelt.

The Sherman Antitrust Act of 1890 outlined many propositions and goals that legislators deemed necessary to foster a competitive marketplace. For example, Section 2 of the act states that “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States…shall be deemed guilty of a felony.” This establishment of monopolization as a felony significantly altered the status quo; before, free-market capitalism faced little to no explicit punishment for actions deemed detrimental to the public good, making the Sherman Antitrust Act an early proponent of the welfare of people at large by seeking to ensure fair market conditions.

Two additional pieces of legislation, the Clayton Antitrust Act of 1914 and the Celler-Kefauver Act of 1950, refined the Sherman Antitrust Act to make the system of antitrust enforcement work more effectively. For instance, the Clayton Act makes it unlawful for one company to “acquire…the whole or any part of the stock” of another company when the result would substantially lessen competition or tend to create a monopoly. More than just breaking up existing trusts, the Clayton Act thus seeks to prevent anticompetitive practices before they fully take hold. The Celler-Kefauver Act further strengthened antitrust legislation by making it more difficult for corporations to circumvent these rules. Concurrently, the Clayton Act allowed the government to regulate the purchase of a competitor’s stock, and the Celler-Kefauver Act extended this oversight to include the acquisition of a competitor’s assets, thereby closing a significant loophole and providing regulators with more comprehensive tools to address potential monopolistic behavior in all its forms. These foundational laws continue to be the basis for current antitrust challenges against dominant firms in the digital economy.

Deregulation and the Telecommunications Act of 1996

Although the government in the early part of the 20th century broke up trusts and kept monopolies in check, the media industry, particularly in the latter part of the century, still progressed steadily toward conglomeration, where companies join together to form larger, more diversified corporations. Widespread deregulation, the removal of legal regulations on an industry, took place during the 1980s, primarily driven by free-market economists who argued that it would foster more competition in the information marketplace. However, possibly due in large part to the media economy’s inherent focus on economies of scale, this often did not occur in practice. Companies became increasingly conglomerated, with corporations like the predecessors to today’s major media and telecom entities growing significantly.

The Telecommunications Act of 1996 is widely considered a pivotal moment that accelerated this trend of media consolidation. Although touted as a way to let “any communications business compete in any market against any other” and to foster competition, this act, in practice, significantly relaxed media ownership rules, leading to an unprecedented wave of mergers and acquisitions across radio, television, and telephone industries (Federal Communications Commission, 2008). For example, within five years of the Act, the number of radio station owners drastically declined, even as the total number of stations increased, leading to concerns about homogenized content and reduced local programming.

Since 2010, the long-term effects of the Telecommunications Act of 1996 continue to be debated and analyzed, especially in the context of the rapidly evolving digital economy. While the Act did spur investment in infrastructure and the rollout of new services, critics argue it contributed to a less diverse media landscape and concentrated power in the hands of a few large conglomerates. The rise of internet-based services and streaming platforms has introduced new forms of competition. Still, it has also led to new forms of market concentration, with tech giants now holding significant sway over information distribution. Modern discussions around media regulation often revisit the legacy of the 1996 Act, examining how its principles apply to issues like net neutrality, data privacy, and the market dominance of platforms that control both content and distribution. Regulatory bodies, including the Federal Communications Commission, continually review media ownership rules in an attempt to adapt to the digital age, balancing the goals of fostering innovation and competition with the public interest in diverse and accessible information.

Media Conglomerates and Vertical Integration

The extension of corporate abilities to vertically integrate, primarily facilitated by the Telecommunications Act of 1996, acted as a primary driving factor behind this increased conglomeration. Vertical integration has proven particularly useful for media companies due to their high fixed costs and low marginal costs. For example, a television company that both produces and distributes content can run the same program on two different channels for nearly the same price as only broadcasting it on one. Because of the localized nature of broadcast media, two broadcast television channels will likely reach different geographical areas. This results in cost savings for the company, but also somewhat decreases local diversity in media broadcasting.

The Telecommunications Act of 1996 made some changes in authority for these local markets. For instance, Section 253 outlines that no state may prohibit “the ability of any entity to provide any interstate or intrastate telecommunications service (Federal Communications Commission, 1996).” Thus, since state and local governments cannot prohibit any company from entering into a marketplace, this imposes checks on the amount of the local market that any one company can reach. In addition, the Telecommunications Act initially capped the share of the U.S. television audience for any one company at 35 percent. However, this national cap was subsequently increased to 39 percent. Furthermore, the passage of additional legislation and FCC rulings has allowed for more flexibility in local market ownership, including permitting a single entity to own more than one television station in a single market, which has indeed diluted the effect of some initial rulings aimed at limiting concentration.

Despite the fragmentation of audiences across numerous streaming services and digital platforms, traditional broadcast networks like CBS, NBC, and ABC may be declining in popularity, but they “still offer the only means of reaching a genuinely mass television audience” in the country (Doyle, 2002). While their viewership numbers may have declined from their peak, these networks continue to offer a means of reaching a genuinely mass television audience in the country, particularly for live events, national news, and major sporting events. This enduring reach, combined with the relaxed ownership rules, allows vertically integrated media conglomerates to leverage their content across both traditional broadcast and newer digital distribution channels, maximizing their economies of scale and maintaining substantial influence in the contemporary media landscape.

Corporate Advantages of Vertical Integration

In the contemporary media landscape, major players like Disney exemplify the power of extensive vertical integration, utilizing both administrative and content integration. Administrative integration refers to the potential for divisions of a single company to share the same higher-level management structure, leading to increased operational efficiency. For example, Disney manages vast enterprises like theme parks and movie studios. At the same time, these two industries may not have obvious content connections, but both function as large, multinational ventures. Placing these diverse divisions under a single corporate umbrella allows them to share structural similarities, accounting practices, and other administrative resources that are helpful across various industries.

Content integration, a particularly crucial practice for media companies, refers to their ability to leverage duplicate content across multiple platforms and business units. Disney’s theme parks, for instance, would lose much of their charm and meaning without iconic characters like Mickey Mouse or Cinderella’s castle; the synergistic integration of Disney’s theme parks with its animated characters and stories proves immensely profitable for both. Behind the scenes, Disney reaps excellent benefits from its consolidation. For example, Disney can release a major film through Walt Disney Studios, then immediately promote its stars and content on news programs airing on Disney-owned broadcast television network ABC, or feature exclusive sneak peeks on its ESPN channels. A prime illustration of this synergy is the promotion of major film franchises like Star Wars or the Marvel Cinematic Universe. For instance, trailers for films such as Star Wars: The Last Jedi or Avengers: Infinity War have famously debuted during high-profile broadcasts of Monday Night Football on ESPN, reaching a massive and engaged audience directly within Disney’s ecosystem. Beyond just the ABC broadcast network and ESPN, Disney also utilizes its extensive portfolio of cable channels (e.g., Disney Channel, FX, National Geographic) and, crucially, its direct-to-consumer streaming services like Disney+ and Hulu, to directly market its movies and products to targeted demographics. Unlike a competitor that might not wish to promote Disney’s films, Disney’s ownership of numerous different media outlets and platforms allows it to single-handedly reach a vast and diverse audience, creating unparalleled promotional opportunities and reinforcing its brand across a wide array of consumer touchpoints.

Ethical Issues of Vertical Integration

However, this high level of vertical integration raises several ethical concerns. In the context of a media conglomerate, for example, there is a potential for perceived or actual influence over editorial content. A company like Disney, which owns both production studios and numerous distribution outlets, including broadcast networks, cable channels, and streaming services, could prioritize or promote its own studio movies or series across its various platforms. This creates a potential for a conflict of interest, where journalistic independence or objective content curation might be compromised to serve corporate business goals. Therefore, this potential for misused trust and skewed information could subtly, or overtly, influence audiences.

In many ways, the extensive consolidation of media companies often occurs behind the scenes, with varying levels of consumer awareness regarding the full scope of their vertically integrated holdings. While some consumers may not track every corporate acquisition, public discourse around the power of large technology and media companies has increased, particularly with the rise of direct-to-consumer streaming services that aggregate content from various owned subsidiaries. This direct branding of content under a single corporate umbrella (e.g., Disney+ featuring content from Disney, Pixar, Marvel, Star Wars, and National Geographic) makes the extent of vertical integration more apparent than in previous eras. Of course, this rule of subtle integration has had its exceptions; the NBC sitcom 30 Rock famously and frequently delved into the comedic troubles of running a satirical sketch-comedy show (a parody of NBC’s Saturday Night Live) under the ownership of General Electric (GE), which was NBC’s real-life owner at the time. Today, NBCUniversal is fully owned by Comcast, demonstrating the continued evolution of these massive media structures. The ethical challenge persists in ensuring that the pursuit of synergistic corporate advantages does not inadvertently lead to a narrowing of diverse viewpoints or a blurring of lines between independent journalism and corporate promotion.

The Issues of the Internet

Although many media companies have grown into larger businesses than ever before through consolidation, many have nevertheless faced significant challenges in the digital age. The pervasive availability of instant, often free, online content is a primary factor in this decline. This transformation is evident across various sectors: from the dramatic shift of classified advertising revenue away from newspapers to free online services like Craigslist or Facebook Marketplace, to the fundamental change in music consumption from physical sales (vinyl records, CDs) to digital downloads and, predominantly, streaming. The internet has fundamentally reshaped the economics of legacy media outlets, forcing them to adapt or face obsolescence.

Media companies continue to grapple with the implications of an open and interconnected internet, particularly concerning the ease with which digital files can be replicated and distributed globally. Traditional music companies, which historically derived the vast majority of their revenue from selling physical music formats, found themselves at a significant disadvantage. They incur substantial expenses to discover, sign, and promote musicians, as well as to produce and record music. Meanwhile, modern consumers, who may pay as little as nothing (through illicit file sharing) or a low subscription fee (for streaming services), can access and share music files with unprecedented ease.

The Digital Millennium Copyright Act (DMCA) of 1998 remains a cornerstone of U.S. copyright law in the digital realm. A key provision of the DMCA, known as the “safe harbor” (Section 512), exempts Internet Service Providers (ISPs) from direct liability for copyright infringement committed by their users, provided they meet certain conditions. These conditions include expeditiously removing infringing content upon receiving a proper “takedown notice” from copyright holders and implementing a policy for terminating repeat infringers. While this framework encourages ISPs to cooperate with copyright owners, it also means that ISPs are generally not required to monitor their networks for infringing activity proactively. With providers shielded mainly from direct liability, and with media consumption, particularly streaming, being a major driver for high-speed internet subscriptions, ISPs’ primary incentive is to provide robust and reliable internet access. This dynamic can create a complex environment where the lines between legal downloads and illegal sharing are constantly navigated, and copyright holders bear the primary responsibility for identifying and reporting infringement.

Digital Downloads, DRM, and Streaming

Although media companies have steadily grown into larger businesses through consolidation, many have nevertheless faced significant economic challenges. The widespread availability of instant, often free, online content is a primary factor in this transformation. This shift is evident across various sectors: from the dramatic decline in classified advertising revenue for newspapers, which migrated to free online services, to the fundamental change in music consumption. The internet has profoundly reshaped the economics of legacy media outlets, forcing them to adapt or face obsolescence.

The music industry, in particular, experienced a seismic shift. While large music companies traditionally generated the vast majority of their revenue from selling physical music formats such as vinyl records and compact discs, they found themselves at a severe disadvantage with the advent of digital file sharing. These companies incurred substantial expenses to discover, sign, produce, and market musicians, yet early digital consumers could share and distribute files with little to no cost. Media companies feared an unregulated internet because it allowed other parties to replicate digital files and send them anywhere else in the world, undermining their traditional business model. The Digital Millennium Copyright Act (DMCA) of 1998, with its “safe harbor” provisions, further complicated matters by generally exempting Internet Service Providers (ISPs) from direct liability for user-generated copyright infringement, provided they adhere to “notice and takedown” procedures. With providers largely freed of direct liability, and with media consumption being a driving factor in the rise of high-speed internet services, ISPs had little inherent incentive to actively deter file sharing beyond what was legally mandated.

While music companies eventually found some success selling music through digital outlets, they were not the pioneers. Instead, technology companies like Apple and Amazon recognized a massive market for digital downloads coupled with a need for a user-friendly, legitimate delivery system. They created platforms that revolutionized these services. Consumers, already accustomed to downloading MP3s, readily adopted this new model. However, record companies initially insisted on the inclusion of Digital Rights Management (DRM) protection, viewing the lack of such protection in standard MP3s as a significant vulnerability to their intellectual property.

Apple provided a pivotal solution that struck a compromise between consumer accessibility and rights control. Steve Jobs’ motivation for creating iTunes and the iPod was multifaceted. He observed the rampant music piracy fueled by platforms like Napster and recognized that consumers desired easy access to digital music. Rather than fighting this trend, he sought to provide a legal, convenient, and aesthetically pleasing alternative that would entice users away from illicit downloads. His vision was to create a seamless, integrated ecosystem of hardware (the iPod) and software (iTunes) that offered a superior user experience. He famously convinced major record labels to sell individual songs for 99 cents, a price point that made legal downloads more appealing than purchasing entire CDs. This strategy, initially involving DRM-locked tracks that would primarily play on Apple devices, aimed to provide a controlled environment that appeased the record companies while still offering consumers the digital convenience they craved. This inflexibility, while a limitation, also offered a small benefit by enabling Apple to secure those lower per-track prices compared to physical CDs.

This compromise, while selling millions of iPods and digital tracks, did not entirely satisfy the record companies, who saw their album sales decline as consumers opted for single downloads. However, the landscape has dramatically shifted since the era dominated by digital downloads. While digital music sales increased significantly from $187 million in 2004 to $1.8 billion by 2008, the true innovation and monetary growth in digital music since 2010 has come from streaming services.

Today, streaming is the dominant format, accounting for the vast majority of music industry revenue globally. In 2024, streaming services alone are projected to account for nearly 70 percent of the industry’s total revenue, with paid music streaming subscriptions reaching over 750 million worldwide. Digital downloads have significantly declined, and while physical sales (especially vinyl) have seen a niche resurgence, streaming is the primary mode of consumption. DRM, while still present in some forms, particularly for video content and in certain licensing agreements, is far less prevalent in mainstream music streaming due to the nature of access-based rather than ownership-based consumption. Innovations in digital music distribution since 2010 have focused on personalized playlists driven by AI, high-fidelity audio options, direct-to-fan platforms for independent artists, and the integration of music into social media platforms like TikTok, which now play a significant role in music discovery and virality. The industry continues to evolve, with new challenges and opportunities emerging around fair artist compensation, data analytics, and immersive audio experiences.

Piracy

The music industry has historically attributed a significant portion of its revenue decline to piracy. Cary Sherman, former president of the Recording Industry Association of America (RIAA), famously stated in 2003 that “There’s no minimizing the impact of illegal file-sharing. It robs songwriters and recording artists of their livelihoods, and it ultimately undermines the future of music itself (Sherman, 2003).” While the RIAA continues its anti-piracy efforts, focusing on unauthorized distribution and stream-ripping services, the industry’s narrative has evolved.

Economists, however, have often viewed the matter with more nuance. Early studies, such as the 2007 research by economists at Harvard Business School and the University of North Carolina, found that the impact of digital downloads on sales was “statistically indistinguishable from zero,” suggesting a more complex relationship than a direct one-to-one loss (Oberholzer-Gee & Strumpf, 2007). Modern research from entities like MUSO in 2024 indicates that while overall piracy may have seen some fluctuations, it persists, driven by factors such as content access fragmentation, which requires multiple subscriptions for legal content, demand for digital-first formats, and economic disparities. Some studies still estimate significant annual losses to the U.S. economy and job losses due to music piracy.

Regardless of the precise economic impact, two things have become clear in the digital music landscape: consumers are willing to pay for digital music, and the digital distribution of music is here to stay, albeit primarily through streaming rather than downloads.

Since 2010, the digital music landscape has undergone a profound transformation, with streaming services emerging as the dominant mode of consumption. Digital downloads, while still existing, have significantly declined in revenue and market share. In 2024, streaming accounts for over 80% of digital music revenue, with paid subscriptions driving most of this growth. This shift to an “access-over-ownership” model has provided a compelling legal alternative to piracy, offering vast libraries of music for a relatively low monthly fee.

Innovations in combating piracy since 2010 have moved beyond traditional lawsuits against individual file-sharers, which the RIAA largely ceased in 2008. The focus has shifted to content recognition technologies, where advanced AI-powered systems and acoustic fingerprinting are now widely used by platforms like YouTube’s Content ID to automatically identify and manage copyrighted material, allowing rights holders to monetize, block, or track infringing content. The widespread availability and affordability of streaming services, such as Spotify, Apple Music, Amazon Music, and YouTube Music, have been the most effective deterrents to casual piracy. The ease of access, personalized playlists, and curated experiences offered by these platforms often outweigh the perceived benefits of illegal downloads. Furthermore, direct-to-fan models, exemplified by platforms like Bandcamp and SoundCloud, empower independent artists to distribute their music directly, often offering flexible pricing, merchandise, and direct engagement, creating new revenue streams that bypass traditional gatekeepers and sometimes reduce the incentive for piracy. Emerging technologies like blockchain are being explored for secure tracking of ownership and provenance of digital music files, and digital watermarking embeds unique identifiers into files to trace unauthorized copies. As direct downloads declined, “stream-ripping,” which involves converting audio from streaming video or audio platforms into downloadable files, became a new piracy challenge, and anti-piracy efforts now actively target these services. Services like Netflix, while primarily a video streaming platform, offer a pertinent example of how digital media companies have cracked down on widespread account sharing. These services have implemented measures to curb the number of simultaneous logins or require users to periodically verify their primary household location, thereby restricting how many different households can access a single account. While primarily driven by business models and intellectual property concerns, such policies reflect the industry’s evolving strategies to convert unauthorized access into paid subscriptions. Ultimately, while piracy remains a persistent challenge, the music industry’s strategy has evolved from solely punitive measures to a dual approach: robust enforcement against large-scale infringing operations combined with the development of highly convenient, affordable, and feature-rich legal services that meet consumer demand.