Anthony J. Pennings, PhD

WRITINGS ON DIGITAL ECONOMICS, ENERGY STRATEGIES, AND GLOBAL COMMUNICATIONS

Why Digital Media Firms Need to be Fed Watchers

Posted on | December 12, 2013 | No Comments

Over the course of about 10 years of teaching economics and digital media at New York University (NYU), I developed a simulation of the Federal Reserve Bank that has proved useful in engaging participants in the study of economics, monetary policy, and how the US economy works.

I developed it initially to make my macroeconomics course more interesting, but recently applied the Fed simulation to an MBA course in digital economics. Consequently, I felt an additional burden to relate the Fed’s actions to a variety of media companies. In this post, I identify key components of the larger economy that digital media companies should be following and how decisions by the Federal Reserve can influence these aspects of the economy – and ultimately their organizations.

The Fed Watcher's Handbook

The entirety of this article is published in The Fed Watcher’s Handbook.

Producers of digital goods and services need to develop educated expectations about economic conditions influencing their businesses. They need to tie observations about the economy and where it is heading to their own decisions about hiring, production schedules, and investments in permanent facilities like studios or office space. While the Fed’s actions, policies, and research are not the only points of concern that can impact a digital firm; they are significantly consequential to warrant sustained observation.

This material is now available at Amazon as part of The Fed Watcher’s Handbook: Simulating the Federal Reserve in Classrooms and Organizations

How do digital media managers conceptualize larger business trends and track this information while necessarily micromanaging the daily activities of their organizations? One of our media economics textbooks proved helpful, The Economics and Financing of Media Companies by Robert G. Picard points out four important areas where media companies should direct their attention:

  • the business cycle
  • inflation
  • interest rates
  • and exchange rates

Although Picard barely mentions the Federal Reserve, we can address the above concerns, starting with the recurring and irregular expansions and contractions of economic activity known as the business cycle.

The Federal Reserve influences the business cycle by controlling the supply of money in the economy. By injecting more money through the financial system, it can lower interest rates and consequently increase business investments and consumer spending. Economic growth means more jobs, increased incomes and more disposable income for consumers to spend. Sales of media products and services are subject to consumer incomes and expectations about the state of the economy. Monitoring the contraction and expansion of the economy supplies vital information about consumer spending patterns and confidence.

Media goods like game consoles and HDTVs are particularly sensitive to economic fluctuations. Advertising, a key driver of media sales, reacts strongly to business conditions. But admittedly, more research needs to be done on digital media products as substitute goods for other entertainment pastimes, particularly in times of economic downturn. For example, films and radio were popular pastimes during the Great Depression as a means of escaping the harsh conditions of the time. More recently, Netflix began its historic rise during the Great Recession and video gaming also did well as consumers purchased relatively cheaper forms of entertainment that allowed them to stay home or take advantage of mobile leisure time.

Inflation can come either from too much money/demand in the economy or too few goods and services. If the economy is growing too fast, prices for goods and wages increase accordingly. When prices inflate it can be good for the economy as purchases are made more quickly to avoid the higher prices. Another incentive to spend is that the value of monetary savings depreciates faster. Inflation is good for borrowers as they wind up spending less to pay off their debt. On the other hand, prolonged inflation makes it hard for producers to plan and inventories can dry up as consumers hoard goods, contributing to shortages. Excessive inflation can be quite stressful for an economy as the US discovered during an economic period during the 1970s known as “stagflation“.

Deflation comes from too little money or effective demand (demand with cash) or from an abundance of goods and services. Deflation has been a more persistent problem in our contemporary economy. This has occurred despite the massive infusions of money into the economy and rising prices of energy. While deflation mainly results from a slow economy and lack of demand, one of the reasons for our current deflationary trend has been the increasing efficiencies of digital products following Moore’s Law that predicts the speed of digital microprocessing doubles every 18 months. Digital technologies are allowing us “to do more with less” – including humans. Competitive pressures due to low barriers to entry into Internet commerce also push prices down. Price stability is a major concern for the Federal Reserve and they watch changes in prices closely.

Interest rates are the prime vehicle for the Federal Reserve to influence the price of money and consequently the supply of it in the economy. The cost of borrowing capital is critical for many digital media firms that need funds for new initiatives, expanding operations, or just the cash flow for meeting payroll and other expenses. The Federal Reserve conducts complex financial trading operations to meet their target for interest rates which they announce about 8 times a year following a two-day meeting.

With the globalization of the net-centric activities, exchange rates are also a concern for digital media firms. The Fed rarely intervenes directly in the spot markets that determine the dollar’s exchange rates. Exchange rate policy is the responsibility of the U.S. Treasury. However, because the global currency markets are so huge, trading trillions of dollar each day, they sometimes coordinate with the New York Fed. Even then, it is more to signal a policy that can influence exchange rates rather than to implement one.

The Fed can have an influence on exchange rates with their interest rate policy. Lower interest rates depress the value of the US dollar by discouraging purchases of U.S dollar denominated financial instruments. It also makes it attractive to borrow cheap money and spend it internationally. Sending money offshore requires purchasing other currencies and that depresses the value of the U.S. dollar. It makes exports more attractive but can drive up the prices of imports, including raw materials and other components needed for your own production processes.

It would be a mistake to think that the Fed somehow controls the economy – far from it. Despite powerful governmental influences, the US and most of the global economy operates under market (or market-failure) conditions. Also, large banks and companies can exert significant influence on markets as we saw with the events leading to the crash of 2007. Still, the Fed can have a major impact and its stabilizing effects are often underestimated. The research on the economy it produces is also extremely valuable. It would be wise for digital media firms to keep an eye on the Federal Reserve.

For a small fee, you purchase my Fed Watcher’s Handbook.

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AnthonybwAnthony J. Pennings, PhD is the Professor of Global Media at Hannam University in South Korea. Previously, he taught at St. Edwards University in Austin, Texas and was on the faculty of New York University from 2002-2012. He also taught at Victoria University in Wellington, New Zealand and was a Fellow at the East-West Center in Hawaii in the 1990s.

Category: digital coordination, digital media economics, digital media management, media strategies, political economy of media, strategic communications
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    Professor at State University of New York (SUNY) Korea since 2016. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, digital economics, and strategic communications.

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