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Media and network companies are increasingly providing digital media online. We develop a model to examine optimal strategies for media providers to utilize the online channel to distribute digital media. We examine a number of options for media providers. Our results suggest that media companies should sell programs online when content quality is relative high and online access cost is low. When online access cost is relative high, media providers could use the advertising strategy. Overall, companies are better off providing both pricing and advertising options to consumers. We derive the optimal price and advertising level, and analyze the factors that affect the price and advertising decisions. We find that as advertisement revenue rate increases, advertising level should be kept low. In addition, media companies should set online price and advertising level with consideration of the traditional channel in order to avoid channel cannibalization. We also analyze the advertising level in the traditional channel. Our results suggest that as digital video recorder technologies provide more convenience to consumers, media companies should increase, rather than decrease, revenues from advertising.
Fan et al. (Sat,) studied this question.
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