IJC 2008 H2Econ Prelim Paper 1 (Question Paper)

INNOVA JUNIOR COLLEGE JC2 PRELIMINARY EXAMINATIONS 2 in preparation for General Certificate of Education Advanced Level Higher 2 ECONOMICS Paper 1 Additional Materials: Answer Paper 9732/01 15 September 2008 2 hour 15 minutes

READ THESE INSTRUCTIONS FIRST Write your index number and name on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer all question. You are advised to spend no longer than 1 hour 15 minutes on this paper. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question. You are advised to spend several minutes reading through the data before you begin writing your answers. You are reminded of the need for good English and clear presentation in your answers. This document consists of 9 printed pages and 1 blank page. Innova Junior College [Turn over

9732/01/IJC/Sep 08 2 Answer all questions Question 1 Hollywood and the Internet Extract 1: DVDs or Online Downloads? For the moment, most people are still happy with DVDs, so the studios have had little incentive to switch to an unproven new format. The DVD business is huge, bringing in $23.4 billion in America last year, against $9.6 billion from the box office. The studios are terrified of damaging that source of revenue. In 2006, when Disney made a deal with Apple to sell movies via iTunes, Wal-Mart, America's biggest retailer, reportedly threatened to retaliate: the internet, after all, bypasses it. Wal- Mart accounts for about 40% of DVD sales in the United States and if it sharply cut shelf-space for DVDs, the lost sales would far outweigh new digital sales in the near term. Not everyone agrees, however. Wal-Mart and other big retailers rely heavily on DVDs to bring higher-income people into their stores, says a studio executive. “So they don't have a leg to stand on threatening to pull shelf-space.” For this reason, he believes that Hollywood should be able to cultivate online revenues without greatly disrupting its existing businesses. In any case, there are now signs that the DVD boom has come to an end (see Figure 1) — which should also encourage the studios to worry less about Wal-Mart and to move faster online. Moreover, as well as boosting sales overall, the internet will make it easier for the studios to make money from their libraries— bricks-and-mortar retailers, after all, have limited shelf-space, and mostly stock new releases. Digital sales yield a higher profit margin too. Virtual distribution does away with manufacturing, packaging, transport and inventory costs. At the moment, the studios get $18 per film from a Wal-Mart or a Best Buy and about $16 for a digital sale, but because of the lower costs they make about $3 more on each film when sold electronically. Figure 1: US Consumers’ Spending on DVDs (US$ billion)

9732/01/IJC/Sep 08 3 The second reason for Hollywood's sluggishness is that the studios and the consumer-electronics industry have not overcome three technological hurdles. Downloading a film still takes a long time— in America, about 30-40 minutes on average. Movies in high-definition format would take about four times that. But broadband speeds are increasing all the time. In Japan and South Korea it now takes between five and ten minutes to download a film in standard definition. Another obstacle is that most people want to watch films on television, not on personal computers— especially if they have wide, “home-theatre” TV screens. Products connecting PCs and televisions have been available for years but have not caught on, because they are hard to install and operate. That is changing. Apple has just overhauled its linking gadget, Apple TV, to make it easier to use. At the CES in Las Vegas, says Alan Bell, Paramount's chief technology officer, new televisions and set-top boxes that connect directly to the internet were on show, “so the PC is not the bottleneck in getting digital content from internet services to the TV screen that people saw a year ago.” The last hurdle, and perhaps the highest, is the lack of common standards among websites and devices. “Imagine if you went to Wal-Mart to buy a new DVD player and then found that your DVDs from Best Buy didn't work on it,” says Mitch Singer, Chief Technology Officer of Sony Pictures Entertainment. Movies on the internet, he says, is “a format war on steroids”. Each download store sells different usage rights. Hollywood is trying to do something about this. Late last year a group of studios, retailers and consumer-electronics firms met to discuss an idea of Mr Singer's for a standardised electronic movie product called Open Market. But the talks are at an early stage, and it will be tricky to get companies such as Apple and Microsoft to agree to common standards. Hollywood's dealings with the consumer-gadget companies also betray its habitual caution. The studios fear that Apple could become the Wal-Mart of the internet— a giant with power to push them around, continually pressing prices down. Adapted from: www.economist.com, 21 Feb 08 Extract 2: Online Content Distribution Trends Online Music With revenues in the UK in 2006 at £45 million, the online music market is already the model that other online content distributors emulate. By 2011, Screen Digest forecast that 191 million single tracks and 21 million albums will be downloaded, with UK revenue at £285.6 million. Dan says “The rapid growth of online music constitutes an invaluable lifeline for the record industry as the decline in physical sales shows no sign of letting up. So the question remains whether the growth in digital will be able to fill the revenue gap left by the fall in physical sales.” Online TV Despite a slow start, Screen Digest forecasts that the online TV market will generate annual revenues of £181 million by 2011. Arash Amel, Senior Analyst says “Broadcasters and pay-TV operators will come under increasing pressure from many

9732/01/IJC/Sep 08 4 major ‘virtual networks’, such as YouTube and Joost, who will be competing for viewers’ time and attention. This will be exacerbated by hardware manufacturers, such as Apple, Microsoft and Sony, who will be far more adept at selling TV shows because of their existing device relationships with the consumer. The result is that the UK online TV market will be increasingly fragmented, with the new entrants trapping considerable market share. The threats and opportunities for traditional broadcast networks and pay-TV platforms is clear. They must adapt their online strategies quickly and efficiently, whether it is focusing on maximizing the potential of video offered through their own websites and online outlets, or co-operating with the new platforms to syndicate as widely as possible in order to tap significant additional revenue." Online Movies Yet it is the forecasts for the value of the online movies market that reveals the slowest market growth. There are a number of reasons for the comparatively small size of movie downloads compared to music and TV. Screen Digest believes that consumers will be reluctant to watch three hour long films on their PC, preferring to view them on their plasma screens and home entertainment systems. For movie downloads to make it into the British front room, film fans need to update their hardware to make transferring them possible – and this is a long way off. Ben Keen, Chief Analyst says “While the Internet offers an important new opportunity for movie distribution, studio fears of a ‘single dominant platfor