Media Concentration and Conglomeration

1. Media Concentration and Conglomeration

2. Announcements Happy Chinese New Year! No class next week. Travel safely. Presentation schedule Group assignment

3. Media Concentration and Conglomeration Measures of concentration and diversity The trend towards media concentration and conglomeration Growth strategies adopted by media conglomerates Risks and failures of the strategies

4. Measures of concentration and diversity Results of a survey Oriental 35.0% HKED 1.9% Apple 32.7% Daily News 1.4% Ming Pao 10.0% HKEJ 1.0% Sun 5.3% SCMP 0.9% Sing Tao 5.2% Tai Kung 0.1% Metropolis 2.7% Wen Wei 0.1% Sing Pao 2.6% HKCD 0.1% How concentrated is this market?

5. Measures of concentration and diversity Concentration ratios: The ratio of total revenues of the major players with the revenues (or market share) of the entire industry usually using the top four firms or top eight firms The HK newspaper market according to the survey results CR4: 83% CR8: 95.2% Qualification: Dual product market A market is usually considered to be highly concentrated if the top four ratio is higher than 50% and the top eight ratio is higher than 75%

6. Measures of concentration and diversity Characteristics of the measure Sensitive to number of firms: A market with fewer than 11 firms is by definition hugely concentrated when using the CR8 ratio E.g., a market with 10 firms: 10, 10, 10, 10, 10, 10, 10, 10, 10, 10 A market with 100 firms is much more likely to have a small ratio than a market with only 20 firms Insensitive to what happens to the small firms Scenario 1: 10, 10, 10, 10, 10, 10, 10, 10, 10, 10 Scenario 2: 10, 10, 10, 10, 10, 10, 10, 10, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2 CR4 is 40% and CR8 is 80% in both cases

7. Measures of concentration and diversity Insensitive to levels of inequalities within the top firms Scenario 1: 12.5, 12.5, 12.5, 12.5, 10, 10, 5, 5�� Scenario 2: 25, 9, 8, 8, 8, 8, 7, 7�� CR4 is 50% and CR8 is 80% in both cases Lack of precision may or may not be a problem depending on the case

8. Measures of concentration and diversity Lorenz curve Rank order all firms according to their market share Plot a curve by starting with the weakest firms The weakest 10% of the firms capture X% of the market The weakest 20% of the firms capture Y% of the market And so on

9. Measures of concentration and diversity

10. Measures of concentration and diversity

11. Measures of concentration and diversity

12. Measures of concentration and diversity

13. Measures of concentration and diversity

14. Measures of concentration and diversity Characteristics Sensitive to the number of firms/categories What if there are five firms sharing the market equally? 20 X 20 X 5 = 2000 Six firms sharing the market equally 16.67 X 16.67 X 6 = 1666.67 Seven firms sharing the market equally 14.29 X 14.29 X 7 = 1428.57 Eight firms sharing the market equally 12.5 X 12.5 X 8 = 1250

15. Measures of concentration and diversity In other words, for a market not to be regarded as concentrated with the HHI, there has to be at least 8 firms, and the 8 firms have to share the market pretty equally Notice that different conclusions can be drawn by using the HHI or the CR8 What happened to the small firms matter Scenario 1: 10, 10, 10, 10, 10, 10, 10, 10, 10, 10 Scenario 2: 10, 10, 10, 10, 10, 10, 10, 10, 2, 2, 2, 2, 2, 2, 2, 2, 2, 2 HHI = 1000 and 840 respectively

16. Measures of concentration and diversity The indices are important tools for research: Descriptive studies and explanatory studies Example: Children�s book market, 1992-1995 (McQuivey and McQuivey, 1998) Time period: from 1992 to 1995 Data: Reported in Publishers Weekly, which gathers data for the frontlist books (i.e., published for the first time that year) that sell more than 75,000 copies and backlist titles (i.e., published previously, but still selling enough copies to merit tracking) that sell more than 100,000 copies Only best-sellers are studied

17. Measures of concentration and diversity Ultimate parent of publisher Total Unit Sales (1,000) % of total Golden Book 27,334.3 27.04% Advance Publishers 17,052.6 16.87% Disney 16,387.0 16.21% Lyons Group 9,379.8 9.28% News Corp. 6,721.2 6.65% Seagrams 4,525.1 4.48% Time Warner 3,292.4 3.26% Scholastic, Inc. 3,192.7 3.16% National Amusements 2,005.0 1.98% Harcourt General 1,977.2 1.96%

18. Measures of concentration and diversity CR4 69.40% CR6 80.53% CR8 86.95% CR10 90.89% HHI 1,468 Interpretation CR4 and CR8: Highly concentrated HHI: only moderately concentrated

19. Measures of concentration and diversity HHI tends to underestimate the power of the biggest players when the number of players is large CR4 or CR8 tend to neglect the existence of large number of weak players When one makes more sense depends on the nature of the case and the question one wants to address E.g., is the market dominated by a few number of big firms? E.g., does the market as a whole provide a large range of choices for consumers?

20. Concentration of market share Interpreting concentration Within-industry and across-industry concentration (Albarran and Dimmick, 1996): The US market, 1990-1994 CR4 CR8 1994 1990 1994 1990 TV networks 83% 85% 88% 90% TV/radio stations 60% 57% 87% 80% Cable systems 55% 54% 71% 59% Cable networks 88% 91% 98% 99% Film entertainment 72% 71% 81% 94% Recorded music 84% 86% 99% 99% Newspapers 42% 39% 48% 46%

21. Concentration of market share CR4 CR8 1994 1990 1994 1990 Book publishing 48% 43% 74% 78% Consumer magazines 49% 58% 52% 62% Professional publishing 81% 75% 95% 99% Business info. services 100% 100% 87% 93% Advertising agencies 87% 87% 100% 100% Interactive digital media 81% 79% 90% 89% Miscellaneous com. 45% 53% 66% 73%

22. Concentration of market share Revenues of top 10 communications companies (in million US) 1994 revenues Time Warner 16,188 CR4: 25.4% Bertelsmann 8,499 CR8: 40.1% Sony 7,665 Capital Cities/ABC 6,379 Viacom 6,332 Matsushita 5,696 News Corp. 5,402 Polygram 4,942 Dun & Bradsheet 4,895 Walt Disney 4,793 Total 152,528.4

23. Concentration of market share Conclusions drawn by the authors In most media industries, there were already little room for further within-industry concentration But there was still room for across-industry concentration because the latter was not serious They predicted more across-industry concentration in the years to come Albarran and Dimmick were right In the late 1990s, Disney purchased Capital Cities/ABC, Viacom purchased CBS

24. Concentration of market share But was across-industry concentration really not serious at that time? One fourth of the revenue from ALL media-related industry in a vast nation with more than 200 million people are controlled by four corporations Level of analysis - What happens in the nation and what happens to a specific community E.g., newspapers and radio What does �concentrated� mean? What does �serious� mean? Technical/economic definition Normative/social definition

25. Concentration of ownership

26. Concentration of ownership

27. Concentration of ownership

28. Concentration of ownership

29. Concentration of ownership Other big media conglomerates include Sony, Tribune company, etc. Who owns what? http://www.cjr.org/tools/owners/ http://libreria.sourceforge.net/library/Free_Culture/images/media-concentration-cl.png

30. Logic of acquisition Acquisitions, mergers, and integration have a long history A lesson: The rise of television in the U.S. Arrived in the late 1940s; By 1960, 90% of US households had TV sets There was limited channel capacity and huge investment was required, thus the three radio broadcasters became the major TV network owners Quickly became the preferred destination for most national advertisers Created problems for other media industries: How did radio, print media, and movies responded?

31. Logic of acquisition Radio Radio �moved out of the living room� Technological development: small radio sets were developed and therefore radio was used in kitchen, cars, bedrooms, etc. Audience culture: New formats were developed so that listeners are encouraged to turn on the radio for �background� Programming change Produce programs that do not require the undivided attention of the audience Turned away from traditional family entertainment fare and towards music Reduce costs by replacing the celebrity hosts with local DJ and substituting recorded music for costly original productions

32. Logic of acquisition Program schedule Defining prime-time in opposition to TV Radio prime-time in HK Target audience and marketing Focus not on the mass audience but more specifically on the youth audience

33. Logic of acquisition Magazines Between 1969 and 1972, 3 of the most widely read magazines in the US folded (Saturday Evening Post, Life, and Look), at a time when each of them had more than 6 million readers Content change: Move to demographically targeted audience by specializing contents Attractive to advertisers who did not need or cannot afford national advertising on television Focusing on television itself TV Guide launched in 1953 Television and entertainment in general became a staple of magazine content

34. Logic of acquisition Movies Number of theatre-goers declined in the 1950s and theatres in less populated areas closed Strategy Cut cost by producing fewer movies The birth of the blockbuster Working with television Hollywood studios became the leading producers of prime time network TV programming by the late 1950s Supply old movies for rerun on television Technological development and new revenue stream VCR and video rental VCD and DVD

35. Logic of acquisition Key points Established organizations working with old media are best positioned to appropriate or invest in new media technologies The rise of a new medium does not necessarily lead to the demise of old media But it often leads to the need for old media to redefine themselves New media technologies sometimes offered new revenue streams for old media New and old media compete with each other, but can also work with each other

36. Logic of acquisition Acquisitions and mergers in the media industry are often economically justified by the argument of increasing efficiency, rather than As an attempt to merely get bigger, or As an attempt to drive out competition, etc. These motivations may exist, but efficiency remains the most frequently cited reason More specifically, a number of strategies are involved in achieving growth Economy of scale Diversification Synergy and branding Market segmentation Joint venture

37. Strategy of growth: Size and Economy of scale The advantage of economy of scale in the conventional sense The average cost goes down as the number of units of products goes up Larger corporations are better positioned to engage in large projects $200 million was needed to make Titanic By 1999, the average cost of a single Hollywood film exceeded $50 million New strategies are used to reduce cost and risk: using young actors, paying actors and directors a share of the profits instead of salaries, co-production with other media giants Promotion is also costly � usually an additional 50% of the cost of the film itself A self-perpetuating cycle: only big corporations are allowed to play the game; they earn the big money and become even bigger

38. Strategy of growth: Size and Economy of scale Blockbuster strategy Cut the overall number of productions and focus on promoting the few big ones Not only in movies but also in other industries, e.g., book Publishers have focused their resources and attention on a few titles they believe may become best-sellers A handful of celebrity authors receive huge advances Dick Morris: $2.5 million Colin Powell: $6.5 million Paula Barbieri (friend of O. J. Simpson): $3.5 million

39. Strategy of growth: Size and Economy of scale Ability to withstand short-term losses Not every blockbuster turns out to profitable Establishing a foothold in a certain market may require an ability to withstand losses in the short-term The market in China: potentially profitable, but not now Starting a business in a new media industry also requires an ability to withstand losses in the short-term Predatory pricing Drive out competition Cross-subsidy

40. Strategy of growth: Diversification Diversification is a means of spreading the base of a business to achieve improved growth and/or reduce overall risk that may take the form of investments that address new products, services, customer segments, or geographic markets Diversification vs. horizontal integration Horizontal integration refers to the buying of a company producing a similar or the same product for a certain market: economy of scale Diversification refers: to the buying of a company producing a different yet related product To extending one�s own businesses to new markets

41. Strategy of growth: Diversification Three models to understand diversification Product/market-portfolio model: emphasizes the attractiveness of the target market in terms of attributes such as market size, growth rate, and profitability Relationship between different products is not important Risk/return model Stresses risk management by diversifying one�s investment Derives mainly from financial theories Similar to how common people invest in the stock market

42. Strategy of growth: Diversification Strategy model: Stresses the interrelationship between the core-business market and the target market Entering a new market is a strategy to benefit the original business For media corporations, strategic concerns are usually the most important, market-portfolio concerns are the second important, risk management is usually the least important

43. Strategy of growth: Diversification Extent of product diversification of the global media conglomerates VU BMG Sony AOL Disney Viacom NC No. of 316 531 150 190 113 30 71 business units No. of SIC 80 29 32 33 28 15 17 sectors involved Broad spectrum 30 na 13 18 16 8 9 diversity Mean narrow 2.67 na 2.46 1.83 1.75 1.88 1.89 spectrum div. SIC � Standard industrial classification

44. Strategy of growth: Diversification Number of merger and acquisition transactions of the GMC VU BMG NC AOL Sony Viacom Disney As a target 164 137 172 138 74 79 45 International 137 110 122 47 50 13 7 Domestic 27 27 50 91 24 66 38 As an acquirer 325 249 188 141 98 88 63 International 249 210 101 54 65 27 14 Domestic 76 39 87 87 33 61 49

45. Strategy of growth: Diversification International diversification of the GMC VU BMG Sony NC AOL Disney Viacom % foreign 49 64 67 90 26 21 21 Revenue No. Countries 36 28 20 18 22 20 17 Entered as an Acquirer Regions 7 6 5 4 6 7 4 Entered as an Acquirer Region diversity 5.14 4.67 4 4.5 3.17 2.86 2.75

46. Strategy of growth: Diversification Performance of GMC (averages of 1997-2001) VU BMG Sony AOL Disney Viacom NC Total sales 22.1 19.1 9.3 36.20 25.4 23.4 13.8 Revenue growth26.9 38.0 9.8 77.1 6.2 12.9 14.3 EBITDA 9.9 4.9 10.5 14.8 16.2 15.9 15.0 ROA 1.90 6.94 2.93 7.08 3.23 0.78 2.58 Product d. H H M M M L L Geographical d. H H M M L L M Sales H H L H M H M Profitability M L M H H H H

47. Strategy of growth:Synergy and branding Synergy Refers to the idea that separate entities working together can achieve results that none could obtain individually Disney CEO Michael Eisner on Disney�s takeover of Capital Cities/ABC: �One plus one adds up to four.� The whole is greater than the sum of its parts

48. Strategy of growth:Synergy and branding Strategies Developing and packaging a single concept for various media A children�s story can be packaged as a comic book, a movie, soundtrack, TV cartoon, computer games, toys, etc. Each adding to the popularity of the other Study by McQuivey and McQuivey (1998) show that children�s books that have �tie-ins� are more profitable It is now common for executives from different divisions of a conglomerate to meet up and develop ideas that can be used across media a book that can be turned into movies a song that would be popular in karaoke

49. Strategy of growth:Synergy and branding Cross-promotion E.g., shortly after Disney bought the ABC television network, some of the sitcoms featured the characters vacationing at Disney�s theme parks E.g., Titanic was repackaged for movies, television, magazines, CDs, Internet, computer software, and other media Viacom, one of the co-producers, owns MTV and thus the station prominently features Celine Dion�s music video related to the movie News Corp., the other co-producer, owns FOX network and the network features special documentaries about Titanic

50. Strategy of growth:Synergy and branding E.g., Forrest Gump was heavily advertised on VH-1 and UPN network, heavily promoted by Blockbuster when the video became available, books related to the movie were published by Simon & Schuster Forrest Gump was produced by Paramount Pictures, owned by Viacom, who also own VH-1, UPN, Blockbuster, and Simon & Schuster Find an idea that can be successfully marketed, rather than trying to market an interesting idea

51. Strategy of growth:Synergy and branding Branding Distinguishing a product from others via real attributes and/or image creation Maintaining high-profile marketing campaigns highlighting the brand name Repeating the brand image and message across different media Brands and sub-brands Nike and shoes associated various NBA stars Disney and Mickey Mouse, Minnie, Donald Duck etc. Creating a brand is costly and is a strategy available only to major conglomerates It is estimated that creating a new, recognized brand in the U.S. would cost about $20 to $40 million in TV advertising in the first four months after launch alone

52. Strategy of growth:Synergy and branding Once a brand is created, new ventures � spin-offs � would result E.g., ESPN ESPN-2, ESPN News, ESPN Classic, ESPN Magazine, ESPN radio, ESPN-The store (retail store), ESPN.com, ESPN zone (restaurant) E.g., Star Wars A series of books aimed at adults and a comic book series aimed at kids A number of computer games Video re-release of the original Star Wars trilogy Theatrical re-release of special editions of the original trilogy New Phantom Menace toys, accessories, video games All done before the release of Episode One

53. Strategy of growth: Market segmentation As media corporations become bigger, a way to make more money is to think small Logically, monopoly may have more incentives to diversify its products than companies in an oligopoly E.g., Scenario: 70%, 15%, 15% Specialized media products aiming at different market segments Streamlining the audience into a product highly attractive to advertisers Most common in Magazines Cable Television

54. Strategy of growth: Market segmentation Another mean to diversify the products and manage risks Producing a channel focusing only on music video is very risky if the company only own that channel Producing a lot of channels focusing on different things, on the contrary, is not risky at all

55. Strategy of growth: Market segmentation Specialization and segmentation for newspapers Developing a large number of sections targeted at specific groups of audiences, and thus advertisers Real Estate sections Automobile sections Women sections Lifestyle/weekend sections (restaurants, entertainment) At home/Living (furniture, remodeling, home repair, design) Food sections (Grocery stores, cookware, kitchen supply) Computer and Technology

56. Strategy of growth: Market segmentation Some US newspapers even produce different editions of the paper to target different types of readers Mostly people living in different areas The Chicago Tribune produces eight differently zoned editions everyday

57. Strategy of growth: Market segmentation Development of place-based media A medium that reaches a particular audience because it is found exclusively at certain locations Channel One: an ad-filled news broadcast aired in many schools in the U.S. CNN�s news service aired on airport television monitors Magazines distributed solely in doctor�s waiting rooms Roadshow in Hong Kong Personalized marketing Amazon.com

58. Strategy of growth: Joint ventures The media giants are not so much competitors as cooperating agents Boards of directors overlap The giants own operations together Viacom and Seagram jointly own Sundance Channel and United Cinemas International Viacom and Time Warner shares Comedy Central cable channel Time Warner and Sony shares Columbia House music club Etc. Joint ventures to reduce risks Most extensive in movie projects, cable channels, and Internet ventures

59. Strategy of growth: Joint ventures Media giants also collaborate with smaller companies; or, in fact, smaller companies need to collaborate with the giants The small companies must turn to larger partners for necessary infusions of capital so that they can participate in bigger projects Smaller companies often have to rely on the media giants for distribution agreements, especially in movies and recorded music Smaller companies also enter into joint ownership agreements to stave off wholesale takeover

60. Strategy of growth: Joint ventures Media corporations may prefer joint ventures to acquisitions when they internationalize Example: US advertising agencies (Jung, 2004) Cross border acquisitions by US agencies, 1981-2001 No. of acquisitions No. of joint ventures Western Europe 121 20 (14.2%) North America 26 7 (21.2%) Latin America 28 3 (9.7%) Asia 40 43 (51.8%) Pacific Asia 15 1 (6.3%) Middle East 7 1 (12.5%) Eastern Europe 7 9 (56.25%) Total 247 85

61. Strategy of growth: Joint ventures Analysis was also conducted at the level of countries to see if mode of entry is affected by Cultural distance between the US and the target country Measured by an index incorporating masculinity, uncertainty avoidance, power distance, individualism Political and economic risks involved in the country Using the World Development Indicator of the World Bank The results support both expectations

62. Risks and failures Many of the above strategies have their own risks Coordinating and managing a large corporation involves its own costs Newly acquired operations sometimes do not work well with each other because of differences in structure and culture Diversification means venturing into an area that the company may not have experience with Sometimes a a division is forced to cooperate with another division within the conglomerate, even though it may be more efficient to cooperate with a company outside the conglomerate

63. Risks and failures So, what do existing figures tell us? Is there a positive relation between scale and economic performance? Is there a positive relation between a simultaneous presence in all or several of the media industries and economic performance? Is there a positive relation between the share of foreign sales and economic performance? A study by Peltier (2004)

64. Risks and failures 11 media firms in the sample Time Warner Bertelsmann Disney News Corp Sony Viacom Vivendi Universal EMI Pearson Reed Elsevier Lagardere The first 7 are GMC, the latter 4 are relatively smaller European firms 3 U.S. firms, 1 Japanese, 1 Australian, 6 European In 1980, these 11 firms were 48 independent firms They were involved in 45 M&A deals totaling more than $500 million dollars

65. Risks and failures Distribution of M&A deals among the firms Horizontal integration: 28 Upstream vertical integration: 7 Downstream vertical integration: 5 Diversification: 5 Conglomerate: 3 Indicators used: Size: sales Performance: Profit margin International diversification: % foreign sales E index measuring the geographically balanced nature of sales

66. Risks and failures Diversification in businesses Three types of media businesses are identified � audio-visual, music, and publishing/press Firms are divided into either �generalists� or �specialists� according to whether their sales are evenly distributed into the three types of businesses

67. Risks and failures Raw data (Average of 1998 and 1999, total and media sales in 100 million US) Company TS MS PM %F E G/S AOL Time Warner 314 263 4.25 25 .635 G Bertelsmann 153 133 3.75 69.5 .740 G Disney 237 175 7.00 21.2 .605 S News Corporation 135 135 6.95 91.0 .646 G Sony 651 174 2.20 68.3 .869 G Viacom 131 128 0.82 24.0 .626 S Vivendi-Universal 543 204 3.10 87.8 .657 G EMI 40 40 5.9 87.8 .918 S Lagardere 126 70 2.3 60.0 .651 S Pearson 48 48 13.5 87.0 .712 S Reed Elsevier 54 54 16.7 79.0 .775 S

68. Risks and failures Is there a positive relation between scale and economic performance? Correlation between sales and profit margin: -.498 Is there a positive relation between a simultaneous presence in all or several of the media industries and economic performance Mean profit margin for generalists: 4.1% Mean profit margin for specialists: 7.7% Is there a positive relation between the share of foreign sales and economic performance? Correlation between % of foreign sales and profit margin: .456 Correlation between the E-index and profit margin: .160

69. Risks and failures No evidence showing that increasing scale promotes efficiency Increasing scale probably promotes efficiency in some cases but may damage efficiency in some other cases No evidence showing that diversification promotes efficiency Evidence showing that internationalization promotes efficiency

70. Risks and failures Therefore, mergers and acquisitions is not a magic formula to improve company performance AOL Time Warner and Vivendi Universal reported record losses in 2002 Disinvestment But of course, it does not mean that mergers and acquisitions would necessarily fail The probabilistic logic of social scientific research Also, note a number of limitations of the study Time scale Number of companies involved