Cross-Industry Digital Convergence Mergers 1
Running Head: Cross-Industry Mergers
Current Issues in the Media Industry:
Understanding A Structural Analysis of Digital Media Convergence*:
Cross-Industry Mergers and Acquisitions in the Information Industries
Bum Soo Chon (Ph.D)
815-201 Hanyang APT, Suridong, Kunpo,
Kyunggido, KOREA
(82) 31-396-6467,
Bum Soo Chon
Senior Researcher, Ph.D
Munwha Broadcasting Corporation
Seoul, KOREA
(82) 018-318-2758,
Junho H. Choi (Assistant Professor)
Department of Language, Literature & Communication
Rensselaer Polytechnic Institute
George A. Barnett (Professor)
Department of Communication, School of Informatics
State University of New York at Buffalo
James A. Danowski (Associate Professor)
Department of Communication, University of Illinois at Chicago
and
Sung-Hee Joo (Doctoral StudentStudent)
Department of Communication Studies, University of Michigan
* This manuscript is based on Chon et al’s study (2003), entitled by “A Structural
Analysis of Media Convergence: Cross-Industry Mergers and Acquisitions in the
Information Industries”, that will be published inPrepared for Possible Publication to the Journal of Media Economics in
this fall.
Abstract
Understanding Digital Convergence
A Structural Analysis of Media Convergence:
Cross-Industry Mergers and Acquisitions in the Information Industries
Chon et al. (2003)This paper analyzeds structural changes in the information industries including publishing, broadcasting, film, cable, telephony, software & data processing, and the Internet in the era of "convergence" before and after 1996. In their study, The the cross-industry network structure iswas mapped using annual data on mergers and acquisitions among information industry firms obtained from the Journal of Mergers and Acquisitions. A comparative network analysis of these ownership transactions suggestindicateds that the consolidating structure of information industries after 1996 appears to have beewas n affected by both deregulation and digitization, and that telephone corporations played the most central role in the transformation of the information industries. As well, cable and Internet industries have noticeably transformed their industrial relationshipss over this time period.
Introduction
Although there is as yet not an extensive body of empirical research to support such characterizations, the transition to digitization and deregulation are widely thought to be breaking down barriers between media platforms, services, and industries (Fidler, 1997; Garcia-Murillo & MacInnes, 2001; Waterman, 2000). For example, the merger of CBS and Viacom in 1999 represented the integration between old media (Levi, 2000). By contrast, AOL-Time Warner was a consolidation between old and new media. Nowadays, the packaged service of telephone, cable, and Internet is not uncommon in the U.S. The transformation of the established and new media/telecommunications industries has been arguably caused by the emerging digital technology and deregulation policy (Fidler, 1997; Garcia-Murillo & MacInnes, 2001).
Although there is as yet not an extensive body of empirical research to support such characterizations, the transition to digitization and deregulation are widely thought to be breaking down barriers between traditional media industries and the new information industries (Fidler, 1997; Garcia-Murillo & MacInnes, 2001; Waterman, 2000). For example, the merger of CBS and Viacom represents new combinations among old media (Levi, 2000). By contrast, AOL-Time Warner is a consolidation between old and new media. Likewise, established media and information industries are seen as transformed by both the emerging digital technology and deregulation policy (Fidler, 1997; Garcia-Murillo & MacInnes, 2001). These changes are dynamically transforming the structure of the traditional information industries.
The transformation is referred to as convergence. Many scholars define convergence as the process of technological integration (Danowski & Choi, 1998; Fidler, 1997; Pavlik, 1998) or as the destruction of regulatory boundaries between sectors of an economy (OECD, 2000). The integration among telecommunications, publishing, broadcasting, cable, film, and computer software & data processing service industries has been conceptualized under the umbrella of a new business sector, the information industries. The information industries refer to businesses that are engaged in one of the following three processes: 1) producing and distributing information and cultural products, 2) providing the means to transmit or distribute these products as well as data or communications, and 3) processing data (U.S. Census Bureau, 1997). More specifically, the information industries may be grouped into three interrelated clusters of business sectors: 1) content production-related services (e.g., publishing, film, and broadcasting), 2) content delivery-related services (e.g., telephony and cable), and 3) data processing services (e.g., software and programming).
Simply, the telecommunications, broadcasting and other information
industries are rapidly integrating through digitization and deregulation, and those combinations have revolutionized the structure of the information industries. This transformation is referred to as convergence. Many scholars define convergence as the process of technological integration (Danowski & Choi, 1998; Fidler, 1997; Pavlik, 1998) or as the destruction of regulatory boundaries between sectors of an economy (OECD, 2000). As such, changing trends in the information industry are perceived as related to the concept of convergence.
Scholars view convergence from three perspectives: 1) the consolidation through industry alliances and mergers, 2) the combination of technology and network platforms, and 3) the integration between services and markets (Baldwin, et al., 1996; European Commission, 1997; Wirtz, 2001). Among them, convergence through cross-industry mergers and acquisitions leads not to the horizontal expansion of market share but to “the cooperation among companies from different sectors, or the expansion of companies into unrelated industries” (European Commission, 1997, p.25). Entering into new sectors of information industries, many media, telecommunications, and software & data processing firms are altering their value chains in order to network multimedia service systems (Wirtz, 2001). In this sense, convergence directly refers to the integration of industries across different business sectors in this paper.
Scholars view convergence from three perspectives: 1) the consolidation through industry alliances and mergers, 2) the combination of technology and network platforms, and 3) the integration between services and markets (Baldwin, et al., 1996; European Commission, 1997; Wirtz, 2001). Among them, convergence through cross-industry mergers and acquisitions leads not to the horizontal expansion of market share but to “the cooperation among companies from different sectors, or the expansion of companies into unrelated industries” (European Commission, 1997, p.25). In this sense, media convergence refers to integration among different business sectors. . Many media and communication firms are entering into new sectors and altering their value chains in order to integrate and network multimedia service systems (Wirtz, 2001).
This paper Chon et al. (2003) examines how the digital revolution and media deregulation policy such as the 1996 Telecommunication Act have alteraffected information industries through cross-industry mergers and acquisitions in the U.S. Generally, the Telecommunication Act of 1996 and the development of digital technology are seen to have opened vast opportunities industry. ThusIn other words, new distribution channels and policy deregulation policy on cross-ownership may are considered to have caused the structure of the information industries to change. Chon et al. (2003) This paper aims to improve the understanding of the changing structure of industrial integration with .a It focuses on the information industries where recent mergers and acquisitions have been particularly active: telephony, cable, broadcasting, software & data processing, and the Internet. Empirical data on mergers and acquisitions over a ninteen-year period is was analyzed to reveal the structural changes in the relationships among the information industries.
Theory
Cross-Industry Mergers and Acquisitions as an Entry Mode
Integration between firms is one method to generate capital required in a competitive market. It takes the form of joining firms thus creating a larger company (Alexander, Owers & Carveth, 1993). Such combinations of firms involve horizontal and vertical integration, sometimes both. Horizontal integration is the combination of two or more companies across the same level of production and distribution , for example, when one radio station acquires another . The potential benefits of this M&A activity are scale economies and an increase in market power. Vertical integration refers to the merger or acquisition of companies at different levels of the production and distribution, when asuch as a production company’s acquiressition of a broadcast station. This makes it possible to secure resources and to directly control product specifications (Lorange, Kotlarchuk & Singh, 1994).
Merger, as a way of integrating firms, refers to the combination of two corporations where only one company survives the transaction. The selling corporation, so called the merged corporation, goes out of existence when the transaction is completed. All its assets and liabilities are retained by the acquiring company. A consolidation is a type of merger in which both companies cease to exist after the transaction and instead a new corporation is formed. This new entity retains the assets and liabilities of both companies. (Alexander, Owers & Carveth, 1993, pp.116-117).
Several studies have explored the need for integration across different industries (Pitofsky, 1992, 1996; Porter, 1980, 1985). Porter (1980, 1985) pointed out the needs for corporations to exploit interrelationships among related businesses to reduce costs or enhance differentiation. Pitofsky (1992; 1996) explained further the economic benefits of mergers by the elimination of the operational inefficiency with an emphasis of alliances between different industry sectors in the new global technological innovation market where speed is the key to success.
Cross-industry integration in the media industries was also explored and proposed (Albarran, 1996; Foley, 1992; Picard, 1996). Picard (1996) argued that a media company may grow when stability may be enhanced or risks reduced through acquisitions, such as newspaper firms’ acquisitions of newsprint facilities. Like the case of telephone companies’ entry into cable industry, the economies of multiformity, which originates from the transactions like M&A, was proposed as a strategy of diversification in the media industries (Albarran, 1996). Foley (1992) identified several reasons for entry into other media industries such as limited revenue growth in local loop services, technological development in upgrading and the need to utilize the additional capacity, potential revenues from the home video market, and economies of scope.
Several studies have explored the need for integration across different industries. Early in 1980s Porter (1980; 1985) pointed out the needs for corporations to exploit interrelationships among related businesses to reduce costs or enhance differentiation. Pitofsky (1992; 1996) explained the economic benefits of mergers, indicating that this merger could eliminate the operational inefficiency. He also emphasized the importance of alliances between firms in the new global technological innovation market. In his view, integration between different industry sectors ishighly effective for the growth of a company especially when speed is the key to success.
Picard (1996) suggested that a media company may grow when stability may be enhanced or risks reduced through acquisitions, such as newspaper firms’ acquisitions of newsprint facilities. Albarran (1996) described the trend of conglomeration and consolidation in the media industries. He depicts strategies that corporations may employ to attain the economies of multiformity, which originates from the transactions like M&A between firms. According to his observation, a firm may diversify into a new industry using existing structure like the case of telephone companies’ entry into local cable business. Foley (1992) distinguished several reasons for entry into other media industries through integration. He identifies limited revenue growth in local loop services, technological development in upgrading and the need to utilize the additional capacity, potential revenues from the home video market, and economies of scope that may be accomplished due to utilization of existing distribution structures.
The temporal changes in the integration of media industries and reasons for them have been examined. Chan-Olmsted (1998) analyzed the strategic alliances before and after the 1996 and attributed reasons for alliances to utilizing different expertise, speeding up a venture with combined resources, as well as developing the economies of scope and range. In other words, a rationale for the mergers and acquisitions was to obtain resources such as labor, knowledge and capital for providing a host of different services like long-distance, local, wireless and cable (Standard & Poors, 1999a). Therefore, where the rapid technological developments in combination with liberalized regulatory reform both enable and force firms to seek new resources across technical and industrial borders, cross-industry mergers and acquisitions can be defined as an entry mode.
Chan-Olmsted (1998) examined the format of industry convergence through strategic alliances between companies before and after the 1996. There may be many reasons for these alliances. She pointed to reasons such as utilizing different expertise, speeding up a venture with combined resources, as well as developing the economies of scope and range. Simply, cross-industry mergers and acquisitions in the information industries can be defined as entry modes that shows how rapid technological developments in combination with regulatory reform both enable and force firms to seek new resources across technical and industrial borders. Thus, the rationale for the mergers and acquisitions is to obtain resources such as labor, knowledge and capital for providing a host of different services like long-distance, local, wireless and cable (Standard & Poors, 1999a).
The Process of Structural Changes in the Information Industries:
Deregulation and Digitizationy
The consolidation of information industries prompted by convergence has implications in relation to not only the development of communication technologies but also the changes in communication policy as well. Regulatory reform and deregulation in such industries as telecommunications play an important role in the increases in mergers and acquisitions in the information industries. Likewise, the deregulation of the telecommunications industry allows companies to enter more than one marketindustry. Deregulation provides a company with a possibility of offering one package for all types of services.
Technological developments made the convergence of media/telecommunications imperative, but a series of entry barriers, which have beenare imposed by governmental lawlegislation, impeded this transition. One important aspect of the Telecommunication Act of 1996, is is that it is fully based on economic principles that encourage (Bates, 1998; Krattenmaker, 1997). It seeks to stimulate competition inbetween different industries telecommunications by reducing entry barriers to market entry previously imposed by the FCC and prior legislation (Bates, 1998; Krattenmaker, 1997). It seeks to end the monopolization of cable and wired telephone markets and promote market entry through eliminating prohibitions on cross-ownership. Because it deals with so many diverse subjects, the following excerpts focus mainly on the provisions related to competition and market entry.