Media Concentration and Conglomeration

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Media Concentration and Conglomeration
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Announcements

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

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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

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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?

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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

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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

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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

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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

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Measures of concentration and diversity
Firm Share Accu. 1 1 1 2 2 3 3 3 6 4 4
10 5 5 15 6 5 20 7 10 30 8 15 45 9 1
5 60 10 40 100
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Measures of concentration and diversity

• The pink line represents the curve when all 10
  firms have equal market shares
• The yellow line represents the other extreme
  when a pure monopoly exists
• The closer the blue line is to the pink line, the
  less concentrated the market is
• Mathematically, we can use the area between the
  blue and the pink line to represent the amount of
  inequality

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Measures of concentration and diversity

• Gini coefficient
• Brown Formula 1 - ? (Xk1 Xk)(Yk1 Yk),
• where k starts from 0 and ends at n-1
• X refers to cum. proportion of population/firms
• Y refers to cum. proportion of income/market
  share
• 0 when market shares are perfectly equal, 1 when
  there is a monopoly
• Usually used for measuring income inequality in a
  society
• Around the world (United Nations, 2004)
• Australia 0.352 China 0.447 France 0.327
• Germany 0.283 India 0.325 Japan 0.249
• Mexico 0.546 UK 0.360 USA 0.408
• Hong Kong 0.434

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Measures of concentration and diversity

• Characteristics of Lorenz curve and Gini
  coefficient
• Insensitive to the number of firms
• Scenario 1 50, 50
• Scenario 2 25, 25, 25, 25
• Scenario 3 10, 10, 10, 10, 10, 10, 10, 10, 10,
  10
• Gini coefficient is 0 in all three cases
• A measure of inequality among players/categories
• However, it is very precise in the sense that
  it takes into account the full range of existing
  information

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Measures of concentration and diversity

• Herfindahl-Hirschman index
• Summing the squared market shares of all firms in
  a market
• Case 1 Case 2 Case 3
• Firm A 25 30 50
• Firm B 25 30 30
• Firm C 25 20 10
• Firm D 25 20 10
• HHI 2500 2600 3600
• Interpretation
• Concentrated when HHI gt 1800
• Somewhat concentrated when 1800 gt HHI gt 1400
• HHI for the HK newspaper market according to the
  survey results 2470.88

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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

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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

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Measures of concentration and diversity

• The indices are important tools for research
• Descriptive studies and explanatory studies
• Example Childrens 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

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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

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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

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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?

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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

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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

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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

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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

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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

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Concentration of ownership

• Over the past two decades, there have been
  widespread concerns about a continuing and
  seemingly accelerating trend of media
  concentration around the world
• Bagdikian and his book The Media Monopoly
• First published in 1980
• Sixth edition in year 2000
• Six media conglomerates are controlling most
  media companies and operations in the U.S. and
  have huge influence around the world
• General Electric, Time Warner, Bertelsmann,
  Disney, Viacom, News Corp.

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Concentration of ownership
Announced media mergers and acquisitions
1987-2002 (in million US dollars) Broadcasting
Film Publishing Total 1987 11231 3101 6410 20
742 1988 6774 3432 9852 20058 1989 9283 2174
4 8855 39882 1990 3962 10644 2174 16780 1991
4321 4843 3896 13060 1992 2236 593 1573 4
402 1993 9255 19031 2690 30975 1994 21108 10
026 3244 34378
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Concentration of ownership
Broadcasting Film Publishing Total 1995 61357
8267 7140 76764 1996 26397 2759 7962 37117 19
97 59371 8822 8429 76622 1998 91825 4629 1529
6 111750 1999 182102 3448 7087 192637 2000 640
87 183615 31331 279033 2001 97365 8061 4195
109621 2002 12930 3913 1507 18350
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Concentration of ownership
Largest Media Merger and Acquisition
transactions Date Target Acquirer Value of
deal 2000/01/10 Time Warner AOL 181568 2001/07/0
8 ATT Comcast Corp 72041 1998/06/24 Tele-Com.
Inc. ATT 69896 1999/04/22 MediaOne ATT 51874 1
999/09/07 CBS Viacom 40882 1999/10/04 AMFM
Inc Clear Channel 22735 1995/07/31 Cap.
C./ABC Disney. 18280 1989/03/04 Warner Com. Time
Inc 15113 2000/08/15 Infinity Broad. Viacom 13649
2000/03/13 Times M. Co. Tribune Co 11628
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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_Cultu
  re/images/media-concentration-cl.png

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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?

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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 ones own businesses to new markets

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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 ones
  investment
• Derives mainly from financial theories
• Similar to how common people invest in the stock
  market

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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

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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

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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

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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

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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

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Strategy of growthSynergy 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 Disneys takeover of
  Capital Cities/ABC One plus one adds up to
  four.
• The whole is greater than the sum of its parts

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Strategy of growthSynergy and branding

• Strategies
• Developing and packaging a single concept for
  various media
• A childrens 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
  childrens 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

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Strategy of growthSynergy and branding

• Cross-promotion
• E.g., shortly after Disney bought the ABC
  television network, some of the sitcoms featured
  the characters vacationing at Disneys 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
  Dions music video related to the movie
• News Corp., the other co-producer, owns FOX
  network and the network features special
  documentaries about Titanic

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Strategy of growthSynergy 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

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Strategy of growthSynergy 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 growthSynergy 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

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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

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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.
• CNNs news service aired on airport television
  monitors
• Magazines distributed solely in doctors 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 MA deals totaling more
  than 500 million dollars

65
Risks and failures

• Distribution of MA 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