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Background The entertainment industry demonstrates a multi channel structure, with companies owning several forms of companies in each link of the value chain. The industry is converging toward a single model, which combines production of content with multichannel distribution. All companies try to sell content in many ways, e. g. movie, TV show, book theme park, etc. All but two of major players in the industry conform to this model.
Non-conforming companies have regulatory barriers (foreign owned) or do so out of choice. Some companies (Disney) buy distribution channels, i. e. networks (ABC); others build their own (News Corp. , Time Warner) or do both Viacom (WB, CBS). The newest trend is to combine production and distribution with added distribution possibilities of internet (AOL Time Warner, Vivendi Seagram) CONTENT DISTRIBUTION Resources Creation Delivery Retail Actors/Writers Television Production/Movie Production Broadcast Television Networks/Cable television Networks Movie distribution Local Affiliates/Local cable companies/Local theaters In this industry we find vertical integration through direct ownership, as well as commercial transactions via long-term contracts and one-time spot market transactions.
Ironically, even the resources can be owned as in the case of the old studio system which tied actors to studies for a number years. In todays industry, these arrangements are still in place, with actors signing on for x number of picture contracts with various studios. Production companies can either be independent or owned by integrated companies. In either case, production from one company may be sold to a competing network or distributor. Finally, local television affiliates and local movie theaters are sometimes bound by contract, sometimes entirely independent, or sometimes owned by networks. This last situation is usually the case with large metropolitan areas, where the networks want to have a closer link to the customer.
Agents and other facilitators play a commercial conduit role of helping to bring together various people and companies along the value chain. The reasons for vertical integration include lowering risk (regardless of where profits are) and locking in distribution for high-risk production. But production companies supply all networks and networks access all suppliers, so motive for consolidation is as much to gain bargaining leverage as to lock in distribution. All companies are aiming for synergies, cross-selling to end users and cross platform selling of advertising In looking at the mergers along the value chain, companies are looking for complementary access (i. e. Viacom strong with the young audience, /CBS with the old).
However, all consolidation does not live up to its billing, with Disney as a good example. Disney has been hurting since its merger with ABC. The cultures have clashed, as have egos. Entertainment Industry Experience Value Chain Before government regulation in the 1950 s, the large Hollywood studios had been vertically integrated. Three studios owned production and worldwide distribution. This system was broken up by regulation, and it was not until the late 1980 s that the federal government again allowed companies owning studios (TV production units) to own TV broadcast networks (distribution).
In 1988, there were many separate companies such as: - Warner $ 3. 4 billion movies and TV production - Time $ 4. 2 billion publishing and cable - Disney $ 2. 9 billion cartoon & theme parks - Capital Cities/ABC $ 4. 4 billion network & stations - Paramount $ 3. 2 billion movies & publishing - Viacom $. 6 billion TV syndication & cable - News Corp. $ 3. 5 billion tabloids and production studio (20 th Century Fox) just starting network By 2001, the industry was dominated by six vertically integrated global companies: AOL Time Warner ($ 36. 2 billion) Disney ($ 25. 1 billion) Viacom ($ 20. 4 billion) Vivendi (Universal, $ 16. 3 billion) News Corp. ($ 13. 4 billion) Only one large company was left, Sony (Columbia pictures, $ 19 billion) that concentrates on production and only one large company left, GE (NBC, $ 5. 8 billion) that concentrates solely on distribution. Between 1985 - 2001, there were a number of M& A transactions that resulted in this vertical integration: Time Warner merged (1991), bought Turner (1995), built Warner network, and acquired by AOL (2001). Disney buys Capital Cities/ABC (1995) Viacom buys Paramount (& Blockbuster) (1993), builds UPN, then buys CBS (1999) Vivendi (a water utility) buys Seagram (2001), which had bought Universal (MCA) /Polygram from Philips Vivendi brings together content of Universal with Canal+, one of Europe's largest pay TV providers Seagram had content film, music, theme parks, but lacked distribution, i. e. TV network though it held a non-controlling interest in Barry Dillers USA networks. With purchase of Seagram, Vivendi aims to deliver music and video clips on broadband to TVs, PC's, mobile phones, and handheld devices.
Vizzavi will be its portal and will directly compete with AOL, especially in Europe. News Corp. bought 20 th Century Fox studio (1985), built Fox network and acquired content (sports teams like Dodgers & interests in other teams such as Knicks). They built the Fox network (number 2 n network among 18 - 49 year olds) from scratch. Fox is unique in that it produces and owns most of its own hits, unlike other TV networks. It studios also supply other networks.
These shows include Dharma and Greg and the Practice, which it supplies to ABC, Chicago Hope, which it supplies to CBS, and Buffy the Vampire Slayer, which it supplies to WB (see article below). Along with Warner, Fox is one of the top Hollywood TV studios. It achieved this position early in 1990 s, by snaring half dozen top comedy writers with lucrative salaries thus tying up the resource. Even if it sells shows to other networks, it not only profits from the sale, but also profits from syndication revenues over time.
In a desire to be everywhere, Fox built or bought cable channels in nearly every content area, e. g. Fox Sports that competes with ESPN, Fox News that competes with CNN, etc. All of the major entertainment companies, except for Sony and Vivendi, now own U. S.
TV broadcast network (distribution). However, these companies are prohibited from owning US television networks because of foreign ownership (similar to some restrictions on US utility ownership). Fox, whose parent company News Corp is owned by Rupert Murdoch, got around this issue by Murdoch taking up US citizenship. All of these companies except for General Electric (NBC) own production studios (idea factories for generating content).
Without content, NBC is forced to pay $ 13 mill per episode to Warner to renew top rated ER. Reasons for Vertical Integration As the entertainment industry moves to vertical integration through ownership, the question is why this integration could not just be purchased or contracted for, or achieved through alliances. Why is ownership necessary? One reason is the convergence of computing, telecom, information, and entertainment. This creates a hierarchy with content, the scarcest commodity, being the most valuable. However, the fundamentals of content are high overhead, high risk, and low margins.
The cost of making, marketing movies continues to increase, as the likelihood of a success becomes guesswork. While a couple hundred movies are made per year at a cost of over $ 50 million a piece, just 20 consume 40 % of total box office revenues. The odds are no better in TV production. One rationale for joining production and distribution is to guarantee outlets for production. With a captive outlet, there is a built-in output for content. Networks cut costs by owning / supplying more of their own prime time programming.
While commercial relationships still exist between production and distribution channels, networks try to be understanding of their own production units (ABC tries to be understanding toward Disney). But there are limits. Production companies cannot force bad shows on networks. Paramount, for example, cannot force CBS/UPN to carry shows that dont have an audience In 1998, Fox produced 14 series with only 6 appearing on Fox. Hits that appear on other networks go into Fox library and are then syndicated on Fox global satellite & other Fox platforms.
Production companies that also own networks - other outlets for their product also have additional bargaining power in the industry. If producer can threaten to pull hit shows from network, they gain bargaining power. For example, Warner can threaten to pull ER from NBC and its put on own network. Hot network too can also demand price for putting a show on the air. Thus, the entertainment industry is one in which the large entertainment companies have production as well as multiple forms distribution. However, production companies supply all networks and networks access all suppliers.
Everyone is buying each others programs. In this system the real rationale for vertical integration is by locking in distribution, companies have leverage in negotiations with production companies and networks. They are more able to hedge their bets as long as can credibly threaten to go elsewhere Another rationale for vertical integration is the ability for big entertainment companies to sell content, i. e. , the same character or idea, marketed in many ways. For example, the Rugrats, Nickelodeon cartoon characters, turned into a Paramount film, a Simon & Schuster book, and a website. The content can come from anywhere movies, TV, music, publishing, merchandising, theme parks, internet sites and the content is repeatedly churned to maximize returns.
For the model to work there has to be synergy along the value chain. Different parts of the business have to be aligned so that they add value to each other. Within Disney, there is a central synergy department so that content providers ideas are known and the company uses them. All parts of Disney try to take advantage of the same ideas. However this does not always work. ABC is not doing better financially or in the ratings since merger with Disney; but ESPN is spinning off restaurants, a magazine, & a website, and has benefited There is still another type of synergy complementary assets (e.
g. relationships to old CBS and young Viacom). Originally, CBS cable flopped and, lost young viewers to hip cable upstarts. Viacom deployed MTV, Nickelodeon, and other cable networks popular with young audiences to help CBS. Personalities now crisscross from MTV, etc. to CBS.
CBS is number one in total viewers, but third in advertising revenues because of its old audience. There is a hope that Viacom with its younger audience can revitalize CBS. Closeness to Customers Each revolution in distribution and transmission gives companies with content (production) more outlets for their product. All companies are big businesses that can create content and distribute in many different of ways. The evolution has been from broad mass audiences (TV networks), aggregation of specific audiences (children, new, movies, comedy) on cable, to catering to individual interests via direct satellite services (15 % of U.
S. homes) and digital cable (> 250 stations), to markets of one and entertainment on demand on internet (similar to distribution generation in the electric industry). Truly interactive TV will enable viewers to see cartoons, movies on demand, and build their own newscast. Networks that try to please everyone are losing out to those that target individual groups. Americans began watching less television as their choices multiplied. Combined audience share for nightly network news fell from a peak of 75 % in 1980 to 47 % in 1998.
Many news choices now exist CNN, MSNBC, Fox News, CNBC (business), ESPN (sports), etc. Cable, in addition to providing choice to the customer, also has an advantage over conventional TV in that it provides two sources of revenue: subscriptions and advertising. Well-established cable networks have become the most profitable parts of entertainment businesses. Almost all media moguls rose through cable and it was the most pr...
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Research essay sample on 20 Th Century Vertical Integration
