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Chapter 6

Strategy and Competition in the Multichannel Media Industry

As a relatively newer challenger to traditional media incumbents such as print and broadcast media, multichannel media firms or multichannel video programming distribution (MVPD) services dramatically altered not only the competitive dynamics in the television industry but also audi- ences’ viewing behavior since the 1980s. The MVPD market continues to evolve and remain a powerful contender as technological advances brought forth the Internet, digitization, broadband, and interactivity. Adopting the strategic framework proposed in chapter 2, this chapter first examines the economic, technological, political, and sociocultural changes that have influenced the MVPD industry and continue to discuss the fac- tors that have affected the competitive dynamics of the MVPD market. Be- cause cable television and DBS services comprise more than 96% of all MVPD subscriptions in the United States (Standard & Poor’s, 2004), this chapter focuses on addressing these two multichannel video media.

CHANGES IN THE GENERAL ENVIRONMENT

As discussed in the previous chapter, elements in the broader context of a society influence the operations of industries and the firms within them. Although the general environmental trends are the same for all media industries, their impacts on individual markets are different. In this context, the major environmental developments and their implications to the MVPD sector are presented next.

Economic Changes

The growth of a global economy has substantially contributed to the market potential of MVPD services. The interconnectedness of different

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economies, including freer flow of products and the establishment of mechanisms enabling that flow, encourages multinational corporations to invest in communications infrastructures in various countries. The development of network capacities helped establish multichannel media services. The subsequent programming needs then fueled the interna- tional expansion of many MVPD firms. The relatively low interest rates during various time periods between the 1980s and 2000s also fostered a favorable environment for mergers and acquisitions. The M&A activi- ties consolidated many smaller systems into large multiple system op- erators (MSOs), which significantly changed the competitive dynamics of the industry. The relatively robust growth of the U.S. economy from 1980 to 2000 also increased consumers’ disposable income, making MVPD and many of its auxiliary services more affordable. In addition, the increase in consumer spending translated to advertising revenue growth for the cablecasters, which more than tripled over the last 10 years (Standard & Poor’s, 2004).

Technological Changes

Technological advances in the last two decades have fundamentally shaped today’s MVPD market. In fact, technologies underlie the very existence of DBS and cable television and drive the types of MVPD ser- vices that might be available in the future. From addressable converters that catapulted premium services like HBO and optical fibers and com- pression that stimulated the development of new channels to the more recent broadband and digital communication technologies that facili- tate the arrival of better audiovisual quality, more content options, fast data transmissions, and interactivity, technological changes have con- stantly brought forth new business opportunities for MVPD firms. The essentiality of technology in this market also means that there is more strategic heterogeneity among MVPD services. That is, because of the product diversity enabled by technologies, there is more room for stra- tegic competition and differentiation among the MVPD firms. In addi- tion, many of the same technologies have also altered their broadcast counterpart’s conventional capabilities, making the broadcasters more competitive (e.g., HDTV and multicasting).

Political Changes

The Telecommunications Act of 1996 and the recent, more relaxed regu- latory environment has also impacted the MVPD market by fostering an environment for group ownership and technological development. Spe- cifically, the deregulatory climate facilitated the formation of large MSOs, which are able to improve operational efficiency through cluster- ing strategies; have better access to resources such as programming through their increasing corporate relationships with cable networks

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(i.e., vertical integration); and explore potential digital, interactive, and even telephone services via their improving broadband platform. Similar to the effect on broadcasters, the opening of media borders and commer- cialization made possible by the global political changes toward privat- ization and commercialization of media systems also led to the option of global diversification and the increase of programming demands and thus the expansion potential for MVPD firms such as cable networks.

Sociocultural and Demographic Changes

A number of developments in this area have influenced the MVPD mar- ket. The growing income disparity between different socioeconomic au- dience segments discussed earlier has elevated the competitiveness of MVPD firms, which are experienced in market segmentation strategies. More women in the workforce as well as increasing workplace diversity also point to the importance of programming content and scheduling flexibility, which are more feasible in a multichannel setting. The busy lifestyle of today’s families makes more valuable the benefits of on-de- mand services provided by cable and DBS services. Finally, the fast growth of two demographic groups—the Hispanic and African Ameri- can markets—has contributed to the value and development of Span- ish-language and African American–focused programming channels. Besides the established specialty brands such as Univision and Black En- tertainment Television (BET), mainstream networks like ESPN and HBO have extended their brands to include ESPN Deportes and the HBO La- tino channel to target these specific audience segments.

CHANGES IN MULTICHANNEL MEDIA INDUSTRIES

To describe the nature and state of competition in the MVPD industry, we again follow the framework depicted in chapter 5 with a review of five fac- tors that shape the competitive dynamics of a market: bargaining power of suppliers, bargaining power of buyers, threat of substitute products, threat of new market entrants, and rivalry among competing firms.

Bargaining Power of Supplier

In the context of the MVPD market, suppliers are the producers/suppli- ers that make available the MVPD contents like local origination and community access information, audio programming, electronic pro- gram guides, news, weather, sports, original programming, retransmitted broadcast signals, and syndicated, recycled program- ming. From this perspective, the main suppliers include information and audio services (e.g., TV Guide and XM), television syndicators (e.g., WB syndication), studio and independent producers (e.g., Universal Studio), cable networks and systems that produce original contents such as news, weather, public affairs, and sports (e.g., ESPN and CNN), and broadcast television stations. Because the audio and information

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components of MVPD services are typically not the primary attraction for an MVPD service (at least currently), our discussion of the bargain- ing power of suppliers focuses on the other four groups.

Because most MVPD services were originally developed as an alterna- tive distribution system for retransmitting broadcast signals, historically studio producers and syndicators did not regard the MVPD market as a primary revenue source. Consequently, the exercise of supplier power has not been as evident as in the broadcast market. Also, because of the nu- merous sources of MVPD programming contents, diversity of MVPD buyers, and their specialized content preferences as a niche medium, there is less domination by a few content suppliers and thus less concentration of supplier power. In addition, the extent of vertical integration between MSOs, cable networks, and studio producers has somewhat neutralized the supplier–buyer power struggle in the market. For example, Time Warner, a major MSO, has ownership interests in movie producers New Line Cinema and Castle Rock Entertainment, news producer CNN, and even the sports teams Atlanta Braves and Atlanta Hawks. In fact, among the 339 cable networks at the end of 2003, about one third of them, with many producing their own original programming, are affiliated by own- ership with an MSO (FCC, 2004). The pervasiveness of vertical integra- tion between cable networks and MSOs actually characterizes the industry and very often changes the dynamics between many MVPD suppliers and buyers from competitive to cooperative.

As the multichannel industry continues to build its own identity, in- vesting more than $11 billion in original programming (Cabletelevision Advertising Bureau, 2004), the linkage between content suppliers and MVPD firms is becoming more strategic. In fact, the success of a content product is no longer dependent simply on generating above-average rev- enues in a particular business sector but also on enhancing other relevant products under the same corporate umbrella. In other words, it is also strategically beneficial for MVPD firms to carry affiliated networks or buy programs from their sister studios. Table 6.1 shows that most cable networks that offer more original programming and/or dominate primetime cable viewing are, in fact, owned by media conglomerates. An examination of the most popular cable networks reveals that they are ba- sically owned by two groups of media conglomerates: one group includes Time Warner and News. Corp., which have powerful MVPD properties along with production holdings, and the other group includes Disney and Viacom, which have powerful broadcast properties with production ca- pabilities. It is clear that the competitive strategies nowadays are corpo- rate and multilateral rather than segmented and vertical.

Another important negotiation power of suppliers that needs to be addressed is that of broadcasters because the carriage of broadcast sig- nals is an essential part of MVPD services. This is indeed a contentious issue amid the expansion of the number of cable networks and the ar- rival of terrestrial digital television that also needs multichannel car- riages. Historically, the broadcasters had more bargaining power over

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TABLE 6.1

Top 10 MVPD Service Providers and Their Affiliate Programming Networks

Rank Company % of MVPD Subscribers

Affiliate National Networks (Ownership %)

Affiliate Regional Networks (Ownership %)

1 Comcast 22.69 Discovery HD Theatre (20) E! Entertainment (50) G4 Video Gaming Network (94) Golf Channel (99) iN Demand (50) Outdoor Life Network (100) QVC (57) Style (60)

CN8-The Comcast Network (100) Comcast SportsNet (78) Comcast SportsNet Mid Atlantic (100) Comcast Sports South East (72) Empire Sports Network (33) Fox Sports Net New England (50) New England Cable News (50) Tri-State Media News (100)

2 DirecTV 12.32 Fox Sports Net Fox Movie Channel Fox News Channel FX National Geographic Channel Speed Channel

Fox Sports Arizona Fox Sports Bay Area Fox Sports Chicago Fox Sports Detroit Fox Sports Intermountain West Fox Sports Midwest Fox Sports New England Fox Sports New York Fox Sports Northwest Fox Sports Ohio Fox Sports Pittsburgh Fox Sports RockyMountain Fox Sports South Fox Sports Southeast Fox Sports Southwest Fox Sports West Fox Sports West 2 Madison Square Garden Network Sunshine Network

3 Time Warner 11.62 Action Max (100) @Max (100) Cartoon Network (100) Cinemax (100) CNN (100) CNN En EspaZol (100) CNN Headline News (100) CNN International (100) CNNfn (100) Comedy Central (50) Court TV (50) 5 StarMax (100) HBO (100) HBO Latino (100) HBO 2 (100) HBO Zone (100) iN Demand (33) MoreMAX (100) OuterMax (100)

Bay News 9 (100) Central Florida News 13 (50) New York 1 News New York 1 Noticias News 8 Austin News 14 Carolina R News Rocheste Turner South (100)

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Ovation: The Arts Network (4.2) TBS (100) Thriller Max (100) TNT (100) Turner Classic Movies (100) WMAX (100)

4 EchoStar 9.35

5 Charter 6.87

6 Cox 6.67 Animal Planet (25) Discovery (25) Discovery En Español (25) Discovery Health (25) Discovery HD Theater (25) Discovery Home & Leisure (25) Discovery Kids (25) Discovery Times (25) Discovery Wings (25) Health Network (25) iN Demand (15) Science Channel (25) TLC (25) Travel Channel (25)

Arizona News Channel (50) Cox Sports Television (100) Local News on Cable (50) News Now 53 (50) News on One (50) News Watch 15 (50) Rhode Island News Channel (50) Sunshine Network (6.3)

7 Adelphia 5.43 Empire Sports Network (67)

8 Cablevision 3.15 AMC (60) Fuse (60) Fuse on Demand (60) Independent Film Channel (60) WE (60)

Fox Sports Net Arizona (45) Fox Sports Net Bay Area (45) Fox Sports Net Chicago (45) Fox Sports Net Detroit (45) Fox Sports Net Florida (45) Fox Sports Net New England (45) Fox Sports Net New York (45) Fox Sports Net Ohio (45) Madison Square Garden Network (41.5) MSG Metro Guide (80) MSG Metro Learning Channel (80) Neighborhood News (75) News 12 Connecticut (75) News 12 Long Island (75) News 12 New Jersey (75) News 12 Bronx (75) News 12 Westchester (75)

9 Bright Housea 2.19

10 Mediacom 1.66

Note: From Federal Communications Commission (2004) and “Who Owns What” (2004). aSubsidiary of the Time Warner Cable Group.

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cable systems when cable-only content was very limited. As cable con- tinues to invest in its own original programming, the power of broad- casters is lessening. Nevertheless, the broadcasters will still have a certain degree of countering power as long as there are differentiated el- ements that cannot be satisfactorily substituted by MVPD program- ming (e.g., the Super Bowl). Finally, it is important to view the relationship between television-broadcasting suppliers and MVPD firms from a corporate perspective, given the fact that many broadcast- ers have corporate owners that are also heavily involved in the MVPD market (e.g., Disney and Viacom); the broadcasters’ bargaining power may materialize as a means to advance other corporate interests.

A final note on the bargaining power of the suppliers is the potential of the pay-per-channel scenario (à la cart program pricing). Technologi- cal advances have made the offering of à la carte programming more feasible. That is, it is now possible for individual consumers to choose to pay for only the channels that they prefer to watch rather than paying by programming tiers. Industry practitioners argued that an à la carte pricing system would result in a restructuring of the cable-program- ming business that would harm consumers by reducing choice, elimi- nating programming diversity, and driving up prices (National Cable & Telecommunications Association, 2004). It is our assertion that such a fundamental change would place a substantial financial burden on the programmers. In other words, the entry barriers to the programming market would likely be raised because of the increased costs in product development and marketing. The need for additional resources (and greater bargaining power) might facilitate more mergers and acquisi- tions in this sector. The pay-per-channel system would also diminish the role of service providers and shift the “value” of the MVPD service to the programming packagers and other facilitators. As a result, competi- tion might heat up between different MVPD service platforms because they would become less differentiated.

Bargaining Power of Buyer

In the context of the MVPD market, buyers include audiences and adver- tisers. From the perspective of the audience buyers, their bargaining power resides in the investment of their “time” in the programming of- fered by MVPD services and the subscription or per-unit fee that they pay to the service providers. It is our assertion that MVPD audiences do not in general possess strong bargaining power over MVPD service pro- viders for the following reasons: (a) Though the audiences directly pay for MVPD services, the pricing structure of most MVPD services some- what insulates consumers from pricing sensitivity through package marketing; (b) the switching cost is relatively high once MVPD sub- scriptions have been established; (c) most MVPD products are differenti- ated and branded; and finally, (d) there are no substitutes for MVPD

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products available in most local markets (note that both DBS and cable are considered MVPD products).

From the perspective of the advertising buyers, MVPD services have become viable commercial outlets over time. In fact, cable network viewership has grown steadily in recent years, largely at the expense of the major broadcast networks. Ad-supported cable had a prime-time audience share of 50.3% in 2003, versus a combined 44.8% for the four major broadcast networks. The growth in viewership has also trans- lated to increased shares of ad dollars as cable services garnered over 33% of total ad spending in 2003 (Cabletelevision Advertising Bureau, 2004). MVPD services, namely cable networks, are now a necessary communications channel for brand marketers because of their ability to target specific audience groups. The essentiality of MVPD services in de- livering defined market segments (e.g., Nickelodeon for children) and the fact that advertising revenue is not the only source of income for MVPD firms means that the bargaining power of advertisers is compar- atively less significant than in the broadcast market.

Threat of Substitute

Substitute products are different goods or services from outside of the MVPD market that perform similar functions. In this context, broad- cast content, video programming provided by local exchange carriers (LECs), Internet video, and home video sales and rental can be viewed as potential substitutes for MVPD services. In the case of broadcast signals, studies have shown that broadcast and cable television are highly substitutable (Waldfogel, 2002). Nevertheless, we believe that the substitutability is becoming moderate because many MVPD channels now offer highly differentiated, niche programming dissimilar to broadcasters’ more mass-appeal content. As for competition from the telephone sector, most large incumbent LECs such as Ameritech (now SBC) and Qwest, despite various attempts to offer video distribution ser- vices via existing copper telephone lines using very high-speed digital subscriber lines (VDSL), have exited the video business, thus presenting limited substitution threats because of unavailability in most local mar- kets (FCC, 2004). In terms of Internet video, notwithstanding the in- creasingly accessible real-time and downloadable online video, near broadcast-quality streaming video is still not widely available, making it a less direct competitor of MVPD services. Finally, the sale and rental of home video, including videocassettes, DVDs, and laser discs, do pose a certain degree of substitution threat for the premium and pay-per-view offerings of MVPD services. To counter such a threat, cable operators have aggressively invested in upgrading their infrastructure to allow for advanced video services such as digital video, video on demand (VOD), and even telephone services. In summary, MVPD services do face some degree of threats posed by a variety of substitutes; however, be-

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cause of their continuous investments in original programming, differ- entiation, and technological development, MVPD firms have obtained some competitive advantages over their competitors from other sectors.

Potential Entrants

With the passage of the Telecommunications Act of 1996, the U.S. gov- ernment attempted to create an environment that encourages competi- tion from new entrants outside of the MVPD market. In this context, the potential entrants include LECs, broadband service providers (BSPs), electronic and gas utilities, and new DBS service providers (FCC, 2004). As mentioned previously, most LECs have decided to stay away from a pure video-programming business model or enter the market through comarketing with existing DBS providers. The LECs’ choice to concen- trate on expanding their broadband telecommunications services rather than video-programming products means limited potential addition of competitors from this sector. Another group of potential entrants, BSPs, on the other hand, have grown from simple local overbuilders to state-of-the-art services that offer bundled telecommunications ser- vices including video, voice, and high-speed Internet access. Neverthe- less, there are significant entry barriers for this group of contestants (U.S. General Accounting Office, 2002b). First, BSPs’ access to program- ming products has been difficult due to vertically integrated cable pro- grammers and unaffiliated programmers that make exclusive agreements with cable operators. Second, BSPs often have problems ac- cessing vital sports and regional news programming as a result of ex- emptions to the program access rules. Third, BSPs have difficulties obtaining franchises from local governments or gaining access to VOD equipment, public rights of way, and utility poles needed to expand their systems (FCC, 2002, 2004). As for potential entrants from the utilities sector, although some utility companies have engaged in the provision of video services through overbuilding incumbent cable systems, such services are not widespread. Though characteristics such as ownership of fiber-optic networks and access to public rights-of-way remove some of the entry barriers, in general, the entry by electric and gas utilities is limited mostly to rural areas where other telecommunications firms may not be willing or able to provide the full range of advanced services (FCC, 2004). Finally, the barriers to entry remain substantial for new DBS services. The economies of scale necessary to set up the satellite uplink and distribution system, required capital, access to program- ming, and even expected retaliation from the existing two established DBS services, DirecTV and DISH Network, translate to little incentive for a third DBS service.

Whereas there has been very modest threat of new entrants at the ex- hibition stage (e.g., distribution systems such as MSOs and DBS ser- vices), we have witnessed a tremendous growth in the number of MVPD programming networks in the last decade. Today’s cable systems offer

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an average of 70 analog video channels and approximately 120 digital video channels, with additional bandwidth to provide high-definition television, VOD, and Internet access services. Through this expanding capacity, more MVPD programmers have entered the market, reaching a total number of more than 330 networks by the end of 2004 (by con- trast, most local markets can sustain only one or at most two cable sys- tems because of the extent of investment to wire a community). Nevertheless, it is quite a challenge for new programming networks to survive without the carriage by leading MSOs because the top four MSOs control as many as 56% of nation’s cable subscriptions (FCC, 2004). The extent of vertical integration between MSOs and cable net- works is therefore one of the most significant barriers to entry for stand-alone networks. In essence, the MVPD market is at a stage of de- velopment that represents a maturing industry with relatively high en- try barriers, whereas the competitive dynamics materialize in the rivalry within the market.

Internal Rivalry Intensity

The MVPD marketplace in the United States has been through some transformations in the last few years because of technological advances, consolidations of services, and the growth of alternative satellite-based services. Only a decade ago, cable systems dominated this market with almost 100% of the nation’s multichannel subscribers (National Cable & Telecommunications Association, 2003); the number now is close to 75% as DBS subscribership grew significantly, reaching 21.6% of all MVPD households. The remaining 3.5% of MVPD subscribers are shared by minor services such as satellite master antenna television (SMATV) (aka private cable), home satellite dishes (HSD), multichannel multipoint distribution services (MMDS) (aka wireless cable), BSPs, and open video systems (OVSs) (FCC, 2004). Because the majority of the MVPD services are offered by either cablecasters or DBS firms, we focus our following discussion on the rivalry between these two groups. Note that the focus here is on MVPD service providers rather than program- ming distributors such as HBO and CNN. The nature and state of the ri- valry between these firms are addressed later in the chapter.

How do cable television and DBS compete, and will DBS continue to take shares away from cablecasters? There are different characteristics between DBS and cable that shape the competitive dynamics in this market. They can be discussed from the perspectives of programming access, service and pricing, and technology. In fact, barriers of access to programming were historically the major obstacles that hindered the early growth of satellite-related multichannel services. Two legislations, the Cable Television Consumer Protection and Competition Act of 1992 and the Satellite Home Viewer Improvement Act of 1999, successfully removed most of the barriers that prevented DBS operators from access-

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ing vertically integrated programming on nondiscriminatory terms (the rules prohibit cable operators from forming exclusive deals with their affiliated cable networks in the sale and distribution of satellite-de- livered programming and from distributing local broadcast signals) (FCC, 2004). It was actually found that DBS are able to compete with ca- ble more effectively where they can offer local signals (FCC, 2004).

DBS became even more competitive when, at the end of 2003, News Corporation purchased 34% of Hughes Electronics, DirecTV’s parent company, for $6.6 billion in cash and stock. Armed with the ownership of Fox, an important supplier of cable content, particularly news and sports channels such as the Fox Sports regional sports networks and the top-rated Fox News Channel, DirecTV now has access to an array of pop- ular MVPD contents from its affiliated programming networks (Higgins, 2003). Furthermore, Liberty Media, the corporate owner of major MVPD networks such as the Discovery Channel and QVC, is the largest outside shareholder of News Corporation, owning 17% of its equity (Higgins, 2003; Who Owns What, 2003). The vertical integration provides DirecTV with an advantage long enjoyed by its cable MVPD counterpart.

The leveling of the playing field contributes to more internal rivalries in the MVPD industry, at least in markets where DBS is able to offer comparable local and national programming packages. In essence, pro- gramming access in the forms of extent, cost, and exclusivity signifi- cantly impacts the competitiveness of DBS as a newer entrant to the market versus the more established cable incumbents. The key strate- gies here for DBS are to strike a balance between the cost of adding local channels to more markets and raising subscriber numbers and to ag- gressively seek exclusivity of programming for which they have no ownership (e.g., DirecTV’s NFL Sunday Ticket package) while control- ling programming costs so they are able to offer comparable or lower package prices to consumers.

From the perspective of services, DBS was consistently ranked to have better consumer satisfaction and pricing than its cable counterpart (J.D. Power & Associates, 2003; Olgeirson, 2003; Schaeffler, 2003). As for technology issues, though the potential for broadband Internet access and other advanced video services such as VOD is promising, studies have found that the majority of the consumers did not find Internet ac- cess services to be a top concern when choosing between DBS and cable (U.S. General Accounting Office, 2002a). In other words, cable’s aggres- sive deployment of cable modem is not, at least currently, considered a strong differentiating point between DBS and cable. In fact, channel va- riety and prices are the top considerations for choosing between the two MVPD platforms (U.S. General Accounting Office, 2003).

It is our assertion is that cable television will remain the dominant MVPD service for the following reasons. First, the MVPD industry growth rate has slowed down, which means that DBS would have to take customers from the incumbent cable systems to expand its cus- tomer base, most likely through pricing strategies. Such a competitive

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engagement reduces profitability and is sustainable on only a short-term basis. Second, there is a lack of major differentiation be- tween cable and DBS programming offerings. Third, the switching cost from cable to DBS is relatively high considering the up-front expenses and the cost of equipment upkeep (though it is getting lower). In fact, industry reports have suggested that DBS has exploited its potential market and will focus on maintaining its modest market share (ZenithOptimedia, 2002). DBS, however, will continue to be a formida- ble competitor to cablecasters for the following reasons. First, there exist high fixed costs for distributing DBS signals, which means that DBS ser- vices are motivated to use pricing and packaging strategies to maximize their sales volume. Second, there are high exit barriers for DBS firms such as their specialized assets and strategic interrelationships with other media properties (e.g., DirecTV and News Corp.), which compel them to remain in the market and compete. Finally, a DBS service might carry high strategic stakes for its diversified corporate owner. For in- stance, DirecTV is critical for News Corp. because it is News Corp.’s only MVPD distribution arm when competing with a media conglomerate like Time Warner that multilaterally engages News Corp. in both the broadcast and MVPD markets.

Going from different platforms to individual competitors, the field of MVPD services is largely populated by major MSOs. The two DBS pro- viders, DirecTV and DISH Network (i.e., EchoStar), were ranked the sec- ond- and fourth-largest MVPD service providers, serving close to 22% of the MVPD subscribers in 2003, slightly less than that of the top MSO, Comcast (FCC, 2004). Time Warner, with close to 12% of the MVPD market share, was number three on the list. The rest of the leading MSOs, including Charter, Cox, Adelphia, Cablevision, Bright House, and Mediacom, all garnered less than 7% share of the market.

How competitive are these MVPD services? One way of assessing com- petition is to examine the degree of concentration in a market because of structural effects on firm conduct, strategic options, and profitability as proposed by industrial economics’ SCP notions. To this end, we can use concentration measures to benchmark industries by the market share (percentage of sales) held by the largest firms. Economic theory and em- pirical research suggest that highly concentrated industries (i.e., those in which most of the market is held by a few powerful firms) face little pres- sure to compete through services, pricing, or new technologies. There are two commonly used measures of industry concentration: the n-firm concentration ratio (CR), where n is the number of the largest firms in- cluded in the measure, and the Herfindahl–Hirschman Index (HHI). Whereas the n-firm CR is the sum of the percentage of market shares held by the number of largest firms, the HHI is defined as the sum of the squared percentage of market shares of all firms in the industry, which is generally a more comprehensive and revealing measure of industry con- centration. According to Shepherd (1987), a CR4 between 40 and 60 iden- tifies an industry with firm concentrations optimal for competitive

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behavior. Scherer and Ross (1990) identified the boundaries for the CR4 as 45 and 60. Scherer and Ross also reported finding that the optimal CR8 for a competitive industry is 70 (which roughly corresponds to a CR4 of 50 in the U.S. economy). The Federal Trade Commission (FTC) uses both the CR and the HHI to assess the extent to which a proposed merger will affect competition in that industry and is unlikely to challenge mergers when the HHI is below 1,000. According to the U.S. Department of Jus- tice (DOJ), a market with an HHI of less than 1,000 is considered unconcentrated, between 1,000 and 1,800 moderately concentrated, and over 1,800 highly concentrated.

Nationally, the MVPD market had a CR4 of 56%, CR8 of 78, and HHI of 1,031 by the end of 2003 (FCC, 2004). The CR4 ratios have fluctuated over time from 47% in 1993 to 55% in 1998, and then dropped to 52% in 2001 and 50% in 2002, whereas the HHI moved from 880 in 1993 to 1096 in 1998, 905 in 2001, and 884 in 2002. Overall, today’s national MVDP market is on the borderline of unconcentrated or competitive. Locally, however, most markets have only one cable system in addition to the two DBS options available to consumers. The significant local en- try barrier due to cable’s natural monopoly characteristic deters new entrants and protects the cable incumbent from other cable MVPD chal- lengers, thus making most local markets oligopolistic with one domi- nant leading firm (i.e., cable franchise holder). The two-tier competitive scheme suggests that whereas we may observe more rivalries between MVPD service providers at the national level in regard to programming development and acquisitions, technology adoption, and audience mar- keting (especially from the DBS providers), there is relatively more lim- ited competitive behavior between local MVPD units.

It is our assertion that the next stage of competitive strategy for MVPD providers will move from a focus on original programming de- velopment to advanced services marketing and advertising sales en- hancement (for cablecasters). There is an increasing pressure to derive new revenues from new products (e.g., broadband, VOD, and personal video recorder [PVR]) as the demand for multichannel video is slowing and to improve the cable ad sales process because cable has successfully established itself as a differentiated, good target ad medium through its programming investment. In fact, technological advances at local cable systems have enhanced local cable advertising by making customized advertising possible. Advertisers now can reach more than 22 million households in the top 10 interconnects and more than 52 million in the top 100 interconnects, making cable a more competitive advertising medium (Cabletelevision Advertising Bureau, 2004).

Several themes seem to permeate throughout our discussions thus far of the changes impacting the MVPD market. They include the perva- sive consolidations that reshaped the structure and competitive behav- ior of this industry, the increasing strategic diversity among different MVPD firms, and the essentiality of realigning resources to capitalize on the new broadband technologies and new media services for MVPD

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firms. The following sections elaborate on the alliance and M&A factor, apply a strategic management concept to evaluate the strategic multi- plicity in this market, and reexamine the MVPD value chain considering the addition of new media services and the trend toward convergence.

FORMATION OF STRATEGIC NETWORKS AND CONSOLIDATION OF OWNERSHIP

As discussed earlier, consolidations in the MVPD industry have created large, clustered, and vertically integrated MSOs. We now examine how the MVPD firms have formulated strategic networks such as joint ventures and acquired more properties to enhance their competitive positions.

Strategic Alliances

To gain access to programming products and provide better coordinated marketing of MVPD services, to increase speed in product development or market entry, and to share knowledge and develop industry stan- dards, MVPD firms have geared up the formation of strategic networks with programmers and producers, technology firms, and even tele- phone companies.

Alliances With Programmers. The integration of MVPD service providers and MVPD programming distributors has been increasingly accomplished not only by mergers and acquisitions but also by joint ventures and other marketing agreements. The partnerships are espe- cially evident in the area of pay-per-view/VOD development and mar- keting. For example, Starz Encore Group has formed various marketing alliances with DBS MVPDs such as DirecTV and EchoStar Communica- tions to increase the subscription of pay-per-view services (“Starz Inks Multi-Tactical,” 2004). Comcast, the largest MSO, has entered a joint venture with Sony to develop new cable networks and utilize Sony’s movie properties to enhance Comcast’s video on demand service (Grant, 2004). In essence, the MVPD service providers, with a growing strategic network of content producers and distributors, are better positioned to quickly deploy attractive content products for a platform that is in- creasing in capacity and interactivity.

Alliances With Technology Firms. Another alliance strategy for the MVPD service providers seems to be developing a network of technol- ogy-driven services to explore new revenue opportunities. Parise and Henderson (2001) once suggested that technological advances tend to in- duce strategic alliances as firms strive to acquire technology complementarity, reduce innovation time span, lessen uncertainty in terms of emerging technologies, and position themselves when there is a convergence of several industry segments. News Corp. and TiVo Inc. agreed to work together on a PVR-digital satellite television venture in the

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U.K. The companies even cobranded their PVR-based personal television services TiVo and Sky (Dickson & Kerschbaumer, 2000). Many MSOs eye- ing broadband and new media expansions have also configured a strate- gic network of telecommunications technology firms. For example, AT&T Broadband (now part of Comcast) and Matsushita Electric Corp. of America formed a joint initiative to develop advanced digital set-top boxes to stimulate the introduction of new broadband video, voice, and data services via cable set-tops (“Panasonic Announces Alliance,” 2000). Time Warner also has a strategic marketing and technology agreement with Samsung Electronics to collaborate on an AOLTV set-top box that would feature TiVo PVR functionality. To explore the potential of new in- teractive services, Time Warner and Royal Philips Electronic even formed a so-called global strategic alliance to develop new e-commerce platforms for cable television (“AOL Forms Tech Partnerships,” 2001).

The expansion of broadband services via strategic networks is also important for the wireless MVPD service providers. EchoStar Commu- nications joined force with PanAmSat in an alliance to distribute content through Excite@Home’s broadband network. EchoStar also entered an- other agreement with Geocast Network Systems to deliver broadband services to personal computers (PCs) through EchoStar’s DISH Network satellite TV service (Connell, 2000). On the other hand, DirecTV and Microsoft collaborated in their delivery of a branded UltimateTV that features PVR technology exclusively for DirecTV subscribers. The stra- tegic networks of technology firms and broadband networks accelerate MVPD service providers’ new media diversification efforts with less risk and more resources.

Alliances With Telcos. In the attempt to position themselves more competitively for broadband services, DBS MVPD providers have also chosen to partner with telephone companies in bundling and comarketing products. For instance, EchoStar Communications and SBC Communications entered a strategic alliance that combined DISH Network’s digital satellite television offerings with SBC’s broadband digital subscriber line Internet access service (Carter, 2002). The EchoStar–SBC plan offers five bundled services—local phone, long dis- tance, cell phone, satellite TV, and broadband Internet access—and is branded as SBC DISH Network. DirecTV Broadband also entered an agreement with WorldCom to expand DirecTV DSL service across the western and midwestern United States via access to WorldCom’s na- tionwide DSL services (“SBC Changes DSL,” 2002). Qwest, on the other hand, formed comarketing partnerships with both DirecTV and EchoStar (Latour & Grant, 2003). Similar RBOC–DBS partnerships were formed between BellSouth and DirecTV and Verizon and DirecTV. The alliances with another wired network, telcos, present wireless MVPD providers with an experienced partner in broadband network deploy- ment and marketing, thus elevating DBS’s competitive position con- cerning new broadband-based MVPD services.

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Mergers and Acquisitions

Mergers and acquisitions have characterized the cable industry for years (Chan-Olmsted, 1996). In fact, the pervasive ownership interests of MSOs in programming networks has been one of the most prominent features of the cable industry structure (Parsons & Frieden, 1998). As of 2003, one third of the satellite-delivered national MVPD programming networks were vertically integrated with at least one cable MSO. Table 6.1 shows that most top MVPD providers have extensive ownership in- terests in cable networks. Leading firms like Comcast, DirecTV, and Time Warner are vertically integrated with a substantial number of popular sports, news, and entertainment cable networks. Table 6.2 further dem- onstrates the importance of such ownership interests for MVPD service providers to stay competitive with the broadcasters because 9 of the 15 most highly rated MVPD programming networks are owned by con- glomerates with top broadcast properties such as Viacom (CBS), NBC Universal (NBC), and Disney (ABC).

To assess the M&A strategies in the MVPD sector, we now examine the top MVPD service providers’ activities involving the acquisitions of pro- gramming properties and the horizontal consolidations of MVPD services.

MULTICHANNEL MEDIA INDUSTRY I 121

TABLE 6.2

Top MVPD Programming Networks (Primetime Viewing) and Their Corporate Owners

Rank MVPD Service Corporate Ownership

1 TNT Time Warner

2 Lifetime Television Disney and Hearst

3 Disney Channel Disney

4 Nickelodeon Viacom

5 TBS Time Warner

6 Cartoon Network Time Warner

7 USA Network NBC Universal

8 A&E Disney, Hearst, & NBC Universal (GE)

9 Fox News Channel News Corp.

10 Discovery Channel Liberty Media

11 MTV Viacom

12 TLC Liberty Media

13 Spike TV Viacom

14 ESPN Disney and Hearst

15 Sci-Fi Channel NBC Universal

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Vertical Acquisitions for Programming Access. As indicated earlier, many leading MVPD service providers are vertically affiliated with pro- gramming producers and distributors by ownership. Comcast, the number one MVPD firm, which reaches more than 22% of the multi- channel media subscribers, however, is not the most active acquirer of MVPD programming properties as it has developed its programming mostly through joint ventures (e.g., with Sony for MGM and with Dis- ney for E! Entertainment) and internal expansions (e.g., QVC, Comcast Sportsnet, and G4). Only recently has it started acquiring programming units to enhance its current programming holdings. For instance, Comcast purchased Home Team Sports and combined it with its SportsNet in 2001 to create a powerful regional sports MVPD network. It also acquired some specialty sports networks such as the Golf Channel and the Outdoor Life Network. Most recently, in 2004, Comcast merged its G4, a network dedicated to entertainment, news, and information about video games and the interactive entertainment industry, with TechTV, a network that showcases the development, business, and life- style of the technology world (“Comcast Acquires Tech TV,” 2004). Be- sides focusing on horizontal M&A (discussed in the next section), the largest MVPD service provider seems to aim at establishing access to re- gional sports, specialty sports, and technology-oriented programming.

Time Warner, on the other hand, has amassed its programming prop- erties mostly through its acquisition of Turner Broadcasting, which gave Time Warner a vast array of cable networks, production units, and extensive film libraries (Dizard, 1997). It is evident that the program- ming assets of Time Warner are most established in the areas of news and movies, continuing its highly valued news and film studio brands (e.g., Time Magazine and Warner Bros. Studio) outside of the MVPD in- dustry. As for the other two major MVPD firms, whereas DirecTV has just been fitted with the tremendous content assets of Fox’s program- ming properties through its merger with News Corp., Cox has devel- oped access to programming mostly through its investment in Liberty Media’s Discovery channels.

It is our assertion that the acquisition of DirecTV by News Corp. is one of the most significant M&A activities in this sector because it posi- tions a major broadcaster to be also a strong contestant on the MVPD platform. In fact, broadcasters have been increasingly involved in this market through mergers and acquisition, but this has mostly occurred in the programming segment of the market. For example, Westinghouse spent some $1.55 billion in stock to purchase The Nashville Network and Country Music Television from Gaylord Entertainment Co. (Burgi, 1997). Viacom acquired BET, the largest cable network targeted at Afri- can Americans, for $2.9 billion (Hay & Saxe, 2000). Disney also ac- quired the Fox Family Channel for $5.3 billion and renamed it ABC Family whereas NBC added Bravo, the arts and entertainment network, to its cable holdings for $1.25 billion (Chunovic & Greppi, 2002). These

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acquisitions have extended the broadcast networks’ reach into the MVPD programming arena; however, only News Corp., with its DirecTV unit, has an integrated access to major popular programming networks and media outlets in both the broadcasting and MVPD indus- tries. The strategic significance of a strong presence in both the MVPD and broadcasting sectors can be further illustrated by Comcast’s failed attempt to merge with Disney in 2004. Though Comcast subsequently withdrew its offer, citing dilution concerns and Disney’s lack of interest, the proposed consolidation underscores the corporate strategy of dual presence in relevant markets and multilateral competition.

Horizontal Acquisitions for Market Expansions. Since the passage of the 1996 Telecommunications Act, there has been a tremendous amount of M&A activity involving horizontal expansions of MVPD ser- vice providers. It began with US West’s acquisition of Continental Cablevision; then the United States’ third-largest cable firm (“US West Acquisition,” 1996), AT&T, also added Tele-Communications Inc. and later MediaOne to its networks (Higgins, 1999b). The wave of telco–cable mergers seemed to be a response to the potential of convergence and to the exploration of new services such as broadband Internet access and phone services over cable-system lines (Marcial, 1998). However, various divestitures of the cable properties following these high-profile ca- ble–telco combinations demonstrate the difficulty of integrating a net- work-driven telephone business with a content-driven MVPD industry.

Many other MSOs such as Adelphia Communications Corp. also ag- gressively began expanding their cable properties with purchases of ca- ble systems from Harron Communications Corp., Century Communications Corp., and FrontierVision Partners LP. Another major MSO, Cox Communications Inc., grew considerably in size with its ac- quisition of Gannett Corp.’s Multimedia Cable unit (Higgins, 1999a, 1999c), whereas Comcast became the number one MSO with its pur- chase of AT&T’s cable assets for about $45.7 billion in stock, plus the as- sumption of nearly $25 billion in debt and liabilities, giving it nearly twice as many subscribers as the industry’s next-biggest MSO, Time Warner (Dreazen, 2002; Higgins, 2001). Many of these mergers and ac- quisitions are about executing a regional strategy of “clustering,” which creates economies of scale and scope, and thus enhances an MSO’s abil- ity to transform its cable systems into “advanced broadband platforms” (FCC, 2004). The FCC has reported that at the end of 2002, there were 109 clusters with approximately 51 million subscribers compared to 97 clusters with 20.1 million subscribers 8 years ago. In a sense, through mergers and acquisitions, the MSOs are attempting to develop a two-way infrastructure capable of providing advanced services such as broadband Internet and interactive television more efficiently, to create attractive regional programming, and to enhance their competitiveness in the regional advertising market.

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Our examination of the formation of strategic networks and system consolidation between MVPD service providers highlighted the impor- tance of certain corporate strategies at the exhibition stage of this mar- ket. We now review the competitive dynamics between MVPD programmers at the distribution stage of the MVPD market.

MULTICHANNEL STRATEGIC GROUP COMPETITION

Past economic discussions of the broadcast television industry have as- sumed that all programming distributors in the industry use the same funding mechanism and deliver products to a fairly homogeneous group of buyers. Such a presumption does not apply to MVPD pro- grammers. For example, whereas CNN charges MVPD service providers relatively high license fees to carry its signals, many new start-up mul- tichannel video programmers offer the providers incentives to induce carriage. Whereas USA Network carries commercials, the Independent Film Channel does not offer any local or national avails. Furthermore, most MVPD programmers have invested in branding and differentiat- ing their content products, which are sold to service providers using various distribution platforms. The traditional emphasis on “industry” as a unit of analysis seems to be less appropriate for analysis of these heterogeneous programmers. In other words, MVPD programming networks operate under a more complex business system than their broadcast counterparts and are capable of more diverse strategic com- petition. The observation that strategic diversity within an industry has a significant bearing on market behavior is central to the theory of stra- tegic groups and grounds our discussion here.

Porter defined a strategic group as a cluster of firms that follow simi- lar strategies in terms of the key decision variables (Cool, 1985; Porter, 1985). Firms within a strategic group resemble one another closely, rec- ognize their mutual dependence, and thus coordinate their behavior ef- fectively. Furthermore, when one considers intergroup market dynamics, the existence of different strategic groups affects the overall level of rivalry in the industry. When firms are associated with different strategic groups, they have different preferences about pricing, research and development (R&D), advertising, optimal output, and other market conduct. As a consequence, operational differences complicate the pro- cess of cooperation (either explicitly or implicitly) between groups (McGee, 1985). Hence, it is more likely for groups with similar strategic approaches to cooperate than it is for groups that use diverse strategies. Moreover, cooperation is easier and more likely to happen within groups than between groups. Also, environmental changes do not have equal impact on different strategic groups due to their different strate- gic postures, assets, and skills. As for the performance differences among strategic group members, many strategic group scholars have argued that there are group-specific entry barriers (i.e., mobility barri-

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ers) that provide protection to group members (Olusoga, Mokwa, & No- ble, 1995). Such structural forces impede firms from freely changing their competitive positions and explain intraindustry profit differentials in a cross section of industries (Caves & Ghemawat, 1992).

Incorporating the strategic groups concept, Chan-Olmsted (1997) proposed that the MVPD programmers would, by their heterogeneous nature, exhibit monopolistically competitive market behavior at the in- dustry level. In other words, these firms attempt to build differential ad- vantages (e.g., programming differentiation) and “selectively” interact with certain competitors’ strategic actions. She also suggested that the industry-level analysis alone would not accurately reveal the competi- tive dynamics between these MVPD firms because they also compete in a group setting within the industry with oligopolistic market behavior (e.g., recognition of mutual dependency; Chan-Olmsted, 1997). Adopt- ing this analytical framework, Chan-Olmsted and Li (2002) empirically examined the strategic patterns of the MVPD programming networks and the relationship between group membership and performance us- ing the strategic dimensions (i.e., grouping variables) of size, vertical in- tegration, operating efficiency, differentiation, and pricing.

It was found that the MVPD programmers, in pursuit of monopolis- tic space (i.e., areas of natural advantage), are highly differentiated not only in their programming approaches but also in many of the strate- gic dimensions tested. By occupying different strategic positions, most of the MVPD strategic groups were able to carve out more definite and clear boundaries to avoid territory encroachment (i.e., direct competi- tion). There were groups of programmers that focus on providing pro- gramming guides and information, offer commercial-free movies, are vertically integrated with differentiated programming, are vertically integrated with general-appeal programming, are stand-alone net- works with niche programming, and are differentiated cable networks owned by broadcasters. The group composition reveals some interest- ing strategic patterns. While the presence of broadcasters may be felt through their niche cable properties, some cable-based MVPDs have tried to compete with the broadcasters with their own mass-appeal networks.

Chan-Olmsted and Li (2002) also concluded that delivering branded content that is highly valued (as suggested by per-subscriber license fees) is the key to better financial performance for the programmer with respect to revenues, both overall and in rate of return. More ad avails and reliance on ad revenue do not necessarily yield better margin or rev- enue numbers, nor does a heavy reliance on license fee revenues. Hori- zontal relationships with other programmers and increased operating efficiency seem to somewhat contribute to the performance measures. Nevertheless, vertical integration, although enhancing carriages by the service providers and/or marketing efficiency, is not essential for supe- rior performance for these firms. Finally, smaller programmers may still outperform bigger programmers in rate of return when they rely

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mainly on license fee revenues and invest in programming to improve the value of their products.

VALUE CHAIN OF AN EVOLVING MVPD MARKET

Whereas the notion of strategic groups presented thus far illustrates the diversity of strategic postures for MVPD programmers, it also un- derscores the significance of the changing environment upon the com- petitive dynamics of this market. Because of the complexity of strategic postures among the MVPD firms, an environmental shift such as tech- nological advances in one area might greatly enhance a firm’s market opportunity while limiting another’s expansion plan. Also because MVPD firms are generally more differentiated and branded, changes in the environment that brought forth the opportunity of new-product development would mean a welcome chance to harvest brand equity through brand extension strategies for certain firms. The addition of product variety from the introduction of new MVPD services would again contribute to this industry’s heterogeneity and enrich its differen- tiation possibilities.

The MVPD market is truly in a revolutionary stage with many new media services developing to enhance and add to its current offerings. The list includes digital video, VOD, subscription video-on-demand (SVOD), PVRs, high-definition television (HDTV), interactive/enhanced television (ITV/ETV), Internet protocol (IP) telephone over cable, and high-speed Internet access. It is our assertion that the growth of these new products inevitably contributes to an integration of the Internet, computing, cable television, and telephone industries and thus the emergence of a multimedia market with a value chain that is multilat- eral and interwoven with previously segmented sectors. Some scholars have even suggested that it is increasingly more appropriate to examine three vertical industries—media, telecommunication, and information technology—not by individual markets but by five horizontal value-adding segments of content, packaging, processing, transmis- sion, and devices (Bane, Bradley, & Collis, 1997).

As one of the most technologically equipped media markets, the MVPD industry has ventured into many new media and broad- band-based services such as digital video, high-speed Internet access, and cable telephony, which certainly point to the emergence of a differ- ent value chain with changing functions, relationships, and players. The next section applies the concept of value chain to examine the new, evolving MVPD market.

The notion of value chain is closely related to the discussion of business models as the former scrutinizes the value that is added to a product or service in each stage of its acquisition, transformation, management, marketing, sale, and distribution (Picard, 2000). Value chain analysis al- lows a firm to understand the cost–value relationship for every stage of

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their operation and thus facilitate the implementation of appropriate strategies. Hoskisson, Hitt, and Ireland (2004) and Porter (1985) detailed that a firm’s value chain includes primary activities (i.e., activities that create, sell, distribute, and service the product) such as inbound logistics, operations, outbound logistics, marketing and sales, and service and sup- port activities (i.e., activities that provide the support needed to imple- ment the primary activities) such as firm infrastructure, human resource management, technological development, and procurement. As a value chain shows how value is added from the raw-material stage to the final output, the key is to identify where the value typically resides and the value-creating opportunities for a particular product.

Figure 6.1 depicts a generic value chain for MVPD programming net- works (i.e., multichannel media programmer or packager) using the Porter value chain framework. For this group of firms, the activities as- sociated with receiving, storing, and disseminating inputs to the prod- uct (i.e., inbound logistics) and collecting, storing, and distributing the product to buyers—MVPD service providers and advertisers—(i.e., out- bound logistics) have more limited value-creating opportunities com- pared to other parts of the value chain. The key to create competitive advantage at these two stages would probably be activities that improve efficiency and result in better cost control. The primary activities associ- ated with transforming inputs into the final product form (i.e., opera- tions), on the other hand, are vital to adding value to the MVPD product, especially in areas of content selection and scheduling. Marketing and sales are another critical set of primary activities because the selection of the right distribution channels (e.g., leading MSOs), effective promotion and branding of the programming products, and productive sales forces (e.g., ad sales) produce tremendous value for MVPD programmers. Fi- nally, service activities, although not as significant at this stage, may become more important in creating value through content and function enhancement as more interactive, broadband-based programming ser- vices are introduced.

We also believe that among all supporting activities, infrastruc- ture-related activities such as effective strategic planning and highly de- veloped information systems that enhance these firms’ understanding of customers programming preferences are essential sources of compet- itive advantages. Note that because numerous MVPD programmers are part of a diversified media firm, their infrastructure activities are split between the business unit and corporate levels. In many cases, the rele- vant corporate activities contribute significantly to creating value for the business unit. Procurement is another major set of supporting activ- ities, especially in gaining access to creative talents, agents, and contents to control costs and increase the quality of their products, thus adding value in the process. Finally, whereas developing incentives to encour- age creativity might be a source of value for human resource manage- ment activities, investments in technologies that enable better differentiation and multiplatform presentations would gradually be-

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come more essential for the success of MVPD programmers in the emerging digital media market.

Figure 6.1 also details the value chain for MVPD service providers. Al- though all the categories of primary activities are present and play a role in deriving competitive advantages, we believe that marketing and sales activities, especially those that enhance the packaging, branding, pro- motion campaigns, and innovative e-commerce and ad sales mecha- nisms, would add the most value to these firms. As more new media, broadband-based services become available, outbound logistics that im- prove the friendliness and efficiency of the service delivery (e.g., set-top box) and service activities that boost the perceived value of the products are likely to contribute to the building of competitive advantages for these MVPD firms.

There are many sources that a multichannel media service provider might look to for adding value through its supporting activities: a flat- ter customer service representative (CSR) structure that could respond more efficiently and effectively to subscribers who have bundled or a wide range of services (rather than a departmental, hierarchical CSR configuration); technological activities that focus on developing new consumer-centered rather than technology-centered media products; and procurement activities that emphasize access to valuable, branded content and the acquisition of content enhancement technologies.

A firm’s value chain is also embedded in a larger stream of activities called the value system, where each channel member’s output adds to the channel value of the overall system (Porter, 1985). Gaining competi- tive advantages would depend on understanding both a firm’s value chain and how the firm fits into the total value system. Within the same industry-wide value creation notion, Wirtz (1999) proposed that there are five stages in a multimedia value chain. They are the content/service creators who provide program contents/services, the content/service aggregators who combine various contents/services to create multiple program bundles, the value-added service providers who develop and offer new services on existing platforms, the access/connecting facilita- tors who undertake the transmission of the contents and services to the customer, and the navigation/interfacing suppliers who provide cus- tomer navigation tools. In essence, the system of value chains here rein- forces Porter’s proposition of analyzing an industry by segmenting its market activities that add different values to the final product (Timmers, 1998).

Figure 6.2 depicts the total value system for the emerging MVPD in- dustry, which takes into account the growing role of other new media, broadband-based services. The value system begins with the content creators’ value chain. Whereas the core activity for this stage is content creation, the most critical competencies or resources that might gener- ate significant value for the firms here are access to talents and capital for content development and the syndication rights for their creations (i.e., the right to maximize profit through the content-windowing

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strategy based on the notions of price discrimination and market seg- mentation) (Waterman, 2000). Some examples of the firms and busi- ness units involved at this level are film studios such as Universal and television producers such as CNN. The next stage of the value-adding process is packaging, which includes content aggregators (i.e., pro- grammers), whose core activities are to assemble contents into packages that appeal to different segments of customers. The most critical core competencies or resources for these firms are access to popular mass-appeal content and/or niche content; access to distributors; capa- bility of repackaging content for different user segments and/or distri- butions systems; and expertise in areas of marketing, brand

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FIG. 6.2. Total value system of the new MVPD market.

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management, and publicity. Examples of a programmer/packager would be MSNTV, USA Network, and broadcast stations like WGN. The next group on the value chain, though essential for the functioning of this market, is not as visible to MVPD consumers. The supporting ser- vices basically exist to enhance the operations and marketing of MVPD products, especially for the packagers and distributors. These services may include billing and marketing specialists, consumer information experts, and other consulting firms. Because of the complexity and im- portance of matching the right product with the right segment of audi- ence in a market full of choices, the core competencies or resources for these firms are consumer knowledge, technology know-how, brand management expertise, and creative use of information. Examples here include companies like Kagan Media, Nielsen Media Research, and Jupi- ter Research. The next group, the interfacing/navigating facilitators, adds value to the overall system by providing navigation, interfacing equipment, and software programs that enable easy access to MVPD content, thus enhancing the value of the content. These firms’ core com- petencies or resources for success are technology know-how, consumer knowledge, cost management, and access to distributors. The examples are software developers and hardware manufacturers such as Microsoft and Motorola as well as content management services like TiVo. Note that to be the first firm to introduce or market a navigating/interfacing technology will also increase the likelihood of success because of a first-comer’s ability to set industry standards and influence consumer demands. The final group in the total value system is MVPD service pro- viders, including cable system operators, DBS, and other minor multi- channel media providers. The service providers offer an infrastructure for the delivery of multichannel video contents and manage the interac- tive access to these contents or additional services. The most significant competencies or resources are access to a mass consumer base for scale and scope economies; relationships with the navigating/interfacing fa- cilitators; and the ability to provide a seamless, efficient network or in- frastructure. Note that there are also critical linkages between different value chains and possible dynamic changes as a result of integrations between firms in various value chains through ownership (e.g., News Corp.’s acquisition of DirecTV).

Our discussions thus far of the value chains of the MVPD program- mers and service providers and the value system of the overall market are based on the notion that by disaggregating a firm’s activities into strategically relevant sets of actions, we might be able to identify the sources of competitive advantages. That is, we can identify compo- nents that an MVPD firm can work on to develop better cost structure, differentiation, technological applications, and other strategies that bring forth above-average returns. We believe that because of the mul- tiplicity of this industry and the increasing service variety propelled by new technologies, such a value source analysis is becoming even more essential.

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FINAL THOUGHTS

The MVPD market has grown tremendously in the last two decades with two major system contenders, DBS and cable television, and more than 330 programming networks. With limited threats of substitution and new entrants, as well as extensive clustered consolidations in the ca- ble sector, the MVPD industry is well positioned to implement the next phase of new broadband and interactive video services. In fact, the growing multiplicity of product offerings, the existing diverse pro- gramming sources, and distribution platforms present an ideal mecha- nism for strategic competition and thus a fertile setting for media strategy studies. Vertical integration, international diversification, joint-venture alliances, brand extensions, innovation management, corporate entrepreneurship, and many more market behaviors are ripe for the empirical testing of strategic management and other economic theories in a media context. In fact, as technological advances transform the MVPD market, we are likely to see the addition of more broadband and telephone communications products available along with video programming offerings, making MVPD a contender also for advanced telecommunications services. This chapter has focused on the general is- sues of the MVPD industry. As it continues to evolve in response to tech- nological developments, the interactive/enhanced television and broadband telecommunications aspects of the market will become more evident sources of competitive advantages. Thus, the next two chapters examine the MVPD as well as broadcast firms’ activities in these two ar- eas and their implications.

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