Walt Disney Company Case Study and Strategic Plan

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Chapter 9

Strategy and Competition of Global Media Conglomerates

Just as in theoil and automotive industries earlier this century, themedia in- dustry has gone through a profound transformation, progressing from a primarily national to a global commercial-media market, and in the process created a group of media conglomerates with worldwide reach (McChesney, 1999). The move toward an international business of media products corre- sponds to the shift away from nationalistic economic policies toward the in- ternationally free-market economy of post–World War II facilitated by the establishment of international agencies like the World Bank and the Interna- tional Monetary Fund (Gershon, 1997). Some have asserted that the inter- nationalization of media is intractable and irreversible as managers increasingly view the expansion of media in a global context and not neces- sarily with an aim to fulfill the cultural needs of specific audiences (Smith, 1991). In fact, the trend toward media conglomeration has generated heated debates among communication scholars, policymakers, and industry prac- titioners (Croteau & Hoynes, 2001; C. Davis & Craft, 2000; S. Davis, 1999; Demers, 1999; Teinowitz, 2001). Drawing from a social/public-sphere the- ory, opponents have called such an acceleration of consolidation the homog- enization of media and a threat to democracy (Parker, 2000; Smith, 1991; Wellstone, 2000). Proponents of the development, coming mostly from an economic/market perspective, have argued that the advent of technologies and proliferation of media outlets would minimize the threat of monopoly power and that economies of scale/scope are necessary when a firm com- petes in a global marketplace (Mandel-Campbell, 1998; Shearer, 2000).

Considering the significant role media corporations play in the pro- duction of culture and the delivery of important news and information and the fact that corporate structure, strategy, management, and be- havior ultimately impact the nature and supply of “content” (Hollifield,

179Chan-Olmsted, S. M. (2005). Competitive strategy for media firms : Strategic and brand management in changing media markets. Retrieved from http://ebookcentral.proquest.com Created from ashford-ebooks on 2019-03-22 13:48:51.

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2001), a better understanding of the competitive patterns, international business strategies of media firms, and determinants of these strategies would contribute to the body of knowledge about the potential effects of media globalization and transnational/global media management.

This chapter contains two general sections: (a) a review of the world me- dia landscape from the perspectives of the degree of media multiplicity, dif- fusion, openness, and new-media potential along with an investigation of how various environmental factors—including economic, cultural, social, political, technological, and other supporting industrial characteristics—in- fluence the media markets in these countries and (b) an examination of the diversification patterns of the leading global media conglomerates along with discussions of the factors that affect media firms’ strategic choices re- garding international business in this sector and the relationship between di- versification and performance. Whereas the macrolevel, general overview of the world’s media systems provides an assessment of today’s market envi- ronment, the microlevel, firm-specific analysis of diversification strategies offers insight into how global media conglomerates have responded to the market forces and the consequences of their strategic actions.

INTERNATIONAL BUSINESS AND GLOBAL MEDIA CONGLOMERATES

Before we dive into the discussions of a global media marketplace and global media conglomerates (i.e., media firms that have overseas opera- tions in multiple countries), it is essential for us first to be familiar with various relevant terms used in the international business (IB) discipline. Though transnational corporations (TNCs), multinational corporations (MNCs), and multinational enterprises (MNEs) are used interchange- ably in many literatures, they are sometimes referred to as companies of different operational philosophies concerning overseas operations. For instance, MNC and MNE are often used to describe either a company that takes a global approach to foreign markets and production, inte- grates operations that are located in different countries, and develops capabilities with an eye toward diffusing them throughout the com- pany’s home countries or a multidomestic company that allows each of its foreign-country operations to act relatively independently. TNC, on the other hand, is frequently used to describe a company that leverages the capabilities of both home and foreign countries where it operates and might have a geographically dispersed power structure (Daniels & Radebaugh, 1998). Although these distinctions are important in denot- ing the degree of international control and strategic emphasis for a me- dia firm, in the context of this study, the terms global, multinational, transnational, and multidomestic are used interchangeably because it is not the objective of this chapter to investigate the comparative merit of different international corporate structures but to assess generally the patterns of operations of media firms with overseas operations. Thus,

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Chan-Olmsted, S. M. (2005). Competitive strategy for media firms : Strategic and brand management in changing media markets. Retrieved from http://ebookcentral.proquest.com Created from ashford-ebooks on 2019-03-22 13:48:51.

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global media conglomerates are defined here as media firms that operate in multiple media sectors and multiple countries concurrently. Accord- ingly, a study of global media conglomerates involves the examination of IB practices of diversified media firms in a global marketplace.

Why do companies engage in IB? Four operating objectives are said to influence such strategy: to expand sales, to acquire resources, to diversify sources of sales and supplies, and to minimize competitive risk (Daniels & Radebaugh, 2003). In reality, there is an evolution of strategy in this inter- national expansion process. Rarely is a media company conceived to be a global media giant. It is more likely that different firms evolve over time with different levels of international ambition and capabilities, which in- fluence the most advantageous strategic alternatives available to the firms. CNN was launched in 1980 as a U.S.-based 24-hour cable news network, but it is now available in many countries around the globe and a part of the world’s biggest media conglomerate, Time Warner. On the other hand, Knight-Ridder, established in 1974, remains largely a newspaper firm that focuses on domestic print and online operations. Figure 9.1 illustrates the typical patterns of international expansion with varying degrees of IB ag-

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FIG. 9.1. Patterns of global expansion for media firms. Source: Daniels, John D. & Radebaugh, Lee H., International Business Environments and Operations, 8th ed. © 1998. Adapted by permission of Pearson Education, Inc., Upper Saddle River, NJ.

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gressiveness and corporate control, different modes of operation and ex- pansion, and various extents of geographic diversification. Note that not all media firms follow the order of progression in the figure. Whereas global media conglomerates like Time Warner and News Corp. have diver- sified extensively utilizing all modes of expansion, Viacom is compara- tively much more conservative in both corporate control and international expansion. A number of factors seem to play a role in affecting these strate- gic differences. Figure 9.2 details the external and internal forces that might influence a media firm’s choice of expansion modes from exporting to foreign direct investment (FDI), functional operations from marketing to human resources management, and other strategic decisions such as market selection and control mechanisms (Daniels & Radebaugh, 2003). The external factors include forces specific to a country such as economic and regulatory conditions of a target country and the competitive envi- ronment, which dictates the potential competitive advantages available to the firm for expansion. Internal factors such as corporate objectives, core competencies, and a firm’s strategic networks also play a significant role in shaping the IB strategy of a media firm. The following section reviews some of these country-based media environments and their determinants.

THE WORLD MEDIA LANDSCAPE

It was suggested that most MNCs are formed because of (a) the uneven geographical distribution of national assets, (b) the exploitation of these assets by transferring them across national boundaries, and, more re- cently, (c) the acquisition, development, and integration of strategically important assets in other countries (Gooderham & Nordhaug, 2003). In 2003, more than 60,000 MNCs had over 800,000 affiliates abroad, gen- erating about half of the world’s industrial output and accounting for two thirds of world trade (Gooderham & Nordhaug, 2003). The media sector is no exception. There is a global disparity in supplies and access

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FIG. 9.2. Factors impacting the IB strategies of media firms.

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to information and media due to different country environments. For example, one fifth of the world’s people who live in countries with the highest income generated 86% of the world’s GDP, 82% of the world’s export markets, 68% of the foreign direct investments, and 74% of the world’s telephone lines, whereas the bottom fifth, in the poorest coun- tries, possessed about 1% in each sector (United Nations Development Programme, 1999).

Environmental Factors That Shape a Country’s Media Systems

In the process of examining mass media either as a social component or as an industry, researchers have identified a number of factors that might play a role in shaping media systems at the country level. They may be summarized as economic, IB, political, social/consumer, cultural, tech- nological, and other supporting determinants. These factors, individually and collectively, capture the multifaceted experiences that countries have with mass media. The following review discusses how the country-spe- cific characteristics affect the development of media markets.

Economic Factors. Studies have found that economic wealth affects a country’s adoption of new technologies (Rogers, 1995). For example, res- idents of industrial countries are 25 times more likely to have access to a daily newspaper than those in African countries, as measured by newspa- per circulation. The difference between the reach of radio and the reach of other media is much greater in developing than in industrial countries (World Bank, 2002). It was also found that general economic strength does matter in predicting the adoption of new media such as the Internet (Hargittai, 1999). In fact, the introduction of new information and com- munication technology requires a heavy investment that most developing countries can neither raise nor commit (Maherzi, 1997). Furthermore, mass-media spending by consumers and advertisers is determined by the general state of the economy. Any change in the level of the economy causes a parallel change in spending on mass media (McCombs, 1972). In essence, studies have shown that national economic factors such as income are closely related to media penetration (Islam, 2002).

International Business Factors. Although media systems had been primarily national before the 1990s, a global commercial media market had emerged by the beginning of the 21st century (McChesney, 1998). A more open economy and greater interconnectedness with the outside world are expected to drive people’s demands for more transnational media content. It was suggested that even over and above other politi- cal, economic, and geographic factors, penetration of newspapers and number of personal computers, Internet hosts, and telephone lines in- creased with more economic openness (Yang & Shanahan, 2003).

A global, open trade environment not only builds demand for transna- tional media products, but also exposes firms at various markets to com-

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petition, new technology, and trading partnerships. Empirical studies covering more than 110 countries have shown that measures of institu- tional effectiveness are significantly related to openness in international trade. In addition, access to foreign media can create demand for institu- tional change and enable access to information on issues not illustrated by local media. Open information exchange and open trade also create de- mand for market-supporting media institutions. Studies have found that competition in the provision of information significantly increases the im- pact of the media on the quality of various institutions (World Bank, 2002). Carrington and Nelson (2002) pointed to the importance of foreign investment in assisting new-media companies with getting started in de- veloping countries. Bell (1999) summarized the importance of a global communication market succinctly, suggesting that access to the revolu- tion in communications is fueled by the desire of a nation to become a part of the world’s market economic order.

Social/Consumer Factors. Economic factors play a significant role in shaping a country’s media systems, but disparities in media penetra- tion exist even for countries with similar incomes. For instance, whereas the United Kingdom had an average newspaper circulation of 331 per 1,000 inhabitants, Italy averaged 104 (Dyck & Zingales, 2002). It is evi- dent that the social and consumer characteristics of a nation also influ- ence the nature of its media markets.

Research has found that a country’s human development level, as measured by variables such as literacy rate, education, and life expec- tancy, is correlated with its level of Internet connectivity (Hargittai, 1999; International Telecommunications Union, 1997). By nature, lit- eracy is essential for the development of print media (Demers, 2002). For example, print media outlets have multiplied to meet a growing readership associated with rising literacy rates in the Middle East (Ayish, 2001). Political economists have also pointed out that in media markets where contents are accessible by price, consumption of that content would be significantly governed by poverty rates or the distribution of household incomes in that country (Golding & Murdock, 1991). For ex- ample, Chad, Ethiopia, and Zambia, all low-income countries, vary widely in terms of media penetration because of such social factors. The social aspects also impacted Botswana and Thailand, which have simi- lar levels of gross national product (GNP) per capita, but differ markedly in the distribution of television sets (Islam, 2002).

Structural differentiation brought about largely by urbanization and industrialization in a country also has important consequences for its media markets. As social systems become more differentiated, needs for information increase, which in turn helps promote growth in the num- ber and variety of media (Demers, 2002).

Finally, sociodemographic variables such as age, income, education, and occupation indirectly influence media adoption (Dyck & Zingales,

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2002; Vishwanath & Goldhaber, 2003). For instance, residents of Hong Kong who were younger, better educated, or single or had fewer chil- dren tended to have a higher evaluation of life quality than their coun- terparts in different countries, and the higher evaluation of their life quality significantly correlated with the number of new-media technol- ogies they owned (Wei & Leung, 1998).

Technological Factors. Technology and related infrastructure also limit the scale of media development and market competition (Islam, 2002). For instance, telecommunications technology leads to the creation of at least one leading sector of an economy and accelerates diffusion of other technologies, thus allowing faster catch-up for less developed coun- tries in many aspects, including media development (Maddock, 1997). The close connection between information technology and media systems is significant as info-rich countries like Sweden, the United States, and Aus- tralia are not ahead just in terms of new-media systems such as the Internet but also in the distribution of other media like newspaper reader- ship, radio, and television sets (Carrington & Nelson, 2002).

The relationship between technology and media is reciprocal. Techno- logical innovations provide a driving force for economic and infrastruc- ture development, which increase the diversity and diffusion speed of media systems. The advancement of media systems could then enable so- cial change in a country, which in turn affects the process of technological innovation (Bijker, Hughes, & Pinch, 1987; Edge, 1995; Powell, 1987).

Cultural Factors. Tradition or culture may also affect how people perceive different media: Some cultures may be less television bound or less print bound than others at similar levels of economic development (Islam, 2002). To a certain extent, mass media reflect the degree of social integration by delivering information of general interest to a large pop- ulation of society as well as by exposing an audience to unfamiliar peo- ple and information. In fact, the proliferation of media systems and content may point to a society of many competing social and cultural interests (Lievrouw, 2001). For instance, the more languages that are spoken in a country, the more fragmented the newspaper market.

Another dimension of national culture might be revealed by a coun- try’s religious environment. In their modern manifestations, the world’s religions continue to be woven into the fabric of daily life for bil- lions of individuals through the advent of nationalism, mass culture and mass politics, and most recently the electronic mass media (Singh, 2000). For many of the world’s geographically dispersed peoples, as well as for those living in media-intense environments, religious beliefs are frequently sustained via mass-media channels such as television, ra- dio, film, and the Internet (Singh, 2000). Cultural characteristics, as manifested in a nation’s religious multiplicity and intensity, are likely to affect the demand as well as supply of media in that nation.

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Political Factors. It is intuitive that a country’s political environ- ment is relevant to its media development. World Bank (2002) sug- gested that one of the main factors that makes a country’s media more effective in producing better social, political, and economic outcomes is a political system that ensures media independence. Information or communication industries also tend to develop faster in democratic so- cieties, which foster freer information flows (World Bank, 2002). Djankov, McLiesh, Nenova, and Schleifer (2002) pointed out that gov- ernment ownership of the media is often higher in countries that are poorer, that have more autocratic regimes, and where overall state ownership in the economy is higher.

It is clear that government policies can improve media access. For ex- ample, removing entry barriers for new media firms or investing in building media infrastructure will improve media markets. Studies have found that, to advance the adoption of information and communi- cation technologies, a climate of democratic freedoms, security of prop- erty rights, and a low level of government distortions are essential (Rodriguez & Wilson, 2000).

There seems to be a direct connection between the characteristics of a media environment and the political control of media ownership. Stud- ies have concluded that the more newspapers the government controls, the less credible the newspapers are, the less they will be read, and the harder it would be for competitors to enter the market (Dyck & Zingales, 2002). Poor countries with interventionist and nondemocratic govern- ments also exhibit higher state ownership of the media (Djankov et al., 2002). Countries that are rated as more democratic have a higher level of news media penetration as measured by newspaper and television ownership (Besley, Burgess, & Prat, 2002). Since the 1970s, many gov- ernments have liberalized the communication industry by introducing private competitors in broadcasting and telecommunications. Support- ers contend that liberalization lowers prices, expands services, and generally speeds up the process of innovation (Besley et al., 2002).

The importance of political environment is magnified by its relation- ship with technology in the case of leapfrogging development, in which certain countries are able to skip generations of intermediate technology and adopt the new alternatives. The chief barrier to leapfrogging is gov- ernment policy in developing countries (“Tele-Haves and Have-Nots,” 1996). In essence, a leapfrog move to DVD (skipping VCR) or broadband (skipping narrowband) would have to be stimulated by appropriate gov- ernmental policies.

Supporting Industry Factors. Finally, complementary, supporting industrial factors such as the advertising market can also impact the role of media in a country. A more robust economy provides more sources for advertising revenue, thus offering more opportunities for media companies to expand into new markets and/or formats (Carring- ton & Nelson, 2002; McCombs, 1972). For instance, in a changing media

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environment, Lee (1998) found that the Russian newspaper industry tends to depend on advertising revenue for survival.

Comparison of Media Markets and Their Determinants

Using “nation” as the unit of analysis, Chan-Olmsted and Oba (2004) examined 98 media markets in eight world regions with data from sources like the Freedom House Index, the Frazer Institute’s world eco- nomic freedom reports, the United Nations Development Programme’s (UNDP) Human Development Index (HDI), the World Advertising Re- search Center’s regional marketing pocket books and global media cost comparison report, ZenithOptimedia’s market and media fact books and its regional television reports, and the International Telecommuni- cations Union (ITU). They assessed the condition of individual media markets by looking at the degree of media multiplicity (i.e., the breadth of the market), media diffusion (i.e., the depth of the market), and media openness (i.e., the degree of commercialization, competition, and access to foreign content). Their results indicate that the multifaceted nature and potential of a media market is best reflected by the composite avail- ability of media options (breadth), the degree of diffusion of the avail- able media (depth), and the system-based opportunities a country offers to a variety of firms in that media market (openness).

Specifically, the availability of mass media such as newspapers, books, radio, television, cinema, and Internet servers in a country was used to measure the breadth or multiplicity of a media market. The reaches of newspaper, magazine, radio, TV, cinema, and the Internet were assessed to indicate the depth or diffusion of a media market. The penetration rates of the Internet, satellite TV, cable TV, and digital TV were scrutinized to investigate the degree of media diffusion for newer media. Three aspects of market opportunities—commercialism, internationalism, and com- petitiveness—which were measured by commercial-radio reach, com- mercial TV’s weekly hours of transmission, number of imported films per 100,000 individuals, and the level of competition for newspapers and television stations in each country, were examined to assess the degree of market openness in a media market. Because digitization is the founda- tion of most new-media systems, the Digital Access Index (DAI)—the first global index to rank information and communication technology (ICT) access in 178 economies developed by the ITU—was used as a proxy for assessing the new-media market potential. Finally, to address the drivers that might shape a country’s media environment, Chan-Olmsted and Oba (2004) also reviewed the relationship between the aforementioned media measures and the economic and IB environment, the social/con- sumer and cultural environment, the technological and political environ- ment, and the supporting industrial environment.

It was found that whereas social and cultural factors such as the ur- banization, employment, religion, and ethnic characteristics of a coun-

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try did not contribute to its media system multiplicity, some social factors like life quality and education impacted the arrays of media out- lets available. The economic productivity, technology, and political/civil rights profiles of a country also played a significant role in this regard. Certain environmental factors seemed to affect media multiplicity dif- ferently depending on media types. For example, IB, intellectual-prop- erty rights protection, and business regulations were relevant only to the media multiplicity of cinema and books. Environmental factors such as economic productivity, IB, consumer characteristics, and tech- nological factors also impacted mostly print and Internet media diffu- sion. Surprisingly, religion and ethnic characteristics played a minimal role in shaping media openness in a nation. Whereas IB, technology, and intellectual-property rights protection affected both transnational con- tent and print competitiveness, life quality, education, and political/civil rights seemed to affect mostly print competitiveness. Finally, economic factors influenced newspaper competitiveness, and state media owner- ships affected the degree of media commercialism in a country (Chan-Olmsted & Oba, 2004).

When all environmental factors were reviewed simultaneously to as- sess their relative roles in affecting media multiplicity, diffusion, and openness, Chan-Olmsted and Oba (2004) found that a country’s techni- cal infrastructure, advertising industry, and degree of civil-rights pro- tection enhanced most significantly the multiplicity of its media markets. However, another set of factors comes into the picture when media diffusion is considered. In this case, intellectual-property rights protection, ICT expenditures, and religious diversity became most criti- cal. In a sense, general political and industrial systems and infrastruc- ture seem to contribute to increasing the supply of media (breadth of media systems), whereas specific policy factors and societal diversity matter more in increasing the demand for media (depth of media sys- tems). The role of intellectual-property rights protection continues to be significant in promoting media openness. The degree of international trading rights also logically plays a role in impacting media openness. Interestingly, the general economic condition of a country is not a domi- nant force for enhancing its media multiplicity, diffusion, or openness. On the other hand, a country’s infrastructure, state media ownership, advertising industry, and business regulatory environment influence the overall development of its media markets. Finally, though economic productivity, private media ownership (i.e., less state media ownership), international trading rights, and supporting telecom and advertising industries seem to set the stage for new-media development, media market characteristics such as content production capacity and vi- sual-media availability also seem to influence the potential of growth of new media. In fact, media openness and multiplicity matter more than diffusion in advancing the development of digital media.

The environmental forces discussed thus far are essential to the ex- amination of media as business entities in individual countries because

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these factors influence not only the development of an important eco- nomic sector but also the parameters in which global media conglomer- ates may diversify geographically. The different sets of factors that were found to affect different aspects of media markets point to the complex- ity associated with the study of transnational or global media econom- ics and the need to examine media markets from multiple perspectives. We now address the global media markets from the perspective of media firms, specifically regarding how the leading media conglomerates have expanded worldwide and the consequences of such expansion strategies.

DIVERSIFICATION STRATEGY OF GLOBAL MEDIA CONGLOMERATES

Scholars have suggested that the development of global media conglom- erates is driven primarily by the privatization of television in many Eu- ropean and Asian markets, deregulation of media ownership, increasing parallel lifestyles in many metropolises across the globe, saturating de- mands for many media products in the United States, and the advance of new communications technologies (Chan-Olmsted & Albarran, 1998; Hollifield, 2001; McChesney, 1999). To capitalize on the potential of growth abroad, U.S.-based firms such as Time Warner operate in more than 60 countries. Multinational industrial giants such as Bertelsmann and Vivendi Universal (before the sale of Universal) turned to the communication sectors by acquiring U.S.-based media compa- nies and even divested some industrial assets into separate publicly traded companies (Goldsmith, 2000). There is also evidence of oligopolistic, interdependent behavior because we have seen many stra- tegic alliances between the same leading media conglomerates.

Chan-Olmsted and Chang (2003) investigated both product and geo- graphic diversification strategies for leading global media conglomer- ates in terms of their relatedness, extent, and mode and explored the existence of strategic preferences for related product and geographic di- versification and complementary distribution–content alignment. Us- ing a case study approach, they analyzed Sony, AOL Time Warner (now Time Warner), Bertelsmann, Vivendi (before the sale of Universal), News Corp., Disney, and Viacom, the top seven global media conglom- erates based on their overall revenues in 2001.

Product and Geographic Diversification of Leading Global Media Conglomerates

Chan-Olmsted and Chang (2003) found that there was a range of prod- uct and international diversification among the leading conglomerates (see Fig. 9.3). In terms of product diversification, the European Vivendi (with Universal) and Bertelsmann had the most diversity, whereas Viacom and News Corp. were the least diversified. In regard to interna-

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tional diversification, partially due to the importance of the North American media markets, the most geographically diversified compa- nies were non-U.S. corporations such as Vivendi, Bertelsmann, Sony, and News Corp. (before moving its headquarters to the United States). In fact, AOL Time Warner (now Time Warner) was the only U.S.-based company that was aggressively competing with the European con- glomerates in Western Europe in addition to North America. Neverthe- less, most likely because of the significance of the North American market, the less diversified conglomerates (e.g., Disney and Viacom) that have concentrated on developing businesses in their own region still attained a relatively good performance. As for the notion of related geographic diversification, it was concluded that the uneven distribu- tion of M&A activities between regions from 1990 to 2000 was consis- tent with the proposition that regional experience and relationships are best realized in “related” international diversification.

In terms of the interaction between product and geographic diversifi- cation, the study did not find an inverse relationship between product and international diversification. In fact, the most geographically diversi- fied conglomerates also had the widest product diversity. Nevertheless, the most internationally diversified conglomerates tended to have more content-based core products (i.e., the products that contribute the highest percentage of revenues). It is likely that the diversification of “distribu- tion/outlets” products generally involves more risks and investment than the “content” products. In a sense, the type of core products a con- glomerate has in the global media market moderates the degree of inter- action between product and international diversification. Chan-Olmsted and Chang’s (2003) study also points to the necessity of owning North

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FIG. 9.3. Relative international product diversification of global media conglomer- ates. The first number in parenthesis is the conglomerate’s product-diversity ranking, whereas the second is its geographic-diversity ranking.

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American media assets, especially those of content properties; the impor- tance of allying with partners that improve content accessibility globally; and the need to explore the new media opportunities via alliances with in- ternational media facilitators, distributors, and content producers. There was an observable oligopolistic behavior between the leading conglomer- ates as these competitors frequently become collaborators for business ventures in a less certain market environment.

Diversification Over Time and Its Effect on Performance

To systematically investigate the relationship between diversification and performance, Jung and Chan-Olmsted (in press) studied the top 25 media companies longitudinally over a 12-year (1991–2002) period. It was found that these leading media firms had diversified their business opera- tions continuously into multiple media sectors and expanded their for- eign operations into many world regions over time. The trend was most evident between 1999 and 2002 because of the mega-mergers such as AOL-Time Warner (2000), Vivendi-Seagram (2002), Clear Chan- nel-AMFM (1999), Tribune-Times Mirror (20002), Viacom-CBS (1999), and Gannett-Central Newspapers (2000), in addition to Disney’s, Bertelsmann’s, and Cox Enterprise’s diversification into other strategi- cally important content media sectors. The extent of international diver- sification also continued to rise throughout the period investigated, similar to that of product diversification. Jung and Chan-Olmsted as- serted that the average number of total international units was 13 in 1991 and 63 in 2002, indicating the firms increased their business units in foreign countries by almost five times for the period. The average num- ber of countries in which the firms had foreign subsidiaries increased from 5 to 12 for the period. Nevertheless, despite the move toward more international diversification, several firms such as Cablevision, Charter, Echostar, Belo, and Meredith had mostly focused their businesses in do- mestic markets. These firms were mainly involved in the distribution business, specifically, local cable operations and television stations. Thus, it was more difficult for them to expand into foreign territories.

As for the relationship between diversification and performance, Jung and Chan-Olmsted (in press) found that a firm’s direction (related degree) of product diversification has an inverted-U curvilinear rela- tionship with financial performance (as measured by return on sales [ROS] and return on assets [ROA]). Specifically, their empirical study concluded that a media firm’s performance increased as it shifted from concentrated business strategy to related diversification, but the firm’s performance decreased as it moved from related diversification toward unrelated diversification. It seems that the combinations of related cross-media ownership that yielded the most significant economic effi- ciencies were those that facilitate sharing of common content or a com- mon distribution infrastructure and expertise (George, Joll, & Lynk, 1992). Jung and Chan-Olmsted also discovered that media firms with

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more focused businesses and highly diversified firms outperformed modestly diversified firms in regard to “cash flow” performance mea- surement. It is plausible that, because most media businesses are in technology-driven sectors (Rizzuto & Wirth, 2002), an initial move to diversify creates a substantial drain on their cash reserves. More diversi- fied media conglomerates, on the other hand, might be able to cross-subsidize their cash-strained business units with the cash-rich units and enjoy the benefits of scope economies through better distribu- tion and marketing efficiency, thus improving their cash flow standing. Note that, because more diversified firms are typically bigger firms that also generate more revenues, the degree of diversification is logically positively related to a firm’s cash-related performance measures.

In terms of international diversification, the same study found that a media firm improved its performance (as measured by ROA and ROS) as it diversified into international markets. However, after a threshold point, performance was inversely related to international diversifica- tion. The inverted-U curvilinear relationship between the direction of international diversification and firm performance is reasonable as ex- tensive geographic dispersion increases coordination, distribution, and management costs (Porter, 1990). Moreover, the uncertainties caused from cultural differences work negatively in the IB setting. In particular, because media products are very subjective to cultural preferences, di- versification into a related area would be a more effective way to exploit the full benefits of globalization. Conversely, the unrelated interna- tional diversification might increase coordination costs due to uncertain business environments. Similar to the product diversification finding, the direction of the relationship shifted to a U-shaped model based on cash flow measures like earnings before interest, taxes, depreciation, and amortization (EBITDA). That is, a media firm’s performance was inversely related to international diversification, but beyond a certain point, the relationship becomes positive. Again, it is plausible that a me- dia firm’s initial attempt to expand to more countries produces a signifi- cant drain on its cash reserve. As it learns how to market its product across borders more efficiently, its cash flow standing might improve with market expansion and more experience in cost control.

It seems that performance is related to diversification in a nonlinear manner. Media firms with related diversified businesses are more profit- able than undiversified firms or diversified firms with unrelated busi- nesses. In other words, managerial efficiency and profitability, as measured by return ratios, decrease with unrelated product diversifica- tion, reflecting the fact that market investors devalue overly diversified media conglomerates with nonsynergistic asset holdings (Ferrari, Harper, Ubinas, Wolf, & Zeisser, 2002). In essence, while related busi- ness and regional diversification was more effective in building the fi- nancial health of media firms, extensive diversification may still be used as a strategic move to acquire a certain competitive position (e.g., better cash flow or presence in a critical sector), and the latter approach might

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be equally important as we enter the technology-driven era of digital media that are highly dependent on cash resources.

Top 10 Global Media Conglomerates and Their Holdings

Since the aforementioned major media conglomerate studies, News Corp. has successfully acquired an MVPD distribution system through its merger with DirecTV and moved its headquarters from Australia to the United States, AOL Time Warner has been restructured as the new “Time Warner,” and NBC has become a vertically integrated broadcast network, just like all of its competitors, with the addition of Universal. Table 9.1 details the top 10 global media conglomerates and their media holdings. Time Warner continues to be the leading conglomerate among its peers with an emphasis in branded content and MVPD business. It has a relatively lesser presence in the broadcast sector. Nevertheless, though Time Warner is comparably weaker in the market of broadcast networks, it more than made up its strategic competitiveness with its content production properties in the television sector. The number two conglomerate, News Corp., is very competitive in both broadcast and MVPD markets, in both branded television/film and print content, and in many regions of the world. Its strategic emphasis, however, is differ- ent from that of Time Warner in that it rests on the wireless MVPD plat- form. The following two U.S.-based conglomerates, Disney and Viacom, are very similar in their holdings as well as total revenue size. Both conglomerates have strong broadcast properties, MVPD brands, and successful production resources. The rest of the six media conglom- erates are significantly smaller than the top four firms discussed thus far and have comparatively fewer media holdings. Whereas Vivendi and Comcast focus on the MVPD sectors, Bertelsmann centers its holdings in the broadcast, TV/film production, and print sectors. NBC is relatively diversified into broadcast, MVPC, and TV/film production businesses, though with a more modest number of holdings in each area. Finally, Sony’s strength seems to be in the content production and music sec- tors, whereas Cox has more presence in broadcast and MVPD distribu- tion businesses, along with its print holdings. It is evident that the majority of the top global media conglomerates have invested heavily in developing MVPD and content production assets. The competencies of producing attractive content, owning branded MVPD products, and/or having access to MVPD distribution systems seem to be essential for most global media conglomerates.

FINAL THOUGHTS

Because of many inherent characteristics as discussed in chapter 3, me- dia firms are likely to expand into different product and geographic markets. In a way, the decision is not whether to diversify but to what

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degree and into which target market. Various media sources have iden- tified up to 50 conglomerates that have actively pursued a diversifica- tion strategy in the global media marketplace (“Global Top 50,” 2001). To examine the strategic behavior of this group of media firms system- atically, the next step is to devise a framework of analysis that identifies the factors that impact such market behavior for the quantitative phase of empirical investigation. We now suggest a list of systematic determi- nants that reflect the characteristics of the industry in its choice of prod- uct and geographic diversification (see Fig. 9.4).

As found in the industrial economics perspective of diversification, the external environment shapes the strategic behavior of a firm. In the case of diversification for a media corporation, the general environment of a target country such as its regulatory, economic, technological, cul- tural, and social (e.g., education) environment influences not only the attractiveness and characteristics of the media industries in that coun- try but also another set of important country-specific external fac- tors—the communications/media environment such as a country’s communications/media infrastructure (e.g., Internet connectivity and broadcast facilities) and demand for multimedia products (e.g., cable programming and Internet usage). These environmental factors also di- rectly impact the attractiveness of each media industry in that country. Continuing with the industry economics theory of diversification, a media conglomerate’s decision to enter a specific industry is likely to be determined by its target industry’s basic characteristics such as market size, growth rate, profitability, and competition, as well as the factors of product/geographical relatedness and content–distribution comple- mentary alignment as discussed previously.

Adopting a resource-based view of strategic management (Lockett & Thompson, 2001), we propose that, in addition to the aforementioned external factors, many internal resource determinants such as financial performance and stability, assets/complimentary assets, management teams, marketing systems, and related strategic alliances, which have been established to impact corporate diversification in previous litera- ture (Chatterjee & Wernerfelt, 1991), also affect a conglomerate’s diver- sification decision. Many other firm-specific resources and capabilities relevant to the media products are likely to shape a conglomerate’s pref- erences in both product and geographic diversification as well. The spe- cific internal factors might include a media firm’s existing strategic networks with other related media product firms, its proprietary “con- tent” products, its dependency on the core product (content vs. distribu- tion), and its branded properties (e.g., MTV). Knowledge-based resources such as access to content production “talents” (e.g., writers, actors, producers, etc.) and the capability of transferring or repurposing content products for different media outlets as well as the availability of a multistream revenue system would also determine the degree of geo- graphic diversity and the extent, directions, and mode of product diver- sification. As suggested by previous studies that stress the flexibility of

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knowledge-based resources in coping with changing and uncertain en- vironments (Miller & Shamsie, 1996), we also believe that the knowl- edge-based resources of media conglomerates would be more critical in determining the effectiveness (i.e., performance) of their international product diversification strategy.

In summary, the media-specific characteristics such as the comple- mentary nature of content and distribution and the windowing process for media content products play a role in shaping the conglomerates’ di- versification strategies. Because the global media market entered a pe- riod of economic and technological uncertainty in the early 2000s, media firms are faced with an increasing need to be less reliant on tradi- tional advertising revenues and to develop additional revenue opportu- nities in new-media systems. We believe that the trend toward global conglomeration will continue because global media conglomerates are in a more competitive position compared to nondiversified media firms. Global media conglomerates often have the resources to exploit content products via the repurposing process for distribution in multiple plat- forms under different ad or fee structures, to perform cross-platform marketing with complementary distribution systems, and to be well positioned to deliver products in the developing broadband spectrum with their diverse holdings and partnerships.

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