The Evolution of the Media Conglomerate

This is the third in a series of posts looking at the changing media industry.

To start, let's review horizontal and vertical integration. Several readers are still struggling with these concepts.

Let's try looking at the supply chain for a product from manufacture to sale. A manufacturer creates a product that is sent to a wholesaler to be assembled, sorted or packaged. The newly packaged product is then sent to the retailer to be distributed and sold. It will end up in the hands of the consumer.

Another way to show this chain would be:

-------Manufacturer => Wholesaler => Retailer => Consumer

If we apply this generic chain to traditional media, such as the television industry, it would look something like this:

-------Studio => Network => Local Station => Consumer

The studios create the programs that are then packaged by the networks and sold to the local broadcast stations to be viewed by the consumers.

An example of horizontal integration would be a media company that expands by buying lots of local stations (focussing only on ONE level of the chain). Vertical integration would involve mixing the various levels; perhaps by owning a studio, a network and local stations.

Miguel M. Pereira described vertical integration this way: "integration of the different levels of production and distribution of media products that leads to companies which are able to, for example, produce films or music, register them in DVDs or CDs and distribute them not only to "brick and mortar" shops but also through the cable, satellite or mobile telephony networks they own. Vertically integrated companies are in a position to exploit their products at every single level of the value chain."

Now, let's take a quick look at the U.S. Government's attitude toward media courtesy of Wikipedia. In 1934, the U.S. Congress abolished the Federal Radio Commission and transferred jurisdiction to a new Federal Communications Commission (FCC).

From its inception, the FCC was concerned with promoting free trade and preventing monopolies within broadcast media. RCA was of particular concern to the FCC because RCA was a radio manufacturer that also owned two radio networks (NBC Blue and NBC Red) with multiple stations plus a research division working on the new technology of television.

The FCC "found that NBC's two networks and their owned-and-operated stations dominated audiences, affiliates and advertising dollars in American radio. In 1939 the FCC ordered RCA to divest itself of one of the two networks; RCA fought the divestiture order."

Meanwhile, CBS was also raising concerns with the FCC. The network was demanding whatever amount of time it wanted from its affiliates, imposing its will on the local stations.

In 1940, the FCC issued the "Report on Chain Broadcasting." "The major point in the report was the breakup of NBC, but there were two other important points. One was network option time . . . The report limited the amount of time during the day, and what times the networks may broadcast . . . The second concerned artist bureaus. The networks served as both agents and employees of artists, which was a conflict of interest the report rectified."

When RCA lost its appeal, they retained the NBC Red network while the NBC Blue network became what we know today as ABC.

The FCC actively pursued a policy of promoting multiple owners as well as limiting cross ownership of radio and TV stations. For thirty years, the FCC enforced the Seven Station Rule, saying that no one could own more than seven television stations, seven AM stations and seven FM stations. In 1985, they relaxed these rules, and it was off to the races as large companies gobbled up stations as fast as they could.

In a speech in Seoul, Walden Bello said: "Much of this process of concentration has been good old horizontal integration. Rupert Murdoch's News Corporation has been called the 'most aggressive global trailblazer...' With over 130 newspapers, including the venerable London Times and less than venerable Fleet Street types, News Corporation is the world's largest news publisher." In addition to its newspapers, the News Corporation owns network TV stations, cable TV stations, film companies, and a book publisher. I would point out that the inclusion of film studios and a book publisher, both of which create product, show that most expansions do not occur purely in one direction. While the acquisition of newspapers and TV stations are horizontal expansions, the acquisition of film studios and a publisher are vertical expansions.

Contrast the News Corporation's mostly horizontal growth with Sony, which has grown vertically. In fact, Dr. Yasuhiro Inoue said in a paper titled "Hard and Soft Mega-Media Conglomeration" that: "Sony's vertical integration is unique because few media conglomerates have been integrated like Sony's hardware and software segments.

Let's look at just two of Sony's subsidiaries: Sony Electronics, which designs and manufactures electronics equipment, and Columbia Tristar, a film studio and distributor. Dr. Inoue points out that: "Sony can use the huge library of Columbia's motion pictures to promote its [electronic] products into the market . . . For example, a movie can be promoted and advertised while hardware is simultaneously promoted. Furthermore, Sony can save huge amounts of money for the use of movie copyright when the company advertises its hardware by using footage from its motion pictures . . . This is one of Sony's advantages over "unintegrated" media companies . . . Columbia's movie characters . . . can appear in [Sony's] Play Station game software to appeal [to] consumers."

Since the FCC relaxed its rules, more and more media has been concentrated in the hands of fewer and fewer owners. Today, 90% of all media is owned by only seven companies: Bertelsmann, CBS, Disney, General Electric News Corporation, Time Warner and Viacom.

Tomorrow, in the final post of this series, we'll look at the consequences of this concentration of ownership.