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VERTICAL INTEGRATION
source: www.oligopolywatch.com/
2003/06/01.html
www.oligopolywatch.com/
2003/10/15.html
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When large companies seek to expand their control over the market, they sometimes expand horizontally by buying other, parallel companies. But quite often, they expand vertically, by buying out companies involved in other layers of the same market…- most markets work on several layers: in the DVD market, for example, there are companies that the own the content (the film studios), the companies that manufacture the DVDs, the companies that distribute the DVDs, and the companies that sell or rent the DVDs at the retail level;
- in the TV industry, there are the studios that produce the shows, the networks that offer them, the local affiliates stations that show them, or, alternatively, the cable or satellite companies that carry the cable networks;
- when a company expands vertically, it takes over several of those levels of intermediation, and the object is to maximise control, to no longer be at the mercy of some other company that has its own interests. The consequence is usually increased risk;
- these risks come in part from the pressure to use internal resources, when there are more effective or less costly alternatives on the outside. Such in-house operations are often dropped, because the wasted capacity and lack of competitive motivation may mean worse service and more expense. Likewise, large companies often decide to spin off acquired extensions because the plusses of cutting out the middleman are outweighed by the minuses of running yet another kind of business;
- nevertheless, the amount of vertical integration keeps growing. Some examples: TV networks are more and more producing their own shows in their own studios, rather than buying shows from independent producers. They also own many of the individual broadcast stations in big markets, and will soon be able to buy more, Time-Warner owns cable systems and Fox may soon own its own satellite system in the US. Meanwhile, a cable company like Comcast is getting more and more into the business of producing shows and developing cable channels;
- the major music companies and film companies are doing more and more of the distribution of their own products.
- Clear Channel is not only the largest radio network in the US, but it has become also promoter for concerts in the US, so it has immediate ability to promote its favored artists and concerts on the radio;
- as the major companies own more and more of the distribution channels for their products, the more small start-ups have to deal with them to get on the shelves. So even when vertical integration is not a direct money-maker, it can be a significant protector of the core business from market disruption.
US networks claim they have to buy up stations to defend themselves against the onslaught of cable…- In the United States, the balance of power began to shift in the early 1990s after networks were allowed to acquire more local stations. For example, Viacom, through its ownership of CBS and UPN stations, now owns 39 stations reaching 39% of the nation's audience, compared with 10 years ago when it owned six stations reaching just 19%;
- the new FCC rules would let any company to own stations reaching up to 43% of the population; (1)
- in a desperate attempt to soften the disruption of their oligopoly, the networks are eager to expand their roles vertically (by acquiring local channels and studio capacity) as well as horizontally (by acquiring and developing new cable channels).
| Network | Stations owned
1995 | Stations owned
2003 | % of current
viewers reached | | CBS/UPN | 16 | 39 | 39% | | FOX | 12 | 35 | 39% | | NBC | 9 | 24 | 34% | | ABC | 10 | 10 | 24% |
(1) US Federal Communication Commission (FCC).
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