FACTORS DRIVING THE MEDIA INDUSTRY STRUCTURE

In addition to the impact of the liberalization of various media ownership rules, the unprecedented merger and acquisition activities that have re- shaped the structure of the media industry have been driven by strategic and financial factors. These factors are not mutually exclusive and most transactions occur as a result of both. The strategic factors are an attempt to gain synergies through leverage and economies of scale or to position the firm in a globalized media marketplace. The financial factors are tied to the stock market “bubble” during the late-1990s when the value of traditional and new media companies reached historic heights or are related to tax or accounting factors.

Strategy plays the greatest role in media mergers and acquisitions. The con- cept of convergence (i.e., the disappearance of technological differences among

3. STRUCTURE AND CHANGE

distribution networks so they begin to compete by delivering multiple appli- cations over the same network to different platforms) has been well anticipated by media strategists. This anticipated convergence was the basis of the AT&T acquisition of TCI’s and MediaOne’s cable properties and the Time Warner merger with AOL. Because the time frame for convergence continues to be pushed back, and because there has been significant postmerger disso- nance, AT&T decided to spin-off its cable subsidiary, and AOL Time Warner has decided to de-emphasize convergence as a strategy (Peers, 2003).

A second strategic reason for media concentration involves the attempt to leverage content such as programming over an increased number of distribution channels. This type of vertical integration not only provides the op- portunity to amortize costs over increased channels and additional product release windows, but also provides a critical mass for the purpose of build- ing brands such as with Disney products or Time Warner editorial content.

A related strategic consideration is the ability to crosspromote across media. Promoting a program or service on other media owned by a company can produce increased demand. Examples include the promotion of AOL service on Time Warner cable networks, of ESPN programs on various ABC networks, and of MTV via various Viacom owned video networks.

The creation of barriers to new competition is an additional reason for recent media merger and acquisition activity. By becoming more vertically inte- grated with respect to media content and distribution, large media companies make it more difficult for smaller content competitors and entrepreneurs to gain access to audience distribution. There is also a preva- lent view that, similar to beachfront property, no new media properties are being created. This is due to the existence of numerous high barriers to media industry entry (Porter, 1984).

The final strategic factor is globalization of the media industry. Although viewed by some as a hegemonic threat of Western media, media companies have identified international markets as a prime source of future revenue growth (Baker, 2002). All major media conglomerates have international subsidiaries. Globalization is not limited to U.S.-based companies with foreign subsidiaries. European companies such as Bertelsmann and Vivendi Universal have a significant presence in the United States that was devel- oped through mergers and acquisitions. The most successful foreign subsidiaries of media companies, such as Viacom’s MTV, make extensive use of locally produced content.

Financial factors have also played a key role in the structure of the media industry. Figure 3.1 depicts the value of an index of media companies during the period of 1997 to 2002. The spike in valuation of media companies during the 1999–2000 “bubble” is apparent.

The valuation of media companies is important for two reasons. First, the company stock represents currency or an asset that can be used to pay

OZANICH AND WIRTH

FIG. 3.1. From Prophet Finance. Available online: www.prophet.net

for a target company in a merger or acquisition. Clearly, the high valuations of common stock made it an attractive currency for M&A activity.

Asecond factor is that with media valuations in parabolic ascent, companies were eager to make acquisitions before prices went higher. Manage- ment and boards of directors may have believed that they were buying cheap assets.

There are other financial reasons to undertake mergers and acquisitions. Tax issues are a consideration in every transaction. The economics of a merger can be partially premised on tax benefits such as sheltering earnings from taxation, the use of unused tax shields such as loss carry-for- wards, and the deferral of taxes through capital gains compared to ordinary income taxes. Other factors can include the acquisition of technology, and the general redeployment of surplus funds for the purpose of corporate de- velopment. Critics have also cited merger accounting as a way to “smooth earnings” and reach the growth targets anticipated by investors (Financial Times, 2002).

FACTORS DRIVING THE MEDIA INDUSTRY STRUCTURE