Vertical–Horizontal Integration
Vertical–Horizontal Integration
Most media businesses influence up to three areas: production, distribu- tion, and exhibition. As distributors, networks have long exerted vertical control over exhibition and production, especially in the distant past, but less so later on owing to the government’s “financial interest” regulations that kept the networks at bay. Today, however, networks have once again become increasingly vertical.
Where 10 years ago the network’s owned-and-operated (O & O) affili- ated stations reached 25% of TV homes, today these stations carry the Big 4 to 35% of households, which was the limit set by the 1996 Telecommunica- tions Act. In some cases they may reach up to 39% via special dispensation that may come to be judged the rule rather than the exception if Federal
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courts have their way. For example, NBC has 13 O & O stations and CBS has
17. The influence over exhibition is heightened by long-term affiliation con- tracts with nonowned affiliates, which are compensated for access to their commercial audiences.
The vertical influence over production also has grown. Where 10 years ago the networks produced less than 15% of their prime-time programs, nearly all studio production today is controlled or owned by networks. Gov- ernment deregulation came in response to the vertical control exerted by the cable networks and a small group of multiple system operators (MSOs), which are collectively the prime competitors to broadcast networks.
Despite the strength of the vertical chain, barriers to entry have not proven as insurmountable as once thought. The deregulation of ownership and the suggestion of duopolies has led to a climate where broadcast net- work competitors have appeared: the WB, UPN, and Pax TV.
As the networks have themselves acquired and allied with cable televi- sion networks, the presence of horizontal integration has surfaced in the re- cent past. Repurposed programming has slowly proliferated (e.g., NBC’s Conan O’Brien Show on Comedy Central). By October 2002, ABC had made plans to be more even more horizontal, repurposing several of its prime-time shows onto its ABC Family Channel, which it had acquired from Fox.
Barriers to Entry. For many years, economies of scale and a shortage of VHF signals barred broadcast competitors from entering into competition with the Big 3 networks. By the 1980s, however, improved UHF signals and 68% cable television penetration helped Fox slowly roll out a fourth network.
On another front, the Hollywood studios foresaw the eventual deregula- tion of the financial interest rules and began in earnest to create fifth and sixth networks to leverage control over their production prowess. As long as the broadcast networks were gatekeepers, the studios had to be content with whatever was bought, usually under the risk of deficit financing by the networks, whose license fees seldom covered the front-end cost of produc- tion. Today, the level of competition at the production and exhibition levels has shrunk, whereas the number of viable players has slightly risen. In all, the number of competitors, broadcast and nonbroadcast, deprives the ad- vertisers of it mass audience—replaced by a fragmented landscape of video alternatives.