Media Diversifications: Horizontal and Vertical


By

Prof. Medha Chintala
Ex-Faculty Member
ICFAI University
MS Program
Nagarjuna Hills, Hyderabad
 


It's the dawn of the Media companies to diversify themselves into various business either related or unrelated. Why are companies seriously doing this? Or is it to establish themselves once again in the digital era, not only to capture eyeballs or time, but to consequently influence lifestyles. If this is the Media Companies' mission, then they have to not only integrate horizontally, but also integrate vertically. How are the media companies enabling expansions to their profitability? Do they lose focus in their core competencies, is what the article attempts to explore.

Media companies are all working on strategies that can render their sizes bigger. It seems that they know that –Bigger is better. This is becoming a reality. For we have been seeing the trend for some time now. They are actively creating the next generation of media of improved connectivity all enabled with increased size and clout.

In February this year, STAR TV was rechristened to STAR. It is the number one channel in the Asian zone. In content the channel boasts of 19,000 hours of programming, in seven different languages for 300 million viewers across 53 countries. Promoter Rupert Murdoch's announcement emphasized this, on how he wants to leverage his brand value, content, technology, local expertise and extensive infrastructure. STAR shall do this by forging important partnerships in key markets. For Distribution it partnered with Hathway in India and GigaMedia in Taiwan, for Radio it has partnered with the Telecom Mogul to launch many FM stations. STAR is seen to evolve from a television brand to a multi-service and multi-platform brand, to totally transform for a new corporate identity.

In the next month followed SUN TV's announcement to shift from pure TV channel to communications. After dominating Southern TV channel over a decade it now plans to cross-sell its content in print media for south. Zee is seen looking for many related businesses, it has signed up with Prasar Bharti to market event of ODI cricket matches internationally, besides also broadcasting them in TV. Sony Entertainment has acquired Sri Adhikari Brothers Television Network for Rs. 57 crore this March with this it has distribution with it.

Many media firms are vertically integrated in distribution networks, toys, clothing, retailing, fun parks etc. Disney World is the master in cross-selling to synergize the content they use. The animated film "The Lion King" generated more than 1 billion USD profit. The profits are not merely from the film, but due to many lucrative media spin offs. There were 186 merchandize items that were followed on the film's theme. Looking into this Wall Street analysts have estimated that such films on average generate four times more profit than their domestic box-office take.

Even the print media is in game for this kind of expansion. Vaarta telugu daily has expressed its interests for broadcasting Telugu news on TV. The Bennett and Coleman of The Times Group is the largest selling National daily, and is also the most diversified media group. Its horizontal diversification can be seen in FM radio Mirchi, SMS 8888, Times Now TV; a perfect case of cross-selling the content to cater different audiences, also is selling music and other entertainment in its name are a huge success.

These are all examples of how media companies are cross-selling and expanding. One thing is pretty clear and that is none of these companies are doing this irrationally, these are well crafted strategies.

Reasons for Diversification:

Technology is the seed for the trend that we are witnessing. With new technology came rise in service sector, and more money at consumer's disposal causing Indian economy to  grow at 8.4 % p.a. With the rise of the great Indian consumerism and proliferation of more products. A number of  TV channels and new media types likewise, came along with certain interactive features. Like radio FM airing interactive talks or even SMS linked to TV.  Industry observers say SMS gives the channels 30-50% of their revenues (; Indian Idol), which is a lot of money. Technology also brought Digitization of Content making it available on multiple media platforms reaching cross border territories. To be proactively involved in the change media companies had to plan out for such diversifications. As Nawal Ahuja, the Director for Exchange4Media says:

"For a media company it is important to be present across as many media verticals as possible to be able to tap the consumer base across the entire strata of the society and hence leverage the commercial potential of the business"

The other ramifications of Technology can be summarized into the three areas, highly volatile media markets, Policies by the Indian Government and free and competitive market. To tackle all the three reasons is the critical factor for Companies to diversify.

Media markets are volatile, not only are the media vehicles getting fragmented by each day, to cater to all the groups and social classes, but the number of players is increasing; this is happening with the free non-monopolistic market that the government of India believes in. The inconsistent policies of the government are another reason to diversify- In 2003-2004 the government had made CAS compulsory. Had it happened eventually, it would combine the radio, TV, Internet and all together. Later its announcement of DTH- (direct to home) broadband connectivity has not materialized so far. So the businessmen of media are quite vary of the erratic tendencies and are mounting their businesses elsewhere.

Regarding competitive market scenario. India has opted for a free and fair competition; media is the "fourth arm" of democracy. Even while this is ensured, some firms are entering into joint ventures and tie-up and artificially creating oligopoly or cartels. This is creating a kind of Tier system among the media players. Because size begets size and the bigger players are in the Tier I. The reason this is happening is because, Media players need to buy media space and sell it on discounted prices thereby come into the circle of economies of scale, else they lose their markets. NDTV's 24*7 has acquired sanctions to broadcast their news channel to Canada based NRI's. The reach of numerous press media is increasing across the globe with cross–selling enabled by content digitization. With this it is now having large scale operations; they also need to expand their scale.

In order to sustain the high market volatility not only do media houses aim at increasing scale but also scope. Ramoji of Eenadu is today not just a Media Baron- but a renowned businessman in many fields, his SBUs include vernacular Telugu daily circulated in Andhra Pradesh, Chit funds, Entertainment, Studios, Satellite channels extended to National viewers and NRIs.  In short it's the dawn of media owners to realize their stakes in media as entry tickets to move into greener pastures. So increasing their influence inside the media business kindles pathways for all future ventures.

Pitfalls:

The synergy effect can be quite good, unless properly harnessed. What is actually intended may not be truly functional after all. The case in the point is AOL Time Warner, in 1999, when the world witnessed the biggest merger of all kinds. Within two years the companies realized tensions growing, and that the tie-up was in haste. They split up finally in 2001, as concentration of power did not work out.

Ruthless expansions can kill core competencies. Analysts opine that a pure media house will have more capacity to cover an issue in depth, with rigor and cover diversity of opinions. The best illustration is perhaps, Disney, one cannot expect it to talk too much on sweatshop labor when it is accused of being involved in such itself. The focus on the core competencies would wane and the company might lose it's much earned credibility in content quality. Times is the most diversified Indian Media group, but has not been quite successful with in the Television foray.

Some wider Industry implications of vertical integration are that if corporations have control of total process, they have few motives for genuine competition because they would have a power to dominate the prices.

Expansions are Market Driven:

The pressure is expand is only being proactive to market phenomenon because a conglomerate wields more power and confidence. Vertical integrations are more profound and not sheer promoter's fancies.

Walt Disney India, says that Television is globally just one-third of its business; because they are going to use television to drive other business. The company shall enter into gaming and mobile platforms in India with its absolute monopoly in Mickey Mouse. With market forces stimulating the media players to increase cross-promoting and cross-selling the brand, the profit potential is enormous. If a film is sold off to magazines, books, products, television of your own company then the spin-offs yield higher results. For smaller companies, who do not have backing of distribution and cross-selling possibilities the competition is very difficult. They have to eventually merge with somebody, or get phased out. The dictum –"If you can't beat them then join them rings true". Media companies should consider the pitfalls and experiences from global players while expanding. But while government approves of mergers and buyouts and vertical integrations to happen on the one hand, diversity and real competition would be dampened.






Benefits of Diversification.

Increased Market Power- If a big business house owns big media space, and then it is more likely that the criticism is less especially in political and government issues. So also the upstream, downstream channel partners and all the members in its territory possess enhanced market power. Further, with top media companies working under monopolistic conditions are entering into strategic joint ventures and tie-ups. These media conglomerates are artificially creating oligopoly and a niche Tier-I media groups who owning shares in each others' enterprises. The less powerful ones form Tier-II and III. With greater market power come other benefits. Customer perception of linkages between the various media is achieved. The top 10 media firms occupy 42% of media space, in 2003 according to advertising age 100 media company list.

For example, in the case of Times Group cross-selling with the goodwill it has generated over the years. Benefits such as greater economies of scale such as the largest selling newpaper ranked 68th among the top 100 publishers- - - - -. Economies of scope such as leveraging its brand image to start other media services like FM- Radio Mirchi, Times now TV channel, Times Music and Times Network.
 


Prof. Medha Chintala
Ex-Faculty Member
ICFAI University
MS Program
Nagarjuna Hills, Hyderabad
 

Source: E-mail January 8, 2008

          

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