Structure of Cable Industry
 Economies of Scale
 Vertical Integraph
Economies of Scale  Economies of size
Cos
t
AC1
AC2
AC3
AC*
EconomicsOfScale
DiseconomicsOfScale
LRAC
Q
Q
Q
Q
Quanti
1
2
3
*
ty
 LRAC, Long Run Average Cost, represents cheapest means that we can
produce given outputs
 It is always cheaper to produce Q* with a single company producing it
 Producing Q* with 2 companies increases AC higher.
Natural Monopoly: One company can produce and be less wastful than having
several companies compete for customers and duplicate the
service.
 Utilities: electricity, gas, water, sewage, local phone…
Q: Is local cable a natural monopoly? Cable has viewed as a natural monopoly
 needfor price/profit regulation to protect consumers.
Networking
AC/viewer
There is room for
multiple networks
Q*
Q (HH/viewers)
At the local level, the cable system behaved as it was natural monopoly but, at the
program networking level, there is a room for multiple networks because each
networks can take advantages of enabling technologies and access to a wide
audiences and, also, turn those potential audiences to actual audiences by charging
them directly for accessing for the programs.  It is not as limiting as a natural
monopoly situation for the local cable system.
Vertical Structure of Industry
Several layers of the industry
Stage 3: Exhibition/Retailing: Local Cable Systems
Value Added
Stage 2: Distribution (Networkings)
Value Added
Stage 1: Production of programs/software
Sum of all the value added = Retail Price of a program
Vertical Integration: If you are simultaneously involved in multiple stages, it is
vertically integrated.
Market concentration of Control: there is a concentration of ownership and control
in relatively few hands
Across Markets: National Market
Chain ownership across markets  National Monopoly ownership control and
power: chains of local cable systems = Multiple System Owners, MSO: AT&T
broadband, AOL TW
How concentrate is cable ownership at the retail/exhibition level?
Combined shares of AT&T and AOL TW exceeds 50% of the market. Very
concentrated industry
What is the origins of concentration of control?
1. Build the systems yourself: Internal Expansion
2. Acquire previously built facilities: Merger/Acquisition approach
3. Create Strategic Alliances via cooperation
Formal cooperation  sharing of monopoly power (possible cartel)
Mergers and Acquisitions:
Vertical Merger
Stage3: Exhibition
Stage2: Distribution
Stage1: Production
(Company A)
(Company B)
(Company C)
Merger between A, B or B, C, or A, B, and C is Vertical Merger
Moving toward consumer such as B acquiring A is Forward Merger
Moving away from consumer such as B acquiring C is Backward Merger
Horizontal Merger
Stage 3: Company A
Stage 2:
Stage 1:
company B
company C
company D
Company Z
If there is a merger among company A, B, C, and D (in the same level of play
field), it is Horizontal merger.
If company Z attempts to merge company A (not directly related and competitor to
each other), it is Diagonal merger. It is also known as conglomerate mergers:
there is no previous customer, supplier, competitor relationship between two
parties.
For Example, AT&T and TCI merger  Conglomerate Merger
AOL and TW merger  Conglomerate Merger
D.O.J (Department of Justice) Antitrust Div.: Strong ethic to disallow horizontal
mergers especially among large companies.  Protect a industry from Elimination
of competition.
D.O.J only occasionally will prosecute vertical mergers.
D.O.J is virtually powerless in attacking/prosecuting conglomerate mergers.
Move away from microeconomic impacts on competition and switch to a mindset
that focuses on the macroeconomic impacts