Digital Convergence 1
Current Issues in the Media Industry:
Understanding Digital Convergence*
Bum Soo Chon
Senior Researcher, Ph.D
Munwha Broadcasting Corporation
Seoul, KOREA
(82) 018-318-2758, ccblade2@yahoo.co.kr
* This manuscript is based on Chon et al’s study (2003), entitled by “A Structural
Analysis of Media Convergence: Cross-Industry Mergers and Acquisitions in the
Information Industries”, that will be published in the Journal of Media Economics in
this fall.
Digital Convergence 2
Abstract
Understanding Digital Convergence
Chon et al. (2003) analyzed structural changes in the information industries including
publishing, broadcasting, film, cable, telephony, software & data processing, and the
Internet in the era of "convergence" before and after 1996. In their study, the crossindustry network structure was mapped using annual data on mergers and acquisitions
among information industry firms obtained from the Journal of Mergers and Acquisitions.
A comparative network analysis of these ownership transactions indicated that the
consolidating structure of information industries after 1996 was affected by both
deregulation and digitization, and that telephone corporations played the most central role
in the transformation of the information industries. As well, cable and Internet industries
noticeably transformed their industrial relationships over this time period.
Introduction
Although there is as yet not an extensive body of empirical research to support
such characterizations, the transition to digitization and deregulation are widely thought
to be breaking down barriers between media platforms, services, and industries (Fidler,
1997; Garcia-Murillo & MacInnes, 2001; Waterman, 2000). For example, the merger of
CBS and Viacom in 1999 represented the integration between old media (Levi, 2000). By
contrast, AOL-Time Warner was a consolidation between old and new media. Nowadays,
the packaged service of telephone, cable, and Internet is not uncommon in the U.S. The
transformation of the established and new media/telecommunications industries has been
arguably caused by the emerging digital technology and deregulation policy (Fidler, 1997;
Garcia-Murillo & MacInnes, 2001).
Chon et al. (2003) examines how the digital revolution and deregulation policy
such as the 1996 Telecommunication Act have affected information industries through
cross-industry mergers and acquisitions. Generally, the Telecommunication Act of 1996
and the development of digital technology are seen to have opened vast opportunities. In
Digital Convergence 3
other words, new distribution channels and deregulation policy on cross-ownership are
considered to have caused the structure of the information industries to change. Chon et
al. (2003) aims to improve the understanding of the changing structure of industrial
integration with a focus on the information industries where recent mergers and
acquisitions have been particularly active: telephony, cable, broadcasting, software &
data processing, and the Internet. Empirical data on mergers and acquisitions over a
ninteen-year period was analyzed to reveal the structural changes in the relationships
among the information industries.
The Process of Structural Changes in the Information Industries:
Deregulation and Digitization
Technological developments made the convergence of media/telecommunications
imperative, but a series of entry barriers, which are imposed by legislation, impeded this
transition. One important aspect of the Telecommunication Act of 1996, is that it is fully
based on economic principles that encourage competition between different industries by
reducing entry barriers to market previously imposed by the FCC and prior legislation
(Bates, 1998; Krattenmaker, 1997). In short, by eliminating the entry barriers that
previously kept telecommunication and media industries apart in separate business lines,
the Telecommunications Act of 1996 helped facilitate convergence. As the plausibility of
convergence grew, industrial consolidation and concentration followed, driven by
economies of scale and scope. Deregulation by the 1996 Act further unleashed these
market forces, increasing not only within industry but also cross-industry business
transactions through M&A. Corporations might have pursued the trend of convergence
by developing a new technology or extending their production line. However, M&A has
Digital Convergence 4
provided a better opportunity for companies to grow in a short time because corporations
could accelerate the implementation of new technologies while capturing an already
developed customer base by another company (Chan-Olmsted, 1998). In addition, crossindustry mergers in the information industries have been driven to obtain resources for
new markets. New communication technologies have created new media and
communication markets with packaged products and services. Therefore, many media
and telecommunications companies viewed M&A an opportunity for rapid growth and
planned M&A after the implementation of the Telecommunication Act of 1996.
In 1999, cross-industry takeovers reached a highest level in history, “when 22%
of companies taken over in the most acquisitive industries were not in the same business
as their buyer. That's up from 20.2% in 1998 and 12% in 1993” (Time, Feb 7, 2000).
Unlike the past mergers and acquisitions, the current situations show different trends in
cross-industry M&As due to the development of digitized communication technologies.
During the 1990s, the shift to digital transmission of all forms of data has increased at an
accelerated pace. All forms of data and information are being produced and stored in
interchangeable digital code. As Negroponte (1995) argues, the transition from physical
media to virtual media is transforming the information industries. In this sense, although
cross-industry mergers and acquisitions are taking place actively across almost all
industries, recent trends have tended to be concentrated in a few major sectors, such as
telecommunications, the Internet and computer-related industries. These are the sectors
which are experiencing intensified competition and rapid technological change. For
example, with the Internet changing the way business is conducted, many companies are
increasingly turning to computer service firms to ease the transition to electronic
Digital Convergence 5
commerce. Acquisitions are prevalent in the computer service industry as companies
scramble to augment their technical skills and enter new market segments (Standard and
Poors, 1999).
With the development of communication technologies, the media and
communication markets are becoming increasingly complex in terms of products and
services as well as actors. Thus, firms in the market have to deal with or adapt to new
technologies and new model of communication. As such, cross-industry mergers in the
information industries are growing due to the drive to obtain technology resources. In
sum, “the digital technologies involved in the communication of information and
entertainment services are changing how the content of these service is produced,
delivered and shared” (OECD, 1998, p.6). Since the emergence of converged networking
technology, this trend has shown the expansion of the market in communication
technology sectors, such as telecommunications, the Internet and computer-related
industries.
Mapping Cross-Industry M&As in the Information Industries
The purpose of the Chon et al. (2003)’s research is to examine the structural
changes in the information industries through cross-industry mergers and acquisitions.
That study’s central question is: With whom do information industries integrate? It
considers the M&A relation among pairs of corporations as the unit of analysis. As
Podolny (2001) argues, M&A networks play a role as the channels of different markets.
Simply, this study asked what effects the 1996 U.S. Telecommunications Act and the
developments of the digital technology had on the consolidation of the information
industries. In the current depressed economy, the collapse of the stock market in
Digital Convergence 6
information industries, followed by financial crises of many companies, such as
WorldCom and Teleglobe, to name a few, supports the validity and significance of this
question. It is because the dynamics of this new market environment can benefit from an
explanation of what has happened during the transition of these industrial structures.
Let me briefly summarize the Chon et al. (2003)’s study. Contrary to the findings
of previous research (Chan-Olmsted, 1998), the results of cluster analysis on the crossindustry M&A revealed that there were structural differences before and after 1996.
Before 1996, content production-based industries showed the most prominent pattern in
consolidation. After 1996, however, most consolidation occurred in information delivery
industries, such as the Internet, cable and telephony. The results of the centrality analysis
also revealed structural changes in the information industries. After 1996, content
production and computer-related industries became less central. In contrast, information
delivery became more central than other information industries. Finally, the results of the
Galileo analysis showed that there have been changes in the relations among the various
components of the information industries. Simply, information delivery industries
became consolidated into the same organizational field, while the remaining industries
maintained similar patterns in their positional groupings that they had prior to 1996.
__________________________________________
TABLE 1 & 2, AND FIGURE 1 ABOUT HERE
__________________________________________
The overall results indicate that the structure of information industries may have
been affected by deregulation and digitization. Evidence of a structural change was found
before and after 1996, a key time for deregulation and a take-off time for digitization.
Digital Convergence 7
Although such evidence is necessary for an interpretation of such a causal effect, it is not
sufficient. Other alternative explanations for the observed changes need to be eliminated
for a more deterministic conclusion. Nevertheless, absent other plausible explanations, it
is reasonable to assume that the observed structural changes may have been caused by
deregulation policy. This is particularly plausible given the match between the findings
and the policy intent. Also, digital technologies including the Internet appear to have led
to digital convergence among cable, telephony, and computer related industries. Without
rival explanations and with the widespread perceptions in society that such factors are
causally potent, such an interpretation for the observed changes appears reasonable. Thus,
it would appear that both deregulation and digitization have facilitated consolidation.
Other major findings are that information delivery industries are in the core of
these changes. Simply, it was the telephony companies that played the most central role
in restructuring of the information industries. For example, information delivery-based
corporations were ranked as the main actors after 1996 in the top 15 cross-industry M&A.
In contrast, content production-based corporations were important actors only before
1996. At the same time, the cable and Internet have noticeably transformed in relation to
the other components of the information industries. These trends suggest that
deregulation and digitization may have transformed the boundary integrators among
telephony, cable and the Internet.
Further Research Topics
Future studies should attempt to examine the structure of cross-industry resource
flows and tying for more accurately explaining digital convergence in the mediaentertainment industry.
Digital Convergence 8
Cross-Industry Resource Flows
-
The recent development and deployment of the North American Industry
Classification System (NAICS).
-
Information as a major sector of the economy and as a commodity.
-
Inter-industry diversification and intra-group member firm concentration.
-
Spillovers and the growth of the media industry
-
Market boundaries around the media industries based on IO data
_________________________
FIGURE 2 & 3 ABOUT HERE
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Tying Problems
In technologically dynamic markets, the major consequence of the policy change
such as the 1996 Act is that telecommunication and entertainment companies can tie the
sales of one information service with others. Tying can be defined as a marketing strategy
where a firm or a service provider make the sale of one of its services conditional upon
the purchaser also buying some other service from it (Shy, 2001, p.155). According to
Shy (2001), tying may lead to (1) an increase in dominant positions of dominant firms,
and (2) leveraging which refers to the use of monopoly power in one market to gain an
advantage or reduce competition in another market. In this respect, tie-in sales may
reduce consumer and total economic welfare (Choi & Stefanadis, 2001), because the
tying of complementary products can be used to preserve and create monopoly positions.
More specifically, Carlton and Waldman (2002) explain how a dominant firm can use
Digital Convergence 9
tying to remain dominant in an industry undergoing rapid technological change, focusing
on entry costs and network externalities.
References
Bates, B. J. (1998). Introduction: special issue on the economic impacts of the 1996
Telecommunication Act. Journal of Media Economics, 11 (3), 1-2.
Carlton, D.W. & Waldman, M. (2002). The strategic use of tying to preserve and create
market power in evolving industries. Rand Journal of Economics, 33 ,2, 194-220
Chan-Olmsted, S. M. (1998). Mergers, acquisitions and convergence: the strategic
alliances of broadcasting, cable television and telephone services. Journal of
Media Economics, 11 (3), 33-46.
Choi, J. P. & Stefanadis, C. (2001). Tying, investment, and the dynamic leverage theory.
Rand Journal of Economics, 32, 1, 52-71.
Chon, B. S., Choi, J. H., Barnett, G.A., Danowski, J. & Joo, S. H. (2003). A Structural
Analysis of Media Convergence: Cross-Industry Mergers and Acquisitions in
Information Industries. Journal of Media Economics, 16, 3, 141-157.
Fidler, R. (1997). Mediamorphosis: Understanding new media. Thousand Oaks, CA: Pine
Forge Press.
Garcia-Murillo, M. A. & MacInnes, I. (2001). FCC organizational structure and
regulatory convergence. Telecommunications Policy, 25 (6), 431-452.
Krattenmaker, T.G. (1997). The Telecommunication Act of 1996. Federal
Communications Law Journal, 49 (1), 1-49.
Levi, L. (2000). Reflections on the FCC's recent approach to structural regulation of the
electronic mass media. Federal Communications Law Journal, 52 (3), 581-617.
Negroponte, N. (1995). Being Digital. New York : Knopf.
OECD. (1998). Content as a new growth industry.
Pavlik, J. V. (1998). New media technology: Cultural and commercial perspectives.
Boston: Allyn and Bacon.
Podolny, J. M. (2001). Networks as the pipes and prisms of the market. The American
Journal of Sociology, 107 (1), 33-61.
Standard and Poors (1999). Industry Surveys: Computers-Commercial services, 167, 50.
Waterman, D. (2000). CBS-Viacom and the effects of media mergers: An economic
perspective. Federal Communications Law Journal, 52 (3). 531-550.
Digital Convergence 10
Table 1. Centralities of Before and After 1996
Code
Industry
1 Broadcasting + Publishing
2 Broadcasting + Telephony
3 Broadcasting + Film
4 Broadcasting + Publish + Film
5 Telephony + Internet
6 Broadcasting + Telephony + Data
Processing + Film
7 Radio-Telephone
8 Non-Radio Telephone Service
9 Broadcasting Combination
10 Radio Broadcasting
11 Television Broadcasting
12 Cable & Pay TV
13 Film
14 Video Rental
15 Programming & Software
16 System Design & Data Processing
17 Internet & Online Service
18 Computer Maintenance
19 Publishing
Mean
S.D.
Before
4.717
4.364
4.234
1.850
0.551
After
0.252
7.241
0.352
0.301
16.324
Whole
1.243
6.232
1.596
0.523
10.065
0.170
101.179
97.677
1.034
0.123
1.166
9.958
1.958
0.072
5.136
3.232
0.297
0.110
4.072
5.497
52.811
124.288
0.343
0.042
0.126
8.154
0.175
0.015
2.314
3.828
36.416
0.369
1.130
3.825
84.404
110.290
0.401
0.051
0.261
7.776
0.430
0.024
3.022
3.049
21.696
0.271
0.908
12.732
29.842
13.863
29.418
13.519
29.493
Digital Convergence 11
Table 2. Differences of the Information Industries’ Locations Before and After 1996
ID
Industry Category
Distances Moved
1
Broadcasting + Publishing
.286 units
2
Broadcasting + Telephony
.219 units
3
Broadcasting + Film
.177 units
4
Broadcasting + Publish + Film
.328 units
5
Telephony + Internet
6
Broadcasting + Telephony +
1.215 units
.166 units
Data Processing + Film
7
Radio-Telephone
1.234 units
8
Non-Radio Telephone Service
1.182 units
9
Broadcasting Combination
.346 units
10
Radio Broadcasting
.156 units
11
Television Broadcasting
.223 units
12
Cable & Pay TV
13
Film
.260 units
14
Video Rental
.183 units
15
Programming & Software
.257 units
16
System Design & Data
.150 units
1.151 units
Processing
17
Internet & Online Service
1.029 units
18
Computer Maintenance
.186 units
19
Publishing
.202 units
Mean Distance
.471 units
Digital Convergence 12
Figure 1. Galileo Analysis of Cross-Industry Mergers Before and After1996
1. Broadcasting + Publishing, 2.Broadcasting + Telephony, 3.Broadcasting + Film, 4.Broadcasting + Publish + Film
5. Telephony + Internet, 6.Broadcasting + Telephony + Data Processing + Film, 7.Radio-Telephone, 8.Non-Radio Telephone Service
9. Broadcasting Combination, 10. Radio Broadcasting, 11.Television Broadcasting, 12.Cable & Pay TV, 13.Film, 14.Video Rental,
15. Programming & Software, 16.System Design & Data Processing, 17.Internet & Online Service, 18.Computer Maintenance,
19. Publishing
Digital Convergence 13
Figure 2. Mapping Resource Flows among the Media Industries in 1992
Digital Convergence 14
Figure 2. Mapping Resource Flows among the Media Industries in 1997
Cross-Industry Mergers 15