Abstract

This study examined the impacts of product diversification of media firms
on their financial performance. For a pooled sample of 26 media firms from
1996 to 2002, this study tested the linear model adopted from the
industrial organizational economics and the inverted-U shaped curvilinear
model based on the strategic management studies. The results showed a
U-shaped model not the expected inverted-U curvilinear model. That is,
performance decreases as firms shift from concentrated business strategies
to related diversification, but performance increases as firms change from
related diversification to unrelated diversification. In conclusion, media
firms might not be successful in creating synergy effect expected from
related product diversification.


The Bigger, the Better?
Measuring the Financial Performance of Media Firms


In the United States, the press is assumed to be an independent monitor of
the surrounding environment, and since it cannot be an instrument of
government, it has evolved as a private enterprise (Bagdikian, 1971). Like
other business, media companies have a right to pursue profit as a private
organization. Whether operating in radio, local television, network
television, cable, newspaper, or magazine, the essence of business is the
logic of the commercial market (McManus, 1994).
Based on this notion, it is natural that media companies have merged to
produce multi-media conglomerates in their effort to seek more profit. In
fact, a wave of mergers and acquisitions and the development of new digital
technologies have transformed the media landscape. For example, Walt Disney
purchased Capital Cities/ABC and its ten television stations, 21 radio
stations, and interest in several cable networks for $19 billion in 1995
(Albarran & Dimmick, 1996). Subsequent to this acquisition, Time Warner
made another major acquisition by absorbing Turner Broadcasting Company, a
parent company of CNN and other popular cable networks in 1996. The
transaction value was $8.5 billion. In 1999, Viacom announced its merger
with CBS. The huge deal combined CBS' television network, its TV & radio
stations, and several Internet sites with Viacom's well-known cable
channels, movie and television productions, publishing enterprises, theme
parks, etc. Including these big mergers, the 1990s alone saw well over $300
billion in major media deals (Croteau & Hoynes, 2001).
A series of big bang mergers continued in the new century. On January 10,
2000, America Online Inc. (AOL) announced it would buy Time Warner Inc.,
creating a media giant of unprecedented size. The $166 billion deal was the
biggest corporate merger ever. It was four times as big as Viacom's $38
billion acquisition of CBS in 1999.
At present, one media conglomerate or another owns virtually everything
from production to distribution of all media products/services, such as
newspaper, magazine, book, broadcasting, cable, music, movie, and the
Internet through diverse business actions. It has always been assumed that
a newspaper article might be expanded to a magazine article which could
become the basis for a hardcover book which, in turn, could become a
paperback, and then, perhaps, a TV series and, finally, a movie. At the
same time, the product might enjoy the support of publicity by its parent
company's news outlets. This conceptual advantage, called 'synergy', has
induced the diversification of many media companies.
The continuous diversification activities of media firms can be understood
as the strategy to earn more money. This then begs the question: Does the
repeated diversification through mergers and acquisitions result in more
profit expected by the media conglomerates? Some believe that investors
analyzing mergers pay too much attention to short-term earnings gains and
do not notice that these gains are at the expense of long-term prospects.
However, how long is long term? Before getting the long-term effect, who
pays money to support the media companies? Eventually, the loss of media
firms might be compensated from the money of the public. In other words,
there is a possibility that media companies set the price high for their
products to make up for the loss from mergers and acquisitions.
In fact, nearly all major media companies are commercial corporations,
whose primary function is creating profits for owners or stockholders. Even
noncommercial and not-for-profit media need to produce profit that can be
used to develop their content and to operate organizations. If media firms
are not able to operate profitably, they fall into a spiral of decline that
makes it difficult to sustain their operations and to offer quality content
(Picard, 2002). Therefore, the need of the yardstick measuring the
financial performance of media companies is an unavoidable reality.
The goal of this study is to explore the diversification strategies of the
global media corporations, and to examine their impacts on firm
performance; in other words, what is the relationship between
diversification and financial performance?

LITERATURE REVIEW
Product Diversification
When a firm chooses to diversify its operations beyond a single industry
and to operate businesses in several industries, it is pursuing a corporate
strategy of product diversification (Hitt, Ireland, & Hoskisson, 2001).
Through this strategy, the firm engages in the manufacture and sale of
multiple diverse products. Most firms implement a diversification strategy
to enhance the strategic competitiveness of the entire company. This
position rests upon several assumptions including those derived from market
power theory, internal market efficiency, and synergy arguments (Grant,
1998; McCutcheon, 1991; Scherer, 1980).
Market Power Advantages. Diversified firms can exploit market power
advantages that are mostly not available to their undiversified
counterparts (Caves, 1981; Hitt, Ireland, & Hoskisson, 2001; McCutcheon,
1991; Scherer, 1980; Sobel, 1984). For example, broadcasters with a large
audience share or market share are able to command a premium in the
cost-per-thousand rates that they charge advertisers (Doyle, 2002).
        Another approach to creating value by gaining market power is the strategy
of vertical integration. Through vertical integration, a firm can derive a
power of reciprocal buying and selling. Greater diversification in more
factor and product markets increases opportunity for such reciprocity
(Grant, 1998). For media industries, it is possible to integrate the stages
in the vertical supply chain, which includes content creation (gathering
news stories, making television news), packaging (assembling into a product
like newspaper or television service), and distribution (delivering to
consumers). No single stage is more important than another. Ultimately, the
interdependent relation of different phases in the supply chain induces
media firms to pursue vertical integration between the stages (Doyle, 2002).
Market Efficiencies.    The diversified firm has much greater flexibility in
capital formation since it can access external sources as well as
internally generated resources (Lang & Stulz, 1994; Stulz, 1990). That is,
losses can be funded through cross-subsidization whereby the firm taps
excess revenues from one product line to support another (Berger & Ofeck,
1995; Meyer, Milgram, & Roberts, 1992; Scherer, 1980). Thus,
diversification can generate efficiencies that are unavailable to the
single-business firm (Gertner, Schartstein, & Stein, 1994). In a media
situation, a diversified media firm can afford to absorb the cost of an
expensive movie flop through cross-subsidizing from other booming
businesses units. Therefore, diversified media firms can withstand
short-term losses and wait for the next megahit.

Synergy. Synergy exists when the value created by business units working
together exceeds the value those same units create working independently
(Hitt, Ireland, & Hoskisson, 2001). The element of synergy involves
developing a single concept for various media. A children's story, for
example, may be packaged as a comic book, movie, music label, television
cartoon, and computer game. By doing this, media conglomerates can take
advantage of simultaneous revenue streams, thereby generating as much
profit as possible from a single idea (Croteau & Hoynes, 2001).
Another aspect of synergy involves cross-promotion. Media conglomerates
have placed more emphasis on the promotion of their own subsidiaries'
products such as television programs or movies (McAllister, 2000; Jung,
2001, 2002; Williams, 2002). The result is that conglomerates, with their
enormous resources and diverse holdings, are economically able to develop
and promote projects in ways that smaller competitors simply cannot match.
Linkage between Product Diversification and Performance
Linear Model. Industrial organization economists considered the relative
performance of diversified firms and undiversified firms and proposed that
diversification may be associated with concomitant increases in
performance. However, empirical research has revealed conflict results.
Gort (1962) was one of the first to examine the profitability of
diversified firms. He analyzed 111 large U.S. corporations over the years
1947-1957 and showed that there was no significant correlation between
profitability and diversification. In the study of 104 U.S. food-processing
firms, Arnold (1969) also concluded that no significant relationship
existed between any of the above measures of diversification and
profitability. On the other hand, Carter (1977) presented evidence that
diversified firms outperform their specialized counterparts.
However, Markham (1973) found that in all of the multiple regression models
relating diversification with various firm-specific variables, whenever
profitability entered at a significant level, it entered with a negative
sign. Lang and Stulz (1994) also showed that financial market and firm
diversification were even negatively related throughout the 1980s. Firms
that chose to diversify were poor performers relative to firms that did not.
Beginning with Gort (1962), industrial organization economists spawned
decades of research based on the premise that diversification and
performance are linearly and positively related. However, they found no
evidence supportive of the view that diversification provides firms with a
valuable asset.
Curvilinear Model. Later approaches from the perspective of strategic
management focused specifically on performance differences between related
and unrelated diversifiers showing a more systematic paradigm (Christensen
& Montgomery, 1981; Palich, Cardinal, & Miller, 2000; Palich, Carini, &
Seaman, 2000; Rumelt, 1974, 1982; Varadarajan & Ramanujam, 1987). The most
common theoretical rationale suggesting the superiority of related
diversification is derived from economies of scope (Markides & Williamson,
1996; Seth, 1990). Specifically, related diversifiers generate operational
synergies by designing a portfolio of businesses that are mutually
reinforcing. Since they are related in some way, units are able to share
resources or boost revenues by bundling products, enjoying a positive brand
reputation and the like (Barney, 1997). While benefits accrue to
diversification, at some point these efforts are also associated with major
costs. For example, Grant, Jammine and Thomas (1988) recognize the growing
strain on top management as it tries to manage an increasingly disparate
portfolio of businesses. Markides (1992) delineates other costs such as
coordination costs and other diseconomies related to organization
inefficiencies from conflicting "dominant logics" between businesses and
internal capital market inefficiencies.
Taken together these indicate that moderate levels of diversification yield
higher levels of performance than either limited or extensive
diversification. Thus, they provide support for an inverted-U curvilinear
model: that is, performance increases as firms shift from single business
strategies to related diversification, but performance decreases as firms
change from related diversification to unrelated diversification (Bettis &
Hall, 1982; Christensen & Montgomery, 1981; Geringer, Beamish, & daCosta,
1989; Geringer, Tallman, & Olsen, 2000; Grant, Jammine, & Thomas, 1988;
Kim, Hwang, & Burgers, 1989; Palepu, 1985; Palich, Cardinal, & Miller,
2000; Palich, Carini, & Seaman, 2000; Sambharya, 1995; Tallman & Li, 1996).
Diversification in the Media Studies. Compared to fervent research in
business management area, diversification research in media studies has
rarely been seen in the literature. As an initial study, Dimmick and
Wallschlaeger (1986) researched the level of diversification of television
network parent companies. The results indicated that the least diversified
parent companies were most active in new media ventures. Albarran and Porco
(1990) measured diversification of corporations involved in pay cable by
using the formula developed by Dimmick and Wallschlaeger (1986). The
results were consistent with the previous research that all firms appear to
utilize diversification as a means to limit resource dependency and ensure
organizational survival. Both studies dealt with the concept of product
diversification.
On the other hand, Picard and Rimmer (1999) introduced the concept of
geographic diversification as well as product diversification. They sought
to determine whether the degree of diversification affected the financial
performance of newspaper firms during the economic downturn. They concluded
that non-newspaper diversification reduced the effects of the recession.
The introduction of multiple measurement of performance such as growth
rates and profitability is another contribution to the diversification
literature in media studies.
        Because of the enormous size and a wave of mergers across media industry,
recent studies attempt to analyze the structure and performance of media
conglomerates. Albarran and Moellinger (2002), for example, examined the
biggest six media conglomerates' structure, conduct, and performance
following the industrial organization model. They focused more on the
common strategies of six media giants than on the difference. Powers and
Pang (2002) examined the diversification and performance of eleven media
conglomerates before and after the Telecommunication Act of 1996. The
results showed that both the diversification and the performance have
increased after the Act. Additionally, the study provided an alternative
analysis to the premise that media conglomerates must be harmful to free
speech by arguing that the number of news outlets has increased. Shaver and
Shaver (2003) also looked at the impacts of increasing media industry
consolidation on managerial effectiveness. They examined the activities of
eleven companies over a ten-year period and concluded that operating
margins were significantly and negatively correlated to the degree of
business diversity. In other words, greater margins were realized as
companies became more concentrated within their core industries rather than
diversifying into other areas.
Chan-Olmsted and Chang (2002) reviewed the diversification patterns of
leading seven media companies in terms of product/international dimension
and proposed an analytical framework for examining the factors influencing
these strategic choices. They also explained the medium-diversifiers
yielded the best financial performance. However, due to the limited sample
size, they left unanswered question about the relationship with performance
to be solved. Peltier (2002) showed the relationship between
diversification through mergers and acquisitions and financial performance
by studying eleven media conglomerate firms. While there is no positive
correlation between its presence in multiple businesses and economic
performance, internationalization rate of firms appears to be positively
correlated with economic performance. However, the study fell short in two
regards. First it needs a large number of firms in the sample. Second, the
study only used net margin as performance; multidimensional aspects of
economic performance also should be taken into consideration. In sum, the
attempts to measure financial performance of media firms' diversification
among media scholars are very limited and there is no conclusive comment at
this time.
HYPOTHESES
Although the industrial organization approach was unsuccessful to support
the linear linkage between product diversification and performance, this
study adopts such an approach as well as strategic management approach to
test the two frameworks. Because we do not have any proven model yet, it is
meaningful to study both perspectives in the media industry context.
The argument in the industrial organization literature linking
diversification to profitability revolves around the notion of market power
(Caves, 1981; Markham, 1973). Vertical mergers may be interpreted as a
means to exclude rival firms from the market by reducing their supply of
raw materials or their outlets. The reason for choosing vertical
integration is then clearly market foreclosure. In fact, the ownership of
program services by cable MSO has historically resulted in two problems.
For example, MSOs have occasionally discriminated against competing program
services by refusing carriage, charging higher retail prices for competing
services, and providing less favorable channel positions. MSOs have also
refused to provide the program services in which they had an interest to
competing distribution outlets such as SMATV operators and MMDS
broadcasters (Owen & Wildman, 1992). Because of its ability to acquire and
exercise market power, a diversified firm is alleged to be able to subvert
market forces through mechanisms such as cross-subsidization, predatory
pricing, reciprocity in selling and buying, and barriers to entry.
Another mechanism that is expected to allow diversified firms to sustain
supernormal profits is the efficiency gains. Diversification deals may
generate economies of scope among the different media industries. Economies
of scope occur when it costs less to jointly produce two different products
than to produce each of them independently (Gertner, Schrfstein, & Stein,
1994; Lang & Stulz, 1994). Hence, a single idea, first materialized in a
film for example, may be then used to publish a CD of the film's music, a
book of the scenario, a video game, Web site etc. Disney exploits these
kinds of synergies very efficiently. In the same vein, Time Warner's
television channels, newspapers, magazines may promote AOL through
advertising and vice versa.
The above arguments lead to the hypothesis that the more diversification a
firm has in its operations, the better are its chances of extracting
supernormal profits. Stated more precisely, this leads to the following
hypothesis on the relationship between the extent (total degree) of product
diversification and performance.
Hypothesis 1: A firm's extent (total degree) of product diversification has
a positive relationship with firm financial performance.

As long as product diversification stays within the scope of a firm's
strategic resources and capabilities, it will provide increasing profit
margins. However, excessively high or unrelated product diversification
depresses firm performance, as costs outstrip returns to strategic
resources (Bengtsson, 2000; Chen, 1998; Geringer, Tallman, & Olsen, 2000;
Jones & Hill, 1988; Prahalad & Bettis, 1986; Tallman & Li, 1996;
Williamson, 1975).
Obviously, a company would be expected to profit from related
diversification by economies of scale and scope that should generate more
synergistic benefits than in the case of unrelated diversification that
have no relationship other than becoming part of one overarching system of
corporate control. Therefore, it is expected that a firm needs to conduct a
deduction of unrelated portfolio. This strategy has been chosen by Vivendi
Universal. This French firm has divested its non-media business such as
environmental and water businesses to concentrate on media related
properties. Based on strategic management perspective, we expect an
inverted-U curvilinear relationship between the direction (unrelated
direction) of product diversification and performance.
Hypothesis 2a: A firm's direction (unrelated degree) of product
diversification has a positive relationship with firm financial performance.

Hypothesis 2b: A firm's direction (square of unrelated degree) of product
diversification has a negative relationship with firm financial performance.
METHODS
Sample
In order to test the hypotheses, the top 25 media companies as ranked by
the industry journal, Broadcasting & Cable, based on the year 2001 media
revenues were chosen (see Table 1). Although Bertelsmann is not listed on
the list, the firm was added because of its revenue size and position as
one of most mentioned global media leaders.
Data for the top 26 media firms are collected over a seven-year (1996-2002)
period. The enactment of Telecommunication Act in 1996 struck down the
walls between the media and telecommunication industry by allowing firms to
cross the boundary. It also removed the limitation of television and radio
station ownership by a single entity and raised the ownership cap.
Consequently, the law has accelerated a wave of mergers and acquisitions in
the media and telecommunication industry. Therefore, the year 1996 was
selected as the starting point of the analysis.
We can pool 182 observations by gathering the data for seven years
observation for the top 26 firms. However, the sample size is over the
estimated number of observations because of ownership change. For example,
the company, AOL Time Warner, was merged in 2000. Therefore, the AOL and
Time Warner were treated in different company before year 2000. We gathered
the diversification and performance data for two firms separately and
included them as the different samples from 1996 to 1999. After eliminating
not available data, in sum, 189 samples were analyzed for the final analysis.
Data Source
The major archival data source for diversification measurement is Directory
of Corporate Affiliations, which includes more than 180,000 parent
companies, affiliates, subsidiaries, and divisions in the U.S. and
worldwide. Profiled data in the volume of Directory of Corporate
Affiliations from 1996 to 2002 were analyzed.
For the measurement of financial performance, the data set were derived
from the firms' annual reports and 10-K filings. All financial figures were
verified by comparing Standard & Poor's Compustat financial data and there
was no questionable case.
Measurement
Extent. Previous literature from the industrial organization economics used
objective measures based on SIC count to capture the total degree of
diversification (Arnold, 1969; Carter, 1977; Gort, 1962). This study also
uses the number of different four-digit Standard Industrial Classification
(SIC)[1] codes in which a firm operates. Its use is dictated by following
considerations; (1) it is a well-accepted classification system and is
frequently used in previous research; and (2) the analysis presented in
this study can be replicated by others. All media product/service is
categorized as one of the four-digit SIC codes by industry. For example, if
a company runs businesses in newspaper (2711), book publishing (2731), and
television broadcasting station (4833), the extent (total degree) of the
firm's diversification is three.
Direction. Strategic management scholars introduced several methods such as
Rumelt's category (1972), Herfindahl type index (Montgomery, 1982), Entropy
(Jacquemin & Berry, 1979; Palepu, 1985), and BSD & MNSD (Varadarajan &
Ramanujam, 1987) to measure the direction of diversification.
Entropy measure is a frequently used method to measure the relatedness of
product diversification based on firms' sales volume by product segment.
However, it is difficult to find secondary sources that provide reliable
and consistent data for media firms. Worse yet, each media firm provides
product segment revenue in a different way. One company, for example,
combines broadcasting, cable, movie, games, and other segments as
entertainment revenue, while another company reports its revenue from
broadcasting and cable respectively. As a consequence, it is impossible to
apply the same rule of segment to different companies.
Adopting Jacquemin and Berry (1979)'s Entropy measurement, researchers used
the number of SIC industries instead of sales segment data (Geringer,
Tallman, & Olsen, 2000; Palich, Carini, & Seaman, 2000; Robins & Wiersema,
1995; Sambharya, 1995). They used a Herfindahl type measure of product
diversification, which takes into account both the number of segments in
which the firm operates and relative importance of each segment. This
Herfindahl measure is computed based on the sum of the squared proportion
of industry involvements relative to total operations. Subtracting that sum
from one provides an index that rises as industry spread (i.e., product
unrelatedness) increases. Following is the equation for the measurement of
unrelated degree of product diversification.
D = 1- S Pi2/ (Spi)2
; where Pi= proportion of operations in the industry i to total
operations.
        Products belonging to different four-digit SIC industries within the same
two-digit industry group are treated as related. Here is an example of the
measurement. Two companies, A and B, involve four SIC codes equally.
Company A is involved in four businesses in the same two-digits SIC (2711,
2721, 4831, and 4832), which are print media and broadcasting businesses.
On the other hand, company B has different two-digit SIC businesses (2711,
4841, 7375, and 7822) in four areas. Based on the Herfindhal calculation,
company A has value of .50 and company B has the value of .75. Therefore,
the higher value indicates that the firm's diversification is less related.
Performance. Following variables will be used to measure the multiple
aspects of media firm performance: revenues (REV), sales growth rate (SGR)
for firm growth, operating income before depreciations and amortizations
(EBITDA) and operating margin (OM) for profitability, and return on sales
(ROS), return on assets (ROA), and return on equity (ROE) for management
effectiveness, and earning per share (EPS) for stock market reaction.
Operating income before depreciation and amortization (EBITDA) is not a
typical performance measure in accordance with generally accepted
accounting principles (GAAP). However, because media business is
principally goodwill related, EBITDA will be another appropriate measure
for evaluating the media sectors. Earning per share is calculated by using
the number of shares outstanding instead of dollar amounts reported on the
balance sheet.

RESULTS
Table 2 shows the descriptive results of diversification in terms of total
diversification (extent) measured by number of SIC businesses and unrelated
degree of diversification (direction) over the seven years.
The total number of SIC involved in media firms has risen from 453 in 1996
to 672 in 2002. The number was not significantly different until year 2000.
However, it shows significant increase in year 2001 and 2002 due to the
results of recent big mergers completed by AOL-Time Warner (2000),
Vivendi-Seagram (2001), Clear Channel-AMFM (1999), Tribune-Times Mirror
(2000), Viacom-CBS (1999), and Gannett-Central Newspapers (2000). At the
same time, Disney, Bertelsmann, and Cox Enterprises also expanded their
businesses into more areas in recent years in order to respond their
competitors' diversification through big mergers.
The more noticeable thing is the change of unrelated degree of
diversification. The mean of unrelated score has risen from 0.5645 in 1996
to 0.6197 in 2002. Moreover, the score shows constant increase year by
year. It means that media firms have expanded their businesses in more
business sectors over the years. It is a natural phenomenon to diversify
their business into related areas in the media industry. For example, a
firm publishing a newspaper might expand its business into magazine
publishing. Because it can utilize its resources and know-how learned in
print media business, it is no surprise to see that kind of horizontal
diversification.
However, the increasing trend of diversification does not limit the
boundary of related business. Meredith, for example, which initially
started from a magazine publishing company, now runs an equivalent amount
of broadcasting businesses. Moreover, it has expanded its business into
integrated marketing service and interactive media. The Washington Post
Company had businesses mainly in print and broadcasting in 1996. However,
it has increased its ownership in the areas of cable television systems,
provision of educational services, and interactive media. In fact, most
firms analyzed in this study are involved in at least ten businesses, and
the mean number of SIC of the sample firms has changed from 17 in 1996 to
26 in 2002.
Regression analysis was used to estimate the effects of total degree of
product diversification and the unrelated degree of diversification on
media firms' performance. The first hypothesis proposed that performance is
linear relationship with the degree of total diversification. Hypothesis 1
was tested by regressing multiple performance measures on total degree of
diversification. Although two dependent variables (Revenues: ß = .883, R2 =
.779, p<.001; and EBITDA: ß = .86, R2 = .74, p<.001) showed statistically
significant results, the other six dependent variables measuring financial
performance revealed no significant results. As main industrial
organizational economics literatures failed to show linear relationship
between total diversification and performance, this study also did not
support the linear relationship between variables.
On the other hand, the prediction of Hypotheses 2a and 2b was modeled by
introducing the following quadratic relationship between performance and
unrelated degree of diversification;
Performance = ß0 + ß1 (degree of unrelatedness) + ß2 (degree of unrelatedness)2
Hypotheses 2a and 2b predict an inverted-U curvilinear model that
coefficient ß1 is positive and that coefficient ß2 is negative.
Table 3 presents the effect of direction (unrelated degree) of
diversification on firms' performance. The hypotheses of quadratic model
were consistent with previous management literature in several dependent
variables. Four measures (Revenues, Sales growth rates, Operating margin,
and EBITDA) revealed significant results with high explained power in
R-square. However, it was not expected to find that the directions of
coefficient were contradictory with the predictions. The coefficient of
unrelated degree enters with a negative sign and that of the square of
unrelated degree enters with a positive sign. In other words, it is a
U-shaped curvilinear model not an inverted-U curvilinear model.
Concentrated media business and the more unrelated diversifiers are
therefore better than medium level diversifiers with medium degree of
relatedness. This result, however, is contradictory to the postulations of
the relationship between diversification and performance literature
discussed in the previous section.
On the other hand, the remaining other four dependent variables (ROS, ROA,
ROE, and EPS) did not yield significant results in the regression models.

DISCUSSION and CONCLUSIONS
This study suggests that the relationship between product diversification
and performance is more complex than the linear relationship implied in
most studies of degree of total diversification. The directionless rampant
diversification does not contribute to firms' healthy finance represented
as management effectiveness. It only showed relationship with overall
amount of revenues. This theory recognizes that increasing diversification
may not be associated with concomitant increases in performance, at least
not through the entire relevant continuum.
On the other hand, this study reveals a quadratic relationship between
diversification and performance. However, it was a U-shaped curvilinear
model, not the expected inverted-U curvilinear model. In other words, this
finding for media firms does not support previous studies completed by
strategic management scholars. Rather, the hypotheses relating direction
(unrelated degree) of diversification yielded a contradictory result. That
is, performance decreases as firms shift from concentrated business
strategies to related diversification, but performance increases as firms
change from related diversification to unrelated diversification. The
theoretical framework of diversification in strategic management cannot
account for this contradiction. Therefore, explanation for this discrepancy
is speculative at best.
One possible reason is that although diversification strategy pursued by
media firms has been successful in terms of overall profit, it does not
seem to contribute managerial effectiveness for the firms. In line with
theoretic interpretation, the firms might enjoy the market power advantage
or market efficiencies through greater flexibility in capital formation.
However, they might not be successful in creating synergy effect caused
from related diversification. Where is the evidence the company got more
money in aggregating Time Warner content with AOL distribution? Contrary to
the rosy expectation of the new company, it faces a record-high financial
failure at the present. Rather than relying on the traditional concept of
vertical integration or poorly conceived synergy advantage, far more
dramatic strategic rethinking is likely soon to be necessary in all parts
of the company's businesses. The mantra of synergy does not work in the
media industry at this point, not only in AOL Time Warner but also in other
media companies as well.
A slightly different explanation for the contradictory result is the
contribution of the enormous revenue size of GE and Sony. It might be
worked as a bias in the overall model and lead to the opposite direction in
the proposed hypotheses. It is possible to eliminate two companies at the
sample. However, because other companies also have non-media related
business, it is fair to include GE and Sony's non-media business sectors
and performance as well.
The contradiction can also be accounted for from the perspective of
multi-dimensional aspects of performance measurement. The four variables
(Revenue, SGR, OM, and EBITDA) were statistically significant with the
opposite direction of coefficient. It should be noted, however, that the
performance measurement for management effectiveness (ROS, ROA, and ROE)
and market reaction (EPS) showed the expected direction of the hypotheses.
Although their models were not significant statistically, if the latter
four variables are better indicators to measure a firms' financial
performance, the proven inverted-U model might be applicable to media
firms. In other words, the split results in multiple performance
measurement still leave unidentified the relationship between
diversification and performance.
In conclusion, this study provides partial corroborating evidence that
performance is related to product diversification in a nonlinear manner,
supporting the contention that concentrated and more diversified business
firms are more profitable than related business firms.
Due to its exploratory attempt to figure out the relationship between
product diversification and performance, this study has a number of
limitations and recommendations for future research. One of the limitations
of this study comes from the measurement of performance. Accounting
measures of performance are frequently used by managers, executives, and
scholars. In spite of their prevalence, accounting based measures have some
shortcomings. They reflect previous investment decisions and do not
accurately illustrate expected cash flows that organizational assets may
generate in the future (Fisher & McGowan, 1983). Additionally, they also
may be distorted due to varying tax laws in different industries or
nations. In fact, there is a lively interest within the strategic
management field in adopting market-based performance measures[2] (Amit &
Livnat, 1988; Dubofsky & Varadarajan, 1987; Hitt & Ireland, 1986). Because
only accounting-based performance was measured in this study, it should be
considered to measure performance with market-based method as well as
accounting-based method in future studies.
Second, it is assumed that the current diversification profile of a firm
would impact not only the performance of that year but also the performance
of following years. Therefore, future research can figure out the time lag
for registering financial profit in a time-serial analysis. Because there
was not much variation in the degree of diversification during the time
period for this study, it was not necessary to perform time serial analysis
in this study. However, we have witnessed much diversification of media
firms in the past two years. Therefore, future research might observe the
future financial performance of media firms who diversified their business
in recent years. In fact, AOL Time Warner is severely staggering after
three years of the merger.
Third, other variables like international diversification and its combined
effect with product diversification also should be considered in future
studies. Because the dual diversification both in product and in geography
is very popular in the media industry, the result might have a different
answer.
Despite these limitations, this study has taken a useful step in the
analysis of diversification effects on performance. Transaction cost theory
suggests that excess product diversification may harm performance. In other
words, more diversification does not always seem to be better. Hence,
rather than pursuing diversification for its own sake, the management of a
firm needs to choose businesses that lead to real economic gains. Although
this study can not suggest the appropriate level of diversification for the
better performance, the financial results reflected in management
effectiveness such as return on sales, return on assets, and return on
equity, do not provide apparent evidence of synergy effect. Again, it is
desirable to figure out the realistic business diversification strategy
rather than relying on the traditional concept of vertical integration or
poorly conceived synergy advantage.
 From the perspective of the public, whether the fat media conglomerates
would invest money to provide quality information and entertainment product
is questionable. Even worse, if these same conglomerates are struggling
financially due to their rampant diversification through mergers and
acquisitions, which might lead to excessive debt levels, ultimately it is
the public who will suffer. Big is not necessarily bad, but uncontrolled
ambitious big, which may cause financial difficulty, might well conceive
the seeds of disaster that can hurt the public, who need fair and
high-quality media products and services.


















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Table 1. Top 26 Media companies including Bertelsmann

Rank
Company
Nation
Revenue (billion)
Ownership
1
AOL Time Warner
U.S.
38.2
PB
2
Vivendi Universal
France
31.0
PB
3
Walt Disney
U.S.
25.3
PB
4
Viacom
U.S.
23.2
PB
5
Bertelsmann
Germany
19.1
PV
6
Comcast
U.S.
19.1
PB
7
Sony
Japan
17.1
PB
8
News Corp.
Australia
13.8
PB
9
Hughes Electronics
U.S.
8.3
PB
10
Cox Enterprises
U.S.
8.0
PV
11
Clear Channel
U.S.
7.9
PB
12
Gannett
U.S.
6.3
PB
13
NBC
U.S.
5.8
PB
14
Tribune Co.
U.S.
5.3
PB
15
McGraw-Hill
U.S.
4.7
PB
16
Cablevision
U.S.
4.4
PB
17
Charter
U.S.
4.1
PB
18
Hearst
U.S.
4.1
PV
19
Echostar
U.S.
4.0
PB
20
Adelphia
U.S.
3.6
PB
21
NYT Co.
U.S.
3.0
PB
22
Washington Post
U.S.
2.4
PB
23
Discovery
U.S.
1.8
PV
24
E. W. Scripps
U.S.
1.5
PB
25
Belo
U.S.
1.4
PB
26
Meredith
U.S.
1.1
PB
Source: Broadcasting & Cable (2002, May 13)
PV: Privately held/PB: Publicly held













Table 2. Extent and Direction of Product Diversification by Year

1996
1997
1998
1999
2000
2001
2002
TD
453
440
426
436
446
494
672
UD
0.5645
0.5782
0.5803
0.5828
0.5848
0.5951
0.6197




Table 3. Unrelated Degree of Product Diversification and Performance

Revenue
SGR
ROS
ROA
ROE
OM
EBITDA
EPS
UD
-1.223***
-.775**
.263
.327
.206
-.75**
-1.187***
.406
UDSQ
1.813***
.580*
-.284
-.448
-.173
.320*
1.692***
-.393
R2
.519
.073
.006
.026
.004
.203
.413
.001
F
95.486
6.866
.553
2.346
.335
22.153
61.199
1.066


[1]  Standard Industrial Classification (SIC) system was developed to
facilitate collection of data for economic analysis by the Department of
Labor. It employs a set of reporting standards that have evolved over time
based on a variety of consideration ranging from similarities in materials
to product-market linkage. Each industry is assigned as different SIC code.
For example, SIC code of newspaper publishing is 2711, while broadcasting
station has SIC code of 4831.
[2]  Accounting measures reflect present and past performance, but they do
not consider the future potential of the firm. In contrast, market measures
capture the forward-thinking assessments of investors. Specifically,
market-to-book value (MTB) reflects the difference between the market value
of the firm and its book value, indexing stockholders' perceptions of the
firm's ability to exceed expected returns in the future.