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Megamedia: A Research Note Examining Communication Industry Concentration
by
Alan B. Albarran, Ph. D.
Professor and Chair
Department of Radio, Television and Film
The University of North Texas
P. O. Box 310589
Denton, TX 76203
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A paper submitted for review to the Media Management and Economics Division of the AEJMC for possible participation in the 2001 Annual Convention Program.
Megamedia: A Research Note Examining Communication Industry Concentration
Abstract
Concentration ratios within and across nine different segments of the communication industries were assessed by analyzing data over a five-year time frame. The data indicates most media industry segments are highly concentrated. Cross-industry concentration is also increasing, fueled by a number of mergers and acquisitions involving high-ranking firms. Implications of these findings are reviewed and discussed in the concluding section of the paper.
Megamedia: A Research Note Examining Communication Industry Concentration
Media mergers and acquisitions have become rather commonplace during the past twenty years. During the 1980s, a series of major media mergers took place, involving Time Inc. and Warner Communications; General Electric and RCA, Viacom and Paramount; and Capital Cities Communications and ABC (Auletta, 1992). Merger activity escalated during the 1990s with a number of major transactions that structurally altered the media marketplace. Among the more significant mergers involved the Walt Disney Company's acquisition of Capital Cities/ABC, AT&T's acquisition of Tele-Communications Inc., Viacom's acquisition of CBS, Clear Channel Communication's acquisition of AMFM Inc., and more recently the merger of AOL-Time Warner.
Recent merger activity impacted industries outside of broadcasting and cable. In the newspaper industry, Tribune acquired the assets of Times Mirror. In the recording industry, Time Warner was rebuffed in its efforts to acquire EMI, only to open the door for Bertelsmann to make a pending offer for the recording company. Seagram merged with Vivendi to create a European media conglomerate with assets that rival Bertelsmann. In the book industry, the four largest publishers (Pearson, News Corporation, Viacom and Bertelsmann) all acquired "smaller" houses during the 1990s, further increasing their respective market shares (Schiffrin, 2000).
Many factors have contributed to the increase in corporate mergers and acquisitions. Ozanich and Wirth (1998) claim media mergers and acquisitions have been driven by technological change, liberalization of regulatory policy, and the availability of capital. The latter two factors deserve additional comment.
There is no doubt the 1996 Telecommunications Act fueled increasing consolidation across many areas of the communication industries. Designed to eliminate barriers to competition, the 1996 Act greatly liberalized ownership limitations for broadcasting and cable companies, allowing companies to acquire more competitors. For example, in the radio industry alone, some 75 different companies operating independently in 1995 were consolidated into just three companies by 2000.
The economic expansion of the 1990s (roughly from 1992-1999) was driven by low interest rates and inflation, low unemployment, and a strong global economy in the developed regions of the world. Business, industry, and individuals were making money, and with interest rates among the lowest in post-war history, there was plenty of capital available to finance mergers and acquisitions for media properties.
Together, these conditions further enhanced a marketplace already conducive to consolidation and expansion. With so much emphasis and attention on "new media" and "new economy" ventures available through markets associated with the Internet (e.g., portals, e-commerce, Internet Service Providers [ISPs]) traditional media companies expanded their empires and operations, all in pursuit of achieving higher profits and increasing economies of scale and scope.
The study of concentration in the communications industries remains an important concern for researchers interested in media management and economics. By understanding the level of concentration within a given market one can learn a great deal about the structure of a market, which in turn has implications for the types of products offered, the degree of differentiation, the costs to consumers, and the barriers to entry for new competitors.
The study presented in this paper replicates an examination of concentration published in the Journal of Media Economics in 1996 (Albarran & Dimmick, 1996). It is the only known study to look at concentration from both within particular industries, as well as concentration across different segments of the communications industries. Because of the significant structural changes that have taken place since 1996, an update to this study should be of interest to media management and economics researchers. Hence, the purpose of this paper is to take an updated look at concentration in selected segments of the communication industries.
Theoretical Aspects of Concentration
Albarran and Dimmick (1996) identified two categories of concentration in their analysis of the communication industries. Within-industry concentration is familiar to economists and regulators as it uses abstract labels (e.g. monopoly, oligopoly, etc.) to identify market structure. These labels are commonly referred to as "the theory of the firm" (Litman, 1988). Further, concentration can be calculated using several different measures such as concentration ratios or the Herfindahl-Hirschlemann Index (HHI) (See Litman, 1985).
A second category of concentration is across-industry concentration, increasingly recognized by media scholars (e.g., Bagdikian, 2000; Compaine & Gomery, 2000). Clearly, mergers and acquisitions impact both forms of concentration. In within-industry concentration, market leaders try to dominate the same industry, while in across-industry concentration a firm's behavior is directed toward control of businesses in aggregate industries.
Albarran and Dimmick (1996) identified economies of multiformity as a strategic means behind increasing consolidation. The authors cited diversification efforts, repurposing of content, and the contracting of successful talent as a means to promote economies of multiformity. This study does not address economies of multiformity as a catalyst for recent merger activity, but rather offers a systematic, contemporary view of media industry consolidation.
Measuring Concentration. Different tools are used to measure concentration of market share within a particular industry. One common approach involves calculating concentration ratios.[1] This measure of concentration compares the ratio of total revenues of the major players to the revenues of the entire industry, using the top-four (CR4) or the top-eight firms (CR8). The results can be interpreted in this way: If the four-firm ratio is equal to or greater than 50 percent, or if the eight-firm ratio is equal to or greater than 75 percent, then the market is considered highly concentrated (see Albarran, 1996; Picard, 1989).
Concentration ratios are helpful in conducting trend analysis, to determine changes over time. It should be noted that the ratios themselves are not sensitive to the individual power held by individual firms. For example, two different industries may have equal ratios, but the shares of the firms within each of the industries may differ greatly.
The CR4 and CR8 ratios have been frequently used to measure concentration within media industries. Owen, Beebe and Manning (1974) found the market for television programming concentrated. Picard (1988) examined the newspaper industry using daily papers in local markets and found evidence of high concentration. Chan-Olmsted and Litman (1988) found cable systems were moving towards increasing concentration. Other researchers have used concentration ratios to assess levels of concentration in media markets in other countries (see Chen, in press).
As Albarran and Dimmick (1996) articulate, concentration ratios could be applied to measure across-industry concentration. Researchers must identify the appropriate market share (e.g. revenue) of the top-four and eight firms across the various types of communication industries compared to the total communication industry revenues. Using similar criteria, across-industry concentration would exist if the CR4 was equal to or exceeded 50 percent of total communication revenues or the CR8 was equal to or exceeded 75 percent of total communication industry revenues. Albarran and Dimmick (1996) point out that across-industry concentration measured in this way "would include revenue derived simply from being in different industries as well as revenues specifically derived from economies of multiformity" (p. 44-45).
To determine these two categories (within-industry and across-industry) of concentration, this paper analyzes nine different communication industries over a five-year time interval, from 1995 to 1999. The study is guided by the following research questions:
RQ1: Which media industries are highly concentrated? Which industries are not concentrated?
RQ3: To what extent does across-industry concentration exist in the communication industries?
Method
The data for this paper is drawn from the 1999 Communications Industry Report, published annually by Veronis, Suhler and Associates, an investment banking and consulting firm. Since 1982, VS&A has analyzed the financial performance of all publicly reporting companies operating across the communication industries. The report is published annually during the month of July, and is an important data source for researchers, investors and media financial analysts. Albarran and Dimmick (1996) based their study on the 1995 VS&A report.
Over the years the VS&A report has modified the number of industry segments it features in its annual report. For example, the 1995 report featured 14 different segments, while the 1999 report features 12 segments. This paper reports data drawn from nine of those segments in the following sectors: Broadcast Television (which includes TV networks and TV stations), Cable and Satellite, Radio Broadcasting, Newspapers, Consumer Books, Consumer Magazines, and Entertainment (including Filmed Entertainment and Recorded Music). Because the interest in this research is on traditional "mass" media segments, other areas of the report were not included in this paper.[2]
Concentration ratios (CR4 and CR8) were calculated using the data in the VS&A Report. First, the CR4 ratio for 1999 (the most recent year of data within the report) was calculated by totaling the market shares of the top four firms within a particular industry segment. Next, the CR4 ratio for 1995 was calculated for the same industry, and the difference between the two time periods observed. The same procedures were used to calculate the CR8 ratios for 1999 and 1999, this time using the top eight firms (if available) in each industry to determine the exact ratio. Differences between the two time periods were compared as with the CR4 ratios.
There are limitations regarding the data in the VS&A report. First, only publicly reported companies are included in each report, eliminating privately held companies. Second, companies vary in the information they publicly report. Also, the VS&A reports some segments differently than what is ideal for this type of analysis. For example, motion picture revenues and recorded music revenues are listed in the same section of "entertainment" but are reported separately. Last but not least, the report only includes companies with at least $1 million in revenues within a particular segment, omitting small companies. Despite these limitations, the VS&A report remains a valuable tool for researchers studying concentration.
Results
Within-Industry Concentration. The CR4 and CR8 concentration ratios for the nine industry segments are presented in Table 1, along with the degree of change between 1995 and 1999.
Regarding the first research question, in 1995 all but two industries (Television Stations and Newspapers) were found to be highly concentrated based on the CR4 ratio. Using the CR8 measure for 1995, these same two industries were below levels of high concentration. Likewise, the analysis for 1999 for both the CR4 and the CR8 found Television Stations and Newspapers to again be the only two media industries that were not highly concentrated. All other industry segments were found to be highly concentrated at both the CR4 and CR8 level of analysis. In all but Radio Stations, concentration decreased slightly in most categories, but by a very small percentage.
Table 1: CR4 and CR8 Ratios, 1995-1999 for Selected Industry Segments.
Top 4-1995
Top 4-1999
% Change
TV Networks
0.87
0.84
-0.03
TV Stations
0.32
0.31
-0.01
Radio Stations
0.59
0.77
0.18
Cable Systems (MSOs)
0.70
0.61
-0.09
Filmed Entertainment
0.85
0.78
-0.08
Recorded Music
0.98
0.98
NC
Newspapers
0.49
0.48
-0.01
Consumer Books
0.85
0.77
-0.12
Consumer Magazines
0.83
0.77
-0.06
Top 8-1995
Top 8-1999
% Change
TV Networks
0.98
0.98
NC
TV Stations
0.51
0.51
NC
Radio Stations
0.81
0.88
0.07
Cable Systems (MSOs)
0.92
0.87
-0.05
Filmed Entertainment
1.00
1.00
NC
Recorded Music
1.00
1.00
NC
Newspapers
0.69
0.69
NC
Consumer Books
0.96
0.94
-0.03
Consumer Magazines
0.95
0.91
-0.04
Across-Industry Concentration. In regard to the second research question, a list of the top eight communication companies ranked by total revenues across the communication industries was drawn from the VS&A report, and these revenues were then compared to total communication revenues. A CR4 and CR8 ratio was calculated to determine the degree of concentration across industries. This analysis is presented in Table 2.
Table 2: Top Eight Communication Industry Firms Based on 1999 Revenues
Company
1999 Revenues
(in millions)
Time Warner
$28,441
Walt Disney
17,296
Bertelsmann
11,246
Sony
1,0837
Viacom
8,724
Fox Entertainment Group
7,928
Thomson Corporation
6,515
General Electric
5,790
Total Communication Revenues
$161,585.8
Using the 1999 total revenue data, the CR4 ratio equals .42, while the CR8 ratio equals .59. In other words, the top four companies control slightly less than one-half of total communication industry revenues, while the top eight companies control less than 60 percent of total communication revenues. While most individual segments within the communication industries are heavily concentrated, in terms of total industry revenues the communication industries as a whole have not yet reached levels indicating high concentration. But one caveat is in order. There are no defined levels to dictate "high" across-industry concentration, as this measure is not necessarily what regulators might use in evaluating media industries.
Regardless, the 1999 CR4 and CR8 ratios are approximately 20 percent higher than the values reported in Albarran and Dimmick (1996). In their study, the CR4 ratio equaled .25, while the CR8 ratio equaled .40. Clearly, across-industry concentration grew rapidly from 1995-1999 no doubt a manifestation of considerable merger and acquisition activity.
Note that the top eight firms listed in Table 2 includes Time Warner and Viacom, two companies whose mergers with America Online and CBS respectively had not been consummated at the time the VS&A report was prepared. To hypothetically consider the impact on the CR4 and CR8 ratios had these mergers been approved, the revenues from AOL and CBS were added to the 1999 revenues for Time Warner and Viacom, and the ratios were re-calculated. Adding the revenues from the two companies increased the CR4 to .45, and the CR8 to .62, respectively. In short, there is little doubt that the concentration ratios will likely increase as the revenues from these large conglomerates grow via additional mergers and acquisitions.
Discussion
This examination of concentration ratios reveals high levels of concentration within the communication industries, and evidence of growing consolidation across industries. In fact, concentration has become the standard in the communication industries, and the question that seems most relevant is simply how much more consolidation will we observe in the 21st Century among media firms.
All indications suggest we are moving towards a global oligopoly structure of media conglomerates. In 1999, four of the top eight communication industry firms were based outside the United States (Bertelsmann, Sony, Fox [News Corporation], and Thomson). The other four firms (Disney, Viacom, AOL/Time Warner, General Electric) are domestically based. This confirms that the media industries are heading towards a structure likely dominated by an oligopoly of media firms (Demers, 1999; Maney, 1995).
The only areas of the media industries examined in this paper not highly concentrated are TV stations and newspaper publishing. Ironically, both of these industries are engaged in lobbying to eliminate cross-ownership restrictions that prevent merger activity between television broadcasters and newspaper publishers. In local markets, firms want to combine broadcasting operations with newspaper publishing along with Internet marketing and billboards (outdoor advertising) to create advertising "clusters" to sell to clients.
The television industry has been engaged in fierce debate over the 35% ownership audience reach cap imposed in the 1996 Telecommunications Act. The broadcast networks want the cap to be lifted, and have argued that a 50% cap is reasonable. Local station ownership groups are resistant, arguing that such a policy move would only make the networks more powerful, at the demise of local television stations. The National Association of Station Affiliates (NASA) filed a complaint with the FCC in March 2000 asking the Commission to investigate network practices towards affiliates (Flint, 2001).
All of this action may prove to be moot with the U. S. Court of Appeals recent ruling in favor of AT&T's complaint that the 30% ownership cap on cable television systems is arbitrary (Dreazen & Solomon, 2001). The Court required the FCC to provide further examination of the ownership cap, a clear indication that the cap was capricious and limited the First Amendment rights of cable system operators. The decision calls in to questions the fate of the 35% audience reach cap for broadcast television. If cable ownership caps are not constitutional, how can broadcast audience caps remain in force?
With a new Republican administration coming to power in Washington in 2001, and a Republican FCC more sensitive to the marketplace than its predecessor, prospects favor relaxation of ownership limitations, especially in regards to cross-ownership possibilities. Likewise, the Department of Justice's Antitrust Division, very active under the Clinton administration, may be less motivated to scrutinize future media mergers as stringently under the new Bush administration. Ultimately, the resolution that emerges from FCC decisions, Court decisions, or action by Congress could effectively eliminate all media ownership caps at the national level. Such action would only spur further industry consolidation and concentration.
The question of which firms will emerge as the new industry leaders-and which will be merged or acquired into other entities-remains to be determined. Scholars working in the area of media management and economics should continue to monitor the continuing impact of mergers and acquisitions on media industry consolidation and concentration.
Notes
1The ideal measure of concentration is the Herfindahl-Hirschman (HHI) Index. The HHI is calculated by summing the squared market shares of all firms in a given market. The index is more accurate than concentration ratios, but to calculate the HHI one must have data on each firm contributing to total revenues in an industry. Because this paper examines concentration across a number of segments, the CR4 and CR8 ratios are used to provide a more parsimonious interpretation.
2Sections of the 1999 VS&A Report not included in this paper include the Internet, Business-to-Business Communications, Professional, Educational & Training Media, Business Information Services and Advertising & Specialty Media.
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