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Vertical Integration in Mass Media Industries

Vertical supply structure of media industries

Three vertical stagesProduction – content creationDistribution – packaging or transmitting contentExhibition – delivery to or reception by end customers

Examples

MoviesStudios – Distributors – TheatersStudios – Movie Channels – Cable System

NewspaperPress Service – Newspaper – Circulation

TV programsTV Producer – Syndication – TV StationTV Producer – TV Network – Stations

Upstream/Downstream of Supply

Production

Distribution

Exhibition

Upstream of industry

Downstream of industry

(wholesale)

(retail)

Vertical Integration

Production

Distribution

Exhibition

Upstream of industry

Downstream of industry

(wholesale)

(retail)

Merging ownerships of the two successive operations:

The operations (firms) no longer are separate entities but a concerted business decision-maker, considering costs and benefits of both stages jointly.

Vertical Integration

Production

Distribution

Exhibition

Upstream of industry

Downstream of industry

(wholesale)

(retail)

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Full Vertical Integration

Production

Distribution

Exhibition

Upstream of industry

Downstream of industry

(wholesale)

(retail)

Co-ownership of sequential operations (vertical integration)

Economic efficiency gain– Removing double (or even multiple) price

markupsTo reduce the additional profit-margins from the retail price of the media product, charged by middlemen

– Increased retail consumption due to the lower price

Vertical Integration vs Sequential Sale Stages

Cost

PVI

CostPU

More price markups

PD

# Sold # Sold

More purchases due to a lower price-mark, under vertical integration.

Demand Curve

Demand Curve

Vertical Integration vs Sequential Sale Stages

Cost

PVI

CostPU

More price markups

PD

# Sold # Sold

Consumer surplus shrinks with a higher price

Reducing retail risks

Reducing investment or financial risk in the content production (upstream)– To secure retail sale outlets for vending their

products– To collect more direct and accurate

marketing/demand info about retail consumers– To brace for competition

Cutting opportunistic behaviors

Abridging opportunistic incentives of successively transacting parties– As both upstream and downstream traders can

benefit from an increase to end-user sale, who should promote the end product?

– “Tragedy of the commons”– VI can eliminate room for ambiguity or cheating

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Vertical Integration and Impact in the Singapore

Cinema Market

Market and Organizational Structure and Competitive Strategies in the Local Cinema

Market

Competitive interaction between the theater (chain) operatorsMovie supply and distributionStructure of distribution-exhibition operations and management responsesStrategies on film and theater acquisitions

Movie Market Players

Golden VillageShawCathayUIP (Paramount/Universal)Buena Vista (Disney)Columbia Tri-StarWarner Bro20th Century Fox

Distributors

583929167

Screens

88622

Theaters

Golden VillageShawEng WahCathayOverseas

Exhibitors (theater operators)

GV Shaw EW Cathay Overseas

Theater Locations in Singapore

Frenzy of Cinema Merger & Acquisitions

This cinema marketplace, in the last decade, was fast-transformed from one once composed of independent and single-screen theaters operations into one dominated by integrated multiplex cinema chains. After the flurry of property acquisitions, virtually all previously freestanding cinemas fell prey to integrated chains.

Process of Film Distribution

Movie release– Negotiation between the distributor and the theater.– Contract terms: screening freq, promotion/ marketing,

exclusive or parallel releases, and the box office revenue split.

Factors of bargaining power between the distributor and the theater

Degree of distribution and exhibition competitionthe screen/theater holdingthe box office prospect of the filmthe vertical positions

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Cinema Competition

Theaters compete with each other in getting popular films to screenTheaters, of course, compete in attracting moviegoersThese two sources of competition are interrelated:– Having more strong films entices the crowd and sell

better at the box office– A robust box office receipt, and thus having a large

revenue pool, help bid for popular hits

Upstream/Downstream of Movie Industry

Production

Distribution

Exhibition

Downstream of industry

content creation

showing to end customers

Release the exhibition rightto whom

Vertical Integration

Production

Distribution

Exhibition

Downstream of industry

The Situation of the Singapore Market

Integration and Competition in Distribution & Exhibition

Shaw Distributor

Shaw Theaters

Cathay

Upstream market

Downstream market Eng Wah

Competing Dist

GV Distributor

GV Theaters

Competing Dist

To reduce downstream competition, an integrated firm wants to exclude its rival theaters by keeping its films away from them

Shaw Distributor

Shaw Theaters

Cathay

Upstream market

Downstream market Eng Wah

Competing Dist

GV Distributor

GV Theaters

Competing Dist

More favorable screening position

A vertical firm may profit from foreclosing its rivals

• refuse to deal• exclusionary deals

Not only that! The integrated firm, when controlling many theaters, can threaten independent distributors not to release strong titles to its theater competitors.

Shaw Distributor

Shaw Theaters

Cathay

Upstream market

Downstream market

Eng Wah

Competing Dist

GV Distributor

GV Theaters

Competing Dist

Threaten

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Shaw Distributor

Shaw Theaters

Cathay

Upstream market

Downstream market

Eng Wah

Competing Dist

GV Distributor

GV Theaters

Competing Dist

To Think about the movies shown at Cathay’s Cineleisure!

To reduce upstream competition, an integrated firm can also exclude its rival distributors by not carrying their films

Shaw Distributor

Shaw Theaters

Cathay

Upstream market

Downstream market Eng Wah

Competing Dist

GV Distributor

GV Theaters

Competing Dist

No show

Anticompetitive Effect of Vertical Integration

VI exploited to foreclose or exclude rivals from the market, either down or up-stream

• By rebuffing requests for production input in control, an integrated firm can exclude other players, existing or potential, from competition against its downstream branch.

• Symmetrically, the integrated firm can close out upstream rivalry by refusing access to its controlled downstream outlet from a competitive upstream supplier

Findings

Integrated theaters carry a higher percentage of owned titles, for a much longer periodDrop independent titles much earlier

Theater Location Discrimination in Movie Releases

Eng Wah

GV Distributor

A GV Theater

Eng Wah

near far

Theater Location Discrimination in Movie Releases

Integrated firms appear location-selective in renting out films so as to preempt competition. – They tend not to release their movies to theaters near

their own screens. Integration works to optimize screening coverage of a film to collect box office receipts. – An integrated distributor wants to prevent its box office

turfs from erosion by competitive screening while still expanding its films’ reach to wherever it has no or low screen control.

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Strategy of Integrated Operation & Competitive Advantages

Vertical integration works to ensure advantages both in distribution and exhibition in a competitive environmentKey to the success of vertical integration strategies – High control of theater outlets