Media Business Architecture

| October 29, 2011

Paradox

One of the problems of convergence is the ‘paradox of capitalism’—that increased competition actually leads to less competition among media firms, because smaller firms are being acquired by the few large transnational corporations.
The Vertical Supply Chain for Media
  • One way to analyze a media industry is to deconstruct the vertical supply chain.
    • This is the process of breaking apart the industry’s actions into a series of stages so that each stage can be studied more closely.
  • See diagram below

The diagram is pretty straight forward.
  • Industry activities start with the creation of media content at the early stages in the production process,
    • So for example, when formulating a television news broadcast or a newspaper article, content must first be gathered.
      • This can be done by writers, journalists, filmmakers, and so on.
  • The next stage is assembly of the media product, otherwise known as packaging.
    • So this can be the process of printing and publishing a magazine or newspaper.
  • Finally, the product is distributed and sold to consumers.
    • Could be a product you purchase in the store; a radio broadcast you listen to over the airwaves; the delivery of a newspaper to your home; etc
All activities are interrelated
  • Obviously, media content would have no value unless it’s distributed to an audience; and a distribution channel would have no value unless it has content to distribute.
Changing Market Structures and Boundaries
  • Many organizations tended to operate in markets that were influenced by technological factors (e.g. high costs of equipment) and/or by state regulations (e.g. broadcasting license requirements).
  • The reason for this was because these factors held back new entry of competition, thereby maximizing the organization’s revenue.
  • However, new technology has reduced many barriers
    • So in broadcast, you now have an influx of television channels that can be accessed by anyone in any area, via satellite, digital cable and so on. Channels are no longer restricted regionally; they can now be shown nationally and internationally.
    • Another example is the internet, which has allowed the expansion into international markets to be relatively easy.
    • As a result, digital technologies have removed market boundaries which were once existent. This led to increased competition and reduction in profits for many existing firms.

Strategic responses of media firms

  • This increased competition has lead to new strategies for media firms, one of which is the growth of conglomerates—which are firms who acquire a multitude of other firms.
  • The article outlines three major strategies of corporate growth—horizontal, vertical and diagonal expansion (otherwise known as diversification).
  • Horizontal expansion
    • This is when 2 firms in the same supply chain merge
  • Vertical expansion
    • When firms expand into another stage of the supply chain.
  • Advantages:
    • Higher degree of control over the process
    • Economies of scale “Scale economies in media production are determined by massive consumption, not by massive production” (Angel Arese Reca, 2006). – September 25 lecture.
      • Rather than producing a plethora of content, the goal is to get people to consumer as much as your product as possible.
      • So be expanding horizontally, you reuse the same content you produce in new markets.
    • Economies of scope
    • Reduce threat
Vertical expansion is desired because it secures the supplies needed by the firm to produce its product and the market needed to sell the product. The result is a more efficient business with lower costs and more profits. Vertical expansion gives the organization access to inputs and outputs. So Reuters has a constant flow of inputs, and articles from Reuters can just be added to the Globe and Mail whenever needed
Diagonal expansion
  • When firms expand into new business areas
    • Advantages
      • Allows for the opportunity to spread resources across multiple media products; cross-promotion
      • Economies of scale
        • Economies of scale don’t have to come in just production benefits. They can come in distribution.
      • Reduce risk
        • Having ownership in newspapers and television can reduce risks. Newspaper readership is reducing, but television viewership is increasing. So the firm can still rely on revenue from the television channel to keep it in business.
      • Job security for senior managers
      • Cross-ownership—e.g. cross-owning a magazine and a television channel allows for cost efficient advertising.

Category: Media Industries

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