vertical-integration-in-mass-media-industries
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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