Strategic Benefits and Risks of Vertical Integration in International Media Conglomerates and Their Effect on Firm Performance

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Strategic Benefits and Risks of Vertical Integration in International Media Conglomerates and Their Effect on Firm Performance Strategic Benefits and Risks of Vertical Integration in International Media Conglomerates and Their Effect on Firm Performance D I S S E R T A T I O N of the University of St. Gallen, Graduate School of Business Administration, Economics, Law, and Social Sciences (HSG) to obtain the title of Doctor Oeconomiae submitted by Fiona Röder from Germany Approved on the application of Prof. Dr. Beat Schmid and Prof. Dr. Li-Choy Chong Dissertation no. 3402 Difo-Druck Bamberg The University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) hereby consents to the printing of the present dissertation, without hereby expressing any opinion of the views herein expressed. St. Gallen, October 15, 2007 The President: Prof. Ernst Mohr, PhD Table of Contents III Summary of Content Table of Contents.......................................................................................................................V List of Figures............................................................................................................................X List of Tables ............................................................................................................................XI List of Abbreviations .............................................................................................................. XII Abstract..................................................................................................................................XIII 1. Introduction.......................................................................................................17 1.1. Research Background ...........................................................................17 1.2. Problem Statement................................................................................18 1.3. Purpose of the Study.............................................................................20 1.4. Scope and Limitations of the Study......................................................21 1.5. Organization of Research......................................................................22 2. Literature Review..............................................................................................25 2.1. The Empirical Context of the Media Industry......................................25 2.2. Influences on the Development of the International Media Conglomerate........................................................................................26 2.3. Theoretical Frameworks of Vertical Integration...................................38 2.4. Vertical Integration Theories................................................................40 2.5. Possible Diseconomies of Vertical Integration.....................................76 2.6. Summary and Concluding Analysis of the Motives for Implementing a Vertical Integration Strategy.......................................77 2.7. Vertical Integration Rationales Along the Media Value Chain............90 2.8. Vertical Integration and Its Effect on Firm Performance ...................105 2.9. Hypotheses..........................................................................................106 3. Methodology and Research Design ................................................................109 3.1. Research Goal of the Study.................................................................109 3.2. Research Model ..................................................................................109 3.3. Research Design..................................................................................112 4. Empirical Part I: Media Case Studies............................................................127 4.1. Introduction.........................................................................................127 4.2. Case Study: Time Warner...................................................................128 4.3. Case Study: The Walt Disney Company ............................................142 4.4. Case Study: News Corporation...........................................................157 4.5. Case Study: Viacom Inc.....................................................................174 4.6. Case Study: Bertelsmann AG .............................................................187 4.7. Case Study: Sony Corporation............................................................202 4.8. Conclusion ..........................................................................................212 5. Empirical Part II: Inter-Case Analysis...........................................................213 5.1. Introduction.........................................................................................213 5.2. Extent and Direction of Vertical Integration for Leading Global Media Companies ...............................................................................214 5.3. Analysis of Each Conglomerate’s Financial Performance Variables .............................................................................................227 5.4. Comparison of Common Segment Profitability for the Selected Media Conglomerates .........................................................................237 Table of Contents IV 5.5. Analysis of Share Price Developments of the Selected Media Conglomerates ....................................................................................238 5.6. Probable Link between Performance and Organizational Structure..............................................................................................251 6. Conclusion ......................................................................................................256 6.1. Summary of Findings..........................................................................256 6.2. Concluding Summary of the Benefits of Vertical Integration for Media Conglomerates .........................................................................262 6.3. Recommendations Regarding the Conglomerates’ Strategic Reactions to the Value Shift in the Media Value Chain .....................263 6.4. Recommendations for Further Media Research .................................266 7. Appendix.........................................................................................................268 8. Bibliography ...................................................................................................304 Curriculum Vitae Table of Contents V Table of Contents 1. Introduction...................................................................................................................17 1.1. Research Background .......................................................................................17 1.2. Problem Statement............................................................................................18 1.3. Purpose of the Study.........................................................................................20 1.4. Scope and Limitations of the Study..................................................................21 1.5. Organization of Research..................................................................................22 2. Literature Review..........................................................................................................25 2.1. The Empirical Context of the Media Industry..................................................25 2.2. Influences on the Development of the International Media Conglomerate....................................................................................................26 2.2.1.1. General Environmental Influences ............................................................... 26 2.2.1.1.1. Development of Global Capital Markets ............................... 27 2.2.1.1.2. Technological Innovation ...................................................... 27 2.2.1.1.2.1. Convergence .................................................................... 27 2.2.1.1.2.2. Digitization ...................................................................... 30 2.2.1.1.2.3. New Media and Internet................................................... 31 2.2.1.1.3. Globalization.......................................................................... 31 2.2.1.1.4. Socio-Cultural Developments ................................................ 32 2.2.1.2. Media-Specific Policy Influences................................................................. 32 2.2.1.3. Market-Specific Influences........................................................................... 33 2.2.1.3.1. Increasing Competition and Market Consolidation............... 33 2.2.1.3.2. Increasing Fragmentation of Media Markets ........................ 36 2.2.1.4. Firm-Specific Influences .............................................................................. 37 2.3. Theoretical Frameworks of Vertical Integration...............................................38 2.3.1. Introduction and Definition of Vertical Integration..............................38 2.4. Vertical Integration Theories............................................................................40 2.4.1. Static Models of Vertical Integration....................................................42 2.4.1.1. Transaction Cost Economics ........................................................................ 42 2.4.1.1.1. Applicability of Transaction Cost Economics to the Media Industry .................................................................................. 47 2.4.1.2. Property Rights Theory ...............................................................................
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