Entertainment Industry
The Entertainment Industry in America
Background
The entertainment industry demonstrates a multi channel structure, with companies owning several forms of companies in each link of the value chain. The industry is converging toward a single model, which combines production of content with multichannel distribution. All companies try to sell content in many ways, e.g. movie, TV show, book theme park, etc. All but two of major players in the industry conform to this model. Non-conforming companies have regulatory barriers (foreign owned) or do so out of choice. Some companies (Disney) buy distribution channels, i.e. networks (ABC); others build their own (News Corp., Time Warner) or do both Viacom (WB, CBS). The newest trend is to combine production and distribution with added distribution possibilities of internet (AOL Time Warner, Vivendi Seagram)
CONTENT DISTRIBUTION
Resources Creation Delivery Retail
Actors/Writers Television Production/Movie Production Broadcast Television Networks/Cable television Networks Movie distribution Local Affiliates/Local cable companies/Local theaters
In this industry we find vertical integration through direct ownership, as well as commercial transactions via long-term contracts and one-time “spot market” transactions. Ironically, even the resources can be “owned” – as in the case of the old “studio system” which tied actors to studies for a number years. In today’s industry, these arrangements are still in place, with actors signing on for “x number of picture” contracts with various studios. Production companies can either be independent or owned by integrated companies. In either case, production from one company may be sold to a competing network or distributor. Finally, local television affiliates and local movie theaters are sometimes bound by contract, sometimes entirely independent, or sometimes owned by networks. This last situation is usually the case with large metropolitan areas, where the networks want to have a closer link to the customer. Agents and other facilitators play a commercial conduit role of helping to bring together various people and companies along the value chain.
The reasons for vertical integration include lowering risk (regardless of where profits are) and locking in distribution for high-risk production. But production companies supply all networks and networks access all suppliers, so motive for consolidation is as much to gain bargaining leverage as to lock in distribution. All companies are aiming for synergies, cross-selling to end users and cross platform selling of advertising
In looking at the mergers along the value chain, companies are looking for complementary access (i.e. Viacom strong with the young audience, /CBS with the old). However, all consolidation does not live up to its billing, with Disney as a good example. Disney has been hurting since its merger with ABC. The cultures have clashed, as have egos.
Entertainment Industry Experience – Value Chain
Before government regulation in the 1950’s, the large Hollywood studios had been vertically integrated. Three studios owned production and worldwide distribution. This system was broken up by regulation, and it was not until the late 1980’s that the federal government again allowed companies owning studios (TV production units) to own TV broadcast networks (distribution).
In 1988, there were many separate companies such as:
- Warner $3.4 billion movies and TV production
- Time $4.2 billion publishing and cable
- Disney $2.9 billion cartoon & theme parks
- Capital Cities/ABC $4.4 billion network & stations
- Paramount $3.2 billion movies & publishing
- Viacom $.6 billion TV syndication & cable
- News Corp. $3.5 billion tabloids and production studio (20th Century Fox) just starting network
By 2001, the industry was dominated by six vertically integrated global companies:
AOL Time Warner ($36.2 billion)
Disney ($25.1 billion)
Viacom ($20.4 billion)
Vivendi (Universal, $16.3 billion)
News Corp. ($13.4 billion)
Only one large company was left, Sony (Columbia pictures, $19 billion) that concentrates on production and only one large company left, GE (NBC, $5.8 billion) that concentrates solely on distribution.
Between 1985-2001, there were a number of M&A transactions that resulted in this vertical integration:
Time Warner merged (1991), bought Turner (1995), built Warner network, and acquired by AOL (2001).
Disney buys Capital Cities/ABC (1995)
Viacom buys Paramount (& Blockbuster) (1993), builds UPN, then buys CBS (1999)
Vivendi (a water utility) buys Seagram (2001), which had bought Universal (MCA)/Polygram from Philips Vivendi brings together content of Universal with Canal+, one of Europe’s largest pay TV providers Seagram had content film, music, theme parks, but lacked distribution, i.e. TV network though it held a non-controlling interest in Barry Diller’s USA networks. With purchase of Seagram, Vivendi aims to deliver music and video clips on broadband to TVs, PC's, mobile phones, and handheld devices. Vizzavi will be its portal and will directly compete with AOL, especially in Europe.
News Corp. bought 20th Century Fox studio (1985), built Fox network and acquired content (sports teams like Dodgers & interests in other teams such as Knicks). They built the Fox network (number 2 n network among 18-49 year olds) from scratch.
Fox is unique in that it produces and owns most of its own hits, unlike other TV networks. It studios also supply other networks. These shows include Dharma and Greg and the Practice, which it supplies to ABC, Chicago Hope, which it supplies to CBS, and Buffy the Vampire Slayer, which it supplies to WB (see article below).
Along with Warner, Fox is one of the top Hollywood TV studios. It achieved this position early in 1990s, by snaring half dozen top comedy writers with lucrative salaries – thus tying up the resource. Even if it sells shows to other networks, it not only profits from the sale, but also profits from syndication revenues over time. In a desire to be “everywhere”, Fox built or bought cable channels in nearly every content area, e.g. Fox Sports that competes with ESPN, Fox News that competes with CNN, etc.
All of the major entertainment companies, except for Sony and Vivendi, now own U.S. TV broadcast network (distribution). However, these companies are prohibited from owning US television networks because of foreign ownership (similar to some restrictions on US utility ownership). Fox, whose parent company NewsCorp is owned by Rupert Murdoch, got around this issue by Murdoch taking up US citizenship.
All of these companies except for General Electric (NBC) own production studios (idea factories for generating content). Without content, NBC is forced to pay $13 mill per episode to Warner to renew top rated ER.