Diversification is a defining characteristic of media firms and products in the new millennium. There was a time when media companies concentrated on their core business, whether through management decision-making or government mandate, and when there were fewer distribution channels available to media producers. Time and innovation altered both of these to dramatic degrees. The parent corporations of the major motion picture production and distribution companies in Hollywood, for example, are now part of diversified conglomerates with holding in broadcast, cable and satellite television, and newspaper, magazine, and book publishing, and other media industries, as well as many others unrelated to their core businesses. These same corporations, moreover, distribute their products through countless channels, as the films that once headlined theaters around the world are also now viewed via satellite and cable television, home video, video-on-demand, iPods, and other new technologies.
Conceptualization And Measurement
The conceptualization of diversification varies in different contexts and across disciplines, so definitions are important. Diversification relates to the range of elements in a given population, whether stock in an investment portfolio or businesses in a conglomerate. Much of the literature on diversification can be divided into two broad groups: product diversification, which involves the expansion of firms into different lines of business or industries, and market diversification, which entails the adaptation of a given product to reach additional customers or users. The most common use relates to product diversification, which can be further classified as either unrelated diversification, also known as corporate or conglomerate diversification, or related diversification, also known as concentric diversification.
Diversification has been measured through various methods, and these techniques mirror the more nuanced understanding that has emerged since the 1960s. When Gort (1962) first measured the degree of diversification, his focus was on expansion across broad industrial sectors. Rumelt (1974) refined such measurements, making a distinction between industries and businesses. The importance of this distinction is clear in the twodigit and four-digit standard industrial classification (SIC) codes used in the US that Gort and Rumelt employed. For example, the two-digit code placed printing, publishing, and allied industries under a single title, while the four-digit codes made distinctions between newspapers, periodicals, and books. The four-digit codes under communications, meanwhile, differentiated between broadcast television, cable television, broadcast radio, telephones, and telegraph. In the Rumelt scheme, related product diversification was measured at the four-digit level within a broad industrial sector.
There are various motivations for product diversification. At a basic level, expansion into new businesses creates opportunities to increase growth and reduce overall risk. There are more sophisticated theories that explain such behavior. The resource view holds that diversification results when firms accumulate excess capital, both financial assets for investment and human assets for management (Penrose 1995; Markides & Williamson 1996; Piscitello 2004). These perspectives argue that firms that are successful in diversification exploit their existing strengths, which include their given technical competencies and managerial resources, and create new synergies.
The agency view, on the other hand, holds that in the absence of significant ownership stakes, managers pursue diversification to advance their own interests at the expense of the firm’s owners. This includes directing diversification down a path that increases the firm’s demands for the managers’ particular skills, which results in managerial entrenchment (Shleifer & Vishny 1989).
There was a time when diversified conglomerates were in vogue, most evident in the 1960s and 1970s, but related or concentric diversification has been far more common since then. That pattern holds true in media industries, most evident with the major motion picture production and distribution companies. The Gulf & Western Industries acquisition of Paramount Pictures in the US in 1966, for instance, was the first in a series of mergers that integrated the studios into diversified conglomerates. Gulf & Western was the quintessential conglomerate of the mid-1960s, as Charles Bluhdorn spearheaded the acquisition of over 90 smaller companies between 1958 and 1969. Most of those properties were in manufacturing sectors, which is where Gulf & Western traced its roots. The Transamerica Corporation acquisition of United Artists in 1967 and Kinney National Services’ purchase of Warner Bros in 1969 followed this same pattern.
The News Corp acquisition of Twentieth Century-Fox in 1985 can be used as a line of demarcation. While the Coca-Cola Company purchase of Columbia Pictures in 1982 and the General Electric merger with RCA in 1986 sandwiched that merger, the Fox deal represents the related diversification that has been dominant since the mid-1980s. News Corp’s roots were in publishing, but when Rupert Murdoch acquired Twentieth Century-Fox he also controlled Network Ten, a broadcast television network in Australia, and Sky Channel, a satellite service in Europe. In 1986, Murdoch purchased seven broadcast television stations from Metromedia and launched the Fox Television Network. In short order, Twentieth Century-Fox became the content producer for a chain of television outlets around the world.
The conceptualization of related or concentric diversification is critical to this discussion. The literature is replete with studies that conclude that related diversification leads to better performance than unrelated diversification since the former allows firms to build on their strengths (Penrose 1995; Chandler 1962; Rumelt 1974) The reasons for this are quite important. The characteristics of successful concentric diversification include, “existence of a strong core business, diversification into adjacencies that are close to the core business, and leveraging of skills from the core business” (Rijamampianina et al. 2003). Concentric diversification involves the acquisition of firms that are related to the core business in critical areas. This allows firms to improve their strengths and reduce their weaknesses through the investment in logical adjacencies.
Examples Of Product Diversification
The impact of such diversification is most evident in the case of the Walt Disney Company. In the early 1980s, Disney was a corporation that focused on “family entertainment” and derived the bulk of its revenue from its theme parks and merchandise. The domestic and foreign box office from its motion pictures contributed just 15.5 percent of total revenue in 1980. The acquisitions that followed, with the purchase of Capital Cities/ ABC Inc. the most significant, transformed Disney into a diversified media conglomerate. In 2005, it derived just under 35 percent of total revenue from its Parks and Resorts and Consumer Products divisions combined, just under 24 percent from Studio Entertainment and just over 41 percent from Media Networks. What was not part of the equation was a collection of newspapers and other publishing assets that Capital Cities/ABC held prior to the merger that Disney sold after it took control. The broadcast and cable outlets that Capital Cities/ABC controlled allowed expansion into logical adjacencies and created synergies for Disney, while the publishing companies did not.
Prominent media holdings have been part of diversified conglomerates since the mid- 1980s. The General Electric ownership of NBC is the clearest case in the US. In the 1999 fiscal year, for example, NBC accounted for just 5.2 percent of General Electric consolidated revenues of $111.6 billion. At the same time, Universal Pictures was part of Seagram Company Ltd., a conglomerate best known for its spirits and wine business. The latter business sector accounted for over 39 percent of Seagram revenues in the 1999 fiscal year, compared to just under 24 percent for the filmed entertainment business, which also included its investment in USA Networks. In 2000, Universal Pictures became part of Vivendi SA, a French conglomerate that traced its roots to water treatment and waste management. That relationship was short-lived, and the creation of NBC Universal in 2004 is more indicative of the diversified media conglomerates that are now dominant.
Media conglomerates around the world followed similar patterns. Bertelsmann AG traces its roots to the publishing company that Carl Bertelsmann founded in Germany in 1835 to print hymnals and religious material. Bertelsmann expanded its publishing interests in the preand postwar periods, but it was in the 1970s and 1980s that its diversification reached new levels when it took control of prominent US publishers Bantam Books and Doubleday and moved into the music business with the acquisition of Arista Records in 1979 and RCA Records in 1987. The impact of such growth was evident in 2004, when just under 25 percent of Bertelsmann revenue came from its book and magazine publishing divisions. This compared to over 42 percent from its television (RTL Group) and music (BMG Entertainment) interests and 21 percent from its media services division, Arvato.
The second dimension of diversification is also quite significant in the examination of media firms and markets. Product diversification remains prominent, but it is also important to consider various forms of market diversification. The most basic of these is geographic or international diversification, and the nature of most media products makes them conducive to such expansion into new markets. One of the defining characteristics of most media products is that almost the entire cost of production is incurred in the creation of the master unit, known as the “first print” cost in films, with duplicates produced at little additional cost. That is the reason why most media products are said to be infinitely reproducible and infinitely exportable.
The motion picture business provides a prime example of the benefits of such diversification. The rise of the studio system in the US in the 1920s created a structure that resembled typical American industries, with production, distribution, and exhibition corresponding to the manufacturing, wholesaling, and retailing in other firms. And similar to other industries, the motion picture business pursued overseas markets. The total feet of motion pictures exported from the US increased from 32 million in 1913 to 235 million in 1925. In the latter period, American films accounted for 95 percent of the market in the UK and 77 percent in France. From that point forward, Hollywood worked hand in hand with the US government to ensure that it maintained unfettered access to foreign markets, with the Motion Picture Export Association of America, formed in 1945, becoming known as the “little State Department.”
The importance of foreign markets remains indisputable. The literature is rich with studies on the impact of Hollywood products across oceans and borders. The raw numbers can be rather staggering. Titanic shattered the worldwide box-office record with a total gross of over $1.8 billion. While it established records for the US box office of over $600 million, more than two-thirds of its total came in foreign markets. In 2004, the Motion Picture Association of America reported worldwide box-office revenues of $25.2 billion, with $9.5 billion of that generated in the US, and the major Hollywood studios accounted for a significant percentage of both these figures.
There is another dimension of market diversification that is relevant to media industries. While geographic diversification represents one attempt to access new customers and users, the adaptation of products represents another. The evolution of new digital technologies has created additional distribution channels for media products. Motion pictures were once shown in theaters, with broadcast television networks becoming a second alternative in the 1950s. The evolution of cable television set the stage for the creation of premium movie channels such as Home Box Office and Showtime in the US in the 1970s. While those all remain outlets for motion pictures, new technologies allow for distribution via direct-broadcast satellite and video-on-demand, DVD, and iPods. And the development of communication satellites has allowed such patterns to cross the globe, evident in the success of Star TV and other services across Asia.
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