Beginning in the mid-1980s, a spate of major mergers have reshaped the structure of the media and entertainment industries: News Corporation acquired 20th Century-Fox (1985); Sony bought CBS Records (1987) and Columbia Pictures (1989); Time merged with Warner (1989); Universal was acquired first by Matsushita (1990), then by Seagram (1996), then by Vivendi (2000), then by General Electric (2003); Viacom acquired Paramount (1994); Westinghouse bought CBS (1995), which was later acquired by Viacom (2000); Disney bought CapCities/ABC (1995); and America Online (AOL) merged with Time Warner (2001). Three broad trends contributed to this surge of media conglomeration. First, increasing economic globalization expanded foreign markets for entertainment products as well as attracting capital investment in U.S. entertainment firms from investors in Japan, Australia, Canada, France, and Germany. Second, in order to stimulate increased investment and technological innovation within the media and communications industries, policymakers in the United States and Europe have dismantled many of the regulatory standards that had governed the media industries for the previous half century. The Telecommunications Act of 1996, for example, relaxed many rules concerning cross-ownership of media and dropped limits on single-firm ownership of multiple media outlets (ownership caps). Policymakers expected that the subsequent wave of consolidations and mergers among telephony, cable, broadcasting, and film companies would stimulate increased investment in new technologies and lower prices for consumers. Underlying these policy changes were expectations concerning the direction and rate of technological change, the third broad trend affecting conglomeration. New delivery technologies, including VCRs, cable, satellite, and the networking potential of the Internet, have opened new markets for entertainment products. Digitization, the conversion of data into computer code, has expanded as computing power has increased and computing costs have decreased. However, digitization is a two-edged sword for the entertainment industries. Digitization provides cost efficiencies because copying and transferring data is easier and more accurate, yet it is precisely that ease and accuracy that threatens to undermine the entertainment industries’ control over intellectual property rights. Consequently, while technological change promises to open new markets for entertainment, it also threatens already existing markets. Thus, firms that own interests in both “new” and “old” media technologies expect to reap the advantages of diversification through conglomeration or, at the least, survive the forthcoming upheavals wrought by technological change.

However, in addition to the overall economic, political, and technological factors affecting the media’s industrial structure, the entertainment industry is itself a risky business, subject to high product failure rates and shifting audience tastes. Success rates in the entertainment industries are extremely low: only about 20 to 30 percent of films, roughly 10 percent of music recordings, and approximately 5 percent of television pilots return a net profit. The high profit rates of a small number of entertainment products (the “hits”) must subsidize the costs incurred in the production of the majority of unprofitable entertainment products. Thus, entertainment firms engage in a number of risk management strategies to survive these long odds, including overproduction and high marketing expenditures. A key risk management strategy is for a firm to grow through mergers and acquisitions, the fastest way to gain market share and market power. Market power through mergers can increase a firm’s ability to negotiate favorable terms with competitors, set prices, and reduce competition, all of which improve a firm’s ability to weather the high product failure rates of entertainment.

Mergers may be characterized as either horizontal, vertical, or conglomerate. Horizontal integration is when a firm acquires or merges with firms in the same business, for example, when local television stations merge into a station group. Vertical integration occurs when a firm merges with its suppliers or buyers, or up and down the product chain of production, distribution, and exhibition. For example, in the 1960s, the networks (program distributors) vertically integrated upstream into program production (program suppliers) and downstream into program syndication (program resales), thus controlling programming at each stage of its product life. Conglomerate mergers occur when a firm acquires a company that is neither in the same business nor a direct supplier or buyer, as, for example, when the major newspaper publisher News Corporation acquired the 20th Century-Fox film studio. The horizontal, vertical, and conglomerate merger strategies are all intended to create greater efficiencies of scale and scope by consolidating overhead and administrative costs, cutting out intermediaries, and guaranteeing smoother production chains.

Some conglomerates may be characterized as loosely conglomerated because their subsidiaries are in unrelated fields. For example, General Electric, the conglomerate that owns NBC and the entity formerly known as Universal or Vivendi/Universal, also owns companies that make aircraft engines, medical systems, power plants, and plastics as well as financial services companies, none of which are directly involved in the television business. However, most media conglomerates are not loose but what Thomas Schatz calls “tightly diversified”: they have a tight focus on media and entertainment yet are diversified across fields such as film, television, music, book publishing, theme parks, and online services as well as being vertically integrated into production, distribution, and exhibition. Tightly diversified conglomerates can cross-collateralize losses from one business with gains in another, cross-promote entertainment products across different media, and sell products on multiple distribution platforms (film, video, broadcast, and cable).

Most tightly diversified media conglomerates are formed with at least one of the three following rationales. One rationale is to create “content synergies,” that is, to build entertainment “franchises” that can be repurposed into multiple products including films, television programs, videos, DVDs, books, comics, toys, video games, theme park rides, music soundtracks, and so on. The Star Trek franchise, for example, based on a television series, expanded to include additional television series (Next Generation and Enterprise), films, books, games, and merchandise. Star Trek’s conglomerate owner, Viacom, produces, distributes, and promotes these through its various holdings (Paramount, UPN, and Simon and Schuster). Other television programs converted into franchises include Mission Impossible, The Flintstones, and The Brady Bunch, which have been resold on home video, pay-per-view cable, premium cable, and broadcast television. Owning and controlling a variety of content producers and distributors enables a conglomerate to capture the majority of the revenues from these multiple product extensions.

A second major rationale for tight diversification is to ensure distribution for a production company or to ensure a supply of content for a distribution outlet. For example, after losing key scheduling slots for its children’s programming on the FOX network, Disney ensured that its programming would continue to be distributed on network television by acquiring Cap-Cities/ABC. Likewise, Viacom acquired Paramount in part to guarantee a steady supply of films for its cable network Showtime and then launched the broadcast network UPN in 1995 to ensure a distribution outlet for its Paramount-produced program Star Trek. This type of vertical integration between film studios and television distributors cut across previously existing ownership boundaries between film and television companies.

A third major rationale for tight diversification is to secure content for new distribution technologies or to acquire software for hardware. For example, Sony acquired Columbia Pictures and CBS Records in part to gain control of films, programs, and music for distribution on the consumer electronics technologies it manufactures. In the early 1980s, Sony’s Betamax home video technology had lost the market to the competing VHS technology in part because Hollywood film studios refused to license the rights to major films to Sony for use on Betamax video. Acquiring Columbia Pictures and CBS Records, now both renamed Sony, protects Sony’s hardware products from failing solely because they lack the rights to film, television, and music content. Each of these rationales for conglomeration is intended to strengthen a firm’s performance in high-risk environments; however, none can guarantee the ultimate outcome.

Time Warner

Time Warner, at the time of this writing the largest media conglomerate, was created in 2001 when the online services provider AOL parlayed its highly valued stock into a friendly takeover of the “old media” company Time Warner. Time Warner controls major television interests, including one of the largest U.S. cable operators, Time Warner Cable. Warner Bros. Television and its fellow subsidiaries produce programming shown on a variety of broadcast and cable networks, including Friends, ER, Gilmore Girls, The West Wing, Everybody Loves Raymond, The Drew Carey Show, Six Feet Under, and Smallville. Although Time Warner created the WB broadcast network in a joint venture with Tribune Broadcasting in order to gain a broadcast network foothold, it is more dominant in cable networks. Home Box Office (HBO), originally a Time company, pioneered programming distribution by satellite, becoming one of the first and most successful nationally distributed pay cable programmers. In 1995 Time Warner acquired the Turner networks (Turner Network Television, Turner Broadcasting System, Turner Classic Movies, and Cable News Network) to become the conglomerate dominant in both cable networks and cable systems. The Turner, Cable News Network (CNN), and HBO networks are also distributed in Asia and Europe. Time Warner’s other cable networks include Cinemax and the Cartoon Network.

Time Warner is also dominant in film (Warner Bros. and New Line), music (Warner Music Group), and publishing (Time/Life). However, a key element in its conglomeration strategy was to meld Time Warner’s cable operating systems (then second largest in the United States) with AOL’s top brand name in online services. By aggregating the more than 100 million subscribers to AOL Time Warner’s Internet services, cable systems, premium cable networks, and the Time magazine group (including People, Sports Illustrated, In Style, and Entertainment Weekly), the merger was expected to create a base for launching new entertainment technology services, such as video-on-demand, interactive television, and broadband Internet. However, by 2003, as Time Warner’s stock price suffered severe declines, the merger was heavily criticized by investors for pursuing the aim of media convergence at the cost of its core businesses. In that year, “AOL” was dropped from the corporate name.

Viacom

CBS spun off Viacom in 1971 when the Federal Communications Commission (FCC) required the major networks to divest their vertically integrated program production and syndication subsidiaries. As Viacom expanded, acquiring cable networks MTV, Nickelodeon, and VH1 from Warner in the mid-1980s, it was then absorbed by Sumner Redstone’s holding company, National Amusements, in 1987. Redstone led Viacom’s battle for control over Paramount Communications, which succeeded, bringing Paramount Studios and Simon and Schuster publishers into the Viacom conglomerate. Paramount has produced numerous television programs, including every Star Trek series, JAG, Frasier, and That’s Life; other subsidiaries, Viacom Productions and Spelling Productions, have produced Sabrina, Charmed, 7th Heaven, and Beverly Hills 90210. In 1995 Viacom launched the minor broadcast network UPN in part to guarantee broadcast exposure for its expensive Star Trek series. Viacom also controls premium cable networks Showtime and The Movie Channel and basic cable networks Black Entertainment Television, Comedy Central, and Spike as well as owning an interest in the Sundance Channel. However, despite these strengths in cable programming, Viacom divested its cable operating systems in 1995 because the maintenance and upgrading of cable systems were too capital intensive. Instead, in 2000, Viacom surprised observers by acquiring a major stake in the “old media” of broadcasting by buying its former parent company CBS and its subsidiaries, including Infinity Broadcasting (one of the largest radio station groups) and CBS Radio. With 34 owned-and-operated television stations, one major and one minor broadcast network, and major cable networks that are top rated in their demographic categories, Viacom is one of the most dominant conglomerates in the television industry. Viacom’s holdings also include theater chains in Canada and Europe, Famous Music publishing, the Viacom Outdoor advertising group, theme parks (Great America and Star Trek: The Experience), and the video retailer Blockbuster.

The Walt Disney Co.

Founder Walt Disney had diversified his animation production company into merchandising, theme parks (Disneyland), and television production (The Wonderful World of Disney) by the 1950s in part to survive the competition with the major Hollywood studios. This tightly diversified firm was almost broken apart and sold in the early 1980s, until an investor installed Michael Eisner as chief executive officer to revive the Disney brand. Disney has remained focused on film (Disney, Touchstone, Hollywood Pictures, Miramax, Buena Vista, and Dimension), television production (Walt Disney Television, Buena Vista Television, and Network Television Production), and theme parks (Disney World and Paris and Tokyo Disneylands). By acquiring CapCities/ABC, Disney became a major television distributor as well, gaining a national network plus ten owned-and-operated stations. Disney has also invested in cable networks, including Disney, Toon Disney, Family Channel, and SoapNet as well as having interests in the ESPN networks, Lifetime, E!, A&E, and the History Channel. Walt Disney TV International includes channels in Europe and Asia. Disney also owns the ABC Radio Network, Radio Disney, and ESPN Radio. Disney has interests in music (Buena Vista Music Group), book publishing (Disney and Hyperion), and sports teams (Anaheim Angels and Anaheim Mighty Ducks) as well as numerous Internet investments (Walt Disney Internet Group).

News Corporation

Originating as an Australian newspaper group, News Corporation, under the leadership of Rupert Murdoch, has diversified aggressively. Having acquired the film and television studio 20th Century-Fox in 1985, News Corporation launched the fourth major broadcast network, FOX, in 1986. As the first conglomerate to integrate a film studio and broadcast network, its FOX network exploited those synergies, airing 20th Century-Fox Television productions such as The Simpsons and The X-Files. For competing networks, 20th Century-Fox produced programs such as Buffy the Vampire Slayer, Dharma and Greg, Judging Amy, and Roswell. News Corporation, like Viacom, pushed the regulatory limits on ownership caps of local television stations by acquiring several station groups and helped precipitate a debate on the appropriateness of ownership caps in an era of cable and satellite television. Although News Corporation does not own any U.S. cable operators and only a few cable networks (FX and FOX News), it is an international presence in satellite television, which is more prevalent than cable in Europe and Asia. News Corporation controls the majority interest in the satellite services BSkyB (Europe), StarTV (Asia), SkyPerfecTV (Japan), Sky Latin America, and Sky Brazil and at this writing is planning to merge with the largest U.S. direct broadcast service, DirecTV. News Corporation has also invested in sports (Los Angeles Dodgers), Internet services (FOX Interactive), music (FOX Music), and one of the world’s largest publishing companies (HarperCollins) as well as hundreds of magazines and newspapers in the United States, the United Kingdom, and Australia (New York Post, The Times, The Sun, TV Guide, and The Weekly Standard).

Sony

Headquartered in Japan, Sony is barred from owning any U.S. broadcast stations or networks; however, its Columbia Tri Star Television subsidiary is a major producer of network and syndicated programs, including Bewitched, Seinfeld, Dawson’s Creek, The King of Queens, Family Law, Ricki Lake, and soap operas Days of Our Lives and The Young and the Restless. Sony’s other media interests include its film studio (Sony, formerly Columbia Pictures), theater chains, Japan Sky Broadcasting, Sony Online Entertainment, and its major music group, Sony Music Entertainment, which includes the former CBS Records. Only a small proportion of Sony’s revenues derive from its media holdings; Sony is primarily an electronics manufacturing company (Trinitron, Walkman, and PlayStation). Sony’s game box, PlayStation, was designed as a multi-media entertainment appliance for games, DVDs, CDs, and Internet access in order to present a possible alternative to interactive television or PC appliances. The principal purpose of Sony’s investments in media production and distribution is to support its consumer electronics manufacturing interests.

NBC-Universal

Vivendi Universal was a French-based conglomerate that was originally in the water, construction, waste management, and real estate business. Under the leadership of Jean-Marie Messier, it expanded into European telephony (Cegetel and SFR) and cable and film interests (Canal Plus) and by 2000 had acquired the Universal holdings then owned by Seagram, a Canadian beverage company. Having gained control of the Universal film studios and theme park as well as the single largest music company in the world, Universal Music Group, Vivendi also recaptured the Universal television production and distribution interests by agreeing to repurchase USA Networks (including cable networks USA and the Sci-Fi Channel) back from Barry Diller, who had bought them from Seagram. In 2003 Vivendi Universal agreed to sell the Universal film and television interests to General Electric, which has merged them with its NBC holdings (including Bravo, Telemundo, MSNBC, and CNBC). Historically, Universal Television had been one of the largest producers of television programs throughout the network era (Kojak, Magnum, P.I., and Miami Vice). Recent Universal television programs include Just Shoot Me and The Steve Harvey Show. By integrating Universal’s massive film and television production subsidiaries with NBC’s broadcast and cable networks, General Electric joins the other fully vertically integrated media conglomerates.

In summary, media conglomerates are structured to take advantage of diversification as well as the efficiencies and synergies of integration. However, the rewards of such efficiencies are sometimes outweighed by the costs of unwieldy diversification, internal competition, and debt service. Since entertainment is difficult to produce efficiently, media conglomeration is more often a means toward market domination and negotiating leverage with fellow oligopolistic competitors. The largest media conglomerates account for up to 90 percent of the U.S. markets for film, television, and music, thus creating production and distribution bottlenecks that keep smaller competitors in check.

Investors have cyclically valued and devalued conglomeration, as can be seen in the peaking and crashing of the merger waves of the 1890s, 1920s, and 1960s. For example, many of the conglomerates that were formed in the 1960s were broken up by leveraged buyouts during the 1980s. Corporate raiders discovered that selling conglomerates piecemeal provided greater returns than keeping conglomerates whole. Consequently, the structures of the previously mentioned media conglomerates may undergo yet another round of restructuring if investment markets are devalued, if there is a long-term economic downturn, or if policy-makers decide to discourage conglomeration by enforcing new regulatory standards. However, given that conglomeration does provide advantages of scale and diversification in the highly volatile business of entertainment, media conglomeration is likely to remain a key risk management strategy for the time to come. The ultimate impact of media conglomeration on cultural and democratic processes is problematic. Hence, it is essential that viewers, audiences, and consumers learn more as to how and why media conglomeration occurs in order to more effectively engage as citizens in the political processes that shape the regulatory standards affecting the structure of the media industries.