Reconfiguration of Value Chains in Converging Media and Communications Markets

Abstract

The media and communications markets are undergoing a fundamental transformation. Information and communication firms such as Time Warner and AT&T are pushing into new sectors and altering their value chains in order to integrate and network multimedia service systems. This article seeks to highlight the changes taking place using an exploratory methodology, examining causes, effects and corporate reactions. A first section will analyse the relevant literature. Following this, the causes and effects of industry convergence as well as companies' reactions to this will be identified. On this basis, the integration of new value-added stages will be identified as the central corporate strategy for meeting a changing business environment, the risks and potentials of which will also be elucidated.

Introduction

The increasing penetration of economy and society by innovative information and communication technology has been attracting considerable attention both in scholarly discussion and in corporate boardrooms recently.¹ In particular, the unstoppable advance of the internet, with its vast range of potential services and applications, has led to a transformation of corporate strategy since the middle of the 1990s, as reflected in the increasingly widespread use of terms such as industry convergence, virtual corporations and e-commerce.² In media and communications markets—which are based on information and communication technologies, and which include the procurement and outlet markets of firms involved in the media, telecommunications and internet economy³—such transformations are particularly pronounced. The internet economy, as used here, is a digital economy which uses a computer-based network to allow global communications, interaction and transaction. This also includes—apart from purely internet firms which have established their business activities on the electronic network—those companies which provide the electronic infrastructure—the so-called enablers.

Competition in the media and communications markets since the middle of the 1990s has been characterised by two fundamental processes. First there has been a large number of firms established which correspond to Schumpeter's model of pioneer enterprises. Companies such as AOL (online service provider, electronic media), Yahoo! (internet search engine, electronic media) or e-Bay (electronic auctioning) are noteworthy for their introduction of innovative products and services which offer substantial advantages to consumers. Second, established companies that specialised in one or more of the media and communications markets are moving into new sectors. The recent takeover by Vivendi (telecommunications/utilities) of Seagram/Universal (media/consumer goods) provides a good example of this development.

Both processes are leading to transformations of the media and communications markets. In this paper these transformations will be described, as well as corporate reactions to them. Special attention will be paid to the changes in the value chain and integration of new value-added stages as a form of corporate strategy and their ramifications for corporate management.

Literature generally treats the transformation of value-added structures from a technical perspective with little space dedicated specifically to the media and communications markets. There is broad agreement that developments in technology will lead to a convergence of industries and a break-up of old value chains. Evans/Wurster argue this point using private banking as an example.⁴ However, they restrict themselves to their case study and offer no more comprehensive analysis. Hagel III examines the convergence of value chains for business webs, seeing in this the consequence of firms' close networking,⁵ but transformations in value chains are only marginally discussed. Finally, Hagel III and Singer note that unbundling value chains will be followed by a new structuring. Takeovers and alliances are assigned a significant role.⁶ This point is, however, not developed in great detail. Moreover, the focus of the article is rather more on business fields than value chains.

Another angle is taken by Rayport and Sviokla, who describe the transformation from a physical to a virtual value chain.⁷ Such transformations are rather more business migrations than alterations of value-added activities. Also deserving mention are articles by Benjamin and Wigand and Ghosh who note that technological developments lead to firms being able to approach end-users directly by eliminating further stages in the value chain.⁸ However, consequences for the value chain per se are not discussed.

This overview shows that transformations in value chains is a recognised phenomenon. Such an analysis has, however, not been explicitly applied to the media and communications markets. Also absent is an exact description of the mechanisms of and relations between drivers—the causes of transformation—and the transformation of the value chain itself. Lacking especially is a clear idea of what a transformed value chain looks like. Moreover, the integration of new value-added stages through takeovers and alliances has only been dealt with rudimentarily.

In this paper these four points will be examined in greater detail: it will analyse exclusively the media and communications markets; derive the relevant drivers; evaluate the implications of M&A on the integration of value-added stages; and develop a transformed and reconfigured value chain. First, it will define the relevant drivers of such transformations in the media and communications markets. After a description of mergers and acquisitions as a manifestation of these transformations in practical settings, the transformations will be described and explained in detail. Potentials and risks will also be dealt with. In the final section, the implications for both business and economics will be discussed and conclusions will be drawn. All analysis is based on an exploratory approach with case studies. The necessary data has been collected by working with nine European and US companies since the mid 1990s.