Mergers, acquisitions and alliances for a "triple play" world
The last twelve months has seen a spate or mergers and acquisitions in Internet related industries. Examples include the acquisition of Macromedia by Adobe in April 2005, the purchase of Skype by eBay in September 2005, the takeover of WebCT by Blackboard in October 2005 and the purchase of Friends Reunited by ITV in December 2005.
Rupert Murdoch's News Corp has been involved in several acquisitions, buying up Intermix Media (to get hold of MySpace), Scout Media (an online sports company) and IGN entertainment (an Internet games company) in the space of a few months last year. BSkyB (in which News Corp has a major stake) also acquired the broadband ISP EasyNet. Right now the telecoms equipment companies Lucent technologies (of the US) and Alcatel (of France) are in merger talks, Ericsson (of Sweden) having already acquired Marconi (of the UK) last October.
And if you add into the mix companies buying just a stake in other companies (Google bought a stake in AOL last December), or entering into partnerships or joint ventures to pursue specific projects (Virgin Mobile is going to work with BT on plans for delivering digital TV and radio to mobile phones) you can find even more interesting activity. What is this all about?
Mergers and acquisitions can take place for a variety of reasons of course. Horizontal mergers or acquisitions (involving two firms in the same type of activity) are often motivated by the drive to pool costs and derive economies of scale. In an increasingly global market this could explain some of the cross-border mergers. More cynically you might think that horizontal integration sometimes occurs because it will give the new company greater market power (over consumers in output markets or over suppliers in input markets).
Vertical mergers or acquisitions relate to the backward or forward links in the production and distribution process. In this way companies internalise the procurement of inputs and gain direct control over their design and production. Of course there have been moves in the opposite direction too, with companies outsourcing activities that have traditionally been in-house.
Mergers and acquisitions might also occur as a means of diversification into markets outside the usual area of business. This could just be a case of risk spreading (particularly if the traditional core business area is going through a bad patch or in decline) or as part of a strategy designed to move the company into a completely new market. On the other hand a takeover might be organised by a group of investors who believe that a company's stock is currently undervalued due poor management of the available resources. The plan would be to put in a new management team that could realise the full value of the assets. This might result in the break up of a conglomerate company into several parts, each refocusing on its core business.
Probably each of these factors has played some part in the recent merger and acquisition activity, but the strongest factor that underlies recent trends is technological convergence and the need to bring together elements that, while they might once have been separate, in a digital word are now inextricably interconnected. The term "triple play" is usually used and it relates to a one-stop purchase of telephone, television (broadband) Internet connection subscriptions - or as Microsoft
terms it "voice, video and data services over IP networks" or "services over IP" for short.
Whereas once Internet access was typically via a dial-up link on a telephone line, now this has been turned on its head with the development of the Voice over the Internet Protocol (enabling telephone calls via the Internet). Cable TV companies can of course offer broadband Internet connections and broadcasters are working on downloadable TV programmes. You can already buy a card to slot into your PC ti enable you to pick up free satellite TV channels (see Tony Smith's article earlier this month on the
. And Microsoft has developed a software platform called IPTV
"to deliver broadcast-quality video and new, integrated TV services over broadband networks".
Now an interesting question to ask is whether content should also be created by triple play companies, or whether it is better to leave that to partner organisations. TimeWarner famously purchased AOL in January 2000 to create what was described then as the world's first integated media and communications company. (Or was it a merger - see some comments
made at the time.) Was this tie-up just a bit ahead of its time, or a warning that huge conglomerates like this are not the best way forward and that partnerships, where each partner focuses on what they are good at, provide a better way forward?
What do you think?
 Murdoch ties News future to Internet. Meredith Booth. The Advertiser, 17th November 2005
 Internet a careful strategy: MurdochHerald Sun, 25th November 2005
BSkyB buying its way into broadband future. Dan Milmo and Richard Wray. The Guardian, 18th October 2005
 NewsCorp throws everything but kitchen sink at 'digital home'.The Register, 13th January 2006
 Murdoch buys into online lads' mags. The Register, 8th September 2005
 Rupert Murdoch seeks dysfunctional search engine. The Register, 16th August 2005
 Murdoch buys blogsThe Register, 19th July 2005
 Murdoch tumes into iPod generation. The Register, 14th March 2006
 Murdoch to bring MySpace to UK The Register, 24th January 2006
 Murdoch gets EasyNet The Register, 21st Ocotober 2005
 Sky plans broadband assault The Register, 13th October, 2005
 Don't be scared of Sky. Alex Cameron The Register, 17th February, 2006
 Branson to challenge Murdoch's dominance. Jane Martinson. The Guardian, 5th December 2005
 Europe to embrace triple play The Register, 25th January 2006
 Virgin Mobile takeover talks with NTL 'ongoing'. The Register, 1st February 2006
 NTL tipped to up bid for Virgin Mobile. The Register, 3rd January 2006
 Microsoft turns triple play for telecommunications providersMicrosoft Presspass
6th June 2005.
 The Future Role of Cable in Shaping the Digital Home in Europe
. Booz Allen Hamilton. See the press release
Broadcasting, the media, movies and the Internet
This week saw the publication of the UK government White Paper on the future of the BBC [A Public Service for All: the BBC in the Digital Age]
. Amongst other things it will guarantee the BBC a revenue stream from the licence fee for another decade. The BBC's Charter will be renewed with a continuing requirement for the BBC to "inform, educate and entertain". The corporation's governance will be completely overhauled. Out goes the BBC Board of Governors, to be replaced by two new bodies: the BBC Trust and the Executive Board.
The BBC has of course always been seen as providing the cornerstone of broadcasting in the UK. But in recent years with the proliferation of satellite and cable channels and with more homes having access to digital television and radio (Tessa Jowell's announcement gave this as "over 70%") the BBC's share of the television audience has shrunk (as indeed has ITV's). And a recent survey for Google has found that British people are spending more time on the Internet than watching TV. Brits prefer the Internet to TV
, America's Network - 10 Mar 2006.
Some bloggers and commentators are already forecasting the end of TV broadcasts. Writing in the New York Times last week Dan Mitchell quoted a former media executive, Prince Campbell, writing on the Chartreuse (Beta) blog
as saying "Broadcast television is dead. Just like the Internet killed the music industry, it's about to do the same to broadcast TV".
And just a couple of days later, in a speech in London, media giant Rupert Murdoch added a warning for newspaper publishers. He described the Internet as "..a creative, destructive technology that is still in its infancy, yet breaking and remaking everything in its path."
Certainly big changes are afoot and TV broadcasters and newpapers have already responded by making their programmes and stories available via the web. You can catch up with programmes that you missed, download podcasts and even watch live webcasts. The BBC (together with ITV) is also conducting trials of a "multicasting" system which will allow continuous online broadcasting (as opposed to downloading clips or viedo-streaming).
Another story in this week's New York Times by Saul Hansell identifies a further trend - the growth of "slivercasts" aimed at niche audiences. Hansell tells the story of a London based sailing enthusiast called Andy Steward who wanted to create a sailing channel to be broadcast via the Sky satellite TV system. He soon discovered that it would cost him £85,000 to start the channel and around £40,000 a month in production costs. This was too much to take a chance on. But then Steward heard about Narrowstep
, an internet TV service on the web using the TelVOS platform. Now sail.tv is one of the many programmes hosted by the service, attracting 70,000 viewers in its first month.
Hansell links this development with Chris Anderson's concept of The Long Tail
. Anderson, the editor of Wired magazine
observed that the technology and economics of the Internet means that consumers would no longer be limited only to the popular titles at the top end of a "hit list" (this applies to books, music, movies, TV programmes etc.). Niche products lower down the list cost very little to store and distribute in electronic form so the old economics that required substantial revenues to overcome the costs of production and distribution would be undermined.
And soon we might also be able to download movies via the web. This week has also seen stories about plans for both Apple and Amazon to set up systems for digital downloads of movies. Amazon is reportedly in talks with Paramount Pictures, Univeral Studios and Warner Bothers, while Apple already has links with Walt Disney and MTV, amongst others, through its iTunes service. And if viewers want old TV programmes as well as movies, the BBC is well endowed with content in its archives.
References and links
 A Public Service for All: the BBC in the Digital Age
Official Press Release on the White Paper.
 Brits prefer the Internet to TV
, America's Network - March 10th, 2006
 A Blog writes the obituary of TV
Dan Mitchell, New York Times, March 11th, 2006.
 Internet means end for media barons, says Murdoch
. Owen Gibson, The Guardian March 14th, 2006.
 Multicast Technical Trial
 As Internet TV aims at niche audiences, the slivercast is born
, Saul Hansell, New York Times, March 12th, 2006.
 Amazon considering downloads
, Richard Siklos, New York Times March 10th, 2006.
 Apple may be testing the waters for film downloading service
, Gene Koprowski, MacNewsWorld, March 9th, 2006.
The impact of the Internet on the prices of goods and services
In the early years of e-commerce it was predicted by some that the Internet would lead to a "frictionless economy". Lower search costs and better information provided via the Internet were expected to increase competition in retail markets and thus lead to lower price levels. It was also expected that there would be greater price convergence, that is a lower dispersion of prices for online transactions (see Bakos (1997).
"The explosive growth of the Internet promises a new age of perfectly competitive markets. With perfect information about prices and products at their fingertips, consumers can quickly and easily find the best deals. In this brave new world, retailers' profit margins will be competed away, as they are all forced to price at cost." [The Economist (1999)].
Since then a great many empirical studies of the issue have been published, mainly looking at homogeneous products such as books and CDs. Perhaps the best known and most often cited is Brynjolfsson and Smith (2000). They found that book and CD prices were 9 to 16% lower online than offline - depending on whether additional costs (taxes, shipping and shopping costs) were included.
A wide range of product markets have now been examined including videos and DVDs, computer games and software, computers and other electronic products and new cars. Brown and Goolsbee (2000) have also looked at the life insurance industry and Clemons et al. (2002) have examined packaged travel products. There has even been a study of wine bought via the Internet (Lynch and Ariely (2000)). Most studies are based on US data but there have been some using data from other countries; see for example the paper by Ancarani and Shankar (2004) looking at book and CD prices in Italy.
Most studies have found lower price levels online than offline, even when shipping and other costs are included. Some studies distinguish three categories of retailer: pure-play Internet, bricks-and-mortar (traditional shops) and bricks-and-clicks (multi-channel retailers). There has been some suggestion that the gap between online and offline prices has been reducing over time. Ancarani and Shankar remind us that shopping comparison sites provide information not only about product prices but also on product characteristics and independent product reviews, and that this can affect offline prices as well as online.
There is a lot of evidence that consumers research products online even if they subsequently purchase them offline. A survey in the United States - the American Interactive Consumer Survey, conducted by the Dieringer Research Group - found that nearly 15% of the the total US retail spending is influenced by online research, even through the proportion of retail sales that is completed online is much lower [see this report on the iMediaConnection.com web page].
But price dispersion remains as high online as offline. Indeed many of the recent papers have focussed on this issue. Why should a consumer not buy from the cheapest source? How can an online retailer (sometimes called an e-tailer) get away with charging a higher price than its rivals?
Various explanations have been put forward. One approach broadly identifies the phenomenon with the concepts of trust and confidence - with brand loyalty also coming into the picture. The work of Michael Baye and his associates at nash-equilibrium.com is important here - see for example Baye and Morgan (2003). Buying via the Internet carries with it various risks and uncertainties not associated with purchases from a traditional high street retailer. The transaction is not synchronous, that is the exchange of goods and money doesn't take place at the same time. Buyers may have concerns about whether a product purchased over the Internet will be delivered, or at least whether it will arrive within an acceptable period of time. Sometimes goods that are delivered might be faulty or damaged, or may not exactly match the description provided on the website. Essentially we are talking about the after sales policies and practises of the companies concerned. From the customer's point of view there may be a willingness to pay a premium to cover these risks. Effectively by paying such a premium they are taking out insurance to guarantee that that they can be sure of getting what they want. This can help explain the dispersion of prices. Some consumers are less risk averse than others and they may just seek out the lowest price supplier, irrespective of the company's reputation ("name").
Another related issue is whether the customer has confidence in the supplier to provide a secure and confidential transaction, with no risk of his financial or personal information being passed on or falling into the hands of third parties. There may be concerns about whether a company that is advertising a product via the Internet is fraudulent. There have been cases of Internet fraud where payment has been accepted but there has been no intention of providing goods. This occurs most frequently in the area of products that are illegal or where a consumer might be ashamed to admit to buying. In these cases there might be less chance that the fraud will be reported (firearms, drugs, sex products etc.). Of course these points apply to purchases made via other remote retail channels such as those from catalogues or magazine offers, and whether the order is made by post or over the telephone.
Just having a web presence doesn't mean that a consumer will find your site. Haring (2004, 2005) has introduced the notion of a "virtual location". Just as some physical stores are prominently located on the high street or in a shopping mall, in the virtual world some sites are highly visible while others are more difficult to locate. They might have a highly promoted brand name that customers will easily remember (e.g. Amazon) or they might feature high up on search results lists provide by shopping comparison sites such as Kelkoo or Froogle. Baye et al. (2001,2002) call these sites "information gatekeepers". There is evidence that consumers rarely look beyond the first couple of pages of search results ("hits") so it has become vitally important for retailers to make sure that their site is well known. Some sites - not Froogle - accept payments from firms in return for their site appearing high up a hit list. Even if the algorithm for displaying results is based on some other more indirect factor, such as the number of sites that link to the retailer's site, it becomes important for the retailer to advertise and promote their brand.
Pereira (2004) provides a theoretical argument as to why online prices might remained dispersed, based on the assumption that search costs may differ among consumers. In a game theory model where firms may also have differing cost structures he finds two types of equilibrium. In the competing equilibrium case high cost firms will be forced to charge the same price as low cost firms so that competition is effective. In the segmentation equilibrium case high cost firms will sell to high search cost consumers while low cost firms will sell to low search costs consumers. Costly search gives firms market power since it leads consumers to accept prices above the minimum charged in the market. But it depends on the relative importance of what Pereira calls the "volume of sales" effect and the "per consumer profit" effect. Paradoxically in this model a fall in search costs can even lead to higher prices and greater price dispersion. Unless all consumers benefit fully from these low search costs we may find that the market moves from a competing equilibrium to a segmentation equilibrium.
Brynjolfsson, Dick and Smith (2004) consider the following hypothesis relating to price dispersion on the Internet: consumer preferences may differ over price and non-price attributes of the transaction (delivery time, reliability, security). Consumers who search more intensively (i.e. not just comparing prices) are more concerned about trading off price reductions with retailer trust factors.
So we can see a number of reasons why consumers might be willing to pay a price above the lowest one that is advertised on the Internet. They might not find this low price if the hit list from the search tool doesn't place it high up the list. Or they might be wary of dealing with a company that they haven't heard of, or used before. If online retailers can develop customer loyalty they can exploit the market power that this gives by charging higher prices than their less well known competitors. Effectively the more loyal are customers the less price sensitive they are, that is their price elasticities of demand are lower. Retailers can keep their prices high without fear of losing trade.
Another point that comes up in these studies is the degree of transparency (or seeing it from the other side the "obfuscation") that online retailers provide in their price information. The headline price quoted may not always represent the full cost of acquiring an item. Costs that are "hidden" until the final checkout stage of a transaction include the shipping costs (postage and packing), tax or duty that is liable, or for car rentals additional insurance payments that must be made. Efforts have been made in some juristictions to standardise the way that such information appears and indeed the shopping comparison sites have been helpful here in providing full and comprehensive statements about the cost of products purchased online. But there are still some unresolved issues concerning local taxes and import duties that must be paid. References
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