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  1. 1. Vertical supply structure of media industries Three vertical stages Production – content creation Distribution – packaging or transmitting content Vertical Integration in Mass Exhibition – delivery to or reception by end Media Industries customers Examples Upstream/Downstream of Supply Movies (wholesale) Studios – Distributors – Theaters Studios – Movie Channels – Cable System Production Upstream of industry Newspaper Press Service – Newspaper – Circulation Distribution TV programs Downstream of industry TV Producer – Syndication – TV Station Exhibition TV Producer – TV Network – Stations (retail) Vertical Integration Merging ownerships of the two successive operations: Vertical Integration The operations (firms) no longer are separate entities but a concerted business decision-maker, considering costs and benefits of both stages jointly. Production Upstream of Production Upstream of industry (wholesale) (wholesale) industry Distribution Distribution Downstream of Downstream of industry (retail) (retail) Exhibition industry Exhibition
  2. 2. Co-ownership of sequential Full Vertical Integration operations (vertical integration) Economic efficiency gain – Removing double (or even multiple) price Production Upstream of markups industry (wholesale) To reduce the additional profit-margins from the retail price of the media product, charged by Distribution middlemen Downstream of – Increased retail consumption due to the lower industry (retail) Exhibition price Vertical Integration vs Sequential Sale Stages Vertical Integration vs Sequential Sale Stages Consumer surplus shrinks with a higher price Demand Demand Curve Curve PD PD PVI PVI PU PU Cost Cost Cost Cost # Sold # Sold # Sold # Sold More purchases due to a lower price- More price More price mark, under vertical integration. markups markups Reducing retail risks Cutting opportunistic behaviors Reducing investment or financial risk in the Abridging opportunistic incentives of content production (upstream) successively transacting parties – To secure retail sale outlets for vending their – As both upstream and downstream traders can products benefit from an increase to end-user sale, who – To collect more direct and accurate should promote the end product? marketing/demand info about retail consumers – “Tragedy of the commons” – To brace for competition – VI can eliminate room for ambiguity or cheating
  3. 3. Market and Organizational Structure and Competitive Strategies in the Local Cinema Market Competitive interaction between the theater (chain) operators Vertical Integration and Movie supply and distribution Impact in the Singapore Structure of distribution-exhibition operations and management responses Cinema Market Strategies on film and theater acquisitions Theater Locations in Singapore Movie Market Players Distributors Exhibitors (theater operators) Golden Village Golden Village 8 58 Shaw Shaw 8 39 Cathay Eng Wah 6 29 UIP (Paramount/Universal) Cathay 2 16 Buena Vista (Disney) Overseas 2 7 Columbia Tri-Star Theaters Screens Warner Bro 20th Century Fox GV Shaw EW Cathay Overseas Frenzy of Cinema Merger & Process of Film Distribution Acquisitions This cinema marketplace, in the last decade, Movie release – Negotiation between the distributor and the theater. was fast-transformed from one once – Contract terms: screening freq, promotion/ marketing, composed of independent and single-screen exclusive or parallel releases, and the box office revenue theaters operations into one dominated by split. integrated multiplex cinema chains. Factors of bargaining power between the distributor and the theater After the flurry of property acquisitions, Degree of distribution and exhibition competition virtually all previously freestanding the screen/theater holding cinemas fell prey to integrated chains. the box office prospect of the film the vertical positions
  4. 4. Upstream/Downstream of Cinema Competition Movie Industry Theaters compete with each other in getting popular films to screen Theaters, of course, compete in attracting Production content creation moviegoers These two sources of competition are interrelated: Release the exhibition right Distribution – Having more strong films entices the crowd and sell to whom better at the box office Downstream of industry – A robust box office receipt, and thus having a large Exhibition showing to revenue pool, help bid for popular hits end customers Vertical Integration Integration and Competition in Distribution & Exhibition The Situation of the Singapore Market Upstream Shaw GV Competing Competing market Distributor Distributor Dist Dist Production Distribution Downstream Shaw GV Eng Wah Cathay market Downstream of Theaters Theaters industry Exhibition Not only that! The integrated firm, when To reduce downstream competition, an controlling many theaters, can threaten integrated firm wants to exclude its rival independent distributors not to release strong theaters by keeping its films away from them titles to its theater competitors. Upstream Shaw GV Competing Competing market Distributor Distributor Dist Dist Threaten Upstream Shaw GV Competing Competing market Distributor Distributor Dist Dist Downstream Shaw GV Eng Wah Cathay market Theaters Theaters Downstream Shaw GV Eng Wah Cathay A vertical firm may profit from market Theaters Theaters More favorable foreclosing its rivals screening position • refuse to deal • exclusionary deals
  5. 5. To reduce upstream competition, an integrated To Think about the movies shown at firm can also exclude its rival distributors by Cathay’s Cineleisure! not carrying their films Upstream Shaw GV Competing Competing market Distributor Distributor Dist Dist Upstream Shaw GV Competing Competing market Distributor Distributor Dist Dist No show Downstream Shaw GV Eng Wah Cathay market Theaters Theaters Downstream Shaw GV Eng Wah Cathay market Theaters Theaters Anticompetitive Effect of Vertical Findings Integration VI exploited to foreclose or exclude rivals from the Integrated theaters carry a higher percentage market, either down or up-stream of owned titles, for a much longer period • By rebuffing requests for production input in control, an Drop independent titles much earlier integrated firm can exclude other players, existing or potential, from competition against its downstream branch. • Symmetrically, the integrated firm can close out upstream rivalry by refusing access to its controlled downstream outlet from a competitive upstream supplier Theater Location Discrimination in Theater Location Discrimination in Movie Releases Movie Releases Integrated firms appear location-selective in GV renting out films so as to preempt competition. Distributor – They tend not to release their movies to theaters near their own screens. Integration works to optimize screening coverage of a film to collect box office receipts. A GV Eng Wah Eng Wah – An integrated distributor wants to prevent its box office Theater turfs from erosion by competitive screening while still expanding its films’ reach to wherever it has no or low screen control. near far
  6. 6. Strategy of Integrated Operation & Competitive Advantages Vertical integration works to ensure advantages both in distribution and exhibition in a competitive environment Key to the success of vertical integration strategies – High control of theater outlets