11969 1 Industry Architecture and Entrepreneurial Opportunities: The Case of the U.S. Broadcasting Sector by Jeffrey L. Funk Associate Professor National University of Singapore 7 Engineering Drive 1 Block E3A, 4 th Floor Singapore 129793 [email protected]Revise and resubmit, Industrial and Corporate Change
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Industry Architecture and Entrepreneurial Opportunities:
Gomery, 2000c), and radio (Leblebichi et al, 1991), television (Klepper and Simons, 1997),
and video recorder manufacturers (Cusumano et al, 1992).
Finally, this paper also looks at whether the numbers of these firms continued to increase
even after a so-called dominant design emerges. It did this by comparing their dates of
emergence with the numbers of firms. The specific dominant designs have been either
specified by the technology management literature or are defined in terms of interface
standards by the author where the specific dates were found in the literatures on the
broadcasting sector. In doing the comparison between the dates of emergence with the
numbers of firms it is recognized that increases in the size of a market (Stigler, 1951), which
may be driven by falling prices for products, may also occur over time and thus impact on the
number of firms and the levels of vertical disintegration. However, as mentioned in the
previous section, the conventional wisdom is that shakeouts occur in industries even when
markets are undergoing rapid growth and that the emergence of a dominant design drives
such a shakeout and thus a reduction in the number of entrepreneurial opportunities.
Furthermore, comparisons between the U.S. and European countries have found that
differences in the number of firms, particularly programming-related ones, and differences in
the levels of vertical disintegration have been much larger than have been differences in the
sizes of the markets where many of the events discussed in this paper appear to have
impacted on these differences. For example, the BBC has provided a vertically integrated
service for the programming side of Figure 1 throughout its history in spite of a growing
market for both radio and television (Noam, 1991; Briggs and Burke, 2002).
4. Results
Tables 1, 2, and 3 summarize the technological discontinuities that have occurred in the
broadcasting sector between the 1920s and the 1990s. Table 1 summarizes the events that
have led to the emergence of vertical disintegration in the industry architecture where an
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asterisk is placed next to those events that are usually characterized as dominant designs.
Table 2 focuses on the submarkets that have emerged in the programming layer for some of
the discontinuities. Although submarkets have also emerged for receivers and other hardware,
a much larger number of submarkets emerged for the programming side of the business due
to the large variety of television programs and movies. Table 3 summarizes the leading firms
and methods of value capture (i.e., business model) for each discontinuity.
Figure 1 summarizes the changes in industry architecture, particularly in the
programming side of the industry. Since different firms have pursued different levels of
vertical disintegration and thus created different boundaries for their activities, multiple types
of firms are shown in some of these vertically disintegrated layers. Solid lines separate the
layers and dotted lines are used when the same vertically disintegrated layer continues over
multiple time periods. These details are discussed in the subsequent sub-sections.
Figures 3-5 summarize the growth in revenues and the number of firms for selected
technological discontinuities (FM and AM radio are combined) and vertically disintegrated
layers. Each technological discontinuity and the vertical disintegration that has occurred
within them have provided opportunities for entrepreneurs where the amount of revenues,
numbers of firms, and thus entrepreneurial opportunities quickly moved from hardware to
programming/advertising following each discontinuity. The revenues from radio and
television advertisements passed those from the manufacture of radio and televisions in the
late 1920s and mid-1950s respectively and the revenues from video rental/sales passed those
from the manufacture of video recorders/players in the late 1980s. The number of
programming-related companies (e.g., local broadcasters, program producers, cable systems,
and video rental stores) also quickly exceeded the number of manufacturers for each
technological discontinuity.
As can be seen from Figure 5 and as is discussed in the following sub-sections, the
number of firms has continued to grow in many of these vertically disintegrated layers in
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spite of the emergence of designs (See dates in Table 1) that the literature on technology
management ordinarily defines as dominant designs. As is discussed in the following
subsections it appears that the number of firms in other vertically disintegrated layers also
continued to grow after other “dominant” designs emerged. This suggests that the emergence
of dominant designs, in particular those that involve open interface standards, can lead to
increases in the number of firms and thus increases in the number of entrepreneurial
opportunities.
Place Tables 1-3 and Figures 1-5 about here
4.1 Radio Broadcasting
The possibility of commercial radio emerged in the 1910s and 1920s as frequencies were
regulated in the Radio Act of 1912, the price of receivers and transmitters dropped, licenses
were issued by the Department of Commerce beginning in 1920, and vacuum tubes were
included in most radio sets by 1922 (Bilby, 1986; Sobel, 1986; Lewis, 1991). The first major
business question for commercial radio concerned the business model: how could firms
capture value and how should they divide up the scope of activities? The U.S. was one of the
few countries that did not create a single national provider of commercial radio services and
fund this provider with monthly fees on radio users. Instead, the U.S. government divided the
country into many small markets, licensed multiple firms in each of these markets, and
restricted the number of markets that a single firm could operate in. From these different
broadcasters and their different approaches, the business model of advertising emerged
beginning with the first broadcasted advertisements in 1921 (Bilby, 1986; Sobel, 1986;
Leblebici et al, 1991).
Initially manufacturers and retailers of radios operated these stations and financed their
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operations with profits from the sale of radios, which resulted in the high level of vertical
integration shown in Figure 1 (See column labeled “Radio: Early 1920s”). In 1923 about
two-thirds of radio stations with known ownership were operated by manufacturers (47%) or
retailers (20%) of radio receivers (Leblebici et al, 1991). However, the number of
manufacturers quickly dropped from a peak of 748 (between 1923 and 1926) to 72 in 1927
and 18 by the end of 1934 (Leblebici et al, 1991) thus limiting the number of manufacturers
that could vertically integrate into broadcasting. The falling number of radio manufacturers is
also consistent with economies of scale in R&D (Klepper, 1997) where RCA’s increased
enforcement of its radio patents in the mid-1920s (Sobel, 1986; Bilby, 1986; Lewis, 1991)
may have accelerated the emergence of these economies of scale.
During this time period, David Sarnoff of RCA introduced a new form of business
model that until recently dominated the industry. He recognized that local broadcasters would
have trouble financing the high cost of radio programs because their markets were too small
and because it was initially difficult to attract local advertisers. His solution was for so-called
network broadcasters (e.g., RCA created NBC) to work with advertising agencies to finance
the production of programs and to distribute them to local broadcasters over AT&T’s
telephone lines as shown in Figure 1 (See column labeled “Radio: 1920s to 1940s). Although
AT&T wanted to enter the radio business itself and thus initially rejected RCA’s proposals, it
agreed to RCA’s proposals in July 1926 under legal and regulatory pressure from the U.S.
Government (Sobel, 1986: Bilby, 1986; Lewis, 1991). This agreement and the emergence of a
second network provider (CBS) created opportunities for thousands of entrepreneurs to form
local broadcasting companies where they obtained programs and to a lesser extent advertising
revenues from the network broadcasters. Evidence for the success of this business model is
seen in the growth in the number of local broadcasters that were affiliated with a network
broadcaster from 6% in 1927 to 97% in 1947 (Leblebici et al, 1991; Sterling and Kittross,
1990).
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The second major business decision for commercial radio was how to organize the
production of radio programs. NBC (and later the other two networks) produced some of its
own programs in order to avoid complete dependency on advertising agencies and thus
advertising agencies only fill half the production layer in the column entitled “Radio: 1920s
to 1940s” in Figure 1. Advertising agencies worked with sponsors to conceptualize and
develop programs for specific sponsors and then the advertising agencies outsourced this
production to other firms. Advertising agencies decided against producing programs
themselves in order to focus their attention on the choice of advertising (radio, newspapers,
magazines, and billboards) for their clients and in order to utilize the capabilities that were
already available from other forms of entertainment. This outsourcing facilitated the
emergence of independent producers, talent agents, transcription syndicates (Leblebici et al,
1991), and other entrepreneurs (Hilmes, 1990), which represent more detailed levels of
vertical disintegration than are shown within the block labeled “Ad Agencies” in Figure 1.
These firms collaborated to produce music (played by live bands), drama, talk, and variety
shows where these genres reflect the emergence of specific submarkets for radio programs
(See Table 2) (Leblebici et al, 1991; Sterling and Kittross, 1990).
A number of events and trends led to changes in this sourcing of programs in the 1950s
(See column in Figure 1 labeled “Radio: from 1950s). First, restrictions on playing
phonograph records on the radio were rescinded in a legal decision by the Second Circuit
Court of Appeals in 1940 and by the early 1950s most record companies had realized that
playing records on the radio increased, rather than decreased, the sales of phonograph records
where some of these music companies paid to have their records played on air in a system
called “payola” (Millard, 1995). Second, the start of television in the late 1940s further
promoted music as the preferred content for radio as many of the dramas, comedies and other
radio programs moved to television. Third, the start of television also opened up
opportunities for local sponsors as many of the national ones moved to television and as a
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growth in rating agencies made it unnecessary for local (or national) advertisers to fund a
complete program; by 1960 almost 62% of advertising was local (Sterling and Kittross, 1990).
Together these events caused the percentage of stations affiliated with a network to fall from
its peak of 97% in 1947 to 33% by 1960 where music became the preferred content for the
unaffiliated local stations (Sterling and Kittross, 1990).
The emergence of music as the new form of programming content coincided with the
emergence of FM radio. FM radio provides better sound quality than does AM radio for some
forms of music such as rock-and roll that emerged at about the same time FM radio stations
began offering services in the 1950s (Millard, 1995). Both the new licenses that were made
available for FM radio and the new submarkets that emerged for rock-and roll music created
new entrepreneurial opportunities for local broadcasters and other firms. Each music segment
required different kinds of disc jockeys (which formed the personality of a station) and
different relationships with music companies, sponsors, and market research agencies
(Leblebici et al, 1991) where opportunities in each of these layers continued to increase
throughout the second half of the 20th century (Sterling and Kittross, 1990).
In summary, network broadcasters focused on a set of capabilities (Jacobides and Winter,
2005) and a “standard platform (Gawer and Cusumano, 2002) from which they could
dominate the industry. They developed relationships with local broadcasters and advertising
agencies partly because there were large economies of scale (Klepper, 1997) in these
relationships and the number of licenses in the largest markets (3 to 4) basically restricted the
number of network broadcasters that could co-exist. AT&T was prevented from entering the
market and basically forced to provide services at a reasonable cost to the network
broadcasters by legal and regulatory actions where economies of scale in telephone services
(and other factors) prevented the entry of other telephone suppliers. The network broadcasters
also outsourced financing to existing advertising firms that already had relationships with
national manufacturers and these advertisers outsourced program production to firms that
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already provided various forms of entertainment services. Put in other terms, the network
broadcasters wanted to create mobility (Jacobides, Knudsen and Augier, 2006) in local
broadcasting, financing, and program production in order to increase the value of their
resources and capabilities. The large number of submarkets (Klepper, 1997) for radio
programs supported this outsourcing of program production as it would have been difficult
for the advertising agencies or network broadcasters to develop the capabilities needed to
produce programs for a significant number of these submarkets.
Falling transaction costs (Jacobides and Winter, 2005) also impacted on the architecture
of the radio industry. The choice of a frequency band and a rudimentary standard reduced the
costs of matching transmitters and receivers and created entrepreneurial opportunities for
many firms in spite of the fact that interface standards are often defined as dominant designs
for many network industries like broadcasting and computers2. The availability of AT&T’s
telephone lines reduced the transaction costs associated with different firms providing
network and local broadcasting services. In combination with the emergence of a rating
system, these actions enabled the importation of radio programs from an existing network of
entertainment firms through advertising agencies. The 1940-ruling that playing records on air
doesn’t violate copyrights enabled local broadcasters to import content from another existing
set of entertainment firms, the music companies.
4.2 Television Broadcasting
The possibility of commercial television emerged in the 1930s and 1940s (WWII
delayed the start in growth by several years) as technical problems were solved and standards
were chosen where a similar form of industry architecture emerged in television as in radio.
Government rules restricting the number of broadcasting stations that a firm could own and 2 Whether the selection of the frequency band and rudimentary standard in 1912 or the inclusion of vacuum tubes in radio sets (most had
them by 1922) (Rosenkopf and Tushman, 1993) are defined as a dominant design, the growth in the number of firms in most layers
continued to grow following its emergence.
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the small size of local broadcasting markets caused network broadcasters to provide the local
broadcasters with both programs and advertisements. The network broadcasters distributed
these programs through AT&T’s telephone lines where AT&T’s implementation of coaxial
cable made this technically possible. With the higher cost of television than radio programs,
local broadcasters became affiliated with network broadcasters much faster and stayed with
them longer in television than they did in radio.
Sourcing the programs and advertisements has been a major issue for the network
broadcasters. Initially, as with radio, network broadcasters outsourced program production to
the advertising agencies, which found single sponsors for programs and outsourced the
program production to other firms. This industry architecture is summarized in Figure 1 (see
column entitled Television: 1940s and 1950s). But as the number of hours and the cost of
programming increased, it became difficult for advertising agencies (and network
broadcasters) to find enough sponsors that were capable of financing a complete program for
a single year. This caused the network broadcasters to begin using multiple sponsors for a
single program over a year and even for a single evening program thus increasing their use of
so-called “spot advertising.” Programs sponsored by a single firm had dropped to 14% by
1960 and spot advertisements, as a percentage of total advertisements, had reached 27.4% in
1957 or almost double the figure in 1949 (Sterling and Kittross, 1990).
The increased use of both multiple sponsors and spot advertising caused the network
broadcasters to reduce their dependence on the advertising agencies, deal more directly with
individual sponsors, and obtain more of their programming from so-called program packagers
(Sterling and Kittross, 1990) (See column labeled “Television: from 1960s” in Figure 1).
Program packagers were major opportunities for new entrants (Hilmes, 1990). They
combined talent, production facilities, and ideas for specific programs or series under contract
to a network and thus had more levels of vertical disintegration than are shown within the
block labeled “Entry by …” They produced a variety of programs such as comedies, country
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and westerns, detective dramas, news, and cartoons, which reflect the emergence of specific
submarkets for television programs (See Table 2).
The importance of program packagers and their associated businesses grew steadily in the
late 1950s and 1960s. By 1960, they produced about 60% of television programs (Sterling
and Kittross, 1990) and their role was strengthened by a 1970 FCC (Federal Communications
Commission) ruling that restricted the amount of programming that a television network
could produce for itself. Syndication, which was the sale of programs as reruns to unaffiliated
local stations, also became important sources of revenues for program packagers and other
independent producers where improvements in magnetic videotape in the 1960s facilitated
syndication (Sterling and Kittross, 1990). As shown in Figure 1, special firms called
“syndicators” carried out this function.
The increased vertical disintegration that came with program packagers also occurred in
movie production, which was connected to television broadcasting through a technique called
“film chain.” This technique matched the different speeds of motion picture film and the
television camera and thus enabled motion pictures to be broadcast on television. By the
1970s, television broadcasting provided film/movie companies with more income than
theaters did and it became increasingly difficult to separate the two industries (Guback, 1979).
Furthermore, while the changes in the movie industry are too complex to cover here, the
Paramount antitrust decision in 1948 ended the movie studio/distributors extensive vertical
integration into the ownership of theatres, led to a vertically disintegrated network of movie
production to emerge (See Figure 2)3, enabled thousands of entrepreneurs to enter the movie
industry, and made it difficult to distinguish between the industries of movie and program
production for television (Guback, 1979; Storper and Christopherson, 1987; Caves, 2002). As
shown in Figure 5, increases in the number of firms occurred well into the 1990s where many
3 One example of a successful entrepreneur that emerged from these changes in industry architecture is Len Wasserman, who became a
leading talent representative Ferraro, F. and Gurses, K. (2008)..
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of these firms also became suppliers of programming to local and network television
broadcasters.
In summary, network broadcasters focused on almost the same set of capabilities
(Jacobides and Winter, 2005) in television that they used to dominate the radio industry. They
developed relationships with local broadcasters and advertising agencies partly because there
were large economies of scale (Klepper, 1997) in these relationships and the number of
licenses in the largest markets (3 to 4) basically restricted the number of network broadcasters
that could co-exist. The major difference between the television and radio industries was the
higher cost of program production. This made it difficult for single advertisers to sponsor
programs, which reduced the importance of the advertising agencies and their relationships
with sponsors and caused network broadcasters to deal directly with program producers and
sponsors. On the other hand, there were similarities between television and the early days of
radio (before music became the dominant content) in the levels of vertical disintegration that
occurred in program production. The network broadcasters wanted to create mobility
(Jacobides, Knudsen and Augier, 2006) in program production in order to enhance their
services where the large number of submarkets (Klepper, 1997) for radio and television
programs supported this outsourcing as it would have been difficult for the network
broadcasters to develop the capabilities needed to produce programs for a significant number
of these submarkets.
Falling transaction costs (Jacobides and Winter, 2005) also impacted on the architecture
of the television industry. Rating systems facilitated a separation between sponsors and
broadcasters and the choice of black and white and color standards reduced the costs of
matching transmitters and receivers. Like radio, these standards created many entrepreneurial
opportunities for television receiver producers, local broadcasters, and program producers
(See Figure 5) in spite of the fact that the color standard is defined as a dominant design by
the literature on technology management (Anderson and Tushman, 1990; Utterback, 1994;
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Suarez and Utterback, 1995; Suarez, 2004). For example, hundreds of television stations were
started by 1960 and more than 1000 were in existence by 1980. On the other hand, according
to Klepper and Simons (1997), the number of television manufacturers peaked at 95 in 1950
before economies of scale in R&D caused this figure to decline to about 35 in 1960 and 20 in
1970 (See Figure 5). They argue that the definition of a color standard could not have caused
this “shakeout” to occur in television manufacturers since the sales of color receivers did not
begin growing until the 1960s and did not exceed those of black- and white ones until the late
1960s.
4.3 Cable Television
For many years cable television served a small niche market of consumers that could not
receive a broadcasted signal because they lived in a hilly or mountainous region. Cable
television firms served these niches by rebroadcasting the television signals over coaxial
cable to homes. They provided this service for installation and monthly fees where the high
cost of laying cable has been a large barrier to entry and in combination with exclusive
licenses it has provided many local cable companies, many of whom are entrepreneurs, with
local monopolies (Gomery, 1979; Sterling and Kittross, 1990; Inglis, 1991; Gomery, 2000a).
The falling costs of satellites and the FCC’s “open skies” decision in the mid-1970s began
changing the market for cable television from a niche to a main market. The open skies
decision authorized the commercial use of communication satellites for the first time and thus
enabled local cable companies to download programs through a satellite link, which was
much cheaper and faster than the available alternatives4. Many entrepreneurs recognized the
potential benefits from this change and from the standard interface between cable and
satellite systems that accompanied this change. Cable entrepreneurs recognized that they
4 Local cable companies could receive local broadcasted signals or import ones from other broadcasters over micro-wave links but could
not gain access to AT&T’s telephone lines (Hilmes, 1990).
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could provide a larger variety of programs to consumers and that they and the newly created
programming companies such as CNN and HBO (more commonly called cable channels)
could charge for these programs using the billing systems of the cable operators.
The emergence of this standard interface between cable and satellite systems and the
architecture that this standard interface represented can be thought of as a dominant design
where the emergence of this dominant design created new opportunities for both cable and
programming companies. The ability to provide a greater variety of programs with cable than
broadcast television enabled cable television to diffuse even in areas where users could easily
obtain broadcasted signals and thus the number of cable companies continued to grow
throughout the 1980s and 1990s (See Figure 2). The user’s willingness to pay for specific
programs5 naturally provided opportunities for new programming companies partly since
pay cable and the new channels increased the number of submarkets for television programs
(See Table 2). Although the increasing number of programming companies shown in Figures
2 and 5 during the 1980s and 1990s includes program providers for both film and broadcast
television, part of this continued growth was due to the diffusion of pay cable (Sterling and
Kittross, 2001; Hazlett, 2004).
In summary, the emergence of a standard interface, which is an example of falling
transaction costs (Jacobides and Winter, 2005), between cable and satellite systems created a
new breakdown of work between program production and program delivery. In some ways
the cable companies replaced both the local and network broadcasters, the satellite companies
replaced AT&T, and the work breakdown for program production has stayed approximately
the same. However, in other ways the new standard interface has increased the importance of
capabilities associated with program production and by adding a new method of delivery,
increased the mobility in the assets of delivery and distribution that the network broadcasters
5 The percentage of subscribers paying for additional programs increased from less than 1% in 1973 to 21% of all subscribers in 1978
(Sterling, 1979b) and continued to grow in the 1980s and 1990s (Gomery, 2000a; Hazlett, 2004).
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have focused on. Furthermore, the increasing power of the programming companies has
occurred in spite of continued increases in the number of them where increases in the number
of submarkets for these programs is probably one reason there was not a shakeout in the
number of programming companies.
4.4 Pre-Recorded Movies
Although technically pre-recorded movies do not involve broadcasts, they are included in
this paper because they are viewed on regular televisions and because entrepreneurs have
played an important role in the distribution of them. Television broadcasters used the first
video recording equipment in the 1950s to record programs on magnetic tape so that they
could broadcast a program multiple times in different time zones and later so they could more
easily sell the rights of the recorded programs (i.e., syndication) to other broadcasters
(Rosenbloom and Freeze, 1985). By the mid-1970s, this equipment had become inexpensive
enough for consumers who initially used it for recording television programs and later for the
playback of pre-recorded movies (Cusumano et al, 1992; Klopfenstein, 1989); e.g., the dollar
sales of pre-recorded tapes was smaller than the sales of blank tapes in 1980 and the unit
sales of pre-recorded tapes was only 1/6 those of blank tapes (Klopfenstein, 1989).
The emergence of open interface standards (Beta in 1975 and VHS in 1976) enabled
separations between the production of movies, manufacture of recorders/players, and sale of
pre-recorded movies in video rental outlets (See Figure 1) and the emergence of a single
standard further strengthened these separations. Such standard(s) (along with the diffusion of
players) were needed before most movie distributors would release pre-recorded tapes and
the release of the pre-recorded tapes was needed before profitable retail outlets could be
established. This is why the number of pre-recorded tapes or the number of rental stores did
not begin to increase until long after these standards emerged and even until long after VHS
represented more than one-half the market in 1978 (Lardner, 1987; Cusumano et al, 1992).
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Growth in the number of retail outlets did not emerge until the 1980s and by 1995, there were
25,000 to 30,000 stores dealing exclusively in videos and an additional 10,000 to 12,000
other stores (e.g., supermarkets) that rent videos but not as their main business. The
emergence of these standards also facilitated the temporary emergence of independent
distributors between movie companies and rental stores (Lardner, 1987) and a temporary
increase in the number of manufacturers. The number of manufacturers increased by about
five-fold between the release of standards in 1975 and 1983/4 (Cusumano et al, 1992) where
the number of them may have continued to grow before a shakeout occurred.
The big winners were the movie distributors. Although some independent film makers
attempted to create movies just for the video rental business, rental outlets preferred to stock
movies that had been successful in theaters and that thus benefited from the promotions that
accompany theater release (Lardner, 1987; Caves, 2002). Furthermore, large movie
distributors have used video rentals (and sales) as just one more stage in their complex
calculation of price discrimination to maximize revenues and thus provide the means to
develop blockbuster movies (Gomery, 2000c; Caves, 2002).
In summary, the emergence of an interface standard(s) between video players and
pre-recorded movies, which is an example of falling transaction costs, formed the basis of an
industry architecture in which movie distributors take most of the profits. In some ways retail
outlets are the equivalent of local broadcasters or cable companies where retail outlets and
local broadcasters are much less profitable than cable companies because of the lower
economies of scale and thus lower barriers to entry for them. By coordinating the vertically
disintegrated structure of the movie industry (See Figure 3), movie distributors play the role
of network broadcasters where the large and perhaps increasing number of submarkets for
movies prevents a shakeout from occurring in the number of firms concerned with movie and
other forms of program production (See Figures 2 and 5).
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4.5 Satellite Television
As discussed above, satellites were first used to distribute programs to local cable
companies and by the 1990s the cost of satellite dishes had reached the level at which
consumers could afford them. Although the first commercial services were offered in the
1980s, it was not until digital compression in the form of a digital video broadcasting
standard enabled households to receive up to 200 channels in the mid-1990s that direct
broadcast satellites began to diffuse through services offered by firms such as Hughes, Echo
Star, PrimeStar, Astro, and AlphaStar (Gomery, 2000a). The high entry barriers that are
represented by the high cost of launching satellites (i.e., economies of scale) have probably
significantly reduced the number of opportunities for satellite service providers.
In summary, the satellite operators and to a lesser extent the program producers are the
strongest firms in satellite television. Like the cable companies and unlike local broadcasting
and retail outlets for pre-recorded movies, there are high barriers to entry in satellite services
and their primary competition is cable companies that also have monopolies. On the other
hand, they provide another outlet for program producers and thus probably further increase
the importance of the capabilities associated with program and movie production.
4.6 Deregulation
Deregulation began in the 1970s and accelerated in the 1980s under the Reagan
administration. In particular, the FCC’s relaxation of program ownership rules in the early
1990s and the National Telecommunication Act of 1996 have partly reversed the trends of
vertical disintegration and increased opportunities for entrepreneurs that are described in
previous sub-sections. After the FCC relaxed the restrictions on broadcasters and cable
companies for owning programming companies, the number of opportunities for program
producers has begun to decline. In combination with the increasing cost of movies and thus
the benefits of consolidation and economies of scale (Klepper, 1996, 1997; Hilmes, 1990), by
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1999 there are fewer independent producers left in Hollywood as it takes deep pockets to
create and sustain high risk prime time productions. The six largest movie studios dominated
the movie industry, broadcasters had acquired 15 of the largest 17 syndicators by 1999, cable
companies had bought many of the largest programming companies, and movie studios have
also either acquired broadcasters (e.g., Disney takeover of ABC) or started their own (e.g.,
Fox) (Gomery, 2000c).
The National Telecommunications Act of 1996 has taken this one step further by further
relaxing a number of restrictions on ownership. It eliminated the numerical limit on the
number of stations that a single firm could own and increased the percentage of U.S.
households that can be legally reached by a single broadcaster’s signal from 25% to 35%. It
also eliminated cross-ownership rules, which has enabled increased horizontal integration of
radio and television broadcasting and cable television (Gomery, 2000a). From the standpoint
of entrepreneurs, both the National Telecommunication Act of 1996 and the FCC’s
elimination of program ownership rules in the early 1990s have probably reduced the number
of opportunities for them but this may change in the future.
5. Discussion
The purpose of this paper was to look at the relationship between vertical disintegration in
industry architectures and entrepreneurial opportunities. Vertical disintegration created
thousands of opportunities for local radio and television broadcasters, program producers,
cable companies, and even more for video retail outlets. Although figures were not found, it
may have also created large numbers of opportunities for advertising agencies, research
agencies, and rating services.
This paper analyzed its emergence in terms of capabilities, transaction costs, and methods
of value capture (Jacobides and Winter, 2005). Initially, the financing and acquisition of
programs were key capabilities and both radio and television network broadcasters basically
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controlled them. Network broadcasters connected both sponsors (i.e., financing) and program
producers with local broadcasters and thus created mobility (Jacobides, Knudsen, and Augier,
2006) in local broadcasting, advertising, and program production. One reason they were able
to do this was because the legal and regulatory action in 1926 against AT&T reduced the
transaction costs of distributing programs from network to local broadcasters.
Subsequent reductions in transaction costs and the emergence of new methods of value
capture (i.e., new business models) changed the importance of these capabilities. The
emergence of rating systems reduced the costs of matching sponsors with broadcasters and
the ruling that playing pre-recorded music on the air did not violate copyrights reduced the
costs of acquiring programming content. Together these reductions in transactions costs
reduced the importance of the network broadcasters’ capabilities; this enabled local radio
stations to more easily survive without being affiliated with a network broadcaster.
Furthermore, new methods of value capture such as subscription services from cable and
satellite providers and rental income from pre-recorded movies provided new methods of
financing program production and thus increased the amount of mobility (Jacobides, Knudsen,
and Augier, 2006) in program distribution and delivery; this increased the importance of
capabilities in program (and movie) production at the expense of other capabilities.
Focusing just on program production for television, the necessary capabilities associated
with procuring programs changed as the method of financing television programs (i.e.,
method of value capture) changed from single to multiple sponsors and this led to the
replacement of advertising agencies with program packagers. Although network broadcasters
also produced some of their own content, their increasing use of program packagers and
movie distributors (along with the success of cable channels) caused the capabilities
(Jacobides and Winter, 2005) of program production, and coupled with the changes
mentioned in the last paragraph, the profits to migrate away from them and towards program
producers, movie distributors, and cable channels.
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These events emerged in a combination of top-down (Langlois and Robertson, 1992;
Baldwin and Clark, 2000; Langlois, 2003; Jacobides, 2005) and bottom-up processes
(Jacobides, 2005; Jacobides and Winter, 2005). For example, the choice of frequency bands
and standards, government decisions to restrict ownership of local broadcasting companies,
and the distribution of programs from network to local broadcasters over AT&T’s network in
both radio and television were carried out in a top-down process in which system designers
such as the U.S. Federal Communications Commission and RCA’s David Sarnoff determined
the vertically disintegrated architecture of the broadcasting sector. Similarly, the architecture
of the cable industry that enabled the distribution of programs from satellites to cable
providers also emerged in a top-down process in which system designers like Ted Turner
(founder of CNN) strategically assembled the architecture of an improved cable system. On
the other hand, a ratings system, the ruling concerning playing records on air, the legal and
regulatory pressure on AT&T to exit the radio industry, and the 1948 Paramount antitrust
decision emerged through bottom-up processes (Jacobides, 2005) in which many of the
participants were not looking at the entire value chain for the industry.
Turning our attention to the numbers of entrepreneurial opportunities that emerged in
each vertically disintegrated layer, economies of scale (Klepper, 1997) may explain the
relative numbers of firms in many of the layers and certainly better than does the theory of
dominant designs. On the one hand, large economies of scale probably restricted the number
of firms that can be network broadcasters, telephone and satellite companies (i.e., distributors
of programs to local broadcasters or cable companies), or manufactures of radios, televisions,
and video recording and playback equipment. On the other hand, continuous growth in the
number of submarkets for television programs and movies throughout the second half of the
20th century, which were partly driven by the growth in the overall market sales, have
probably reduced the economies of scale and thus the chances of a shakeout in the number of
program producers. Although submarkets for radios and television receivers and video
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recording equipment exist in for example different levels of sound and picture quality and
sizes of screens, the numbers of these submarkets seems to be much fewer than for the
programming side of the market. A similar logic may also apply to local broadcasting
companies and to retail outlets (that distribute pre-recorded movies) although in theses two
cases the submarkets are defined more by geography and less by heterogeneity in customer
needs.
Changes in one layer can also impact on the economies of scale in other layers. Just as the
emergence of independent equipment suppliers reduced the economies of scale in R&D for
product manufacturers and thus enabled entry by new product manufacturers (Klepper, 1997),
the emergence of pre-recorded music as a form of radio content enabled large increases in the
number of local radio stations even as advertisers and producers of radio programs were
moving to television. Similarly, the ability of cable companies to access programs from
satellites enabled large increases in the number of cable companies. In all three cases, new
forms of vertical disintegration reduced the economies of scale in another layer and thus
enabled increases in the number of firms that could survive in the layer.
The concept of platforms (Gawer & Cusumano, 2002) plays an important role in this
interaction between vertical disintegration and entrepreneurial opportunities in the
broadcasting sector. Achieving low costs in a final product or service in which there are
heterogeneous needs (Lamoreaux et al, 2003; Langlois, 2007) can come from the
standardization of certain activities (economies of scale) and this standardization requires
both standard interfaces and standard platforms (Gawer & Cusumano, 2002). In the
broadcasting sector standard platforms exist in the form of network broadcasters, AT&T’s
telephone lines, satellites, and movie distributors where economies of scale exist and specific
capabilities are needed to achieve these economies of scale. These examples and the ones
mentioned in the previous paragraph provide further evidence that the number of
entrepreneurial opportunities in one layer depends on actions in other layers and that the
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framework of industry architecture can better address the number of entrepreneurial
opportunities in different layers than can the product life cycle theory.
One final conclusion is that the emergence of dominant designs did not drive a shakeout
in the number of firms in the broadcasting sector. The literature on technology management
defines most dominant designs for the broadcasting sector in terms of interface standards
such as those for AM and FM radio, black and white and color television, video players, and
satellite transmission and argues that entrepreneurial opportunities decline after such a
dominant design emerge (Utterback, 1994; Suarez and Utterback, 1995). This paper has
shown that the number of broadcasters, programming companies, to some extent
manufacturers, and thus entrepreneurial opportunities for them actually increased in the
broadcasting sector following the definition of these open interface standards. The number of
radio and television broadcasters continued to increase long after frequencies and standards
were set and even the number of manufacturers did not decline until long after these
frequencies and standards were set (an exception may be following the color standard). The
number of video retail outlets continued to increase long after the VHS and Beta standards
were released and even the number of manufacturers did not begin to decrease until long after
these standards were released. The number of cable companies and programming companies
also continued to increase long after standards that define the interface between cable systems
and satellites was set in the 1970s. These results suggest that many dominant designs, in
particular those that involve open interface standards, can enable the entry of new firms in
many vertically disintegrated layers.
There are a number of limitations to this study. First, it is a single sector and thus the
mechanisms by which vertical disintegration emerges and creates entrepreneurial
opportunities may be different in other sectors. Second, it is based on an exploratory study
that required the application of concepts from both the industry architecture and product life
cycle literatures. Future research should address other sectors and better quantify how the
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concepts of economies of scale, submarkets, and shakeouts can be applied to each vertically
disintegrated layer in an industry architecture.
6. Conclusions
This paper analyzed the mechanisms by which vertical disintegration emerged and
created entrepreneurial opportunities in the broadcasting sector. It looked at the number of
firms in various vertically disintegrated layers and the specific events that led to the
emergence of these layers and impacted on the number of firms in them using the interaction
between capabilities and transaction costs, mobility of assets, industry shakeouts, economies
of scale, and submarkets. The framework of industry architecture is probably better suited to
addressing the relationship between vertical disintegration and entrepreneurial opportunities
than is the product life cycle theory and the importation of concepts from the product life
cycle theory such as economies of scale, submarkets, and industry shakeouts into the
framework of industry architecture can improve the analysis of this relationship.
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