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Mergers and Acquisitions
Mergers and acquisitions have characterized the cable industry for years (Chan-Olmsted, 1996). In fact, the pervasive ownership interests of MSOs in programming networks has been one of the most prominent features of the cable industry structure (Parsons & Frieden, 1998). As of 2003, one third of the satellite-delivered national MVPD programming networks were vertically integrated with at least one cable MSO. Table
6.1 shows that most top MVPD providers have extensive ownership in- terests in cable networks. Leading firms like Comcast, DirecTV, and Time Warner are vertically integrated with a substantial number of popular sports, news, and entertainment cable networks. Table 6.2 further dem- onstrates the importance of such ownership interests for MVPD service providers to stay competitive with the broadcasters because 9 of the 15 most highly rated MVPD programming networks are owned by con- glomerates with top broadcast properties such as Viacom (CBS), NBC Universal (NBC), and Disney (ABC).
To assess the M&A strategies in the MVPD sector, we now examine the top MVPD service providers’ activities involving the acquisitions of pro- gramming properties and the horizontal consolidations of MVPD services.

Vertical Acquisitions for Programming Access. As indicated earlier, many leading MVPD service providers are vertically affiliated with pro- gramming producers and distributors by ownership. Comcast, the number one MVPD firm, which reaches more than 22% of the multi- channel media subscribers, however, is not the most active acquirer of MVPD programming properties as it has developed its programming mostly through joint ventures (e.g., with Sony for MGM and with Dis- ney for E! Entertainment) and internal expansions (e.g., QVC, Comcast Sportsnet, and G4). Only recently has it started acquiring programming units to enhance its current programming holdings. For instance, Comcast purchased Home Team Sports and combined it with its SportsNet in 2001 to create a powerful regional sports MVPD network. It also acquired some specialty sports networks such as the Golf Channel and the Outdoor Life Network. Most recently, in 2004, Comcast merged its G4, a network dedicated to entertainment, news, and information about video games and the interactive entertainment industry, with TechTV, a network that showcases the development, business, and life- style of the technology world (“Comcast Acquires Tech TV,” 2004). Be- sides focusing on horizontal M&A (discussed in the next section), the largest MVPD service provider seems to aim at establishing access to re- gional sports, specialty sports, and technology-oriented programming.
Time Warner, on the other hand, has amassed its programming prop- erties mostly through its acquisition of Turner Broadcasting, which gave Time Warner a vast array of cable networks, production units, and extensive film libraries (Dizard, 1997). It is evident that the program- ming assets of Time Warner are most established in the areas of news and movies, continuing its highly valued news and film studio brands (e.g., Time Magazine and Warner Bros. Studio) outside of the MVPD in- dustry. As for the other two major MVPD firms, whereas DirecTV has just been fitted with the tremendous content assets of Fox’s program- ming properties through its merger with News Corp., Cox has devel- oped access to programming mostly through its investment in Liberty Media’s Discovery channels.
It is our assertion that the acquisition of DirecTV by News Corp. is one of the most significant M&A activities in this sector because it posi- tions a major broadcaster to be also a strong contestant on the MVPD platform. In fact, broadcasters have been increasingly involved in this market through mergers and acquisition, but this has mostly occurred in the programming segment of the market. For example, Westinghouse spent some $1.55 billion in stock to purchase The Nashville Network and Country Music Television from Gaylord Entertainment Co. (Burgi, 1997). Viacom acquired BET, the largest cable network targeted at Afri- can Americans, for $2.9 billion (Hay & Saxe, 2000). Disney also ac- quired the Fox Family Channel for $5.3 billion and renamed it ABC Family whereas NBC added Bravo, the arts and entertainment network, to its cable holdings for $1.25 billion (Chunovic & Greppi, 2002). These acquisitions have extended the broadcast networks’ reach into the MVPD programming arena; however, only News Corp., with its DirecTV unit, has an integrated access to major popular programming networks and media outlets in both the broadcasting and MVPD indus- tries. The strategic significance of a strong presence in both the MVPD and broadcasting sectors can be further illustrated by Comcast’s failed attempt to merge with Disney in 2004. Though Comcast subsequently withdrew its offer, citing dilution concerns and Disney’s lack of interest, the proposed consolidation underscores the corporate strategy of dual presence in relevant markets and multilateral competition.

Horizontal Acquisitions for Market Expansions.	Since the passage of the 1996 Telecommunications Act, there has been a tremendous amount of M&A activity involving horizontal expansions of MVPD ser- vice providers. It began with US West’s acquisition of Continental Cablevision; then the United States’ third-largest cable firm (“US West Acquisition,” 1996), AT&T, also added Tele-Communications Inc. and later MediaOne to its networks (Higgins, 1999b). The wave of telco–cable mergers seemed to be a response to the potential of convergence and to the exploration of new services such as broadband Internet access and phone services over cable-system lines (Marcial, 1998). However, various divestitures of the cable properties following these high-profile ca- ble–telco combinations demonstrate the difficulty of integrating a net- work-driven telephone business with a content-driven MVPD industry. Many other MSOs such as Adelphia Communications Corp. also ag- gressively began expanding their cable properties with purchases of ca- ble systems from Harron Communications Corp., Century Communications Corp., and FrontierVision Partners LP. Another major MSO, Cox Communications Inc., grew considerably in size with its ac- quisition of Gannett Corp.’s Multimedia Cable unit (Higgins, 1999a, 1999c), whereas Comcast became the number one MSO with its pur- chase of AT&T’s cable assets for about $45.7 billion in stock, plus the as- sumption of nearly $25 billion in debt and liabilities, giving it nearly twice as many subscribers as the industry’s next-biggest MSO, Time Warner (Dreazen, 2002; Higgins, 2001). Many of these mergers and ac- quisitions are about executing a regional strategy of “clustering,” which creates economies of scale and scope, and thus enhances an MSO’s abil- ity to transform its cable systems into “advanced broadband platforms” (FCC, 2004). The FCC has reported that at the end of 2002, there were 109 clusters with approximately 51 million subscribers compared to 97 clusters with 20.1 million subscribers 8 years ago. In a sense, through mergers and acquisitions, the MSOs are attempting to develop a two-way infrastructure capable of providing advanced services such as broadband Internet and interactive television more efficiently, to create attractive regional programming, and to enhance their competitiveness in the regional advertising market.
Our examination of the formation of strategic networks and system consolidation between MVPD service providers highlighted the impor- tance of certain corporate strategies at the exhibition stage of this mar- ket. We now review the competitive dynamics between MVPD programmers at the distribution stage of the MVPD market.

MULTICHANNEL STRATEGIC GROUP COMPETITION

Past economic discussions of the broadcast television industry have as- sumed that all programming distributors in the industry use the same funding mechanism and deliver products to a fairly homogeneous group of buyers. Such a presumption does not apply to MVPD pro- grammers. For example, whereas CNN charges MVPD service providers relatively high license fees to carry its signals, many new start-up mul- tichannel video programmers offer the providers incentives to induce carriage. Whereas USA Network carries commercials, the Independent Film Channel does not offer any local or national avails. Furthermore, most MVPD programmers have invested in branding and differentiat- ing their content products, which are sold to service providers using various distribution platforms. The traditional emphasis on “industry” as a unit of analysis seems to be less appropriate for analysis of these heterogeneous programmers. In other words, MVPD programming networks operate under a more complex business system than their broadcast counterparts and are capable of more diverse strategic com- petition. The observation that strategic diversity within an industry has a significant bearing on market behavior is central to the theory of stra- tegic groups and grounds our discussion here.
Porter defined a strategic group as a cluster of firms that follow simi- lar strategies in terms of the key decision variables (Cool, 1985; Porter, 1985). Firms within a strategic group resemble one another closely, rec- ognize their mutual dependence, and thus coordinate their behavior ef- fectively. Furthermore, when one considers intergroup market dynamics, the existence of different strategic groups affects the overall level of rivalry in the industry. When firms are associated with different strategic groups, they have different preferences about pricing, research and development (R&D), advertising, optimal output, and other market conduct. As a consequence, operational differences complicate the pro- cess of cooperation (either explicitly or implicitly) between groups (McGee, 1985). Hence, it is more likely for groups with similar strategic approaches to cooperate than it is for groups that use diverse strategies. Moreover, cooperation is easier and more likely to happen within groups than between groups. Also, environmental changes do not have equal impact on different strategic groups due to their different strate- gic postures, assets, and skills. As for the performance differences among strategic group members, many strategic group scholars have argued that there are group-specific entry barriers (i.e., mobility barri-ers) that provide protection to group members (Olusoga, Mokwa, & No- ble, 1995). Such structural forces impede firms from freely changing their competitive positions and explain intraindustry profit differentials in a cross section of industries (Caves & Ghemawat, 1992).
Incorporating the strategic groups concept, Chan-Olmsted (1997) proposed that the MVPD programmers would, by their heterogeneous nature, exhibit monopolistically competitive market behavior at the in- dustry level. In other words, these firms attempt to build differential ad- vantages (e.g., programming differentiation) and “selectively” interact with certain competitors’ strategic actions. She also suggested that the industry-level analysis alone would not accurately reveal the competi- tive dynamics between these MVPD firms because they also compete in a group setting within the industry with oligopolistic market behavior (e.g., recognition of mutual dependency; Chan-Olmsted, 1997). Adopt- ing this analytical framework, Chan-Olmsted and Li (2002) empirically examined the strategic patterns of the MVPD programming networks and the relationship between group membership and performance us- ing the strategic dimensions (i.e., grouping variables) of size, vertical in- tegration, operating efficiency, differentiation, and pricing.
It was found that the MVPD programmers, in pursuit of monopolis- tic space (i.e., areas of natural advantage), are highly differentiated not only in their programming approaches but also in many of the strate- gic dimensions tested. By occupying different strategic positions, most of the MVPD strategic groups were able to carve out more definite and clear boundaries to avoid territory encroachment (i.e., direct competi- tion). There were groups of programmers that focus on providing pro- gramming guides and information, offer commercial-free movies, are vertically integrated with differentiated programming, are vertically integrated with general-appeal programming, are stand-alone net- works with niche programming, and are differentiated cable networks owned by broadcasters. The group composition reveals some interest- ing strategic patterns. While the presence of broadcasters may be felt through their niche cable properties, some cable-based MVPDs have tried to compete with the broadcasters with their own mass-appeal networks.
Chan-Olmsted and Li (2002) also concluded that delivering branded content that is highly valued (as suggested by per-subscriber license fees) is the key to better financial performance for the programmer with respect to revenues, both overall and in rate of return. More ad avails and reliance on ad revenue do not necessarily yield better margin or rev- enue numbers, nor does a heavy reliance on license fee revenues. Hori- zontal relationships with other programmers and increased operating efficiency seem to somewhat contribute to the performance measures. Nevertheless, vertical integration, although enhancing carriages by the service providers and/or marketing efficiency, is not essential for supe- rior performance for these firms. Finally, smaller programmers may still outperform bigger programmers in rate of return when they rely mainly on license fee revenues and invest in programming to improve the value of their products.