The Emerging Broadband Television Market in the United States:
Assessing the Strategic Differences between
Cable Television and Telephone Firms
Sylvia Chan-Olmsted, Jae-Won Kang
University of Florida
Abstract
This paper compared the strategic differences between telcos and cable television firms in the United States based on a proposed strategic architecture that depicts the roles of various channel members and the interrelationships between them in the emerging broadband television industry. We found that mergers and acquisitions (M&As) were practiced more frequently than other types of alliances and cable was a more attractive target as well as an active acquirer in M&A alliances. Also, ¡°relatedness¡± appeared to be a more important M&A strategy for the cable firms as the telcos focused on a resource alignment strategy, allying with firms in the information services and software sectors.
Introduction
The broadband industry is frequently touted as an essential building block of future digital entertainment as its platform enables the fast delivery of digital videos with the personalization and on-demand nature of the Internet (Bratches and Rooney 2001). Specifically, broadband systems enhance traditional television with richer graphics, links to Web sites through television crossover links, electronic mail, and chat room activity and online commerce through a back channel (T-commerce). As the two leading broadband service providers, digital subscriber lines (DSL) and cable modem, continue to expand in this emerging market, we are witnessing a new phase of development for the television medium. Just as the introduction of cable television added the multichannel, narrow-casting capability to broadcast television, the arrival of the Internet and the broadband infrastructure brought more enhanced functions such as interactivity and personalization to cable television. Such an expansion of television functions and content varieties means more opportunities for product differentiation in the marketplace and thus more strategic options for the market participants.
While cable modem has been the front-runner of broadband connections in the United States, DSL has enjoyed the fastest growth rates of all broadband systems globally in the last couple years. In fact, despite a slow economy, consumer demand for broadband in this country continues to rise into 2003, growing at a rate of more than 40 percent. It was estimated that more than 59 percent of all U.S. homes will use broadband connections by 2008 (Greenspan 2003a).
Most analysts believe that cable will continue to dominate the U.S. residential broadband market (Greenspan 2003b). However, as DSL deployment forges ahead, broadband industry observers expect DSL to remain a strong contender, citing that DSL¡¯s improving operational efficiencies, marketing, and service area coverage are gradually winning the provisioning speed and service satisfaction offered by cable (Greenspan 2003b; Pastore 2001). With a 21% household penetration, the broadband access market is entering the growth stage of its product life cycle (Greenspan 2003b). Accordingly, the race between cable and DSL is likely to go beyond the initial phase of product introduction and become more strategic. Furthermore, as an emerging industry, the broadband television market exhibits the characteristics of technological uncertainty; high initial costs; entry barriers such as access to distribution channels and input/materials; and cost advantages due to experience (Hitt, Ireland, and Hoskisson 2001; Porter 1980). As a result, there is a trend toward strategic alliances as the broadband firms attempt to minimize uncertainty, share resources, and obtain access. Although the economic downturn caused by the Internet bubble in the late 1990s somewhat slowed the market activities in many high-tech industries, the move toward digital media continues to propel the development of broadband television and, thus, the continuous formation of partnerships in the emerging broadband television industry.
This paper will examine the different strategies adopted by an important sector of the emerging industry¡ªthe broadband access/system providers. This group of industry practitioners was chosen because of its fundamental role in promoting the growth of the industry at its initial stage. Specifically, we will empirically examine a strategic architecture that depicts the roles of various channel members and the interrelationships between them in the emerging broadband television industry as proposed by Chan-Olmsted and Kang (2003). The focus will be on the differences in alliance strategies between the two broadband competitors, cable and telcos, and the implications of the strategic differences. For the purpose of this study, ¡°broadband television¡± is defined as interactive or enhanced television distributed through a wire-line broadband network. Specifically, we subscribe to Pagani¡¯s (2000) basic definition for ¡°Interactive¡± television as domestic television equipped with interactive functions made possible by the digitization process and the convergence between television, the Internet, and other interactive technologies. The interactive/enhanced television system also needs a customer interfacing device (e.g., set- top boxes or internal decoder in television sets) and a broadband system capable of fast transmission speeds for a larger amount of data. Strategic alliance, on the other hand, is defined as a business relationship in which two or more companies, working to achieve a collective advantage, attempt to integrate operational functions, share risks, and align corporate cultures. The degree of strategic alliances may range from a simple licensing agreement, to joint marketing effort, to establishing consortium, to combining resources for joint ventures, to the ultimate form of mergers and acquisitions. Note that though most strategic management literature excludes mergers and acquisitions (M&A) from the discussions of strategic alliances, treating M&As as restructuring strategies and strategic alliances as cooperative strategies, for the purpose of this study, we will regard M&As as the extreme form of alliances. Typically, non-structural or non-M&A alliances include joint ventures, equity alliances, and non-equity alliances (Hitt, Ireland, and Hoskisson 2001).
A Proposed Strategic Architecture of the Broadband Television Market
Under the notion of ¡°complementary convergence,¡± Chan-Olmsted and Kang (2003) proposed a strategic architecture that depicts the roles of and the relationships between different participants in the broadband television value chain. They asserted that the broadband market would continue to offer telecommunications and video programming products under two separate interfacing devices and different distribution infrastructures because the converging, additional services such as cable telephony and video-on-demand enhance, rather than replace, the existing products. Additionally, they proposed that a true convergence between PC and television or telephone and cable would diminish the value of functions served by either product. Various scholars have advocated such a complementary notion (Dowling, Lechner, and Thielmann, 1998; Stipp 1999). Empirical studies and industry reports have also indicated a slow growth of integrated telecom/video services and limited inter-industry mergers and acquisitions between the cable and telephone industries since the 1996 Telecommunication Act, which largely eliminated the regulatory separation of the two industries (Chan-Olmsted 1998; Higgins 2001; Rosenbush and Elstrom 2001; Sandburg 2001).
Using a value chain framework (see Table 1), Chan-Olmsted and Kang (2003) proposed a strategic architecture that divides the broadband television markets into two different infrastructures; the telephone and multi-channel system (see Figure 1).
Table 1: The Value Chain of Broadband Television
Figure 1: Strategic Architecture of the Proposed Broadband Television Market
*All three production stages were combined in our analysis as stage 9 because the difficulty of differentiating the firms from the three sectors.
According to the authors, the creation stage of the value chain involves value creators such as television programs, Web video, and film producers whose core activities are to create video contents for end users. Examples of creators are Pixar Animation Studios, CNN, and many independent filmmakers. The most critical core competencies or resources for these participants in the broadband television value chain are likely to be access to talents and capital for content development and the syndication rights for their creations. The next stage of the value-adding process is packaging, which involves content aggregators whose core activities are to assemble contents into packages that appeal to different segments of customers. Examples of packagers are Web TV, Discovery Channel, and Broadcast.com. The most critical core competencies or resources for the firms at this stage are access to popular mass-appeal content and/or niche content; access to distributors; capability of repackaging content for different user segments and/or distributions systems; and expertise in areas of marketing, brand management, and publicity. The following value chain component, the value-adding services, performs basically a supporting function to the rest of the value providers (especially packagers and distributors). These services may include online billing/marketing specialists, hosting companies, and IT consulting firms, whose core activities in the value chain are to support and thus enhance the operations and marketing of the television content packages. Because of the complexity and importance of matching the right product with the right segment of audience in a market full of choices, the core competencies or resources of these firms are likely to be consumer knowledge, technology know-how, and creative use of information. The next stage in the broadband TV value chain is the focus of this study, distribution, which involves infrastructure providers such as cable system operators and telephone/IP network/access providers. Examples of a distributor would be AT&T Broadband, BellSouth, and Earthlink. The distributors provide a broadband infrastructure for the delivery of enhanced/interactive TV contents/services and/or manage the access to these contents/services. The model proposes that access to a mass consumer base for scale and scope economies; relationships with the navigating/interfacing facilitators; and the ability to provide seamless, efficient network/infrastructure are important to the participants in this segment of the value chain. The facilitators, which include software developers and hardware manufacturers such as Microsoft and Motorola, add value to the product by providing navigation and interfacing equipment and software programs that enable the easy access of the broadband television content. Their core competencies or resources for success are likely to be technology know-how, consumer knowledge, cost management, and access to distributors (Chan-Olmsted and Kang, 2003).
The strategic architecture further suggested that during the initial stage of product development, the most active players in the broadband television industry would be the ¡°distributors¡± such as the MSOs, telcos, and access service providers that build the necessary access network for consumers and ¡°alliances¡± would be the dominant strategy for these distributors.
As for the choice of alliance partners, scholars have suggested different rationales of determination. Some believe that the degree of similarities between the acquiring and target firms is positively related to better performance in the newly made firm in cases of mergers and acquisitions (Akhavein, Berger, and Humphrey 1997). Thus, ¡°relatedness¡± or similarity would be paramount in the search of such alliance partners. In contrast, some argued that a firm should ally with the ones that enhance its core competencies, which may be achieved regardless of ¡°relatedness¡± (Collis and Montgomery 1995; Hennart and Reddy 1997; Peteraf 1993; Silverman 1999). This notion of ¡°partner resource alignment¡± refers to the pattern whereby the resources of partner firms are matched in an alliance (Beamish 1987; Lei 1993). The pattern is viewed as the supplementary or complementary resource-based relationship between partners (Das and Teng 2000). Thus, strategic alliances are about accessing resources that a particular firm does not already possess, yet which are critical for improving its competitive position (Das and Teng 2000). In fact, a reliance on any single type of resource may well work in the short term but would be unlikely to generate sustainable competitive advantage in the intensified competition environment. Therefore, it is natural that many firms attempt to reach out to other firms who hold resources complementary to their own.
Based on the notion of complementary convergence that maintains the functional separation of the two distributions systems and the premise that cable and telcos would have different strategic preferences because of the underlying theory of ¡°path dependency¡± (Collis 1991; Dosi, Teece, and Winter 1990) (i.e., The future strategy of a firm is largely determined by its history and restricted by its current level of resources), we propose the following research question:
RQ1: What are the differences in strategic alliance patterns between the cable television and telephone firms under the proposed broadband television industry strategic architecture? Is ¡°relatedness¡± or ¡°partner resource alignment¡± the mode of alliances?
Because of the natural tendency to combine the actual network infrastructure with the management and marketing of network access (e.g., combination of Time Warner Cable and AOL) and the importance of allying with the firms that have access to customer information and relationships, the model expected extensive alliances between telcos/multichannel television systems and access service providers. Chan-Olmsted and Kang (2003) also stressed the strategic role of an often omitted but essential group of participants, the broadband television hardware/software facilitators such as Microsoft and Motorola that empower the broadband television consumers by supplying them user friendly devices/software that facilitate the interactive television experience. Accordingly, a second research question is posed:
RQ2: How have access service providers and facilitators been strategically targeted as alliance partners by cable television and telephone firms?
As for the preferences between structural/equity alliances (i.e., M&As) and non- structural/equity alliances, researchers have suggested that non-equity alliances may be favored over M&As when not all the resources possessed by the target firm are valuable to the acquirer or when non-desired assets are not easily separable (Hennart and Reddy 1997; Ramanathan, Seth, and Thomas 1997). Accordingly, because of telcos¡¯ historical separation from the television industry as a common carrier, it¡¯s likely that they would prefer non-equity alliances that offer them selective, valuable resources, while the cable firms would be more comfortable merging with other television-related firms in this industry. Finally, as suggested by Dowling, Lechner, and Thielmann (1998), the strategic architecture model also concluded that complementary convergence is more likely to be accomplished through non-equity strategic alliances. To test these propositions, the following research question is proposed:
RQ3: Are mergers and acquisitions or non-equity alliances the dominant strategy for the broadband television industry?
Methods
Using ¡°industry¡± as the unit of analysis, we examined the alliance activities occurring during the period of 1996 to 2001. This time frame was selected because of the significance of the 1996 Telecommunication Act, which eliminated many regulatory separations of telecommunications properties in the broadband television market.
Data Source and Criteria of Selection
This study utilized a secondary data source, the SDC Platinum database compiled by Thompson Financial Securities Data. The online database is the leading, standard industry database that provides detailed information on all financial transactions and agreements, including mergers and acquisitions, joint ventures, and other strategic alliances around the globe. In the case of M&As, transactions involving at least 5% of the ownership of a company where the transaction, either public or private, was valued at $1 million or more or where the value of the transaction was undisclosed were included in the database. In the case of non-structural alliances (all alliances other than M&As, including joint ventures), reported agreements where two or more entities have combined resources to form a new, mutually advantageous business arrangement to achieve predetermined objectives, such as¡ªjoint ventures, research and development agreements, sales and marketing agreements, manufacturing agreements, supply agreements, licensing, and distribution pacts¡ªwere included.
Industry Analysis
A series of criteria was established to identify the relevant structural (M&A) alliances occurring in the broadband television industry from a total of 63,452 domestic mergers and acquisitions recorded during the five-year period. To be included in the dataset, the target or acquiring firm in a merger or acquisition has to: 1) belong to a primary SIC (i.e., Standard Industrial Classification) code that is one of the identified broadband SIC codes, and 2) contain at least one of the broadband television key words in the officially filed description or synopsis of the transaction. The SIC method of classification has been used frequently by scholars in their ¡°industry-level¡± studies such as industrial policy, firms¡¯ conduct and performance in homogeneous economic markets, and ¡°relatedness¡± (Clarke 1989; Fan and Lang 2000; Tsai and Norsworthy 1996). However, the SIC codes do not provide enough granularity of information on many technology-related industries as it was last revised in 1987. Thus, we reviewed various broadband literatures and identified a number of keywords that are frequently used in broadband television related reports to narrow the list of transactions. A total of 1,710 mergers and acquisitions were included in the analysis. As for the non-structural alliances, of the 15,143 domestic non-structural alliances, we identified a total of 1,301 agreements using the same SIC and keyword filtering process.
Factors of Consideration
The following factors were investigated against the identified alliances to assess the strategic patterns of telcos and cable companies.
Alliance Strategic Stages. To assess the trends of alliances between broadband television firms with different economic activities, we classified each alliance based on its position in the proposed strategic architecture. In the case of M&A alliances, we examined both the target firms¡¯ and acquirers¡¯ primary SIC codes, along with the synopsis of each alliance to identify the stages. In the case of non-M&A alliances, we reviewed both the formed alliances¡¯ and the participants¡¯ SIC codes, along with the description of each agreement to identify the stages.
Types of Alliances. There are basically three types of alliances in our study. Structural alliances include all mergers and acquisitions, the financial transactions in which two firms agree to integrate their operations on either a co-equal basis (mergers) or one-firm-as-the-controlling-party basis (acquisitions). We differentiated between target firms and acquirers in our M&A analysis to assess the attractiveness of various broadband television firms. The non-structural alliances include joint ventures and non-M&A agreements. While the former creates an independent firm combining parts of two or more firms¡¯ assets, taking on a more long-term relationship, the latter is a cooperative strategy in which partnerships were formed either by equity sharing or contractual agreements such as licensing, franchising, and marketing agreements.
Alliance Relatedness and Sameness. To assess the types of alliances that the broadband television firms have preferred to join, we classified all alliances as either related or unrelated based on the SIC codes of the participants. An alliance is classified as related when at least two of the participants¡¯ primary SICs are of the same first two digits. Otherwise, they are ¡°unrelated.¡± Such a classification system is consistent with how the SIC system categorizes firms. For example, a SIC code that begins with 47 includes the firms with transportation service-related economic activities, while a SIC of 48 includes communication-related firms. An alliance between a firm with a 4841 (cable television services) primary SIC and a firm with a 4833 (television broadcast stations) SIC would be considered related. On the other hand, industry sameness would be the result when an alliance is comprised of two or more participants from identical SIC codes.
Results
Mergers and Acquisitions versus Non-Structural (M&A) Alliances
Table 2: Broadband M&A and Alliances in the U.S. 1996-2001
Figure 2: Total Broadband Television Strategic Alliances in the U.S. 1996-2001
There were overall more M&A alliances (1,710) than non-M&A alliances (1,301). Joint ventures, as a more permanent form of non-M&A alliances, were practiced modestly and remained fairly stable during the five-year period (see Table 2). The trends between M&A and non-M&A alliances were similar and increased gradually during the first three years when non-M&A alliances were adopted somewhat more frequently than the M&A alliances (see Figure 2). The number of alliances increased substantially during the fourth year, especially for M&A activities. While the number of alliances dropped sharply the following year, M&A alliances continued to outperform non-M&As by over 110 alliances. In sum, the levels of alliances have increased over the years as M&As moved from a slightly less favored model to the dominant method of alliances by the end of 1999.
Table 3: Broadband M&A Activities by Industry Sectors and Strategic Stages 1996-2001
Differences in Strategic Alliance Patterns between Cable Television and Telcos
In regard to the M&A activities, cable has been an alliance target much more frequently than telcos during the five-year period (16.2% versus 4.7% of all M&As) (see Figure 3 and Table 3). The difference, however, became much narrower in the fifth year. Cable continued to be more aggressive than the telcos as an acquirer in broadband television M&As, though the range of difference was somewhat smaller than it was as a target (14.8% versus 8.2% of all M&As). The situation changed during the fifth year as telcos slightly passed cable as an M&A acquirer. In general, cable television firms were more likely to be the target than the acquirer, while telcos were more likely to be the acquirer than the target during this period.
As for non-M&A alliances, telcos appeared to be more active than cable, though the difference is marginal and became minimal in the fifth year (see Figure 3 and Table 4). Overall, cable¡¯s non-M&A alliances followed its trend of M&A activities except for the year of 1999-2000 when cable was aggressively involved in M&A activities as the number of its non-M&A alliances dropped. In contrast, telcos preferred non-M&A alliances over M&A (as an acquirer or target) for the first three years until 1999-2000 when it changed its alliance strategy, actively acquiring firms through M&A in the broadband television industry. Its M&A alliances continued to surpass non-M&A activities in the fifth year, even with a substantial reduction of alliance numbers.
Table 4: Broadband Alliances by Comparable Industry Sectors and Strategic Stages 1996-2001*
*The SIC codes and strategic stages for the non-M&A alliances here were from the participants of the alliances, not the newly formed alliances since the two are not always identical. Note that only the primary SIC codes and stages were used.
In general, cable firms were most interested in acquiring firms from its own industry (81.8%), followed by television broadcast stations (5.5%) and information services (4.7%) (see Table 5). On the other hand, telcos were most interested in acquiring firms from the information services sector (41.4%), followed by its own industry (24.3%) and the cable industry (16.4%). Finally, cable was more likely to form joint ventures than the telcos (30.2% versus 15.1% of all non-M&A alliances).
Relatedness versus Partner Resource Alignment
To investigate the M&A alliance partner strategy of the cable television and telephone firms, we examined the two groups¡¯ preferred targets when they were acquiring (see Table 5). It is evident that the cable firms were overwhelmingly more likely to acquire related communications firms (90.1% for SIC 48). The partner preference seems to go beyond relatedness as over 81.8% of the cable acquirers chose firms within their industry. In contrast, telcos were more likely to branch out of their industry as only 42.1% of its M&A targets were in the related industries. Telcos were aggressively targeting the business services sector (52.8% for SIC 73), especially aiming at the information services market (41.4% for SIC 7375). The telcos have considered firms from their own industry as an M&A target only about a quarter of the time. It¡¯s interesting that while cable rarely pursued telcos for M&As (2.7%), telcos were much more likely to approach cable as an M&A target (16.4%).
Table 5: Broadband M&A Activities in the Cable Television (SIC: 4841) and Telephone (SIC: 4813) Sectors 1996-2001
As for non-M&A alliances, both cable and telcos were much more likely to form such partnerships with firms from related industries. Cable television was slightly more active in forming related non-M&A alliances than the telcos (81.3% versus 73%). Cable was also more likely to ally with firms from the same industry than the telcos (61.5% versus 43.7 %). We again studied the formed non-M&A alliances in the cable and telephone sector to see what kinds of firms were most likely to be involved in these alliances (see Table 6). As in the case of M&As for the telcos, the information services sectors was most likely (more than the telcos) to be involved with an alliance in the telephone sector, while cable companies continued to be the major players for alliances in the cable market. In sum, relatedness seemed to be the main partnering strategy for the cable television firms, while the telcos were more likely to look for partner resource alignment, except in the case of non-M&A alliances in which the telcos might ally with related but not necessarily similar communications firms.
Alliances with Access Service Providers and Facilitators
The analysis of the M&A activities revealed
that the broadband television firms that were targeted most
frequently during this period were the firms from the information
retrieval sector (SIC 7375) (38.7% of all M&As), including
access service providers,
Web-based video/content packagers, and cable-based interactive
television application packagers (see Table 3). The firms
from the prepackaged software sector (SIC 7372) (23.3% of
all M&As) such as the Internet/television software facilitators
were the second most targeted, followed by cable television
(16.2% of all M&As). Similar trends continue when we
examined the numbers of M&As occurring during the period
by the acquirers¡¯ SIC codes and when we reviewed
the numbers of the non-M&A alliances (36.2% for SIC
7375 and 29.2% for SIC 7372 (see Table 4). By comparison,
cable constituted only 4.8% of the total non-M&A alliances
and telcos a mere 6.8%. In fact, contrary to our expectation,
the most active sectors, both for M&A and non-M&A
alliances, were information services (SIC 7375) and software
companies (SIC 7372), rather than the distributors such
as telcos and cable firms (see Table 3 & 4).
Table 6: Industries (SICs) and Stages Involved in the Formed Non-M&A Alliances by the Cable Television and Telephone Firms 1996-2001*
*The SIC codes and strategic stages for the alliances were for the formed non-M&A alliances, not the participants of the alliances since the two were not always identical.
Further examinations of the alliances by the proposed strategic stages revealed that the Web-based video/content packagers (26.7%), Internet/television software facilitators (23.4%), cable/broadcast programming packagers (19%), and access service providers (14.7%) were the most targeted stages for M&A during this period. Firms at these four stages were also the most aggressive in acquiring other broadband television firms (23.6%, 21.3%, 19.5%, and 13.6% respectively). A similar pattern exists for non-M&A alliances; Web-based video/content packagers (28.7%), Internet/television software facilitators (28.5%), access service providers (10%), and cable/broadcast programming packagers (8.1) were the most active stages. A review of the formed alliances in the telephone sector saw most activities in stage 6 (Web content packagers), 3 (telcos), and 2 (software facilitators). But for the cable sector, they were mostly in stage 7 (cable/broadcast programming packagers), 4 (cable systems), and 8 (cable-based interactive television packagers) (see Table 6).
Figure 4: Broadband Television M&As by Target Firms¡¯ Strategic Stages 1996-2001
Figures 4 and 5 show the dynamic changes over the five-year period for both M&A and non-M&A alliances by the proposed strategic stages. Internet-related content packagers (stage 6) and software facilitators (stage 2) (and to some degree, the access service providers-stage 5) rose sharply to become the leading M&A targets during the year of 1999-2000. Cable and telcos exhibited similar degrees of attractiveness as a target over the years until 2000-2001 when cable was targeted less frequently compared to its telephone counterpart. The Non-M&A alliances have shown trends parallel to those of the M&A alliances during this period with the exceptions that cable/broadband programming packagers (stage 7) were less likely to engage in this type of alliance and the Internet/TV facilitators (stage 2) were more active during the early years (see Figure 5). In sum, the Internet/TV software facilitators, as expected, were very attractive alliance partners for broadband television firms. The access service providers, though still active participants, seemed to be less appealing as alliance partners than the content packagers in the proposed strategic architecture.
Figure 5: Broadband Television Non-M&A Alliances by Primary Participants¡¯ Strategic Stages 1996-2001
Discussion and Conclusions
Mergers and acquisitions have become the
preferred choice of alliances as the broadband television
market entered the phase of strategic alliances. Cable television
firms have in general been more active in forming alliances
than the telcos. Specifically,
cable television is a more attractive target as well as
a more active acquirer for M&A alliances than the telcos.
Nevertheless, telcos have changed their alliance strategy,
moving away from non-M&A alliances and becoming a more
aggressive acquirer in recent years. This change in alliance
strategy suggests a learning curve as the telcos increasingly
regard many components of the television industry as relevant
and valuable while they reposition themselves beyond the
traditional common carrier role and extent to the content/integrated
telecommunications services sector.
¡°Relatedness¡± appeared to be a more important M&A strategy for the cable firms than the telcos as the latter have aggressively pursued firms outside of their market in the information services and software sectors, practicing a resource alignment alliance strategy (see Figure 6). The differential alliance strategies between the telcos and cable firms affirm the notion of ¡°path dependency¡± in this industry as cable played to its historical strengths through the M&As with related television firms while the telcos attempted to counter their resource weaknesses in this emerging industry by extending into complementary sectors via M&As. Note that when it comes to non-M&A alliances, both cable and telcos were more comfortable allying with firms from related sectors; it seems that flexible access to specific, related resources is an important alliance strategy for both the telcos and cable firms.
Figure 6: Patterns of Alliances and the Broadband Television Strategic Architecture
The roles of access service providers and facilitators, as alliance partners to the cable and telephone firms, were not as significant as expected. Only Internet/television ¡°software¡± facilitators were sought after frequently by the telcos. Web-based content packagers, and to some degree the access service providers, were also targeted by the telcos (see Figure 6). Cable, on the other hand, continued to go after cable television-related firms in its choice of alliance partners. We believe this again illustrates the notion of complementary convergence and the independent trajectory of PC and television as cable attempts to form alliances with television programming packagers to enrich the content of its product and with interactive television application packagers to enhance the format in which it offers its product. On the other hand, the telcos have focused on forming alliances with Web-based content packagers that would enrich their Web-based content and with software facilitators that would enhance the format in which they offer their products.
Also contrary to our expectations, Internet-related firms such as software and online information services, rather than the broadband television distributors, were the most active firms in forming strategic alliances during this time period. This may signal the nature of an Internet-driven broadband television market and the fact that the current ¡°broadband television products¡± are still evolving and these sectors are most in need of alliances to minimize uncertainty, share resources, and obtain access. Finally, unlike what was suggested by previous literature (Dowling, Lechner, and Thielmann 1998), mergers and acquisitions, not non-equity alliances, were the dominant strategy for the U.S. broadband television market. Complementary convergence, in the context of broadband television, seemed to be increasingly accomplished through structural alliances.
The differences in alliance strategies between telcos and cable illustrate the two groups¡¯ different emphases in the development of their core competencies for the broadband television market (see Figure 6). It seems that the telcos are focusing on expanding their ability to offer a seamless, top-down, integrated broadband television service by securing access to Web-based content packagers, access service providers, and better navigating/interfacing tools. In contrast, the cable firms are focusing on developing their ability to offer attractive, enhanced cable programming by allying with the traditional as well as new television programming packagers. It is possible that television applications of broadband may not be central to telcos¡¯ broadband strategies at this stage as the telcos chose to focus on their existing core competencies in areas of communication networks and informational services, rather than consumer television content services.
This study is limited by its reliance on a somewhat outdated industry classification system (i.e., the SIC system) and the necessity to limit its alliance analyses on the primary participants (rather than all participants) of a non-M&A alliance and their economic activities. The arbitrary use of keywords to identify strategic alliances heavily relied on the trade literature descriptions and might have excluded certain conglomerate-style diversifications. Finally, only 5-year series of data were used in the analysis which might represent an unusual short-term pattern. Further studies may be conducted by using a case study approach to examine the leading firms from both the telco and cable sector, by expanding the comparisons of alliance patterns for firms at the different stages of the strategic architecture, or by including the wireless broadband distributors.
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Endnotes
1. In their study, ¡°strategic architecture¡± is used as a metaphor that likens the design of social systems such as an industry to the design of physical artifacts such as a building. Just as architecture is the infrastructure that shapes physical space to meet human needs, the strategic architecture of broadband television is the basic structure that shapes a firm¡¯s behavior space in carrying out its strategic objectives in this industry.
2. Though wireless broadband systems such as DBS are capable of providing broadband television services as well, for the purpose of this study, we have chosen to focus on the two leading broadband distributors, cable and telephone, the wire-line network providers.
3. A complementary convergence occurs when resources and competencies from different industries are combined to form new functions that complement the existing ones. The existing products continue to exist because of their uniqueness but are enhanced as a result of the convergence. Under this view, for example, cable and telephone would continue to supply individual core products but the introduction of cable telephony or telephone video-on-demand adds value to the existing products. See Dowling, Lechner, and Thielmann 1998.
4. Alliances in all formats, including mergers and acquisitions.
5. The M&A database includes domestic transactions (i.e., with U.S.-based firms as target) since 1979 and international transactions since 1985. It is updated daily using over 200 English and foreign language news sources; SEC filings and their international counterparts; trade publications; and wires and proprietary surveys of investment banks, law firms, and other advisors. Variables such as asset sales & divestitures, rumored & seeking buyer transactions, tender offers, privatizations, target and acquirer profiles (industry, location, parent company information), event history, and/or other financial information on target and acquirer are included in the database.
6. The non-M&A database, separate from the M&A database, includes domestic and worldwide alliances since 1988. It is updated daily using the sources of SEC filings and their international counterparts, trade publications, wires, and news sources. Variables such as participant profile, capitalization, purpose of venture, and business and products involved are included in the database.
7. Both the M&A and non-structural alliance datasets include the U.S. transactions/ alliances from September 16, 1996 to September 15, 2001.
8. The SIC system is a four-digit code for classifying firms according to their economic activity. To identify the SIC codes that are related to our definition of the ¡°broadband television¡± industry, we utilized the industry descriptions published by the U.S. Census Bureau and the Department of Commerce and compared them with the characterization from the proposed value chain and strategic architecture. The broadband television SIC codes include 3651, 3661, 3663, 3669, 4813, 4833, 4841, 7372, 7375, 7379, 7812, and 7822.
9. In 1997 a new system, North American Industry Classification System (NAICS), was introduced that reflects the greater breakdown of information with its 5-6 digit lengths. Nevertheless, almost all financial databases continue to use the SIC system as the classification standard.
10. The keywords identified were television (TV), cable, broadband, online, Web, Internet, video, broadcast, satellite, interactive, and digital subscriber line (DSL & ADSL).
11. An alliance is classified as domestic here when the main activity of the alliance is based in the United States.
12. At least one of participants in the non-M&A alliance has to be in one of the broadband television SIC codes to be included.
13. Because there is no differentiation between the acquirer and target in non-M&A alliances, we identified the levels of relatedness and sameness by simply comparing the alliance partners¡¯ SIC codes.
14. For each non-M&A alliance, in addition to listing the participants¡¯ SIC codes, the database also assigned an SIC code for the newly formed alliance based on its new, main economic activities.
About the author
Sylvia Chan-Olmsted (Ph. D., Michigan State University, 1991) is an Associate Professor of Telecommunication in the College of Journalism and Communications at the University of Florida. Her research focuses on media economics and strategic management/marketing in telecommunication industries.
Jae-Won Kang is a doctoral candidate in the College of Journalism and Communications at the University of Florida. His research interests are in the consumer adoption of interactive media.
