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July 11, 2014

Should Media Consumers Worry About Consolidation?

Posted by Vaibhav Bakre (View Profile | View All Posts) at 5:33 AM

AT&T buys DirecTV in multibillion dollar deal [Source: http://www.youtube.com/watch?v=kS_lkNXL68g]

Very often we hear of industry consolidation in the media and telecommunications space. Take the recent announcement by AT&T to acquire DirecTV, for example. The press releases that went out talked of how the sheer size of the combined company would have many benefits. The belief is that a merger of this stature would bring economies of scale, enable investments, and help the end-users--the customers.

Consolidations like this, however, are not just for the customer's benefit. The truth is, Pay TV companies are facing tough competition from new entrants in the market, like Netflix and Amazon Fire TV. These new entrants not only stream music and content via the Internet but also create their own content! Moreover, the customer demographic for Pay TV companies is also changing. Younger consumers don't have the kind of loyalty to the traditional TV medium that their parents do. They stream content on their mobiles.

No doubt, market is becoming more dynamic each day. Therefore, it is imperative for Pay TV companies to continuously innovate. A merger can provide both players with an opportunity to bring their strengths to the table and together, they can evolve with the changing, dynamic times.

Then there's the question of an increasing customer base with every merger. According to reports, the AT&T and DirecTV consolidation will triple AT&T's customer base. Naysayers in the industry, who were alarmed at the financials of this particular deal, wondered what else a company like AT&T could do with the money being spent to buy DirecTV. In such a scenario, the question we would have to ask ourselves I this--is it better to have five companies spend $1 billion each investing in technology transformation and spreading it over, say, 5 million customers? Or is it optimal for one company to spend between $3 billion and $4 billion on a customer base of say 25 million? I would have to answer the latter. Scale matters when investments are so massive. If spending a little more money and joining hands with another company will help companies to reach out to a much larger customer base - then that's the way forward.

Thirdly, there remains the tension between content producers and the distributors. I think it's helpful to think about this issue in the context of the well-known "5 Forces" theory from Harvard Business School's Michael Porter. Media producers are churning out content. Then the television networks and syndicates buy the content and distribute it. As it stands now, there are a handful of large content producers and several Pay TV companies. This is a classic case, as in the 5 Forces, of power tilting towards suppliers. Everyone who knows this industry understands that content is king. So what do you have when fewer suppliers are negotiating with more buyers? Nothing close to an equilibrium, that's for sure. No wonder every time a content renewal deal is secured we see a bit of old fashioned posturing and arm-twisting from both sides. Now the buyers are consolidating. If anything, the situation is providing buyers with a much-needed bargaining power.

Mergers and acquisitions are here to stay. But, it's important to remember that consolidation is only the starting point. Companies cannot rest easy, as they are still competing with new, emerging players. To stay ahead of the game, they have to remain nimble in order to offer positive consumer experiences and increase consumer mindshare. Also, America's Federal Communications Commission (FCC) and other regulatory government agencies have to play assertive roles to ensure that consumers will benefit from these mergers, in the short and long runs.

Certainly, these mega-mergers are game changers in the industry. However, consumer satisfaction is at the top of every enterprise's mind. At the end of the day, consumers will still have a bouquet of choices at their disposal. There's nothing to worry about really, from the consumer standpoint.

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