Oligopoly and the Disney Company

1. INTRODUCTION

Oligopolies have been around ever since there is trade. However, it has only recently gained grounds in this age of globalisation. Never before has oligopolistic competition been so fiercely contested across so many industries.

The media industry in the United States of America (US) is one such industry. As a powerful communication tool, the media has attracted many companies but only a handful has grown big. These media giants have dominated the local market and are currently seeking to conquer the global media industry in search of better profits.

One of these media giants is the Walt Disney Company (Disney). Its dramatic growth from a small company to become an oligopolist in the media industry offers an interesting case study.

This report studies Disney’s nature of business in the US media market. It starts with an outline of the media oligopoly in the US, which is imperative to appreciate the nature of Disney’s business. Moving on to the next section, it briefly describes the history and corporate structure of Disney.

Following that, the study analyses Disney’s nature of business in relation to oligopoly. Here, it correlates the characteristics of oligopoly with the nature of Disney’s business.

The subsequent section proceeds to discuss the influence that oligopoly has on Disney’s strategies. It demonstrates how Disney develops these strategies under the oligopoly structure to remain competitive.

In the final section, this report discusses the influence of oligopoly on Disney’s behaviour. It assesses how Disney behaves and responds towards an oligopolistic market structure.

2. THE MEDIA OLIGOPOLY

When a handful of big corporations dominate an industry, the industry is said to be concentrated (McCain n.d.). The concentration ratio (total output from the four largest firms) is used to measure the degree of concentration in the market. Generally, if the concentration ratio is more than 40%, the market is considered an oligopoly (O’Sullivan & Sheffrin 2003).

The USA media industry is an oligopoly because it is concentrated with five big companies. According to McChesney (1998):

The US media industry covers a very broad spectrum of related businesses. Any business that is related to the media such as film production, broadcasting, distribution, movie theatres, television, book publishing, newspaper publishing, recorded music, etc. belongs to the media industry.

Traditionally, these businesses were all individual oligopoly markets with a handful of firms trying to control as much production in their own fields as possible. In general, these firms were different firms dominating each of these businesses (McChesney 1998, 1999).

For years the US laws and regulations prohibited vertical integration and mass ownership in the media industry (McChesney 1999). However, some of these restrictions have been relaxed or eliminated recently. Media companies immediately capitalised on this opportunity to begin conglomeration of media ownership (McChesney 1998, 1999).

Figure 1 shows the rate of market concentration and conglomeration over the last two decades. By 2000, there are only six of these media giants competing among themselves. Some media observers said that the media market is becoming non-competitive because of these media giants’ domination.

(source: Baum 2003)

Figure 1: The media market concentration

Their fears materialised when the Federal Communications Commission removed all remaining media ownership restrictions in June 2003. It opened the way for even more media consolidation and really showed how non-competitive the media market became (Kaufman 2003; Gangadharan 2003).

Today, five media conglomerates have emerged to dominate and control the media market, cementing the US media economic environment with striking oligopoly features such as interdependence, barriers to entry, vertical integration and economies of scale (Martin 2001; McChesney 1998). Figure 2 shows the five media conglomerates (please refer to Appendix A for details of conglomeration).

(source: Martin n.d.)

Figure 2: The Media Conglomerates

These five media giants are involved in the production and distribution of media products targeted towards the consumers (Rohn 2004). Figure 3 shows that together they dominated 75% market share of the US media industry in 2003 and reach 80% of the prime-time TV audience through their combined broadcast and cable outlets (Hannaford 2004; Peers 2003).

(source: Hannaford 2004)

Figure 3: The media conglomerates market share

Of the five, Disney is perhaps the most famous because generations of children have grown up with its cartoon characters.

3. THE WALT DISNEY COMPANY (DISNEY)

Walt Disney started out by producing short animated films in 1922 and in 1928 introduced Mickey Mouse, the world most famous cartoon character shown in Figure 4 below (Olsson 1996; Kramer 2002). Following this breakthrough, Kramer (2002) found that Disney proceeded innovatively with new film technologies of sound and colour that resulted in the first successful animated feature Snow White and the Seven Dwarfs in 1937.

(source: Disney.com 2004)

Figure 4: Mickey Mouse

There was no turning back after that. Disney went on to become a major international corporate giant in the US media industry and a model for other media companies. After acquiring the ABC television network in 1995, Disney finally became a fully diversified media corporation and was the most recognisable brand in the entertainment world (Kramer 2002).

Today, Disney furnishes our TV programs, movies, videos, radio show, music, books and other recreational activities through its various media holdings shown in Figure 5 (please refer to Appendix B for details). It has built its entire business such as the Disneyland amusement park, around its cartoon characters.

HOLDINGS

publishing

broadcast and cable

movies

financial and retail

multimedia

music

theater & sports

theme parks and resorts

(source: Columbia Journalism Review 2004)

Figure 5: Disney corporate structure

4. DISNEY’S NATURE OF BUSINESS

Since oligopoly is a market structure dominated by a few media players, these corporate giants control the demand, supply and pricing of the industry products. Disney alone has a market share of 25% and accounted for 21% of the prime time hours (Hannaford 2004; Consumer Federation of America 2003). Furthermore, its television networks reached around 24% of the national audience (Kaufman 2003).

Such business practices normally develop certain characteristics inherent to the oligopolistic market structure. As Disney evolved into a conglomerate its business characteristics turned towards oligopoly. Its nature of business can be analyse to identify them with the characteristics of oligopoly.

4.1 Interdependent of the competitors

According to Rea (2003, p. 11) ‘…interdependence of the firms in the industry is a significant feature of oligopoly…’. Rea (2003) explained that an oligopolist must consider the reaction of other firms in the industry regarding its every decision and vice versa. This feature can be seen in Disney’s nature of business.

For instance, oligopolists’ pricing decisions are mutually interdependent because the price of one producer significantly affects the others’ sales. Oligopoly pricing decisions can be so complicated and difficult to predict that theories of oligopoly price determination work best only in the short run (anything can happen in the long run) ( 2004).

In fact, Katz and Rosen (1998) found that there is no one theory that describes the oligopoly behaviour for every market. Very often a firm subscribed to different oligopoly models for different products under different circumstances. To illustrate the interdependence, one of these models can be used to explain Disney’s pricing decision as an oligopoly price leader. With five large firms dominating 75% of the industry, avoidance of price competition is necessary. If Disney lowers its prices, competitors are likely to follow and forsaking higher profits.

As an example, Jones and Robinette (1999) found that Disneyland Paris has significant impact on the theme park industries in France and Europe. They believed that Disney will provide price leadership in the market because it has the lowest cost of production and others will price to Disney levels or risk being underprised and exit the market.

Figure 6 explains this situation. Here, Disney is shown as the dominant producer (Figure 6b) with its other competitors assumed to be the small producers (Figure 6a).

Legend: MC – Marginal Cost Curve, D – Demand Curve, MR – Marginal Revenue Curve

(source: 2004)

Figure 6: Oligopoly price leadership

At a price of P1, Disney’s competitors supply the entire market for the parks at the quantity demanded, Q2. Therefore, at P1 or above, Disney will not sell anything. At prices below P1, say Pd, the total quantity demanded, Q3 exceeds the total quantity supplied by Disney’s competitors. Therefore, Disney can sell the difference between the quantity supplied by its competitors and the quantity demanded by the market i.e. Q3 – Q1 ( 2004).

As the price falls below P1, Disney can sell more and more quantities thus forming Disney’s demand curve, Dd. With its accompanying marginal revenue curve, MRd, and marginal cost curve, MCd, its profit-maximizing output level and price are Qd and Pd respectively. So, Disney sets its price, Pd, and its competitors must follow otherwise their sales will be limited ( 2004).

Alternatively, if Disney were to increase its prices, the others might not in order to gain market share. Taylor (1996, pp. 8-9) said:

It is therefore prudent not to lower prices and only raise prices when knowing the other firms will do so. The largest or lowest-cost or most aggressive firm will often emerge as the price leader. This is totally an informal and unwritten collusion since any actual agreement would violate the antitrust laws.

Apart from pricing decision, interdependence also lead to collusion. Oligopolists discover that sometimes in order to maximise profit it is best to collude among themselves and act like a group monopolist (Mankiw 2001, p. 351). Overt collusion leads to a formal cartel setup whereas tacit collusion is an informal agreement among members on any business issue ranging from price and production to government issues (Sloman 2003).

For instance, Grey (2000, pp. 1-2) discovered that:

In order not to be missed out on government financial credits amounting to US$200 million in the year 2000, Disney’s ABC network colluded with its competitors and the government to include anti-drug messages into TV scripts in lieu of the legal obligation to broadcast, free of charge, government spurred public service ads against drug use.

4.2 Barriers to entry

Barriers to entry discourage competition and are significant features of the media oligopoly (Sloman 2003). A barrier to entry is a restriction on the entry of firms into a market or industry. According to the website AmosWEB (2004), the primary barriers to entry are resource ownership, start-up and government policies. Ologopolists create barriers to entry so that their price remains inelastic i.e. an increase in price resulted in an insignificant drop in demand (Sloman 2003). This simply means that their product is so much in demand that customers are willing to pay extra for them as shown in Figure 7 below.

(source: Investopedia.com 2003)

Figure 7: Price Inelasticity

Disney’s nature of business has created relatively high entrance barriers for other competitors. Disney controls the family entertainment market because it has economies of scale in production, high fixed cost and low variable cost. The company knows what the target customer wants and has focused on market diversification with a wide array of products and services. That makes it very difficult for new and small firms to develop brand recognition/identification, product differentiation and production processes (Olsson 1996; Taylor 1996; Chinloy n.d.).

In addition, Baum (2003) mentioned that in the media market, the high sunk costs required to establish a media outlet constitute a heavy barrier to entry. This is true because Olsson (1996) discovered that competitors find it difficult to penetrate into the highly specialized industry in which Disney is operating due to the large initial capital investments required to enter the industry.

Furthermore, with the relaxation of the Federal Communication Committee’s rules and regulation, media oligopolists find it easier now to collude and make supernormal profit. They can erect entry barriers and challenge the theory of contestable markets by making the contest difficult (Sloman 2003). Chinloy (n.d.) argued that Disney would simply purchase the up-and-coming small firm or rely on its established relationships with customers or suppliers to limit the activities of smaller firms.

4.3 Vertical Integration

Another feature of oligopoly is vertical integration. Vertical integration allows media corporations to control and dominate the market by owning different media companies to produce and distribute their own products. This control and dominance will subsequently lead to price stability even though there is a change in cost thereby maximising profit.

This price stability was noted by Paul Sweeny in 1939 who developed the kinked demand curve shown in Figure 8 to reflect his observation (Sloman 2003). According to Sloman (2003), Sweeny argued that there is price stability even in a non-collusive oligopoly with the assumptions that competitors will follow price reduction set by the dominant player (the inelastic part of the curve) and will not do so when the dominant player increases price (the elastic part of the curve). Together with the marginal revenue curve and change in marginal cost curves, price stability is achieve anywhere vertically within the marginal cost curves.

(source:

economics/Sisir/Econ120/ chapter13a.pdf> n.d.)

Figure 8: Kinked demand curve

Such is the impact of vertical integration that it is no wonder that media companies are accelerating their efforts lately. Vertical integration means that businesses have a buyer-supplier relationship that represents stages of production (Management Guru n.d.). In other words it is the process where media firms own two or more distinct media sectors.

With vertical integration, media firms not only produce content but also own distribution channels to display their wares. Currently, vertical integration involves the combination of film and television show production with the ownership of cable channels, broadcast networks and stations, and motion picture theaters (McChesney 1998, 1999). As McChesney (1999) noted:

If a media conglomerate has a successful motion picture, for instance, it can promote the film on its broadcast properties, distribute on its distribution channels and then use the film to spin-off television programs, CDs, books, merchandise and much more.

Disney’s vertical integration has resulted in ownership of the ABC network, ten TV stations, 30 radio stations, cable programming (ESPN, the Disney Channel, A&E, E!, Lifetime), film studios (Miramax, Walt Disney Pictures, Touchstone, Hollywood), the Hyperion book company, ESPN magazine, music labels (Walt Disney Records, Mammoth, Lyric Street), amusement parks and sport teams (Anaheim Angels, Mighty Ducks) (McChesney 1999).

By integrating vertically, Disney’s animated films like Pocahontas and Hunchback of Notre Dame which were only grossing roughly US$100 million were able to generate US$500 million in profit for Disney because of its high prise stability through TV shows on its ABC network and cable channels, amusement park rides, comic books, CD-ROMs, CDs and merchandising (through 600 Disney retail stores) (McChesney n.d.).

The end result is that Disney, with its enormous resources and diverse holdings are economically able to develop and promote expensive projects. Spending a lot of money on a project does not ensure economic success but rather it means to be given every chance possible to succeed in the competitive media marketplace (Croteau & Hoynes 2001).

4.4 Economies of scale

The fourth significant feature of oligopoly is economies of scale. According to Samuelson and Nordhaus (1995) economies of scale is where firms are able to increase an extra unit of production at a lower average cost.

Majority of the costs in the media business are fixed cost i.e. the basic costs required to operate, which do not change significantly in the short run (Rohn 2004). In the long run, all cost is variable cost.

In the broadcast media market, Baum (2003, p. 15) said that ‘…economies of scale lead to market dominance, spectrum limitations and other features resulting in low elasticity of substitutes…’. This has led Disney to seek greater profits through economies of scale in the media business (Foote, 2004).

For instance, Disney spent USD3.6 billion in its Disneyland Paris theme park of which a large portion is basic expenses for salaries and facilities that did not change significantly with the number of tourist arrivals or duration of opening hours. Only very large companies can meet such large capital requirement (Olsson 1996; Rohn 2004).

Average cost in Disneyland Paris is the total cost involve in operation divided by the total number of tourists. Park operation, therefore, have high economies of scale in the long run because the cost of operating an additional hour (marginal cost) is lower than the average cost (Rohn 2004) as shown in Figure 9 below.

(source: Williams n.d.)

Figure 9: Economies of scale

With the French government investing USD 1.2 billion (40%) in Disneyland Paris, providing public transportation facilities and offering a large tax relief (from 18.6% to 7%) on the cost of goods sold, the operating cost went down as the number of visitors went up. Economies of scale were thus enjoyed with higher profits (Olsson 1996; Rohn 2004).

5 INFLUENCE OF OLIGOPOLY ON COMPANY STRATEGIES

Media companies are business entities and the ‘theory of the firm’ states that the primary goal of any business entity is to maximise profit (Sloman 2003). The ‘theory of the firm’ assumes that a company’s every decision is made to maximise profit regardless of the market structure.

Taylor (1996, pp.8-9) said that ‘…oligopolists that follow a price leader do not engage in price competition, but they still contest for market share with other non-price strategies in search of profit…’. It is not surprising then that Disney’s business model focuses on product creation, brand development and property development in order to sustain the control of its market share (Hong Kong Trade Development Council 2004).

In 2001, Croteau and Hoynes (2001) examined some of the profit oriented non-price business strategies that have emerged as a result of oligopoly. Some of these have been adopted by Disney. Although these strategies were discussed individually, they often overlap to make up an overall integrated business strategy.

5.1 Manipulating demand through advertising

One of the ways to improve market share and profit is to increase demand. In avoiding price competition, increasing demand through advertising is a very important strategy (Sloman 2003). Taylor (1996) concurred that the large firm is often in a position to create a demand for its own product through advertising.

Disney’s strategy to increase demand is to manipulate the demand through advertising. In other words, Disney uses advertisements to attract customers to its products. In this aspect of marketing, Disney has been successful in getting the advertising message across the mass through perception, awareness, understanding, persuasion and retention (Wells, Burnett & Moriarty 2000).

Instead of stating the price to avoid a price war, Disney focused on added value in their advertisement like the one shown in Figure 10 which emphasised on winning a family holiday to Disneyland Resort.

(source: Stien 2002)

Figure 10: A Disney advertisement

Furthermore, Disney made full use of vertical integration to advertise its products by broadcasting them in its vast media networks. For example, to gain more audiences to its ESPN radio, Disney gained the rights to broadcast the 1996-97 NBA basketball season and advertised this program in its ABC Radio Network. This strategy managed to attract 42 million adult customers to NBA on ESPN radio (Wells, Burnett & Moriarty 2000).

In another example, Schiffman & Kanuk (2004, pp. 456-57) wrote that Disney manipulated demand with advertisement to:

Entice baby boomers to vacation at its theme parks without their kids so that they can feel young again. This is because baby boomers (those born between 1946 and 1964) are the single largest distinctive age group alive today, make important consumer purchase decisions and contain some trendsetting consumers.

Once this market segment is captured, Disney can proceed to erect entry barriers through customer loyalty.

5.2 Synergy

One of the fruits of vertical integration is synergy. According to Croteau and Hoynes (2001) synergy is ‘…the concept of different elements cooperating to achieve results that none could individually…’. Media conglomerates can maximise benefits from synergetic ownership of many different media firms. When Disney took over ABC, Disney CEO Michael Eisner told the press, “I’m optimistic that one plus one adds up to four”, meaning the whole is greater than the sum of its parts.

Synergy involves cross development of an idea across several media such as films, television, cartoon, comics, soundtrack, etc. with each adding value to the other. It provides Disney the advantage of generating huge profits from simultaneous revenue streams (Croteau & Hoynes 2001).

An example of such a synergy was provided by Tompkins (1996, p. 1) when he
researched into the Disney company:

The movie Aladdin was distributed via Buena Vista into various revenue generating film markets including the motion picture theaters (domestic and abroad), home video, Disney Channel and television. Return of Jafar, a takeoff of the original movie, was the first ‘made for video’ Disney movie, skipping the theaters altogether. The parks/resorts/shows sector of Disney also generated entertainment and revenue through parades and shows. Last, Disney’s consumer products platform generated 4,000 Aladdin products, sold through Disney Stores, records, videogames, CD-ROM software, promotional tie-ins with Burger King, even an art auction of individual animated frames from the movies. In total, the movie and all other activities springing from Aladdin racked up $1 billion in sales.

The huge profits are generally reinvested into research to find better and cheaper resources so that economies of scale can be attain and sustain.

5.3 Branding

In the oligopoly environment, US media companies concentrate on branding as a strategy because they have the capital to promote the brand. It was estimated that creating a recognised brand costs from US$20 million to US$40 million in television advertising in the first four months alone (Croteau & Hoynes 2001).

Croteau and Hoynes (2001) mentioned that:

Disney uses its brand-name in association with wholesome family entertainment to sell all sorts of products emblazoned with the Disney brand. Its cartoon characters are in film, television, videotape, the Internet, consumer products and theme park attractions. Over time, their appeal built up a Disney brand that has strong loyalty among customers.

According to Interbrand, a leading brand consultancy, Disney is the six most valuable brand in the world for the year 2004 (please see Figure 11) ( 2004).

(source: 2004)

Figure 11: Disney’s brand value for year 2004

Regardless of the content, a new animated movie, for example, will enjoy an edge over competitors if it is a new Disney animated movie. The same goes for Disney toys, clothing and other peripherals. Although Disney does not manufacture them it appropriates most of the profit from the royalty collected from manufacturers ( 2004).

Disney is also capitalising on a mixture of cross media channels to extend its brand’s reach. For instance, Disney has worked at developing multiple brands such as the Touchstone, Hollywood and Miramax movie label (and production house) to produce more adult-oriented, live action movies without tarnishing Disney’s family image (Hong Kong Trade Development Council 2004; Croteau & Hoynes 2001; Tompkins 1996).

Tompkins (1996) reported Eisner as summing it up:

At Disney, our strength in family-oriented films, especially animation, gives us strong and unique brand identification that lifts much of our output (end products) out of that risky ‘hit-driven’ category. The Disney logo on a film or TV show (or consumer product or at a theme park) has come to mean ‘top-quality for the entire family’. No other …logo says that.

Without price warfare, branding is perhaps the most important strategy to create demand, increase market share and improve profits through brand awareness which again will lead to creating barriers to entry and achieving economies of scale.

5.4 Joint venture

Interdependent of the firms has led many media companies to form joint ventures. While competition in the US media market can be and is ferocious, the aim of joint ventures is to reduce competition and divide the media pie among the handful of giants.

As each merger or acquisition between conglomerates gets more and more expensive the last few remaining conglomerates rely increasingly on strategies of cooperation and joint ventures with their competitors, as a way of reducing risk (Croteau & Hoynes 2001). McChesney (1998) found that the media giants each employ equity joint ventures with their competitors to an extraordinary extent.

Disney too, share ownership with its competitors on many media companies. (McChesney 1999). For example, Disney and General Electric jointly owned History, a cable network that shows historical events (Consumer Federation of America 2003). Its lucrative joint venture with Pixar generated 50% of the film division’s profit on certain years with Computer Generated Imagery (CGI) movies like Toy Story and Finding Nemo (Frost 2004). In 2002, Disney and News Corporation launched a new video-on-demand service, Movies.com which provided films on both cable and the Internet (BBC News 2001).

6 INFLUENCE OF OLIGOPOLY ON COMPANY BEHAVIOUR

While Disney must consider competitors’ reaction to its decision, likewise Disney must also react to its competitors’ decision. This reaction is generally a response to the media industry’s oligopolistic nature of business.

The way Disney responds in the oligopoly environment influences its behaviour. Here, profit maximisation is again the driving force because Disney behaves in a way as to achieve maximum profit. Hence, oligopoly has an influence on the way the company behaves.

6.1 Conglomeration

When Disney’s saw its competitors acquiring other media sectors through vertical integration and enjoying all the benefits, it responded similarly with the acquisition of Capital City’s ABC television network and other media companies. By getting bigger through vertical integration, Disney does enjoy some distinct advantages as a conglomerate.

One advantage is that Disney can afford to develop more expensive projects since it controls or has access to enormous amounts of investment capital. It has continuously produced animated movies costing more than US$50 million such as The Emperor’s New Groove (2000, US$100 million), Finding Nemo (2003, US$80 million) and Home on the Range (2004, US$100 million) (Waterman 2004). In turn, a successful project can be enormously profitable thus reinforcing Disney’s role as a dominant media corporation (Croteau & Hoynes 2001).

A second advantage of size is the ability to withstand short term losses. For every successful movie such as Finding Nemo, there are dozens of movies that make little or no money like Home on the Range (Internet Movie Database 2004). Disney can absorb the expensive media flop and still continue making movies (Croteau & Hoynes 2001).

A third advantage is to prevent takeover. In February 2004, Comcast made a bid to acquire Disney for US$54 billion at US$26 per share (La Monica 2004). However, analysts said that Disney’s share was worth US$30 per share. A fairer price for Disney would then be US$63 billion (Isidore 2004). In April 2004, Disney rejected the proposal and Comcast withdrew its offer saying that Disney was too costly (Phillips 2004). Therefore, with its size and sound financial standing, Disney was able to thwart off the hostile bid.

(source: www.cablevisiontechsneedrespect.com 2004)

Figure 12: Flyer on Comcast takeover bid on Disney

6.2 Globalisation

Content programming in the US media industry involves very high initial cost for development and equipment. Sometimes media giants fail to recover this cost domestically (Rohn 2004). With insufficient revenues from the domestic
market media companies find it difficult to claim a profitable market share (Croteau & Hoynes 2001).

In response to this, Disney ventured to sell their content to the foreign market. Disney’s motivation in globalisation is driven by content recycling to spread its production cost and gain economies of scale (Rohn 2004). Rohn reported that in 1993, Disney’s CEO Michael Eisner said:

Our products have been outside the US for decades, but all of a sudden we realised that the opportunities for growth outside that US are going to be much greater in the future than in the US.

Thus in 1996, Walt Disney Television International took charge and employed the global strategies ‘…to expand the children and family oriented Disney Channel into a global force and to establish global joint ventures for distributing its programming…’ (Rohn 2004, p. 86).

Today, Disney’s ESPN, Disney Channels, Playhouse Disney, Toon Disney and many others are established in France, Germany, the United Kingdom, Spain, Italy and Scandinavia. It has also reach the Middle East, Latin America and several Asian countries (Rohn 2004).

With immense business potential, the Chinese mainland has become Disney Consumer Products’ second largest market in the Asia Pacific after Japan. Today, the US entertainment giant has already established more than 1,000 retail corners or outlets throughout mainland China (Hong Kong Trade Development Council 2004).

Disney has come up with a multitude of great products to satisfy insatiable consumer demands around the globe. Licensing business has taken Mickey Mouse and other Disney characters around the world and into the Asia Pacific region. Mr. Norman Janelle, senior vice president and general manager of Disney Consumer Products (Asia Pacific) said:

We have been in Japan for many years, which is probably the first market that embraced Mickey and Disney as an entertainment character. The Japanese market is our largest single market outside the US (Hong Kong Trade Development Council 2004, p. 1).

With the relatively untapped foreign markets, globalisation presented unlimited opportunities for Disney such as global vertical integration and enjoy economies of scale to harvest greater profits.

6.3 Diversification

Oligopoly competitors frequently introduce new and multiple products. Reliance on a single product is suicidal during an economic downturn. Disney’s obsession with conglomeration is somewhat a risk reduction through diversification.

Instead of buying stock in various companies, Disney simply bought the companies in the progress of conglomeration. Spreading its finger in many different media business helps Disney to withstand downturns in any particular market. Croteau and Hoynes (2001, p. 8) said that:

If the movie business goes into a slump, perhaps revenue from publishing or music recording will take up the slack. In a couple of years, the expansion and contraction of particular markets may shift and movie revenue will be the cash cow that helps support other areas of the conglomerate.

As pointed out by Olsson (1996), Disney has been able to diversify its operations and products to hedge against decreasing sales in product lines by diverting into home video, film, merchandise, radio broadcasting, network television and in theme parks.

Diversification helps Disney to respond to its rivals’ barriers to entry in a particular segment. Dickerson et al. (n.d.) concluded that Disney is not well positioned to challenge AOL-Time-Warner horizontal internet portal with its GO.com portal. Instead, Disney has diversified into its individual branded Internet properties such as ABC.com, ABCNews.com and ESPN.com with much more success.

6.4 Technology

The advent of information technology (IT) has taken the media world by storm with its huge potentiality. In an oligopoly market, technology can provide economies of scale and barriers to entry.

For instance, the Internet is an advantageous but costly medium for promotion and advertising. As a Wall Street Journal report concluded, “building a brand in crowded Internet markets will require ever-larger spending on advertising and marketing.” Only the major media players had those sorts of resources to buy up promising ventures. (Croteau & Hoynes 2001).

In order to take advantage of the Internet, Disney purchased a $70 million controlling share of Infoseek, a web search site, and in 1998 launched its “Go Network” (Croteau & Hoynes 2001) thereby transforming its behaviour into a click and mortar company.

As an IT company, Field (2002, p. 2, 6) discovered that the Disney Internet Group business model was based on convergence i.e. an effort to combine the strength of a powerful offline traditional entertainment brand with the new generation of Web distribution and promotion. Hence, Disney’s strategy is to:

Develop unique and independent Internet properties that many people do not directly associate with Disney such as ABCNEWS and ESPN, while reserving its branded Disney products for Disney.com to strengthen customer relationships tied to Disney products and service.

Building brand through the Internet increases demand and subsequently economies of scale due to lower production cost.

Another example of Disney’s IT adaptation is Disney’s Imagineering tank i.e. the “how’d they do that” department, which is extremely creative and innovative. According to Tompkins (1996, p. 5), Imagineering helps Disney to:

Produce certain filmed entertainment, such as ‘Jim Henson’s Muppet Vision 3D,’ the first film to combine Audio-Animatronics with in-theater special effects. It also assists in the development of CD-ROM consumer products. Imagineering is instrumental in the creation of Disney theme parks and rides i.e. the group that makes standing in a Disney ride line feel like only 15 minutes, when it may actually be 90 minutes.

Imagineering has turned out to be a competitive advantage for Disney to erect entry barriers because its creativity is a tough act for competitors to follow.

7 CONCLUSION

As one of the five media conglomerates, Disney experiences oligopoly competition. Its nature of business shows oligopolistic traits such as interdependence of its competitors, barriers to entry, vertical integration and economies of scale. These traits are actually inter related to enhance Disney’s competitiveness and ensures Disney’s dominance in the media industry. Vertical integration increases Disney’s size so large that it is able to achieve economies of scale which create barriers to entry that resulted in market dominance whereby it has to consider competitors’ reaction to its business decision.

These oligopoly traits have influence on Disney’s business strategies. These strategies aim at maximising profit in an oligopoly environment through manipulating demand through advertising, synergy, branding and joint venture. These strategies work in combination to increase market share, lower production cost, increase advertising efficiency and build brand awareness. Disney’s joint ventures offer an ideal synergy potential to manipulate demand through advertising that build brand awareness.

Apart from that, these oligopoly traits have also influence Disney’s behaviour. Disney has reacted to the oligopoly media industry by being a conglomerate, diversifying, globalising and implementing new technologies. Disney behaves according to the industry trends to stay relevant and continuously in search of new foreign markets. Its conglomeration is advantageous to fight stiff competition and survive economic downturn with product diversification, global expansion and Information Technology implementation.

Disney has grown into a media company with an oligopolistic nature of business that has influence its strategies and behaviour. Growing in an oligopoly industry has turned Disney into the second largest media company after AOL-Time Warner (Cacace & Tucksmith 2003).

8 RECOMMENDATION

Though much has been done by Disney to get to where it is today, oligopoly treats exist constantly such as takeover and loss of market dominance. Much can still be done for Disney to survive in the oligopolistic media industry. Lately, Disney’s films such as The Alamo and Home on the Range failed to achieve box-office standard, performing below expectation. On top of that there was the Comcast hostile takeover bid. These treats happened because Disney was getting complacent and seemed to be resting on its previous laurels.

Dominating oligopolists devour the weak the moment they see an advantage in the weak company. Disney should focus on strengthening itself against oligopoly treats because apparently Comcast still harbours the desire to acquire Disney in the future. It may also be prudent for Disney not to over diversify into unrelated businesses. Over diversification clouds the purpose of core businesses at some point in time. Instead Disney is better off concentrating on its media products improvement, distribution, promotion and marketing.

The Internet is a very good medium for Disney to spread its brand and advertisement. Dial-up connection is slow and is limited to advertising Disney’s products. With the advent of broadband services, Disney’s venture into Movies.com must be improve because it is a positive step to increase its films audience. Broadband is fast and viewers can watch Disney’s latest films releases and promotions in the comfort of their homes.

Lastly, it is tempting to stray into the monopoly structure once the company becomes too dominant. It is more advantageous for Disney to remain an oligopolist because monopolist always attract unwanted Government attention which can be very restrictive. Collusion with its competitors is recommended to avoid being a monopoly. However, care must be taken to avoid collusion partners from opting out later.

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