CBS-Viacom and the Effects of Media Mergers: An Economic Perspective.

• Author: Waterman, David

1. INTRODUCTION

   Like other large-scale mergers between media corporations, the proposed CBS-Viacom combination has attracted a great deal of public attention. It immediately rose to the top of the national news agenda when announced in September 1999, and congressional hearings followed on October 28.(1) The merger plan brings together the extensive motion picture and television production, cable network, video retailing, television station, television network, and publishing assets of Viacom, Inc. with the television network, radio station, and cable programming holdings of CBS, Inc., to create the world's second largest(2) media conglomerate (behind Time-Warner), having combined 1998 revenues of $18.9 billion. (A more complete description of the merger elements appears in Appendix Table 1).

   The CBS-Viacom debate has raised important questions about undesirable effects that this merger--and media mergers more generally-may have on our economy and society. Like mergers in other industries, media mergers can have adverse effects on prices, output levels, and other elements of economic welfare. Media mergers are of exceptional policy interest, however, because they may also threaten the diversity of voices or a free "marketplace of ideas" in the United States.

   Among the main issues that have been raised about CBS-Viacom are whether the merger will lead to excessive market power or a reduced diversity of voices within particular media market segments, such as in broadcast networking or in local radio and television station markets. A second issue is the effects of increased vertical integration, especially the combination of CBS's television network with the movie and television production facilities owned by Viacom. Will this integration increase barriers to market entry by independent suppliers of television programming, to the detriment of program diversity and freedom of market access by program producers? A third, broader concern about CBS-Viacom involves the growing size of media conglomerates in the United States. Does the CBS-Viacom merger take a significant step toward the concentration of control of the all media in the United States into too few hands? In the words of Senator Paul Wellstone, who testified at the October 28 Senate hearing:

   Mr. Chairman, I think most people would be shocked by the degree of media concentration that has occurred in the last [fifteen] years. When Ben Bagdikian wrote "The Media Monopoly" [sic] back in 1983, about [fifty] media conglomerates controlled more than half of all broadcast media, newspapers, magazines, video, radio, music, publishing, and film in this country. By 1986, that number had shrunk from [fifty] to [twenty-nine]. By 1993[,] it had shrunk even further, to [twenty] firms. Today fewer than [ten] multinational media conglomerates-Time/Warner, Disney, Rupert Murdoch's News Corp, Viacom, Sony, Seagram, AT&T/Liberty Media, Bertlesmann, and GE--dominate most of the American mass media landscape.(3) Of special significance in this respect--and receiving perhaps the greatest amount of attention at the October 28 hearing--is the threatened concentration of control by a handful of corporations over the major sources of news and information in the United States.

   Related questions about the effects of CBS-Viacom and other media mergers on the quality and integrity of news were also raised at the CBS-Viacom Hearings.(4) Both journalists and academics have in fact devoted much attention in recent years to the effects of common ownership of news with entertainment or other nonmedia products on news reporting.(5) The blending of entertainment into news programming, the increased subservience of news organizations to budget-minded executives, and the rising specter of conflicts of interest in news reporting have all been linked to the increasing size and breadth of media conglomerates.

   In this Article, I address these issues from an economic perspective. In doing so, I begin with the premise that preserving a diversity of voices and open access by the creators of media products to the public is of paramount importance. I also make no dispute of claims that the blending of news and entertainment and an increased focus on profits from news operations have deteriorated the quality and integrity of commercial news in the United States. With some caveat, however, I conclude that the concerns of this merger's critics are misdirected. In my view, the CBS and Viacom merger is unlikely to pose a serious anticompetitive threat or a threat to the diversity of media voices.

   In summary, I argue that the most appropriate criterion for evaluating either the economic or diversity-of-voices effects of media mergers is the extent to which they increase horizontal market concentration within particular media market segments or geographic areas. In the case of CBS-Viacom, those increases in concentration appear to be relatively minor or easily resolved by divestiture. With respect to vertical integration, I argue that the combination of television content and distribution facilities is unthreatening, mostly because the nature of creative production limits foreclosure effects on unaffiliated program suppliers. In terms of the overall size and control of media conglomerates, I offer some statistical data suggesting that while media conglomerates are in fact growing far larger, this growth appears much less dramatic when compared to growth in the size and diversity of the media industries themselves. With respect to the various issues about the declining quality and integrity of news raised in the context of CBS and Viacom, it is very difficult to know the effects that conglomeration of media have. It seems likely to me, though, that technological advance and deregulation leading to increased competition in the media have played the overwhelmingly important role in those changes.

2. HORIZONTAL CONCENTRATION WITHIN PARTICULAR INDUSTRY SEGMENTS

   There is a popular conception that media conglomerates compete with each other as massive, self-contained corporate entities in which all the media together are the playing field. For the most part, however, competitive battles in the media are actually waged within much smaller industry segments, such as among the national television networks, among the radio stations within a certain local market area, or within particular niches, such as televised sports or news magazines. Cross-media ownership can also be significant, such as within local market areas where packages of television, newspaper, or radio advertising can be offered by one firm.

   The importance of maintaining competition within definable industry segments is uncontroversial. Horizontal concentration levels are an overwhelming concern of the Department of Justice (DOJ) and the Federal Trade Commission in their antitrust investigations of mergers and acquisitions because the ability to exert power over prices is directly related to the degree of concentration within the relevant market.(6) The Federal Communications Commission's (FCC's) concerns are broader. They involve diversity of voices and access issues as well as the preservation of competition per se. To a great extent, however, the FCC also focuses its regulations and merger investigations on market shares within narrowly defined market segments. Of course, the appropriate levels of concentration deemed necessary to insure adequate access and diversity of voices might be higher or lower than those necessary to preserve economic competition. But the focus on horizontal market shares is appropriate because preserving competition is mostly consistent with preserving access and diversity of voices.

   As proposed, the CBS-Viacom merger would seem to result in fairly minor increases in horizontal market concentration. The merger will combine radio station, television station, and outdoor advertising properties of CBS and Viacom in several local markets. To the extent that the DOJ might conclude that such ownership consolidation would threaten competition in advertising within these market areas, divestitures are justified on straightforward antitrust grounds as a condition of the merger. On the national level, a combination of the CBS and Viacom television station chains would reportedly reach forty-one percent of U.S. television households, in violation of the FCC's thirty-five percent national ownership reach cap. If local markets are themselves concentrated, media chains with substantial national market shares can have anticompetitive effects on programming supply or advertising markets.(7) Given the FCC's fairly cautious restrictions on dual TV network ownership within the same market, however, it seems unlikely that this degree of concentration could result in anticompetitive control over national television advertising...