Omens are not good for media mega-mergers

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The Independent Online
Of all contributors to the development of the modern business corporation, John D Rockefeller, the 19th century oil baron, stands out like a colossus. In many respects he invented it. But perhaps his most defining contribution was something that most of us would nowadays regard as blindingly obvious - the realisation that if you control distribution you essentially control the market place. Rockefeller developed this into a whole new business concept.

His domination of American oil refining went hand in hand with his domination of the rail network; no competitor was able to match his costs.

The concepts and systems Rockefeller developed are still there to be seen in the giant modern-day oil companies - only, unlike him, they have taken vertical integration a stage further. They are oil producers as well, something that Rockefeller spurned on the grounds that production is both risky and volatile. Much better to buy in product and make your margin on the refining and distribution, was his philosophy.

More than 100 years after Rockefeller discovered these basic business principles, America's media, entertainment, broadcast and communications industries seem collectively to have decided to try the same thing. Deregulation is the spark. Until very recently it was not possible to combine a Hollywood production house with a national broadcaster. Content and carriage, to use the jargon, was separated by a fire-wall of laws and regulations. All these are going and the same sort of business logic that compelled Rockefeller, can now be applied. Rapid technological change also drives the process. It has already spawned an awesome new raft of strategies, alliances, mergers and link-ups.

It is not at all clear, however, that the principles Rockefeller applied so successfully to the commodity business of oil can be duplicated in the world of popular entertainment. Though the parallels may seem striking - for oil strike read blockbuster movie, for a whole field read the Superbowl, and for the railroad read cable, telecoms and satellite - in truth they are superficial.

The fact is that nobody really knows if these mega-mergers and link-ups between culturally and organisationally very different companies are going to work. The omens are certainly not good. The deals are pricey and the strategies that justify them abstract - two of the most potent warning signals during merger booms.

Set against the clarity of Rockefeller's business vision, these are companies floundering around in the fog, unsure what the future holds, certain only that size is the best defence against the changes afoot. Nor are they yet sure where the value lies.

Last year production was all the rage. The people in the driving seat would be those with the intellectual property rights, the music, film, entertainment and software producers. In a world of growing demand, they would be able to charge what they like, was the general view. That's now been turned on its head. Those who control the distribution will be the real winners, is the present thinking, or possibly those who control the technology. A powerful distributor can squeeze at both ends, the producer and the consumer. Those rich and powerful enough - the Time Warners, Disneys and News Corps - are hedging their bets in a bold attempt to tie up both product and distribution.

Whether any of these ventures works out commercially is anyone's guess. Make no mistake about it, however. Their ultimate purpose, like that of Rockefeller, is anti-competitive and monopolistic. If they work as they are supposed to, the consumer will end up paying more for less.