Fox Broadcasting Case

Five Forces Analysis

The television broadcasting industry, in the year 1986, had three major players, ABC, CBS and NBC and all of
them were national networks. Due to federal regulation, networks were not allowed to provide coverage to
more than 25% of U.S. households. The success factor in this industry is based on the broadcasted content.
Having quality content was extremely important for sustained success. These networks had to ensure that
they offer their viewers the best possible content to remain competitive in the industry. In the 1980s, content
suppliers (producers) assumed the risk and had low bargaining power because the networks set demanding
terms (like upfront payment of only 80% - 90% of production costs to producers). The bargaining power of
customers determines the strength at which customers can impose pressure on margins. In this case, since
the advertising revenue for the networks is based on the number of viewers, the customer bargaining power
is moderate. Threat of new entrants is low because of the high capital investment, FCC regulations, asset
specificity, and economies of scale. New entrants would find it difficult to negotiate content deals with
different producers and advertisers. Threat of substitutes is not very low in the broadcasting industry because
they are competing against several different entertainment avenues such as radio broadcast, newspapers,
concerts, sports and tourism. Competitive rivalry between the players in the industry is low. There are only 3
major players in the TV broadcasting industry. The potential market size of TV viewership is huge. In near
term there is plenty of space for different players to grow because the demand for programming is growing.
Major networks also have the potential to create new business models through which they can monetize the
content.

In sum, the TV broadcasting industry was at the growth stage. Both the number of household televisions and
the advertising billings were growing from 1976 to 1985. From the Porters Five Forces industry analysis, a
growing pie could generate opportunities for new entrants.

Profitability of networks
The networks were historically profitable because of a variety of reasons. One such was the control the FCC
had on the broadcast television industry. The FCC had the responsibility to assign the VHF and UHF television
bands to local stations. Traditionally television sets had capability to receive only 12 channels. By the mid
1960's, the FCC mandated all sets to be capable of receiving UHF bands too. The FCC also had a strong control
over the screening of cable television outside a particular geographic area. And lastly, the relay system that
transmitted the broadcast was expensive. The above mentioned factors led to competition between the three
main networks - ABC, CBS and NBC. For years networks were allowed to own and operate up to five VHF and
two UHF stations that reached no more than 25% of the nation's population. This limit was raised to 12
stations in 1980s but the reach limitation was not increased. This, along with the high initial capital
requirement ensured that there were no new entrants or acquisitions and mergers in the industry, ensuring
significant profits for existing players.

By the early 1960s, the networks took responsibility for selecting and sponsoring programming away from
advertisers. They introduced advertisement blocks of 10 to 60 seconds which allowed smaller advertisers to
invest in commercials. Also, since advertisement was the preferred way to reach out to the public, more and
more companies were interested and invested in commercials. The spend by companies (especially CPG
firms) on TV advertising was constantly increasing. This was a significant reason why networks were
profitable.

Also, affiliates carried programs from different networks which gave them the leeway to choose the best
programming for their stations. This led them to be historically more profitable than their independent
counterparts and also ensured that networks had a variety of outlets to distribute their content and benefit
monetarily.




Changes in 1980s
The industry changed in the 1980s due to the advent of satellites. Prior to satellites, one of the major barriers
to entry to the market was the tremendous amount of investments a new entrant needed to set-up a station.
Satellites greatly reduced the start-up costs and this made it easier for new entrants to distribute content.

Satellites reduced the fixed costs for companies as well. With lower transponder costs, companies didnt need
to buy their own transponders but instead only needed to rent them. In 1985, the cost of renting one hour of
transponder time was $400 dollars and the year before was $600. The industry was becoming less capital
intensive. Satellites also lowered costs by enabling syndicators and producers to beam shows directly to a TV
in contrast to converting show formats to meet a stations needs. This made it easier for new entrants to
operate.

Finally, satellites allowed new entrants to match the advantages of established networks. Local stations could
now show not just local advertisements but national advertisements as well and thus could capture some
larger revenue sources. Satellites allowed more flexible programming. This enabled up to the minute
programming and customized programming, such as hour long comedies. Finally, satellites allowed stations
to combine to make superstations dramatically changing the industry. The result was that we saw a greater
number of new entrants, such as FOX come into the market and succeed.

Fox's' added value / Value Net
Through the 1970s and early 1980s, the networks began passing cost increases to their advertisers. Other
changes in the ecosystem, including the growth of cable television and increased use of VCRs forced
advertisers to discount the prices that they were willing to pay for networking time. This was evidenced by
the decrease in networks advertising revenues in 1985 for the first time since 1970. In this context, all the
other three major networks, ABC, CBS, and NBC are complementary to Fox to a certain extent. They afforded
Fox an opportunity to enter the market, and because of Foxs willingness to price its advertisements at 20%
below comparable rates, customers (advertisers, mainly CPG companies) saw a higher value for Fox. Also, the
vertical integration between FBC and Twentieth Century Fox Studios (suppliers) could give full control of
production and distribution to Fox. Vertical integration takes advantage of the potential economies of scope
and reduces the amount of risk for Twentieth Century Fox. Foxs exemption from FCC rules that regulated
sharing in syndication profits represented an additional source of revenue compared to other networks.

With the demand for programming constantly increasing, demand is expected to outstrip supply in the near
future. As a result Fox can safely enter the market without any real fear of its competitors undercutting Fox on
pricing (to advertisers). Such a scenario is more likely if there was excess supply of programming. Even if the
other 3 competing networks cut price, the best possible strategy for them would be to match Foxs price. Fox
would serve to reduce the gap between (excess) demand and supply and this would help Fox attract
additional audience at the national level while increasing its revenues from TV advertising. The advertisers
would stand to benefit most from the entry of Fox Broadcasting Company.