Comcast to buy DreamWorks and Vertical Integration
Today, news broke that Comcast plans to buy DreamWorks Animation for $3.8 billion. Read the WSJ article here. The reason this has implications for the end users (you and I) has to do with vertical integration.
Vertical integration:
One company refines the raw goods (cotton jean fabric) which are then sold to a manufacturer who uses raw goods to create a finished product (stylish jeans). That finished product is then sold to a retailer (Nordstrom) who sells it to consumers.
In the world cable television, there are TV shows (Saturday Night Live), television networks (NBC) and cable companies (Comcast). An analogy to understand how vertical integration works in cable television would be a shopping mall. Comcast is the mall; the stores are the TV networks; and the products in the stores are the TV shows.
So how does the purchase of DreamWorks by Comcast qualify as vertical integration? In 2009, Comcast (a cable company) bought NBCUniversal (a cable network). Within that network, you can watch numerous TV shows, such as Saturday Night Live, The Tonight Show with Jimmy Fallon and The Voice.
And that’s just on NBC. The full range of TV shows is much larger when you factor in all of the other TV networks that are under the NBCUniversal umbrella including Bravo, USA and Telemundo.
By merging the cable company with cable networks, that integrates two of the three vertical segments in the cable TV marketplace. In our earlier analogy, this would include the mall and the stores within the mall.
That’s news from 2009 though. The last remaining vertical segment is the TV shows. This is where DreamWorks comes in.
The recent announcement by Comcast (cable company) to purchase DreamWorks (content creator) is the equivalent of the mall owning the stores and also the products sold within the stores.
Why would this be bad? Well, do you use Netflix to watch movies and TV shows? If so, Netflix could be negatively impacted by their competitor, Comcast, owning the actual TV shows that Netflix offers to it’s customers. The worry is that a company like Comcast could prevent Netflix from accessing its TV shows, in an attempt to attract customers and appear more valuable than Netflix.
You might think that the example above is simply a case of granting exclusive rights to a provider or distributor, such as what happens in the video game world. Some games are offered exclusively on certain consoles, giving those consoles a competitive advantage. Example: The video game Halo is exclusively offered on Xbox. The more games Xbox can get exclusive rights to, the more attractive it is to consumers.
This is not a fair analogy though. A more accurate example would be if there was a video game offered on all gaming consoles that was then purchased by Microsoft Xbox who then decided to only design and make it available for Xbox moving forward. Fans of that video game would be angry to learn that the Playstation they invested money in would lose access to a previously available game.
The world of digital video content is evolving faster than ever. There are so many moving parts.
There are content creators who are finding new homes such as Netflix and YouTube. The cable companies are merging with or acquiring other companies to enhance their competitiveness. Then there is Net Neutrality, which is the battle to keep the Internet free, open and fairly allocated.
It will be interesting to watch this unfold. It’s also interesting to watch Chuck Norris vs Communism, a Netflix documentary that kicks ultimate butt. Screw you Comcast (please don’t penalize me by slowing my download speeds..).