amine if there is empirical evidence for

the impact of size and diversification

Strategies for Growth on economic performance by
in the Media and Communications Industry: analysing data of the US media and
Does Size Really Matter? communications industry. We con-
clude this paper with a discussion of
what our results mean for media man-
agers and outline issues warranting
further research.
by Castulus Kolo and Patrick Vogt, University of St.Gallen, Switzerland
Theoretical background
and hypotheses
Introduction ticular segments where this is the case
and others where it is not? To address Conventional wisdom implies that the
Until the beginning of this millennium these questions, we first summarize re- bigger the size of a company and its
it was collective thinking amongst me- curring arguments on the impact of market share, the more successful the
dia and communications executives size on profitability raised to justify the company is (Makadok, 1999: 935f.;
that size effects would boost media various growth initiatives. We then ex- O’Regan, 2002: 287). This argument is
companies’ profits, thereby fulfilling
investors’ expectations of continuous
and sustainable profit growth. This stra- Abstract
tegic approach resulted in countless
This empirical study examines potential size effects in the US media and communica-
growth initiatives and an increase in
tions industry. Motivated by investors’ demand for continuous profit growth, media
growth-driven mergers and acquisi-
and communications executives attempt to leverage size effects, be it by growing the
tions. This trend peaked with the
core business or by diversifying into other media segments, thereby exploiting cross-
merger of AOL and Time Warner form-
media synergies. However, contrary to conventional wisdom, the authors could not
ing the largest media company. ‘Syner-
find a general correlation between size and diversification on the one hand and perfor-
gies’, ‘cross-media offers’ and the amal-
mance on the other hand. The authors’ reason that exploiting size effects in the media
gamation of ‘old and new media’
and communications industry is far from simplistic and cross-media synergies may
(Bradley/Sullivan, 2002; Klein, 2003)
take more time and effort to leverage than assumed. Therefore, research is recommended
were the buzzwords that labelled stra-
to focus on the operational level of size effects and their development over time. For
tegic efforts to boost revenues and sub-
media managers, the findings imply that more emphasis should be placed on strategy
sequently, an increase in profitability
implementation and operational effectiveness, rather than on sophisticated M&A and
more than proportionate to revenue
growth initiatives.
growth was aspired to and expected.
Today, all this glitter seems to have Castulus Kolo
faded. The ambitious expectations of (castulus.kolo@web.de)
media and communication executives,
is a visiting research fellow at the Institute for Media and Communications Manage-
as well as investors, have evaporated.
ment at the University of St. Gallen, Switzerland and member of the management
M&A activities in the media and enter-
board at the online subsidiary of a large German publishing house. His research
tainment industry are now rather
focuses on strategy and innovation management in the area of media, as well as
driven by divestments. Media compa-
information and communication systems.
nies such as Time Warner and Vivendi
Universal are amongst the largest sell-
Patrick Vogt
ers of assets in an effort to reduce their
(patrick_vogt@gmx.ch)
levels of debt (Linde/Roch, 2003).
www.mediajournal.org

These developments raise a few ques-
tions: Does size really matter in media
and communications and subse-
quently lead to higher profitability? Is
it rewarding for a media and commu-
nications company to diversify into re-
lated media segments? Are there par-
is a consultant, lecturer and researcher in the fields of strategy, media and communi-
cations. He lectures on, amongst others, strategy and media management at the Ex-
ecutive MBA in Media and Communications Management at the University of
St.Gallen (HSG), Switzerland. His research focuses on strategy, namely business mod-
els in the networked economy. Previously, he was a consultant with strategy
consultancy, a manager and a journalist in several media companies.

© 2003 – JMM – The International Journal on Media Management – Vol. 5 – No. IV : (251 – 261) 251
in line with a resource-based view
characterising a company in terms of
bundles of resources and capabilities
that are accumulated over time (Barney,
1991; Grant, 1991; Peteraf, 1993;
Wernerfelt, 1984; Nelson/Winter 1982).
In order to reach a competitive advan-
tage, resources must be acquired, built,
combined, maintained and utilized su-
periorly (Teece et al., 1997). Through
improved utilization of resources and
capabilities, size effects can be ex-
ploited. These effects consist mainly of
economies of scale and economies of
scope (Baumol et al., 1990; Scherer/Ross,
1990; Teece 1980; Teece, 1982;
Nicholson, 1985). Accordingly, econo-
mies of scale and scope are employed to
operationalize size effects.
Economies of scale result when the in-
creased size of a single operating unit
producing or distributing a single prod-
uct reduces the costs of production or
distribution per unit (Chandler, 1990:
17). Independent from its particular
source, economies of scale are argued
for in the context of growth in a
company’s existing business area.
There are some general reasons why
there might be economies of scale in
production and distribution processes:
Firstly, the smallest economically viable
size of some output can be large, e.g.,
due to large set-up costs. If fixed costs
can be allocated to larger outputs, aver-
age production costs are lowered
(Milgrom/Roberts, 1992: 598; Sloman,
2000: 195). For example, a newspaper
company may lower average production
costs per copy by printing more copies
on an existing printing plant, allocat-
ing fixed printing costs to more copies.
Secondly, specialization increases with
size, so larger companies may get more
of the gains of specialization. Thirdly,
bigger producers buy more inputs and
therefore may get bulk discounts.
Fourthly, demand side network effects
may increase the value of a product to
the customer the more other people are
using it. Therefore, the demand in-
creases as the volume sold increases.
252 © 2003 – JMM – The International Journal on Media Management – Vol. 5 – No. IV
In contrast to economies of scale,
economies of scope result from the use
of processes within a single operating
unit to produce or distribute more
than one product (Chandler, 1990: 17).
As a result companies are expected to
add new products as economies of
scope increase. Such economies arise
most obviously when the production of
one good provides another good as a
by-product but also from allocating
particular resources and capabilities to
additional areas over and above their
intended and current use. This in-
cludes tangible and intangible re-
sources together with organizational
capabilities. In the case of tangible re-
sources, economies of scope are lever-
aged by eliminating the duplication of
facilities between companies and cre-
ating a single shared facility. In the
media context, this is illustrated
through shared sales forces or distribu-
tion networks (which may additionally
involve vertical integration as a direc-
tion for diversification) and the cen-
tralized provision of accounting, fi-
nance, legal and IT services for
different businesses.
The argument for economies of scope
in media industries is often based on
synergies resulting from convergence
in a digital environment, which can be
understood as the “partial integration
of different communication and infor-
mation based market applications”
(Wirtz, 1999: 15). Technical innova-
tions and increasing standardization
of formats allow, e.g., to simulta-
neously produce a newspaper and a
consumer Internet application out of
a shared content management system.
Intangible resources such as brands
and corporate reputation may addi-
tionally offer economies of scope
mainly due to the ability to transfer
them from one business area to an-
other at low marginal costs. Finally or-
ganizational capabilities enable such
economies of scope by transferring the
resources between the businesses and
divisions of a diversified company
(Grant, 2001: 82).
Hence, economies of scope are argued
for in the context of growth across seg-
ment borders and to diversification
into related segments, thus raising the
question of where to compete.1 In me-
dia and communications, the term
‘cross-media’ is widely used for this ex-
ample of diversification.2
Despite the range of theoretically plau-
sible arguments for positive effects of
size and diversification on perfor-
mance, such as the existence of econo-
mies of scale and scope, it has to be
taken into account that growth may
also have adverse effects. Such
diseconomies may originate in differ-
ences in management culture, which
is particularly relevant among differ-
ent media segments like T V broad-
casting, newspapers and consumer
Internet. Further, such diseconomies
may become evident within larger com-
panies, for example, if coordination
and control costs show a more than pro-
portional increase and annul the posi-
tive effects (Hardes, 2002: 109), or if the
extensive division of work in excep-
tionally large companies leads to a
demotivation of employees (Sloman,
2000: 196). However, it needs to be con-
sidered that the media and communi-
cations industry, in comparison to
other industries, is rather unconsoli-
dated 3 (Deans et al., 2002). Conse-
quently, these kinds of diseconomies
are theoretically of lesser relevance in
the industry under discussion, com-
pared with other industries.
The main conclusion that arises from
these theoretical considerations is that
there is no simple and consistent rela-
tionship between size and diversifica-
tion on one side and company perfor-
mance on the other side. Not
www.mediajournal.org
surprisingly, the empirical evidence of
the impact of size or diversification on
performance is inconclusive too.4 Em-
pirical studies are highly fragmented
and have been undertaken on various
levels and subsets, e.g., in selected coun-
tries (e.g., for India: Majumdar, 1997) or
within specific businesses (e.g., for
 booksellers success of online market
entry: Ehrmann et al., 2002) or a com-
bination of both (e.g., for international
tourist hotels in Taiwan: Lin/Liu, 2000).
There are, in our view, three reasons for
the ambiguities in the empirical find-
ings, the first being a different choice
of measures for size and performance.
A second reason may lie in inherent bi-
ases – or rather distortions – in the
analysed sample of companies. Such
distortions arise, for example, when
hidden independent variables have a
significant impact on the dependent
variable,5 but are not controlled for in
the analysis. A third reason for the dis-
parity in the results, however still re-
lated to the second, is the different level
of aggregation. Whilst one might find
empirical evidence for a positive rela-
tion at company level, one may not find
corresponding empirical evidence on
business unit level.
From the preceding theoretical consid-
erations and the ambiguous empirical
evidence we derive two hypotheses that
we will test for the media and commu-
nications industry:
H 1: Size has an impact on perfor-
mance.
H 2: Diversification has an impact on
performance.
We test the hypotheses on two levels of
aggregation, namely on a company
level and on a business unit level.6 For
the latter case, a market-oriented divi-
sion of the media industry in 12 mutu-
ally exclusive media and communica-
tions segments such as radio, TV
broadcasting and newspapers was
made. We then split the companies into
their constituting businesses within
the 12 segments of the media and com-
www.mediajournal.org
munication industry and labeled these
businesses, each focused on a specific
sector of the 12 media and communica-
tions segments, as “business units”.7
Consequently, we analyse the effects of
size and diversification on performance
on a business unit level segment by seg-
ment. In doing so, we are, on the one
side, able to account for possible effects
compensating each other, arising out
of a business unit in one media and
communications segment and possible
adverse effects of other business units
of the same company in other seg-
ments. On the other hand, we are able
to identify particular media and com-
munications segments with effects of
size or diversification on performance.
According to these two levels we subdi-
vide the first hypothesis into:
H 1.1: Company size has an impact on
company performance.
H 1.2: Within a specific media and
communications segment, the
size of a business unit has an
impact on the business unit per-
formance.
Following the same scheme we also
subdivide the second hypothesis into:
H 2.1: Diversification has an impact
on company performance.
H 2.2: Within a specific media and
communications segment, the
fact that a business unit belongs
to a diversified parent company
has an impact on its perfor-
mance.
Method
To test the hypotheses outlined above,
we analyse the mutual dependencies of
the three variables size, diversification
and performance characterising a com-
pany or a business unit according to
the two levels we want to analyse. We
do not track other characteristics in
our statistical analysis as we do not in-
tend to relate possible effects of size
and diversification to how these effects
are actually brought about by the man-
agement, e.g., how an organizational
form is implemented to create scope
effects. Our primary intention is to
analyse whether effects of size and di-
versification on performance can be
detected at all, regardless of why they
arise for a specific company.
© 2003 – JMM – The International Journal on Media Management – Vol. 5 – No. IV 253
Variables
Whilst a broad selection of effective
measures exists for all the three vari-
ables size, diversification and perfor-
mance we decided to conduct the analy-
sis on the basis of measures given as
follows:
■ We measure the size of a company as
well as the size of a business unit on
the basis of the turnover reported.
The turnovers in our sample exhibit
a wide spread across several orders
of magnitude with an average at
small values and a long tail to larger
companies, so the turnovers do not
follow a normal distribution. How-
ever, some statistical analyses like a
correlation analysis after Pearson we
intend to use require a normal dis-
tribution of the independent vari-
able. The application of a simple
transformation, a natural logarithm,
leads to a normal distribution. The
natural logarithm is a monotonous
transformation, which is often ap-
plied in such cases (e.g., Majumdar,
1997). It leaves a dependence in the
form of ‘the larger the size, the bet-
ter the performance’ or vice versa, if
there is any, unchanged.8
■ The diversification of companies
was coded as a binary variable being
0 for companies active in only one
segment of the media and commu-
nications industry and 1 for compa-
nies active in at least two segments.
This certainly is a simplification, as
the measure does not account for
different degrees of diversification,
i.e. the number of different seg-
ments into which the company is di-
versified. However, if an analysis tak-
ing the latter into account does lead
to significant linear correlations,
this would have noticeable effects
for a simple measure, too. In fact we
applied both kind of measures and
the results remained unchanged.
We will therefore continue our
analysis on the basis of the binary
measure.9
■ Finally, performance was measured
on the basis of operating cash flow
 Table 1: Results of a multi-linear regression analysis of the dependence of performance on size and diversification on the company level
Dependent variable: Performance
(operating cash flow margin, percent)
(R2 = 0.004, significance of F = 0.735)
(Constant)
Size (turnover, USD mIn.,
Logarithmic values)
Diversification (0 = non diversified,
1 = diversified)
margins. Operating cash f low is
calculated as revenue minus direct
costs, costs of selling, general and
administrative expenses. Operating
cash flow does not include deduc-
tions for interest expenses or addi-
tions for interest income, taxes,
extraordinary items, subsidiary re-
sults reported in case the equity
method was used, as well as depre-
ciation and amortization as non-
cash items. Write-downs were only
included in case they were related
to a company’s ongoing operations
(Veronis et al., 2002: 485). We used
cash flow margin, as performance
should not inherently depend on
size and hence should be set in rela-
tion to the turnover as a measure of
size. We deliberately used operating
cash flow margin to measure perfor-
mance on an operational level at the
‘source’ and disregarded, wherever
possible, non-operational effects
and unscheduled external inf lu-
ences. To eliminate distortions from
hidden independent variables, par-
ticularly losses of start-ups, we fo-
cused on companies and businesses
with a positive cash flow.10
Sample
To test our hypotheses all publicly re-
porting companies in the US media
and communications industry in
200111 where the above-mentioned data
was available, matched respective cri-
254 © 2003 – JMM – The International Journal on Media Management – Vol. 5 – No. IV
Unstandardised coefficient
B Standard error
26.462 4.464
2.312 3.441
-0.489 0.773
teria and had a turnover larger than
USD 1 million were selected. The
original database was obtained from
Veronis et al. (2002) and filtered subse-
quently. In parallel, as given by the sup-
plier of the database, the media indus-
try was split into twelve mutually
exclusive segments. The companies
were then assigned to these twelve
segments and companies active in
more than one segment were, of
course, split in these segments. The
activities of a company in a particular
segment were then labelled as “busi-
ness unit”.12 In doing so, 178 companies
and 220 business units were included
in the sample for the analysis on the
respective levels.
The segments and the number of
business units taken to analysis in each
segment are included in table 3 (see
below). Thereby, the number of busi-
nesses per segment varies considerably
and the percentage of the businesses in
each segment that belongs to a diversi-
fied company ranges from 9% to 58%.
Statistical
analysis
As outlined above we proceed across
two levels of aggregation, i.e., firstly on
the company level and, secondly, re-
garded segment by segment on the
business unit level. On both levels, we
conduct a multi-linear regression
analysis with performance as depen-
Standardised coefficient
Beta Significance
0.000
0.055 0.503
-0.052 0.528
dent and size and diversification as in-
dependent variables. By regarding both
independent variables concurrently,
we can control for correlations be-
tween them. Additionally, we divide
the data on the company level into sub-
sets to check for non-linear dependen-
cies. On the segment level, this proce-
dure is not feasible for statistical
reasons as the number of businesses
per segment is, in most cases, too small
to be further divided into subsets.
Company level
Both hypotheses H 1.1 and H 2.1 (see
above) referring to the company level
were tested simultaneously by apply-
ing a multi-variate linear regression
analysis. According to the results of the
regression analysis given in table 1 and
contrary to conventional wisdom,
both hypotheses are wrong. The
standardised coefficients for both inde-
pendent variables are small and their
probabilities of being irrelevant or zero
are above 50% (see the values for their
significance). Moreover the model does
not at all explain the variance in the
performance values (R2 < 1%). Hence on
www.mediajournal.org
the company level, no effects of either
size or diversification on company per-
formance are observable.
However, a further consideration is
that relations may be non-linear, e.g.,
that there is a size effect in one direc-
tion on a small scale and a size effect
 Table 2: Pearson correlation of performance and size for different company categories above-mentioned form and confirm
the refutation of both our hypotheses.
Number of Correlation
companies coefficient Significance Segment-wise analysis
Size category 50 percent largest 89 0.020 0.851
on the business unit level
of company
50 percent smallest 89 -0.220 0.306 On the segment level we again
Diversification Single business
conducted a multi-variate linear re-
148 -0.031 0.705
of company gression analysis, thereby simulta-
Multi business 30 -0.211 0.264 neously testing hypotheses H 1.2 and H
2.2. The results of the multi-linear
analysis are given in table 3. The stan-
dardized betas with reference to size
in the opposite direction on a larger tion of the performance for the four and diversification as independent
scale. To account for this possible pat- different subsets led to a reasonable fit variables show, again surprisingly,
tern we divided the company data into in all cases (Kolmogorov-Smirnov-Test significant size effects in the radio and
two subsets, i.e., in 50 percent of the with a two-tailed asymptotic signifi- entertainment segments only (sig-
smallest and 50 percent of the largest cance far above five percent). A Pearson nificance at the 2.7 percent and 3.2 per-
companies.13 Additionally, size effects correlation analysis of performance cent level respectively). Additionally,
could act in opposite directions for di- and size is therefore applicable. How- there is a slight indication of a positive
versified and non-diversified compa- ever, as shown in table 2 we did not effect of diversification in the book
nies. We therefore undertook a second find a significant dependence of per- segment, given the relatively high
division of the complete data set into formance on size in any of the four sub- positive value of the standardized beta.
single business and multi-business sets. We can therefore exclude a poten- However, this effect is not significant
companies. The test of normal distribu- tial non-linear dependence in the (significance at the 7.4 percent level),

Table 3: Segment-wise multi-linear regression analysis of the dependence of performance on size and diversification on the business unit level

Percentage of Size (turnover, USD mln., Diversification (0 = non

the businesses logarithmic values) diversified, 1 = diversified)
that belong
Total number to a diversified Standar- Signifi- Standar- Signifi-
Segment of activity: of businesses company dised beta cance dised beta cance

Advertising 22 0.033 0.888 0.031 0.895

9
TV Broadcasting 30 57 -0.031 0.874 -0.117 0.545

Cable & Satellite TV 13 46 -0.022 0.946 0.381 0.255

Radio 19 0.554 0.027 -0.038 0.868

32
Entertainment 14 50 -0.617 0.032 -0.049 0.850
(Music, Games)

Consumer Internet 6 17 -0.155 0.919 0.396 0.796

Newspapers 19 58 0.121 0.631 0.036 0.886

Books 9 -0.950 0.150 1.245 0.074

56
Magazines 12 -0.215 0.540 -0.072 0.836
www.mediajournal.org

58

B2B Media 6 50 -0.448 0.339 -0.576 0.241

Professional Education 28 -0.082 0.734 0.237 0.326

11
& Training Media

Business Information 42 -0.19 0.243 0.141 0.384

10
Services

© 2003 – JMM – The International Journal on Media Management – Vol. 5 – No. IV 255
 Figure 1: Dependence of performance on size in the segments radio (left) and entertainment (right)
50
cash flow margin, percent)
Performance (operating
40
30
20
10
10 100
Size (turnover, USD mln)
which is, to some extent, due to the
small number of cases in this segment
(n = 9).
Apart from the above-mentioned seg-
ments, this leads to a refutation of hy-
potheses H 1.2 and H 2.2. Even in the
cases of radio and entertainment, the
model with size as independent vari-
ables explains only a fraction of the
variances in the performance values
ranging (29 and 41 percent respec-
tively, given by R2). Interestingly, the
size effects we observe do not point in
the same direction. While size is posi-
tively correlated with performance in
the case of radio, it has a negative ef-
fect in the entertainment segment. The
correlation of performance with size,
regardless of the diversification, can
also be seen for both segments in the
related scatter plots shown in figure 1.
Discussion and Conclusion
Discussion of results
The examination of our company
sample shows that there are no effects
of size, diversification or a combination
of both on company performance. De-
spite the statistical analyses, this fact
also becomes apparent in the scatter
plot depicting performance versus size
in figure 2. These effects are explicitly
not a result of the inadequate merging
of different business units as there is
also no generally significant correlation
either of size, diversification or a com-
256 © 2003 – JMM – The International Journal on Media Management – Vol. 5 – No. IV
50
cash flow margin, percent)
Performance (operating
40
30
20
10
1000 10000 10 100 1000 10000
Size (turnover, USD mln)
bination of both with performance to associated with increasing audience
notice in the segment-wise perspective reach are relatively low and local pref-
on business unit level. However, this erence is of minor importance, com-
does not necessarily mean that there pared to other local or locally adapted
aren’t any economies of scale or scope media, such as newspapers or TV. The
at all. It could as well be that scale or absolute and relative costs for local ad-
scope effects, though existing, have not aptations on radio are significantly
(yet) been effectively exploited. lower than for TV and newspapers, due
to the deterministic nature of the main
The radio and entertainment segments content, i.e., music. In addition, well-
are the only exceptions, where we developed IT systems are in place to ef-
found a correlation of performance ficiently network and produce locally
and size. In the radio segment, busi- adapted versions. Furthermore, radio
ness performance is positively cor- is a relatively mature and stable indus-
related with size, whereas in enter- try, presenting fewer external market
tainment, performance is negatively threats, such as the recent occurrence
correlated with size. We shall first dis- of file-sharing in the music industry. To
cuss these two exceptions. date, the Internet has had an insignifi-
cant impact on radio. Since the pass-
As a fixed cost business, radio is very ing of the US Telecom Bill in 1996, ra-
susceptible to scale effects. The costs dio regulation is somewhat stable. The
Figure 2: Scatter plot of performance versus size. Companies with a single business are marked
with dots, diversified companies witzh a triangle.
60
40
cash flow margin, percent)
Performance (operating
www.mediajournal.org
20
0
1 10 100 1000 10000 100000
Size (turnover, USD mln.)
 bill was followed by a wave of massive
consolidation in the late 90s (Veronis
et al., 2002: 465). Due to the relative
maturity of the radio business, manag-
ers may also simply have had more
time to optimise operational effective-
ness and to exploit economies of scale
than in other segments like consumer
Internet. All these conducive circum-
stances and events seem to have al-
lowed radio companies to efficiently
and significantly leverage synergies
across networks.
The entertainment segment includes
filmed entertainment, music and inter-
active entertainment, the latter mainly
being video games for consoles and
PCs. Much to the authors’ surprise, the
particularly negative size effects evi-
dent in this segment may be explained
by the impact of particular circum-
stances attributed to the development
stage of these industries. Revenues in
filmed entertainment generally fluctu-
ate dramatically due to the consider-
able reliance on blockbusters. In 2001,
investments were required to migrate
to DVD. The music industry, particu-
larly the labels, was adversely affected
by file-sharing services, with the peak
and the subsequent grounding of
Napster (Veronis et al., 2002: 467). Pro-
ducers of video games grappled with
varying industry standards. Alterna-
tively, the negative size effect could be
explained by assuming that large com-
panies tend to be less creative than
small companies, this factor being of
particular relevance in the entertain-
ment industry, where creativity is one
of the most crucial and definitive suc-
cess factors. However, whilst explana-
tions for the positive size effect in ra-
dio seem to be sound, the negative size
effect in entertainment tends to be, at
www.mediajournal.org
least to some extent, cryptic. An obser-
vation of the results for the entertain-
ment segment over time may further
explain the causes for the negative cor-
relation.
With the exceptions of radio and enter-
tainment, the general finding that
there are no effects of size and diversi-
fication or a combination of both on
performance allows for two potential
conclusions: Either there are no size
effects in the media and communica-
tions business to leverage14, or the theo-
retical size effects are not (yet) ex-
ploited by media managers.
To argue for the first conclusion, in the
instance of size, i.e. to grow in a
company’s own segment, potential size
effects can, to a large extent be an-
nulled by complexity, adaptations or
fixed-step costs. Complexity costs arise
when costs to manage a conglomerate
increase more than proportionally to
its size.15 Adaptation costs arise if me-
dia products need to be adapted for ad-
ditional sales, e.g., reproduced to reach
additional target groups with different
needs or translated. Rupert Murdoch,
Chairman of News Corp., one of the
largest media conglomerates, consid-
ers books and movies as the only me-
dia products to market globally. For all
other media products, a local adapta-
tion is, in his view, a prerequisite for
success (Murdoch, 1998). Step-fixed
costs arise if the maximum possible
output, on a given fixed-cost basis, is
exceeded. For instance, a cable com-
pany or a newspaper can easily access
one thousand additional customers on
a given fixed cost basis and thereby
achieve scale effects. However, to access
one hundred thousand additional cus-
tomers, perhaps even in a new area,
requires additional equipment such as
cable infrastructures or printing plants,
which are likely to increase costs pro-
portionately.
Still arguing in favour of the first con-
clusion, that there might not be any
size effects in the media industry, size
effects appear to be annulled by addi-
tional costs in the diversification case
too, arguing against the concept of
‘cross-media’. To utilize the assets of
one business in another business with
the objective of saving costs seems
simple in theory, but is practically chal-
lenging and creates additional costs.
© 2003 – JMM – The International Journal on Media Management – Vol. 5 – No. IV 257
With reference to the most popular
media diversification case, the combi-
nation of newspapers and TV, e.g., pre-
processing news stories for both media
is far from simple and results in high
costs for the management of the con-
tent database. Based on the knowledge
that pre-processing news represents
only a small fraction of total costs, this
cost centre presents one of the very few
areas of potential synergy, as the actual
TV and newspaper production is vastly
different. Additionally, given the fact
that TV and newspapers rarely focus on
the identical target audience with re-
spect to age and social status and that
TV, to a large extent, serves as an enter-
tainment medium compared to news-
papers, which operate predominantly
as an information medium, it becomes
apparent that from a cost perspective,
leveraging cross-media is rather diffi-
cult.16
If there were actually no positive ef-
fects of size or diversification the main
argument for growth-driven M&A ac-
tivities would be obsolete. The Hubris
Theory (Roll, 1986) would then provide
a more mundane explanation of these
activities. This theory states that top
managers commit errors of excessive
self-confidence, being over-optimistic
about the synergies that would result
from mergers.
An alternative conclusion of the results
from our statistical analysis is that
positive effects of size and diversifica-
tion exist, but media managers are not
(yet) effectively exploiting their ben-
efits. Firstly, it appears to be the case
that media managers are more focused
on growth than on operational excel-
lence. The rapid and dynamic pace of
change in the media industry or in the
converging telecommunications, me-
dia and IT industry could serve as a
potential explanation for an external
and strategic focus rather than an in-
ternal and operational focus. Secondly,
media managers and employees tend to
be educated, trained and attached to a
particular media segment, for in-
stance, radio or magazines, and rarely
transfer. Very few integrative efforts
are noticed, even in large media con-
glomerates (Hermreck/Moran, 2002: 5).
As the ‘convergence generation’, a
new generation of more flexible and
broadly educated media managers and
employees, gains influence, the lever-
age of size effects could be facilitated.
For media managers, the findings im-
ply that the exploitation of size effects
is far from simplistic. Potential effects
of economies of scale and economies of
scope generally seem to be overrated
and potential pitfalls of growth and
diversification strategies seem to be
underestimated. Firstly, ideas and stra-
tegic rationale behind internal growth
initiatives, M&A and alliances, have to
be complemented with a careful and
in-depth assessment of size and diver-
sification effects on an operational
level. Secondly, operational excellence
seems to be equally a key to success, as
is the ability to adapt in response to the
changes in today’s challenging media
business environment.
The most recent strategic moves
adopted by leading media conglomer-
ates substantiate these principles. Fo-
cussing on the six largest media com-
panies on a global scale, at least three
have narrowed their growth ambitions
following an aggressive expansion
phase. After a series of acquisitions17,
Time Warner, the largest global media
company, has significantly disposed of
assets and recently announced further
disposal of non-core assets. Addition-
ally, Time Warner will focus its efforts
on internal synergy exploitation rather
than on external growth (Linde/Roch,
2003; Kirkpatrick/Sorkin, 2003: 12). At
the beginning of the millennium, the
second largest media company, Vivendi
Universal, strategically aspired to
growth in response to former chair-
man and CEO, Jean-Marie Messier’s, slo-
gan “defence always loses” (Sjurts,
2002: 378). After Messier’s ousting in
mid-2002, the company shed assets on
a large scale, e.g., the book publisher
258 © 2003 – JMM – The International Journal on Media Management – Vol. 5 – No. IV
Houghton Mifflin (Fabrikant/Sorkin,
2003: 9). Further assets, such as the en-
tertainment business, Universal, are at
disposal (Linde/Roch, 2003; Tagliabue,
2003: 1). Bertelsmann scaled back to its
core business in content packaging and
content distribution. The CEO changed
from the internationally and multi-
media-oriented personality, Thomas
Middelhoff, to the rather traditionally
oriented personality of Gunter Thielen,
former head of Bertelsmann’s printing
and service business Arvato (Sjurts,
2002: 385). These strategic decisions
serve to verify the change in global me-
dia trends. In further support of our
conclusion are industry giants Disney,
Viacom and News Corp., which seem to
intend to neither shrink their current
business scope nor invest in growth
strategies.18 However, it remains to be
seen as to what extent these develop-
ments are ascribed to a new under-
standing regarding size effects or of
current financial constraints. Publicly,
most asset disposals are labelled as
debt-reduction efforts (Kirkpatrick/
Sorkin, 2003: 12; Tagliabue, 2003: 1).
Further Research
Given the results of this analysis we see
mainly two areas deserving further
research. Firstly, research regarding
the exploitation of cross-media syner-
gies and size effects in media and com-
munications should concentrate on a
lower, operational level, allowing
conclusions to be drawn from positive
and negative cases rather than from
high-level theoretical considerations.
A combination of both case studies,
which take additional variables
characterising the business into
account and statistical approaches,
which allow for generalization, should
further elucidate the complex nature
of (dis)economies of scale and scope.
Secondly, research should focus on lon-
gitudinal studies, rather than on stud-
ies at a single point in time. It would be
interesting to conduct further in-
vestigations into how scale and scope ef-
fects are leveraged over time in a
certain segment. Additionally, the idea
of cross-media and the subsequent ex-
ploitation of synergies are new. The
concept of leveraging of size effects is
being accelerated by relaxed industry
regulation in the media and commu-
nications industry. Media companies
may simply need time to exploit all of
these potentially positive effects. In any
respect, the fact that size effects are
being exploited to some extent in the
relatively stable radio industry19 sup-
ports these considerations.
Endnotes
1 Where to compete refers to the degree of diver-
sification or scope of a firm, i.e. its products,
markets, and business activities. This can be
either narrow (e.g., highly specialized internet
companies) or broad (e.g., fully integrated
media companies). Another perspective on di-
versification provides business relatedness (re-
lated/unrelated) that is often measured with
the help of Standard Industrial Classifications
(SIC). Furthermore, four different types of diver-
sification can be distinguished: geographical,
vertical, product/market related and lateral
(Markides/Williamson, 1996; Rumelt, 1982). In
this paper, we focus on product/market diversi-
fications. Additionally, vertical diversifications
are considered to some degree, if the businesses
are seen as media and communications
businesses, e.g., TV, satellite and cable distribu-
tion. Geographical diversification is not covered,
as the sample we use consists of U.S. companies
only. Lateral diversification outside the media
and communications industry is not covered
either, as we intend to focus on scale and diversi-
fication effects within the media and commu-
nications industry.
2 Sjurts (2002) distinguishes between five related
and non-related diversification strategies of
media and communications companies.
Related diversification strategies include (1) in-
www.mediajournal.org
tra-media diversifications (similar media seg-
ment) and (2) related cross-media strategies (dif-
ferent, traditional media segment). Non-related
diversification strategies include (3) non-related
cross-media strategies (different media seg-
ment), (4) convergence-driven cross-media strat-
egies (new media segment) and (5) non-media
diversification (outside media) (Sjurts, 2002:
 344ff.). In this respect, only the first four diver-
sification strategies are considered (see previ-
ous endnote).
3 In the Fortune 500 list of the 500 largest global
companies based on revenue, only Vivendi
(rank 42; data from 2002, utility business still
consolidated) and Time Warner (rank 80) are
amongst the 150 largest (N.N., 2003).
4 Interestingly, most studies find an impact in ei-
ther one or the other direction. However, we do
not know of any study resulting in no influence
at all.
5 E.g., if we take a set of companies consisting of
start ups and mature companies, the hidden
variable could be the fact of being a start up or
not. For both subsets there may be a different
impact of size on performance, possibly even
in opposite directions. The overall impact of
size on performance then depends on the rela-
tive size of both subsets. The resulting correla-
tion would therefore hardly be of any use for
scientific or strategic considerations.
6 There has been a vast discussion on different
performance effects in management literature.
A critical and most recent overview is provided
by Bowman/Helfat (2001). They also distin-
guished between company performance effects,
business unit effects and market effects (Bow-
man/Helfat, 2001).
7 Accordingly, the financial data were split
(Veronis et al. 2002)
8 A correlation analysis after Spearman which
does not require a normal distribution was con-
ducted with the original values before the
transformation. However, no other dependen-
cies than the ones reported here appeared.
9 We did not distinguish different degrees of re-
latedness among the segments in media and
communications. All segments are treated as
equally related, though we acknowledge that
the physical or skill bases of relatedness as dis-
cussed for example by Farjoun (1998) may not
be equal. Since we focus our analysis on a spe-
cific industry we do not expect this simplifica-
tion to have a significant effect. See also note 1
for a discussion of relatedness.
www.mediajournal.org
companies undergoing structural change are
negative at operating cash flow levels. We de-
liberately wanted to exclude such effects to
avoid distortions from hidden variables (in this
case age or restructuring, see explanation in
text above). Thirdly, and most importantly, we
re-ran our analysis including companies with
losses up to a level of -50% at operating level
and did not receive significantly different re-
sults.
11 We selected 2001 as most recent year with
mostly complete data. To increase validity we
regard it as a quite representative year as it is
the first complete year after the burst of the
‘dot-com bubble’ and the AOL Time Warner
merger. By selecting several segments in the
media and communications industry, we ana-
lyzed companies, businesses within companies
and industry segments at very different stages
in their lifecycle.
12 In doing so, a “business unit” in our analysis is
defined taking the segment perspective, i.e.,
splitting the media industry in 12 mutually ex-
clusive segments. It is therefore independent
from the actual internal organization form of
a media and communications company and
could, e.g., contain several actual subsidiaries
that operate in the same segment.
13 For opposite effects in the case of small and
large companies, in principle, a quadratic rela-
tionship could be considered. In fact we mod-
elled a quadratic relationship, but without sig-
nificant results. Additionally, the assumption
of a quadratic dependence is rather arbitrary.
In the lack of a theoretical foundation, it could
be any functional relationship which is not mo-
notonous. A straightforward way to prove this
non-monotonous dependency is to compute the
correlation for two distinct size categories. If
there were indeed a quadratic dependency, it
would most likely (within the statistical restric-
tions in terms of number of data points) be no-
ticed as well as any other function with oppo-
site sign for the gradients in both categories.
14 What has actually already been speculated in
the case of the AOL Time Warner merger: ‘It is
on the cost side, cross-advertising offers on the
revenue side etc. A practical and complete pic-
ture of potential synergies for the AOL Time
Warner merger is provided by Blodget (Blodget,
2000: 26). However, as experience shows, these
theoretical concepts are at least as difficult to
materialize as the one described.
17 Time Warner (TW) was actually formed through
a series of mergers and acquisitions, the most
important, besides the merger with AOL, being
the merger of Time and Warner in 1989 and the
acquisition of CNN in 1996. Gerald Levin, former
chairman and CEO and Chairmen of Time
Warner labelled his company 1997 ‘strategically
complete’ (Levin, 1997: 2). The company further
adapted technological developments and heavily
invested in telecommunications peaking in the
merger or reverse takeover of AOL. Today, Time
Warner is almost fully vertically integrated and
active in a large number of media segments.
18 Nevertheless, News Corp. closed one of the larg-
est recent media acquisitions, a 34 percent
stake in DirecTV, the US satellite TV provider,
valued at USD 6.6 bn (Pasztor/Lippmann, 2003:
B1). However, after several attempts to enter the
American satellite market (Burt, 2003a: 15;
Burt/Larsen, 2003, 27), this acquisition seems
rather a completion of News Corps’ global sat-
ellite T V strategy than part of a corporate
growth strategy.
19 Steady regarding regulation, technology devel-
opment, competition etc. See comments above.

10 There are, in our view, three reasons for such
an approach. Firstly, operating cash flow ex-
cludes non-operating and extraordinary items.
In our opinion, a sustainable company should
at least at this level be positive to remain in the
business, as even companies with large losses
are regularly profitable at operating level. Sec-
ondly, we observed that mainly start-ups or
clear that the massive synergies expected from
the merger did not materialize. It is even pos-
sible that there are no synergies at all’ (Burt,
2003b: 10).
15 See comments above on ‘diseconomies of scale’.
16 We acknowledge having illustratively stated an
example, rather than the complete picture.
Other potential effects include cross-marketing

© 2003 – JMM – The International Journal on Media Management – Vol. 5 – No. IV 259
References

Barney, J.B. (1991): Firm resources and sustained competitive advantage. In: Journal of Management, Vol. 17(1), p. 99-120.

Baumol, W. J./Panzar, J. C./Willig, R. D. (1990): Contestable Markets and the Theory of Industry Structure (revised edition). Harcourt
Brace Jovanovich, New York.

Blodget, H. (2000): You’ve Got Upside – America Online/Time Warner. Merill Lynch Research. 23.02.2000.

Bowman, E. H./Helfat, C. E. (2001): Does Corporate Strategy Matter? In: Strategic Management Journal, Vol. 22, p. 1-23.

Bradley, S. P./Sullivan, E. E. (2002): AOL Time Warner, Inc: The Convergence of the ‘Old’ and ‘New’ Economies? Harvard Business
School Publishing, Boston.

Burt, T./Larsen, P. T. (2003): Murdoch’s Hughes deal sends a clear signal. In: Financial Times, 11.04.2003, p. 27.

Burt, T. (2003a): Murdoch wins a bigger slice of the sky. In: Financial Times, 12.04.2003, p. 15.

Burt, T. (2003b): AOL Offline – History suggests that a cosmetic move is worth a try. In: Financial Times, 13.08.2003, p. 10.

Chandler, A. D. (1990): Scale and Scope. Harvard University Press, Cambridge, MA .

Deans, G/Kroeger, F./Zeisel, S. (2002): Winning the Merger Endgame. A Playbook for Profiting From Industry Consolidation.
Mc Graw-Hill Trade, New York.

Ehrmann, T./Haas, F./Harms, R. (2002): The Bases of Successful Market Entry: the Liability of Size and of Newness in E-commerce.
In: The International Journal of Media Management, Vol. 4 (4), p. 203-211.

Fabrikant, G./Sorkin, A. R. (2003): Is Universal Worth Fighting Over? In: The New York Times, 27.07.2003, p. 9.

Farjoun, M. (1998): The Independent and Joint Effects of the Skill and Physical Bases of Relatedness in Diversification.
In: Strategic Management Journal, Vol. 19 (7), p. 611-630.

Grant, R.M. (1991): The resource based theory of competitive advantage: Implication for competitive advantage.
In: California Management Review, Vol. 33 (3), p. 114-135.

Grant, R. M. (2001): Corporate Strategy : Managing Scope and Strategy Content. In: Pettigrew, A./Thomas H./Whittington R. (eds.):
Handbook of Strategy and Management, p. 72-97. Sage Publications, London et al.

Hardes, H. (2002): Grundzüge der Volkswirtschaftslehre. Oldenbourg, München/Wien.

Hermreck, I./Moran, S. (2002): Corporate Universities and Organizational Learning – Making Corporate Learning Work.
Paper presented at the European Academy of Management, 2nd Annual Conference on Innovative Research in Management, 09.-
11.05.2002, Stockholm, Sweden.

Kirkpatrick, D. D./Sorkin, A. R. (2003): AOL Is Trying To Find Buyer For Book Unit. In: The New York Times, 23.01.2003, p. 12.

Klein, A. (2003): Stealing Time: Steve Case, Jerry Levin, and the collapse of AOL Time Warner. Simon & Schuster, New York.

Lin B. H./Liu H. H. (2000): A study of economies of scale and economies of scope in Taiwan international tourist hotels.
In: Asia Pacific Journal of Tourism Research, Vol. 5 (2), p. 21-28.

Linde, S. M./Roch, J. (2003): Surveying the Media M&A Landscape. Lehman Brothers, New York. 13.06.2003.

Levin, G. M. (1997): Letter to shareholders. In: Even better together. Time Warner Annual Report 1996, p. 1-3.

Majumdar, S. K. (1997): The Impact of Size and Age on Firm-Level Performance: Some Evidence from India. In: Review of Industrial
Organization, Vol. 12, p. 231-241.
www.mediajournal.org

Makadok, R. (1999): Interfirm differences in scale economies and the evolution of market shares. In: Strategic Management Journal,
Vol. 20, p. 935-952.

Markides, C./Williamson P. J. (1996): Corporate diversification and organizational structure. In: Academy of Management Journal,
Vol. 39, p. 340-367.

Milgrom, P. R./Roberts J. (1992): Economics, organizations and management. Prentice Hall, Upper Saddle River.

260 © 2003 – JMM – The International Journal on Media Management – Vol. 5 – No. IV
 Murdoch, R. (1998): Wir suchen Partner auch in Germany. In: Industriemagazin (1998), October, p. 28-36.

Nelson, R.R./Winter, S.G. (1982): An evolutionary theory of economic change. Harvard University Press, Cambridge, MA.

Nichsolson, W. (1985): Microeconomic Theory: Basic Principles and Extensions (3rd edition). Dryden Press, New York.

N.N. (2003): The Fortune 2003 Global 500. In: Fortune, 21.07.2003. p. 1ff.

O’Regan, N. (2002): Market share: the conduit for future success? In: European Business Review, Vol. 14 (4), p. 287-293.

Pasztor, A./Lippmann, J. (2003): Finally, Murdoch Wins DirecTV, but His Prize Has Pitfalls. In: The Wall Street Journal,
10.04.2003, p. B1.

Peteraf, M.A. (1993): The cornerstones of competitive advantage: a resource-based view. In: Strategic Management Journal,
Vol. 14 (3), p. 179-191.

Roll, R. (1986): The Hubris Hypothesis of Corporate Takeovers. In: Journal of Business, Vol. 59 (2), p. 197-216.

Rumelt, R.P. (1982): Diversification strategy and profitability. In: Strategic Management Journal, Vol. 3 (4), 359-369.

Scherer, F. M./Ross D. (1990): Industrial Market Structure and Economic Performance (3rd ed.). Houghton Mifflin, Boston.

Sloman, J. (2000): Mikroökonomie. Oldenbourg, München/Wien.

Sjurts, I. (2002): Strategien in der Medienbranche: Grundlagen und Fallbeispiele. Gabler, Wiesbaden.

Tagliabue, J. (2003): Vivendi Posts USD 25 billion Loss; Will Explore Shedding Assets. In: The New York Times, 07.03.2003, p. 1.

Teece, D. J. (1980): Economies of scope and the scope of the enterprise. In: Journal of Economic Behavior and Organization,
Vol. 1, p. 23-47.

Teece, D. J. (1982): Towards an economic theory of the multiproduct firm. In: Journal of Economic Behavior and Organization,
Vol. 3, p. 39-63.

Teece, D. J./Pisano, G./Shuen, A. (1997): Dynamic capabilities and Strategic Management. In: Strategic Management Journal,
Vol. 18 (7), p. 509-533.

Veronis, J. J./Suhler, J. S./Stevenson J. T. (2002): Communications Industry Report 2002. Veronis Suhler Stevenson, New York.

Wernerfelt, B. (1984): A resource-based view of the firm. In: Strategic Management Journal, Vol. 5 (3), p. 171-180.

Wirtz, B. W. (1999): Convergence processes, value constellations and integration strategies in the multimedia business.
In: International Journal on Media Management, Vol. 1 (3), p. 14-22.
www.mediajournal.org

© 2003 – JMM – The International Journal on Media Management – Vol. 5 – No. IV 261