The Old Guard vs. the Vanguard

By GARY HAMEL and LLOYD SWITZER

With two giant mergers in the news, consumer groups are once again sounding the alarm. Ever vigilant, they're concerned that the proposed deal between Comcast and Disney and the merger of Cingular and AT&T Wireless will work to the disadvantage of consumers. Industry consolidation, it is argued, almost always results in higher prices and diminished service. Certainly, regulators will closely scrutinize both deals. But fears of competition-stifling oligopolies are overblown.

In a world of accelerating change, oligopolies provide no more than a temporary refuge from the gales of creative destruction. A flurry of megamergers in the pharmaceutical industry hasn't prevented relative upstarts like Genentech, Amgen and Genzyme from amassing more than $140 billion in market value. Relentless consolidation in the traditional phone business hasn't made the survivors any less vulnerable to innovations like Internet-based telephony. and the "fortress hubs" of America's big airlines haven't prevented mavericks like Southwest, JetBlue and Frontier from vigorously exploiting the orthodoxies of the industry's aristocracy.

Put simply, while oligopolies are good at dampening competition among industry stalwarts, they don't protect the old guard from the vanguard. Indeed, consolidation tends to reduce competitive variety within an industry, creating space for new and unorthodox strategies. and no deal, however big, inoculates incumbents from rule-busting innovation.

Consider the media, where consolidation has raced ahead for a decade. Fact is, Comcast is late to the party. Viacom, News Corporation and Time Warner are already more vertically integrated. In the industry, profits depend on the ability to command the attention of consumers, on control over distribution, on the power to intermediate between those who create content and those who consume it and on one's capacity to siphon off a share of advertising dollars. In these areas, incumbents face threats aplenty.

Start with share of attention. While consumers can choose from among several hundred TV channels, they can also access several billion pages of Web content. The UCLA World Internet Project reports that in 2003, Internet access consumed over five hours per week of time previously spent watching TV. The proportion of time spent online can only grow as consumers abandon dialup ISPs for broadband service. Based on the evidence thus far, it seems unlikely that today's media giants will capture anything like the same share of attention online as they currently command in the offline world.

Recently, consumers have shown a voracious appetite for new kinds of media experiences, particularly those that cast them as active participants or involve them as co-creators. and more times than not, it is media newcomers that provide new experiences. With its 95 million registered users, all of who seem to be captivated by the interactive allure of online auctions, eBay is as much an entertainment company as it is a retailer. Electronic Arts, the leading developer of video games, is another media outsider that that has changed the entertainment landscape. According to EA, teens already spend more time playing video games than watching TV. Already bigger than the movie business, the video game industry has been growing at a rate of 20% for a decade and is now aggressively moving online.

More change is afoot. Thanks to new applications like Apple's iMovie and GarageBand, and ever more powerful PCs, media consumers are increasingly able to create and share their own content. While most homemade fare is hokey, the sheer volume of consumer-authored content may one day yield enough gems to challenge the media industry's control over content creation.

The cable industry is also facing threats to its hold over distribution. In less than a decade, satellite TV has won over 20% of households. and while the cable industry has garnered nearly twice as many broadband Internet subscribers as the phone giants, the future will give consumers even more options for broadband access. For example, South Korea's SK Telecom is promising to roll out a technology that will let customers watch satellite TV on their phones. Nokia is also working to bring digital TV to handheld devices. While "third generation," or 3G, mobile phone services have been slow in coming, they will give consumers another way to access digital content of all kinds.

In aggregating dozens of channels into entertainment packages sold to customers on an all-or-nothing basis, cable companies have traditionally served as powerful gatekeepers between content producers and consumers. Yet cable's role as an intermediary will undoubtedly be challenged. Before long, it may be easier for a consumer to download a news clip from CNN.com than turn on a TV set. Film companies may deliver first-run movies directly to consumers via the Internet. and instead of buying a season pass from their cable company, sports fans may buy programming directly from the NFL or their local team -- to be delivered over a broadband connection. In this scenario, cable operators may be more like trucking companies, charging for the transport of bits, and less like shopping malls, aggregating goods and services.

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There's also the threat to advertising revenues. In 2002, "ad" income accounted for nearly 30% of cable industry revenue. With the proliferation of TiVo-like personal video recorders, consumers will increasingly be able to avoid the advertising on which media companies so desperately depend. Looking forward to this eventuality, Steven J. Heyer, Coca-Cola's president and COO has publicly questioned whether TV advertising will remain the most effective way to reach consumers. Put simply, TV advertisers are going to find it ever more difficult to hold a consumer's attention. This may put a big dent in media-industry profits.

Against this background, the Comcast-Disney deal appears more reactionary than revolutionary. Yes, Comcast and Disney have the chance to create the future -- with digital video recorders, an expanding menu of pay-for-view movies, Internet-based phone calls and more. But history suggests this isn't the way to bet. After all, the essential nature of oligopolists is defensive. The future belongs to the inventive.

Messrs. Hamel and Switzer are, respectively, the chairman and a director at Strategos Inc.