Canadian Media Merger Creates High Market Power and Runs Against Concentration Trends Elsewhere

The proposed merger between Bell Canada Enterprises and Astral Media will shortly be considered by the Canadian Radio and Television Council (CTRC). The merged company will own 70 television and cable channels, more than 100 radio stations, and some of the country’s most popular websites.

The combined company will serve nearly one-third of the national TV audience, more than 40 percent of the national cable TV audience, and about 30 percent of the nationwide radio audience. In addition the merger will increase Bell’s vertical integration and its power over distribution systems used by competitors. This later factor is particularly important because Canada lacks much of the regulatory control seen in Europe and the US over business practices of distribution systems that are also used by competing firms.

The merger will benefit the two companies by giving them more market power and permitting efficiencies at the corporate and divisional levels. It is also likely to produce efficiencies at the operational level by using more common content, something that is especially likely in its radio operations.

Investors will see benefit in the future. Share prices often go up before mergers as speculators jump into the market and then sell before the merger is completed, but prices typically decline after mergers when the realities of the costs of integration reduce short- to mid-term performance.  It will take some time before the benefits of the consolidation reach investors as dividends and heightened share value.

The downside of the merger will be borne by consumers and advertisers because the combination will create more market power to push up prices and reduce incentives for better service and quality. Competitors will also face a stronger company that controls the distribution infrastructures for their products and this should lead to higher prices. Additionally, one can expect social harm because the merger reduces plurality of those selecting content and the original content made available—particularly in radio—will probably be diminished.

How the CTRC will respond is unknown.  However, Canada has traditionally permitted far greater media concentration than other countries arguing that it helps strengthen Canadian ownership. It has permitted media concentration levels 2-3 times higher than those found in US and Europe and has one of the most concentrated media markets in the world.

Most other countries have been using broadcasting law and competition law in recent decades to reduce concentration in content provision and those policies have been quite successful. Why not Canada?

Canadian policy has been hampered by its nationalistic rhetoric, a significant degree of regulatory capture, and also because there are inconsistencies among broadcasting and competition policies  that allow regulators to downplay public and consumer interests.  The CRTC deals with station ownership, for example, but has set a market cap of 45% on total national television audience—about twice that in most countries. The Competition Bureau can review media mergers, but has tended to be concerned only about effects on advertising prices. Existing policies do not effectively address cross media ownership effects.

Ironically, the public service broadcaster (Canadian Broadcasting Corp) was heavily criticized when it served about 40 percent of the television audience. Commercial firms were particularly vocal arguing that having such a large firm distorted the market and their complaints led Parliament to reduce support for the CBC and over time its audience has been cut in half.

It will be interesting to see whether CRTC is willing to take a broader view and is willing to stand up to the interests of Bell and Astral when it considers this massive merger.

Contemporary Trends Change Magazine and Newspaper Printing Markets

The markets of magazine and newspaper printing firms are undergoing significant changes, reflecting on-going transformations in the customers they serve.

Some of the changes have been under way for 2 decades with traditional printing companies morphing into printing service companies offering more profitable value-added services and products.  These included high-end specialized printing capabilities and services, database printing, and wide-ranging distribution services. At the same time, the increasing number of magazine titles, accompanied by lower average press runs, pushed the companies toward higher efficiency and acquisition of presses and systems designed for lower press runs.

In this environment, many printers could not effectively compete and consolidation began creating large regional players in the industry.

Shorter-term trends have also played havoc with the printing industry by killing off some magazine and newspaper titles, lowering the average number of pages printed because of advertising reductions, and by decreasing demand for catalog printing by mail order companies.

These changes created excess capacity and financial problems for many printers, opening the way for private equity firms to purchase trouble companies, restructure their operations, and consolidate the industry even further. Walstead Investments, for example, bought the St. Ives Group, Southern Print and Wyndeham in the UK to do just that.

About the only bright spot for the printing industry has been that many newspapers have now decided to outsource printing—increasing the number of customers in that segment for the short term, at least. Even some large newspapers that had given up commercial printing decades ago have changed the size capacity and flexibility of their presses to gain more production options and they are now offering printing services to other publishers and advertising service firms.

The consolidation has allowed big players to grow bigger. Donnelley has expanded by acquiring firms across North America.  Quad/Graphics has moved into Europe and Latin America. The German publisher Guner & Jahr acquired Brown Printing in the US and Prisma Presse in France.

The current economy is limiting the ability of these firms to push up prices, but one can expect that to occur when better times return and capacity utilization increases.