Horizontal Dis-integration in the Media Industry : A New Business Model

ABSTRACT

In today's dynamic environment of digitalization, IP network and broadband service development, media interface and protocols for data transfer are in the midst of standardization. In conjunction with this, the analog media industry of the past will be replaced by a new "digital media industry", characterized by a completely different style of organization. In contrast to the vertical integration of the analog media industry, it is natural for the digital media industry, which utilizes IP networks to transmit various types of digital media, to employ a structure of horizontal dis-integration. Though advocacy of horizontal and vertical dis-integration in the media industry is not new, recently demands for horizontal dis-integration are being made by the industrial world in order to elicit more competition.

In terms of promoting competition and institutional design, it is of paramount importance to understand that the digital media industry is characterized by a dis-integrated structure. This is especially true of institutional design issues; in the case of the copyright system, for example, the traditional classification of contents-text, static images, video, and sound-must be transcended, and a new comprehensive copyright regulation system that will promote the dissemination of digital media is recommendable. Furthermore, in regard to network and infrastructure development, rather than charge the Broadcast Law and Telecommunications Business Law with managing separately classified types of infrastructure as in the past, it is necessary to develop a system in which radio waves, telephone lines, CATV hotlines, and other types of infrastructure can be managed together within the same framework.

Though it is necessary to set horizontally dis-integrated industrial organization as a premise for institutional design, it is not necessarily the case that companies employ this method of business organization. Though some restrictions apply due to competition policies, whether a company will choose vertical integration or horizontal dis-integration is a decision that should be left up to individual companies.

This report divides the business organization of the digital media industry into four elements: (1) facility provider, (2) service provider, (3) contents distributor, and (4) contents provider, and analyzes the cost and revenue structure of each. Furthermore, business patterns consisting of ten possible combinations of the above four elements are presented. Five of these ten business patterns have promising future potential; analysis of the structure and business description of the ISP (Internet Service Provider) industry shows that mainstream ISP business developments fall into one of these five patterns.

When a company considers business development, the question of whether to pursue an integrated or a dis-integrated business structure is a critical one not only for the media industry, but for other industries as well. Thus, the analytical framework proposed in this paper may be employed effectively when investigating industrial organization and dominant business models in other industries as well.