Introduction

One of the most innovative aspects of media markets is the weakening of barriers to entry: Digital technology facilitates the emergence of new competitors because the “cost of entry” has declined dramatically (^{Chon, Choi, Barnett, Danowski, & Joo, 2003}). According to ^{Doyle (2018)}, “changing technological and market dynamics have accentuated the importance of configuration-scale and corporate structure-as a critical success factor” (p. 8). Previous legal barriers to entry in the areas of content production and distribution are no longer insurmountable. From a company perspective, this change has two fundamental consequences: On the one hand, it is increasingly difficult to maintain market share in one’s own territory; but, on the other hand, it is easier to penetrate other markets. Therefore, strategies for growth emerge as the most effective way of preventing company decline.

During the last decade, both the consumption of information and entertainment contents and investment in media advertising have grown worldwide. Total worldwide entertainment and media revenues are expected to rise at a compound annual growth rate (CAGR) of 4.4% in nominal terms over the course of five years, from USD1.72 trillion in 2015 to USD2.14 trillion in 2020 (^{PwC, 2016}). Therefore, the macroeconomic data imply that it would be reasonable for communication companies to re-invest at least part of their surplus profits in their own sector.

However, this line of reasoning cannot mask another striking fact in this context: The increasing investment potential of the communications sector is shadowed by the decline of many of the media and entertainment companies that led their respective national markets over the last number of years. This paradox may be accounted for as follows: While the industry affords major opportunities to innovative organizations, it also leaves more conservative companies at a profound disadvantage, whereby the latter endeavor-mistakenly-to preserve their past glories.

Economic theory in general, as well as discussions of the communication sector in particular, has been marked for some time by discussions of the advantages and disadvantages of a company being larger than its competitors. The empirical findings of published research in this regard prove inconclusive: The results vary in relation to the specific conditions of competition and strategies for growth facing or adopted by each company (^{Oliver, 2014}; ^{Carayannis & Rakhmatullin, 2014}; ^{Esser, 2016}; ^{Peltier, 2004}). Likewise, there is no conclusive evidence as to which model of growth may afford the greatest competitive edge in relation to the specific characteristics of each market.

The purpose of this paper is to explore what approaches may enable the highest expectations of profitability for media companies in a new context shaped by increasingly intense competition and the correspondingly increased difficulty in retaining a leadership position in the market. The first section comprises an overview of the pros and cons of different strategies for growth. Our hypotheses, based on the specific characteristics and conditions of the communications sector, are framed in the following section. Then, the basic indicators of 50 major companies in the industry are analyzed to assess correlations between strategies for growth and financial efficiency and profitability. Finally, the limitations of this research are outlined, along with some proposals for future study that might complete the conclusions drawn here.

The Bigger, the Better?

For many years, classical economics has held that, by increasing in size, a company may obtain considerable advantages: It can achieve economies of scale and scope, synergies, safeguards for its markets, diversification of risks, become more appealing to its employees, and enhance its name, reputation and negotiating power (^{Stigler, 1958}; ^{Krugman, 1980}; ^{Buzzell, Gale, & Sultan, 1975}; ^{Schmalensee, 1981}; ^{Lawler, 1997}; ^{Chalaby, 2018}). Mergers and acquisitions are the inevitable step for achieving a superior position in the market and maximizing revenue streams (^{Evens & Donders, 2016}). In fact, companies refuse opportunities for growth in only two scenarios: (i) when they have recently grown and need time to assimilate the change in size before expanding further (for instance, accommodating a newly acquired unit or area within an internal corporate culture); and (ii) when they are faced with serious problems, such as a loss of profitability, damage to corporate reputation or other severe financial difficulties that require the undivided attention of company management. In boom times, by contrast, company management tends to ignore the question of whether or not growth is desirable, to focus directly on how such growth should be brought about.

Nevertheless, all forms of growth involve challenges. For ^{Aldrich and Auster (1986)}, the main difficulty comes from the characteristic resistance to change, which is inevitable in large organizations. Other researchers (e.g., ^{Allocca & Kessler, 2006}) point out that growth in company size leads to increased bureaucracy and that it may slow managerial decision-making processes. Moreover, inorganic growth tends to lead to greater debt and corporate culture clashes between organizations (^{Schwartz & Davis, 1981}; ^{Kerr & Slocum, 1987}). Finally, many growth strategies may blur the focus or undercut the specialization of the companies involved (^{Matsusaka, 2001}). For ^{Van Kranenburg and Ziggers (2018)}, “empirical evidence shows that many M&As fail to create value or even destroy value” (p. 214).

From the point of view of strategic decision-making, the most judicious theoretical model consists of exploiting all the potential advantages of growth while simultaneously avoiding any and all of the kinds of collateral damage referred to above (^{Coad, Daunfeldt, Hölzl, Johansson, & Nightingale, 2014}; ^{Roos & von Krogh, 2016}). Such an objective may not be achievable in practice, leading to divestment and, in some cases, the division of the company into two or more parts so as to safeguard the interests of shareholders. Recent examples of this phenomenon include AOL-Time Warner, Gannett, News Corp, Scripps, Tribune, and Viacom.

Strategies for Growth

Indeed, strategies for growth involve both advantages and disadvantages at the same time; assessment of the real impact of each strategy, in the short as well as long term, requires close analysis of how each model might function in the market of a given product or service. Even then, however, the indicators obtained may depend on other factors that are difficult to separate out, such as the way each strategy is implemented, the reactions of competitors, and/or the overall development of the market.

Strategies for growth are based on five basic decisions (^{Carman & Langeard, 1980}; ^{Cronin & Page, 1988}):

The strategies for growth are more complicated because not all of the five strategic decisions listed above are mutually exclusive or they may cease to be so over time: For instance, a company may embark on a process of vertical integration, before later deciding to implement a horizontal form of integration as well; moreover, having acquired another company (inorganic growth) may also decide to launch a new product or service on the market (organic growth).

There are a number of specific circumstances in the media sector that may condition strategies for growth. A number of these conditions and their potential impact on the five strategic decisions are outlined below.

First, the media industry-especially the audiovisual sector-has traditionally been a highly regulated industry; therefore, many companies have only been able to increase in size by means of inorganic growth (^{Hendriks, 1995}; ^{Chalaby, 2016}). Although the print media have not been subject to such legal restrictions, the high barriers to entry in terms of distribution function as a strict limit on organic growth (^{Carvajal & García Avilés, 2008}). Nevertheless, the development of the internet (a relatively unregulated space with low barriers to entry) has tipped the scale between organic and inorganic growth.

Second, vertical integration has been more common in the audiovisual sector than in print media because the former has encountered a higher number of bottlenecks in the value chain than the latter (^{Evens & Donders, 2016}). However, given that digital technology facilitates the distribution of audiovisual contents, many companies no longer see a need to engage in extensive vertical integration, which requires significant investment and may lead to a loss of specialization (^{Storper, 1989}; ^{Wirtz, 2001}; ^{Yoo, 2002}; ^{Chalaby, 2016}) or at least it affects the investment in the content, lowering the quality produced (^{D’Annunzio, 2017}).

International strategies are more prevalent among media companies specialising in entertainment products (music, cinema, fiction production for TV) because such contents and brands “translate” more easily to markets in other countries and contexts. In contrast, news-based contents tend to depend on proximity in terms of perspective and/or context; in fact, most news-journalism media brands establish a high percentage of their sales volumes within their domestic markets (^{Albarran & Dimmick, 1996}; ^{Casero-Ripollés & Izquierdo-Castillo, 2013}).

In terms of product and/or service specialization, most media companies opt for a diversification rather than a specialization strategy (^{Chan-Olmsted & Chang, 2003}). The rationale for this approach is based on making the best use of both tangible assets (production processes and distribution systems) and intangible values (knowledge, relationships, brands) to increase sales and profitability (^{Kolo & Vogt, 2003}). But, as ^{Jung and Chan (2015)} point out, a high degree of unrelated diversification might decrease performance. There also appears to be a hurdle level for diversification, prior to which expanding businesses in product and international markets may need considerable investment and produce negative cash flow.

Finally, media companies have moved from single-device (paper, airwaves, cable, satellite, or the Internet) to multiplatform content distribution systems. Two main reasons account for this shift (^{Doyle, 2015}; ^{Schlesinger & Doyle, 2015}): the increase in distribution options, in some cases, faster, cheaper and more efficient than traditional modes; and new demands from audiences, who want to access contents where, when and the way(s) they want. Thus, unlike the other four strategic decision options discussed above, each of which may evince advantages or disadvantages in different situations, the general trend throughout the communications sector is towards multiplatform content distribution.

Hypotheses and Methodology

Our research is based on the following hypotheses referred to the media and entertainment companies:

H1: Inorganic growth allows for a faster increase in revenues but involves higher levels of indebtedness than organic growth.

H2: Vertical integration generates lower Return on Investment (ROI) than horizontal integration: If there is a bottleneck in the market, media corporations may be forced to be vertically integrated, and it is expected to generate revenue streams or greater economy efficiency. However, such strategy will lead towards a loss of specialization and efficiency.

H3: Internationalization increases the profitability of audiovisual companies.

H4: Specialization in a type of business can generate rates of income growth inferior to those obtained from the offer of a more diversified business portfolio.

H5: Traditional players are also moving into new digital territories by acquiring companies with digital capabilities or developing their own digital platforms. Such strategy allows the firms to enlarge their scope and their economies of scale.

Results

The results for the measures outlined above are presented in Table 1, which takes into consideration whether the companies are local or international, diversified or specialized, and whether or not they have implemented inorganic or organic strategies for growth. After the presentation of results, a more detailed account of the following issues is offered: the geographical context in which corporate operations take place; the kinds of operations that strengthen the value chain; the most profitable strategies for growth; and finally, the profitability of operations relating to vertical or horizontal integration.

As ^{Peltier (2004)} averred, specialization and inorganic growth appear to be the strategic decisions that lead to greatest growth in terms of revenues, market capitalization and results (EBIT) of media companies. International companies and specialized audiovisual companies evinced higher levels of profitability in terms of ROIC for the period covered by this study. However, this was not the case for international firms as regards the EBIT percentage margin. Local media companies show higher levels of growth in terms of revenues, market capitalization and results (EBIT) than international companies-that is, they grow more quickly.

As regards indebtedness, companies that opt for inorganic growth or specialization show higher levels of debt. Likewise, local companies tend to have higher levels of indebtedness. More diversified companies show greater stability in their results (EBIT Coefficient of Variation) as well as higher margins; such stability also correlates with larger companies. Based on the data in Table 1, the top ten diversified companies have a lower EBIT coefficient of variation (standard deviation of EBIT/average), a higher EBIT margin (16.5% vs. 15.1%), and their market capitalization is also higher than the average (USD31.02 billion vs. USD18.46 billion). More diversified companies report significantly lower levels of debt.

Conclusions and Managerial Implications

In light of the analyses carried out above, the hypotheses formulated for the purposes of this research may now be tested in relation to the fifty companies that have undertaken the highest number of corporate operations in recent years.

H1 is confirmed by the analysis presented in this paper. As Table 1 shows, the increase in revenues generated via inorganic growth (19% CAGR) is higher than that generated via organic growth (7% CAGR). At the same time, however, the level of indebtedness is also higher. Our conclusion also refuses ^{Peltier’s (2004}) reasoning about the negative correlation between size and performance. Our data shows that, in a period of seven years, media companies that developed growth strategies based on mergers and acquisitions increased their EBIT by 19% per year.

H2 has also been confirmed by the data presented in this paper. Vertical integration generates a lower ROIC than horizontal integration, although the return is quite similar. The difference is bigger in relation to the EBIT margin. The increase in profit margins at companies that integrated horizontally over the period of time covered by this study was 21%, as compared with just 13% for companies that integrated vertically. It seems that the increase of fixed costs associated to vertical integrations is not balanced by the main rationale behind this strategy: to raise a company’s profitability through the sum of the profit margin earned at the different stages of the production and commercialization processes (^{Sánchez-Tabernero & Carvajal, 2002}).

As our third hypothesis suggests, internationalization increases the profitability of audiovisual companies. ROIC is higher in firms that have grown internationally, as compared to those that have grown locally. The results are different for more internationalized companies in comparison to companies that have centered their inorganic strategy for growth more intensively on internationalization. The hypothesis is not confirmed in relation to the former. Thus, the outcome for H3 in this study is inconclusive: It is confirmed in relation to ROIC but not in terms of margin. The international companies do not have a greater margin in terms of EBIT. This conclusion coincides with ^{Peltier’s (2004)}, who assumed a positive correlation between internationalization and economic performance. Certainly, the internationalization for production companies has the risk of producing contents for the international markets and no to focus towards the concerns of domestic audiences (^{Esser, 2016}).

Our fourth hypothesis-specialization in a type of business leads towards lower growth rates-cannot be confirmed on the basis of the results presented in this paper. Although the increase in revenues is significantly higher in specialized companies (20%) than in diversified companies (4%), the margin involved is similar in both. When the specialization is in business terms, the rates of growth are higher.

Finally, we assumed that traditional players were moving into new digital territories by acquiring or merging companies with digital capabilities or developing their own digital business units (hypothesis 5). In accordance with ^{Verhoeven, von Rimscha, Krebs, Siegert, and Sommer (2018)}, we thought that media firms were enhancing their scope by enhancing their distribution channels, aiming at both achieving economies of scale and increasing efficiency. However, such trend is not dominant. Most media companies are not taking high risks in the new digital markets. Though the number of operations is high (24%), the deal size means just 4% of total investments.

The following conclusions may be drawn from the discussion of the results above, which prompt reflection on the possible causes and effects in relation to honing a competitive edge through corporate operations. In terms of ROIC, international companies and specialized companies show higher indices of profitability. As ^{Chan-Olmsted and Chang (2003)} and ^{Doyle (2018)} already concluded, this advantage is due to the effective exploitation of economies of scope and scale.

The internationalization of audiovisual companies increases their profitability because content distribution costs are low and a wide variety of such contents-cinema, music, television series, some sports-“translate” easily to other markets outside the country in which they were produced. This enables the development of an international brand identity capable of attracting large international audiences.

The fact that such growth is not reflected in terms of margin/EBIT proves that not every international company benefits from economies of scope and scale, especially if the audiovisual contents they offer are not attractive to audiences beyond the original market. The uncertainty inherent in the audiovisual market makes it difficult to predict the success of specific contents (^{Medina, Sánchez-Tabernero, & Arrese, 2016}; ^{Medina & Herrero, 2013}).

According to the analysis detailed above, diversified companies tend to have the lowest levels of indebtedness. This finding appears to confirm the general theory regarding diversification (^{Makides & Williamson, 1994}), especially in unrelated sectors, that diversification is driven by a surplus of financial resources.

We discover a big variety of competitive situations when we analyze specific sectors. The cable industry tends towards a natural monopoly: In the time-period covered by this study, 60% of acquisitions were in the distribution sector. Other operations are oriented to guarantee the rights of exclusive contents that may attract consumers. On the other hand, the digital transformation of the media market explains why digital development and e-commerce companies have emerged as targets of investment among traditional media operators (^{Gutierrez-Rentería & López, 2014}). Corporate operations across sectors are likewise noteworthy: Television networks and entertainment production have acquired digital companies. For ^{Chalaby (2016)}, the disruption of Internet has been one of the most important causes of vertical integration operations in the last years. However, such investments are still weak, probably because they are not yet enough profitable in comparison with their current core business (^{Picard, 2014}).

The production sector has not invested heavily in acquiring external production companies because most managers prefer to develop talent in house in order to protect internal culture. In addition, audiovisual production is both expensive and risky; thus, production companies have less capital to devote to expanding their business, and tend to re-invest in their own resources, to ensure the quality of the contents they produce.

Growth is one of the main targets of every company as it is directly related to its value: The higher the cash flows of the company will be in the future, the higher the net present value. But managers usually face some challenges when choosing their strategic options to grow. The first one is uncertainty: There is no golden rule for growth, because one strategic option can fit very well to a particular company and can be inefficient for another. A second challenge is that growth is not for free: It requires resources and can be expensive depending on the strategy chosen and the cost of capital for the company; usually growth and debt are two terms intrinsically related.

Our research sets a good frame for analysis for managers of media companies who face the challenges of corporate growth: We show that mergers and acquisitions can generate rapid growth but is expensive in terms of ROIC and usually increases the leverage of the company; we provide data which demonstrate that internationalization is not always a source of competitive advantage; and we come to the conclusion that concentration strategies are the best option for increasing profit margins while vertical integrations must answer to any other needs than growth or profitability.

Limitations and Further Research

A number of the limitations in this study relate to the sample selected for analysis. The selection criteria are open to question because although the rationale underpinning them is outlined in the methodology section, the criteria correspond primarily to the pragmatic interests of the researchers. Future studies might usefully deploy statistical cluster analysis to classify the companies addressed. The sample size may seem small for the purposes of some analyses as the deal size of operations at some of the companies has a significant bearing on the sample and may distort the results.

At the same time, a seven-year time-lag was introduced in an attempt to cover a period as close as possible to the present. This study could be improved in the future, broadening its scope in terms of historical data. The time-period might be extended to ensure that the findings are not conditioned by the immediate economic context, as another study has averred.

Any analysis of international growth must encompass the geographical origins of both acquirer and acquired companies because different financial scenarios may account for such developments in different ways. The analysis carried out for the purposes of this paper centers on the consolidated data of defined clusters rather than the data of specific companies.

The conclusions of this paper, which appear to be coherent and congruent with the theory of company growth, should also be validated in relation to other industrial sectors, thus enabling an understanding of whether some of these conclusions are specific to the media market as such. At the same time, the conclusions drawn here are general in nature: It remains to be seen to what extent specific cases reflect the general theory or might be better framed as exceptions due to contextual conditions or company size.

Finally, while the database used is wide-ranging and consistent, it would benefit from further refinement as regards industrial classification and the amount or value of the operations involved. A media industry database could be used for future research in this field. Research into other industries and in-depth study of a number of key cases would also serve to consolidate the general theory outlined and invalidate any factors that may distort this widely accepted approach.

We have analyzed the efficiency of growth strategies of media companies. However, we have not paid attention to their effects on society. For instance, concentration may have negative consequences since the point of view of content pluralism and market competition. Vertical integration can cause that a few companies may be able to monopolize the market. Therefore, it may reduce choice for consumers. Furthermore, mergers and acquisitions may be oriented and get dominant positions in the market. Those relevant effects of corporate growth strategies deserve further policy-oriented pieces of research.