Vertical Integration and Market Foreclosure in the Korean Cable Television Industry: An Empirical Study

Abstract

This study investigated vertical foreclosure effects in the Korean cable television market. While it focuses mainly on vertical foreclosure, the study also examined reciprocal carriage between large vertically integrated cable operators. From the analysis of cross-sectional data regarding cable operators' carriage information in Korea, two conclusions were derived. First, vertically integrated cable operators tend to carry their affiliated channels and were less likely to carry their rivals' channels. Second, the data suggest that large vertically integrated cable operators were engaged in reciprocal carriage.

Notes

*p < 0.05;

**p < 0.01.

*p < 0.05;

**p < 0.01.

¹Suppose there are two independent firms, upstream and downstream, and that the two firms have market power. Two firms may engage in above-marginal cost pricing in upstream and downstream markets respectively, which causes double marginalization. However, if the two firms merged, then the integrated firm may price the upstream product at marginal cost. Refer to Spengler (1950) for original idea.

²Thus, the vertical integration could contribute to either reduce the final product price or increase product diversity.

³Recently, the FCC reinstalled the horizontal ownership limits which was struck down by a federal court in 2001. According to this order, a cable system may serve no more than 30% of subscribers nation-wide. The FCC is also seeking further guidance on channel occupancy limits, which prohibit cable operators from carrying more than a certain portion of affiliated channels.

⁴However, many debates have arisen over the existence of vertical foreclosure. Other economic studies argue that vertical foreclosure cannot be a rational business strategy (Bork, 1978; Posner, 1976; Posner & Easterbrook, 1981), and thus the 1982 and 1984 U.S. Department of Justice Merger Guidelines removed the principle of vertical foreclosure (Chipty, 2001). Recent studies have tried to develop theoretical models in which vertical foreclosure can occur in equilibrium. Refer to Hart & Tirole (1990), Ordover, Saloner, & Salop (1990).

⁵Recently, however, newer alternative platforms for MVPD services have provided meaningful competition to incumbent cable services in Korea (Rhee & Lee, 2010). Wise and Duwadi (2005) argued that the cable TV consumers would readily switch to DBS if faced with a significant increase in quality-adjusted cable prices. In addition, the United States experienced the fastest IPTV growth in the world with 60% more subscribers in 2009 than in 2008 (Briel, 2010).

⁶Note that the Korean cable networks reported in this paragraph include cable networks, pay per view, and on-demand channels.

⁷In Korea, DBS and IPTV started to provide services in 2002 and 2008, respectively.

⁸As of 2008, the percentage of analog cable subscribers among total cable subscribers was 90% and the average channel capacity of analog cable services was around 70s from 2004 to 2008. This means that the capacity limit of analog cable services could work as an entry barrier to new cable networks.

⁹The distribution of 90 channels in each category is as follows: movie (10), drama (12), family/documentary (7), financial news (5), health (2), leisure/travel (2), fashion/beauty (3), general entertainment (3), news (2), educational (4), public information (3), religious (2), sports (6), music (4), comedy/entertainment (5), event information (1), baby care (1), cartoon (5), home shopping (5), game (3), government/congressional (3), and adult entertainment (2).

¹⁰ Rowley and Bae (2003) argued that Korean society has an exclusive attitude towards other countries, people, and cultures because its homogeneous population is composed of a single ethnic group. According to Shin (2006), “Most Koreans do not question the racial purity and homogeneity of their nation, and believe strongly in a shared bloodline and a common ancestry” (p. 6). Shin's study also shows that 93% of Koreans agree that their nation has a single bloodline. According to Park and Song (2009), Koreans' emotional identity may motivate viewing habits and satisfaction. That is, traditionally, Korean people have had a homogeneous culture, which leads to homogeneous patterns of television viewing.

¹¹The marginal effects in a binary choice model typically can be expressed as F'(X'β)β_i , where F() represent the cdf of underlying distribution for the binary model. Refer to Cameron & Trivedi (2005) for a discussion of the marginal effects in a binary choice model.

¹²A binary choice model, because of the identification problem, estimates coefficients only up to scale, not the original values. Thus, we report only the ratio of estimates. Refer to Cameron & Trivedi (2005) for identification problems in binary choice models.

¹³From an interview with the CEO of CJ Cable Net, one of the biggest cable MSOs in Korea.