11969

1

Industry Architecture and Entrepreneurial Opportunities:

The Case of the U.S. Broadcasting Sector

by

Jeffrey L. Funk

Associate Professor

National University of Singapore

7 Engineering Drive 1

Block E3A, 4th Floor

Singapore 129793

etmfjl@nus.edu.sg

Revise and resubmit, Industrial and Corporate Change

11969

2

Industry Architecture and Entrepreneurial Opportunities:

The Case of the U.S. Broadcasting Sector

Abstract

This paper shows how changes in industry architecture, and in particular the emergence

of vertical disintegration in these architectures, led to increases in the number of

entrepreneurial opportunities in the U.S. broadcasting sector. It did this by analyzing the

number of firms in various vertically disintegrated layers and the specific events that led to

the emergence of these layers using concepts from the literatures of industry architecture and

the product life cycle model. Two broad conclusions are that the framework of industry

architecture is better suited to addressing the relationship between vertical disintegration and

entrepreneurial opportunities than is the product life cycle theory and that the importation of

certain concepts from the product life cycle theory such as economies of scale and industry

shakeouts into the framework of industry architecture can improve the analysis of this

relationship.

11969

3

1. Introduction

Research on vertical disintegration has steadily increased over the last 15 years as its

increasing occurrence and importance have become widely recognized. The visible hand

(Chandler, 1977) has been partially replaced by the virtual hand (Langlois, 2003, 2007;

Chesbrough, 2003) where these visible and virtual hands guide the emergence of vertical

disintegration in either a top-down or bottom-up (Jacobides, 2005; Jacobides and Winter,

2005) process. This emergence of vertical disintegration has been partly documented in

semiconductors (Arora et al, 2001; Baldwin and Clark, 2000), computers (Langlois, 1992;

Garud and Kumaraswamy A 1993), the Internet (Kenney, 2003), movie production (Storper

and Christopherson, 1987), biotechnology (Chesbrough, 2003), mortgage banking (Jacobides,

2005), and telecommunications (Fransman, 2002; Steinmueller, 2003).

The increasing extent to which vertical disintegration and thus inter-firm architectures are

emerging in many industries has also led to an increasing interest in so-called “industry

architectures.” Industry architectures are “an abstract description of the economic agents

within an economic system” that represent the degree of vertical (dis)integration in the

industry (Jacobides, 2005; Jacobides and Winter, 2005; Jacobides, Knudsen and Augier,

2006). Part of this literature focuses on open modular designs. For example, Jacobides,

Knudsen and Augier (2006) argue that complementary assets can be specified in terms of

complementarity and mobility where mobility focuses on the easy exchange of assets in a

system through open modular interfaces. They and others (Langlois, 1992, 2003, 2007;

Sanchez and Mahoney, 1996; Baldwin and Clark, 2000; Baldwin, 2008) also focus on the

interaction between industry and product architectures where the degree of open modularity

is an important aspect of the product architectures where dominant product architectures are

often defined as dominant designs (Henderson and Clark, 1990; Tushman and Rosenkopf,

1992; Suarez and Utterback, 1995; Sanchez and Mahoney, 1996; Murmann and Frenken,

2006).

11969

4

The literature on industry architecture also focuses on other concepts, however. First, it

defines interfaces more broadly than does the literature on modular design. For example,

interfaces are “technological, institutional or social artifacts that allow for two or more

independent entities to divide labor” and they are “both the catalysts and the evidence of

co-specialization between players” (Jacobides, Knudsen and Augier, 2006). Second, vertical

disintegration emerges through either a bottom-up or top-down process (Jacobides, 2005;

Jacobides and Winter, 2005). Third, a new division of labor emerges through an interaction

between transaction costs and capabilities where reductions in transaction costs can reduce

the costs of different firms providing different modules and the importance of capabilities

associated with integrating different modules. Furthermore, these reductions in transaction

costs come from a broader set of events than just the emergence of open modular design and

interface standards (Jacobides and Winter, 2005). These events include governments (or legal

systems) approving standards, requiring the un-bundling of products, or restricting a firm’s

ownership/market share in a market (Arora et al, 2001; Caves, 2002; Kenney, 2003;

Steinmueller, 2003).

In spite of this wide agreement that vertical disintegration in industry architectures is

occurring and is somehow related to entrepreneurial opportunities, however, empirical

research has not addressed the relationship between changes in industry architecture, and in

particular the emergence of vertical disintegration in these architectures, and the number of

entrepreneurial opportunities. More specifically: 1) what are the mechanisms by which

vertical disintegration emerges and creates opportunities; 2) what determines the number of

opportunities in a layer; and 3) do these opportunities continue to emerge even after a

so-called dominant design emerges? In posing the last two questions, this paper is partly

asking to what extent concepts from the product life cycle literature can be applied to the

framework of industry architecture.

This paper uses the history of the broadcasting sector to address these questions. This

11969

5

sector is an appropriate one to address these questions because there have been large changes

in this sector’s industry architecture over the last 100 years. It first discusses the concepts that

are used to evaluate the evolution of industry architecture in the broadcasting sector. Second,

it describes the research context, i.e., the broadcasting sector, and the general methodology.

Third, it analyzes the evolution of industry architecture and how the emergence of vertical

disintegration has led to entrepreneurial opportunities in the broadcasting sector. It does this

by using concepts from industry architecture (mobility of assets and co-evolution of

capabilities and transaction costs) and the product life cycle model (e.g., dominant designs,

economies of scale, and industry shakeouts). Two broad conclusions are that the framework

of industry architecture is better suited to addressing the relationship between vertical

disintegration and entrepreneurial opportunities than is the product life cycle theory and that

the importation of certain concepts from the product life cycle theory such as economies of

scale and industry shakeouts into the framework of industry architecture can improve the

analysis of this relationship.

11969

6

2. Theoretical discussion

The most widely used models of technological change in the management and economic

literature are the product life cycle and cyclical model of technological change. Both

characterize the evolution of an industry in terms of technological discontinuities, dominant

designs, and incremental change (Anderson and Tushman, 1990; Tushman and Rosenkopf,

1992). Technological discontinuities can replace existing products and technologies or they

can create entire new product categories (Tushman and Anderson, 1986; Utterback, 1994). In

the broadcasting sector technological discontinuities such as radio, television (broadcast,

cable, and satellite), and pre-recorded videos can be defined as new product categories or

even new industries within the broadcasting sector.

Focusing just on the product life cycle model, it typically focuses on a single industry, the

diffusion of a final manufactured product in this industry, and competition among firms that

supply this manufactured product (Gort and Klepper, 1982; Klepper and Grady, 1990;

Agarwal and Gort, 1996; Klepper, 1997; Klepper & Simons, 1997). The conventional

wisdom in the technology management (Utterback, 1994; Suarez and Utterback, 1995) and

entrepreneurship (Bygrave and Zacharakis, 2003; Shane, 2004; Baron and Shane, 2005)

literatures is that the emergence of a dominant design in a single industry leads to a decline,

i.e., a shakeout, in the number of firms through mergers, acquisitions, and exits where these

shakeouts occur even when the total market continues to grow rapidly (Gort and Klepper,

1982; Klepper and Grady, 1990; Agarwal and Gort, 1996; Klepper, 1997; Klepper & Simons,

1997)1.

On the other hand, the literatures on modular design, interface standards, other

explanations of shakeouts, and industry architecture suggest that the emergence of dominant

designs may not lead to a shakeout in the number of firms and that the emergence of certain

1 For example, there were large shakeouts in the number of automobile and television manufacturers firms even while the markets for these

products were growing rapidly in the 1920s and 1950s respectively and have continued to grow since then (Klepper and Simons, 1997).

11969

7

kinds of “open” dominant designs may lead to increases in the number of firms and thus the

number of entrepreneurial opportunities. Modular designs are those in which the interfaces

that determine how the functional components or “modules” in a product or process design

will interact are specified to enable the substitution of component variations within the design.

Design rules (Baldwin and Clark, 2000) define the interaction between these modules (Ulrich,

1995; Sanchez and Mahoney, 1996; Brusoni and Prencipe, 2001). The term “standard” or

“interface standard” (Farrell and Saloner, 1985; Katz and Shapiro, 1985, 1994; Shapiro and

Varian, 1999) is often used to define the way in which these different modules interact when

products from different firms are compatible with the same interface design rules. The greater

the extent to which design rules or interface standards (and thus modular designs) are open,

the greater the extent to which new entrants may specialize in specific modules and thus

occupy new positions in vertically disintegrated layers/modules of the industry (Langlois,

1992; Langlois and Robertson, 1992; Baldwin and Clark, 2000; Langlois, 2003, 2007).

In the technology management literature, many interface standards (and modular designs)

are defined as dominant designs because key interfaces often determine key aspects of the

product architecture and because these interface standards are easier to specify than the entire

architecture is. For the broadcasting sector examples include standards for television

(Anderson and Tushman, 1990; Utterback, 1994; Suarez and Utterback, 1995; Suarez, 2004)

and for pre- recorded movies (Cusumano et al, 1992). Examples from other sectors include

fax machines (Baum et al, 1995), telephone receivers and networks (Steinmueller, 2003),

routers and servers (Kenney, 2003), and operating systems, processors, and application

software in computers such as the “Wintel” one (Baldwin and Clark, 2000).

The notion that economies of scale in R&D explains a shakeout in the number of product

manufacturers also suggests that the emergence of dominant designs may not lead to a

shakeout in the number of firms (Klepper, 1996, 1997). Large firms are able to do more R&D,

introduce new products, and increase sales while smaller firms are acquired or exit the

11969

8

industry. Two factors may reduce these economies of scale in R&D and thus prevent a

shakeout in the number of firms. First, vertical disintegration, in for example, the emergence

of independent equipment and process technology suppliers can reduce the need for product

manufacturers to do process R&D and thus enable the entry of new product manufacturers.

Second, the existence of submarkets can reduce the similarities in R&D among markets

(Klepper, 1997; Klepper and Thompson, 2006).

Furthermore, there may be an interaction between vertical disintegration and the number

of submarkets (Schilling, 2000) where the number of submarkets and the advantages of

specialization, i.e., vertical disintegration (Stigler, 1951; Pavitt, 1999), may be related to the

overall size of the market. For example, one analysis found contract manufacturing is used

more in industries with heterogeneous (i.e., existence of submarkets) than homogeneous

outputs (Schilling and Steensma, 2001). Others argue that a division of labor between

standard platforms (Gawer and Cusumano, 2002) and custom products and services is needed

more in markets with heterogeneous (i.e., existence of submarkets) than homogeneous users

(Lamoreaux et al, 2003; Langlois, 2007).

The framework of industry architectures can probably better address these issues than the

product life cycle model can, particularly if some concepts from the product life cycle model

(shakeouts, economies of scale, submarkets) are imported into the framework of industry

architectures. The major advantage of the industry architecture framework is that it places the

division of labor at the center of industry evolution. Building from the questions posed in the

introduction, this enables one to analyze the mechanisms by which vertical disintegration

emerges and creates opportunities, the roles of capabilities, methods of value capture, and

transaction costs in its emergence, the numbers of opportunities in specific layers, the impact

of economies of scale and submarkets on these numbers of opportunities, and whether these

opportunities continue to emerge even after a so-called dominant design emerges.

11969

9

3. Research Context and Methodology

Histories of the broadcasting sector (Bilby, 1986; Sobel, 1986; Inglis, 1991; Sterling,

2001) suggest that AM and FM radio, broadcast, cable, and satellite television, and

pre-recorded videos can be defined as technological discontinuities. Because similar industry

architectures exist for AM and FM radio, they are considered together thus leaving five

discontinuities. Each of these five technological discontinuities created new product

categories and thus they can be considered new industries that continue to co-exist with each

other. This enables one to apply the concept of the product life cycle to each of these

discontinuities/industries where industry architectures and dominant designs can be defined

for them. Although the fact that these discontinuities co-exist with each other suggests that

their emergence has created many entrepreneurial opportunities, much fewer opportunities

would exist if vertical disintegration had not emerged for each of them.

For each of the five discontinuities this paper uses the literature on the broadcasting sector

to identify the vertically disintegrated layers that emerged and that form the basis of the

industry architectures and to address the questions posed at the end of the last section. The

relevant literature includes academic papers and books from the management, economic, and

historical fields, practitioner-oriented accounts, and encyclopedic histories. For radio

broadcasting, a key source was Leblebici et al’s (1991) analysis, which covered the

emergence of vertical disintegration in more detail than this paper does.

The main sources of data for the numbers of firms and revenues are primarily from the

literature on media economics. Historical data on the numbers of firms and revenues in

broadcasting, cable, and satellite stations/firms can be found in Sterling (1979a; 1979b),

Sterling and Kittross (2001), and Gomery (2000a; 2000b). More recent data can be found in

Hazlett (2004) and NCTA (2006). Data on the number of firms and revenues exists for

television programming/movie production (Storper and Christopherson, 1987; Sterling and

Kittros, 2001; Gomery, 2000c; Scott, 2002; Hazlett, 2004), video rentals (Klopfenstein, 1989;

11969

10

Gomery, 2000c), and radio (Leblebichi et al, 1991), television (Klepper and Simons, 1997),

and video recorder manufacturers (Cusumano et al, 1992).

Finally, this paper also looks at whether the numbers of these firms continued to increase

even after a so-called dominant design emerges. It did this by comparing their dates of

emergence with the numbers of firms. The specific dominant designs have been either

specified by the technology management literature or are defined in terms of interface

standards by the author where the specific dates were found in the literatures on the

broadcasting sector. In doing the comparison between the dates of emergence with the

numbers of firms it is recognized that increases in the size of a market (Stigler, 1951), which

may be driven by falling prices for products, may also occur over time and thus impact on the

number of firms and the levels of vertical disintegration. However, as mentioned in the

previous section, the conventional wisdom is that shakeouts occur in industries even when

markets are undergoing rapid growth and that the emergence of a dominant design drives

such a shakeout and thus a reduction in the number of entrepreneurial opportunities.

Furthermore, comparisons between the U.S. and European countries have found that

differences in the number of firms, particularly programming-related ones, and differences in

the levels of vertical disintegration have been much larger than have been differences in the

sizes of the markets where many of the events discussed in this paper appear to have

impacted on these differences. For example, the BBC has provided a vertically integrated

service for the programming side of Figure 1 throughout its history in spite of a growing

market for both radio and television (Noam, 1991; Briggs and Burke, 2002).

4. Results

Tables 1, 2, and 3 summarize the technological discontinuities that have occurred in the

broadcasting sector between the 1920s and the 1990s. Table 1 summarizes the events that

have led to the emergence of vertical disintegration in the industry architecture where an

11969

11

asterisk is placed next to those events that are usually characterized as dominant designs.

Table 2 focuses on the submarkets that have emerged in the programming layer for some of

the discontinuities. Although submarkets have also emerged for receivers and other hardware,

a much larger number of submarkets emerged for the programming side of the business due

to the large variety of television programs and movies. Table 3 summarizes the leading firms

and methods of value capture (i.e., business model) for each discontinuity.

Figure 1 summarizes the changes in industry architecture, particularly in the

programming side of the industry. Since different firms have pursued different levels of

vertical disintegration and thus created different boundaries for their activities, multiple types

of firms are shown in some of these vertically disintegrated layers. Solid lines separate the

layers and dotted lines are used when the same vertically disintegrated layer continues over

multiple time periods. These details are discussed in the subsequent sub-sections.

Figures 3-5 summarize the growth in revenues and the number of firms for selected

technological discontinuities (FM and AM radio are combined) and vertically disintegrated

layers. Each technological discontinuity and the vertical disintegration that has occurred

within them have provided opportunities for entrepreneurs where the amount of revenues,

numbers of firms, and thus entrepreneurial opportunities quickly moved from hardware to

programming/advertising following each discontinuity. The revenues from radio and

television advertisements passed those from the manufacture of radio and televisions in the

late 1920s and mid-1950s respectively and the revenues from video rental/sales passed those

from the manufacture of video recorders/players in the late 1980s. The number of

programming-related companies (e.g., local broadcasters, program producers, cable systems,

and video rental stores) also quickly exceeded the number of manufacturers for each

technological discontinuity.

As can be seen from Figure 5 and as is discussed in the following sub-sections, the

number of firms has continued to grow in many of these vertically disintegrated layers in

11969

12

spite of the emergence of designs (See dates in Table 1) that the literature on technology

management ordinarily defines as dominant designs. As is discussed in the following

subsections it appears that the number of firms in other vertically disintegrated layers also

continued to grow after other “dominant” designs emerged. This suggests that the emergence

of dominant designs, in particular those that involve open interface standards, can lead to

increases in the number of firms and thus increases in the number of entrepreneurial

opportunities.

Place Tables 1-3 and Figures 1-5 about here

4.1 Radio Broadcasting

The possibility of commercial radio emerged in the 1910s and 1920s as frequencies were

regulated in the Radio Act of 1912, the price of receivers and transmitters dropped, licenses

were issued by the Department of Commerce beginning in 1920, and vacuum tubes were

included in most radio sets by 1922 (Bilby, 1986; Sobel, 1986; Lewis, 1991). The first major

business question for commercial radio concerned the business model: how could firms

capture value and how should they divide up the scope of activities? The U.S. was one of the

few countries that did not create a single national provider of commercial radio services and

fund this provider with monthly fees on radio users. Instead, the U.S. government divided the

country into many small markets, licensed multiple firms in each of these markets, and

restricted the number of markets that a single firm could operate in. From these different

broadcasters and their different approaches, the business model of advertising emerged

beginning with the first broadcasted advertisements in 1921 (Bilby, 1986; Sobel, 1986;

Leblebici et al, 1991).

Initially manufacturers and retailers of radios operated these stations and financed their

11969

13

operations with profits from the sale of radios, which resulted in the high level of vertical

integration shown in Figure 1 (See column labeled “Radio: Early 1920s”). In 1923 about

two-thirds of radio stations with known ownership were operated by manufacturers (47%) or

retailers (20%) of radio receivers (Leblebici et al, 1991). However, the number of

manufacturers quickly dropped from a peak of 748 (between 1923 and 1926) to 72 in 1927

and 18 by the end of 1934 (Leblebici et al, 1991) thus limiting the number of manufacturers

that could vertically integrate into broadcasting. The falling number of radio manufacturers is

also consistent with economies of scale in R&D (Klepper, 1997) where RCA’s increased

enforcement of its radio patents in the mid-1920s (Sobel, 1986; Bilby, 1986; Lewis, 1991)

may have accelerated the emergence of these economies of scale.

During this time period, David Sarnoff of RCA introduced a new form of business

model that until recently dominated the industry. He recognized that local broadcasters would

have trouble financing the high cost of radio programs because their markets were too small

and because it was initially difficult to attract local advertisers. His solution was for so-called

network broadcasters (e.g., RCA created NBC) to work with advertising agencies to finance

the production of programs and to distribute them to local broadcasters over AT&T’s

telephone lines as shown in Figure 1 (See column labeled “Radio: 1920s to 1940s). Although

AT&T wanted to enter the radio business itself and thus initially rejected RCA’s proposals, it

agreed to RCA’s proposals in July 1926 under legal and regulatory pressure from the U.S.

Government (Sobel, 1986: Bilby, 1986; Lewis, 1991). This agreement and the emergence of a

second network provider (CBS) created opportunities for thousands of entrepreneurs to form

local broadcasting companies where they obtained programs and to a lesser extent advertising

revenues from the network broadcasters. Evidence for the success of this business model is

seen in the growth in the number of local broadcasters that were affiliated with a network

broadcaster from 6% in 1927 to 97% in 1947 (Leblebici et al, 1991; Sterling and Kittross,

1990).

11969

14

The second major business decision for commercial radio was how to organize the

production of radio programs. NBC (and later the other two networks) produced some of its

own programs in order to avoid complete dependency on advertising agencies and thus

advertising agencies only fill half the production layer in the column entitled “Radio: 1920s

to 1940s” in Figure 1. Advertising agencies worked with sponsors to conceptualize and

develop programs for specific sponsors and then the advertising agencies outsourced this

production to other firms. Advertising agencies decided against producing programs

themselves in order to focus their attention on the choice of advertising (radio, newspapers,

magazines, and billboards) for their clients and in order to utilize the capabilities that were

already available from other forms of entertainment. This outsourcing facilitated the

emergence of independent producers, talent agents, transcription syndicates (Leblebici et al,

1991), and other entrepreneurs (Hilmes, 1990), which represent more detailed levels of

vertical disintegration than are shown within the block labeled “Ad Agencies” in Figure 1.

These firms collaborated to produce music (played by live bands), drama, talk, and variety

shows where these genres reflect the emergence of specific submarkets for radio programs

(See Table 2) (Leblebici et al, 1991; Sterling and Kittross, 1990).

A number of events and trends led to changes in this sourcing of programs in the 1950s

(See column in Figure 1 labeled “Radio: from 1950s). First, restrictions on playing

phonograph records on the radio were rescinded in a legal decision by the Second Circuit

Court of Appeals in 1940 and by the early 1950s most record companies had realized that

playing records on the radio increased, rather than decreased, the sales of phonograph records

where some of these music companies paid to have their records played on air in a system

called “payola” (Millard, 1995). Second, the start of television in the late 1940s further

promoted music as the preferred content for radio as many of the dramas, comedies and other

radio programs moved to television. Third, the start of television also opened up

opportunities for local sponsors as many of the national ones moved to television and as a

11969

15

growth in rating agencies made it unnecessary for local (or national) advertisers to fund a

complete program; by 1960 almost 62% of advertising was local (Sterling and Kittross, 1990).

Together these events caused the percentage of stations affiliated with a network to fall from

its peak of 97% in 1947 to 33% by 1960 where music became the preferred content for the

unaffiliated local stations (Sterling and Kittross, 1990).

The emergence of music as the new form of programming content coincided with the

emergence of FM radio. FM radio provides better sound quality than does AM radio for some

forms of music such as rock-and roll that emerged at about the same time FM radio stations

began offering services in the 1950s (Millard, 1995). Both the new licenses that were made

available for FM radio and the new submarkets that emerged for rock-and roll music created

new entrepreneurial opportunities for local broadcasters and other firms. Each music segment

required different kinds of disc jockeys (which formed the personality of a station) and

different relationships with music companies, sponsors, and market research agencies

(Leblebici et al, 1991) where opportunities in each of these layers continued to increase

throughout the second half of the 20th century (Sterling and Kittross, 1990).

In summary, network broadcasters focused on a set of capabilities (Jacobides and Winter,

2005) and a “standard platform (Gawer and Cusumano, 2002) from which they could

dominate the industry. They developed relationships with local broadcasters and advertising

agencies partly because there were large economies of scale (Klepper, 1997) in these

relationships and the number of licenses in the largest markets (3 to 4) basically restricted the

number of network broadcasters that could co-exist. AT&T was prevented from entering the

market and basically forced to provide services at a reasonable cost to the network

broadcasters by legal and regulatory actions where economies of scale in telephone services

(and other factors) prevented the entry of other telephone suppliers. The network broadcasters

also outsourced financing to existing advertising firms that already had relationships with

national manufacturers and these advertisers outsourced program production to firms that

11969

16

already provided various forms of entertainment services. Put in other terms, the network

broadcasters wanted to create mobility (Jacobides, Knudsen and Augier, 2006) in local

broadcasting, financing, and program production in order to increase the value of their

resources and capabilities. The large number of submarkets (Klepper, 1997) for radio

programs supported this outsourcing of program production as it would have been difficult

for the advertising agencies or network broadcasters to develop the capabilities needed to

produce programs for a significant number of these submarkets.

Falling transaction costs (Jacobides and Winter, 2005) also impacted on the architecture

of the radio industry. The choice of a frequency band and a rudimentary standard reduced the

costs of matching transmitters and receivers and created entrepreneurial opportunities for

many firms in spite of the fact that interface standards are often defined as dominant designs

for many network industries like broadcasting and computers2. The availability of AT&T’s

telephone lines reduced the transaction costs associated with different firms providing

network and local broadcasting services. In combination with the emergence of a rating

system, these actions enabled the importation of radio programs from an existing network of

entertainment firms through advertising agencies. The 1940-ruling that playing records on air

doesn’t violate copyrights enabled local broadcasters to import content from another existing

set of entertainment firms, the music companies.

4.2 Television Broadcasting

The possibility of commercial television emerged in the 1930s and 1940s (WWII

delayed the start in growth by several years) as technical problems were solved and standards

were chosen where a similar form of industry architecture emerged in television as in radio.

Government rules restricting the number of broadcasting stations that a firm could own and 2 Whether the selection of the frequency band and rudimentary standard in 1912 or the inclusion of vacuum tubes in radio sets (most had

them by 1922) (Rosenkopf and Tushman, 1993) are defined as a dominant design, the growth in the number of firms in most layers

continued to grow following its emergence.

11969

17

the small size of local broadcasting markets caused network broadcasters to provide the local

broadcasters with both programs and advertisements. The network broadcasters distributed

these programs through AT&T’s telephone lines where AT&T’s implementation of coaxial

cable made this technically possible. With the higher cost of television than radio programs,

local broadcasters became affiliated with network broadcasters much faster and stayed with

them longer in television than they did in radio.

Sourcing the programs and advertisements has been a major issue for the network

broadcasters. Initially, as with radio, network broadcasters outsourced program production to

the advertising agencies, which found single sponsors for programs and outsourced the

program production to other firms. This industry architecture is summarized in Figure 1 (see

column entitled Television: 1940s and 1950s). But as the number of hours and the cost of

programming increased, it became difficult for advertising agencies (and network

broadcasters) to find enough sponsors that were capable of financing a complete program for

a single year. This caused the network broadcasters to begin using multiple sponsors for a

single program over a year and even for a single evening program thus increasing their use of

so-called “spot advertising.” Programs sponsored by a single firm had dropped to 14% by

1960 and spot advertisements, as a percentage of total advertisements, had reached 27.4% in

1957 or almost double the figure in 1949 (Sterling and Kittross, 1990).

The increased use of both multiple sponsors and spot advertising caused the network

broadcasters to reduce their dependence on the advertising agencies, deal more directly with

individual sponsors, and obtain more of their programming from so-called program packagers

(Sterling and Kittross, 1990) (See column labeled “Television: from 1960s” in Figure 1).

Program packagers were major opportunities for new entrants (Hilmes, 1990). They

combined talent, production facilities, and ideas for specific programs or series under contract

to a network and thus had more levels of vertical disintegration than are shown within the

block labeled “Entry by …” They produced a variety of programs such as comedies, country

11969

18

and westerns, detective dramas, news, and cartoons, which reflect the emergence of specific

submarkets for television programs (See Table 2).

The importance of program packagers and their associated businesses grew steadily in the

late 1950s and 1960s. By 1960, they produced about 60% of television programs (Sterling

and Kittross, 1990) and their role was strengthened by a 1970 FCC (Federal Communications

Commission) ruling that restricted the amount of programming that a television network

could produce for itself. Syndication, which was the sale of programs as reruns to unaffiliated

local stations, also became important sources of revenues for program packagers and other

independent producers where improvements in magnetic videotape in the 1960s facilitated

syndication (Sterling and Kittross, 1990). As shown in Figure 1, special firms called

“syndicators” carried out this function.

The increased vertical disintegration that came with program packagers also occurred in

movie production, which was connected to television broadcasting through a technique called

“film chain.” This technique matched the different speeds of motion picture film and the

television camera and thus enabled motion pictures to be broadcast on television. By the

1970s, television broadcasting provided film/movie companies with more income than

theaters did and it became increasingly difficult to separate the two industries (Guback, 1979).

Furthermore, while the changes in the movie industry are too complex to cover here, the

Paramount antitrust decision in 1948 ended the movie studio/distributors extensive vertical

integration into the ownership of theatres, led to a vertically disintegrated network of movie

production to emerge (See Figure 2)3, enabled thousands of entrepreneurs to enter the movie

industry, and made it difficult to distinguish between the industries of movie and program

production for television (Guback, 1979; Storper and Christopherson, 1987; Caves, 2002). As

shown in Figure 5, increases in the number of firms occurred well into the 1990s where many

3 One example of a successful entrepreneur that emerged from these changes in industry architecture is Len Wasserman, who became a

leading talent representative Ferraro, F. and Gurses, K. (2008)..

11969

19

of these firms also became suppliers of programming to local and network television

broadcasters.

In summary, network broadcasters focused on almost the same set of capabilities

(Jacobides and Winter, 2005) in television that they used to dominate the radio industry. They

developed relationships with local broadcasters and advertising agencies partly because there

were large economies of scale (Klepper, 1997) in these relationships and the number of

licenses in the largest markets (3 to 4) basically restricted the number of network broadcasters

that could co-exist. The major difference between the television and radio industries was the

higher cost of program production. This made it difficult for single advertisers to sponsor

programs, which reduced the importance of the advertising agencies and their relationships

with sponsors and caused network broadcasters to deal directly with program producers and

sponsors. On the other hand, there were similarities between television and the early days of

radio (before music became the dominant content) in the levels of vertical disintegration that

occurred in program production. The network broadcasters wanted to create mobility

(Jacobides, Knudsen and Augier, 2006) in program production in order to enhance their

services where the large number of submarkets (Klepper, 1997) for radio and television

programs supported this outsourcing as it would have been difficult for the network

broadcasters to develop the capabilities needed to produce programs for a significant number

of these submarkets.

Falling transaction costs (Jacobides and Winter, 2005) also impacted on the architecture

of the television industry. Rating systems facilitated a separation between sponsors and

broadcasters and the choice of black and white and color standards reduced the costs of

matching transmitters and receivers. Like radio, these standards created many entrepreneurial

opportunities for television receiver producers, local broadcasters, and program producers

(See Figure 5) in spite of the fact that the color standard is defined as a dominant design by

the literature on technology management (Anderson and Tushman, 1990; Utterback, 1994;

11969

20

Suarez and Utterback, 1995; Suarez, 2004). For example, hundreds of television stations were

started by 1960 and more than 1000 were in existence by 1980. On the other hand, according

to Klepper and Simons (1997), the number of television manufacturers peaked at 95 in 1950

before economies of scale in R&D caused this figure to decline to about 35 in 1960 and 20 in

1970 (See Figure 5). They argue that the definition of a color standard could not have caused

this “shakeout” to occur in television manufacturers since the sales of color receivers did not

begin growing until the 1960s and did not exceed those of black- and white ones until the late

1960s.

4.3 Cable Television

For many years cable television served a small niche market of consumers that could not

receive a broadcasted signal because they lived in a hilly or mountainous region. Cable

television firms served these niches by rebroadcasting the television signals over coaxial

cable to homes. They provided this service for installation and monthly fees where the high

cost of laying cable has been a large barrier to entry and in combination with exclusive

licenses it has provided many local cable companies, many of whom are entrepreneurs, with

local monopolies (Gomery, 1979; Sterling and Kittross, 1990; Inglis, 1991; Gomery, 2000a).

The falling costs of satellites and the FCC’s “open skies” decision in the mid-1970s began

changing the market for cable television from a niche to a main market. The open skies

decision authorized the commercial use of communication satellites for the first time and thus

enabled local cable companies to download programs through a satellite link, which was

much cheaper and faster than the available alternatives4. Many entrepreneurs recognized the

potential benefits from this change and from the standard interface between cable and

satellite systems that accompanied this change. Cable entrepreneurs recognized that they

4 Local cable companies could receive local broadcasted signals or import ones from other broadcasters over micro-wave links but could

not gain access to AT&T’s telephone lines (Hilmes, 1990).

11969

21

could provide a larger variety of programs to consumers and that they and the newly created

programming companies such as CNN and HBO (more commonly called cable channels)

could charge for these programs using the billing systems of the cable operators.

The emergence of this standard interface between cable and satellite systems and the

architecture that this standard interface represented can be thought of as a dominant design

where the emergence of this dominant design created new opportunities for both cable and

programming companies. The ability to provide a greater variety of programs with cable than

broadcast television enabled cable television to diffuse even in areas where users could easily

obtain broadcasted signals and thus the number of cable companies continued to grow

throughout the 1980s and 1990s (See Figure 2). The user’s willingness to pay for specific

programs5 naturally provided opportunities for new programming companies partly since

pay cable and the new channels increased the number of submarkets for television programs

(See Table 2). Although the increasing number of programming companies shown in Figures

2 and 5 during the 1980s and 1990s includes program providers for both film and broadcast

television, part of this continued growth was due to the diffusion of pay cable (Sterling and

Kittross, 2001; Hazlett, 2004).

In summary, the emergence of a standard interface, which is an example of falling

transaction costs (Jacobides and Winter, 2005), between cable and satellite systems created a

new breakdown of work between program production and program delivery. In some ways

the cable companies replaced both the local and network broadcasters, the satellite companies

replaced AT&T, and the work breakdown for program production has stayed approximately

the same. However, in other ways the new standard interface has increased the importance of

capabilities associated with program production and by adding a new method of delivery,

increased the mobility in the assets of delivery and distribution that the network broadcasters

5 The percentage of subscribers paying for additional programs increased from less than 1% in 1973 to 21% of all subscribers in 1978

(Sterling, 1979b) and continued to grow in the 1980s and 1990s (Gomery, 2000a; Hazlett, 2004).

11969

22

have focused on. Furthermore, the increasing power of the programming companies has

occurred in spite of continued increases in the number of them where increases in the number

of submarkets for these programs is probably one reason there was not a shakeout in the

number of programming companies.

4.4 Pre-Recorded Movies

Although technically pre-recorded movies do not involve broadcasts, they are included in

this paper because they are viewed on regular televisions and because entrepreneurs have

played an important role in the distribution of them. Television broadcasters used the first

video recording equipment in the 1950s to record programs on magnetic tape so that they

could broadcast a program multiple times in different time zones and later so they could more

easily sell the rights of the recorded programs (i.e., syndication) to other broadcasters

(Rosenbloom and Freeze, 1985). By the mid-1970s, this equipment had become inexpensive

enough for consumers who initially used it for recording television programs and later for the

playback of pre-recorded movies (Cusumano et al, 1992; Klopfenstein, 1989); e.g., the dollar

sales of pre-recorded tapes was smaller than the sales of blank tapes in 1980 and the unit

sales of pre-recorded tapes was only 1/6 those of blank tapes (Klopfenstein, 1989).

The emergence of open interface standards (Beta in 1975 and VHS in 1976) enabled

separations between the production of movies, manufacture of recorders/players, and sale of

pre-recorded movies in video rental outlets (See Figure 1) and the emergence of a single

standard further strengthened these separations. Such standard(s) (along with the diffusion of

players) were needed before most movie distributors would release pre-recorded tapes and

the release of the pre-recorded tapes was needed before profitable retail outlets could be

established. This is why the number of pre-recorded tapes or the number of rental stores did

not begin to increase until long after these standards emerged and even until long after VHS

represented more than one-half the market in 1978 (Lardner, 1987; Cusumano et al, 1992).

11969

23

Growth in the number of retail outlets did not emerge until the 1980s and by 1995, there were

25,000 to 30,000 stores dealing exclusively in videos and an additional 10,000 to 12,000

other stores (e.g., supermarkets) that rent videos but not as their main business. The

emergence of these standards also facilitated the temporary emergence of independent

distributors between movie companies and rental stores (Lardner, 1987) and a temporary

increase in the number of manufacturers. The number of manufacturers increased by about

five-fold between the release of standards in 1975 and 1983/4 (Cusumano et al, 1992) where

the number of them may have continued to grow before a shakeout occurred.

The big winners were the movie distributors. Although some independent film makers

attempted to create movies just for the video rental business, rental outlets preferred to stock

movies that had been successful in theaters and that thus benefited from the promotions that

accompany theater release (Lardner, 1987; Caves, 2002). Furthermore, large movie

distributors have used video rentals (and sales) as just one more stage in their complex

calculation of price discrimination to maximize revenues and thus provide the means to

develop blockbuster movies (Gomery, 2000c; Caves, 2002).

In summary, the emergence of an interface standard(s) between video players and

pre-recorded movies, which is an example of falling transaction costs, formed the basis of an

industry architecture in which movie distributors take most of the profits. In some ways retail

outlets are the equivalent of local broadcasters or cable companies where retail outlets and

local broadcasters are much less profitable than cable companies because of the lower

economies of scale and thus lower barriers to entry for them. By coordinating the vertically

disintegrated structure of the movie industry (See Figure 3), movie distributors play the role

of network broadcasters where the large and perhaps increasing number of submarkets for

movies prevents a shakeout from occurring in the number of firms concerned with movie and

other forms of program production (See Figures 2 and 5).

11969

24

4.5 Satellite Television

As discussed above, satellites were first used to distribute programs to local cable

companies and by the 1990s the cost of satellite dishes had reached the level at which

consumers could afford them. Although the first commercial services were offered in the

1980s, it was not until digital compression in the form of a digital video broadcasting

standard enabled households to receive up to 200 channels in the mid-1990s that direct

broadcast satellites began to diffuse through services offered by firms such as Hughes, Echo

Star, PrimeStar, Astro, and AlphaStar (Gomery, 2000a). The high entry barriers that are

represented by the high cost of launching satellites (i.e., economies of scale) have probably

significantly reduced the number of opportunities for satellite service providers.

In summary, the satellite operators and to a lesser extent the program producers are the

strongest firms in satellite television. Like the cable companies and unlike local broadcasting

and retail outlets for pre-recorded movies, there are high barriers to entry in satellite services

and their primary competition is cable companies that also have monopolies. On the other

hand, they provide another outlet for program producers and thus probably further increase

the importance of the capabilities associated with program and movie production.

4.6 Deregulation

Deregulation began in the 1970s and accelerated in the 1980s under the Reagan

administration. In particular, the FCC’s relaxation of program ownership rules in the early

1990s and the National Telecommunication Act of 1996 have partly reversed the trends of

vertical disintegration and increased opportunities for entrepreneurs that are described in

previous sub-sections. After the FCC relaxed the restrictions on broadcasters and cable

companies for owning programming companies, the number of opportunities for program

producers has begun to decline. In combination with the increasing cost of movies and thus

the benefits of consolidation and economies of scale (Klepper, 1996, 1997; Hilmes, 1990), by

11969

25

1999 there are fewer independent producers left in Hollywood as it takes deep pockets to

create and sustain high risk prime time productions. The six largest movie studios dominated

the movie industry, broadcasters had acquired 15 of the largest 17 syndicators by 1999, cable

companies had bought many of the largest programming companies, and movie studios have

also either acquired broadcasters (e.g., Disney takeover of ABC) or started their own (e.g.,

Fox) (Gomery, 2000c).

The National Telecommunications Act of 1996 has taken this one step further by further

relaxing a number of restrictions on ownership. It eliminated the numerical limit on the

number of stations that a single firm could own and increased the percentage of U.S.

households that can be legally reached by a single broadcaster’s signal from 25% to 35%. It

also eliminated cross-ownership rules, which has enabled increased horizontal integration of

radio and television broadcasting and cable television (Gomery, 2000a). From the standpoint

of entrepreneurs, both the National Telecommunication Act of 1996 and the FCC’s

elimination of program ownership rules in the early 1990s have probably reduced the number

of opportunities for them but this may change in the future.

5. Discussion

The purpose of this paper was to look at the relationship between vertical disintegration in

industry architectures and entrepreneurial opportunities. Vertical disintegration created

thousands of opportunities for local radio and television broadcasters, program producers,

cable companies, and even more for video retail outlets. Although figures were not found, it

may have also created large numbers of opportunities for advertising agencies, research

agencies, and rating services.

This paper analyzed its emergence in terms of capabilities, transaction costs, and methods

of value capture (Jacobides and Winter, 2005). Initially, the financing and acquisition of

programs were key capabilities and both radio and television network broadcasters basically

11969

26

controlled them. Network broadcasters connected both sponsors (i.e., financing) and program

producers with local broadcasters and thus created mobility (Jacobides, Knudsen, and Augier,

2006) in local broadcasting, advertising, and program production. One reason they were able

to do this was because the legal and regulatory action in 1926 against AT&T reduced the

transaction costs of distributing programs from network to local broadcasters.

Subsequent reductions in transaction costs and the emergence of new methods of value

capture (i.e., new business models) changed the importance of these capabilities. The

emergence of rating systems reduced the costs of matching sponsors with broadcasters and

the ruling that playing pre-recorded music on the air did not violate copyrights reduced the

costs of acquiring programming content. Together these reductions in transactions costs

reduced the importance of the network broadcasters’ capabilities; this enabled local radio

stations to more easily survive without being affiliated with a network broadcaster.

Furthermore, new methods of value capture such as subscription services from cable and

satellite providers and rental income from pre-recorded movies provided new methods of

financing program production and thus increased the amount of mobility (Jacobides, Knudsen,

and Augier, 2006) in program distribution and delivery; this increased the importance of

capabilities in program (and movie) production at the expense of other capabilities.

Focusing just on program production for television, the necessary capabilities associated

with procuring programs changed as the method of financing television programs (i.e.,

method of value capture) changed from single to multiple sponsors and this led to the

replacement of advertising agencies with program packagers. Although network broadcasters

also produced some of their own content, their increasing use of program packagers and

movie distributors (along with the success of cable channels) caused the capabilities

(Jacobides and Winter, 2005) of program production, and coupled with the changes

mentioned in the last paragraph, the profits to migrate away from them and towards program

producers, movie distributors, and cable channels.

11969

27

These events emerged in a combination of top-down (Langlois and Robertson, 1992;

Baldwin and Clark, 2000; Langlois, 2003; Jacobides, 2005) and bottom-up processes

(Jacobides, 2005; Jacobides and Winter, 2005). For example, the choice of frequency bands

and standards, government decisions to restrict ownership of local broadcasting companies,

and the distribution of programs from network to local broadcasters over AT&T’s network in

both radio and television were carried out in a top-down process in which system designers

such as the U.S. Federal Communications Commission and RCA’s David Sarnoff determined

the vertically disintegrated architecture of the broadcasting sector. Similarly, the architecture

of the cable industry that enabled the distribution of programs from satellites to cable

providers also emerged in a top-down process in which system designers like Ted Turner

(founder of CNN) strategically assembled the architecture of an improved cable system. On

the other hand, a ratings system, the ruling concerning playing records on air, the legal and

regulatory pressure on AT&T to exit the radio industry, and the 1948 Paramount antitrust

decision emerged through bottom-up processes (Jacobides, 2005) in which many of the

participants were not looking at the entire value chain for the industry.

Turning our attention to the numbers of entrepreneurial opportunities that emerged in

each vertically disintegrated layer, economies of scale (Klepper, 1997) may explain the

relative numbers of firms in many of the layers and certainly better than does the theory of

dominant designs. On the one hand, large economies of scale probably restricted the number

of firms that can be network broadcasters, telephone and satellite companies (i.e., distributors

of programs to local broadcasters or cable companies), or manufactures of radios, televisions,

and video recording and playback equipment. On the other hand, continuous growth in the

number of submarkets for television programs and movies throughout the second half of the

20th century, which were partly driven by the growth in the overall market sales, have

probably reduced the economies of scale and thus the chances of a shakeout in the number of

program producers. Although submarkets for radios and television receivers and video

11969

28

recording equipment exist in for example different levels of sound and picture quality and

sizes of screens, the numbers of these submarkets seems to be much fewer than for the

programming side of the market. A similar logic may also apply to local broadcasting

companies and to retail outlets (that distribute pre-recorded movies) although in theses two

cases the submarkets are defined more by geography and less by heterogeneity in customer

needs.

Changes in one layer can also impact on the economies of scale in other layers. Just as the

emergence of independent equipment suppliers reduced the economies of scale in R&D for

product manufacturers and thus enabled entry by new product manufacturers (Klepper, 1997),

the emergence of pre-recorded music as a form of radio content enabled large increases in the

number of local radio stations even as advertisers and producers of radio programs were

moving to television. Similarly, the ability of cable companies to access programs from

satellites enabled large increases in the number of cable companies. In all three cases, new

forms of vertical disintegration reduced the economies of scale in another layer and thus

enabled increases in the number of firms that could survive in the layer.

The concept of platforms (Gawer & Cusumano, 2002) plays an important role in this

interaction between vertical disintegration and entrepreneurial opportunities in the

broadcasting sector. Achieving low costs in a final product or service in which there are

heterogeneous needs (Lamoreaux et al, 2003; Langlois, 2007) can come from the

standardization of certain activities (economies of scale) and this standardization requires

both standard interfaces and standard platforms (Gawer & Cusumano, 2002). In the

broadcasting sector standard platforms exist in the form of network broadcasters, AT&T’s

telephone lines, satellites, and movie distributors where economies of scale exist and specific

capabilities are needed to achieve these economies of scale. These examples and the ones

mentioned in the previous paragraph provide further evidence that the number of

entrepreneurial opportunities in one layer depends on actions in other layers and that the

11969

29

framework of industry architecture can better address the number of entrepreneurial

opportunities in different layers than can the product life cycle theory.

One final conclusion is that the emergence of dominant designs did not drive a shakeout

in the number of firms in the broadcasting sector. The literature on technology management

defines most dominant designs for the broadcasting sector in terms of interface standards

such as those for AM and FM radio, black and white and color television, video players, and

satellite transmission and argues that entrepreneurial opportunities decline after such a

dominant design emerge (Utterback, 1994; Suarez and Utterback, 1995). This paper has

shown that the number of broadcasters, programming companies, to some extent

manufacturers, and thus entrepreneurial opportunities for them actually increased in the

broadcasting sector following the definition of these open interface standards. The number of

radio and television broadcasters continued to increase long after frequencies and standards

were set and even the number of manufacturers did not decline until long after these

frequencies and standards were set (an exception may be following the color standard). The

number of video retail outlets continued to increase long after the VHS and Beta standards

were released and even the number of manufacturers did not begin to decrease until long after

these standards were released. The number of cable companies and programming companies

also continued to increase long after standards that define the interface between cable systems

and satellites was set in the 1970s. These results suggest that many dominant designs, in

particular those that involve open interface standards, can enable the entry of new firms in

many vertically disintegrated layers.

There are a number of limitations to this study. First, it is a single sector and thus the

mechanisms by which vertical disintegration emerges and creates entrepreneurial

opportunities may be different in other sectors. Second, it is based on an exploratory study

that required the application of concepts from both the industry architecture and product life

cycle literatures. Future research should address other sectors and better quantify how the

11969

30

concepts of economies of scale, submarkets, and shakeouts can be applied to each vertically

disintegrated layer in an industry architecture.

6. Conclusions

This paper analyzed the mechanisms by which vertical disintegration emerged and

created entrepreneurial opportunities in the broadcasting sector. It looked at the number of

firms in various vertically disintegrated layers and the specific events that led to the

emergence of these layers and impacted on the number of firms in them using the interaction

between capabilities and transaction costs, mobility of assets, industry shakeouts, economies

of scale, and submarkets. The framework of industry architecture is probably better suited to

addressing the relationship between vertical disintegration and entrepreneurial opportunities

than is the product life cycle theory and the importation of concepts from the product life

cycle theory such as economies of scale, submarkets, and industry shakeouts into the

framework of industry architecture can improve the analysis of this relationship.

11969

31

6. References

Agarwal, R. and Gort, M. 1996. The evolution of markets and entry, exit, and survival of

firms. The Review of Economics and Statistics, 78(3): 489-498.

Anderson, P. and Tushman, M. 1990. Technological discontinuities and dominant designs: A

cyclical model of technological change. Administrative Science Quarterly, 35, 604-633.

Arora, A. Fosuri, A. and Gambardella, A. 2001. Markets and Technology: The Economics of

Innovation and Corporate Strategy. MIT Press, Boston, MA

Baldwin, C. 2008, Where do transactions come from? Modularity, transactions, and the

boundaries of firms, Industrial & Corporate Change 17(1): 155-195.

Baldwin, C. and Clark, K. 2000. Design Rules, Volume 1: The Power of Modularity.

Cambridge, MA: MIT Press.

Baum, J.A.C. Korn, H, Kotha S. 1995. Dominant designs and population dynamics in

telecommunications services: founding and failure of facsimile transmission service

organizations, 1965–1992, Social Science Research 24, 97–135.

Baron, R. and Shane, S. 2005. Entrepreneurship: a process prospective. South-Western

Publishers

Bilby K. 1986. The General: David Sarnoff and the Rise of the Communications Industry.

NY: Harper and Row.

Briggs A. and Burke, P. 2002. A Social History of the Media: From Gutenberg to the

Internet, Cambridge, UK: Polity Press.

Brusoni, S. and Prencipe, A. 2001. Unpacking the Black Box of Modularity: Technologies,

Products and Organizations. Industrial and Corporate Change, 10(1): 179-205.

Bygrave, W. and Zacharakis, A. 2003. The Portable MBA in Entrepreneurship, NY: John

Wiley & Sons, 3rd edition.

Caves, R. 2002. Creative Industries: Contracts between Art and Commerce, Cambridge,

MA: Harvard University Press.

11969

32

Chandler, A. 1977. The Visible Hand: The Managerial Revolution in American Business.

Boston: Belknap.

Chesbrough, H. 2003. Open innovation: The new imperative for creating and profiting from

technology. Boston: Harvard Business School Press.

Cusumano M., Mylonadis Y. and Rosenbloom R. 1992. Strategic Maneuvering and

Mass-Market Dynamics: The triumph of VHS over beta, Business History Review, 66:

51-94.

Farrell, J. and Saloner, G. 1985. Standardization, Compatibility, and Innovation,’ RAND

Journal of Economics, 16(1), 70-83.

Ferraro, F. and Gurses, K. 2008. Building Architectural Advantage in the US Motion Picture

Industry: Lew Wasserman and the Music Corporation of America, All-Academy (AOM)

Symposium Description on the Dynamics of Industry Architecture.

Fransman, M., 2002, Telecoms in the Internet Age: From Boom to Bust To...? Oxford

University Press, NY.

Gawer, A. and Cusumano, M. 2002. Platform Leadership: How Intel, Microsoft, and Cisco

Drive Industry Innovation, Boston: Harvard Business Press.

Gomery, D. 2000a. The Television Industries: Broadcast, Cable, and Satellite. In Who Owns

the Media? Compaine, B. and Gomery, D. (Eds): 193-284. Mahwah, New Jersey:

Lawrence Erlbaum Associates.

Gomery, D. 2000b. Radio Broadcasting and the Music Industry. In Who Owns the Media?

Compaine, B. and Gomery, D. (Eds): 285-358. Mahwah, New Jersey: Lawrence Erlbaum

Associates.

Gomery, D. 2000c. The Hollywood Film Industry: Theatrical Exhibition, Pay TV, and Home

Video. In Who Owns the Media? Compaine, B. and Gomery, D. (Eds): 359-436. Mahwah,

New Jersey: Lawrence Erlbaum Associates.

Gort, M. and Klepper, S. 1982. Time Paths in the Diffusion of Product Innovations.

11969

33

Economic Journal, 92: 630-653.

Guback, T. 1979. Theatrical Film, in Who Owns the Media? Compaine, B. (Ed): 179-250.

Mahwah, New Jersey: Lawrence Erlbaum Associates.

Hazlett, T. 2004. The Economics of Cable TV Pricing: A La Carte v. All-You-Can-Eat,

Comments before the Federal Communications Commission, August 12, 2004.

Henderson, R. and Clark, K. 1990. Architectural innovation: The reconfiguration of existing

product technologies and the failure of established firms. Administrative Science

Quarterly, 35: 9-30.

Hilmes, M. 1990. Hollywood and Broadcasting: From Radio to Cable. Chicago: University

of Illinois Press.

Inglis A. 1991. Behind the Tube: a History of Broadcasting Technology and Business.

Boston: Focal Press, 1991.

Jacobides, M. 2005. Industry Change through Vertical Disintegration: How and why markets

emerged in mortgage banking. Academy of Management Journal, 48 (3): 465 – 498.

Jacobides, M. and Winter, S. 2005. The Co-evolution of Capability and Transaction Costs:

Explaining the Institutional Structure of Production, Strategic Management Journal 26(5),

395-413.

Jacobides, M., Knudsen, T. and Augier, M., 2006, Benefiting from innovation: Value creation,

value appropriation, Research Policy 35, 1200–1221

Kenney, M. 2003. The Growth and Development of the Internet in the United States,’ in The

Global Internet Economy, Kogut, B (Ed.), MIT Press, Cambridge, 69-108.

Klepper, S. 1997. Industry Life Cycles. Industrial and Corporate Change, 6(2): 145-181.

Klepper, S. and Graddy, E. 1990. The Evolution of New Industries and the Determinants of

Market Structure, Rand Journal of Economics, 21: 27-44.

Klepper, S. and Simons, K. 1997. Technological Extinctions of Industrial Firms: An Inquiry

into their Nature and Causes. Industrial and Corporate Change, 6(2): 379-460.

11969

34

Klepper, S. and Thompson, P. 2006. Submarkets and the Evolution of Market Structure, Rand

Journal of Economics 37(4): 861-886

Klopfenstein, B. 1989. The Diffusion of the VCR in the United States, In The VCR Age, Levy,

M. (Ed). London: Sage.

Langlois, R. 1992. External Economics and Economic Progress: the case of the

Microcomputer Industry. Business History, 66, 1- 50.

Langlois, R. 2003. The vanishing hand: the changing dynamics of industrial capitalism,

Industrial and Corporate Change, 12(2): 351-385.

Langlois, R. 2007. The dynamics of industrial capitalism: Schumpeter, Chandler, and the

New Economy. NY: Taylor and Francis Group.

Langlois, R. and Robertson, P. 1992. Networks and innovation in a modular system: lessons

from the microcomputer and stereo component industries. Research Policy, 21: 297-313.

Lamoreaux, N., Raff, G., Temin, P., 2003. Beyond markets and hierarchies:

Toward a new synthesis of American business history, American Historical Review

108: 404-433.

Lardner, J. 1987. Fast Forward: Hollywood, the Japanese, and the VCR Wars, NY: W.W.

Norton and Co.

Leblebici, H., Salancik, G., Copay, A. and King, T. 1991. Institutional Change and the

Transformation of Inter-organizational Fields: An Organizational History of the U.S. Radio

Broadcasting Industry. Administrative Science Quarterly, 36(3): 333-363.

Lewis T. 1991. The Empire of the Air: the Men who Made Radio. NY: HarperPerennial.

NCTA, 2006. National Cable and Telecommunications Association Home Page,

http://www.ncta.com/.

Millard, A. 1995. America on Record: A History of Recorded Sound. Cambridge England:

Cambridge University Press.

Murmann, P. and Frenken, K. 2006. Toward a Systematic Framework for Research on

11969

35

Dominant Designs, Technological Innovations, and Industrial Change. Research Policy, 35

(7): 925-952.

Noam, E. 1991. Television in Europe, NY: Oxford University Press.

Pavitt, K. 1998. What Adam Smith tells us that Schumpeter doesn’t, Industrial and

Corporate Change 7(3): 433-452.

Rosenbloom, R. and K. Freeze, 1985. Ampex Corporation and Video Innovation, Research

on Technological Innovation, Management and Policy, 2: 113-185.

Rosenkopf, L., Tushman, M.L., 1993. On the co-evolution of technology and organization,

in: Singh, J., Baum, J. (Eds.), The Evolutionary Dynamics of Organizations. Oxford

University Press, NY.

Sanchez, R. and Mahoney, J. 1996. Modularity, flexibility, and knowledge management in

product and organization design. Strategic Management Journal, 17: 63-76.

Schilling, M. 2000. Toward a General Modular Systems Theory & Its Application to

Interfirm Product Modularity, Academy of Management Review 25(2): 312-334.

Schilling, M. and Steensma, K. 2001. The use of modular organizational forms: an

industry-level analysis, Academy of Management Journal 44(5): 1149-1168.

Scott, A 2002. A New Map of Hollywood: The Production and Distribution of American

Motion Pictures. Regional Studies, 36 (9), 957-975.

Shane, S. 2004. Finding Fertile Ground: Identifying Extraordinary Opportunities for New

Ventures, Philadelphia: Wharton Publishers.

Shapiro. C. and Varian, H. 1998. Information Rules, Harvard Business School Press, Boston.

Sobel, 1986. RCA. NY: Stein and Day.

Steinmueller, E. 2003. The Role of Technical Standards in Coordinating the Division of

Labour in Complex System Industries. In Prencipe A, Davies A, Hobday M (Eds). The

Business of Systems Integration. NY: Oxford University Press.

Sterling, C. 1979a.Television and Radio Broadcasting, in Who Owns the Media? Compaine,

11969

36

B. (Ed): 61-126. Mahwah, New Jersey: Lawrence Erlbaum Associates.

Sterling, C. 1979b. Cable and Pay Television, in Who Owns the Media? Compaine, B. (Ed):

293-318. Mahwah, New Jersey: Lawrence Erlbaum Associates.

Sterling, C. and Kittross, J. 2001. Stay Tuned: A Concise History of American Broadcasting.

3rd Edition, Mahwah, New Jersey: Lawrence Erlbaum Associates.

Sterling, C. and Kittross, J. 1990. Stay Tuned: A Concise History of American Broadcasting.

2nd Edition, Belmont, CA: Wadsworth Publishing.

Stigler, G. 1951. The Division of Labor is limited by the Extent of the Market.” Journal of

Political Economy, 59: 185-193.

Storper, M. and Christopherson, S. 1987. Flexible Specialization and Regional Industrial

Agglomeration: the case of the US Motion Picture Industry, Annals of the Association of

American Geographers, 77: 104-117.

Suarez, F. and Utterback, J. 1995. Dominant Designs and the Survival of Firms. Strategic

Management Journal, 16: 415-430.

Tushman, M. and Anderson, P. 1986. Technological discontinuities and organizational

environment. Administrative Science Quarterly, 31: 439-456.

Tushman, M. and Rosenkopf, L. 1992. Organizational Determinants of Technological

Change: Toward a Sociology of Technological Evolution, in Cummings, L. and B. Staw

(eds), Research in Organizational Behavior 14: 311-347, Greenwich, CT: JAI Press.

Ulrich, K. 1995. The role of product architecture in the manufacturing firm, Research Policy,

24, 419-440.

Utterback, J. 1994. Mastering the dynamics of innovation: How companies can seize

opportunities in the face of technological change. Boston: Harvard Business School

Press.

11969

37

Table 1. Some of the Events that Led to Vertical Disintegration and Changes in the Industry

Architectures in the Broadcasting Sector

Discon-

tinuity

Events that led to vertical disintegration

and changes in Industry Architectures

Facilitated Entry or Separation of:

*Choice of AM (1910s) and FM (1950s)

frequency bands and standards

Broadcasters and radio

manufacturers

Advertising as business model Advertising agencies and sponsors

Regulatory support for local ownership

AT&T makes network available

Local and network broadcasters

Rating system Ratings agencies

Radio

Broad-

casting

Ruling that playing records on air doesn’t

violate copyrights

Music companies

*Choice of black and white (1940) and

later color (1954) standards

Manufacturers and broadcasters

Advertising as business model Advertising agencies and sponsors

Rising cost of television programs Program packagers

Regulatory support for local ownership

AT&T introduces coaxial cable

Local and network broadcasters

Television

Broad-

casting

“Film chain” and video tape (Ampex)

standards

Film and other independent

program producers

Connect homes and broadcasters with

coaxial cable and later microwave relays

Cable providers Cable

Television

*Distribution of programs to local cable

companies via satellite (1975)

New national program producers

Recorded

Movies

*Beta (1975) and VHS (1976) standards,

later DVD (Digital Video Disk)

Manufacturers, film producers and

video rental stores

Satellite

Television

*Direct Broadcast Satellite (1994) Separation between satellite

operators and receiver sales

Sources: (Sterling, 1979a; Sterling, 1979b; Sterling and Kittross, 1990, 2001; Leblebici et al,

1991; Lewis, 1991; Gomery, 2000a; 2000b, 2000c)

* Events that are defined as dominant designs

11969

38

Table 2. Examples of Submarkets in the Programming for the

Technological Discontinuities

Discontinuity Submarkets

Initially music (played by live bands), drama, talk, and

variety shows

AM and FM Radio

Later recorded music: these include country, rock-and roll,

classical, jazz, and easy listening

Broadcast Television Comedies, country and westerns, detective dramas, news,

cartoons, and other program types

Cable and Satellite

Television

Expansion in the number of channels increased and

changed the types of program types

Recorded Movies Various types of movies

Sources: (Sterling, 1979a; Sterling, 1979b; Sterling and Kittross, 1990, 2001; Leblebici et al,

1991; Lewis, 1991; Gomery, 2000a; 2000b, 2000c)

Table 3. The Leading Firms and Business Models for each Discontinuity

Discontinuity Leading Firms Main Method of Value

Capture

AM and FM Radio

Broadcast Television

Network Broadcasters Advertising

Cable Television Cable operators and program

producers

Subscriptions

Satellite Television Satellite operators and

program producers

Subscriptions

Pre-Recorded Movies Movie/program producers Sale and rental

11969

39

Figure 1. Evolution of Vertical Disintegration and Industry Architectures in Broadcasting Sector

ReceiversProduction

Retail

ProgrammingDelivery

Distribution

Production

Financing

Consumers

Localbroad-

castingstationsowned

by producers

or retailers

of radios

Radio Television RecordedEarly 1920s 1920s-1940s From 1950s 1940s-1050s From 1960s Cable Satellite Movies

Independently Owned Local Broadcasting Stations

AdAgencies

Radio Networks

NationalAdvertisers National and local advertisers

MusicCompanies

Television Networks

Revenues from consumersand advertisers

Rating and Research Agencies

Program packagers, movie distributors, andcable channels and increasing vertical disintegration in their activities (See Figure 3)

Local GeneralCable and

Companies Satellite SpecializedCompanies Retailers

Satellites

Producers of radios, televisions, set-top boxes, satellite dishes, video players

Various retailers with increasing concentration. Exception is small cable franchises for satellite dishes

AdAgencies

AT&T’s telephone network, later satellites

MSOs

MSOs: Multiple System Operators

Syndi-cators

LocalStations

Film Companies/Program Packagers

(563, 709, 1473)

Figure 2. Increasing Vertical Disintegration in Film Companies and Program Packagers (Number of Firms in Parentheses for 1966, 1974, and 1981)

Artists Representatives(242, 359, 344)

Film Processing (43, 76, 55)

Recording/Sound

(20, 33, 187)

Lighting(2, 16, 23)

Editing(4, 31, 113)

PropertiesFirms

(66, 33, 184)

Rental Studios

(13, 24, 67)

Market Research(3, 5, 24)

Total1966: 9561974: 12811981: 24701999: 9500

Source: Storper and Christopherson, 1987 (for number of firms in 1999: Scott, 2002)

11969

40

0

0.3

0.6

0.9

1.2

1.5

1.8

1927 1935 1947 1955Year

Rev

enue

s (B

illio

ns o

f D

olla

rs

Radio Manufacturing

Radio Advertisements

TV Manufacturing

TV Ads

Figure 3. Revenues for Selected Discontinuitites and Layers (1927-1960)

0

7

14

21

28

35

42

1975 1980 1990Year

Rev

enue

s (B

illio

ns o

f D

olla

rs

TV Ads

Radio Ads

Video Sales/Rentals

Satellite

Cable

VCR Production

Figure 4. Revenues for Selected Discontinuitites and Layers (1975-2000)

11969

41

1

10

100

1000

10000

1921 1940 1965 1990Year

Num

ber

of F

irm

s (L

og S

cale

) Radio Stations

Radio Manufacturers

TV Stations

TV Manufacturers

Cable(MSOs)

Program Producers

Figure 5. Number of Firms for Selected Discontinuitites and Layers