CHANGES REQUIRED IN THE CURRENT LEGAL

FRAMEWORK TO ENSURE VERTICAL INTEGRATION OF

THE MEDIA

Arthi Gaddipati

DSNLU, Visakhapatnam
 TABLE OF CONTENTS

Abstract………………………………………………………………………….2

Introduction……………………………………………………………………...3

Indian Television Broadcasting and Distribution Sector- A

Snapshot…………..5

Advantages Of Vertical Integration in Media……………………………………

6

Media Law and Regulation in

India……………………………………………..8

Cross Media Ownership Restrictions in DTH &

HITS………………………….9

Trai Recommendations on Ownership of Media………………………………10

Conclusion……………………………………………………………………..12

Guidelines And Sources Referred……………………………………...………14

1
 ABSTRACT

The paper shall begin with understanding the term vertical integration in accordance with
media and the Indian Legal System. The paper will then continue to analyze the current legal
trends in Media laws and the inefficiency or efficiency of the Indian laws in maintaining the
vertical integration of media outlets and the barriers it imposes. Various online resources,
ranging from the recommendations given by the Telecom Regulatory Authority of India
(hereby referred to as TRAI), regarding media ownership; to multiple e-journal articles.

2
 INTRODUCTION

Vertical integration refers to the joining of two businesses at various stages of the supply
chain. For example, a company that relies on another for supplies may discover that it is
unreliable, negatively impacting commerce. As a result, it might vertically integrate with its
supplier to cut down on late deliveries and boost efficiency. When a business grows into
areas that are at various stages on the same manufacturing path, such as when a manufacturer
controls its supplier and/or distributor1. Vertical integration can help businesses save money
and time by lowering transportation costs and shortening turnaround times, among other
things. However, rather of becoming vertically integrated, it is sometimes more advantageous
for a corporation to rely on the expertise and economies of scale of other providers2.

Businesses will want to integrate in order to get greater supply chain management. Buyers
require suppliers, and suppliers require buyers. There is, however, a competitive element.
Nothing prevents either the supplier or the buyer from doing business with someone else. The
supplier no longer has to worry about custom, and the client no longer has to worry about
unpredictable delivery because of vertical integration.

There are several reasons for integration, and any attempt to categorize them may result in
uncertainty. Nonetheless, recognizing at least two broad choices is frequently beneficial. To
begin with, integration may be done purposefully in order to minimize the expenses of
manufacturing or distributing current products. Second, integration may be carried out for
longer-term strategic reasons, such as improving the firm's overall competitive position and
reducing the risks it faces3. However, we should emphasize that, in some situations, it may be
difficult or impossible for a firm to develop at all unless it does so as an integrated unit,
because existing supply sources are insufficient and cannot develop quickly enough to
provide a viable alternative.

When a corporation merges, buys, or expands with a company ahead of it in the supply chain,
this is known as forward vertical integration. The raw material extractors, manufacturers, and
retail distributors are all part of the supply chain in its most basic form. This sort of vertical
integration, also known as upstream integration, is less widespread. Large retailers and
enterprises at the end of the supply chain, on the whole, have the most purchasing power.
This permits them to be the 'predator' rather than the 'prey,' i.e., enterprises at the end of the
1
Boyce, P., 2022. Vertical Integration. [online] BoyceWire.
2
McGee, J.S. & Bassett, L.R., 1976. Vertical integration revisited. The Journal of Law and Economics, 19(1).
3
C. J. Sutton, Vertical integration, in Economics and Corporate Strategy 23–50 (1980).

3
supply chain have the money to buy companies in front of them, but firms farther down the
supply chain do not4. Because the enterprises at the end of the supply chain are generally
highly concentrated, forward vertical integration is not prevalent. Thousands more suppliers,
on the other hand, could only dream of integrating vertically5.

Backward vertical integration occurs when one firm merges with another in the supply chain
at a later point. To put it another way, it interfaces with one of its vendors. Because the
company is behind in the supply chain, it is referred to as backward vertical integration.
Backward vertical integration occurs when a distributor merges with a raw material extractor
or a manufacturer in a fundamental supply chain of raw material extraction, production, and
distribution. This is due to the fact that they are now behind in the supply chain 6. This sort of
vertical integration, also known as downstream integration, is fairly widespread. Because
large companies at the end of the supply chain have the purchasing ability to consume their
suppliers, this is the case.

Vertical integration provides significant advantages for both businesses and consumers. The
efficiency of upstream and downstream activity rises as a result of vertical mergers, and there
is better coordination between the two markets. Such advances translate into significant cost
reductions for both firms. This allows consumers to have the same products and services at a
lesser cost with higher quality. It also aids in increasing competition in the relevant market,
resulting in higher quality and reduced product and service prices. Vertical mergers, on the
other hand, may enable firms to establish entry hurdles for new players, foreclose
competitors, and, as a result, influence customer choices in specific scenarios. It may also
discourage vertically combined companies from investing and innovating. As a result, in
India's entertainment and media business, it is vital to assess the benefits of vertical
integration against the different anti-competitive implications.

4
Id.§ 1
5
Ibid.
6
Ibid.

4
 INDIAN TELEVISION BROADCASTING AND DISTRIBUTION
SECTOR- A SNAPSHOT

The Entertainment and Media industry is separated into four segments: television, print,
radio, and other media such as Internet access, film, and music, to name a few. According to
PwC's Global Entertainment and Media Outlook: 2012–2016, the global E&M business was
valued at $1.6 trillion in 2011. India is now the 14th largest E&M market in the world, with
revenue predicted to more than quadruple by 2016. Furthermore, according to World Bank
estimates, India's average annual expenditure on E&M (per capita) in 2011 was US $6.6.
Consumer spending on the E&M industry as a proportion of per capita GDP in India, on the
other hand, is 0.4 percent, which is comparable to rising economies such as China, Russia,
and Brazil. Consumer spending accounts for a significant portion of total industry income and
has been rapidly expanding in recent years. The primary consumer expenditure areas,
according to various industry studies, are TV subscription (58 percent), films (19 percent),
and print (17 percent).

TV is the most popular form of entertainment among end-users in the E&M business, out of
the four main media divisions. TV has the capacity to affect people, their views, and their
attitudes, and since it is a visual medium, its impact transcends the socioeconomic and
educational backgrounds of its viewers, which is especially true in a varied country like India.
In terms of television channels, MIB approved 848 TV channels on December 20, 2012, of
which 31 have just up linking approval and so are not available for watching in India, while
the remaining 817 channels are operational and available for viewing in India.

5
 ADVANTAGES OF VERTICAL INTEGRATION IN MEDIA

Vertical integration is typically driven by a desire to cut costs rather than raise the prices of
the parties' products. Vertical integration has been seen to allow parties to attain improved
productivity, i.e., to deliver the same number of items and services at a cheaper price or to
increase output at the same price 7. In the case of the broadcasting business, there is actual
evidence that vertical integration improves service quality while lowering costs. Greater
efficiency is accomplished primarily through improved coordination, which is enabled
through vertical integration, which also provides the following advantages.8

Production efficiencies and cost savings — A vertical merger can result in a variety of
production efficiencies and cost savings, either via economies of scale or increased
coordination. Economies of scope refer to cost reductions that are achieved by combining
upstream and downstream production operations to obtain a more streamlined outcome. They
develop when overhead, marketing, R&D, sales, or other costs for two or more related goods
may be shared, or when any other efficiency savings from the combined production and sale
of related or unrelated items can be realised9. Economies of scope are common in the media
industry because the nature of media content allows for the reformatting and repackaging of
one product for multiple markets. When economies of scope exist, vertical integration is an
economically efficient strategy because the total cost of the diversified firm is bound to be
lower than the total cost of a group of single product firms producing the same output
(Moschandreas, 1994, p. 155). As a result of efficient manufacturing and cost reductions,
consumers benefit from cheaper pricing which attracts business to the integrated firms in
question.10

Economies of scale – This exists in an industry where marginal costs are lower than average
costs, and economies of scale are particularly important in the media business due to the
public benefit characteristics of media products. For media companies, marginal costs are the
costs of delivering a product or service to one more customer, whereas average costs are the
overall costs of providing the product or service divided by the number of customers 11. The
7
Federation of Indian Chambers of Commerce and Industry, Comments on Telecom Regulatory Authority of
India’s Consultation Paper on Issues relating to Media Ownership
8
Jeffrey Church, 'The Competitive Effects of Vertical Integration: Content and New Distribution Platforms in
Canada
9
Jeffrey Church, 'The Competitive Effects of Vertical Integration: Content and New Distribution Platforms in
Canada ' [27 April, 2011] 30.
10
Fiona Röder, ‘Strategic Benefits and Risks of Vertical Integration in International Media Conglomerates and
Their Effect on Firm Performance’ (DEco thesis, University of St. Gallen 2007) 89.
11
Ibid.

6
average cost of giving that product to the company drops as the number of listeners grows,
which in turn boosts output, allowing the firm to benefit from economies of scale and larger
profits. It will also lead to more investments and innovations from the vertically integrated
organisation, which will benefit end-users and the media sector as a whole.

Internalization of vertical externalities – Externalities occur when one entity's activities

have a direct impact on the wellbeing of another. A vertical merger's improved coordination
can result in savings from: (i) aligning incentives within the vertical supply chain; and (ii)
preventing free-riding. If there is vertical separation, investments and behaviour by upstream
and downstream enterprises that hurt or benefit each other will produce incentive difficulties,
but will be internalised if there is vertical integration 12. Vertical integration, for example,
internalises the issue of quality assurance for the distributor and the customer since quality
checks may be undertaken in the presence of both the distributor and the broadcaster.

Pricing efficiency – Vertical integration can eliminate the idea of double marginalisation 13,
which occurs when a downstream firm's marginal cost surpasses the marginal cost of the
upstream producer due to market dominance, resulting in a markup above a markup or double
marginalisation14. The wholesale market transaction (one of the markups) will be eliminated
as a result of vertical integration, and the marginal cost downstream will be reduced. It
contributes to more earnings and reduced downstream prices.

Hold up problem - This includes a buyer (lower price) or seller (higher price) attempting to
renegotiate the terms of trade after making an investment in the item. Because the
expenditure required to generate or acquire original TV content puts broadcasters at risk of
being held up, broadcasters will only invest in programming that allows them to recoup both
fixed content acquisition expenses and marginal distribution costs. However, once the first-
copy expenses have been incurred, broadcast stations may be able to hold out in order to
avoid having to pay to fixed costs15. Similarly, cable content aggregators will not invest in
programming unless they believe they will be able to recoup both the fixed and marginal
costs of delivery. However, once the first-copy expenses have been absorbed, cable providers
may be able to hold out ex-post in an attempt to bring the price down to marginal cost.
Although contractual mechanisms can be employed to protect against such opportunistic

12
Federation of Indian Chambers of Commerce and Industry, Comments on Telecom Regulatory Authority of
India’s Consultation Paper on Issues relating to Media Ownership (25 April, 2013) 20.
13
Ibid 22.
14
Ibid 21.
15
Ibid.

7
behaviour, negotiating such contracts can be costly. As a result, in situations with a high level
of risk and significant negotiating costs, it is sensible and more effective for businesses to
adopt vertical integration to shield themselves against such opportunistic conduct.

MEDIA LAW AND REGULATION IN INDIA

The Prasar Bharti Act 1990 and the Cable Networks Act 1995, as well as the rules enacted
thereunder, control the media sector's regulatory framework. The Ministry of Information and
Broadcasting (MIB) and the Prasar Bharti are two institutional frameworks and government
entities that regulate the sector. These government entities have been charged with governing
the broadcasting and electronic media sectors by issuing guidelines, regulations, and rules, as
well as providing licenses. By a government announcement in 2004, broadcasting and cable
services were included in the scope of telecommunications services.16

In India, media plurality is still in its early phases of development. To ensure media pluralism
and combat the ills of monopolies, reasonable ownership restrictions in the media sector must
be imposed to strike a balance between ensuring a degree of plurality of media sources and
content on the one hand, and giving companies the freedom to expand, innovate, and invest
on the other.

In August 2014, the Telecom Regulatory Authority of India, TRAI released

recommendations on media ownership problems. In its recommendations on content
aggregators, the TRAI prohibited the bundling of channels from multiple broadcasters and
recommended restrictions on cross-media and corporate ownership of television stations and
newspapers. Vertical integration became possible because to TRAI's decision to enable
broadcasters to own distribution systems. Control of ownership was defined by the regulator
as a 20% shareholding, over 50% voting rights, or half of the members of the media
company's board of directors, or managing management or affairs through decision-making
and the appointment of key managerial employees. TRAI has established broad rules for
identifying genres or sectors for cross-media ownership.17

There are three reasons for the necessity for regulation in this area:

16
Dua, A., 2019. media law and regulation in India. Lexology.
https://www.lexology.com/library/detail.aspx?g=4975586a-c15b-4c0c-9103-cc4020265dcd
17
Ibid.

8
 1. Breakdown of political power and influence through surrogates, such as media,
television channels, and television distribution, which are frequently used to promote
political objectives;
2. Politically supported businesses are either taking over the operations of rival cable TV
operators or employing other tactics to drive them out of business, thereby extending
their monopoly throughout the region; and
3. Corporate sector entities can likewise have comparable impact.

Sponsored news stories, slanted analysis and projections in the political and business arena,
and reckless, sensationalist reporting are all examples of the inherent conflict of interests that
develops from unregulated ownership in the media industry. When control is in the hands of
entities with commercial and political objectives, these become much more dangerous.

As a result, there is a significant need to safeguard plurality, and the relevant authorities and
bodies are in the process of implementing suitable measures to do so, with the formation of a
robust regulatory system not far behind.

CROSS MEDIA OWNERSHIP RESTRICTIONS IN DTH & HITS

Cross-media ownership limitations are included in the existing Direct-to-Home (DTH) and
Hyperlink-Induced Topic Search (HITS) policy guidelines. The following are the relevant
provisions/clauses of these guidelines.18

At no stage during the licencing period, broadcasting firms and/or cable network companies
may jointly control more than 20% of the entire stock of Applicant Company. In addition, the
Applicant Firm may not own more than 20% of a broadcasting and/or cable network
company. Following are clauses taken from the licensing agreement of the respective
services.

DTH Guidelines

“The Licensee company not to hold or own more than 20% equity share in a broadcasting
and/or Cable Network Company. The Licensee shall submit the details of investment made by
the Licensee Company every year once within one month of start of that financial year. The
Government will also be able to call for details of investment made by the Licensee Company
in the equity of other companies at such times as considered necessary.”

18
Choudhry, V., A note on FDI in Media. Available at: www.vikkichoudhry.in.

9
HITS Guidelines

“Broadcasting Company(ies) and /or DTH licensee company(ies) will not be allowed to
collectively hold or own more than 20% of the total paid up equity in the company at any
time during the permission period. Simultaneously, the HITS permission holder should not
old or own more than 20% equity share in a broadcasting company and/or DTH licensee
company.

Further, any entity or person holding more than 20% equity in a HITSs permission holder
company shall not hold more than 20% equity in any other Broadcasting Company(ies)
and/or DTH licensee and vice-verse. This restriction, however will not apply to financial
institutional investors. However, there would not be any restriction on equity holdings
between a HITS permission holder company and an MSO/cable operator company.”

TRAI RECOMMENDATIONS ON OWNERSHIP OF MEDIA

The Authority's principal concern is ensuring that the broadcast and distribution sectors are
free and capable of providing customers with accurate news and information from a variety
of sources. Ownership and control must not be used to limit this in any manner. Vertical
integration between broadcasters and Distribution Platform Operators (DPOs), such as cable,
HITS, and DTH operators, can limit horizontal competition. However, the Authority's
objective in addressing this problem is to develop and nurture an atmosphere that encourages
innovation and investment in this industry.19

The current policy framework on cross-holding is rife with inconsistencies. At one extreme,
there are no limits on cable operators, while at the other, HITS operators are subject to
rigorous regulations. DTH operator limits are somewhere in the middle. There is a need for
broadcasters and DPOs to implement policy consistency on cross-holding/'control' limits 20.
The current constraints set forth under various licenses/guidelines have had mixed results.
Cross-holding/'control' by a single organisation has been documented in some circumstances,
both in the broadcaster and across different types of DPOs. This has resulted in complaints,
lawsuits, and worries about a tilted playing field, which has harmed non-integrated
broadcasters/DPOs. The problem emerges not just as a result of the structural imbalance
between "no regulation" on the one hand and "heavy regulation" on the other, but also
because regulation has failed to prevent vertical integration even when it exists. The fact that

19
TRAI, Recommendations on MEDIA OWNERSHIP (25 February, 2009) 11.
20
Id § 36

10
the Zee TV, Sun, and STAR TV organisations own controlling stakes in DTH operators Dish
TV, Sun Direct, and Tata Sky, respectively, demonstrates this.

In 2008, MIB asked the Authority for advice on how to address crossmedia and ownership
limits for the broadcasting sector's future expansion. On February 25, 2009, the Authority
sent the Government its "Recommendations on Media Ownership." The following were the
suggestions for vertical integration in the broadcasting sector.

(i) “The broadcaster should not have “control” in the distribution and vice-versa.
(ii) Definition of Control: Any entity which has been permitted/ licensed for television
broadcasting or has more than 20% equity in a broadcasting company, shall not have
more than 20% equity in any Distributor (MSO/Cable operator, DTH operator, HITS
operator, Mobile TV service provider) and viceversa.
(iii) The existing broadcasters who may have control in distribution
(MSO/Cable/DTH) and entities in the distribution sector who may have similar
control over broadcasting should be given sufficient time of three years for
restructuring.
(iv) For the purpose of putting in place effective safeguards to prevent vertical integration
between the broadcasting sector and its distribution platforms as recommended
above, the word “entity” be given a broad meaning so as to include any person
including an individual, a group of persons, a public or private body corporate, a
firm, a trust, or any other organization or body and also to include inter-connected
undertakings as defined in the Monopolistic and Restrictive Trade Practices Act,
1969 (54 of 1969).”

Regarding the subject at hand, the author believes that the Indian television business is
immune to the harmful impacts of vertical integration due to the sector's structure as well as
current TRAI laws, which ensure that there is no barrier to entrance. It is also said that
current TRAI rules and Competition Act provisions may appropriately manage the
difficulties that may develop as a result of vertical integration21.

Vertical integration should be permitted because it improves production efficiency, reduces

operational and transaction costs, and allows for competitive product pricing, all of which
benefit the end customer. There is no shortage of bandwidth or channels in today's digital
distribution landscape, and content diversity can always be maintained. With a channel

21
Supra note 8

11
capacity of up to 1000, there is no need for vertical or horizontal integration in terms of
content creation or distribution platforms. The government should enable vertical integration
while also establishing standards to guarantee that vertically integrated media organisations
play fairly and that "third parties" are not treated unjustly or disadvantaged. If an entity is
allowed to have such an interest, it must be along with strict common carriage regulations and
close monitoring by the regulator to ensure that there is no abuse of market power.

Any explicit prohibition on a business with ownership or control in one media sector from
keeping or obtaining ownership or control in another would be a very uncommon,
inappropriate, and risky regulatory action. The Authority, economic theory, and international
regulatory best practises have not been used to determine whether such a position is
inevitably anti-competitive or poses a threat to plurality or other public interests. One
recommendation is that the anti-competitive features of vertical integration be examined on a
"case-by-case" basis, within the framework of India's existing competition regulatory
environment.

CONCLUSION

The object of this report was to bring forth the effects of vertical integration in the TV
broadcasting and distribution sector in a neutral light and then critically analyze each one of
them. As per the available statistics, India is currently ranked as the 14th largest E&M
industry in the world and is expected to more than double its revenue by 2016. The TV
channels are increasing day by day and are mostly distributed using cable and terrestrial
network. With the coming up of digitization, the distribution platforms like DTH and HITS
are gaining popularity very quickly. With vertical integration between the broadcaster and 34
distributors, the competition gets benefitted because of many reasons. To begin with, the
broadcaster and distributor's collaboration improves. This contributes to increased efficiency
and cost savings. Second, increased efficiency allows for the creation of economies of scale
and scope, which leads to better profitability. Profits increase, which leads to additional
investment and innovation. Finally, the service quality increases, and customers receive better
services at lesser pricing.

Every year, a new player enters the Indian media sector, further fragmenting the market.
There would not have been such a quick expansion in the number of channels and consumer
viewership if there had been a barrier to entry for new companies in the Indian industry. As a
result, the competitive issues cited are mostly irrelevant, and any blanket prohibition to

12
address these concerns should be avoided. Furthermore, the Competition Act of 2002's
current rules and the CCI's authorities are sufficient to deal with such competition concerns
whenever they emerge. In addition, if an unanticipated event arises, the CCI can use the 'rule
of reason' method to reach a decision, rather than declaring any transaction 'per se' anti-
competitive. To deal with and address such situations, the CCI may undertake mutual talks
with statutory bodies such as TRAI.

13
 GUIDELINES AND SOURCES REFERRED

Guidelines For “DTH” Broadcasting Service In India Dated 15th March, 2001

Guidelines For Providing “HITS” Broadcasting Services In India Dated 26th November,
2009

The Telecommunication (Broadcasting and Cable Services) Interconnection (Sixth

Amendment) Regulations, 2010.

The Telecommunication (Broadcasting and Cable Services) Interconnection (Digital

Addressable Cable Television Systems) (First Amendment) (First Amendment) Regulations,
2012.

The Telecommunication (Broadcasting and Cable Services) (Fourth) (Addressable Systems)

Tariff (First Amendment) Order, 2012

Commission clears merger between Stream and Telepiù subject to conditions' (europa.eu ,
2003)

Competition, regulation in TV channels distribution (thehindubusinessline.in, 2004)

GUIDELINES FOR DTH BROADCASTING SERVICE IN INDIA (indiantelevision.com,

2013)

14