COMPETITION AND TECHNOLOGICAL CHANGE IN THE TELEVISION INDUSTRY

Transcription

1 COMPETITION AND TECHNOLOGICAL CHANGE IN THE TELEVISION INDUSTRY There are few in-depth studies of individual industries available, and even fewer which attempt to relate such studies to economic theory. Erik Arnold's book breaks new ground by providing the first detailed study of the United Kingdom television industry and by using the case of that industry to launch a devastating attack on conventional microeconomic theory of the firm. A central concern is the role of viewdata (videotex) in the industry. The book offers important lessons for industrialists, economists and policy-makers, showing the vital importance of continuous technological progress to successful firms. Part I sets out conventional neoclassical theory of the firm and contrasts this with managerial and behavioural approaches, and with more dynamic Schumpeterian theory. Part II describes the television industry and viewdata, while Part III assesses economic theory in the light of events in industry. Part IV concludes that while neoclassical, managerial and behavioural theories do not offer very useful descriptions of successful firm behaviour, Schumpeterian thinking is relatively appropriate and goes on to show that aspects of the Schumpeterian approach are capable of fruitful further development. Erik Arnold is a Research Fellow at the Science Policy Research Unit at Sussex University. Previously he has worked in market research and in computing. His research interests include the economics of industrial innovations and the skill and manpower implications of new technology in the engineering industry. He has published widely on office automation and computer-aided design, and has jointly authored Microelectronics and Women's Employment in Britain.

2 COMPETITION AND TECHNOLOGICAL CHANGE IN THE TELEVISION INDUSTRY An Empirical Evaluation of Theories of the Firm Erik Arnold Foreword by Christopher Freeman M

3 Erik Arnold 1985 Softcover reprint of the hardcover 1st edition All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission First published 1985 by THE MACMILLAN PRESS L TO London and Basingstoke Companies and representatives throughout the world Filmset in Monophoto Times New Roman by Latimer Trend & Company Ltd, Plymouth British Library Cataloguing in Publication Data Arnold, Erik Competition and technological change in the television industry. I. Television supplies industry~great Britain I. Title 338.4' '00941 HD9696.T463G7 ISBN ISBN (ebook) DOI /

4 To Jenny

5 Contents List of Figures and Tables Foreword by Christopher Freeman Acknowledgements XI xiii XV Introduction 1 Paradigms of Firm Behaviour 1 Research Method 4 The Representative Firm 5 Structure of the Book 10 I ECONOMIC THEORY OF THE FIRM 11 1 The Neoclassical Paradigm Strategy and Control of the Firm Technical Change Marketing- Price 18 Competition 19 Monopoly 20 Oligopoly Marketing- Quality 21 Competition 22 Monopoly 23 Oligopoly Interaction Between Supply and Demand Summary- A Neoclassical Model 25 2 A 'Managerial-Behavioural' Paradigm Strategy and Control of the Firm Technical Change Marketing- Price Marketing- Quality Interaction Between Supply and Demand Summary- A 'Managerial-Behavioural' Model 35 3 A 'Schumpeterian' Paradigm Strategy and Control of the Firm Technical Change 44

6 viii Contents 3.3 Marketing Interaction Between Supply and Demand Summary- A 'Schumpeterian' Model 48 II INDUSTRY 51 4 The UK Television Industry 53 Infrastructure and Innovation 55 Radio and Television 58 The Colour Television Era 61 Video and Text Products 71 5 Viewdata and British Telecom 75 Sales and Marketing 80 6 The Semiconductor Industry 84 III ANALYSIS 91 7 Strategy and Control of the Firm 93 Ownership 93 Goals 95 Planning 96 Growth of the Firm Technical Change 109 Technical Change in the Television Industry 109 Reliability 112 R & D and Technology Sources Marketing- Price 122 Capacity, Volume and Scale 122 Technology Licences, Trade Barriers, and Prices 124 Price Policies- Established CTV Products 125 Price Policies- New Text Products Marketing- Quality 136 Quality Variables which are inherent in the Product 136 Quality Variables which are not inherent in the Product 137 Inherent Quality Variables- 'Quality' 137 Inherent Quality Variables- 'Features' 140 Non-Inherent Quality Variables- 'Subjective' 142 ll Marketing - Distribution Interaction Between Supply and Demand 159

7 Contents IX IV CONCLUSIONS Conclusions for Theory Ownership and Control of the Firm Strategy Growth Technical Change Marketing- Price Marketing-Quality Marketing- Distribution Interaction Between Supply and Demand Implications for Theory 204 The Product Cycle 205 Inter-Cycle Movement 212 Firm Behaviour 214 Appendix I: Major Specialist Renters, Appendix II: Distribution Strategies of TV Manufacturers, Bibliography 221 Index of Authors and Institutions 230

8 List of Figures and Tables FIGURES 3.1 Business assessment of product performance Innovation and stage of development in the product cyck Number of firms in the UK television industry, UK television sales and imports, Monochrome TV- UK market development, Television reliability, Trends in mean basic 20" CTV list prices, , by ownership of manufacturer TV renters' principal sources of CTV, Proportions of households owning television and licensed to receive broadcasts, Radio and television licences in force, Proportion of homes licensed to receive radio, monochrome and colour TV, TABLES 4.1 Leading firms' shares of world television production Television market share estimates, Monochrome TV- UK import-export performance, UK television industry- new entry from Colour TV- UK import-export performance, Contribution of television manufacture to profits Import shares of screen size market segments in the UK, UK videotape recorder market, Cumulative Prestel registrations, XI

9 XII List of Figures and Tables 4.10 Videotape recorder production in Europe by Japanese companies 7.1 Origins and role of founder in firms active in the UK television industry, Goals of firms in the UK television industry, Effective planning horizon needed for technical change 8.1 Japanese 14" CTV -one firm's component count Estimates of employment in TV manufacturing plant, Types of R & D done by firms in the UK television industry, or their parent companies, Milestones in video tape recorder development 8.5 Strategies of the firm 8.6 Firms' product technology strategies, Real price of colour television, TV plant production volumes 9.3 Strategies for price determination 9.4 Mean prices of CTVs from different firms, Trade prices of teletext CTVs Advertising spend for TV by principal advertisers: manufacturers and renters, Advertising expenditure by TV manufacturers, Advertising expenditure by TV renters, Manufacturers' brand names, Percentage of TV set disposals rented, TV market distribution channels, 1974 and Television: household penetration by social class, and Dominant specialist renters' shares of sets on rental, Households licensed to receive radio, monochrome and colour television 12.2 UK television and VCR ownership, Characteristics of the product cycle (I) 14.2 Characteristics of the product cycle (II)

10 Foreword Over the past twenty years there has been a slowly growing recognition of the central importance of technical change for economic growth, firm performance and international competition. It was Joseph Schumpeter more than any other twentieth-century economist who recognised this and consistently advocated a more realistic theory of competition, firm behaviour and business cycles than that enshrined in the established neoclassical orthodoxy. Even in the natural sciences however, established paradigms are notoriously hard to change and in the social sciences this is doubly difficult because of the problems in conducting controlled experiments and the greater element of ideological reinforcement for many theories. Consequently it has taken a long time for Schumpeter's ideas to gain any general acceptance or to displace the conventional wisdom. The fact that some of his central propositions were derived from Marx did not make this any easier. Nevertheless the cumulative weight of the empirical evidence and of business experience, rather than theoretical disputations, have increasingly undermined the conventional view of the economic system. This became most glaringly obvious in the sphere of international trade in the 1950s and 1960s, where the debate surrounding the Leontiev paradox led to the almost universal recognition that technical innovation played a major role in comparative advantage and international trade performance. In the case of the United States in particular, it became virtually impossible to ignore this factor in relation to such highly labour-intensive export product groups as aircraft and (at that time) electronics. More and more the empirical evidence of the trade statistics supported the standpoint of the 'technology gap' or 'neotechnology' trade theorists, and ultimately the acknowledged doyen of international trade theory, Harry Johnson, bowed to the inevitable and himself accepted a major revision of the orthodox theory at the Montreal conference of the International Economics Association. Although something of the old factor proportions theory was salvaged, the incorporation of 'human capital' in the form of skilled engineers, X111

11 xiv Foreword scientists and technicians, constituted a major breach in the established orthodoxy. As often happens in both the natural and social sciences, the work of young researchers was a vital element in the challenge to the older paradigm. The work of Gary Hufbauer, a young American economist who completed his PhD at Cambridge University in the 1960s, was a crucial step. In his thesis (later published as a book on Synthetic Materials in International Trade), Haufbauer showed beyond all reasonable doubt that the pattern of international trade in synthetic materials could only be satisfactorily explained in terms of the technological leadership of Germany, the United States and other innovating countries: a leadership which was only eroded and supplanted by other (comparative cost) advantages over very long periods. Later, a young Belgian student Luc Soete, working at the Science Policy Research Unit, in his thesis and in his subsequent research provided more general and comprehensive statistical evidence for the whole range of product groups and for many OECD countries, with a general technology gap theory of foreign trade. What occurred in the sphere of international trade theory is now also beginning to happen in relation to the theory of the firm and (even more recently) in relation to business cycle theory. Old paradigms however, do not lie down and die so easily in the social sciences as in the natural sciences. Even though Schumpeter's basic point seems so obvious to most engineers and scientists-that the inter-firm competition in the form of new products, new processes and new systems is far more important than traditional price competition with equal technology and invariant conditions of production- this very elementary point, with all it implies in terms of firm behaviour, has still not been placed at the heart of competition theory or the theory of the firm. There in fact, is the rub. The implications of placing technical innovation at the centre of the stage are very great indeed because it brings down the whole elaborate house of cards upon which orthodox economic theory depends. Uncertainty and evolutionary behaviour become the norm and not the exception; equilibrium becomes only a special case and not the central feature of the entire edifice. Just as in the sphere of international trade theory, the work of young researchers has been of critical importance in undermining the foundations of the established orthodoxy. Erik Arnold's work, like that of Giovanni Dosi (Technical Change and Industrial Transformation: The Theory and an Application to the Semiconductor Industry, Macmillan, 1984), provides the type of detailed empirical observations which

12 Foreword XV contradict the received wisdom with its totally unrealistic assumptions about firm behaviour. Of course, pure empiricism would be quite inadequate in itself. Hufbauer's work and that of Luc Soete was so effective because it provided convincing empirical support for an alternative theoretical paradigm, based in that case on the earlier theoretical work of Posner (and, of course, Schum peter himself). They themselves also contributed to the further development of that new paradigm. Erik Arnold's work follows in this admirable tradition. It tests out alternative theories of the firm against the evidence of one particular industry- television-just as H ufbauer tested out alternative theories of foreign trade against the empirical evidence of trade in synthetic materials. It is not generally recognised that a large part of the theoretical edifice of neoclassical economics has actually never been tested in this way. Such a situation would be almost inconceivable in most, if not all, branches of the natural sciences. When the testing does take place it generally supports the Schumpeterian theory of firm behaviour. This book does not, like that of Nelson and Winter, attempt to develop an alternative theory of the firm to supplement the increasingly inadequate traditional theory. It has the more modest objective of testing out several alternative theories in the light of the historical evidence from one industry. Schumpeter maintained that such historical studies of firms, industries and technical innovations were the necessary foundations for a more satisfactory general theory. I believe that he was completely right in making this point and I strongly commend Erik Arnold's book to the reader as an excellent contribution to this essential task. Science Policy Research Unit University of Sussex Brighton, England CHRISTOPHER FREEMAN

13 Acknowledgements Inevitably, in the process of researching and writing this type of book one acquires a great many debts of gratitude. Since this study is about economics, it seems apposite first to thank the Joint Committee of the Science and Engineering Research Council and the Economic and Social Research Council for financial support in the period Sadly, it is not possible to acknowledge by name the people in industry who so freely gave their time to be interviewed during the course of this study, since the interviews were conducted in confidence. It goes without saying, however, that their role was crucial. I owe a particular debt to the staff of the libraries at the Science Policy Research Unit and the Mirror Group of Newspapers, as well as to successive statistical officers at the British Radio and Electronic Equipment Manufacturers' Association. Alfred Sorkin, editor of Electrical Retailing and Trading, and his staff kindly gave me access to television price data. Over the past few years, Ian Cole has been a fount of invaluable knowledge and comment, both about the television industry and other matters. Richard Hooper, director of the Prestel Organisation, and Susan Markham at the National Economic Development Office, made useful comments on an earlier article about Prestel, and these remarks also informed the writing of chapter 5. Colleagues at or associated with the Science Policy Research Unit have been a constant source of help and advice. In particular, I am grateful for comment and encouragement to: Norman Clark, Lesley Cook, Chris Freeman, Keith Pavitt and Morris Teubal. Most particularly, I would like to thank my friends and colleagues: Ed Sciberras, who taught me most of the little I know about economics; and Peter Senker, who persuaded me that although I know little, it is necessary to write down even less. I am grateful to the following for permission to reproduce published material: Audits of Great Britain Ltd, for Home Audit Division data; The British Market Research Bureau, for TGI (UK) data; The British XVI

14 Acknowledgements XVII Radio and Electronic Equipment Manufacturers' Association, for BREMA statistics; The Consumers' Association, for material from Which?; Dempa Publications, for material from the Journal of the Electronics Industry; The Economist Intelligence Unit, for material from Retail Business; Elsevier Science Publishers BY (North-Holland}, for material from Research Policy; HMSO, for Table 10.4, which is reproduced with the permission of the Controller of Her Majesty's Stationery Office; Media Expenditure Analysis Ltd, for the use of MEAL data on advertising expenditures; The Mirror Group of Newspapers, for material from MGN/IPC Marketing Manuals in Table 10.1; Pergamon Press, for material from Omega; Frances Pinter (Publishers) Ltd; Technology Review at the Massachusetts Institute of Technology for Table 14.1, which is reprinted with permission from Technology Review, copyright Science Policy Research Unit, Sussex University, Brighton, England ERIK ARNOLD