The Logic of Demand-Side Diversification: Evidence from the US Telecommunications Sector, 1990–1996

The logic of demand-side diversification articulated herein explains that a firm's demand-side strategic assets motivate its choice to diversify into an industry whose production function warrant possession of different supply-side strategic assets. The concept of demand-side relatedness, which underpins the logic of demand-side diversification, clarifies the conditions under which a firm's demand-side strategic assets provide it with the motivation to explore opportunities for realizing consumer synergies. We invoke this logic to explain the observed variation in the decision of monopoly local telephone service providers to diversify into the competitive long distance telephone services markets in the U.S. during 1990–1996. We find that the likelihood of a monopoly local telephone company to diversify into the long-distance services market within its area of franchise increases in the (a) quality of its customer-base for local telephony, and (b) competitive intensity of the market for long-distance services.