The provision of high-definition TV (HDTV) service is an important component of
ID: 466487 • Letter: T
Question
The provision of high-definition TV (HDTV) service is an important component of our digital cable strategy. As you know, it provides significant improvements in visual and audio quality compared to traditional cable TV, and the value added is a promising new source of revenue for the company. Currently, we offer HD programming with standard definition counterparts for free to our digital service subscribers. In certain areas, we also offer a separate package devoted exclusively to HD programming for a monthly price of $5.99. Although we do not charge extra fees for some HD channels, we still benefit because of the higher advertising revenues it generates. According to estimates by our product development division, the extra advertising revenue that each HDTV subscriber brings us is about $10/month, compared to a traditional TV customer. The development of our HDTV business remains slow. According to a recent survey by the product development department, two major factors attribute to the sluggish market. The first is the high price of HDTV sets. Currently, a typical HDTV set costs well over $1,000 and this keeps many customers from upgrading their equipment. The second factor is the lack of HDTV programming. Customers indicate a very strong preference for viewing sporting events (such as NFL and NBA games) in HD format. We expect that more HDTV programming will boost the sales of HDTV sets, and in turn, stimulate subscriptions to our HDTV services. My goal is that, within three years, a significant fraction of our digital cable subscribers will be equipped with HDTV sets and signed up for our new program tier devoted to HDTV programming. Please formulate a plan that will permit us to profitably achieve this goal.
Explanation / Answer
The plan is formulated in two parts
(1) increase the penetration of installed HDTV sets
(2) Increase the content of HDTV programming to stimulate customers to subscribe to HDTV services.
Challenge to the implementation of the first part of the plan is prohibitively high cost of HDTV set. The proposed solution to overcome this challenge is
i) Indirect subsidy to the customers on the cost of HDTV set by providing free subscription to HDTV programming for three years. This will effectively reduce the cost to customer by 215.64 (=5.99*36)
ii) Direct subsidy to the customer of $ 360 (=10*36) . The company will recover $ 10 per month incremental revenue from advertising.
The combined subsidy will bring down the effective cost of HDTV set for the customer by $ 575.64.
The company will offer a bundled package along with the HDTV set for $ 640 . This price will be offered as 36% promotional discount on the list price of $ 1000 for a limited period. The package will contain a subscription to HDTV programming for three years worth $ 5.99 per month. This subscription is Free of cost to customer.
This plan will enable us to install more HDTV sets and increase penetration of our HDTV services. Once the customers get the hang of HDTV programming and services, they will renew the paid subsription after the expiry of three years free subscription. This will generate a steady revenue stream for the company.
Second part of the plan requires HDTV programming and content creation. for this company needs to tie up with sporting events and live shows.
Collectively both the aspect of the plan will help the company achieve the goal of significant portion fraction of digital cable subscribers be equipped with HDTV sets and signed up for new program tier devoted to HDTV programming with profitable revenue.
Average Additional Revenue per subscriber from HDTV programming 5.99 Additional Advertising Revenue per subscriber 10.00 Total incremental revenue per subscriber per month 15.99 Total incremental revenue per subscriber per 3 years 575.64 Origianl HDTV set cost 1000 Subsidized HDTV set cost 424.36 =1000-575.64Related Questions
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