SPANISH CABLE TV MARKET DIFFUSION MODEL:
PROFITABILITY ANALYSIS OF COMPETITIVE TELECOMMUNICATIONS
BUSINESSES
Antonio Barrén, Engineer, Telefonica de Espaiia
INTRODUCTION
The development of the cable television market, a very late comer in Spain, has been *
hindered by a number of factors, while its future depends largely on both legal issues and the
appearance of the competition platform, satellite TV.
It has been assumed for the purposes of this paper that the cable TV offering will be
clearly distinguishable from satellite TV - a highly questionable presumption - in terms of the
number of channels offered and in particular of the potential for interactivity that cable affords, as
well as of the complementary telephone services that cable TV operators will be in a position to
offer. We will, then, focus on the unique existence of a “cable platform”, to, in a later stage of the
model - perhaps to become available via an Internet home page -, broach the impact of satellite
TV as a replacement for cable.
MODEL STRUCTURE
In this overview we will discuss the various steps that help comprehend cable TV business
diffusion in an area or region with two cable operators; using revenue and associated cost
mechanisms, we will also set up various scenarios that will enable us to evaluate the profitability
of the business from the standpoint of only one of the competitors, since a similar procedure
would be followed in assessing the
‘cohorts,
= young
other’s performance as well.
-<childrer.
\ erty rate
™
i> ———— Initial values
Ne Aging
<stay time>
Popuidiion
| change
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ent
me
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The model comprises the following
modules:
Potential market. formulated on the
basis of statistical trends for
populations, divided into cohorts with
their respective fertility and mortality
rates and the number of
homes resulting therefrom, houses as Unssited factor
drawing a distinction Povential market
between the various kinds of ‘Coverage sto ——————> Cumulative total hhlds Moniny fes effect,
: passed ,
dwelling on the basis of the \
number of families they ny
accommodate. This is used Seaton i
: Inst No. oasbold asied cums
to deduce the maximum
number of families willing to subscribe to cable TV, based on planned interviews conducted to
research the potential market. Such ceiling is dependent upon monthly fees, initial connection
costs, the range of thematic channels and product offerings. Investment is time-scaled, taking
account of the legal commitments that broadcasters must meet with respect to coverage in terms
of population density.
CTV (cable TV) subscription module. A diffusion structure (Bass, Mahajan, et al.) was tested
for this module, in accordance with the innovation and mouth-to-mouth principles.
Each operator’s share is based on their respective ability to attract potential customers: coverage,
fees for the various services (pay-per-view, premium programmes, monthly and initial fees, range
of thematic channels, brand prevalence, quality, complementary telephone services in the same
package, interactivity or otherwise...). All of this makes for a marketing mix that tilts the scales
one way or the other, and the cumulative effect over several years results in the total number of
customers for the operator in question.
prov one’s share, new customers
. provider one’s share total attractiveness
— we
innovation prov one a te tn CoRAReROE ~ ;
oe Ci pe provider one attractiveness
4 a“ 7, mouth to mouth prov one ae
new customers, provider one Droxe eR ORE ‘$ decrease
e-| Houscholds connected —.
provider one
Fotential provider one rate of decrease
Market
Competitor’s decrease
vd
Households connected: __
competitor oe
new customers competitor
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Revenue module. Revenue is computed on the basis of the above ceiling and the services
purchased by such customers, multiplied by the prices.
Cost module. Here we estimate the various kinds of investment required for networks or
facilities, sales organisation, personnel, publicity, financial costs and cable company start-up
costs... along with the respective amortisation and depreciation expenses.
Results, profit, loss, cash-flow and ratio module. This is a combination of the above modules,
formulated pursuant to standard equations relating these parameters.
Taken together, these modules make up the system that enables us to simulate different
scenarios while maintaining the competitor’s strategy unchanged or even varying it in terms of
presumed criteria or those observed to be followed by other agents, countries, ...
USER-FRIENDLY INTERFACE .
Taking the process one step farther, we can facilitate handling a model built under these
conditions for users unfamiliar with system dynamics and the tools that support it, via a friendly
interface that guides or drives the Business Manager, using readily understood menus in
connection with the various options, together with utilities for simulation (under the various
possible formats, including policy optimisation, analysis of sensitivity to variations in parameters,
calibration, reality check...), results analysis and print-outs, scenario changes, etc. All this is
available through the program using standard Windows programming (Visual Basic, Delphi...) or
even the tools included in the SD software itself (applications generator, multi-media effects,
friendly icons and/or windows).
“Translation”:
‘MENU PRINCIPAL
Main menu
© review structure
© runa scenario
© analyse a previous run
© run sensitivity analysis
© review sensitivity analysis *
© return to starting point
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Some sample displays or screens for the above interface are shown below. It will be noted from
these illustrations that combining these techniques with the appropriate tools that support them
can be both very powerful and useful for both professionals with SD expertise accustomed to
working with such methods and final users for whom the application is intended and which is
closed from their standpoint, although easily amended and maintained by its skilful builder.
This display shows causal tracing for a
selected variable, and a graph of its evolution.
We can choose: Tabulated (numerical) format
results, variable definitions or equations, the
print function,...
Comments are included to help users
understand each phase or step as they work
through the model.
This screen summarises the results of a
comparison of the various scenarios
implemented, considering different hypothesis,
strategies,... This enables users to contrast the
results of the major variables, thereby helping
them to reach decisions: Cash flow, profit, cost,
investment, customers,... or even the
competitor’s business figures.
INFORMATION VIA INTERNET
I trust you will find this information - expanded and updated - together with other related
items of interest on my web page:
http://ourworld.compuserve.com/homepages/telinges/tve.htm.
If you wish to correct something there, or enlighten me with your advice and experience,
please do not hesitate to contact me at the following e-mail address: 100407.2170@
compuserve.com _ or by telephone: 34 29 13 19 31.
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