Thursday, October 18, 2012

Television and Duopoly Economics

I love duopolies: two or more companies fighting it out in an economic arena.  There's a couple of different models out there to describe the outcome of duopoly behaviour.  

One theory (Cournot duopolies) says that the companies will fight it out, matching business models and competing until both or all are "the same".  At the end of the day, each competitor winds up with about equal market share.  So if there's two companies, each will fight with each the other and wind up with half.  For example, Vodaphone and Telecom, before 2 Degrees, had simliar-ish market shares in the mobile phone market (~2.0 - 2.4 mill users), but have lost some market share to new entrant 2 Degrees.  They both share a similar business model, they are both "the same".  And, for 2 Degrees, mimicking both Telecom and Vodaphone will be a successful strategy - if nothing else changes it could reasonably be expected to secure 33% of the mobile telecommunication market.  Not too bad as a business proposition..

But then there's another theory (Stackleberg duopolies) that says one company will become dominant over the other.  Its does this through moving quickly and decisively into a dominately market position which seizes the lions share of a industry sales.  Faced with such a dominate competitor, any other firm looking to enter the market is dissuaded from actively and aggressively competing to steal market share.  Instead, they chooses to operate at a significantly lower level of size of operation, happy in niche areas, not competing for the others business. Its just easier that way:  the dominant firm is so much bigger, and the competitive fight to steal their business is MUCH harder. 

Television Industry
Take Sky TV for example.  Ever seen its balance sheet?  Compare and contrast it with TVNZ. I've reproduced the salient numbers below, together with inter-year comparisons, which I'll use to talk about the interesting bits below:


Sky TV

2012 2011 Growth
2012 2011 Growth
Residential satellite subscriptions 682,348 641,337 6.4%
- -
Television advertising revenue 67,235 62,691 7.2%
313,687 304,666 3.0%
Other Revenue 93,491 92,920 0.6%
33,079 35,750 -7.5%
Total Revenue 843,074 796,948 5.8%
346,766 340,416 1.9%
Subscribers 846,931 829,421 2.1%

Programme rights 216,131 209,008 3.4%
199,596 193,440 3.2%
Depreciation and amortisation 134,119 124,954 7.3%
22,964 21,277 7.9%
Other Expenses 290,921 266,265 9.3%
131,353 131,368 0.0%
Total Expenses 641,171 600,227 6.8%
353,913 346,085 2.3%

Tax 48,847 51,706 -5.5%
5,242 8,898 -41.1%

Profit after tax 122,787 120,326 2.0%
14,207 2,080 583.0%
Profit as a Percentage of Revenue 14.6% 15.1%

4.1% 0.6%

Sky TV
Balance Sheet 2012 2011 Growth
2012 2011 Growth
Property, plant and equipment 364,335 364,335 0.0%
83,484 100,383 -16.8%
Goodwill 1,424,494 1,424,494 0.0%
- -
Other Assets 173,638 151,731 14.4%
159,897 128,307 24.6%
Total assets 1,962,467 1,940,560 1.1%
243,381 228,690 6.4%

Total Equity 1,253,864 1,297,544 -3.4%
154,635 154,281 0.2%

Points to Note:
  1. Although not immediately apparent, draw your eye to the $1.4 billion Goodwill figure in Sky's balance sheet.  Its main asset is goodwill which is approximately 3 times larger than its investment in physical property, plant and equipment.
  2. Mull that number over for a bit: this is evidence of a super-normal profit.  Goodwill is an intangible figure... it represents the difference between physical assets and market value.
  3. The next immediate difference is in revenue size - Sky is more than twice the revenue size of TVNZ and growing.  That's where the super-normal profit comes from.  Both companies increased their revenue, but in comparison with TVNZ, Sky is in a completely different league.  Its revenue grew 5.8% compared to TVNZ's paltry 1.9%
  4. I haven't replicated TV3 revenue, owned by Canwest - a private company, because its annual report wasn't on its website.  The only numbers I found were old.  So we can't see the full television industry's Total Revenue for 2012 and 2011.  But even on the numbers we can see above, TVNZ has only 30% of the combined revenue, much lower than half and suggesting Stackleberg duopoly behaviour.
  5. Sky managed to increase its subscribers by 2.1%, and its subscription  revenue by 6.4% - Sky viewers are paying Sky 4.3% more to view Sky TV in 2012 than in the previous year.
  6. Sky more than doubled TVNZ's rate of growth in Advertising revenue.  So not only are consumers paying more to view Sky, advertisers also perceive the viewer benefit.  Advertisers back winners.
  7. TVNZ and Sky paid similar programme licensing costs, but Sky's business model allowed it to capture more of the viewer's "consumers surplus"  - they were able to charge viewers a price related to the benefits the viewer received from the shows.  TVNZ, in contrast - with an advertising only business model - couldn't capture any of the viewer's benefit from viewing.  TVNZ makes money by an indirect advertising related method, compared to Sky's charging.

  8. In comparison to TVNZ, the average amount of revenue it retains as profit is massive.  Approximately 15% of revenue earnt goes directly into net profit for Sky.  That's massive!  In contrast, TVNZ can only expect to pocket 4% of its revenue.  And last year, it couldn't even expect to pocket 1%.  This difference directly reflects the business models of the two companies, and Sky's able to capture consumer (viewer) surplus in its subscription model. 

So, if TVNZ is "losing" against Sky, why doesn't it change its business model, and seek to secure consumer surplus through subscriptions like Sky has achieved?  In part, the above results are the legacy of the TVNZ's Public Charter, which obliged it to focus on public service objectives and expectations, both of which are the antithesis of pay-for-view subscription.  

But also in part, comes the uphill battle associated with taking on the large market incumbent inherent in the thinking underlying the Stackleberg duopoly theory.  How else do you explain Igloo and Heartland Television which are examples of TVNZ co-operating with Sky within a commercial environment?

No comments:

Post a Comment