Question

Memo 2

To: Pricing Manager, Austin

From: Vice President, Marketing

Re: Google Fiber

As you are aware, Google has been entering select markets with its Google Fiber service that competes directly with our high-speed data and video services. Even though its market penetration has been moderate, Google has deep pockets and excellent brand awareness. As a result, we are paying close attention to markets that it is entering.

Within the last year, we completed our own fiber upgrade in the area at a cost of a little over $550 million. We are able to provide our high-speed data and video, and have a large number of bundled customers for our products. Unfortunately many of them have been with us for a while and are no longer under any contract to remain with us. With Googles entry along with existing competition) we may need to reduce our prices. The Austin service area for our services includes 340,000 households. Currently, in neighborhoods where Google competes, we provide bundled services that average $120 per household per month.

n addition to monthly costs associated with the $550 million (which is being amortized over 15 years at 6.0 percent), agreements with program providers stipulate that we pay them $41.50 per subscriber per month. In addition, we have maintenance, service, and billing costs of $9.20 per subscriber.

I am concerned that increased competition will lead to a price war, and that prices may get to unprofitable levels. If things turn really bad, we may need an exit strategy from this market. How low should we be willing to go with our prices before it makes sense to exit the Austin market?

Please answer in paragraph format and within 400-500 words. Less if needed.

Answer 1