Question

Time Warner Cable Memo #1

We recently added the EPIX Movie Channels as part of a new tier programming for our digital video subscribers. The EPIX channels are sold as an add-on package for $9.75 per month, but we would like to potentially increase our revenue from our subscriber base. Currently we have about 15,059 subscribers, generating monthly revenue of $146,823

Some have suggested we should cut price, as customers tend to be fairly price sensitive for add-on packages. However, in this case, if we lower price for our new subscribers, we really need to cut it to all of our existing subscribers as well. I have some concerns that lowering price will be counter productive.

The marketing department calculated some subscription levels at various price points in this region, and i need you to perform the analysis. Specifically, I want you to estimate the price sensitivity of customers at the current price. Please address the following questions. (1) If we lower the price, do you think this is likely to lead to higher revenue, and (2) how much potential revenue can we generate and how low should we go with our price.

Price	Number of Subscribers (Thousands)	Cost of License Fees (Thousands)	Divisional Sales, General and Administrative Costs (Thousands)
$5.00	29.974	$         134.883	$              14.50
$5.50	29.256	$         131.651	$              14.50
$6.00	17.822	$           80.199	$              14.50
$6.50	22.657	$         101.956	$              14.50
$7.00	19.897	$           89.537	$              14.50
$7.50	16.671	$           75.017	$              14.50
$8.00	20.492	$           92.213	$              14.50
$8.50	20.000	$           89.998	$              14.50
$9.00	19.760	$           88.920	$              14.50
$9.50	17.123	$           77.053	$              14.50
$10.00	12.644	$           56.896	$              14.50
$10.50	12.785	$           57.531	$              14.50
$11.00	12.216	$           54.974	$              14.50
$11.50	13.246	$           59.608	$              14.50
$12.00	8.637	$           38.867	$              14.50
$12.50	10.595	$           47.678	$              14.50
$13.00	5.857	$           26.357	$              14.50
$13.50	2.615	$           11.768	$              14.50
$14.00	2.739	$           12.326	$              14.50
$14.50	5.291	$           23.809	$              14.50
$15.00	3.051	$           13.730	$              14.50

(estimates of market penetration in the Tri-State Region based on different price levels, License fees represent the fees we must pay to EPIX for the rights to re-transmit their channels. Fees are based on the number of subscribers)

ADDITIONAL INFO

Last week, you read the Time Warner Cable information on Page 467 to 485. Read Memo #1 on page 486. To provide the answers for the Memo, you will use all topics and materials you learned from CH 3. The data set of Epix. xls is attached. Assume you are the Junior Executive and address your memo to the proper person.

Submit your report by Sunday 11 PM. You have to include the appropriate output in your report. Your analysis output should be properly shaped such as changing the decimal points, copy, and pasted on to your report paper. when you label your output, specify what program did you use to bring the regression output. Ex: Excel Regression Analysis. Submit in one file using docs or PDF format. (1-2 page including regression output)

Your grade will be based on:

• Recognizing appropriate tools & performing all analysis that needs to be done
• Able to organize and perform necessary analysis in proper sequence
• Accurate analysis output, interpretation, drawing the correct answers and reporting in a professional manner

Also that chart I created above, was in excel and that was the only information included. Please let me know if you need anything else!

Answer 1

For profit maximizing price determination, we may first calculate the profits

Profit = Total Revenue - Total Cost

Price	No. of Subscribers	Revenue = Price * No. of Subscribers	License Fee	Admin Cost	Total Cost = License fee + Admin Cost	Profit
5.00	29.974	149.87	134.883	14.5	149.383	0.487
5.50	29.256	160.908	131.651	14.5	146.151	14.757
6.00	17.822	106.932	80.199	14.5	94.699	12.233
6.50	22.657	147.2705	101.956	14.5	116.456	30.8145
7.00	19.897	139.279	89.537	14.5	104.037	35.242
7.50	16.671	125.0325	75.017	14.5	89.517	35.5155
8.00	20.492	163.936	92.213	14.5	106.713	57.223
8.50	20	170	89.998	14.5	104.498	65.502
9.00	19.76	177.84	88.92	14.5	103.42	74.42
9.50	17.123	162.6685	77.053	14.5	91.553	71.1155
10.00	12.644	126.44	56.896	14.5	71.396	55.044
10.50	12.785	134.2425	57.531	14.5	72.031	62.2115
11.00	12.216	134.376	54.974	14.5	69.474	64.902
11.50	13.246	152.329	59.608	14.5	74.108	78.221
12.00	8.637	103.644	38.867	14.5	53.367	50.277
12.50	10.595	132.4375	47.678	14.5	62.178	70.2595
13.00	5.857	76.141	26.357	14.5	40.857	35.284
13.50	2.615	35.3025	11.768	14.5	26.268	9.0345
14.00	2.739	38.346	12.326	14.5	26.826	11.52
14.50	5.291	76.7195	23.809	14.5	38.309	38.4105
15.00	3.051	45.765	13.73	14.5	28.23	17.535

Hence, the profit of $ 78.221 thousand is maximized at a price of $11.50, generating reveune of $152.329 thousand with 13.246 thousand customers.

1. If we lower, the price from $11.50, we may increase our revenue to $177.84 thousand with more subscribers at 19.76 thousand. But at the same time license fee qould be increased resulting in lowering of our profits. Hence, it is not advisable to reduce prices any further.

2. Potential reveune generated = $152.329 thousand at price $11.50.