This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
11/15/2010
Dish Network Preventing Product Cannibalization?
Several weeks ago, in response to the high prices for my previous cable television supplier, I began to shop shop around for less expensive options. It was interesting to me how much planning went on in putting together each company's different channel lineups. Each company offered several different plans, with different channels and different combinations of high and standard definition. Obviously the prices reflected the desirability of the individual plans. I soon realized that the channel lineups were arranged in ways to prevent product cannibalization. I will use Dish Network as an example. On "America's Top 120" plan they offer CNN, CNBC and Fox News, but not MSNBC. They offer TV Land, but not The Hallmark Channel. They offer many sports channels, but do not include CBS C, The Golf Channel, NFL Network or SPEED. It seems as if they will give everyone a taste of what they want, but not completely satisfy them. I believe that this is done in order to preserve their higher priced products, and insure that people with higher disposable incomes aren't being satisfied with a product targeted to people with lower disposable incomes.
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I believe that cable companies use different bundling packages to maximize profits. They have a mixed bundling system where they can charge different rates for different groups of products, but still offer individual channels as well (even though they are just as expensive as the bundle themselves). When they bundle their products they also use an indirect mean to discriminate between their buyers or segments. They know that someone who wants all the news channels will pay extra to have those channels, but someone who is a sports fanatic won't care for that package. So they create a package that a sports fan would absolutely love and be willing to pay for. They may not be able to pin point each segment and charge them a different rate for the channels they want, but they have created an indirect way to help maximize their profits.
They do have cannibalization, but I'm not sure how much they worry about it. This is a better example of bundling.
Cannibalization is more of an issue if you don't know it's possible in your business, or you have difficulty measuring the extent of it. Those really don't happen with something like Dish Network, because they expect 100% cannibalization: just about everyone who buys a package is opting out of all the other ones. As long as they are upselling customers successfully, the cannibalization is OK.
Bundling is the big story here. A company like Dish Network is offering you bundles of goods, rather than allowing you to buy what you want a la carte. Those bundles are designed to include only some of what you really want, while getting you to help cover the costs of things you don't. Since you aren't really burdened by stations you don't watch, it the things you do watch that determine what you'll pay for. Their marketing people have subdivided their customers into different groups - say, sports lovers - and then seeded their plans with a bit of desirable sports, but less than the next level up.
And sorry ... I forgot to say at the top that Rhett had a good handle on this.
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