By October 1990, two new entrants suffered a combined investment of £1.25 billion and a weekly £10 million loss and are waiting desperately the Christmas season to fall in better hands. Rather than behave rationally and focus on profit maximization and a long run going concern for the entire industry, the two companies engaged in a bloody war, that let the industry suffer one of the major loss ever and led to the merger of the two companies .
This case outlines one of the most ferocious competitions of the satellite TV, and announces a series of battles under other skies in the same industry.
The situation described in the case is much to be close to a “War Game” that ends up with a takeover of one on the other .
Today’s view on that situation could be biased due to the result of such game, but we will try to be as fair as possible with BSB management to justify their intention in that time.
The task would not be easy due to the drastic changes in that industry during the 90’s. The two companies bet all their funds and based all their future wealth on two different alternatives. Nevertheless, these two alternatives were analogue based technologies that have been replaced rapidly in 1996 by the most cheap and higher quality digital satellite broadcasting with its standard known as DVB . The latter technology allows scrambling of the signals, stereo sounds and wide screen support. A lot of scrambling system has appeared during this period. The most secure one remains the Videoguard NDS system developed by an Israeli firm for BSkyB.
Description of the situation :
We are faced with an extremely competitive market with two players. The situation could be summarized in the hereunder points: -High cost entrance
-High Operational Costs
-Existence of substitutes (BBC, ITV and Channel 4 terrestrial TV and VCR for movie channels) -High antagonism between the players
-Government intervention to regulate the industry (applicant –BSB- was “forced” to use high cost risky transmission standards) -Uncertainty about the technology used
-The two companies markets the same product (TV channels package, including a movie channel) -Two “monopolists” based behaviors who are confronted to a ferocious competition. -Price was setup from the beginning in the initial application to IBA (could be assimilated to a regulation) -Each subscription is considered as an asset (power to retain its customers) because of the high cost of switching from one provider to another .
The Initial Game :
The game started far before the going “on air”. It has officially started on 1986, when IBA has granted a 15 years franchise for BSB to run its commercial service on three of its five DBS channels.
For matter of simplicity, we will assume that BSB has three aired channels out of potential five DBS channels. The two channels aired on the same frequency will be considered as one.
The terms of the license were that BSB pay for the construction and launch of two high powered satellites . Yet the terms of the franchise were not listed in the case, we could assume the following: -IBA will allot the remaining two channels with the same terms -Since the two DBS remaining channels could not be easily scrambled, intelligence or military use would not be considered. Only commercial use would be useful. -The second applicant will share the costs of high-powered satellite with BSB (or lease the rights for 15 years)
Thus the game could be figured out as follow (sequentially) : Figure 1
* Assumptions concerning the calculation: for this industry the costs are not variables. Up to 80% of the costs are fixed and are directly linked to operations to go on air. Thus and because of lack of information concerning overheads we will assume in our calculations that the costs presented in Exhibit 6 & 7 of the case are needed to run the business less the depreciation of satellite or equipment that are explicitly shown...