Memo 12 Analysis Revenue Monthly Number from Advertising of Loyal Loyal Revenues Viewers Viewers $ PN %&'((( )('((( % *+,',((

TNT %.'-(( 1'1(( % .0',.& 2iogra#hy %)'((( -( % )'.-( 3ame %&(( +( % )'+(( how Network Cable Network 2ravo %)'1(( $ PNews %)'-(( MTV1 %)'1(( )-( *(( 11Monthly Total Program Revenue Fee Per ubs!riber % %(/0( *-.',(( % &+'+.& %(/1% 1'.-( %(/(. % 1'1(( %(/(* Net Profit Rate from savings if Loyal Channel Viewers "ro##ed %)+-'-(( %1)1'+(( %1+'*0( Cost in Total Fees %*1'()( % -1'+0& %)1')(( %.1& % 1'(11 %*'-*, %-&1 % )'0)& %)'-).

% -'1+, % 0'++, %(/(& % )('+,. % ))',,. %(/)( % .'&.* % ,'(.* %(/(.-

%1')&* %+'*0%*'1.+

% *'(00 % 0')*1 % +'-,,

%+'(*0 %-'(*( %*'..&

$ven before !onsidering the new !hannels' it !an be seen that 2iogra#hy brings in less money in terms of loyal viewers than the !ost savings of dro##ing the !hannel outright/ Com#any en4oys #rofits of only %1'(11 from the loyal viewers but !ould save %*'-*, were they to dro# it from the line5u# and hen!e not have to #ay the %/(. for the remaining -('--( basi! #a!kage subs!ribers whom don6t view the station as vital/ Therefore 2iogra#hy is automati!ally a !andidate for re#la!ement if any of the alternative !hannels have revenue e7!eeding !osts/ $7amination of the figures for the three alternatives show that 2ravo' like 2iogra#hy' would a!tually bring in less loyal viewers than ne!essary to offset the !osts of #roviding the servi!e to all of the other indifferent basi! #a!kage subs!ribers/ 8owever' both $ PNews and MTV1 have #rofit #otentials e7!eeding their asso!iated !osts of delivery/ These two stations should re#la!e the aforementioned 2iogra#hy and 3ame how Network 9whi!h is #rofitable' but only barely: to ma7imi;e #rofit for Time <arner Region =*/ Note that !onsideration must be given not only to the additional revenue generated from adding the new stations' but also of the o##ortunity !ost of the lost revenue from the !hannel loyalists !an!eling their subs!ri#tions/ Firms ma7imi;e their #rofits when marginal !osts are e>ual to marginal revenues/ This analysis may be easy when !onsidering a single or !onglomerate good su!h as the 2asi! Cable #a!kage offered by Time <arner/ 2ut when the dee#er ramifi!ations of the individual !om#onents are e7#lored it be!omes mu!h more !om#li!ated/ The marginal !ost for Time <arner stri!tly in terms of #rogramming !ontent is e>ual to the #er subs!riber fees !harged by the #ublishers///!urrently at %)+/--/ Assuming advertising revenue remains !onstant regardless of the number of subs!ribers' the marginal revenue is %*+/,,/ <ithout !onsidering e7ternalities su!h as hardware' swit!hing systems' and em#loyee labor' marginal !osts will never e7!eed marginal revenues/ ?n this !ir!umstan!e' the Pri!ing "e#artment must therefore attem#t to identify #otential !hannels whi!h will bring in the most new !ustomers at the lowest #ublisher fee #er !ustomer/

<ere two alternatives to draw the same estimated new number of !ustomers' the winner barring advertising revenue !onsiderations would always be the one with the lower fee/ ?n the !ase of a loyal viewer #rofit lower than the total #ublishing #rofit' su!h as with 2ravo' !are must also be taken/ The suggestion for Time <arner is to eliminate su!h !hannel seems astute' !eteris #aribus/ 2ut if too many low or un#rofitable !hannels are eliminated' the !onsumer will no longer view the #a!kage as enough of a value///regardless if the dro##ed !hannel is of im#ortan!e to him or not/

Possible Alternative Pri!ing A #otential alternative for Time <arner would be to offer ala !arte #rogramming o#tions for individual !hannels outside the basi! lineu#/ The basi! #a!kage should be !om#osed of !hannels whi!h have the most wides#read a##eal in a #arti!ular region/ For e7am#le #eedTV' a heavily NA CAR5oriented ra!ing !hannel' would likely #lay better to audien!es in the "ee# outh versus New $ngland and thus should not ne!essarily be in the #rogramming mi7 for a !iti;en of New @ork/ 2ut were a New @ork ra!ing fan to want the !hannel' it !ould be offered to him as an ala !arte !hoi!e/ u!h o#tions !ould result in signifi!antly higher margins for Time <arner #roviding the value #ro#osition of the basi! #a!kage is not too seriously eroded/