Quantity: On the quantity side I estimated the number of customers that the satellite TV offering could reach. I start with 100M households, estimate that 60% of those are in the market for cable services (combination of income levels and need for cable service to get any reception, which differs significantly by region) I find out that TCI has 40M customers across the country. I assume that all of these households could potentially be in the market for satellite service (if it was priced right). Initial Costs and Amortization: The initial $5B cost needs to be amortized over the useful life of the satellite. Upon inquiry, I discover that in general a satellite could last for 7-10 years. However, due to the rapid evolution of technology, the actual useful life of 1 particular satellite would be 5 years. This means that $1B needs to be amortized each year over the customer base of the satellite TV services. Fixed Costs: If you estimate that Hughes can penetrate 50% of TCI’s existing market (20M) than the fixed costs would be $50/year. In addition to this cost, you have to cover the costs of sales and service as well as attaining rights to cable programming. Variable Costs: An additional cost that needs to be amortized is the cost of the satellite dish for the consumer. It’s useful to mention that you could also opt to lease dishes to consumers to get around this big up front cost for the consumer. I discovered that the combined operating costs would, if you choose the leasing of the dish method (like today’s consumers lease the cable box, and it gets rolled into the monthly bill of $35), be low enough to make this a credible threat to TCI! Wrap-up / Recommendations for client:The threat from Hughes is credible! Some suggestions that I had for John and TCI to address this were: 1. Attempt to provide their own satellite service, 2. Buy out the Hughes offering, 3. Improve (increase) the program offerings to your current customers to close the gap on what the satellite would offer, or 4. Try to develop exclusive agreements with certain programming to lock out the satellite offering. Desired Answer / Blinding Insights / Twists and Turns (if any):Additional information that might be useful to your fellow Sloanies: 130Management Consulting Club 2001-2002 Case Book and Interview Guide
Consulting Case Interview QuestionCase No.: STRAT9 Firm:Marakon Type of Case:Brain Teaser (Why are manhole covers round?) Market Sizing (How attractive is the market for fire trucks?) Operations (Our client’s profits are down. Why?) Declining Profits Other Marketing Problems Strategy (Should our client enter the beer brewing industry? If so, how?) New Product Introduction Competitive Response New Market Response to Changing Environ. Merger or Acquisition Other: Advertising Initial Facts offered by interviewer: Your client is a major distilled spirits manufacturer with a number of major brands.
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