Case: Challenges at Times Warner

2402 Words10 Pages
Case: Challenges at Times Warner Content Answer Memo 2 3 Answer Memo 7 6 Answer Memo 11 10 Answer Memo 2 Time Warner has invested $500 million to upgrade the infrastructure in Kansas City area which enable the company to provide full line of services through the new fiber network. Costs The investment of $500,000,000 is a sunk cost. According to our calculation, the sunk cost per month is $2,264,583 (loan of $500 million which has been amortized over 20 years at 8.7% interest, monthly repayment = $500,000,000*1.087/(20*12)=$2,264,583). In addition, there is a variable cost of $40.10 / month / subscriber ($32.50 + $7.60). This cost varies with the number of subscribers, i.e. the market share. A market share of 65% results in 208650 households and a cost of $8,388,865 / month. Break-even point If we assume a market share of 65%, the total cost / month (sunk cost + running costs) would be $10,631,448. The break even point at a market share of 65% would be $50.95 ($10,631,448/208650 households). The following Table 1 illustrates the profits generated with increasing bundle prices (up to the price of $84.95, which the competitor Everest is currently offering). Considering that the $500,000,000 are a sunk cost and excluding this cost from the profit calculation, the profits at 65% market share would be as follows in Table 2: Price war The competitor charges $84.95. If we offer a lower bundle price, we will most likely initiate a round of price war with Everest where we will sequentially lower our bundle price, which will lower our profit, see table above. It may be an option to consider losing market share but staying with higher prices. We will start making revenue of $342 when we capture a minimal market share of 15.6% (approximately 50,500 customers) if we charge a bundle price of $84.95. The Table 3 below shows the variation

More about Case: Challenges at Times Warner

Open Document