Supplier bargaining power

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An analysis of the supplier bargaining power in the cable and broadcasting industry.

An analysis of the supplier bargaining power in the cable and broadcasting industry.

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  • 1. Equipment/Digital Set up BoxesCommodity The equipment and parts that cable and broadcasting companies need to operate are notcommodities.Few large suppliers of a particular item The equipment they require is usually set up boxes, routers and satellites which aren’teasy to come by in the market place. The dependence on those companies that do provide thespecialized equipment increases the supplier’s power. A majority of the companies in theindustry rely heavily on key companies to provide all their supply needs. There are only a fewlarge suppliers that provide the equipment and services that companies in this industry need.Dish network relies solely on Echostar for its digital set up boxes and broadcast operations (DishNetwork 10-K). Time Warner Cable relies on a small number of suppliers for their digital set upboxes, their 3 largest suppliers include Samsung Electronics Co, Cisco Systems and MotorolaInc (TWC 10-K). Comcast also purchases from a limited number of suppliers for their digitalsetup boxes and network equipment/services (Comcast 10-K). Comcast relies on Acer, Dell,Sony, Nintendo and Intel for their consumer electronic needs. DirecTV provides littleinformation on who their suppliers are, but mention extensively the reliance they have on theconstruction and deployment of satellites (DirecTV 10-K). This heavy dependence could hurtthem sternly. The companies in this industry rely heavily on a limited number of suppliers toprovide their needs and that drastically increases suppliers bargaining power.Switching Costs The heavily reliance on those few suppliers raises the switching cost. If any of thecompanies switched suppliers they would have to change their infrastructure because they couldhave a clash of technology with the set-up boxes. Companies also have different deals set upwith various suppliers to reduce cost and those suppliers will have more of a vast knowledge ofwhat that company needs specifically. Dish network for example only has one supplier andaccording to their 10-K, if they were to change their supplier it would have an adverse effect ontheir revenue. They would have to change their infrastructure to adjust for differences intechnology, user interface, and other difficulties as well (Dish Network 10-K). Comcast hascontracts with a lot of its suppliers; in fact Time Warner Cable along with Comcast have justsigned an agreement with Samsung to sell more of their digital set up boxes. The agreementthey’ve signed has them tied to that company for years to come so switching to another suppliercould have extensive costs along with legal ramifications. Those contracts and legalramifications increase the power of the suppliers.Needed Inputs There are no needed inputs in short supply so that decreases the suppliers’ power.Differentiated input Suppliers don’t necessarily provide an input that enhances performance or quality but,they do offer a product that is differentiated from the rest. Companies obtain their digital set upboxes from certain suppliers that are accustomed to that company and its specific needs. Theyhave technology that is accustomed to the way certain suppliers manufacturer the boxes. TimeWarner cable’s Cable CARD only works with certain set up boxes. Some of the services theyoffer wouldn’t work with some set up boxes as well. Comcast is able to offer TiVo through someof it’s set up boxes provided by Cisco systems and Motorola. These different inputs that allowcompanies to improve upon their services increase the supplier’s power.
  • 2. Sizable Fraction of Costs The purchase of the digital set up boxes isn’t a sizable fraction of the cost of the servicethat companies provide to consumers. Dish Network spends about .07% of its revenue onexpense related to equipment. Comcast spends 7% of revenue on equipment. Both of thecompanies spend very little on equipment. Since equipment isn’t a sizable fraction of industrymembers cost this decreases the `supplier’s power. The real costs aren’t incurred until oneaddresses cable programming which will be talked about in another section.Major Customers Industry members aren’t major customers of their supplies. Cisco systems for instancehad a decline in revenue in their video systems segment according to their annual report. Theredecline was offset by an increase in sales of their advanced technology so they aren’t heavilydependent on sales from their video systems. Samsung Electronics has many segments:telecommunications, Mobile Communications, Appliances, IT Solutions, and TV’s as well.They have so many avenues for revenue and receive a vast amount of their income from digitalmedia according to their annual report to shareholders. Motorola, another large supplier of setup boxes, only accounts 18% of its revenue to digital set up boxes while their mobile devicessegment accounts for 40% of their revenue which is double their segment of home devices. Thethree aforementioned companies are some of the largest suppliers of digital set up boxes and theydon’t rely very heavily on those sales and members in the cable and broadcasting industry whichincrease the suppliers bargaining power.Economically Viable It wouldn’t be economically viable for industry members to manufacture their own set upboxes because FCC regulations have encouraged the retail sale of set up boxes. The only thing aconsumer requires to access some the cable content on their TV’s is a CableCARD from theirservice provider. The incentives and sales they could receive from making their own digital setup boxes and selling them to consumers is almost non-existent. A majority of consumers alreadyhave a digital set up box and simply require the CableCARD.Partnerships There are no seller supplier partnerships that give suppliers an advantage which decreasesthe suppliers bargaining power. Video Programming/Internet/Phone servicesCommodity The services that are provided by suppliers are not commodities and are relatively hard tocome by with FCC regulations which increase the suppliers’ power.Few Large Suppliers of a particular item Video Programming Companies usually go through a limited number of suppliers for video programming,internet and phone services. For video programming services they usually go through cableprogramming networks. Industry members have to deal with very large companies when theymake deals to acquire cable programming networks. They are the primary source forprogramming when it comes to the video services they provide customers. Industry membersalso make deals with movie studios to acquire the rights to show movies with their Video OnDemand (VOD) services. Industry members for example must go through television networks toprovide certain TV shows and to provide TV shows online as well. Time Warner Cable must godirectly through film studios to provide movies through its VOD service.
  • 3. Internet Services Internet services are usually provided through third party affiliates usually smaller andlimited in number not much more information beyond that is provided. Phone Services Voice services are provided by third party companies as well and some larger companiesTime Warner Cable has a multi-year agreement with Sprint so that Sprint will assist them andhelp them provide their voice services (Time Warner Cable 10-K). Comcast has aninterconnected VOIP (Voice over internet protocol) service that allows them to offer usage basedor unlimited local/long distance calls. Comcast does have multi-year contracts with some thirdparty companies to offer some phone services like voicemail. So industry members don’tnecessarily rely on large suppliers for a particular service they rely on smaller and third partycompanies. There isn’t one large supplier when it comes to any particular service so thatdecrease the suppliers power because there are a lot of third party companies.Switching Costs Video Programming When it comes to switching cost for the different services the cost are extremely high.When it comes to video programming industry members have to go through cable programnetworks. They have to usually sign multi-year contracts and try to obtain the content thatconsumers would like to watch the most. Industry members don’t determine what consumerswant to watch and can’t switch to another network with very few people watching because thatwould decrease their revenue. The expenses industry members incur are based upon theirsubscriber base so there is an incentive to offer the best programming so you can increase yoursubscriber base. Turner Broadcasting Systems owns TBS and TNT so industry members must gothrough them to get the content they offer consumers. The content and programs they offer isvery unique and aren’t offered by other programming suppliers. This dependence on certainsuppliers that offer unique content raises switching cost. This in turn increases the supplierspower. Internet Services The switching cost involved with providing internet is quite high because that wouldinvolve in a change in infrastructure. A company would have to adjust all their devices orelectronics that are connected to the old supplier. If the internet provider is slower it could have avery adverse effect on productivity. Time Warner Cable provides their internet subscribers with atiered subscription base and with their Roadrunner broadband service. Switching to anothersupplier would mean that they would have to change their subscription model because they offerdifferent subscribers a variety of speeds. Comcast has a variety of 3rd party suppliers that allowsthem to offer services such as email and security software. They have contracts with thesesuppliers that allow them to pay for those services at a fixed rate. If the supplier that they switchdoesn’t have the speed they used to offer customers they could upset their subscribers. Industrymembers are usually locked into multi-year contracts as well. Phone Services For companies to provide their phone services they usually have 3rd party suppliers.Comcast provides a variety of its services like voicemail through a variety of suppliers that aren’tspecified. Time Warner cable has a deal with Sprint that allows them to use their services. The
  • 4. switching cost from a huge corporation like that would be vast because Sprint has a great deal ofresources compared to a third party. A majority of Industry members use VOIP services toprovide their phone services and use third party companies for other services like voicemail. Thisalso affects their subscribers because now the service they’ve been accustomed to have changed,and now consumers have to adjust to a new system. The switching cost for industry members ishigh which increases suppliers bargaining power when it comes to each segment (internet, videoprogramming and phone).Needed Inputs There are no needed inputs in short supply which decreases suppliers bargaining power.Differentiated Input Video Programming When it comes to providing differentiated input or service cable network’s have a greatdeal of bargaining power because each network offers different programming. Each industrymember wants to obtain the programming that subscribers are going to want. So with eachnetwork comes unique and different programming which increases the suppliers bargainingpower, because they won’t be able to obtain that programming or content from another cablenetwork. Discovery Communications offers programming such as the discovery channel andanimal planet and they are the only company that provides that unique programming.NBCUniversal owns the USA network and they offer so they most go through them to offer theirunique television content. This differentiation in services increases the supplier’s power. Internet Services Internet suppliers in this industry also offer a unique service to industry members becausesome internet providers have faster broadband services and wireless. Suppliers are neverspecifically listed they use a variety of 3rd party suppliers. Phone Services Industry members who are supplied with phone services also have suppliers withdifferentiated services as well. The suppliers aren’t specifically listed most companies use avariety of 3rd party companies. Phone suppliers are able to offer you a variety of services likelong distance, international calling and voicemail. The amount of countries an industry membercould advertise that a consumer is able to call can depend on their supplier and rates are alsogoing to fluctuate depending on the supplier as well. The differences in service that suppliersoffer increases suppliers bargaining power because most services are unique to certaincompanies.Cost Savings Video Programming The cost savings that suppliers provide industry members aren’t necessarily directlyattributed with special discounts. Comcast is the only company that mentions cost savings ontheir 10-K by buying in volume from cable networks. Time Warner Cable entered into some longterm flat rate contracts with some cable programmers to lower the expense cost related with theirprogramming. DirecTV also has contracts with a lot of their cable network programmers theyenter into flat rate agreements and minimum subscriber base agreements to help lower cost.
  • 5. Internet/Phone Services Industry members haven’t listed any cost savings associated with internet and phonesuppliers. The real cost savings come with companies not having to integrate backwards toprovide the different services they need to operate that will be addressed in another section.Sizable Fraction of Costs Video Programming Video programming accounts for a huge of amount of the service industry membersprovide consumers. Comcast accounts 52% of its operating expenses to its video programming in2010 that’s a little over half of their expenses. The amount of revenue they can attribute to theirvideo services is 54% so their company is heavily dependent on that segment. DirecTV accounts49% of its operating expenses to broadcast programming in 2010 but, no information on howmuch of their revenue was based upon their video services. Time Warner Cable 47% of theiroperating expenses are covered under the category of video programming and their videoservices provide them with 58% of their total revenue for 2010. The supplier’s bargaining powerwhen it comes to video programming is vastly increased when companies derive at least half oftheir revenue from video services. Internet/Phone Services Phone and internet services aren’t sizable fractions of the cost of services that industrymembers provide to consumers. Time Warner Cable’s operating expense for its high speedinternet amounted to 1.5% of their total operating expenses in 2010. Their operating expense forphone services was 7.4% for the year. When looking at phone and internet suppliers theirbargaining power is decreased because they don’t provide a sizable fraction cost for the serviceswe provide. The most sizable fraction of cost to provide their services has been videoprogramming and will continue to be the case in the years to come.Major Customers Video Programming Companies in the industry aren’t major customers of suppliers in any segment (Video,Phone and Internet). Discovery Channel is one of the leading cable programming providers toCable companies and they are owned by Discovery Communications Inc. That company has tenother channels and is also involved in international markets as well (Discovery CommunicationsInc 10-K). Discovery Communications received 43% of their revenue from advertising aloneduring 2010 and also can attribute revenue through other mediums as well. Some of theirservices provide education and curriculum; while others are generated from online content andother digital media. Turner Broadcasting Systems (TBS) is another leading cable programmingprovider and is owned by Time Warner. Time Warner is involved nationally and internationallywith movies, network programming and publishing. The company operates in three differentsegments and according to their 10-K and does considerable well in each segment. In theirfilmed entertainment (Movies) segment they can attribute $11,359 (in millions) to the moviealone. That’s not taking into consideration subscription based consumers who pay for Video onDemand services and advertising revenue. Suppliers of video programming aren’t heavily relianton industry an member which increases the suppliers bargaining power. Internet/Phone Services There was a lack of information on specific phone and internet suppliers most companiesuse their own means to provide phone services. Time Warner Cable is one of the few companies
  • 6. that uses an outside supplier; which is the Sprint Corporation. Sprint is heavily reliant on revenuefrom the sale of phones and subscribers. Sprint’s revenue from wholesale, affiliates and othercompanies was only .8% of their total revenue for 2010. They don’t rely on industry membersfor revenue which increases the bargaining power they have with Time Warner Cable. Industrymembers did not give enough information on their internet suppliers to judge accurately if theyare major customers.Economically Viable Video Programming Integrating backwards to become more economically viable is not the way to goespecially with providing your own cable programming. The cost and efforts it would take for aIndustry member to come up with its own network and produce their own TV shows would beexhausting. The effort and risk involved is already taken out when you buy from a cableprogrammer; a company can already find out what content consumers want to see without theentire R&D. The substantial cost and time it would take to integrate backwards withprogramming increases the suppliers bargaining power. Phone Services Companies in the industry already have set up their own phone systems for the most partTime Warner Cable is one of the few companies that has a supplier. It’s impossible to determinethe economic benefits to having sprint at the moment. They are still going through someinfrastructure changes and dealing with a variety of other things and won’t be expected to bethrough this process until 2014. Internet Services Internet services that third party companies provide are a huge cost savings to companies.Comcast addresses the issue on their 10-k referring to the fact if they were on a standalone basisand had to provide internet themselves operating expenses would rise. The reliance on those 3rdparty companies increase the bargaining they have over industry members.Partnerships There is no seller to supplier partnerships which decreases the supplier’s bargainingpower.The overall competitive force of supplier bargaining power is moderate tostrong. Industrymembers rely heavily on the key suppliers and don’t have very many alternatives with keyservices and products they need to sustain themselves. The prime example is examining videoservice revenue; which accounts for at least half of most company’s total revenue for the year.Industry members are dependent on the content cable programmers provide them; while those assuppliers have other means of revenue to depend on other than members in the cable andbroadcasting industry.