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Starhub: English Premier League: Takeaway Assignment

This document discusses StarHub's acquisition of English Premier League (EPL) broadcasting rights for $160 million and the impacts on its costs, pricing, and profits. Key points include: 1) StarHub's fixed costs increased significantly due to the acquisition, adding about $106 per subscriber annually. 2) StarHub increased basic cable and sports package prices modestly to cover these fixed costs while limiting impact on demand. 3) Prior to the price increases, StarHub's prices may not have maximized profits given information about costs and revenues. 4) Content providers like ESPN face moral hazard as cable operators control customer experience impacts on royalties. 5) Lump-sum bids

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abinash adhikari
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701 views4 pages

Starhub: English Premier League: Takeaway Assignment

This document discusses StarHub's acquisition of English Premier League (EPL) broadcasting rights for $160 million and the impacts on its costs, pricing, and profits. Key points include: 1) StarHub's fixed costs increased significantly due to the acquisition, adding about $106 per subscriber annually. 2) StarHub increased basic cable and sports package prices modestly to cover these fixed costs while limiting impact on demand. 3) Prior to the price increases, StarHub's prices may not have maximized profits given information about costs and revenues. 4) Content providers like ESPN face moral hazard as cable operators control customer experience impacts on royalties. 5) Lump-sum bids

Uploaded by

abinash adhikari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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StarHub:

English
Premier
League
Takeaway
Assignment

Trijya Kafle (MBA 1st Term)


a. Identify changes in demand and costs (fixed and marginal costs relative to the
number of subscribers) arising from StarHub’s acquisition of EPL rights.

As StarHub bid US $160 million to acquire EPL rights, its fixed cost increased
significantly. The bidding amount needs to be paid irrespective to the number of
subscribers. It has acquired the right for next three years. So we can divide the whole of
fixed cost for next three seasons. The fixed cost for a season would be $ 53,333,333.33.
According to the information of until December 2007 it experienced increase in demand
by 4% to 504,000 subscribers. So,

$ 53,333,333.33
Fixed cost per subscriber =
504000

= $105.82 per subscriber per season

In 2004, marginal cost of StarHub was the royalty that it had to pay to ESPN Star Sports
for each subscriber. After acquisition, StarHub decided to broadcast the game through
its own channel which is included in the sports package along with ESPN. While the
customers subscribe to its sports channel they automatically subscribe to ESPN as well
and StarHub pays royalties according to the number of subscribers. So there won’t be
any major change in marginal cost of StarHub until subscribers decide to unsubscribe
ESPN.

If the terms of royalties were based on Switched Digital Video (SDV), which monitors
who is watching particular channel at a particular time, then their royalty’s fee would
have significantly decreased as less fans would watch ESPN now.

b. Which of changes in (a) would be relevant to StarHub’s pricing of cable TV services?

Cost is a major factor that influenced the decision to increase price of packages. With
the increase in cost of 105.82 per subscriber per season it had to increase price if it were
to enjoy similar profit margin. Being in the monopolistic competition, it is actually nice
of StarHub that it increased the price of basic package and sports package only by $4
and $10. Here it has made sure that most of the fixed cost is covered only by the EPL
fans.

Change in price would not have much effect on demand in this situation. Fans are
unlikely to not watch EPL due to increase in price and also there are no substitutes

StarHub: English Premier League Trijya Kafle (17315)


available. Yet, it increased the price of sports package to $25 a month only on October
while EPL started from August 11, 2007. One explanation for this could be that, it made
sure customers are satisfied with the experience before increasing the price and the
increase in price would not tick off its customers.

c. Do you think that, prior to the 2007 price increases, StarHub’s prices had maximized
profits?

To identify profit maximization, information regarding marginal cost and marginal


revenue is important. When we look closely to the income that it earns from a customer
for whole season i.e. 9 months we can see that it gains revenue of $205 (7 months*$25+
2 months * $15) for this season. From question no 1, we know that average cost per
subscriber is $105.82 and therefore profit per subscriber is $99.18.

Similarly, before acquisition, marginal revenue is $15 a month but information about
marginal cost is unavailable. StarHub is the only cable TV provider in Singapore and
gaining profit would not have been difficult for it. It reduced its prices from $32.95 to
$20 a month in 2001 with addition of new channels. StarHub would have to provide
royalties to the added channels as well. Even with the increase in cost it decided to
decrease its price. This decision might have had an effect on its profits.

This might have been a reason why when government offered a second license no one
applied for it or it might have been just a strategy of StarHub to drive out competitors.

d. From the viewpoint of content provider like ESPN which receives a per customer
royalty from a cable TV operator, explain the moral hazard to which the cable TV
operator is subject.

Moral hazard refers to a situation where a party enters into a risky situation believing
that the other party has protection against the risks and will incur the costs. Here ESPN
has to fully depend upon StarHub for the risks associated with customer experience. As
the royalty is provided based on the number of subscribers ESPN might take greater
risks than it would have if the royalty was based on quality of the service.

For example, if in season finale of EPL, ESPN’s networks are interrupted then a customer
is not going to blame ESPN for it nor it would result in decrease in ESPN’s royalty. This

StarHub: English Premier League Trijya Kafle (17315)


situation must be handled by StarHub. Here, in a way StarHub is insuring against the
risks of ESPN.

e. From viewpoint of EPL, explain how a lump-sum bid would resolve asymmetry of
information between EPL and cable TV operators.

If EPL and cable TV operators did not go for lump-sum bid and opted for subscriber
based fees or SDV then majority of the customer’s information would be with cable TV
operators. They would be in charge of better information and could manipulate it. This
would create asymmetry of information and by going for a lump-sum bid both of them
have avoided this situation. In the other hand, by entering into exclusive contracts with
EPL, StarHub can make sure to enjoy monopoly.

StarHub: English Premier League Trijya Kafle (17315)

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