Case Prompt
Your client is a small holding company that owns three cable television companies in the Northeast: Rochester, NY, Philadelphia, and Stamford, CT. Each of these three companies is profitable, experiencing steady sales growth over the past few years. However, despite being profitable in the Northeast, your client acquired another cable television company in Tucson, Arizona, a little over a year ago. Unfortunately, despite management's best efforts, the Tucson company's sales have remained stagnant, and the company is losing money.
Your task is to analyze this situation and determine the potential causes of the poor performance of the Tucson cable company.
Additional Information :
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Market Size and Growth: The Tucson area is smaller than Philadelphia but larger than Rochester and Stamford. Tucson is experiencing an average annual growth rate of 12%. Per capita income in Tucson is higher than in Philadelphia and equal to that in Rochester and Stamford.
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Operating Costs: Operating costs in Tucson are similar to those in the other markets, except for maintenance, which is higher due to the larger service area. Fixed costs are associated with the physical area covered by cable lines.
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Marketing Efforts: The Tucson company has attempted marketing efforts in the past, mirroring programs used in the other three markets, such as offering free Disney programming for one month, free HBO for one month, and free hookups.
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Penetration Rates: Cable penetration rates in the three Northeastern markets average 45%, while in Tucson, it's only 20%. These rates have remained stable in the Northeast but have increased by only 2% in the past three years in Tucson.
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Substitute Goods: Satellite dishes are the primary substitute for cable television. However, many communities in Tucson are enacting legislation limiting their usage, and they are often too expensive for most residents.
Final Analysis:
The poor performance of the Tucson cable company may be attributed to a failure to recognize another substitute good: no cable television at all. Television reception in the desert Southwest is notably better than in Northeastern cities, likely due to different climate conditions and lower interference in Arizona. This suggests that lower cable penetration rates in Tucson may be a result of viewers finding traditional television reception more satisfactory.
