Case Study Analysis
Personal Video Recorders (PVRs): Personal video recorders (PVRs) are digital video recorders used to record and replay television programs received from cable, satellite, or local broadcasts. However, unlike VCRs, which PVRs replaced, PVRs offer many more functions, notably the ability to record up to 60 hours of programs and easy programming.
A PVR consists of an internal hard disk and microprocessor. After the owner installs the hardware, the PVR downloads all upcoming TV schedules to the hardware via a phone or cable connection. Users merely enter the name of the show(s) they want recorded and the system finds the time and channel of the show and automatically records it. Users must subscribe to a cable or satellite system if they wish to record programs off these channels.
Besides ease of programming and much larger recording capacity than video tape, PVRs allow the user to watch a prerecorded show while the unit is recording a new program, pause watching live programs (for example, if the phone rings) then resume watching the rest of the live broadcast, view instant replays and slow motion of live programs, and skip commercials. In effect, PVRs like older VCRs allow viewers to control when they watch broadcast programs (called "time shifting"). However, PVRs provide much sharper pictures and are much simpler to operate than VCRs, and PVRs allow the user to download the television schedule for the next week.
Two companies currently sell the hardware and provide the subscription service: TiVo and RelayTV. Both firms started in 1997. As of mid-2002 TiVo had nearly 500,000 subscribers and ReplayTV had about 100,000. Companies are developing new technologies that make it even easier for users to "snip" commercials. Cable companies have begun offering a combined cable box and PVR in one unit for a small additional monthly charge. This further simplifies setup and operation and the user gets a single bill.
*J Gudmundsen (2002), "Video Gizmos Change the Rules," Democrat and Chronicle (August), 5E and 8E.
1. Discuss how PVRs will affect the demand from advertisers (i.e., to place advertisements in network television programs).
2. Suppose you are in charge of setting the price for commercial advertisements shown during Enemies, a top network television show. There is a 60-minute slot for the show. However, the running time for the show itself is only 30 minutes. The rest of the time can be sold to other companies to advertise their products or donated for public service announcements. Demand for advertising is given by:
Qd = 30 - 0.0002P + 26V
In which Qd = quantity demanded for advertising on the show (minutes), P = the price per minute that you charge for advertising, and V = the number of viewers expected to watch the advertisements (in millions).
a) All your costs are fixed, and your goal is to maximize the total revenue received from selling advertising. Suppose that the expected number of viewers is one million people. How many minutes of advertising will you sell? What price should you charge? What is total revenue?
b) Suppose price is held constant at the value from part (a). What will happen to the quantity demanded if due to PVRs the number of expected viewers falls to 0.5 million? Calculate the "viewer elasticity" based on the change in the expected number of viewers and the corresponding change in the quantity demanded (when compared to the levels of these variables in part (a)). Explain in words what this value means.
3. As more viewers begin using PVRs, what happens to the revenues of the major networks (CBS, NBC, ABC, and FOX)? For example, is there any change? If so, do revenues increase/decrease and by how much exactly? Explain.
4. Discuss the long-run effects for the major networks if a significant proportion of the viewers begin adopting these "advertising snipping" systems. Offer support for your claims.
5. What advice would you give the major commercial networks and producer of programming for these networks as more consumers adopt PVRs?