Canadian Cable Television Industry example essay topic

Chapter Outline Preface Chapter Title Page Preface Outline 1 I Introduction 2 A The Canadian Cable Television Industry 2 II Details 3 A Model 3 B Data 4 Externality Effect 10 Comparison with Telephone Industry 12 IV References 14 Table Title Page 1.1 2003 Market Share of Canadian Cable Companies. 22.1 Canadian Cable Industry 52.2 Rogers Communications Incorporation 72.3 Shaw Communications Incorporation 82.4 Cogeco Cable Company 93.1 Marginal Private Benefit 113.2 Marginal Private Cost 113.3 Demand Schedule of the market 12 Figure Title Page 1.1 2003 Market Share of Canadian Cable Companies. 22.1 Conventional Depiction of Natural Monopoly 42.2 Measurement of Possibility of Natural Monopoly 52.3 Canadian Cable Television Industry 62.4 Rogers Communications Incorporations 72.5 Shaw Communications Incorporation 82.6 Cogeco Cable Company 103.1 Externality Effect of Regulation of Cable Industry 12 Chapter Introduction 1 A. THE CANADIAN CABLE TELEVISION INDUSTRY It all started back in 1981 when Vid " eo tron Lt " ee and La Presse introduce the first electronic newspaper via cable in Montreal. One year later, The Canadian Radio-television Commission licensed Canada's first pay services and 58% of home televisions were connected to the cable television. The majority of industry members have formed an association the CCTA - Canadian Cable Televisions Association, to have a unified word when facing regulators, help promote the industry's services. Table 1.1 and figure 1.1 show that CCTA have through its members a control over more than 70% of the Canadian cable services.

Table 1.1 Market Control (2003) ROGERS 30.30%SHAW 27.20%COGECO 11.20%EAST LINK 3.20%ACCESS 1.00%MONARCH 0.80%OTHER 26.40%TOTAL 100% less than 50,000 customers each Figure 1.1 2003 Market share of Canadian Cable Companies Since its inception, cable television service has been subject of substantial intervention on the part of regulators in Canada. The Cable television operators are licensed by a single federal regulatory authority, the CRTC. It classifies Licensed Service Areas (LSA) based partly on the current subscription level within the LSA and partly on the quality of broadcast reception available to the service provider. The issues to be addressed in this paper are the following: Was the enforced monopoly provision of basic cable television justified?

Chapter Details 2 A. MODEL When a monopoly occurs because it is more efficient for one firm to serve an entire market than for two or more firms to do so, because of the sort of economies of scales available in that market. A common example is water distribution, in which the main cost is laying a network of pipes to deliver water. One firm can do the job at a lower average cost per customer than two firms with competing networks of pipes. Monopolies can arise unnaturally by a firm acquiring sole ownership of a resource that is essential to the production of a good or service, or by a government granting a firm the legal right to be the sole producer. Other unnatural monopolies occur when a firm is much more efficient than its rivals for reasons other than economies of scale. Unlike some other sorts of monopoly, natural monopolies have little chance of being driven out of a market by more efficient new entrants.

Thus regulation of natural monopolies may be needed to protect their captive consumers. The conventional illustration of natural monopoly in principles textbooks shows the market demand curve intersecting the long run average cost schedule (LAC) in the region of increasing returns to scale. Figure 2.1 Conventional Depiction of Natural Monopoly The modern view of natural monopoly (also called the 'New Learning') is based on the concept of sub additivity. That is, the most important feature of natural monopoly is a cost function that is sub additive. If q 1, q 2, ... , qk are output bundles that sum to q, then a single firm is superior on efficiency grounds to a multi-firm industry if the following condition holds: C (q) C (q 1) + C (q 2) +... + C (qk) (1) C (q 1) can be interpreted as the cost of producing commodity bundle q 1.

If inequality (1) holds, then a single firm can jointly produce bundles q 1, q 2, ... , qk more cheaply than if the bundles were produced separately, or if they were produced by two or more firms. B. DATA To recognize whether the Canadian cable television industry can be labelled as a potential natural monopoly, one should understand the performance of the whole industry - based on both basic and non-basic services. Next, the top three companies - Rogers, Shaw & Cogeco - would be studied each alone, since the three controls more than 68% of the Canadian cable television market. The prices levied by cable operators in each period were not revealed. The most convenient way to have the price was to divide the cable sales of each company by the number of subscribers (all classes).

The same thing was done for the whole industry. My first intention was to measure whether the market demand curve intersecting the long run average cost schedule (LAC) in the region of increasing returns to scale. Furthermore, I plotted the Long run average cost of each of Rogers, Shaw & Cogeco along with the market demand curve. Figure 2.2 Measurement of Possibility of Natural Monopoly. Obviously it is difficult to measure the result graphically, thus the procedure would be to measure the sub additivity. That is, I will insert the production of the whole industry in the average cost equation of each of the top three industry players.

Moreover, if the cost of production of the company was lower than the industry, it follows that operator is more efficient, and the industry is a potential natural monopoly. ROGERS Communication Inc. Canada is tuned in to Rogers Communications. The company is the nation's #1 cable TV operator with some 2.3 million subscribers throughout eastern Canada, including New Brunswick, Newfoundland, and Ontario. (Rival Shaw Communications covers western Canada.) Rogers also owns more than 270 video stores. In addition, the company owns 56% of Rogers Wireless (which operates under the Rogers AT&T Wireless brand, though there are plans to drop the AT&T brand in 2004), one of Canada's largest mobile phone operators.

Rogers' media operations include 43 radio stations, two Toronto TV stations, business and consumer publications, and Internet holdings. CEO Ted Rogers controls about 91% of the voting stake in the company. Thus, TC Rogers = $20,479,807,833.33 $2,458,587,028 TC industry 2 SHAW Communications Inc. Shaw Communications, Canada's #2 cable TV operator, swapped systems with #1 Rogers to split the country: Shaw in western provinces and Rogers in the east. In addition to cable TV, Shaw provides Internet access and other broadband services, directly and through subsidiaries.

After its 2001 purchase of Canadian Satellite Communications (Can com) and its Star Choice direct-to-home TV programming unit, Shaw added satellite TV service to its offerings. With further reshuffling and additional acquisitions, Shaw has about 2.9 million customers. Chairman J.R. Shaw and family own less than 9% of Shaw Communications, but control the voting stock. Thus, AC shaw = $614,504,311,000.00 $2,458,587,028 TC industry. 3 COGECO Cable Company Cogeco Cable operator serves about 820,000 basic subscribers in Ontario (59% of customers) and Quebec and is expanding through acquisitions of other cable system operators.

Cogeco Cable offers pay-per-view services and audio programming, as well as digital cable services such as video on demand and cable-modem broadband Internet access (205,000 subscribers). The company also offers high-speed data communications for business and institutional customers. Parent company COGECO owns 40% of Cogeco Cable and controls 87% of the voting rights. Rival Rogers Communications controls 4%.

Thus, TC cog eco = $40,968,416,033.33 $2,458,587,028 TC industry Chapter Externality Effect 3 "When the activity of one entity directly affects the welfare of another in a way that is transmitted by market prices". That effect is known as Externality. The results of the sub additivity test on each of the three main companies were negative. Furthermore, none of the incumbent firms have the ability to be a natural monopolist over the industry.

However, my main concern in this paper is to know whether the enforced monopoly provision of basic cable television is justified? In other word, had the regulation that the CRTC imposed on the industry, created a positive externality on the society? And if yes, by how much? To answer these questions I should measure: MPB - Marginal Private Benefit: The benefit to the firm for each level of output it is assumed declining as output decrease. I will calculate it as the Marginal Profit of the industry. SUBSCRIBERS in millions Average Profit Marginal Profit 13.33 $83.83 13.19 $89.67 $5.9113.

17 $91.34 $1.6712. 59 $97.01 $5.9212. 29 $92.43 -$4.69 Table 3.1 Marginal Private Benefit Y = -3.4974 X + 49.907 MPC - Marginal Private Cost: The expenses incurred by the firm in terms of input to produce each level of output. 168451 $1,934,269,253.00 $21,943,466,166.67 25.568112. 59443 $1,950,870,701.82 $20,986,764,500.00 13.9830112. 290256 $2,119,345,199.23 $20,479,807,833.33 57.69519 Table 3.3 Demand of the Market MBS - Marginal Benefit to Society Y = -29.214 X +402.98 By using the equations of each of the above we plot them all in one graph: Figure 3.1 Externality Effect of Regulation on Canadian Cable Industry Chapter Comparison with Telephone Industry 4 To compare with the telephone industry I will use a study done by Wesley W. Wilson and Yim in Zhou called "Are Telephone Monopolies Unnatural?

Sub additivity in the Production of Local Telephone Services". In early 1996, Congress passed the Telecommunications Act of 1996. An important objective of this legislation is to establish a pro-competitive and deregulatory national policy framework in the telecommunications industry. Specifically, this legislation opens local telecommunications monopolies to competition by removing legal and regulatory barriers and reducing economic impediments to entry. Prospective entrants, e. g., inter-exchange carriers (Ics), competitive access providers (CAPs), and cable TV companies, welcomed the new legislation. Incumbent local exchange carriers (LECs), however, have worked to block its implementation and have had moderate success in that the U.S. Court of Appeals for the 8th Circuit suspended 'pricing and contract rules that would have forced the Baby Bells to extend discounts and other advantages to new rivals entering their local phone markets.

An important premise for introducing competition into local telephone markets is that these markets are not (or no longer) natural monopolies. They simulated costs and conducted a series of sub additivity tests on cost specifications. Their results of sub additivity tests proved that the U.S. local telephone markets are consistent with natural monopolies Chapter

Bibliography

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html 14) web annual report en / CCA 2003 10 ans.
pdf 15) web Repr/02/Shaw 02 AR. pdf 16) Law, S.M. and Nola, J.F. (2002): Measuring the impact of regulation: A study of Canadian basic cable television.