Comcast Feels the Threat from DirecTV’s Satellite TV

Case Type: business competition, competitive threat.
Consulting Firm: McKinsey & Company first round job interview.
Industry Coverage: telecommunications & network.

Case Interview Question #00359: The President & CEO of Comcast commissions you to look into a concern that he has. He has heard that DirecTV is planning to launch a commercial satellite that will offer satellite TV services to the domestic market. Is this is a credible threat to Comcast’s monopoly position in cable TV services? If it is credible, what should Comcast do?

Additional Information:

Comcast (NASDAQ: CMCSA and NASDAQ: CMCSK) is currently the largest cable operator, home Internet service provider, and fourth largest home telephone service provider in the United States. Headquartered in Philadelphia, Pennsylvania, the company provides cable television, broadband Internet, and telephone service to both residential and commercial customers in 39 states and the District of Columbia.

DirecTV (NASDAQ: DTV) is an American direct broadcast satellite service provider and broadcaster based in El Segundo, California. Its satellite service transmits digital satellite television and audio to households in the United States.

Possible Solution:

Suggested framework:

Profits = Revenues – Costs = Price x Quantity – (Fixed Costs + Variable Costs)

Upon inquiry I find that it would cost DirecTV $5 Billion to get this satellite in the air and operational. I also find out that DirecTV will offer 200 channels whereas Comcast only offers 50 channels. At first, I had a tough time putting a structure to this business competition type of case. In the end, after asking a few questions, I determined that we needed to estimate the revenues and costs for DirecTV to see if this was a credible threat to Comcast or not.

1. Price

I assumed that on average, current cable bills are $35/month. In order to be a credible threat DirecTV needs to be able to provide service at a price of around $35 (could be a little higher because of additional channel offerings).

2. Quantity

On the quantity side I estimated the number of customers that the satellite TV offering could reach. I start with 100M households in the U.S., estimate that 60% of those are in the market for cable services (combination of income levels and need for cable service to get any reception, which differs significantly by region). I find out that Comcast has 40M customers across the country. I assume that all of these households could potentially be in the market for satellite service if it was priced right.

3. Initial Costs and Amortization

The initial $5B cost needs to be amortized over the useful life of the satellite. Upon inquiry, I discovered that in general a satellite could last for 7-10 years. However, due to the rapid evolution of technology, the actual useful life of 1 particular satellite would be 5 years. This means that $1B needs to be amortized each year over the customer base of the satellite TV services.

4. Fixed Costs

I estimate that DirecTV may be able to penetrate 50% of Comcast’s existing market (40M * 50% = 20M), then the fixed costs would be ($1B / 20M = $50 per year). In addition to this cost, DirecTV has to cover the costs of sales and service as well as attaining rights to cable programming.

5. Variable Costs

An additional cost that needs to be amortized is the cost of the satellite dish for the consumer. It’s useful to mention that DirecTV could also opt to lease dishes to consumers to get around this big up front cost for the consumer. I discovered that the combined operating costs would, if DirecTV chooses the leasing of the dish method (like today’s consumers lease the cable box, and it gets rolled into the monthly bill of $35), be low enough to make this a credible threat to Comcast!

Recommendations for Client:

The threat from DirecTV is credible! Some suggestions that I had for Comcast to address this were:

1. Attempt to provide their own satellite TV service.
2. Buy out the DirecTV offering.
3. Improve (increase) the program offerings to your current customers to close the gap on what the satellite would offer.
4. Try to develop exclusive agreements with certain TV program providers to lock out the satellite TV offering.