Discuss how pvrs will affect the demand from advertisers
Microeconomics
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?
