Commercial Success through Commercials? Advertising and Satellite TV Operators
62 Pages Posted: 28 Jun 2019
Date Written: June 17, 2019
The pay television service market had been dominated by cable operators until the nationwide entry of satellite operators in the early 1990s. The satellite operators have been consistently growing their footprints since. While there have been many reasons for the success of satellite operators, in this paper, we focus on one potential factor that could explain, at least partially, the success of these new entrants in a market, where the entrenched incumbents commanded a near 100% market share and firms had to make large investments for entry. In particular, we characterize the role of television advertising in making this success possible. Using data on US households’ subscription choices with data on advertising spending for various operators, we estimate a household demand model and advertising cost functions for the operators. We find that both demand- as well as supply-side factors could have contributed to the success of the satellite operators. On the demand side, while these subscription-based services have traditionally had strong state dependence, consumers in this market were sensitive to advertising, and even more so to that of the satellite operators. On the supply side, scale economies in television advertising benefited the entrants more than the incumbents. The unit costs of local advertising are higher than of national advertising, at least in the large media markets. Accordingly, the satellite operators were better able to leverage their national presence with national advertising, compared to the cable operators whose geographic scales of operation were much smaller. Together, our findings have implications for the interaction between advertising scale economies and the distribution of ad delivery across markets.
Keywords: Advertising, Television service market, Border strategy, Advertising scale economies, Cost advantage
JEL Classification: M37, L82, O33, D61
Suggested Citation: Suggested Citation