Tag: revenue

The term ‘Google it’ is now part of everyday language. If there is ever something you don’t know, the quickest, easiest, most cost-effective and often the best way to find the answer is to go to Google. While there are many other search engines that provide similar functions and similar results, Google was revolutionary as a search engine and as a business model.

This article by Tim Harford, writing for BBC News, looks at the development of Google as a business and as a search engine. One of the reasons why Google is so effective for individuals and businesses is the speed with which information can be obtained. It is therefore used extensively to search key terms and this is one of the ways Google was able to raise advertising revenue. The business model developed to raise finance has therefore been a contributing factor to the decline in newspaper advertising revenue.

Google began the revolution in terms of search of engines and, while others do exist, Google is a classic example of a dominant firm and that raises certain problems. The article looks at many aspects of Google.

Just google it: The student project that changed the world BBC News, Tim Harford (27/03/17)

Questions

  1. Is Google a natural monopoly? What are the characteristics of a natural monopoly and how does this differ from a monopoly?
  2. Are there barriers to entry in the market in which Google operates?
  3. What are the key determinants of demand for Google from businesses and individuals?
  4. Why do companies want to advertise via Google? How might the reasons differ from advertising in newspapers?
  5. Why has there been a decline in advertising in newspapers? How do you think this has affected newspapers’ revenue and profits?

German Engineering has dominated for decades and is seen as the pinnacle of quality and the key to manufacturing long-lasting products. But are long-lasting products a good strategy for a company? If products break quickly, customers need to replace them and this encourages more spending. But does this encourage customers to switch to other suppliers? Instead, do high quality products that don’t require replacement but demand a higher price offset this lack of repeat custom?

Markus Miele is the Chief Executive of Miele, the German domestic appliance manufacturer and he takes a personal interest in his products and customers. Typical appliances from Miele can cost up to twice as much as similar appliances from other companies and yet this company is going from strength to strength. Rather than selling products that need frequent replacements, Miele is proud of its strategy to retain customers by selling products at a very high price, knowing that they will last for years. Customers appear equally willing to pay this high price for big consumer durables and their long-lasting nature is clearly encouraging its customers to buy other products too. This strategy has been so successful that other big companies are now targeting these customers. Anthony Williams, from GfK said:

“Evidence suggests manufacturers are putting in money to ensure good build quality…There are so many standards that now have to be adhered to, particularly for hi-tech products, by the nature of the product they have to make sure the [manufacturing] environment is very carefully monitored.”

The following article from BBC News considers the market for domestic appliances and the role of durability.

Can you charge double and still keep your customers coming back? BBC News, Lucy Hooker (2/10/15)

Questions

  1. How important is the concept of price elasticity of demand in determining a company’s strategy?
  2. If other firms are targeting a similar strategy to that of Miele, what might this mean for prices?
  3. How does the brand ‘made in Germany’ affect the demand for a product? Is there imperfect information here?
  4. With increase competition, companies such as Miele may be pressured into moving into cheaper production markets. How would this affect the company?
  5. Will the recent scandal at VW have a negative impact on companies such as Miele who rely on the ‘brand Germany’?

In the year to June 2014, Qantas, the Australian airline, posted record losses of $2.8 billion. The airline was seen to be in some serious trouble and engaged in various cost-cutting measures. This, together with help from falling oil prices appears to have reversed this company’s fortunes. It posted profits of $557 million in the year to the end of June 2015.

The airline industry was hit by the financial crisis and subsequent worldwide recession. Holidays are a luxury item, such that when incomes are rising, there is a greater demand for travel abroad. Conversely, when incomes fall (as we see in a recession) demand will fall and this can hurt the revenues and profits of airlines such as Qantas. Qantas, in particular, had been struggling with a high degree of competition from other airlines, who are also competing on key long-haul routes, for example Emirates, Etihad and Singapore. Further competition came at home from Virgin Australia, who had significant backing from other large airlines and Qantas found itself unable to compete with such low prices and restrictions on foreign ownership.

However, with significant layoffs, cancelling some unprofitable routes and various other cost-cutting measures, Qantas will return $505 million of profits to its shareholders and will purchase 8 Boeing 787-9 Dreamliners. This will certainly boost confidence in the company and its Chief Executive, Alan Joyce’s comments may well add to this. He said:

“We are halfway through the biggest and fastest transformation in our history … Without that transformation, we would not be reporting this strong profit, recommencing shareholder returns, or announcing our ultra-efficient Dreamliner fleet for Qantas International.”

Although the investment in so many new planes is a large outlay, it is expected that they will improve the efficiency of its fleet, reducing its fuel bill significantly, especially over its longest routes. As these profit figures only represent a job that is half done, it will be interesting to see how Qantas fares with the recovery of the global economy.

Qantas to buy eight Boeing dreamliners after posting profit of $557m The Guardian (20/8/15)
Qantas returns to full-year profit and pledges new growth phase BBC News (20/8/15)
Qantas soars past overhaul to return to profit Wall Street Journal, Rebecca Thurlow (20/8/15)
Qantas injects another $55 million into Jetstar Japan Sydney Morning Herald, Jamie Freed (24/8/15)
Is Qantas set to keep on soaring? Sydney Morning Herald, John Collett (21/8/15)
Qantas to expand fleet after rapid profit turnaround Reuters (20/8/15)
Qantas turnaround gains altitude with swing to profit Financial Times, Jamie Smyth (20/8/15)

Questions

  1. Into which market structure would you place the airlines industry?
  2. Consider the different strategies that were adopted by Qantas and in each case, explain whether it would have had an impact on the firm’s costs or revenues.
  3. Why was Virgin Australia proving to be such fierce competition for Qantas?
  4. The Wall Street Journal Article refers to Qantas finding it difficult ‘to attract a White Knight’. What is meant by a White Knight?
  5. What has been the impact of falling global oil prices on the airline industry? Use a diagram to explain your answer.

Ever been to the cinema and found it almost empty? And then wondered why you paid the full price? Perhaps you’ve taken advantage of Orange Wednesday or only go if there’s a particularly good film on? Often it might be cheaper to wait until the film is out on DVD!

Going to the cinema can be an expensive outing. The ticket, the popcorm, a drink, ice cream – it all adds up! Orange Wednesday has recently disappeared and this will definitely have an impact on consumption of movies at your local Odeon, Vue or Showcase. The impact will be on how many seats are left empty.

However, a new app could be set to generate revenues for the cinema and provide cheaper entertainment for your everyday consumer. This new app will allow cinemas to send out alerts to people in the local area advising them that a screening will have many empty seats. What’s the incentive? Perhaps a discount, or some food. But, why would they do such a thing?

If a movie is being shown at a cinema, there will be a large fixed cost. However, what happens as each additional consumer enters the theatre? Does the cost to the cinema rise? Perhaps there is a small cost with more cleaning required, but the additional cost of actually showing the film if there 11 rather than 10 people is almost (if not equal to) zero. That is, the marginal cost of an extra user is zero. Therefore, if there is a screening with many empty seats, wouldn’t the cinema be better to offer the seats for half price. After all, if you can earn £5 from selling a ticket and the additional cost is almost zero, then it’s better to sell it for £5 than not sell it for £10! The following article and video from BBC News considers this new app and other strategies to maximise cinema usage!

Apps in pockets, bums on cinema seats BBC News, Dave Lee (27/2/15)

Questions

  1. What would the budget constraint look like for a cinema where a discount was offered if you purchased two cinema tickets and then received the third ticket for half price?
  2. Why is the marginal cost of an extra user at the cinema almost zero?
  3. If the MC = 0, does this mean that a cinema is a public good?
  4. How will this new app allow a cinema to increase total revenue and profit?
  5. If it is cheaper to buy a DVD rather than go to a cinema, why do people still go to the cinema?

Some eyebrows were raised when the English Premier League (EPL) recently published the final payments to each of the clubs from the revenue generated by the latest TV deal. The headlines were that Liverpool received the highest individual pay-out of £97,544,336! Cardiff City received the lowest pay-out of £62,082,302. What caught the eye of the headline writers was that the revenue from the lowest pay-out this season (the payment to Cardiff) was greater than the highest pay-out from the previous season (a payment of £60,813,999 to Manchester United).

The 2013-14 season was the first year of the latest 3 year deal for the rights to broadcast EPL games on the television, internet and radio. As part of this deal BSkyB are paying £760 million each year for the rights to broadcast 116 EPL games per season in the UK. BTSport are paying £246 million per year for the rights to broadcast 38 EPL games per season. In addition to selling the rights to broadcast games in the UK, the EPL also separately sells the rights to broadcast games in other countries. For example Cable Thai Holdings paid £205 million for a 3 year deal to show EPL matches in Thailand while NowTV paid £128 million for a similar deal in Hong Kong. In total the EPL earns approximately £1.8 billion per season from the sale of their domestic and international media rights.

The approach taken by the EPL to manage the sale of the broadcasting rights has raised considerable debate amongst economists and policy makers. There are two very different methods that can be used by teams in a league to sell the rights. They are the Individual Sales Model (ISM) and the Collective Sales Model (CSM). In the ISM each club is responsible for marketing and selling the rights to broadcast its home games. The ISM is currently employed by both La Liga in Spain and Primeira Liga in Portugal. In the CSM the rights are sold jointly by the league, federation or national association on behalf of the teams involved. This CSM is currently used by the majority of the football leagues in Europe. The EPL sold the rights for 2013-16 on behalf of the 20 clubs using a sealed bid auction.

Some economists and policy makers have criticised the CSM, claiming that it is an example of a cartel that simply restricts output and leads to higher prices. Each club is considered to be the equivalent of a firm in a traditional industry. The argument is based on a number of observations about the teams. They:

• are each separately owned and submit their own individual set of accounts
• compete with each other to buy inputs (i.e. the players) to produce an output (i.e. a match)
• individually market and set the price for the outputs they produce i.e. the ticket for the games and the prices of the merchandise such as football shirts

If this view of the industry is taken, the league or federation looks rather like a restrictive agreement between independent competitors that creates monopoly market power. As evidence to support this interpretation of the CSM, reference is often made to the details of the contract between the EPL and BSkyB and BTSport. As part of this agreement the number of live matches that can be broadcast is restricted to 154.This represents just over 40% of the maximum total of 380 that could be shown. Teams are effectively prohibited from individually selling the rights to matches that are not selected for broadcast in the collective deal as they must seek permission from the EPL. Over ten years ago the Director General of the Office of Fair Trading commented that:

Within the market the Premier League has a major if not unique position. By selling rights collectively…it is acting as a cartel. The net effect of cartels is to inflate costs and prices. Any other business acting in this way would be subject to competition law and I see no reason why the selling of sport should be treated differently.

The EPL has always defended it actions by claiming that any increase in the number of televised games would have a negative impact on the attendance at matches.

An alternative view focuses on the peculiar or unique characteristics of sports leagues. In particular it is argued that sport is unusual because the level of co-operation required between the teams and a league to produce matches is far greater than that required by firms in other industries to produce output. Agreements have to be made about issues such as the timing and venue of the games as well as the rules under which they will be played. However unlike a traditional cartel arrangement these agreements do not simply control and restrict output. They also improve the entertainment value of the game and hence the quality of the product. Some authors have argued that because of these unique characteristics, the league rather than the individual team should be considered as the equivalent to a firm in a more traditional industry. In this ‘single entity theory’ teams are viewed as divisions of a single organization i.e. the league. The league is treated as a natural monopoly that legally owns the broadcast rights of the clubs rather than a cartel of separate firms. Others have argued that it is more sensible to think of the league as a joint venture between the teams.

Not only are the levels of co-operation required much greater than in traditional industries but it is also argued that competitive balance is important for a successful league. If the same teams always win most of the games then there are concerns that fans will find this boring and it will reduce their willingness to pay to watch matches in either the stadium or on television. It is argued that the CSM makes it easier to distribute the TV money more equally and so helps to maintain competitive balance in a league. The White Paper on Sport published by the European Union in 2007 stated that:

Collective selling can be important for the redistribution of income and can thus be a tool for achieving greater solidarity within sports.

The debate continues about whether the CSM used by the EPL is an example of a restrictive cartel which acts against the public interest or a business practice that helps to improve the quality of the product for the customer.

Premier League clubs earn record-breaking sums thanks to TV bonanza The Telegraph (14/5/14)
Liverpool top earners over season with £99m – and bottom side Cardiff got £64m (so see what your team received in 2013-14 Mail Online (11/5/14)
Cardiff earn more TV cash than champions Man Utd did in 2013 BBC Sport (14/5/14)
Relegated Cardiff Earn More TV Revenue than Man Utd Tribal Football (14/5/14)
TV Bonanza for Premier League Clubs Pars Herald (18/5/14)
Season of woe hits home in money league Express & Star (15/5/14) .

Questions

  1. What is a natural monopoly? Draw a diagram to illustrate your answer.
  2. What is a cartel? Find three real-world examples of cartel agreements.
  3. It was explained in the article how the EPL sells the rights to broadcast just over 40% of the total number of matches played per season. Draw a diagram to illustrate and explain how this might be an example of a cartel agreement that restricts output and results in higher prices.
  4. The EPL defends its decision to restrict the number of games that can be televised in its domestic deal by claiming that any increase would have a negative impact on attendance at the matches. To what extent do you think that watching a live game on the television is a substitute for watching it in the stadium? Draw a demand and supply diagram to illustrate a situation where they are strong substitutes. Explain how the concept of cross price elasticity could be applied to this example.
  5. Outline how a sealed bid auction works. What are the advantages of using a sealed bid auction as opposed to other types of auction.
  6. Can you think of any other economics arguments that could be used to defend the use of the CSM for the sale of the broadcast rights?