a. Triplecast was NBC’s and Cablevision’s joint venture to provide pay-per-view cable coverage of the 1992 Summer Olympics in Barcelona. Based on extensive surveys of potential demand, the partners hoped to raise $250 million in revenue by attracting some 2 million subscribers for three channels of nonstop Olympics coverage over 15 days. NBC set the average package price at $125 for complete coverage and offered a separate price of $29.95 per day. However, as the games began, fewer than 400,000 homes had subscribed.
i. In general, what goal should NBC follow in setting its program prices? Explain.
ii. After experiencing the unexpectedly lukewarm response prior to the games, what strategy would you recommend that NBC pursue?
b. In 1997, America Online (AOL) overhauled its pricing of Internet access. Formerly, subscribers paid a monthly fee of $9.95 (good for a limited number of access hours) and paid an additional fee for each hour exceeding the limit. In a bid to increase its customer base, AOL offered a new plan allowing unlimited access at a fixed monthly fee of $19.95. (The company estimated that the new plan would deliver a cheaper effective rate per hour for the vast majority of its current customers.)
i. In terms of impact on revenue, what are the pros and cons of AOL’s unlimited access pricing plan?
ii. What might the cost consequences be?
SOLUTION
a. i. In pricing Triplecast, NBC faced a pure selling problem, the marginal cost of each additional subscriber being insignificant.
ii. Unfortunately, management dramatically misjudged its demand curve as well as the point of maximum revenue along it. Once it recognized the depressed state of demand, management instituted a dramatic price cut (trying to reach the demand point at which EP = -1). This was its best course of action to capture what revenue was available. Over time, the partners reduced their package price from $125 to $99 to $79 and the daily price from $29.95 to $19.95 to $11.95. However, these actions at best were able only to stem large losses.
b. i. The main benefit of AOL’s new pricing plan was attracting new customers. Indeed, the company raised its customer base over 18 months from 8 million to some 11 million subscribers. It also increased revenues from retailers, advertisers, and publishers, who would pay for access to AOL’s customers. The main risk of the new plan was that some current customers would pay less each month for the same online use and others would greatly increase their use at the lower effective price.
ii. This is exactly what happened. Current customers more than doubled their daily time on-line. Constrained by a fixed capacity, AOL’s system overloaded. Customers received busy signals and experienced interminable waits for access. (One commentator likened the new pricing policy to offering a perpetual all-you-can-eat buffet to food lovers, who once seated would eat through breakfast, lunch, and dinner, fearing they would not get back in if they gave up their table.) Customers were disaffected, and AOL was forced by regulators to give widespread refunds while it scrambled to increase its network capacity at a cost of $350 million.