Bargaining power of suppliers

It is important to understand the bargaining power of suppliers as presence of suppliers

would significantly reduce the profit potential of each of the suppliers. By increasing or

decreasing the prices, reducing the quality of services, suppliers can often increase the

competition in any industry (Porter, 1998). Looking at the cable industry, Comcast and

Timewarner are the big suppliers but there is competition from other suppliers like DirectTv,

Dish Network, Verizon, AT&T, Charter, etc.

Some of the factors we know that significantly affect the power of the supplier group in

the cable industry are: 1) It is dominated by a few cable providers and is more concentrated in

certain areas. 2) In cable industry, the providers do not need to contend with each other for

selling their product. 3) Cable providers are important for the cable networks to be able to

provide their content to the consumers. 4) A lot of the cable networks now have two year

contracts and termination fees for breaking the contracts so switching providers has become an

issue. They also charge high installation fees which leads to consumers not switching providers

more often. 5) There is also an issue with forward integration with these cable providers.

Looking at the equipment that is supplied by the cable providers, they have specific

requirements for the modem and routers that are provided and it is usually difficult to find them

from other sources. Thus the consumers are forced to pay a monthly fee to the cable provider for

using their equipment. There are specific equipment that some cable companies use: Dish uses

equipment only from Echostar, Time Warner uses cable boxes only from Samsung and Cisco,

while Comcast only uses equipment from Acer, Dell, and Intel. This leads to each cable provider

having different technology that delivers their product and thus switching the equipment

providers becomes difficult for them as there would be a high cost for changing their

technologies. This would lead to decreased revenue and profit margin and thus there is a

monopoly as the agreements with the cable box providers are generally for decades. Also the

companies generally provide tiers of different services, each require its own set of equipment for

example, for Comcast DVR equipment differs from its general cable equipment. Their TiVo

service equipment differs as well and each are supplied by a specific supplier.

Also to consider is that it is extremely unlikely that a cable provider can manufacture its

own equipment as the FCC regulations have prohibited them from doing so unless they incur a

high cost. Also, a cable card is all that is required to receive cable but the cable boxes have

additional functionalities built in which include internet, DVR. Gaming, and Wi-Fi capabilities.

Along with Cable, the providers link internet, phone and other video gaming services and the

companies generally they make deals with movie studios, gaming studious, fiber network

providers and television network providers to provide their content exclusively. Switching these

providers is often difficult and costly for them, and can lead to a large customer base switching

the providers. The internet services are generally outsourced with other specialty companies who

handle the whole network from installation to services including customer services. There is

rarely an instance when the internet services provider is switched by the cable provider and so

the contracts often run into decades.

Switching video programming networks is often difficult and costs associated are

extremely high. The cable providers have exclusive contracts with NFL, NBA, MLB, NHL,

ESPN to provide content and the cable providers do not have much leeway in terms of not

providing their services as customers want to watch the content provided by them, especially

local sports. The expenses that the cable providers face are often based upon the subscriber base

and so there is often an incentive to increase the customer base as this would lead to increased

profits. Also the content provided by the cable networks is often exclusive and so there is less

incentive to switch the networks. We have seen that disputes between TNT/HBO and Dish had

led to a large number of consumers switching from Dish to other cable companies.

Phone services that are bundled with the cable services are often provided by third party

suppliers. For example, Time Warner provides phone services in association with Sprint, while

Comcast provides phone services in association with Verizon. Changing the phone service

providers is often difficult for the cable companies as the consumers are bound to two year

contracts. The contracts have huge termination fees that the customers would not want to pay

under any circumstances and also they would have to switch numbers which could pose a

potential issue. This often leads to difficulty in switching phone providers by the cable

companies and their contracts runs into number of years (Chipty, 2005). The cost for providing

video services is huge for cable companies, for example Comcast had 52% of its operating costs

attributed to video services while Time Warner had 47% for the same services. Consider these to

phone and internet services which are often less than 1.5% of the total operating cost and thus

there is rarely an incentive for the cable companies to switch the internet and phone providers

which could lead to a significantly higher cost in setting up new infrastructure.

Quality of other suppliers can be lower than the one provided by the current suppliers for

the cable industry and so switching suppliers is not generally recommended for them. Especially

with video services, where new technologies like HD and 1080p are the norm for companies like

Comcast and Time Warner, switching to a lower quality supplier would lead to huge complaints

from the consumers and they can often cancel the services and switch cable providers. This

would significantly affect their revenue and profit. Sometimes the suppliers can demand huge

prices as in the case of ESPN where they charge $5 per customer for supplying their channels to

the cable providers, but ESPN has a monopoly with providing sports news and live sports which

is a significant portion of most customers need for buying cable. Thus switching or dropping

ESPN completely is an unthinkable proposition for most cable providers unless they want to lose

a large portion of their subscriber base (Ward, 2014).

References

Chipty, T. (2005, Jan 13). Horizontal integration for bargaining Power: Evidence from the Cable

Television Industry. Journal of Economics & Management Strategy, 375-397.

doi:10.1111/j.1430-9134.1995.00375.x

Porter, M. (1998). Competitive Strategy. New York Free Press, 27-29.

Ward, M. (2014, Aug 21). Bargaining Power Of Suppliers | Porter’s Five Forces Model.

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