Monday, October 22, 2012

Rogers Communications

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Introduction Primary Market Problem


In 15 a changing regulatory environment is compelling Rogers Communications, one of Canada’s largest industrial corporations, to consider the prospect of market share erosion in its cable television division. Political climate changes aside, management views increasing Internet usage among consumers as both a possible opportunity and a threat to advancing the mission of the firm to gain competitive advantage through the delivery of information and entertainment. Primarily, Rogers confronts whether to seize first-mover status and make the necessary investment to provide Internet access over the firm’s own cable wires.


Introducing WAVE, or broadband Internet access to PC users with modems, in the Newmarket suburb of Toronto represents a diversification strategy for growth. Based on figures provided in the case, we derived a market size calculation (Exhibit A) used in our analyses. Rogers needs to identify project goals, and determine which marketing strategy would most likely achieve those goals. In terms of market attractiveness, launching broadband Internet access poses high entry costs partially offset by an anticipated high growth rate and the absence of competitive services. A sound launch strategy should include analyses of market segmentation variables, such as age, income, occupation, gender, lifestyle, benefits sought, usage rate, buyer readiness and loyalty. In determining a marketing strategy, Rogers should also consider relevant positioning differentiators such as reliability, customer service, price and benefits provided.


Strategy 1 The Profitability Maximization Approach


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Rogers could launch service in Newmarket from a profitability approach. This option minimizes risk by targeting service to likely early adopters identified in market research, the Computer Jock segment. A fair prediction would estimate that adoption in other market segments would come at a slower rate. Thus, targeting a to Computer Jocks as technically superior service under the Rogers brand would enable Rogers to minimize initial acquisition and customer support costs associated with diversification.


Based on market segmentation, new customer forecasts for 15 illustrate penetration estimates of 75%, 0%, and 1% for the Computer Jock, Aware, and Neophyte market segments, respectively (page 1, Exhibit B). Post-demonstration surveys supports these proportional estimates. Surveys demonstrated innovators and early adopters were heavy users of the Internet. Therefore they the least price sensitive for a highly valued technologically superior service. Market segment sizes were net of churn rates that were based off of rates from cellular and local phone industries a churn rate of 5% for Computer Jocks represents users exiting Newmarket. A churn rate of 10% and 15% for the Awares and Neophytes, respectively, represented subscribers lost due to lower-priced Internet service substitutes with brand awareness (i.e. AOL, DSL, etc.).


Page of Exhibit B details the forecasted Cash Flows from Operations of the WAVE project. Cash inflows come from two sources cash from recurring monthly subscription fees and cash from one-time installation fees. Monthly subscription fees were forecasted with higher fees decreasing steadily over five years. Rogers should assume the Computer Jocks, in contrast to Awares and Neophytes, would shop for the speediest Internet access available with less regard to price. The latter segments, given adequate customer support and high quality of service, could be expected to pay less for WAVE monthly. Installation revenue should remain at $. during the rollout for the sake of consistency with the post-demonstration survey results.


Page of Exhibit B forecasts the related cash disbursements for this approach Capital Costs, Annual Operating Costs, Installation Costs, Customer Acquisition Costs, and Customer Support Costs. Market forces such as heightened demand and supplier competition should reduce the costs of ethernet cards and cable modem, thus reducing installation and capital costs for Rogers’ WAVE service over the long term. Targeting service primarily to Computer Jocks should require lower customer support in the near term, based on computer jocks’ penchants for independent problem solving.


Alternative 1 demonstrates a conservative WAVE rollout in terms of market share. The potential upside positive net cash flows in the fifth year of operations, with a net present value (NPV) of -$47,540.64 by the sixth year, according to pro forma cash flow (Exhibit B) estimates. In addition, Rogers would gain first-mover advantage and broader positioning flexibility in the absence of technologically equivalent competition.


Strategy The Market Share Optimization Approach


Rogers could launch Wave Service based on maximizing market share. Targeting all three market segments identified in market research would broaden the potential customer pool. However, this goal will result in high initial acquisition costs and high customer support costs. Awares and Neophytes are likely more price sensitive buyers whose lower Internet usage reduces the value of a technically superior connection. As a result, Rogers will have to spend more money in targeting, acquiring, and retaining these customers.


Page 1 of Exhibit C illustrates the estimated market penetration percentage over five years for all three segments. Notice higher customer acquisition costs and support costs increase compared to the previous approach. Another assumption in this scenario is that better customer service will be valued highly by Awares and Neophytes, thus reducing customer churn. Proportionally, Awares’ and Neophytes’ price sensitivity won’t win over more customers than Computer Jocks, despite more customer service.


To spur demand in a wider target, monthly fees must be lower than in the previous approach. Rogers should price WAVE service at rates that are close to existing ISP fees and utility bills. With proper positioning under the Rogers brand, Awares and Neophytes should respond to a competitively priced service that offers superior service and speed. Page of Exhibit C forecasts the related cash disbursements for the project. This first mover approach may appeal to a broader segment; thus increasing market share. However, higher expenses associated with increased market penetration demonstrate Rogers will not be able to record a net gain by year 000. Pro forma cash flow estimates show a NPV of -$1,16,1 by the end of year 000.


Strategy The Market Share Optimization with Minimum Churn Approach


In this scenario Rogers can pursue increased market share with added customer support. Higher quality of customer service would likely lower the customer churn rate to 5% for all the segments in the market. Specifically, customer support cost per customer is increased to $15.00 (Exhibit D page ), which is the highest amongst all the models. Rogers would focus on building a larger customer base and appealing to price sensitive Awares and Neophytes who have low buyer readiness and usage rate. Although they may be less swayed by the technically superiority of the WAVE service, their loyalty may be gained through maximum reliability and customer service.. As a result, in this scenario expenses increase. Revenues and net cash flow numbers are remain in the red until year 000; NPV is estimated to be -$1,14,.


Recommendation


All three market approaches fail to realize a forecasted positive real or adjusted (by the proposed corporate hurdle rate of a 15% return per annum) cumulative gain within five years. Thus, we recommend delaying a launch of WAVE service in Newmarket given that it will be unable to fund itself through subscription fees within the Rogers’ Board deadline of five years.


Despite lack of competition in this category, the anticipated growth rate is not enough to offset service rollout costs. We predict that due to a lack of positioning differentiators, the vast majority of potential customers are unwilling to pay a monthly subscription fee of $50 with a limit of $70 for the most avid users. Also, focus group research suggests consumers would not pay more than a $100 installation fee. These constraints make it impossible to overcome costs. The primary culprit is the high cost of the cable modem itself and other associated installation fees. Our installation cost plus cable modem projections range from $70 in 15 down to $08 in 000 for each installation. With an installation fee limit of $100 per installation, the WAVE project loses 08% to 60% for every installation.


Also, reducing installation fees won’t bring Rogers closer to financial gain, due to increasing customer acquisition and support costs. It should be noted that estimated monthly service fees produce healthy gross margins after recouping installation costs. Unfortunately, this time horizon is beyond the board-mandated five years. Therefore, we recommend delaying the launch until technology improvements reduce installation costs to a more favorable level. Meantime, Rogers should conduct more market research to gain specific data on key positioning differentiators and on slicing market segments narrower. In lieu of an immediate launch, it would behoove Rogers to explore other markets; increasing the sample size may produce a market segmentation breakdown that better supports a WAVE rollout.





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