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Original document was submitted as an honors thesis requirement. Copyright is held by the author.

Document Type

Thesis

Abstract

The rise of the Internet Communication Technologies (ICTs), such as video-on-demand (VOD) services, is expected to have substantial impact on the entertainment industry. In particular, cable TV is likely to be one of the media channels most affected by the expansion and development of these new technologies. Given these changes and the fact that the signs of the cable TV viewership decline are starting to show, it is important to investigate the potential of the loss of competitive advantage of television programming services.

Most of the existing research on the topic focuses on the relationship between TV viewing and Internet penetration. However, economic evidence on the relationship between cable TV services and such ICTs as VOD services is limited. In this paper, we empirically investigate the determinants of the demand for cable TV services in the era of ICTs. Our main objective is to identify the relationship between cable TV and VOD substitute services at the aggregate national level as well as identify some of the mechanisms behind this relationship.

We conduct an observational study using a sample of the U.S. quarterly national-level data for years 2008-2015. The data on the number of Time Warner Cable (TWC) subscribers is used as a proxy for cable TV consumption, while the data on the number of Netflix subscribers is used as a proxy for VOD services consumption. We estimate several specifications of the OLS regressions controlling for own price, availability of related goods (VOD services, mobile phones, Internet), and income.

Our results contribute to the existing literature on the economics of entertainment by presenting evidence of substitution between the VOD services and cable TV services. More specifically, our estimates for the elasticity between TV and VOD services, obtained using first-differences OLS estimation, suggest that a 1 percent increase in the number of Netflix subscribers is associated with a 0.123 percent decrease in the number of TWC subscribers. This implies that providers are likely to benefit from focusing on offering extra value to consumers rather than trying to gain additional revenue through advertising. The results of the analysis also highlight that higher prices for cable TV services are likely to be interpreted by consumers as a signal for quality. More specifically, our estimates suggest that a 1 percent increase in own price is associated with 0.38 percent increase in the number of TWC subscribers. This implies that offering greater choice of programs and higher subscription prices might be the pricing strategy to increase revenues.

These findings provide a better understanding of the mechanisms behind consumer choice and decision-making processes. In turn, this understanding elicits valuable insights into television programming services revenue sustainability, and the competition of the providers of these services with the providers of the VOD services.

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