For Tim Kay only

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Case Study

Time Warner/Viacom: Countdown to a Blackout

Why is Dora crying? That was the question readers were faced with when they opened the New York Times and LA Times on December 31, 2008. Viacom, owner of the Nickelodeon television channel where Dora the Explorer shares the stage with SpongeBob SquarePants and many other favorite children’s television stars, purchased full-page advertisements of the cartoon adventurer with a tear streaming down her cheek clutching her frightened looking sidekick, Boots the Monkey. The image was accompanied by this alarming message: Time Warner Cable is taking Dora off the air tonight along with 19 of your favorite channels. Throughout the day, viewers of Viacom channels saw a ticker running across the bottom of their television screens alerting them to the impending blackout, and in the face of Viacom’s aggressive media campaign, Time Warner found its call centers swamped by angry customers, many the parents of distraught children, demanding that Time Warner keep the Viacom channels on the air, or else they might look for another cable provider.

Time Warner is the second largest cable provider in the United States with approximately 13.3 million subscribers. Viacom is one of the largest providers of cable TV channel programming, including MTV, VH-1, BET, Spike TV, Nickelodeon, and Comedy Central. Viacom’s media campaign came at the climax of a growing dispute between the two companies as the agreement under which Viacom granted Time Warner the rights to broadcast its channels would come to an end at 12:01 on January 1st. If Time Warner did not come to terms with the programmer, Viacom threatened to pull its channels. To renew the contract, Viacom asked Time Warner to pay an additional $37 million per year for its programming on top of the $300 million it was already paying—roughly a 12 percent rate increase. At the time, Viacom’s programming constituted about 7.9 percent of Time Warner’s programming costs.

Viacom argued that given the estimated 25 percent of cable viewers who tuned in to Viacom channels over the course of a given day, the amount that Time Warner was paying left Viacom’s programming well underpriced in comparison to other channels. Costs for the Disney Channel amount to about 85 cents per subscriber per month, and ESPN costs about $4. In contrast, Viacom’s MTV would cost 32 cents and Nickelodeon would cost 45 cents per month. Viacom’s rate increase would amount to a monthly cost of about 23 cents per subscriber, a sum they claim is modest in comparison to the likes of ESPN’s subscriber costs, especially considering it would cover Viacom’s entire package.

Time Warner responded that in the current economic environment, such a rate increase could not be justified. As the company said in response to Viacom’s media campaign, the majority of any rate increase would likely have to be absorbed by customers. Furthermore, Time Warner pointed out that in many cases, Viacom was offering the same programming that it was threatening to pull from Time Warner on the Internet for free. Time Warner argued that a rate increase would have Time Warner customers subsidizing Viacom’s Internet programming, even going so far during negotiations as to threaten to provide customers a way to connect their laptops to their cable boxes and to stream programs from the Internet onto their TVs.

Fortunately for customers (or perhaps unfortunately, depending on how much of the cost they end up having to shoulder), in the midst of negotiations, Viacom agreed to suspend its decision to pull its programming, and the two companies were able to come to terms shortly after midnight when their previous contract expired. Traditionally, network programmers hold the upper hand in disputes over programming costs, but in this instance neither Viacom nor Time Warner could afford the fallout of a protracted channel blackout. Viacom’s bid for increased subscription fees is not unique; as advertising revenues decreased over the course of the year, many network programmers looked to cable providers for higher fees to fund increasing programming costs. Any sort of blackout, however, would have greatly hurt whatever ad revenue Viacom was already generating. For Time Warner, while increased fees would be unpleasant, a blackout could send increasingly wary cable customers to competitors. In the end, no blackout occurred, and Dora was able to stay on the air.

1. What is the channel arrangement between Viacom, Time Warner, and consumers? Who are the intermediaries?

2. What is the Channel Conflict between Viacom and Time Warner?

3. Obviously the conflict between Viacom and Time Warner has strained their relationship. If you were in charge of one of these companies, what steps would you take to improve their channel relationships?

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Case Study

Case Study

Dell: Can the Icon of the Logistics Industry Succeed in India?

Michael Dell had the idea of selling computer systems directly to customers when he was a student at the University of Texas. In 1985 his new company designed its first computer system and soon began offering next-day, on-site product service. By 1996 Dell was selling computers on the Internet, and by 2000 the company’s Web site was pulling in $50 million a day in direct sales.

Today Dell is well established as an icon of the logistics industry. Its lean business model has influenced countless other companies to follow its lead. Dell’s 300,000-square-foot Morton L. Topfer Manufacturing Center (known as TMC) in Texas serves as ground zero for the build-to-order (or “just-in-time”) manufacturing processes it’s famous for. The TMC makes it possible for Dell to assemble hundreds of computers an hour, taking orders as they come in and making them to the customers’ specifications. In the computer industry, technological equipment quickly becomes outdated, so Dell wants everything that goes out the door to be fresh off the assembly line—not losing value in a warehouse.

Dell’s revolutionary supply chain is characterized by its minimum levels of inventory, a policy of paying suppliers only after the customers have paid Dell, and direct sales. Industry analysts say that these strategies have changed high-tech manufacturing the way Wal-Mart changed retail.

The question for Dell now is how to plan for future growth in emerging global markets such as China and India. Can Dell’s business model, which is based on information, efficiency, and speed, work as well in parts of the world where the economic and social contexts are so different from how they are in the United States?

Dell has planned a major capital investment and expansion in its Indian operations, which would employ 20,000 people in a new manufacturing facility similar to TMC. Analysts predict that if Dell is successful in bringing its build-to-order implementation to India, it could spur a movement of manufacturing-focused foreign investment in the country.

A 2005 report by KPMG International concluded that China and India will be the world’s two biggest economies by mid-century, and, “although India has underperformed in the last lap of the growth race, there is a strong possibility that India may well move ahead.” Dell appears to agree. CEO Kevin Rollins explained: “India currently sells 4 million computers per year and this is projected to rise to 10 million units annually in the next three to five years. Our workforce here is capable and the time is right for the second phase of expansion in contact center activities, research and development and…a manufacturing site.”

Critics are skeptical that India will be as profitable as Dell hopes, however, citing the country’s lack of reliable roads, power, and telecommunications. Although telecommunications have improved with a 53,000-mile fiber-optic network, India maintains only 2,000 miles of highways (the United States has 23 times that). Delivery chains rely almost exclusively on small vehicles with only three wheels that navigate on dirt roads. As for India’s power supply, business owners experience nearly 20 significant outages every month (compared to 5 in China). Add to this the hassle of endless red tape required of businesses in India, labor regulations that force businesses to get government permission to lay off workers, and laws that require unanimous worker approval before companies can reorganize, and it becomes clear why critics wonder whether Dell can succeed there.

Dell counters that their computers are lightweight enough to be transported in the three-wheeled trucks that are the backbone of the Indian supply chain. And industry observer Clay Risen adds, “Dell’s requirement that suppliers locate warehouses nearby suddenly seems an advantage—after all, the less the supply chain has to deal with the Indian transportation system, the better.” Dell can concentrate on the urban middle class with the money to buy computers in major cities like New Delhi, where the country’s infrastructure, power, and telecommunications systems are more reliable.

Even with the risks involved with doing business there, Dell has decided that India is too large and full of possibilities to ignore. The industry is watching and waiting to see how the computer giant fares. Dell’s success—or failure—could determine whether more manufacturing companies follow its example in the future.

1. Describe how Dell’s manufacturing processes represent a change in chain management from how things were done during the mass-production era. What does it mean that there has been a reversal of the flow of demand from a “push” to a “pull” system?

2. Describe the order processing system. How does it work in a company like Dell? As an order enters the system, what must management monitor? Why is it so important that the order processing system be executed well?

3. Describe the role that a supply chain manager at Dell might play. What would his or her responsibilities be? Why is there such high demand for supply chain managers in companies like Dell today?

4. Describe the benefits that Dell and other companies receive from supply chain management. What benefits do supply-chain oriented companies commonly report? What has research shown?