Supply & Demand Analysis for ASTRO- Satellite television provider in Malaysia

INTRODUCTIONASTRO, introduced in 1996, is Malaysia’s first satellite television. It uses Direct-to-User Service (D.

T.U) and is broadcast as a high-powered KU Band transmission utilizing the transponder of the MEASAT satellite and individual decoder boxes in every subscriber’s home. Besides regular television fare such as movies, news, serials, sports and documentaries, other media are also provided such as radio channels, interactive TV, video-on-demand (pay-per-view), games, real-time stocks status, chatting, SMS, icon download and internet banking which were not available in the ‘television market’ previously. Major source of content for ASTRO is from international content providers such as National Geographic, BSkyB, Star, HBO, CNN, BBC, CNBC, SunTV and ZeeTV, but ASTRO has emerging channels meeting regional demands with home-made content such as Sinar, Lite, X-fresh, THR, Ria, Wah Lai Toi, Awani and Oasis.

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ASTRO’s TV subscriber base in Malaysia is currently at 2 million which represents 37% of all households, while radio listener’s base is 11 million. ASTRO’s revenue in 2012 was RM3.1Billion, with EBITDA rising 33% year-on-year to RM1042M resulting in profit of RM336Million. At the national level, there are no other satellite TV providers in Malaysia.

The competition in Malaysia is currently terrestrial TV stations (which is also provided as part of ASTRO’s list of free channels), Internet Protocol over UHF (fully digitized) subscription-based service called MiTV which was launched in 2005 and video-on-demand based pay-tv called FineTV. However, MiTV and FineTV are only available in the Klang Valley.Market Structure & Competitive AnalysisSupply and demand analysisASTRO was started in 1996 and was known as the first satellite television in Malaysia. It used digital transmission and monopolised digital television market during that time.

ASTRO focuses on a narrowly defined market. Itprovides extreme digital viewing experiences such as Dolby Digital sound; better viewing quality and multi-channel preferences to Malaysians. In 2005, the government approved entrance of MiTV and FineTV into the digital market but both products do not offer close substitution of ASTRO as both competitors are active only in Klang Valley. As the sole supplier in digital television market, the demand curve is downward sloping.

ASTRO is a subscription-based television and is still considered a luxury item that many households cannot afford. Therefore, ASTRO has to drop its prices if it wants to have more subscribers. When the quantity sold increases by one unit, the revenue earned from additional unit sold decreases. This indicates a monopolist’s marginal revenue is always less than the price of its good.

There is no supply curve for monopoly as monopolist is a price maker instead of price taker. Supplier curve tells the quantity that firms choose to supply at any given price, however monopolist sets the price at the same time it chooses the quantity of supply. Figure 1 shows the relationship between demand and marginal revenue in a monopoly.Figure 1 :Demand and marginal-revenue curves for a monopolyIn the long run, ASTRO’s market is expected to be monopolistic competition as the government has announced that analogue television broadcast in Malaysia will be shut down by 2015 and the entrance of new television stations into Malaysia will encourages increasing competition among television stations and driving improvement in the local media content.

Income factorFigure 2: The price elasticity of demand.ASTRO was under price elasticity of demand when ASTRO reduced the product price. This will increase quantity demanded as it enables lower income households to afford to sign up for ASTRO’s services. Figure 2 shows that ASTRO does not have close substitutes in the market, yet buyers are still sensitive to price.

When ASTRO increases its prices, the lower income households that can no longer afford the price hike, will switch to otherFree-to-Air (FTA) television channels, causing the quantity demanded to fall substantially. ASTRO is considered a luxury product in the Malaysian market as only 37% of households subscribe to its services as per ASTRO’s 2012 Annual Report.Demand factorFigure 3: The price elasticity of demand.Figure 3 shows that ASTRO will have shift in demand.

This happens over period of time when the general market population increases. As the number of household that can afford ASTRO will also increase, there will be an increase in demand. This increase of demand will allow ASTRO to supply more at an increased price, and hence increase its revenueBEHAVIOUR OF FIRMS IN THE MARKETA monopoly’s revenueThe demand curve in graph Figure 4 shows how the quantity affects the price of ASTRO. The marginal revenue curve shows how ASTRO’s revenue changes when the quantity increases by one unit.

This is because the price on all units sold must fall if the monopoly increase production, marginal revenue is always less than the price.Figure 4: MR vs. DD curve for a monopolyMARKET EFFICIENCY AND ISSUEMarket efficiencyFigure 5: Demand and supply curve with ASTRO only (Initially)Figure 6: Demand and supply curve with ASTRO, Fine TV, and MiTVIn a free market system, the buyers and sellers are motivated by self-interest. A process of coordination and communication takes place sothat buyers and sellers are directed to the most efficient outcome.

As if assisted by an invisible hand, the free market system reaches efficiency.As per above Figure 5, initially ASTRO was the only pay TV in the Malaysian market and it was indicated that the demand for ASTRO grew due to more viewers requiring the service, thus this shifts the demand curve to the right. The equilibrium price was raised from Equilibrium price0 to Equilibrium price1.However, recently due to its attractiveness and the government’s support for more competition, new operators like MiTV and Fine TV were launched in the market.

As a result, the pay TV market has changed from a monopoly market into an oligopoly market. An oligopoly market is a market with only a few sellers (e.g. ASTRO, Fine TV and MiTV), each offering similar or identical products.

Figure 6 indicates that not only the demand curve shifted to the right (Demand0 to Demand1) due to increase in number of viewers, but the supply curve also shifted to the right due to additional service providers (e.g. MiTV and Fine TV) in the market. This has caused the equilibrium price2 (Figure 6) slightly lower (compared to Figure 5) than equilibrium price1.

This oligopoly may look more like a monopoly. This is because ASTRO is essentially only one big firm in the Malaysian pay TV market (there may be two tiny ones but they have no effect on the big one’s choices), there are significant barriers to entry, and, of course, no competition. It is the sole provider of pay TV throughout Malaysia, whereas FineTV and MiTV are concentrated only in Klang Valley. As a whole, ASTRO controls the overall market of pay TV in Malaysia.

Therefore, ASTRO is the price maker and a monopolist. This monopoly is earning profit from charging high prices. From the perspective of ASTRO, the high price makes monopoly more desirable.ASTRO profit maximization (monopoly)A monopoly maximises profit by producing at the quantity where marginal revenue equals to marginal cost.

As per Figure 7 below, ASTRO’sprofit-maximising quantity of output is determined by the intersection of marginal-revenue curve and the marginal-cost curve. The intersection occurs at point C, which is the profit maximising quantity, QMax.ASTRO then uses the demand curve to find the price that will induce customers to buy that quantity. The profit maximising price is found at point B.

For a monopoly firm like ASTRO: Price ; Marginal revenue (MR) = Marginal cost (MC)In Figure 7 below, the area of the box BCDE is the profit of ASTRO. The height of the box (BC) is the price minus average total cost, which equals profit per quantity sold. The width of the box (DC) is the number quantity sold.Figure 7: ASTRO’s profit (The area of the box BCDE equals the profit of the monopoly firm)The welfare cost of monopolyFrom above, we have seen that ASTRO is a monopoly firm and charges a price above the marginal cost.

To measure the economic well-being, we use total surplus. Total surplus is the sum of consumer surplus and producer surplus. Consumer surplus is the consumers’ willingness to pay for the goods and services minus the amount they actually pay for it. Producer surplus is the amount producers receive for the services provided minus the cost of providing it.

In a competitive market, the invisible hand of the market leads to an allocation of resources that makes total surplus as large as it can be. Social planners try to maximise total surplus by manipulating supply.In contrast, ASTRO is a monopoly and this leads to an inefficient allocation of resources as well as failure to maximise total economic well-being. The monopolist (ASTRO) produces less than the socially efficient quantity of output.

Because a monopoly charges a price above the marginal cost, customers who value the service at more than its marginal cost but less thanthe monopolist’s price would not buy it.Figure 8: The efficient level of outputFigure 8 above analyses the level of output a benevolent social planner would choose. The demand curve reflects the value of ASTRO to customers. The marginal cost curve reflects the cost of ASTRO.

Thus, socially efficient quantity is found at the intersection of demand and marginal cost curves. Below this quantity, the value to customers exceeds the marginal cost, so increasing output (e.g. number of channels, packages, etc.

) would raise total surplus. Above this quantity, the marginal cost exceeds the value to customers, so decreasing output would raise the total surplus.So if a social planner was running this ASTRO firm, it can achieve this efficient outcome by charging price found at intersection of demand and marginal cost curves. Thus, a social planner would charge a price equal to marginal cost as this price would give customers an accurate signal of the cost of providing the service and customers would buy efficiently.

The deadweight lossA monopoly causes deadweight losses. The deadweight loss is due to a monopoly firm setting its price above the marginal cost; it places a wedge between the consumer’s willingness to pay and the producers’ cost. The wedge causes the quantity to fall short of the social optimum. Refer to the triangle ABC in Figure 9.

To evaluate the welfare effects of monopoly, we can compare the level of output that the monopolist (ASTRO) chooses with the level of output a social planner would choose. The monopolist would choose to sell at an output where marginal-revenue and marginal cost will intersect whereas the social planner would choose an output where the demand curve intersects with the marginal cost curve.Figure 9: The inefficiency of monopolyIn Figure 9 above, ASTRO produces less than the socially efficient quantity of output. We can also view the inefficiency of monopoly in terms of ASTRO’s price.

Because the market demand curve describes a negative relationship between price and quantity, a quantity that is inefficiently low is equivalent to a price that is inefficiently high. When ASTRO charges a price above marginal cost, some potential customers value the service at more than its marginal cost but less than the ASTRO’s price. These customers do not end up buying the services. The value these customers place on the service is greater than the cost providing it thus resulting in inefficiency.

Therefore, monopoly pricing prevents some mutually beneficial trades from taking place. The area of the triangle ABC in Figure 9 is the area of the deadweight loss caused by monopoly. Because a monopoly exerts its market power by charging a price above the marginal cost, it places a similar wedge. The wedge causes the quantity sold to fall short of social optimum.

ASTRO gets the monopoly profit as shown in Figure 9.Is monopoly profit a social cost?Monopoly profit is not necessarily a society issue. Welfare in a monopolized market includes the welfare of both customers and ASTRO, the service provider. Whenever a customer pays an extra dollar to ASTRO because of monopoly pricing, the customer is worse-off by a dollar, whereas ASTRO is better-off by the same amount.

This transfer from customers to ASTRO of the monopoly does not affect the market’s total surplus. Therefore, the monopoly profit itself does not show shrinkage in the size of the economic pie.The issue in monopoly market arises when ASTRO provides or sells a quantity below the level that maximises total surplus. The dead weight loss, measures how much the economic pie shrinks as a result.

The inefficiency is linked to monopoly’s high price, thus customers buy fewer units when the firm raises its price above marginal cost. The issue is from the inefficiently low quantity of output.If the high monopoly price did not discourage some customers from buying itsservices, producer surplus will increase by exactly the same amount customer surplus is reduced, leaving total surplus unchanged. In the previous year ASTRO environment, when ASTRO raised its price, most customers still continued to subscribe to ASTRO causing reduction in customer surplus but increment in producer surplus.

This resulted in unchanged total surplus.If ASTRO has to incur additional costs to maintain its monopoly position (e.g. incurred by government, etc.

), the monopoly may use up some of its monopoly profits paying for these additional costs. If this is the case, the social loss from monopoly consists of both said additional costs incurred and deadweight loss resulting from price above marginal cost.Proposals for ASTRO in short and long termCurrently, ASTRO only has less than 40% of its potential customers. There is still room for expansion for potential customers from the lower income groups.

With its advantage of being a monopoly firm, ASTRO can develop market segmentation by introducing different packages to meet different affordability level of its potential customers. ASTRO can regroup some of its product packages into a much cheaper price to cover for lower income groups. Those “existing who are not buyers” will now buy these cheaper products thus reducing its inefficiency.However in the long term, when the government encourages more players in this field, ASTRO as a monopoly firm will soon face stiff competition.

ASTRO will lose some degree of monopoly power or ability to control price. ASTRO will need to take some pre-emptive measures. In order to retain competitiveness, ASTRO can step up pro-active action by product differentiation. Product differentiation can make its products more competitive and maintain its advantage and justification for a high price.

SHORT RUN AND LONG RUN PROFITSAs per Juliana’s research (2006), television was introduced to Malaysia in late 1963. The service provider was government-owned and used analoguetransmission. In late 1969, the government added another analogue transmission channel. Both government-owned channels are known as RTM1 and RTM2.

The introduction of Privatization Policy in 1984 brought about the establishment of TV3, the first private-owned analogue transmission channel, putting an end to twenty years of government monopoly of the television industry.ASTRO is making incremental profits and is a market leader in broadcasting industry as per Figure 10, the extract from Malaysian Communications and Multimedia Commission’s (MCMC) research. As analysed in ASTRO’s Annual Report 2012, Key Performance Indicator (Appendix 1), ASTRO enjoys the incremental revenue throughout the year 2011 to 2013. As per economist, firm makes short-run economic profit encourage new firms to enter to the market.

Appendix 1Competition in the pay-tv industry has emerged with the establishment of MiTV and FineTV in 2005. MiTV is leveraging on the low cost infrastructure of UHF and Internet technologies in developing a high-speed pay-tv service that allows optimal delivery of video, audio and data streams. FineTV is integrating information, education and entertainment together which is called home edutainment on view-on-demand basis (www.finetv.

com.my/what isfinetv.html). These two new entrants have broken 9 years of monopoly by ASTRO as the sole provider of digital subscription television in Malaysia.

On the other hand, the government approved three more private-owned channels in 1998, 2003 and 2004, namely NTV7, TV9 and 8TV. Malaysian television industry currently comprises of six Free-To-Air (FTA) channels which are using analogue transmission and three Pay-Tv digital transmission channels as shown in Figure 11. According to then Deputy Minister of the Ministry of Information, Datuk Zainuddin Maidin, the decision of approving the operation of 8TV was done on the basis of free market competition (Ekonomi, 25 Oktober 2003 as cited in Juliana’s research).Source: MCMC, Analysis of Adex Size and Trend in Malaysia Figure 10:Malaysian Television Industry The market share of television industry is being segregated by new entrants as the products offered are more diversified and Malaysians now have more choices.

Although ASTRO is a market leader of television industry (Figure 10), the competition in the industry has become more monopolistic. The rule for profit maximization of monopolistic competition in the short-run is the same as monopolist, whereby profit-maximizing quantity happened when marginal revenue equals to marginal cost. The price should be greater than average total cost as the firm makes profit and it is derived from demand curve which is consistent with profit-maximizing quantity. Figure 12 shows the cost, demand and marginal curves for monopolistically competitive and profit making firm in short-run.

Figure 11: Monopolistic Competition in Short Run – Firm Makes ProfitThe former Deputy Information Minister, Datuk Donald Lim announced that analogue television broadcast in Malaysia will be totally shut down by 2015. An estimated RM 1.34 billion will be spent to upgrade the service nationwide from 2006 onwards (The Star 28 September 2006 as cited in Juliana’s research). Malaysia’s free-to-air televisions are switching over from analogue to digital transmission as digitization has now become the driving force in global market as shown in Figure 13.

Thus, there will be no more analogue television stations available in Malaysian television market after 2015.Source: MCMC, Analysis of Adex Size and Trend in MalaysiaFigure 12: Analogue Television Shutdown ScheduleWith digitalization of free-to-air television in Malaysia, the public would have a choice not to pay and at the same time enjoy the benefits of digital television. Therefore, in the long run (after 2015), the demand curve for ASTRO and other incumbent pay-TV firms may shift to the left until the intersection of average total cost and marginal revenue as shown in Figure 14. This will determine the quantity to produce and price for making normal profit, i.

e. zero economic profit. The joining of free-to-air television in digital market will reduce demand of existing digital television services. As a result, the profit declines and marginal revenue shifts to left toreach the intersection of quantity for making normal profit with marginal cost (point B in Figure 14).

Eventually, long-run equilibrium is reached whereby price is equal to average total cost, and the firm earns zero economic profit as shown in Figure 15. The long-run profit maximizing quantity is consistent with the quantity to produce for making normal profit.Figure 13: Monopolistic Competition in Long Run – Demand and Marginal Revenue Curves Shift to LeftFigure 14: Monopolistic Competition in Long Run EquilibriumThe price effect disappears, leaving only the output effect in the long run. In this extreme case, each firm increases production as long as price is above marginal cost.

Therefore, ASTRO may sustain in the market through ways such as innovative, superb quality of services, diversified supply of programming, and localized international content and development of hybrid networks.AdvantagesDisadvantagesStability Annoying MonopoliesPay TV is (especially Cable TV) stable in its service. Both traditional air-wave broadcasts and modern satellite television can and will cut out during any serious storm (and often during some not-so-serious storms).Cable, on the other hand, will only go out if there is some flaw in the overall system, like a broken cable or router.

This will happen far less often than rainstorms, so cable television will provide far more consistent serviceMany areas only have traditional air-wave broadcasts television provider, and this creates a monopoly. While the competition from pay TV is increasing, the corporate culture of these monopolies is especially poor. Customer service can be terrible, if not non-existent in many cases, and consumer satisfaction with pay TV companies is consistently some of the worst among any companies throughout the globe. Bundling Confusing Price PackagesOften specials packages are available by bundling pay television with other services in a single package, usually internet, and phone and sometimes services like cellular phones.

These bundles can actually save you quite a bit of money, especially if you bundle all three typical services together. It also provides the convenience of having a single bill.Many cable companies are very confusing when it comes to how much their service will actually cost in the long run. Many require us to sign up for two years in order to get a one-year introductory deal.

However, we have to really dig on their websites to find out how much the second year will cost. In other cases, there are hidden fees, rental charges and taxes. Price PrivacyPay TV can actually be fairly inexpensive, if we do not add too many options. The initial hardware costs are fairly expensive when compared to traditional air-wave broadcasts.

As a result, pay television can be the cheapest form of television, telephone and internet provider.If we are bundling cable television with internet (as many people do), we will have less privacy on the internet. Cable internet works with a stable IP address that doesn’t change, so people will be able to easily track our visits to their sites. Compare this with DSL, where we can easily reset our IP by turning our modem on and off Figure 15: Pros and Cons table for Pay TVGovernment RegulationsWithin the Malaysian context, technology is seen by the Malaysian Government as one of the crucial elements for developing the country.

When television was first set up in the country, the two state-owned television stations were given a mandate to disseminate the ideology of the ruling elite, purportedly to help in developing the nation. Since then, television has undergone numerous changes – some genuine and some are merely cosmetic. With one state-owned terrestrial television station in the beginning and followed by the second television station in 1969, the ‘boom’ began in 1980s, with the introduction of the first private television station (1984), to the establishment of the first cable/pay television station (1996) and the introduction of satellite television (1996), all spurred by the government’s Privatization Policy and further intensified with the launch of the MSCproject.Government of Malaysia (GOM) abolished the TV license at the end of 1999 (http://en.

wikipedia.org/wiki/Television_licence) mainly to encourage foreign direct investment (FDI) by providing a number of incentives, particularly in export-oriented high-tech industries and “back office” service operations. The Ministry of Energy, Water, and Communications enforces broadcast content quotas on both radio and television programming. 80% of television programming must originate from local companies owned by bumiputera.

However, in practice, local stations have been granted substantial latitude in programming because of a lack of suitable local programming. (http://www.state.gov/e/eeb/ifd/2007/82336.

htm)Malaysia historical reputation for strict control of its media is a shackle to which it is still tied. However, Mahathir’s government is working towards removing this repressive image through policies such as universal IT access, self –regulation of the media, and incentives for international investment in the country’s technological infrastructure. As such, Vision 2020 strives to place Malaysia on a competitive world platform. ConclusionIn the current subscription-based television market in Malaysia, ASTRO is the undisputed monopoly firm and it has been riding on the back of this position since its inception by being able to dictate the prices for its services as well as the scope of its services without much negative impact on demand for its services.

However, the impending obligatory digitization of television services, the governments preference to opening up the market further, the emergence of competition in the form of new firms and new technologies, and the growing discontent among customers of the poor levels of service calls for attention. ASTRO should take advantage of its current position by listening for purposefully to the voice of its customers, and understand the needs and the wants of its customers in order to build on its brand loyalty. Furthermore, ASTRO needs to aggressively capture the remaining market share before competition starts gaining more room by revisiting its pricing models and enhancing its locally developed contents to keep costs low. Even though in future, the market will turn into an oligopoly, ASTRO will still be ableto stay in the lead if it proactively manages its costs, pricing and service levels.ReferencesExtract of Key Performance IndicatorsSource : RHB- ASTRO Annual Report 2013, Page 2 ; pg 7

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