The Impact Of Macroeconomic Variables On The Telecommunication Industry

Running head: ENVIORONMENTAL ANALYSIS

The Impact of Macroeconomic Variables on the Telecommunication Industry

University of Phoenix

MBA 501

Forces Influencing Business in the 21st Century

January 22, 2007

Introduction

The intent of this paper is to perform an analysis of the cable industry's external environment. The first sections of the document will discuss environmental scanning and define the telecommunication niche that is currently occupied by cable operators such as Comcast. The next section will identify the macroeconomic variables that currently impact cable operators and will compare two variables to two corresponding industry variables. The final section of the paper will identify some of the challenges and opportunities facing the industry. An external analysis of the industry will provide a clear picture of the environment as well as any opportunities and threats faced by Comcast. By understanding the environment, opportunities and threats a company has the ability to create strategies to support its business goals. The primary process by which Comcast will gain an understanding of its external environment is environmental scanning.

Environmental scanning

Environmental scanning "is the acquisition and use of information about events, trends, and relationships in an organization's external environment, the knowledge of which would assist management in planning the organization's future course of action." Choo (2001) As explained by Gazzale (2007) all businesses external environment are made up of three facets ": 1) the remote environment (macroeconomic factors including inflation, GDP, interest rates, etc.), 2) the industry environment (barriers to entry, the level of competition within the industry, etc.), and 3) the operating environment (the business's customers, suppliers, and workforce, etc.).

Telecommunications Industry (Cable)

Comcast Cable is part of the telecommunication industry which is defined as "extension of communication over a distance. In practice it also recognizes that something may be lost in the process; hence the term 'telecommunication' covers all forms of distance and/or conversion of the original communications, including radio, telegraphy, television, telephony, data communication and computer networking." Anonymous, (2007). "The US's premier operator in the broadcasting & cable TV market is Comcast. Its 2005 revenues of $22.3 billion places it firmly at the top of the sector; while the company attributes revenue growth of 9.6% to the business innovations which Comcast is deploying in the search for new revenues." University of Phoenix (2007) While Comcast provides many different types of services and products this paper will concentrate on one of its primary services which is cable operations, as defined by the North American Industry Classification System (NAICS); code 517500 Cable and other program Distribution. "This industry comprises establishments primarily engaged as third-party distribution systems for broadcast programming. The establishments of this industry deliver visual, aural, or textual programming received from cable networks, local television stations, or radio networks to consumers via cable or direct-to-home satellite systems on a subscription or fee basis. These establishments do not generally originate programming material." NAICS (2007)

Macroeconomic variables that affect the cable industry

Some of the macroeconomic variables that impact the cable industry are gross domestic product (GDP), inflation, trade, interest rates and unemployment. GDP is defined as "the market value of all goods and services produced in an economy." McConnell, Brue (2004) pg 92 Increases in the GDP is a strong indicator of positive economic growth. Positive economic growth puts more disposable income in hands of consumers which allows consumers to dedicate more of their income to entrainment. The opposite is true if GDP is flat or shrinking consumers have less disposable income. As this disposable income decreases consumers become more selective in how they spend their entrainment dollar. These changes in disposable income impacts the cable industry's subscriber numbers through subscriber churn (subscriber leaving) and premium services churn (dropping and adding premium services), these changes are reflected in revenue stream which in turn affects the market value of the cable operators.

Inflation the "general increase in the level of prices" McConnell, Brue (2004) pg 82 is one of the macroeconomic variables that directly impacts the revenue stream of cable operators. Like most industries that maintain fleets of vehicle the escalating cost of fuel has an immediate impact on the bottom line. As a service providers and the owner of the infrastructure one of our largest costs is related to the installation of our services and hardware. In most cases after a new customer orders service the company rolls a truck. A truck roll requires that a technician is scheduled to drive to the customers home, connect their home to our plant, install the ordered product into the customers home, activate the product and do onsite training of the customer. The escalating cost of fuel directly increases the cost of truck rolls which depending on installer status (employee or contractor) is on average a $150.00. In most cases the company does not charge an install fee for this truck roll so the cost is added to the ROI (Return on Investment) that is calculated for each customer. Interest rates also have a profound impact on the cable industry, there are huge investment in property such as data centers, call center, head ends, uplink facilities, office space and satellites. Like all business the majority of this property was acquired through the use of loans.

Unemployment is also a macroeconomic variable that affects the cable industry but does not seem to follow the national trends. As the cable industry has matured many operators realized growth through mergers and acquisitions. In many newly forming companies there was a duplication of head count usually at the divisional level and corporate levels. This duplication actually caused a form of structural unemployment among the people at the divisional