Commercial Success Through Commercials? Advertising and Pay-TV Operators

Abstract

The U.S. pay television service market was dominated by cable operators until the nationwide entry of satellite operators in the early 1990s. The latter have been consistently growing their footprints since. This study documents the role of television advertising to explain satellite operators’ success. Using data on U.S. households’ subscription choices and operators’ advertising decisions, the authors document both demand- and supply-side conditions conducive to the growth of the satellite operators. First, the authors find that consumers in this market were sensitive to advertising, and especially so to that of the satellite operators (ad elasticities of about .05–.06 for satellite operators vs. .02 for cable operators). The authors employ a border strategy to demonstrate advertising-elastic demand and discuss its robustness to potential threats to identification. Second, the authors provide suggestive evidence that a form of asymmetric cost efficiencies in television advertising benefited the entrants more than the incumbents. Specifically, the unit costs of local advertising tend to be higher than those of national advertising, which likely allowed the satellite operators to better leverage their national presence with (cheaper) national advertising. Overall, this study highlights the interaction between advertising efficiencies and the scale of entry in explaining the competition between market incumbents and entrants.