The Fashion Channel Case QUESTION 1: INTERPRETING CONSUMER AND MARKET DATA

To organize and interpret data, the Aakers Strategic Analysis will be used.

1.1.

Internal Analysis

Performance analysis - TFCs revenue for 2006 was forecast at $310.6 million, with $80 million (25.8%) coming from affiliate fees and $230.6 million (74.2%) from ad sales. TFCs average rating was 1.0%, thus with 110 million television households in the US this meant that on overage 1.1 million people were watching at any point in time. The average CPM was $2.00. Total expenses for 2006 were $216.9 million, with a total net income of $93.7 million. Determinants of strategic options TFCs point of difference is that its the only network dedicated exclusively to fashion, with up-to-date and entertaining features and information broadcast 24/7. It was also one of the most widely available niche networks, reaching almost 80 million U.S. households. The weakness of TFC was that the network did not have much detailed information about its viewers, neither did it try to market to any viewer segments in particular. TFCs theme for its marketing programs was Fashion for Everyone. So there is no detailed segmentation, branding, or positioning strategy, but instead, its strategy was to appeal to as broad a group as possible in order to achieve the highest possible viewership numbers. TFC had on average 1.1 million people watching at any point in time and were very successful channel. For the new strategy, the company would be spending more than $60 million in all national and affiliate advertising, promotion, and public relations in 2007. This would be an increase of $15 million over 2006 spending.

1.2.

External Analysis

Customer Analysis - There are four unique groups of consumers who had common attitudes and needs; Fashionistas, Planners & Shoppers, Situationalists, and Basics. The smallest group, The Fashionistas, had the highest degree of interest in fashion. Most of the male interest takes place in the Basics cluster, the least likely to be engaged with TFCs content. Also, results from GFEs panel survey of consumers shows that consumers like to watch special TV programs on current fashion (65%), and to shop for clothes for parties and special activities (61%), like sports and hobbies (55%), and television reports on fashion for special occasions (55%). Also, 55% of the consumers find watching fashion programs on television entertaining. For TFC, 58% of the customers think that TFC is the best place on television for fashion information. Women between 35 and 54 years were its most avid viewers. TFC was positioned as a basic channel in cable packages, so most consumers received it automatically when they signed up for basic cable service. Competitor Analysis - More networks added fashion-related programming to their line-ups, causing new competitive dynamics. Lifetime and CNN had launched fashion-specific programmings that were achieving notable ratings. Lifetime is taking away a lot of ad buys from TFC because theyre attracting younger female demographics. CNN is starting to deliver some
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great programming on men. Both of these segments can be sold for a premium CPM. On a scale of 1 to 5, TFC had achieved a 3.8 rating on consumer interest in viewing, while CNN had scored 4.3 and Lifetime a 4.5. On awareness, TFC had scored 4.1, while CNN scored 4.6 and Lifetime a 4.5. On perceived value TFC was 3.7, CNN 4.1 and Lifetime 4.4. For TFC: The strong fashion programming blocks on Lifetime and CNN is a double-edged competitive challenge. TFC was facing competition that could provide more choices to both viewers and advertisers. Also, if the fashion programs appear to be successful, more networks would likely copy the concept, taking more viewers and ad dollars from TFC. The ratings of consumer interest in viewing, awareness, and perceived value showed that TFC was facing further competitive challenges in its attractiveness to cable affiliates. Although TFC had scored above the midpoint, these data implied that it was lagging behind two key networks that were now offering competitive programming. If the network keeps underperforming compared to competitors, it risks losing ad sales and being taken out of the cables basic service. Market & Environmental Analysis - US advertisers spent almost $20 billion buying spots on cable networks such as TFC. Because there are several hundred cable networks, competition for ad revenue was always fierce across the networks. The ad buyer was most interested in buying ratings and demographics, and less interested in specific programming subjects. The ad market was dynamic and market pricing moved up and down frequently, as advertisers developed new campaigns that required television support. The advertising buying process had also become very sophisticated; they monitored number of viewers, the audience characteristics and general competitive trends and they evaluated networks on their ability to deliver specific target groups. Advertisers would pay a premium CPM to reach certain groups, which are men of all ages and women aged 18-34. Cable operators would also carefully monitor customer satisfaction with network offerings and would drop unpopular channels. For TFC: TFC had time slots of a total of 2.106 minutes per week for advertisers and TFCs ad sales team could achieve CPM pricing increase from 25% -75%. For TFC, the negotiated affiliate fee averaged $1.00 per subscriber per year. The fee was fully paid on the basis of carriage and did not go up or down as viewership changed. The network had already achieved virtually full penetration of available cable households and there was limited opportunity to raise fees. Thus, the drivers of revenue growth would be (1) increased viewership, and (2) increased advertising pricing. TFC could increase CPM by increasing women aged 18-34 and men,

QUESTION 2: RECOMMENDATIONS OF STRATEGIC COURSE

Wheeler presents three different scenarios in this case, each involving a different approach: In Scenario 1, the audience mix remains the same, namely the Fashionistas, Planners&Shoppers, and Situationalists. The advantage of this strategy is that the ratings will be boosted from 1.0% to 1.2%, which will increase ad revenue. The disadvantages are that the average CPM drops 10% from $2.00 to $1.80 because advertisers needs are satisfied less effectively due to the lack of specificity of the target group. This also results in the lowest net income compared to the other scenarios. Also, fully 50% of this broader group is either disengaged or shopping for specific needs; its hard to create loyalty towards TFC in these subgroups. Because marketing and advertising campaign may encourage these audiences to tune

in, they will not remain steady viewers. Under this scenario, TFC cannot differentiate enough to effectively compete with the increasing competitors and this scenario is not recommended. Scenario 2 focuses only on the Fashionistas, which is the smallest segment (15%). The advantage is that this group is very valuable for advertisers, because a large part of its viewers are females aged 18-34 years old. This is why CPM would increase from $2.00 to $3.50. This target group could also differentiate TFC from its competitors and it can create great brand loyalty within this group. On the downside, the average rating would decrease from 1.0% to 0.8%. Also, the overall popularity of the channel could drop among all viewers, and the risk of being taken out of the channels basic service due to the low ratings increases, which in turn declines TFCs reach of viewers. Thus, although this scenario has the highest CPM rate, it complies also a high risk, whereas the revenue is only medium compared to the other scenarios. So this scenario is also not recommended. Scenario 3 targets the Fashionistas and the Planners & Shoppers, which represents 50% of the total viewership. This strategy will drive ratings up to 1.2%, which is the same as Scenario 1. Differently from Scenario 1 is that it also increases CPM to $2.50. Thus, under this scenario, both ratings and CPM increases. Another advantage is that these segments have a high percentage of young female audience (18-34) and they are interested and highly engaged in fashion. Theres a great opportunity for brand loyalty within these groups. The disadvantage of this scenario is that the target group may have less differentiation power compared to Scenario 2, which is shown in the difference in CPM ($2.50 versus $3.50). However, this scenario has the highest ad revenue ($345.9 million) and net income ($168.8 million) of the three considered scenarios. Although Scenario 2 (Fashionistas) creates a very unique positioning and it is high in CPM, it is also very risky. This target is only 15% of total TV household in the US and a decrease in ratings could greatly increase the risk of being dropped out of the cables basic service, which in turn decreases TFCs reach of viewers. Although there is no growth opportunity in affiliate fees, it is still important to keep the cable companies satisfied. Also, advertisers do not only look at the viewers characteristics, they also take into account the number of viewers. Thus, a lower than expected rating could put TFC in a dangerous position where it could lose its cable affiliate fees, and in turn lose revenues from ad sales. Scenario 3 targets a broader group than Scenario 2 (Fashionistas, Planners & Shoppers), but it is still a differentiating point for TFC since this upper 50% of the total TV household is very into fashion and value being up-to-date in fashion. So in this case, TFC could still focus on the Fashionistas, while retaining the Planners& Shoppers as well. Thus, it could pursue a differentiation strategy while still keeping the risk relatively low. If we were Dana Wheeler, we would suggest TFC to follow Scenario 3 as the new positioning strategy, which targets both the Fashionistas, and Planners & Shoppers. Both groups consist of extremely engaged viewers with a high number of highly-valued demographic age of 18-34, which increase CPM price by 25% to $2.50. Although the increased programming spending cost is the highest for this scenario, the potential returns are the highest and it overrules the costs. In addition, TFC reduces some risk by choosing two key segments instead of focusing its whole budget on one very small, specialized group. Thus, the danger of not meeting projected revenues or losing cable distribution support due to a loss of ratings significantly decreases. Also, with Scenario 3 TFC could change its identity as a very specialized provider of fashion instead of appealing to the masses, while not having the risk of a too small and specialized segment.
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Finally, although TFC have to spend the most for programming on Scenario 3, the channel would also see the highest % margin increase of 39% caused by a combination of increased ratings and increased CPM. We believe that this Scenario is a challenging one with high potential, with opportunities to differentiate itself and create brand loyalty within its segment, without upsetting the cable providers and with more viewer ratings to appeal to the advertisers.