Information Wants To Be Half Price
If you haven’t heard already, Steve Jobs is expected to announce on Monday that iTunes will begin offering 24-hour movie rental for $4. This is widely reported not just by traditional rumor sites, but by people like Salon. And, by and large, people have been complaining about the price. Including me. Digging deeper, I have an armchair economist answer as to why this price feels wrong.
I am a long time Netflix customer and former Netflix shareholder. I got out of the stock because I don’t think they are positioned to win in online-rentals. The recent announcement with LG about a set-top box might help, but it’s far from a solution. Right now, customers have yet to find a business model they really like. And so companies are serving up a wide variety of business models, hoping to find one that works. As a result, we are in a tornado of different pricing and contract terms. Now Apple, who has gotten this right before, has thrown their hat in.
The goal with all these different business models is for the company to make as much money as possible. Company bosses are likely to see the price of their brick and mortar competition as a baseline. Ideally, they would like to charge more. They provide additional convenience, they say. Ticketmaster is a success story here, charging additional fees for purchasing online. But they sell one of the remaining actually-scarce goods, tickets to live shows in capacity-limited venues. And they are an effective monopoly. And everyone hates them. An online movie provider cannot win by charging extra for convenience.
Customers don’t accept the brick and mortar price as the right base price. For customers, the base price is free. And claims of convenience fall on deaf ears. It’s quite often more convenient to steal films than to acquire them legitimately online (bad websites, DRM software, advertising). Advertising models might work for older content, but not for big-budget Hollywood films. An online movie provider cannot win (or stay in business) pricing at free.
This leaves frustrated customers and frustrated industry players. Taking a page from Getting to Yes, I went looking for objective criteria to decide the fair price for digital movie rental, based on the current market price for retail movie rental, and the differences that result from going online. I’m going to assume that contract terms will be achieved that for most customers are equivalent to retail rental, and that a software/player stack will be created that offers sufficient convenience.
Customers currently pay about $4 to rent a movie at Blockbuster. But there are a number of additional components of the cost to consumers, beyond simple price. Important components are:
- $4 in cash
- Travel costs to get to the store
- Risk that they won’t have the movie
- Risk that something else will come up between the time you rent and the time you watch
- Risk that the disc will be damaged
- Risk that the pimply-faced-youth will frustrate you with incompetence
As you can see, most of these costs are removed by the convenience of the online rental. “Great,” says Hollywood et al, “we can charge them more and capture all the value.” Well, hold on a second. Let’s look at the costs to the rental store:
- Cost of acquiring the rights and media for films that get rented
- Cost of films that don’t get rented
- Cost of floor space, fixtures, bricks, mortar
- Wages of pimply-faced-youth
As you can see, many of those costs are lower too. “Great,” say customers, “we should get access to more movies more easily for less money.” Ah, a classic two-party negotiation just waiting to have objective criteria applied.
Pricing is about supply and demand. Pricing is about finding a market-clearing price, where there are equal numbers of buying and sellers at that price, so all goods change hands, and both profit and utility are maximized. At least that’s what I learned in Econ 101.
Soft-costs of buying are reduced for buyers. This means that at every price point (lower and higher than $4), there will be more buyers. Production costs are also reduced. So there should also be more supply at every price point.
That means that if the market were working properly, prices would go down, and consumers would be happily buying more of a better product. Instead, prices are staying high, products aren’t better yet, and consumers are getting frustrated and opting out of the whole thing.
The punch line is that on the internet, information doesn’t need to be free, as Stewart Brand claimed. People are willing to pay. But in the mind of consumers, when you remove the overhead of moving about physical goods, and you are trying to set a fair price, Information Wants to be Half Price.