Remember $80 Movies?

by on September 29, 2006 · 24 comments

I’ve finished The Long Tail. Here’s a final point from the book that I liked.

He reminds us that in the early 80s, Hollywood priced the first generation of videotapes at about $75. The theory, he writes, was that this was what a typical family of five would spend on three or four visits to the theater. Obviously, in hindsight this was a stupid pricing strategy. Demand for movies turns out to be highly elastic, and you can sell a lot more movies at $15 or $20 than you can at $75–enough that total revenues go up as a result of the price cuts. Today, the sales and rental of DVDs is on par with movie tickets as a revenue source. Although it’s possible that charging a premium for a new technology made sense, it’s almost certain that the video market would have taken off faster if Hollywood had started out with prices at $30 or $40 instead of $75.

It seems to me that as the movie and music industries move into the digital age, they’re making the same mistakes. The music industry seems to think that 99 cents is unreasonably low. But I think the opposite is probably closer to the truth; demand for music, like the demand for movies, is likely to be highly elastic. If the music industry cut prices to 49 cents a song, a lot of existing customers would buy twice as many songs. Moreover, there are some people who are currently getting their music from illicit file-sharing networks, but would be enticed to buy from an online store at a lower price.

The same seems likely to be true with movies. Apple has priced movies at $10-15, in line with DVD prices. Other movie services seem to be converging on those price points as well. But without the production, distribution, and retail costs associated with shipping a plastic disc around, the marginal cost of getting a movie to consumers via the Internet is far less than $10. It’s likely that here, too, they’d sell a lot more movies for $5 than they would for $10.

I recommend Anderson’s book. It’s an entertaining read that’s packed with insights about the emerging long tail economy.

  • http://weblog.ipcentral.info/ Noel Le

    ***The music industry seems to think that 99 cents is unreasonably low. But I think the opposite is probably closer to the truth; demand for music, like the demand for movies, is likely to be highly elastic. If the music industry cut prices to 49 cents a song, a lot of existing customers would buy twice as many songs.***

    Hmmm. The issue of scale is relevant here. Dropping music downloads from $.99 to $.49 would not necessarily increase sales in the same way that dropping DVD prices from $75 to $15 did. Unless of course, Tim Lee is right, that the technology industries and consumers are hurtin. In this case, I’d say they’re really really hurtin if $.50 per music download is reason to buy more songs.

  • James Gattuso

    Tim — I can see lots of reasons demand would jump when prices are dropped from $75 to $15 dollars — that’s a major difference in pocket change. But a change from 99c to 49c might not make that much difference — its almost trivial. But in the end it’s an empirical question. It seems Apple and the music industry have every incentive in the world to work out the numbers to see what is best for them — I don’t think anyone has accused them of not being good at making money. I was wondering though if you have seen any figures on the elasticity for this sort of thing, or whether you are going by a gut feeling?

  • eric

    I might download a song for 99 cents if I knew the artist was getting more than 5 cents. But many artists do not get more than that. I also don’t like lossy files or DRM. Quality considerations are probably not a factor for most buyers, but DRM probably is or will be.

    Realistically, the choices are between free and 99 cents. That is the reason less than 5% of all songs downloaded on the internet are paid downloads. Obviously in this environment lower price will be an enticement. This is not rocket science.

    Even in the days of the VHS movie, the alternative was free. Wait until the movie plays on television, and tape it on your VCR. When videotapes cost $60, it was quite a motivation to tape your own copy for free, especially given the poor quality of even professionally duplicated tapes in those days.

    One may say it should not be like this, “piracy” ought not to exist as an alternative. But this is reality. Reality is that 99 cents versus free is not very appealing, especially when an artist like tha Allman Bros. makes less than five cents on a one dollar download. (Weird Al Yankovic also recently commented that he makes substantially more money per track from a CD purchase than a download.) On the other end of the scale, the alternative is buying a CD (lossless, no DRM) for $12-14 versus cheating the artist out of royalties by buying the album from iTunes (lossy, with DRM) at $9.99.

  • http://weblog.ipcentral.info/ Noel Le

    ***The music industry seems to think that 99 cents is unreasonably low. But I think the opposite is probably closer to the truth; demand for music, like the demand for movies, is likely to be highly elastic. If the music industry cut prices to 49 cents a song, a lot of existing customers would buy twice as many songs.***

    Hmmm. The issue of scale is relevant here. Dropping music downloads from $.99 to $.49 would not necessarily increase sales in the same way that dropping DVD prices from $75 to $15 did. Unless of course, Tim Lee is right, that the technology industries and consumers are hurtin. In this case, I’d say they’re really really hurtin if $.50 per music download is reason to buy more songs.

  • http://www.techliberation.com/ Tim Lee

    I’m mostly basing this on anecdotal evidence. But I think the example of eMusic is instructive. I spent $83.34 on CDs in the last 12 months before I subscribed to eMusic–about 10 albums for $5-10 each. Now, I pay $10/month for an eMusic subscription that lets me download the equivalent of 3 albums per month. So my cost per song has been cut roughly in half, and my spending has gone up about 50 percent.

    Obviously, I’m not necessarily a representative consumer. There are doubtless some consumer who will simply buy the same songs they would have bought otherwise and pocket the savings. On the other hand, as eric points out, there are likely to be a lot of people who can be enticed away from “free” services by a lower price point. If buying 200 songs costs $200, it might be worth the risks and hassles of peer-to-peer downloading to get them. On the other hand, if those 200 songs cost only $100, it might just not be worth the bother. It’s much easier to compete with free when your product is cheap.

    Anyway, you’re right that the market will ultimately decide, and it may very well prove me wrong.

  • James Gattuso

    Tim — I can see lots of reasons demand would jump when prices are dropped from $75 to $15 dollars — that’s a major difference in pocket change. But a change from 99c to 49c might not make that much difference — its almost trivial. But in the end it’s an empirical question. It seems Apple and the music industry have every incentive in the world to work out the numbers to see what is best for them — I don’t think anyone has accused them of not being good at making money. I was wondering though if you have seen any figures on the elasticity for this sort of thing, or whether you are going by a gut feeling?

  • eric

    I might download a song for 99 cents if I knew the artist was getting more than 5 cents. But many artists do not get more than that. I also don’t like lossy files or DRM. Quality considerations are probably not a factor for most buyers, but DRM probably is or will be.

    Realistically, the choices are between free and 99 cents. That is the reason less than 5% of all songs downloaded on the internet are paid downloads. Obviously in this environment lower price will be an enticement. This is not rocket science.

    Even in the days of the VHS movie, the alternative was free. Wait until the movie plays on television, and tape it on your VCR. When videotapes cost $60, it was quite a motivation to tape your own copy for free, especially given the poor quality of even professionally duplicated tapes in those days.

    One may say it should not be like this, “piracy” ought not to exist as an alternative. But this is reality. Reality is that 99 cents versus free is not very appealing, especially when an artist like tha Allman Bros. makes less than five cents on a one dollar download. (Weird Al Yankovic also recently commented that he makes substantially more money per track from a CD purchase than a download.) On the other end of the scale, the alternative is buying a CD (lossless, no DRM) for $12-14 versus cheating the artist out of royalties by buying the album from iTunes (lossy, with DRM) at $9.99.

  • James Gattuso

    You may be right as well, but I would think there is a lot more than anecdotal evidence of this sort of thing. And given the money being invested, I’d be shocked if the music industry didn’t have a lot of hard numbers on elasticity. That doesn’t mean they aren’t wrong, of course, but it’s in their interest to get this right.

  • http://www.techliberation.com/ Tim Lee

    It’s also possible that there’s a majors/indie split here. The majors have a lot of money to lose if they cut prices and don’t see increased demand as a result. Smaller labels, in contrast, have much less existing business to lose, and they’ve got the potential to use price cutting as a way to gain market share. So what we might see is the majors holding the 99 cent price point in the short term, but being forced to cut their prices in the longer-term to avoid losing too much market share to indy labels.

  • http://www.techliberation.com/ Tim Lee

    I’m mostly basing this on anecdotal evidence. But I think the example of eMusic is instructive. I spent $83.34 on CDs in the last 12 months before I subscribed to eMusic–about 10 albums for $5-10 each. Now, I pay $10/month for an eMusic subscription that lets me download the equivalent of 3 albums per month. So my cost per song has been cut roughly in half, and my spending has gone up about 50 percent.

    Obviously, I’m not necessarily a representative consumer. There are doubtless some consumer who will simply buy the same songs they would have bought otherwise and pocket the savings. On the other hand, as eric points out, there are likely to be a lot of people who can be enticed away from “free” services by a lower price point. If buying 200 songs costs $200, it might be worth the risks and hassles of peer-to-peer downloading to get them. On the other hand, if those 200 songs cost only $100, it might just not be worth the bother. It’s much easier to compete with free when your product is cheap.

    Anyway, you’re right that the market will ultimately decide, and it may very well prove me wrong.

  • James Gattuso

    You may be right as well, but I would think there is a lot more than anecdotal evidence of this sort of thing. And given the money being invested, I’d be shocked if the music industry didn’t have a lot of hard numbers on elasticity. That doesn’t mean they aren’t wrong, of course, but it’s in their interest to get this right.

  • http://enigmafoundry.wordpress.com/ enigma_foundry

    Hmmm. The issue of scale is relevant here. Dropping music downloads from $.99 to $.49 would not necessarily increase sales in the same way that dropping DVD prices from $75 to $15 did. Unless of course, Tim Lee is right, that the technology industries and consumers are hurtin. In this case, I’d say they’re really really hurtin if $.50 per music download is reason to buy more songs.

    Not at all. Things can cross the threshold of becoming an impulse purchase, and the revenue will dramatically increase.

    Look at http://www.allofmp3.com. The songs there are very resonably priced (most are about ten cents), and I bet their sales will take off and drive iTunes into the ground. The price of ten cents may not be sustainable, but I bet it stablizes at about a quarter a song.

  • http://weblog.ipcentral.info/ Noel Le

    Just curious. Of the services that currently offer $.49 songs, how are revenues compared to $.99 rivals. Are the music selections comparable?

  • http://www.techliberation.com/ Tim Lee

    It’s also possible that there’s a majors/indie split here. The majors have a lot of money to lose if they cut prices and don’t see increased demand as a result. Smaller labels, in contrast, have much less existing business to lose, and they’ve got the potential to use price cutting as a way to gain market share. So what we might see is the majors holding the 99 cent price point in the short term, but being forced to cut their prices in the longer-term to avoid losing too much market share to indy labels.

  • http://enigmafoundry.wordpress.com eee_eff

    Hmmm. The issue of scale is relevant here. Dropping music downloads from $.99 to $.49 would not necessarily increase sales in the same way that dropping DVD prices from $75 to $15 did. Unless of course, Tim Lee is right, that the technology industries and consumers are hurtin. In this case, I’d say they’re really really hurtin if $.50 per music download is reason to buy more songs.

    Not at all. Things can cross the threshold of becoming an impulse purchase, and the revenue will dramatically increase.

    Look at http://www.allofmp3.com. The songs there are very resonably priced (most are about ten cents), and I bet their sales will take off and drive iTunes into the ground. The price of ten cents may not be sustainable, but I bet it stablizes at about a quarter a song.

  • http://weblog.ipcentral.info/ Noel Le

    Just curious. Of the services that currently offer $.49 songs, how are revenues compared to $.99 rivals. Are the music selections comparable?

  • http://www.movingtofreedom.org Scott Carpenter

    I think price the songs even lower yet and you’d see people treating them more disposably. At a quarter, people might not bother keeping track of their songs as closely, and the music industry might see multiple sales to the same person.

    Of course, the RIAA would ultimately like a solution where you pay every time you listen, but I’m talking about an outright sale without DRM.

    I suppose there’s a chance that if someone lost a song they’d just copy it for free the next time, reasoning that they already paid for it, but if music was cheap and easy to get legally, I don’t think the illegal file-sharing networks would be so robust for providing a replacement. It’s a lot of work to get free music today, what with the searching and the verifying of quality and the labelling and all.

  • http://www.movingtofreedom.org Scott Carpenter

    I think price the songs even lower yet and you’d see people treating them more disposably. At a quarter, people might not bother keeping track of their songs as closely, and the music industry might see multiple sales to the same person.

    Of course, the RIAA would ultimately like a solution where you pay every time you listen, but I’m talking about an outright sale without DRM.

    I suppose there’s a chance that if someone lost a song they’d just copy it for free the next time, reasoning that they already paid for it, but if music was cheap and easy to get legally, I don’t think the illegal file-sharing networks would be so robust for providing a replacement. It’s a lot of work to get free music today, what with the searching and the verifying of quality and the labelling and all.

  • ramster

    I know my experience with allofmp3.com is that I buy songs willy nilly, frequently on a whim. I don’t buy 99 cent songs for three reasons (i) the price point makes me much less willing to take a flier on something I’m not sure I’d like (ii) even if I do like something, it just seems too expensive given the lower distribution costs (i.e. no retail stores) and the fact that I pay for my internet access (it just feels like a rip-off at 99 cents) and (iii) DRM. I want any music that I paid for to be mine for a lifetime (or at least 10 years-ish…I have many 10 year old CDs), during which time I may have many music players (iPod, my phone or something else) and many computers (Macs, PCs, whatever). I agree that the allofmp3 price is too low but I like 25 cents. I’d be willing to go up to 50 cents for impulse buys. that may be the sweet spot (less if it’s DRM crippled).

    p.s. as far as the ability of certain DRM schemes to allow you to move your music to different PCs or music players, color me skeptical. Last year, I bought a PDF book for about $150 (it was for work so luckily I didn’t pay for it myself). When Adobe Acrobat upgraded, it stopped working. The vendor was useless but I eventually managed to get it working by rewinding my version of Acrobat. DRM is just too brittle, no matter what they say.

  • ramster

    I know my experience with allofmp3.com is that I buy songs willy nilly, frequently on a whim. I don’t buy 99 cent songs for three reasons (i) the price point makes me much less willing to take a flier on something I’m not sure I’d like (ii) even if I do like something, it just seems too expensive given the lower distribution costs (i.e. no retail stores) and the fact that I pay for my internet access (it just feels like a rip-off at 99 cents) and (iii) DRM. I want any music that I paid for to be mine for a lifetime (or at least 10 years-ish…I have many 10 year old CDs), during which time I may have many music players (iPod, my phone or something else) and many computers (Macs, PCs, whatever). I agree that the allofmp3 price is too low but I like 25 cents. I’d be willing to go up to 50 cents for impulse buys. that may be the sweet spot (less if it’s DRM crippled).

    p.s. as far as the ability of certain DRM schemes to allow you to move your music to different PCs or music players, color me skeptical. Last year, I bought a PDF book for about $150 (it was for work so luckily I didn’t pay for it myself). When Adobe Acrobat upgraded, it stopped working. The vendor was useless but I eventually managed to get it working by rewinding my version of Acrobat. DRM is just too brittle, no matter what they say.

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