Remember $80 Movies?

by on September 29, 2006

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.

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