Monday, January 21, 2008

Them Greedy Corporations

It troubles me greatly to think of the extent to which we ignore the technology available to us. The other day I was listening to a podcast (haha! triumphantly) that was talking about the absurdity of flying someone across the country for a meeting when one could just as easily use the phone, email, chat, or an array of other long distance communication devices.

Today I read this post from Seth Godin (marketing god) about the stone-age status quo of the movie rental business that is currently carrying over unnecessarily to the next generation of technology.

The movie studios are starting to get excited about renting movies digitally. The pricing seems to be modeled on Blockbuster. Figure $3 a rental, another buck or so for HD. That seems 'fair', because it's in the same range as we're used to.

But wait.

Blockbuster buys DVDs for $15 or $20. The studios have to pay for duplication and warehousing and marketing and they take a risk with every pressing that they'll have to shred the leftovers.

Blockbuster then rents them out 30 or 40 or more times each, meaning each rental costs Blockbuster fifty cents. Not to mention rent, surly clerks, cost of capital, advertising, etc. Or, in the case of Netflix, stamps.

In the case of online rentals, all of these intermediate costs immediately disappear. Gone.

So, why try to mimic the current model when it comes to pricing if the costs are mostly gone?

Echoes of the recording industry, to be sure. How can these multi billion (Billion. Buh. With a B) dollar markets ignore the possibilities of the latest technology? You'd think the impetus to innovate would be impossible to overlook.

1 comment:

Dave Foree said...

Ahhh, an economics-related question that I can't resist trying to answer:

There are only two possible reasons they'd charge $3 for digital rentals, I think. First, and most importantly, is that people are willing to pay it since the closest [current] competitor offers similar prices and less convenience (renting in the store/via mail).

Second is the possibility that something is acting as a barrier to entry for firms looking to offer even cheaper digital rentals. This could be large initial investment costs, large contract/licensing costs to use existing networks (like renting through Cox or Comcast services), or maybe some third party (like other studios) are somehow getting larger fees for digital licensing or some other crap like that...

I'm guessing it's a little bit of all-of-the-above, though.

Seth Godin's article mentioned:

"Then, once the new habit is set and you've earned permission, sure, charge more for new movies and for blockbusters."

I think he's got it backwards - once the habit is in place, the only way to charge a higher price would be to keep out competition for a long enough period of time. If you can keep out competition, though, there's no reason not to charge the high price in the first place. It's either a consistent high price, or high price first, low price later.

Long story short, I'd say you're right - They won't be able to ignore the possibilities with the latest technology for very long - it probably is impossible to overlook. If they do somehow maintain the high price, though, the only problem would be finding out which government-sponsored monopolies involved (...Cable companies, most likely...)