Movies on itunes: a simple digital media proposal

As I predicted would happen quite some time ago now, the Internet has finally reached the point where you can now download movies legitimately on it. Through both Amazon's and iTunes's movie service, anyone with a high speed internet connection can download movies for a nominal fee between $9.99 and $19.99 (with most of iTunes falling in the $14.99 range).

While this is solid step in the right direction, my question is who will spend their money for this when you can buy the DVD for the same price? I offer this alternative, and having no idea the feasibility of it, can only hope it's rational enough that maybe the idea catches on.

In order to appreciate fully my perspective and idea, however, let me take a moment to speculate on where I see the state of home entertainment over the next 5-7 years. By 2015, I suspect that Comcast will be broken up as a monopoly or at least be seriously challenged, and what we know now as Comcast's on-demand library will be essentially expanded ten-fold and probably working in conjunction with one or both of the Microsoft and Apple companies. All homes in metropolitan areas exceeding 100k in population will have wireless hubs, and 85-90% of all households generally will have high speed internet because it will be run through the electric lines. As a result of the latter, all of the DSL companies will be pretty much dogs in the marketing world and looking to reorganize under Chapter 11. Cell phone bills will still be expensive, but more regulated in part thanks to an extensive energy reworking bill passed two years earlier.

To reach this entertainment utopia in 5-7 years, online companies will obviously have to confront the piracy issue. I believe the problem can be solved rather simply by applying simple supply and demand principles. Most people who will saturate this particular market won't really see the costs since they can easily be built in as part of a unified electric/cable bill. Alternatively, if they are paying $20-30/month for the service, they have no economic motivation to give away for free what they have paid for. And realistically, the widespread availability (supply) would act to deter the demand for piracy anyway. Who would download something of an inferior quality when you can get superior quality also for free just as easily by the push of a button? The movie industry analysts would also want to endorse such a download system because it provides a means to better analyze demographics and real numbers. Obviously this is a bargaining chip the online streaming/distributing companies (itunes, Amazon, etc.) have to play with.

Most importantly, my idea rests on the assumption that the digital video craze will probably reach its apex once 95% of television shows are available on one or both of the sites, and I suspect this will take a mere 5-7 more years. Based on Napster's peak and itunes's initial successes and market dominance, I suspect the mature phase of digital internet media will begin by 2010 or 2011. I would also imagine by then, Apple's iTV or Microsoft's equivalent (think Xbox, but bigger) will be pretty commonplace. Back on point.

Because the market accepts songs costing about a dollar each to download (approx. $10/album) and seemingly accepts purchasing tv shows (roughly 1/4 of the length of movies) at about $2 each, I pose that the optimum price that the market is willing to pay to own a purely digital movie approximates four to six times the price of a single televion show, or $9.99 (7.99/11.99 low/high). That being said, the optimum price the market would pay for a rented video seems to hover around $4 (based on-demand's and blockbuster's oligarchic/monopolistic prices). If, at best, a person is willing to devote his or her time to five movies a month on average ($20/month), the probability of an online merchant attempting to exceed this amount will be low if they attempt to sell one or two digital videos at $10-20 each.

How, then, can you reach $X in profit (assumed to be higher than $20/month/person based on the current videos priced as they are) where the average consumer is really only willing to spend roughly $20 a month on digital media. The answer, I pose, can only be reached through either lowering prices (an idea the movie studio industry obviously has cringed at (for no good reason honestly)), or developing some sort of streaming rental access system (i.e., something like a Comcast on-demand online with a virtually unlimited library). With some sort of per-rental fee or monthly service fee plus, you can probably capture Netflix's market pretty easily and may even begin to cut into HBO & the other pay channels' revenue streams. Purchasing anything in this library is optional, and of course, would be extra. A per-rental could easily exceed the $20/month fixed estimate, and should be favored over some sort of packaged rental fee because in order to stay competitive with Net Flix & its equivalent, you would need to probably keep the monthly rate close to theirs.

The online digital streaming rental system will work. Ask anyone who watches reruns of movies and/or tv shows on their dvd player or vcr and you will hear responses along the lines of the following: The owner doesn't watch them that often, but it's nice to be able to pull out a tape or dvd of something he or she hasn't seen in a while. The same concept easily applies for these online digital video libraries, but instead of having it take up space on your computer or room in your living room, you can easily access it at any point on demand.

The trick with all of this is being able to stream it in such a way that it buffers to your computer completely such that it doesn't skip or skritch or whatever. I am sure the video stream file can be compressed in such a way that its quality is good enough and fast enough, but not so good or fast enough that it is worth keeping (and if you can access it again at your leisure, why would you bother?). And, as I suggested, if it is worth keeping, these companies can easily provide a more expensive, larger, and more permanent file to download or they will purchase the DVD. The way I look at it, people already borrow DVDs and movies from their friends and yet they still sometimes they buy them for themselves. That certainly wouldn't change by this proposal.

My idea may be easier explained in concrete terms. Say, for example, I really liked the Joey Heric (played by John Larroquette) episodes of the Practice. The episodes featuring this character are Betrayal (Season 2), Another Day (Season 2), Checkmate (Season 2), and The Return of Joey Heric (Season 5). And let's throw in The Case of Harlan Basset (Season 6) to complete my list. Eventually this show will get on iTunes and I will be able to download permanently these episodes at my leisure for a mere $2/episode. Presumably, I imagine, if I wanted to get an entire season (say, Season 8), under current market conditions, they will charge me $2/episode and this will roughly translate to the DVD price if I were to buy the entire season. From the viewpoint of a rational consumer, if I wanted to buy the whole season, I would buy the DVD, and if I wanted one or two episodes, I would download them individually. The equivalent of this for digital movie purchases would be to download scenes, and obviously therein lies the rub.

But, if you think of movies not individually but in sets, the concept doesn't seem as far fetched. Obviously stores sell in bundles all the time on the premise that people believe they are getting a bargain (and often times they are, but from the store's perspective it's easier to get rid of something crappy when you stuff it in between two things that are good). So you could buy Rocky, for example, and it would cost $14.99 or whatever, but if you buy Rocky II, III, and IV, you would be forced to buy Rocky V, and the price for all could drops to the $7.99-9.99/per video range I mentioned earlier. You wouldn't even have to bundle them in such sets like that - you could arrange by actor, genre, whatever. That is certainly one method of getting the price down and increasing net sales past that $20-30/month/consumer range.

The other method, I believe, would accomplish the same goal and could be fashioned in such a way to drive online digital rentals/purchases. For any rental of a movie just released on DVD, which is typically not available on pay-per-view for a couple of months, you could probably get away with a $5-6 rental, and a certain percentage of the market will dive at it just to be able to talk about something in front of the water cooler. The purchase price would be commensurate with the DVD price at this point, or you could even block rentals of these movies and they would only be available to purchase and that may work also.

After this short period, however, competition with pay-per-view would kick in, and the rental price would have to drop to the $4/rental stage (purchase price could also drop to the $9.99-14.99 mark). You could probably adhere to that rental structure for all movies released within the past year (perhaps two years wouldn't be too much of a stretch). For movies two years old or older, the rental fee would be a flat $2/rental (and purchase price could fall to the $7.99-12.99 stage depending on the bundle strategy). This price matches the television show rental price, which would make sense since by this time, the movie may be appearing on basic cable or network television.

As Amazon does with purchases, these online companies can easily monitor purchase behavior and tailor recommendations, and I suspect that the entertainment industry could also use the data to speculate on what the market wants in a new movie. Perhaps the side effect would be that Hollywood would stop producing such crap, but that may be a wish for the 10-20 year time frame.

I don't think this idea is anything new, but I think it has merit enough to at least raise an eyebrow for the entertainment and computer geniuses working for these companies. And I'm not sure how you can get the files so you would have access to them for a certain amount of time or whatever, but that's not the point of this proposal. At the very least, executives at these companies have to realize (if they haven't already) that the mySpace and YouTube and Napster generation is getting into that much more key 24-36 marketing demographic (as opposed to the poor income folks just starting off their lives at 18-23 or not-quite-understanding-of-the-internet minded generation at 37-54). This demographic, I pose, is willing to sacrifice DVD quality for the computer quality (and in 5-7 years, they may be one and the same), but such a sacrifice must be met with a commensurate drop in price. Otherwise, the potential for a napster like program (e.g., torrents) to cut into your profits amplifies.

My prediction is that the current online digital prices will act in such a way that it will appear to not be economically feasible to continue the program. I offer this proposal as an alternative to abandonment because I strongly believe that, marketed slightly differently, it can be tremendously successful. But, on the other hand, this proposal is online in a blog, so you may want to spend some money researching my ideas a little further so the higher ups don't start swinging axes. For what it's worth...

Tags: itunes, digital video, digital media download, digital marketing