The Music and Movie industries are across a major transformation. The technological disruption brought by Internet and Mp3 requires a sharp disruption in their business model too.
In the past, consumers were hostages of labels and studios, that were able to set the price for CD albums and DVD films well above what consumers would have liked to pay for the content. Consumers accepted those prices only because CDs and DVDs were the only means to get the content, and we were taught by labels and studios that these supports were that expensive. This is why CDs and DVDs were initially much more expensive than vinyls and videotapes.
Now Internet (P2P) and digital encoding (mp3, aac, XviD, h264) enable virtually no-cost distribution of music and films, without the need of physical costly discs. This is a fact that the Music and Movie industries need to make work in their favour (and in consumer’s), instead of fighting against it.
One of the things they are not getting right is pricing for the new model of downloads and rentals.
Labels and studios compare the price of downloads with that of Audio CDs and DVDs, without realizing that consumers never paid that price because they considered it fair, but only because that was the only option. With almost no cost and no intermediaries compared to CD or rental DVD model, why do they insist on a price that seems unfair to end-user and encourage piracy?
For years consumer electronics companies and telcos have used the “peel-the-onion” principle to price innovations. e.g. the first mobile phones were terribly expensive and targeted the richest executive segment, so that telcos could optimize margins on an initially scarce number of handsets. As bigger volumes of phones are available, the price is reduced only to address the next segment. Similarly, Plasma/LCD are reaching the masses once the manufacturing economies of scale enable a lower cost for the physical goods.
Music and Movie industry sell digital content and do not have the limitation of scarce physical resources. Therefore, it does not make sense to peel-the-onion. They should be targeting the widest possible audience, as users already have all the infrastructure (PC, Broadband, iPod) required for the new distribution model.
Seth Godin provides wise advice to movie studios on how to approach the on-line movie rentals market in his post How much of digital? Seth says “…the market is too small right now for the price to matter. What matters is whether you can build an audience that is in the habit of paying you, an audience that wants to hear from you, an audience that you can build a business on“. Seth suggest a price of 50 cents per rental, enough to establish a pay-content behavior and low enough to develop a wide audience and discourage piracy. Once the user behavior is established, prices for blockbusters or new titles could command a premium.
There are better ways forward for the entertainment industry, other than taking customers to court. They just need to accept the industry is going through a major disruption, and act.