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iTunes’ Content Pricing Not in Crisis

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Daniel Eran Dilger
Apple critics have been working to push the idea that the company’s pricing models in iTunes are in trouble and that HBO’s recent deal to sell shows for $2.99 per episode will cause a stampede toward untenably higher pricing. They’re wrong, here’s why.


Pricing Content to Sell.
Apple has worked to keep iTunes’ prices simple and affordable. As a retailer, Apple sets its own prices in iTunes, but it still has to negotiate for wholesale deals on content that’s only available from a single source: it can’t get NBC’s TV programing from Fox.

That means the labels and studios have a strong bargaining position. Apple can’t simply dictate prices; it has to present a convincing argument in order to get the content sources to play along. The company pioneered fixed rate music at 99 cents, then introduced TV episodes and music videos at $1.99, and then movies for $9.99 and $14.99.

Convincing movie studios to sell their releases as downloads took some effort and time. Apple first inked a movie sales deal with Disney and a few other studios, then introduced rentals (but not sales) with all the studios, and only recently announced an agreement to both rent and sell movies from all the major studios at standardized prices.

Apple TV Digital Disruption at Work: iTunes Takes 91% of Video Downloads Market
The iTunes Monopoly/Failure Myth

Get More, Pay More.
When HBO announced its deal to sell its popular original series on iTunes, including the Sopranos, Deadwood, and Rome for $2.99, critics howled that Apple’s pricing model was falling apart and that the studios were going to hike up prices into the stratosphere. A number of iTunes users also cried foul, adding scores of comments on the new series that called the $1 premium “jaw dropping” and encouraged other users to boycott buying the shows.

Of course, those new HBO series are hour long shows, as reader Juan Trujillo pointed out. HBO also began offering half hour episodes of Flight of the Conchords and Sex and the City for the usual $1.99, along with the hour long, but less established series, the Wire.

HBO’s pricing signals no new real change; iTunes has also been selling hour long episodes of PBS’ NOVA for $4.99. HBO’s pricing is really just another case of paying more to get more. Amazon sells 12 episode box set DVD packages of the Sopranos, Deadwood, and Rome for $60, twice the price of HBO’s other shows on DVD, which include 12 to 18 half-hour episodes. Apple is only charging a 50% premium for the 100% longer shows. No need for jaws to drop and outrage to ensue.

Two Wrongs Make a Write: the Mercury News Interviews Rob Enderle.
Had the media consulted a simple calculator rather than a calculated simpleton, they wouldn’t have seen any crisis brewing with iTunes prices. Instead, lazy journalist stand-ins, including the San Jose Mercury News’ John Boudreau, rushed to ask what Silicon Valley’s “Embarrassing Enderle” could make of the issue.

Enderle said the “pricing shift” indicates that ‘not all content is equal,’ apparently also unaware that the more expensive HBO shows are twice as long. He also suggested the non sequitur that studios could soon begin selling movies as downloads “while they are still in theaters.”

“Maybe a first-time [sic] movie will sell for $30. It’s not going to sell for $2,” Enderle was cited as saying. So there you have it: not only will studios dismantle the theater business to sell first run movies as downloads, but customers will pay three times the price of a theater ticket to watch the show at home rather than on the big screen. Why is Enderle making fun of himself? Apparently just for the opportunity to reaffirm his disdain for Steve Jobs.

Apple’s HBO deal signals shift in iTunes pricing – San Jose Mercury News
New York Times Violates its Own Microsoft Shill Policy

Enderle Doesn’t Know Jobs.

Enderle recently explained in a blog posting that his opinion of Jobs comes entirely from reading the tell-all gossip books that portray Jobs as a crazy, horrible, accidentally successful jerk. Enderle has contributed many efforts to snowballing the fantastically fictional persona of Jobs as a bumbling tyrant. The Merc cited Enderle as saying Jobs “thinks the content people are clueless, and he wants to make sure they don’t destroy the market.”

But that’s not true at all. According to Jobs’ own words, he respects the studios and labels as being uniquely qualified to find and develop talent. Jobs worked hard to convince them that effectively priced download sales are the road to building out of the mess of stagnant CD sales and widespread online piracy. Studio executives, including Warner CEO Edgar Bronfman Jr., complained loudly about wanting to set “flexible pricing,” but Apple overcame those objections by predicting and delivering successful sales, not through name calling and the dramatic hijinks that sell books.

In a Rolling Stone interview from 2003, Jobs said, “At first, they kicked us out. But we kept going back again and again. The first record company to really understand this stuff was Warner. They have some smart people there, and they said: We agree with you. And next was Universal. Then we started making headway. And the reason we did, I think, is because we made predictions.”

Apple predicted that subscriptions would fail and that customers wanted to buy music to own it. The studios worked hard to pursue subscription revenue plans until it became obvious that there were relatively few individuals interested in paying to rent music. Apple sold music, and its success eventually convinced all the studios to join in. The continued success of iTunes since has further convinced TV and movie studios to sign up and sell their content at predictable, reasonable prices.

Where is the iPod Killer?
Rise of the iTunes Killers Myth
Universal vs Apple in the iTunes Store Contracts

Much Ado About Nothing.
There was no soap opera going on where Jobs called the content producers “clueless” and they reacted by setting prices higher. Apple has simply negotiated pioneering deals for content over the last half decade that have incrementally caused iTunes to grow as the most successful online media store. During that time several content executives have rambled off into episodes of kicking and screaming, but they come around once they smell the money.

Microsoft has fallen into line to copy Apple’s successful store model, but it has no audience to sell content to, so its copycat efforts are making no impact on the market. As the Fake Steve Jobs noted, NBC’s posturing deal with Microsoft’s Zune store is the “first time I’ve seen rats swimming toward a sinking ship.”

Is Number Two Amazon Rivaling iTunes in Music Sales? Haha No
From Vista to Zune: Why Microsoft Can’t Sell to Consumers
Zune Sales Still In the Toilet

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17 comments

1 droughtquake { 05.15.08 at 3:38 am }

Not all ‘industry experts’ are equal.

2 Berend Schotanus { 05.15.08 at 4:01 am }

I know my remark will sound boring to you but it would be so nice if I could purchase or hire ANY movie or TV-show (other than Pixar shorts) in a European iTunes store.

Oh yes, there’s a war going on against big studios sitting on their content and trying to protect their income. I’m happy some are fighting to use new technology for a better consumer experience. So keep on the good work!

3 lowededwookie { 05.15.08 at 4:22 am }

“Had the media consulted a simple calculator rather than a calculated simpleton…”

That is pure brilliance. Some people need to give up while they’re ahead but Enderle has never been ahead so I guess he thinks he still needs to try.

4 Rich { 05.15.08 at 5:28 am }

“I know my remark will sound boring to you but it would be so nice if I could purchase or hire ANY movie or TV-show (other than Pixar shorts) in a European iTunes store.”

You can in the UK, so I’m sure it’ll come to the rest of Europe soon. The only real problem is the price – $3.68 per half hour episode.

5 steffan_w { 05.15.08 at 11:58 am }

Hi Daniel. Been reading RDM for a long time, and I think your analysis is spot on. I wish commentators on other subjects were as insightful as you are in the areas of your expertise.

Is the point in question that HBO’s own programming is being offered at different rates, or that their hourlong programs are more expensive than most other networks? I follow your argument if it’s the former, but it seems like a lot of the noise is coming from folks comparing the price of the sopranos to, say, lost. But as you indicate, HBO’s boxed sets are famously expensive (only recently have they lowered prices at traditional retail), so it should be no surprise that episodes are more expensive on iTunes as well.

6 whmlco { 05.15.08 at 1:04 pm }

In your recent Zune article, you stated that “By raising prices in iTunes, NBC’s “market pricing” would trigger a mob of greed from every other studio, pushing content prices up into ridiculous heights and sending customers back to file trading sites. ”

I disagreed, and said so. But apparently you’ve also flipped on the issue, as now it’s apparently okay for HBO to raise prices for its most popular shows.

You repeatedly covered yourself by saying that the shows priced at $2.99 each are twice as long… while failing to mention that nearly every other studio selling hour-long content is doing it at the $1.99 rate.

Either way, the fact remains that Apple can and will make deals in order bring studios and labels under its wing.

And that these “special cases” are just the tip of the iceberg.

7 drx1 { 05.15.08 at 1:26 pm }

Even if Steve Jobs said they recording/content insdustry were a bunch of frigg’n morons – it would only be the truth!

8 PaulMJohnson { 05.15.08 at 2:20 pm }

Whilst I agree with you, even if you take the argument that this is expensive, who really cares?

If NBC demand a price that is above what people will pay, Apple will make no money, but more importantly, neither will NBC. They’ll drop their prices to a point at which people will pay.

Whilst I admire Apple for standing firm against the efforts of the studios to try and rip us off, this will all normalise in the end anyway.

9 Brau { 05.15.08 at 3:00 pm }

As far as I can tell, Enderle defines himself as a “group” in a vain attempt to hide his MPD (Multiple Personality Disorder). ;) How this mindless troll has managed to get himself into a tech review position at a semi-respectable magazine is beyond me.

As far as pricing goes, Apple can do what they want because the one thing that constrains the pricing today is the fact that if they price it too high many people will simply turn to downloads. In a way we have the illegal downloaders to thank for breaking the age old marketing tactics of the music cartels, but the movie studios are still in the dark ages.

I have a relative who won’t pay for any music or movies (yes he’s a very cheap bugger). So how can you profit off this kind of person? I asked him if he would download a movie if it were free, contained ads, but was at a better quality than can usually be had via the torrent sites, and he said he’d be all over it. I’d do that too for many movies, just like I watch them on broadcast TV. On some occasions I’d want to rent movies ad-free and would pay for this luxury. The movie studios need to start finding ways to serve their customers rather than simply opposing the way people want to consume the content and brow beating them with protectionist tactics.

10 ebernet { 05.15.08 at 4:19 pm }

I think part of the reason why HBO can sell at 2.99 is because they are a premium channel, unlike the other networks where you could have watched the show free on TV and can also watch it advertiser supported on their networks. HBO only gives you their paid network, DVDs, and now iTunes.

11 MikieV { 05.15.08 at 8:37 pm }

Interesting how Apple was able to limit the “damage” of higher-priced shows by raising the bar for any other shows to demand higher prices…

If the Sopranos can only get HBO an extra buck, what chance do most other shows have of asking for the same – let alone greater – premium.

Heck, even HBO’s “less established” 1-hour show is going for $1.99… so its not like -anything- from HBO would be cause for a higher purchase price.

12 MikieV { 05.15.08 at 8:52 pm }

Didn’t see this until after my previous post… and would have worked better as part of it.

@whmlco

“And that these “special cases” are just the tip of the iceberg.”

But Nova going for $5, and Sopranos et. al. going for $3, puts a damper on any prices higher than that.

How many shows can claim to be as critically-acclaimed and/or popular as Nova or Sopranos???

Anything priced at greater-than $3 will just have people asking: “Who do they think they’re kidding? I can get The Sopranos for only $3…”

13 addicted44 { 05.15.08 at 8:54 pm }

“Had the media consulted a simple calculator rather than a calculated simpleton”. Classic!

I disagree with this article, however. I believe offering HBO differential pricing is indeed a crack in the dam, and will lead to differential pricing across the board. Its likely however, that it will take place at fixed price points (e.g. only 0.99, 1.99 and 2.99).

I do not know how bad a thing this is though. We’ve got to realize that when iTunes first came along, paying for downloads seemed a ridiculous idea, considering people could get them from free on Napster. At the same time, internet commerce was not well developed at all. Now that people are a little more savvy with the internet, and more used to buying media off it, differential pricing might not be as much of a turn-off as it once was.

14 gus2000 { 05.15.08 at 11:52 pm }

“Lost”, as much as I enjoy it, is not a 1-hour show. It is 42 minutes after the commercials have been removed.

The HBO shows, on the other hand, have no commercials and never did.

15 steve { 05.16.08 at 11:50 pm }

Yes, the HBO shows have no commercials but their average length is below 55 minutes and some run less than 50 minutes. HBO’s Sopranos at $2.99 are the same length as Showtime’s Dexter at $1.99. I purchased season 2 of Dexter because I don’t get Showtime and it’s not available on DVD yet. But there’s no way I’m going to buy old episodes of the Sopranos for $2.99 a pop.

I wouldn’t claim this is a crisis but it’s clear that the door is open to variable pricing. And that’s probably a good thing.

16 John Muir { 05.17.08 at 8:53 am }

Regarding regions…

Does anyone in their right mind think that Apple choose to have less content in other markets outside of the US? It’s the studios and labels who carved up the IP world into regions long ago, and it is they who sustain it.

I for one thank our (more often bumbling and hypocrite) European overlords for forcing the price cut on iTunes UK music tracks later this summer. But what I particularly like is that Apple’s interpretation is that it’s the labels who take the hit; or get the hell out of the store. Definitely different to what the EU had in mind!

17 MikieV { 05.17.08 at 1:51 pm }

@John Muir

“Does anyone in their right mind think that Apple choose to have less content in other markets outside of the US? It’s the studios and labels who carved up the IP world into regions long ago, and it is they who sustain it.”

Ditto

Made me so sad for human intelligence everytime I read someone’s whining about iTMS availability outside the US – and/or how the US store lacks “imports” – while Apple was having to negociate region-by-region with all the various publishers, artists, associations…

I’m also one who thinks its funny to see how the EU’s even-pricing rulings are keeping the publishers from getting more money in a given region.

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