How much for digital?

The movie studios are starting to get excited about renting movies digitally (via Apple and others). 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 (probably a lot less in volume, but I have no clue what the real number is). 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?

The same thing goes for online music and for PDF versions of books. Kevin Kelly figured this out with his book on films. He makes $1.50 a copy regardless of whether you buy the beautiful color edition or the cheapest edition he sells. Why should he care which version you choose?

The current phone novel craze in Japan is even more evidence for why this makes sense. 2,000,000 people download the phone novel you wrote (it costs you nothing) and then, when it becomes a hit, you make millions on the sales of the paper book and the movie…

No, I don’t think Free is always the answer, but I do think the studios are about to make a mistake of RIAA proportions. I’d charge fifty cents for an online rental. It would immediately hammer the rental stores (which is fine with Hollywood) and DVD replicators (also fine with Hollywood) but would instantly teach people a new habit. Then, once the new habit is set and you’ve earned permission, sure, charge more for new movies and for blockbusters. 300 million movie theatres, all selling tickets every single night–you don’t need to charge $10 a seat when you have access to everyone.

It’s important to charge something, because the act of paying fundamentally changes the dynamics of the relationship. The question is this: at the start, is your goal to maximize profit or to build a platform that scales? The fact is that 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.

At fifty cents a rental, all desire for piracy goes out the window, replaced by convenience, ease of use and a clear conscience. More important, entire new services show up, habits are built and the studios end up with a direct relationship with consumers who want to hear from them. If they don’t get greedy at the start.