Make NBC an offer they can refuse

Variety updates the NBC-Apple tiff with an interesting tidbit.

Sources close to people who resent the heck out of Steve Jobs claim that the price disagreement is not that NBC wants to raise prices, but Steve Jobs wants to cut prices — from $1.99 to $0.99. Apple (correctly) notes that volume will go up and (speculatively) asserts that profits will go up too. But of course there is the cannibalism risk too, in this case in competition with the DVDs. Since DVDs are the only major Hollywood revenue growth of the past decade, such cannibalism is a big concern:

Such pricing concerns echo the problems Apple has had recruiting movie studios to iTunes. Only Disney, in which Steve Jobs is the largest individual shareholder, has agree to sell new movies for $12.99 the same day they are released in homevideo. Others have balked at undercutting, and potentially angering, DVD retailers.

Despite those problems, Apple’s move to cut the price of TV shows indicates that it's only getting more aggressive on video pricing.

Insiders at several networks and studios, all of whom spoke only on the condition that their companies not be identified, seemed skeptical about Apple's price proposal -- but not completely closed to negotiations.

Some believe that prices on library titles could easily be reduced to the 99¢ price Apple wants. They admit that it doesn’t make sense to charge the same amount for an episode of “The Brady Bunch” as for “Lost.”

Notice how the story prompted by Hollywood leaks puts the best possible light on the proposal of different prices for different TV episodes. It continues in the same vein:

But Apple has proved to be resistant to multiple price points for video downloads, preferring to keep things as simple as possible. At the same time, the computer giant has shown some flexibility, allowing nets to cut prices on full-season collections of shows. Indeed, last month, iTunes offered several NBC shows at reduced prices as part of a summer sale.

If cooler heads prevail, it seems possible Apple and the nets will come to a settlement in which shows are sold via tiered pricing, perhaps 99¢ for library titles, $1.99 for current hits and $2.99 for megahits or shows on premium cablers such as HBO or Showtime.

Where the Hollywood spin contradicts Apple’s, the story reports the former as fact and the latter at the bottom of the page. The industry must be grateful to read its side of the story presented in the hometown paper, but of course what matters is how consumers will view things when the price of “megahits” (how is that defined?) is increased.

Hat tip: WSJ (and former SJ Merc) blogger John Paczkowski.

Technorati Tags: Apple, iTunes, movie industry, NBC

Spurning Apple, Universal runs to Amazon

After reaching an impasse with Apple over 2008 pricing of NBC TV episodes, AP reports that Universal has run into the willing arms of Amazon with its Unbox service.

The latest announcement implies that Amazon will be selling the NBC shows for the $1.99 (retail) price that Apple claimed Universal was no longer offering.

There are several problems with flirting with someone to make your partner jealous. One is that you’re trading down — that your original choice was actually the better one, and getting emotional is hurting yourself to get even. Today Amazon’s download service certainly lacks the volume and customers of the iTunes Store, although apparently the new Sci-Fi/NBC content are off to a good start, with (as PC World reports)

three of its shows (Battlestar Galactica, Heroes and The Office) are among the top ten sellers, with Galactica and Heroes nabbing the top two spots.

Apple seems to have called Universal’s bluff, assuming that it has no better alternative. I suspect NBC content will someday be back on iTunes. If the pricing is the same as today, then Apple won. If Apple carries at least some episodes for more than $1.99, Universal won.

Now (in the AP story) Universal is claiming that it wanted the flexibility to sell its products for less:

NBC Universal … has said it wants to package programming in different ways at different prices, something Amazon is willing to consider, according to Jean-Briac Perrette, president of NBC Universal's digital distribution division.

In an interview, Perrette said NBC Universal might like to sell single episodes of two different shows together, for example, or let customers who have already purchased several episodes buy a full season at a prorated price.

That’s a red herring (not to be confused with a Red Herring). NBC (like Fox and other networks) wants more revenue from its content and the goal is obviously to push up the average selling price.

More plausible is when Ars Technica repeats the report that Universal thought Apple’s download policies (five authorized devices per household) were too lax (read: consumer friendly). To pick a fight with Apple, NBC must think there are a lot of households where mom and dad (or dad and junior) want to watch Battlestar Galactica or The Office — households that can be convinced to buy a second copy.

NBC is working hard to create a viable competitor to Apple, and will soon have many allies in its efforts. Competition is normally good for consumers because it gives consumers more choice. But what if competition is fueled only to allow suppliers to increase prices?

Technorati Tags: Amazon, Apple, iTunes

Testing iTunes supplier power

The iTunes [Music] Store has been so successful that the record companies are envious. Many but not all rival stores have failed (most recently Sony’s), and so the record company oligopolists find themselves at the mercy of Steve Jobs and his control of the most successful legal download site to date. Not quite two years ago, Apple got some of these same companies (through the overlap of the music and movie media megapublishers) to provide video for its site — mostly TV episodes — which met with immediate success. But that success has brought bitter complaints from Hollywood (and Nashville and New York).

One of the key issues has been that Jobs believes that $0.99 (or €0.99) per track is a magic number, and wants to keep a single simple price to promote adoption. Prior estimates have shown that (due to high royalties) Apple makes very little off the content but instead makes all its money off of hardware, and thus wants an ongoing supply of attractive content to sell more iPods.

Instead of a fixed price, the record companies have long argued for a range of prices, with higher prices for hot titles and less for run-of-the-mill titles. (Despite occasional claims to the contrary, it would appear that the 99¢ would be the floor and not the average price). Such a “versioning” strategy is very consistent with the work of economist Hal Varian in his book with Carl Shapiro entitled Information Rules. (Labels today are able to charge a premium for some tracks, in that they require download of an entire album to get one or two popular songs.)

Although the record companies have made threats to withdraw — and in July Universal decided to go month-to-month in supplying music to Apple — so far none of the music companies have been willing to cut off their nose to spite their face. Universal also decided to license its DRM-free music to everyone but Apple. But apparently this week NBC (i.e. the same Universal) decided to make a stand on licensing its television content.

NBC decided that it wanted a price increase on what it got for its TV episodes, and thus leaked it would not renew its contract at the current prices beyond the end of 2007. Apple claims that the net result would be to increases episodes pricing from $1.99 to $4.99 each. Whatever the number, it’s clear that NBC think the market will sustain a higher price — and it’s also clear that some outsiders believe NBC is overestimating the value of its content.

IP lawyer Chris Castle articulates what everyone knows: that the suppliers want to reduce Apple’s control over online distribution channels:

“I think there is a general perception in the industry that we need to get tough with Apple and break the lock they have on the consumer market,” Castle said. “I think what’s happening is that there is a general gestalt of ‘Apple is a pain in the (butt) so let’s help some other companies out. Let's do something to build up a retailer other than Apple.’”

Conversely, NBC may be playing a weak hand to challenge Apple on its own. Disney and its ABC subsidiary were first aboard the S.S. iTunes and will likely to be the last to leave — at least as long as Steve Jobs is a director, the largest shareholder, and a key player in its Pixar animation unit. Meanwhile, our local paper implies that NBC will blink now that Apple has decided not to carry any new NBC shows:

That said, NBC is in a tough position, too. The NBC network came in fourth place in the Nielsen ratings last year and has struggled to come up with new hit shows. Not only does iTunes provide an extra source of revenue, but it can serve as an important buzz generator and audience builder for new programs, something NBC arguably could use.

Apparently the biggest loss for Apple will not be NBC, but from its SciFi Channel subsidiary. (With the end of Stargate and the increasing absurdity of Galactica, it’s not clear who’s still watching SciFi anyway).

I happen to think that Apple is dead right on music prices —reasonable prices are necessary since the alternative is an illegal download. Video isn’t there yet, but that’s really a temporary question of bandwidth rather than some difference in practical enforceability or moral compunctions.

If Apple is right, NBC will do a deal to avoid giving ABC and Fox a huge advantage in generating word of mouth. If Apple is wrong, it will lose suppliers until it’s forced to capitulate to their demands to yield more revenue from every subscriber.

Where will it all end up? Gartner VP Allen Weiner predicts that eventually all the downloadable video business models will shift to advertising infested supported ones. As a consumer, I find the prospect appalling, but as an economist I think the logic is unassailable. Variable advertiser pricing is a lot easier to implement than variable consumer pricing, and of course this is the way that the entire industry is set up to monetize mindless TV sitcoms.

Apple is unveiling new iPods on Wednesday, so any doubts about the future of the iTunes store will take some of the wind out of its intro event.

Technorati Tags: Apple, iTunes, movie industry