Who would ever pay for bottled water? While the history of selling bottled water from various sources goes back centuries, it wasn’t until the end of the 1970s that bottled water started catching on in the United States to become what it is today, selling 8.6 billion gallons for 28.9 percent of the U.S. liquid refreshment beverage market. So is Apple’s (s aapl) scheme to rent individual episodes of TV shows online at $0.99 a similar watershed moment? Let’s look at the facts.
Seasonal DVDs on Amazon
Most television seasons start in either August or September and run through April or May, resulting in a season of around 20 episodes. The average price of the top ten seasons on DVD from Amazon (s amzn) is currently around $30. This would put the price of an average episode somewhere in the $1.50 range. That’s the most likely price point the entertainment industry is clinging to when justifying alternate cost models for renting digital media through online delivery solutions like iTunes or Amazon’s (s amzn) video-on-demand.
One downside of buying seasons is that episodes aren’t available for sale until a season is over. However, in the end, the consumer owns the episodes they buy.
Broadcast and Syndicated Television
Cable and satellite television starts at about $50 per month for at least 200 channels, which provides access to most new and syndicated television shows. This would exclude exclusive access to episodes from channels like HBO (s tmx) and Showtime (s cbs), which would add to the $50 monthly access charge. It would also exclude any television series not currently being broadcast. What it does include is early access to the latest episodes as soon as they become available.
All distribution costs are included in the monthly fee, and revenues are further subsidized via advertisements. What’s hard to calculate is exactly how many episodes customers would reasonably be entitled to. There are likely multiple consumers per household and multiple TVs for simultaneous viewing.
Monthly DVD Rental Service
Rental services like Netflix (s nflx) and Blockbuster can grant access to about the same list of shows for about $25 per month, depending on how many DVDs you subscription level allows you to have out at a time. The number of shows one has access to at any given time is more limited than using cable or satellite. Shipping charges are included. You can also stream to your game console with Netflix for $8.99 per month, although that does incur some of the hidden costs of distribution, which I discuss next.
Hidden Costs of Distribution
In all of the above scenarios, the cost of distribution is absorbed into the price structure. Any online distribution system would likely be paid for by the consumer in the form of broadband Internet access. Broadband high-speed internet access alone is similar in cost to each of the aforementioned pricing options, not to mention storage. Hard drives, DVDs or the extremely expensive burnable Blu-ray discs. Not only do consumers have to pay for the means of distribution, but also some means of storage, though HD space is getting cheaper by the day and the price of external drives amortized over a year works out to virtually nothing.
Viewing Behavior Patterns
Now that we know the various tolerances for paying, and the hidden costs of online distribution, what about viewing preferences? For prime timers that have replaced thier VCRs with DVRs, following a television series is more like subscribing to a video podcast than purchasing a season of episodes on DVD. How much consumers are willing to pay for a season’s worth of episodes depends greatly on how many episodes each consumer can consume in a given month.
From $30 to own a full season outright, to somewhere between $25 – $50 per month to watch and discard as many episodes you can bear to watch. How does $.99 to rent a single episode measure up? At just one episode per day you are already at the similar costs of the alternatives, and that does not include the hidden costs of distribution and storage. So is it then worth it to rent a-la-carte from Apple in convenient individual packages, or is it still much better to just pay for the water hook-up represented by cable and Netflix and drink from the tap whenever you like?
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