Greed Is Good?April 01, 2009
In Oliver Stone's Wall Street, Gordon Gecko famously said, "Greed is Good." It's a mantra we in the United States have been living by for the better part of three decades, and it's part of the reason the current recession is as deep as it is. Before someone mistakes me for a socialist or a communist, let me clarify that I'm all for the capitalist way of life. I believe everyone has a right to make a profit, but there's a difference between comfortable profits and excessive ones. There's a difference between charging for a product or service and gouging.
Which brings me to the iTunes price increase. I'm sure you've read about it by now. On April 7, iTunes plans to increase the cost of many "popular" songs from 99 cents each to $1.29. That's 30%. The other part of the equation is that a small number of songs will drop from 99 cents to 69 cents, and many will remain the same. However, as with all re-worked price structures, the goal here is to bring in more money. You can bet the amount of money saved by consumers because of the reduced prices will not overbalance the amount of money accrued as a result of the increase. So what, if anything, does this have to do with movies? Plenty. Consider that almost all of the major record labels are under the same umbrella as "sister" movie studios. The term "independent" merely means something that hasn't been gobbled up by a conglomerate, and there aren't many of those in either the music industry or the movie industry. As has been seen in recent years, as music goes with respect to piracy and on-line sharing, so go movies.
For many people like me who only sporadically buy downloadable content from iTunes, this is a relatively minor news item. (I perhaps purchase ten songs a year on-line, and no movies. All of my movies are DVDs or Blu-Rays; I'm not fond of watching a movie on my computer monitor unless I'm forced to, and I do not currently have a robust set-up where content can be ported from my computer to my TV.) But for music lovers, this emphasizes a dark and foreboding trend.
It is believed that the total cost of a song sold on-line at iTunes is around 25 cents, give or take (depending in large part on the popularity of the artist - U2 gets paid more than Belinda Carlisle). That includes paying the performers, composers, and other rights holders, and the small amounts of overhead associated with making the song available. For movies, it's about $2.00, although the accounting is more complicated. Nevertheless, one would assume that a "healthy" profit could be ascribed to a 100% markup. That would mean half the price is cost and half is profit. Under such a model, a song at iTunes would retail for 50 cents and a movie would cost about $4 to download. Those sound like reasonable numbers to me.
Admittedly, I'm oversimplifying. In a corporate world where almost everything feeds back into the stock market, profit and loss aren't straightforward concepts. They should be, but we have become so obsessed with wringing every last cent out of each dollar that we've made it almost impossible for the average person to have a full understanding of accounting rules. Basic common sense no longer applies, but it still lies at the root of the situation. If a product brings in more money than is paid out to make it, it's profitable.
I can think of three rather obvious reasons why the iTunes price increase is an incredibly bad idea. Obviously, there are more than three reasons, but I have limited space for this column, so I'll keep it simple.
1. "On the Fence" Pirates: Admittedly, many people who illegally download/pirate/file share (the preferred term depends on what camp you're in) movies and music would do so regardless of price. It's as much a cultural thing as it is an economic one. But there are members of a "reluctant" pirate subgroup. That is, they would pay if they could afford it. The way to win back these people is not to increase the price. There is a correlation between price and piracy. That's common sense. The bigger the price tag, the more likely people are to find a way to get the product for less (or for free). A 30 cent increase isn't much to someone who only buys a few songs per month (or year). But it's a huge hit for the music industry's best paying customers - those who buy hundreds of songs each year. And those "reluctant" pirates, who might have been encouraged to become paying customers by a decrease in price, could be lost forever. It has been well-established that once someone becomes comfortable with illegally downloading content, the likelihood of getting them to pay for it at any price is remote. Price changes won't impact hard-core downloaders, but they can impact those on the fringes.
2. Punishing the Innocent: The ultimate result of increasing the price on legal downloads is to punish those who play by the book. The price is the same - zero - for those who illegally download. They don't care if iTunes changes the price. It's irrelevant to them. It's not hard to envision a situation in which someone who pays their hard-earned money becoming annoyed with the gouging that's going on. I'm convinced that a portion of the existing piracy is driven by a "screw you" attitude toward the record companies - a means of venting and a desire to strike back.
3. Major P.R. Hit: We're in a recession. Unemployment is approaching 10%. Wages are down. Investments are down. People are downsizing their expectations for entertainment. Now is not the time to announce a price increase, especially when it's not driven by a cost increase. The only thing driving the iTunes "re-structuring" is a desire for higher profit margins; the 30 cent increase does not mean the people responsible for making the music are getting more. Doing this in the midst of a bad economy strikes me as about the dumbest P.R. move possible.
The movie industry faces many of the same challenges as the record industry and, sadly, appears to be headed down the same path of overcharging for content. Copyright laws need to be reworked. We're trying to cope by using outdated technology rules and regulations to govern new technology. And that technology will continue to evolve. New revenue models are needed, and the profit margins may not be close to what they are today. The movie and music industries decry piracy then invoke policies that feed an atmosphere where piracy will flourish. The number of people who feel morally obligated to pay for downloadable content is decreasing, and this has a great deal to do with the stubbornness of those who set the prices.
The current model is no longer stable, and some would argue it's not sustainable. Had someone figured this out 15 years ago and gotten out in front with cheap downloads and user-friendly policies, the industry might be a healthier and happier places. But CEOs were focused on only one thing - maximizing short-term profit without a concern for long-term implications. Maybe greed isn't good after all.
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