The 80% Solution

Some believe the answer to digital piracy is dropping the price 80% or so. Not so easy. – Ed

More than a few people have essentially said the following:

“If movie or music companies don’t want people stealing from them, what they should do is lower the price to the point
where paying is easier than going through the hassle of stealing it.”

They generally indicate a price drop of 80-90%.

I’ve given this argument short shrift in the past, but haven’t gone deeply into why, so I’ll do that now.

Essentially, this is something you may end up seeing eventually, but “eventually” could be a ten-twenty year process.

I think a lot of people have the history of the home video industry in mind, but I think there’s some big differences between the two.

This Is Not A New Market

In the case of home video, it turned out that home video didn’t wreck the theatre industry. It certainly hurt it a bit, but the loss (at least for the movie producers) was more than made up by additional revenues from video sales.

So what you had was theatre receipts AND video sales, which more than equalled theatre receipts alone in the old days.

That’s not going to be the case with digital media. It’s not a matter of CD/DVD/video tape AND a digital download; it’s CD/DVD/video tape OR a digital download. All else being even, a digital download simply cannibalizes sales of CD/DVD/video tapes.

The Costs of Savings

Now you’ll say, “But Ed, digital downloads will be a lot cheaper.” Well, let’s look at that and also look at some problems that can cause.

There’s no doubt digital downloads would essentially remove some costs (but not as many as you might think).

The record company wouldn’t have to make the CD, but while that’s a savings for them, it may not be a savings for you. All that’s happening is that the cost of manufacturing a CD is being passed on to you, and it’s arguable whether the cost to you in CD-blanks/hard drive space would be any less than their cost in mass-producing CDs. The primary benefit would be greater personal flexibility than actual savings.

The only other real savings (which is probably more considerable) is that digital downloading could cut out middlemen. Right now, if you go to a record store and buy a CD, you’re paying for the cost and profits of the distributor and the store.

This to you seems like a very good thing, but not entirely so. Going to a record store is convenient. You get to choose from recording from a whole lot of companies. If the record companies directly distributed, you’d have to go to each record company to download.

Record stores also provide marketing opportunities. When you’re in a record store, you may end up buying other records if you see them, which you may not do if you go to a website.

You may not find these items important (and in the long run, they probably aren’t), but nobody knows what kind of impact even apparently minor items like these will have on sales.

What is a lot more predictable is what digital downloads are likely to do to current retail outlets if the cost savings are passed along.

You have Best Buys and you have BestBuy.com. If BestBuy.com offered even just a 20% discount on downloads vs. CDs, what do you think that would do the CD sales in the stores? What do you think the 80 or 90% figures being thrown around would do?

Best Buy at least sells a lot of other things. What would happen to Blockbuster as a result?

You may say, “Yeah!!” but Best Buy and Blockbuster won’t. Can you say “legal action?” Can you say “See the handwriting on the wall and get out of the business before the digital alternatives get established?”

You may say, “I don’t care,” but your opinion doesn’t count here. The opinion of the record or movie company honcho counts; he’s the one who is accountable and responsible for the results. He’s the one who has to explain to the stockholders why he wrecked his retail sales in favor of unproven, insecure technology hoping that the company wouldn’t get stolen blind by (largely) teenagers.

Do you at least see why a middle-aged executive who has a lot to lose might not be as gung-ho about the idea as you’d be and that jumping into an empty concrete mosh pit might look sane in comparison?

A huge threat to that middle-aged guy is that the cost savings from the above is simply not going to amount to 80-90% of the total cost. Record companies spend a lot of money discovering acts and marketing them. That’s not going away any time soon.

Let’s assume the cost savings from manufacturing and cutting out the middlemen is 30-50%, and those savings get passed on to the consumer. There’s a real danger that such a discount would be enough to wipe out retail sales but not enough to get those stealing to start paying. In fact, you might get even more stealing just because it’s easier.

Again, you have a middle-aged guy doing more than OK making this decision. If you have problems putting yourself in his shoes, pretend that if you decide to do this, and you’re wrong, you’ll never be able to get a job again and you’ll be on welfare the rest of your life.

Can you understand why that person might not be so gung-ho about this?

In that 50-70% left, all of the music or movie company’s profits are retained. You may say, “That’s wrong, they should make a lot less profit.”

I’m really sorry, boys and girls, but these companies are not around because they love you. They’re around to make money, and they’re not going to willingly do something that will make them a lot less money.

Imagine a stockholders meeting where the head of the company says, “We’re going to go into digital distribution. We’re not sure if we’re going to be stolen blind or not, but if everything works, I guarantee we’ll make 50% less profit and. . . ”

He wouldn’t finish the sentence because the stockholders would fire his ass before he got another word out.

Imagine your boss telling you, “I have a brand new job for you. People are going to love you for doing it, which I’m sure you’ll agree is worth the 50% pay cut you’ll take . . .”

He won’t get to finish the sentence, either, which is probably a good thing, since the rest would be “and if you do a really good job, we’ll cut your pay EVEN MORE.”

Would you agree to that? Then why would they? You think they make too much? I bet your boss thinks the same thing sometimes. Do you agree with him and let him cut your pay whenever he thinks that?

Now circumstances may lead you to accept that, just as they may eventually for the record company, but you hardly would say “Oh wow!!! Thanks, boss!!!” and volunteer for a bigger cut.

This is the real world, people. That’s about as realistic as Intel having a press conference one day and saying, “We’re cutting the price of our processors 50% across the board because we make too much money, and because we love you.”

Yes, Intel makes less money than they used to, but not because they wanted to. It’s because AMD made them, kicking and screaming.

Stack ‘Em High and Sell ‘Em Cheap

The only way a company could justify an 80% price drop is to say, “If we do that, we’ll sell three or four or five times as many items as we sell now.”

How likely is that in the near future?

You have two possibilities: