The Commoditization of Movies

There are two ways to price and sell products at market:

• One is the MARGIN method.
  • The Margin method is usually based on a scarcity; either of product (even if artificial, like diamonds) or of consumers. The margin method is how Apple has typically pursued its business. Make the product at as high a level as you can, understand that your constituency will be a smaller and more loyal body of fans, and make money on the wide “margin” between costs of production and the price paid by consumers.
• The other is the VOLUME method.
  • The Volume method, then, is usually based on a high availability, essentially, of both product and desiring consumers. When Blu-Ray players were introduced at $500 to $1,000, they were scarce, and only wealthy early-adopters could or would pay that much. But there was more margin in each sale. Now it is possible to acquire a Blu-Ray player for as low as $79.95, moving it into the reach of most. Many technology products enter the market this way, following a path through early-adopters to the wide consumption landscape. Under this volume method, the product is priced at about as low as it can get, intending to saturate the market at a level that is always aiming at “everybody.”

Until the advent of DVDs, motion pictures for home viewing used both of these methods. If a movie had a high potential to sell a lot of units (if it was for “everyone,” like E.T.), then the VHS cassette would be priced at something under $24.95, and often as low as $14.95, maybe after a MacDonald’s or Pepsi partner rebate or the like This pricing was called SELL-THROUGH (or Sell-Thru). Other titles would be priced from about $59.95 to as high as $112.95, with the average pricing for quality titles around $100 around the time that DVD was introduced. These titles were priced for RENTAL, and for the collector who had to have that title and was willing to pay up to own it.

So, some films were treated as Margin titles (Rental), and some as volume titles (Sell-Thru), according to the necessary and reasonable analysis of the size of the market for the movie itself. This pricing methodology brought a broad range of quality films of all types within the consumption grasp of a wide cross-section of the film-loving public. Sell-Thru blockbuster status was highly desirable, but everyone knew that every film was not a blockbuster, so many films used the margin method to maintain profitability.

Enter DVD

Now, when DVDs entered the marketplace, a decision was made that DVDs would sell for a price that would be focused on Sell-Thru, and a “most-favored nations” pricing deal was struck which said that all parties would get the same DVD for the same wholesale price. Now, these decisions caused a boom in DVD consumption, and a growth curve for the business that solidified the lead home entertainment already had won over box office and ancillary markets. This growth curve was accelerated by big box stores, the WalMarts and Costcos of the world, using DVDs as doorbusters, as loss leaders to get folks inside their cavernous confines so they could sell them something else. These tactics, driven as they were by something other than a pure love for movies, and other than a pure desire to make movies more profitable overall, exerted further downward pressure on the retail prices for DVDs, further lowering consumers’ expectations of what a movie should sell for.

Now, a little more than ten years after, and in the midst of a recession, some of the chickens of these “blockbuster-oriented” decisions are coming home to roost. Independent movies, made for smaller, more focused, and discerning audiences, whether consumed in theaters or on DVD, on television or VOD, are not a commodity product that can be priced in the same exact way as a blockbuster entertainment. Allowing the WalMarting and RedBoxing of Independent movies that have been, essentially, hand-made for these niche audiences have the strong potential to kill them slowly (or maybe quickly). The WalMartization of DVD was a big contributor in the Dreamworks near-total demise, when shipping too many copies of a Shrek DVD came home to roost when WalMart and others shipped back millions of unsold copies.

This across the board pricing scheme, along with WalMart and RedBox are devaluing the movie proposition overall, and are creating expectations in the mind of the consumer that all products are alike, when they are not all alike. Great foreign films, great independent American films should be marketed and sold like the fine wine and artisan foods they are. Consumers of these films are hungry for the emotional nourishment, the mental nourishment, the soul nourishment that cannot be found in blockbuster films that have had the corners and spikes of individuality rounded off in committee meetings. Just as these consumers pay a little bit more for organic comestibles that they believe are crucial to their health and welfare, they should be willing to pay a little bit more for these other elements of their emotional and intellectual well-being.

Indie Retraction

When I look at the landscape, I see where studios have snatched up independent distributors, and now are in the process of choking off whatever remaining life most of them have. It could be described as necessitated by, caused by, or the result of the recession, but, if they had wanted to take these nuisance smaller players off the street, they could not have found a more effective way. Now, I don’t for a minute think that this was the idea ten or fifteen years ago when these indie units were snapped up, nor do I think it’s the idea now, but it could not have worked out more like this if they had engineered it. Independent films, their distributors and their consumers have entered a complex vortex.

I know this is a delicate, and even a difficult proposition to contemplate. I am not even sure how it could be approached, getting distributors of indie product to re-introduce highly differentiated pricing commensurate with the product and commensurate with its market. But I know one place that can start to deal with this. Having written about Producer Controlled Releases lately, however, I am drawing a connection between life-blood and cost and pricing at market. Maintain your margins.

Do The Math

Calculating and understanding your margins is important. And, I am now saying that these releases have to be priced and price-maintained such that the margins are sufficient for each Producer-Controlled Release, and sufficient time and effort need to be expended to maintain the value of the proposition between producers and their consumers, between distributors and their consumers, such that consumers are educated to an understanding that they are buying artisan product, unique product, exceptional product, and just as they willingly plunk down for their iPhone, their audiophile system, their artisanal bread, they need to be ready to pay for the unique experience of viewing and owning one of these films.

Here is a down and dirty calculation of how the differing SRPs can affect the Profitability of a title, given a set unit sales level. Maybe next time I will show how you can even lose unit sales and still make more money. Now, don’t anticipate that the calcs for COG, Marketing and Returns are exactly right; they are just illustrations, as is the Distrib Split.

Indie Opportunity

Over the years, whenever I have seen one of these retractions in Indie distribution, I have always also seen opportunity. I think this is one of those points of opportunity, as I do not believe that the consumer interest in this product has waned at all.

I would love to know what others think about this…
FilmProfit
Onward and Upward