Meissner Research Group

While it’s common knowledge that the music industry was forever altered when iTunes, with its over 125 million customers, came onto the scene and allowed music fans to download songs for only 99 cents. In the past few years, it was the publishing world that has been changed, with digital book eaders like the Kindle and Nook, and online newspaper programs, like the recently mentioned Times Reader. Now it appears, it’s TV’s turn.

According to the article ‘Networks Wary of Apple’s Push to Cut Show Prices’ by Brian Stelter (New York Times, February 16^th, 2010), Apple executives are in talks with the heads of all the major television networks to plan a widespread price decrease for downloading TV episodes from iTunes.

Each TV show episode, with the exception of a few promotions from PBS, currently sells for a $1.99 per download. But for Apple, the magic number has always been 99 cents. It was the 99-cent price point that allowed iTunes to nearly overnight become the world’s main, and in most peoples’ eyes the only, place to buy music. iTunes’s 99 cent price point could very easily be said to be responsible for the end of the CD and probably helped lead to the end of nationwide electronic store Circuit City.

Apple executives are said to believe that by lowering TV episodes, released on iTunes only the day after their original broadcast on television, to the 99 cent price point could allow the mainstreaming of TV episode downloading, just as it did for music. With several new, cheaper models of digital and portal TV quickly becoming available, like Apple’s upcoming iPad, Apple believes this is its next goldmine waiting to be harvested.

TV executives on the other hand are not so sure. TV shows can cost millions of dollars to produce, and it normally takes hundreds of people (all of whom need to be paid) to produce a single episode. Unlike songs, which are often created in studios by a handful of professionals, TV shows will need far higher sales to return profitable returns.

On the other hand, if lowering the price point does help buying TV episodes become part of the mainstream world culture, as buying songs from iTunes has, then it might be worth it. Consumers have purchased over 10 billion songs from iTunes, while they have only purchased 375 million TV episodes, a huge difference in profits. And considering that there will also always be fewer episodes available then songs, this difference could translate into the change being well worth the risk for TV executives.

As with most digital products, there is little additional cost, so this situation is not about profit maximization, but simply revenue optimization. The refusal of the TV executives to lower the price indicates that they believe the market is not elastic, e.g. they do not believe there would be a volume gain sufficient enough to compensate for the lower price. In this particular case the calculation is easy, as a price decrease from $1.99 to $0.99 must result in doubling the volume to make sense. Apple, on the other hand, would probably be satisfied if it breaks even, as long as this fuels hardware sales.

A $0.99 price point could lead to a large demand raise, probably even of 100 percent. On the other hand, it could be that TV content is already bought by users that are less likely to download files from a peer-to-peer file sharing network, and demand is not actually elastic, which would be required if the demand was to raise high enough. In any case, it will be interesting to see what is going to happen.