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The Problem with Internet-Based Movie Downloads

The Problem with Internet-Based Movie Downloads -
The Internet Isn't Connected to the TV, Stupid!

Michael Greeson, Founder & CEO
Download this TDG Opinion as a PDF

April 6, 2006

The Announcement

As most of you know by now, Monday was a 'watershed moment' in the brief history of online video: six major Hollywood studios announced plans to sell movies over the Internet - not rentals, mind you, but purchases of full-length movies in digital format that a consumer can download and watch any time they chose.

The Model

Two online movie services, Movielink and CinemaNow, will offer consumers a variety of movie titles for purchase and download. Movielink's initial offering spans 300 titles, while CinemaNow will offer around 75 titles (again, these are just initial offerings). Pricing for new movies is expected to be between 20 and 30 dollars per download, while older titles would cost 10 dollars or more.

So Why Won't This Work?

There are a myriad of reasons why this model will prove ineffective and thus require a significant overhaul within the first 12 months of operation. For the purposes of this essay, I'll discuss only three of these reasons.

1. Paying $.99 for a song/$2.50 for a TV program is not analogous to spending 20-30 dollars for a digital copy of a movie.

The studios are only too eager to point to the success of iTunes as proof of concept and to validate market timing. After all, Apple is looking to fill iTunes with a huge library of full-length Hollywood movie downloads, so why shouldn't Movielink and CinemaNow do the same thing? As many of Apple's new media competitors will tell you, that kind of logic can get you in a lot of trouble (and in a hurry).

No doubt the success of iTunes (both from a business model and consumer perspective) offers telling insights into the future of Internet media. In my opinion, the most relevant insight for new media purveyors is the one Movielink and CinemaNow are ignoring even before they sell their first download: determine the lowest price point needed to sustain the business model, and then go one step lower. This holds for almost any Internet vendor, but certainly applies to novel Internet-based media services.

Among the primary reasons consumers use the Internet for shopping is price: in most cases you can get the same item online for much less than you would pay at a retail store. Why pay 2X for a book at Barnes & Noble when you can get the same book at for 1X? Why pay $16 for a new CD at Best Buy when you can get the same 10 songs for $.99 each at iTunes? Why pay 30 dollars for a movie download when you can get the same movie on DVD for 15 dollars at Target? Oops, that didn't work out so well...

Little wonder this strategy appears so counter-intuitive. Movielink and CinemaNow are (a) rationalizing their new services by appealing to a business model which is but dangerously analogous to their own, yet (b) ignoring one of the key assumptions that has made this business model such a success (that is, pricing their content below that of comparable retail products).

2. Usage of these digital movie files is restricted. For example, Movielink allows consumers to download the file, copy it onto a DVD, and download the DVD content to two separate PCs. However, this DVD copy cannot be played on a regular DVD player. CinemaNow is even more restrictive, only allowing the digital movie file to be played on one PC - no copies of any kind allowed.

Are these folks brain dead? Why would I pay twice the price of a DVD to go through the hassle of downloading a digital movie file that can only be viewed on a PC? Think of the collective mindset, the group-think behind this strategy. The studios either (a) believe they can convert their current audience of online movie renters (those who pay 2 to 5 dollars for a rental download) to online movie buyers (at 20-30 dollars a pop); (b) believe that they can attract a new audience of users who, though they are not current online movie renters, will be eager to spend as much as 30 dollars for a digital movie file they can only view on their PC; or (c) don't care if these efforts succeed or fail in the short-term because the end game is about incrementally building a web brand to allow the studios to bypass the TV network owners and sell directly to the consumer.

Hmm....The first two possibilities border on the delusional, especially as the sales model is currently articulated. The third possibility, however, seems to make some sense - at least it did when Movielink and CinemaNow were first set up a few years ago. At that time, most observers believed that the studios were simply carving out a long-term position, preparing for the day when Internet movie distribution became an attractive business model.

Well, it seems the studios believe that the future started on April 3, 2006: no longer content with "short-term positioning" and online rental services, they are convinced it's time to roll a full-on purchase model. This negates the third possibility, leaving us to choose between the first two absurd possibilities, both of which find the studios convinced that this pricing model will work. As previously stated, I give them less than 12 months to radically alter the pricing scheme - and they will.

Final Thoughts

For most of the consumers who use these services, the PC monitor will be the viewing screen. According to Movielink, only 15% of its rental customers currently view their movies on a TV, while one-third use a laptop and the remaining 50% or so use a desktop computer. It seems, then, that being restricted to watching a movie on a PC monitor should not (in-and-of-itself) discourage consumers from purchasing a movie download - so goes the argument.

But if you asked these same consumers if they would rather (a) experience their 30 dollar movie download on a PC monitor, or (b) enjoy their 15 dollar DVD on the flat-panel TV and home theater system sitting in the family room, virtually all of them would prefer the latter. Watching movies on a PC monitor is a last-resort for die-hard PC addicts, not a first-resort for consumers who enjoy watching movies on their TV and who already have number of (less expensive) options for buying movies.

If you want me to use the PC as an entertainment conduit, and the PC monitor as a viewing screen, you've got to (a) make the experience more unique and compelling than my traditional media experiences, or (b) make it virtually risk-free by setting the cost of this new media experience well below my traditional media experiences.

The strategies of Movielink and CinemaNow fail on both accounts. First, the content they offer will not be uniquely compelling (at least not to a large audience) and the movie titles will (not surprisingly) look very similar to what I will see at my local retail store. Second, the 30 dollar price tag is SIGNIFICANTLY HIGHER than a DVD from my local retail store yet I am limited my ability to view this content on devices other than the PC. In other words, you're asking me to take on a greater risk (higher cost for lesser experience) to try out this new media service.

These sticking points (among others) will confine the use of such services to a niche-within-a-niche - a small group of consumers who already rent movies from these services and are willing to try the purchase option.


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