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What's a movie worth?

October 10, 2006

RETAILERS DON'T USUALLY threaten to retaliate against suppliers for selling an inferior product to competitors at a lower price. But that's what the president of Target effectively did in a recent letter to the major Hollywood studios. Gregg Steinhafel warned that if the studios offered downloadable versions of new releases to online sellers at a lower wholesale price than Target paid for packaged DVDs, his company might spend less to promote their wares. That's quite a warning, coming from a retail chain that accounts for almost one out of every six DVDs sold in the U.S.

Never mind the fact that downloadable versions of the big studios' films are more restricted than DVDs. What's strange is Steinhafel thought the letter was even necessary. Most of the studios do not want to sell downloadable versions of their films for less than they sell DVDs. In fact, some want to charge a premium for the convenience of downloading.

That's why, unlike their brethren in the music industry, they resisted Apple Chief Executive Steve Jobs' entreaties to sell discounted movies through Apple's iTunes software. Jobs reportedly wanted to sell new releases for $10, significantly less than the price of the typical new DVD. But only Disney, on whose board Jobs serves, has agreed to offer its movies on iTunes, and most of its new releases go for $15.

Besides, it's not as if the studios could save a lot of money by eliminating the DVD. The manufacturing, packaging and shipping costs of DVDs are relatively cheap -- one estimate put them at $1.50 per disc, not including the cost of returned products. Then why do new releases typically cost $16 to $18 wholesale? Because the studios want to earn back the money they spent making, marketing and advertising the movies in the first place. And those costs won't go away in a digital world.

So what's good news for Target is bad news for consumers: Initially at least, downloadable movies won't be much cheaper than DVDs. But those who like to watch movies at home can take comfort in the fact that, as entertainment becomes more widely available in more varied forms, prices will tend to go down. They may not fall as fast as consumers would like, or as believers in the digital economy once promised. But as surely as you're reading this online, the market will find the most efficient way to get entertainment (and news) in front of the people who want it. And eventually, all of us -- wholesalers, retailers and consumers -- will benefit from those efficiencies.

That's the theory, anyway.

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