Are We Selling Movies for Less Than They are Worth?

Posted by Jim on Tuesday, February 09, 2010 in Author • Jeffrey Hardy - President, FilmProfit • Film Blogs • Film Revenue & ROI • (7) Comments • Permalink •

First DVD sell-thru, and now movies for a buck!

Pricing a product can take two roads:

    •  Pricing for MARGIN - Margin pricing assumes, or acts as if the product is scarce, or the consumers for it are scarce. This is how Apple has generally pursued its business. Sell a product for as much as you can, differentiate and make money on the wide “margin” between costs of production and the price paid by consumers.
    •  Pricing for VOLUME - Assuming a high availability (or hope thereof) of both product and consumers, like a mature DVD player market, in which a player is often $79.95 or even less. Many technology products enter the market higher and work their way down to aim at “everybody.” 

Before DVDs were introduced, movies for home viewing had two pricing schemes. 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.

And Then Along Came 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 doorbusting “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 furtherdownward pressure on the retail prices for DVDs, further lowering consumers’ expectations of what a movie should sell for.

We are now thirteen years after the advent of DVD and our chickens are coming home and wanting to roost. These “blockbuster-oriented” decisions are leading us into a headwind of valuation, and pricing movies for retail is a loss proposition.

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. But, even the blockbuster films lose by allowing themselves to be pushed to thinner and thinner margins.

As a matter of fact, in many cases, allowing a niche title to be treated as the same kind of commodity product that a studio may desire for a blockbuster film, can relegate it to unprofitability, particularly now, with the retreat of sell-through. In other words, 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 as 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. I DO NOT necessarily mean that they are compared as such, but that the margin reality of their commercial life need be embraced. 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 films that may contain elements important to 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…

Onward and Upward

Jeffrey Hardy (more about Jeffrey at: http://filmdependent.com/newsletter/?page_id=100 ) Jeffrey Hardy, president of FilmProfit, LLC, is the co-author of FilmProfit software and the sole author of The FilmProfit Guide To Film Distribution Deals, a respected primer to the deals in the key film distribution markets. Mr. Hardy has acted as an expert resource for Hollywood Reporter, Fortune Magazine, The Washington Times, WSYR radio and The Black Film Report, among other publications, and interviews with Mr. Hardy have appeared in The Independent magazine, Black Talent News, Cue Magazine and FACES Magazine. His products and projects have been profiled in In Motion Magazine, MacWeek Guide to Desktop Video, Film/Tape World, Release Print Magazine, Movie Business Report and other industry publications, and FilmProfit contributed to The Independent Film and Videomaker’s Guide (2nd ed.)

Posted by .(JavaScript must be enabled to view this email address)  on  February 10, 2010 at 01:07 PM

I think it makes perfect sense, at least in the near term. In the long-term I believe movies will go back to being rented more than purchased via On Demand download services, and this may reset the economics once again, and perhaps bring back higher margins.

Posted by .(JavaScript must be enabled to view this email address)  on  February 11, 2010 at 10:21 AM

Actually, Stephen, rental pricing is at the core of this move. Titles which anticipate lower unit sales should target rental pricing, and go back to the model that drove the home video business for a long time.

I know one new video distributor who is starting up with a specific plan of targeting the market this way.

Best,
Jeffrey Hardy

Posted by .(JavaScript must be enabled to view this email address)  on  February 11, 2010 at 12:34 PM

There was recently analysis in the WSJ about Warner’s and others losing sales by increasing the cost of downloaded songs, and intimating that once Steve Jobs, one of the toughest negotiators in the history of negotiating, allowed the music studios to set pricing themselves, they tried raising it, but this was after the bar had been set by Jobs, wanting to support his store more than the content. Another devil’s bargain that is hard to recover from.

But smaller entities than Warner’s and smaller titles should not be crushed in the rush to commoditize content. It is to the detriment of the rights-holders.

Jeffrey Hardy

Posted by .(JavaScript must be enabled to view this email address)  on  February 12, 2010 at 11:51 PM

Jeffrey, this is a brilliant blog that is dead on right. I hope that it gets around and people begin to realize the good, common sense here. It’s sad to realize that the results of so many dedicated people’s passion over the last 15 odd years has been ground down into grist for the benefit of the Wal-Marts and Costcos of the world. I do think that things are at a crossroads and agree with you that people’s appetites for intellectually and emotionally nourishing filmed entertainment will not wane. Let’s talk about this 5-10 years from now when we find ourselves on the other side of the divide. Can you tell us more about Producer-Controlled Releases? Or at least define them?

Posted by .(JavaScript must be enabled to view this email address)  on  February 14, 2010 at 10:45 AM

This article seems pretty naive and does not adequately address market forces at play, instead focusing on decisions producers and suppliers have made. Product pricing for video is largely a result of changing technology and consumer demand—in short, with all the options available, most consumers just are not willing to pay what they used to. Lost in this discussion is any treatment of the impact of technology and changes in the windowing system for pricing and distribution. The times have certainly changed, and movie pricing has taken a hit, but that might be because it was artificially inflated for so long by the protected model that was used. Now that Internet and kiosk technologies have broken open the floodgates and democratized the industry, producers of content will need to adjust. I applaud the thinking that goes into ways to increase margins for high value content, but I don’t think harkening back to the “old days” will do any good, nor will misguided schemes of consumer education. The market has spoken, and consumers are watching more content than ever. The beauty of the Internet is now high value content producers can pool together fragmented audiences into a global market quite efficiently and this should allow them to make more money. Also, high value film making has always been about a good story line, character development, etc.and not expensive special effects. So take what has always been good about high value content, combine with new efficient distribution models to reach a global audience, and the demand and profits will be there.

Posted by .(JavaScript must be enabled to view this email address)  on  February 18, 2010 at 09:48 PM

Hi, Brian,
I appreciate you taking the time to post your thoughts. All thoughts here are appreciated. The dialogue is key. Now, as to the ‘naivete’ of the original posting, this is not based on a history of consumers going to the store and demanding pricing, and the studios capitulating, but based on the history of determining that DVD would be a sell-through strategy, pretty much from the get-go, and then the big boxes and others exerting continual pressure on the studios to enable them to use DVDs as loss-leader fodder.

If you remember, it was only ten years ago that Blockbuster was calling all the shots on copy-depth and the like. Studios swung and swayed to the tune Blockbuster called.

These terms were not driven by technology, but were market forces negotiated among big players. So, “market forces” is accurate, but to say that it is consumer-driven market forces would be inaccurate. We already had sell-thru, but it wasn’t on every title. That is the core of the thesis. Can we put the cat back in the bag? I am not certain, but if we individually analyze the market size of a product, and then do our best to price accordingly, at the best possible pricing to protect value, then we have the best chance of protecting investor value. I deal with this on a daily basis, every single time I do a set of projections, and a whole series of decisions have to be made. Some are clearly more difficult at depressed pricing and smaller markets. I am not the only one at this juncture.

As well, I, like you, see the wisdom of utilizing all tools at disposal for consumer activation and reach, and feel that controlling all costs of delivery is crucial, but pricing flexibility needs to be part of that model. This is not “returning to the good old days,” but restoring some sense to the exuberance that lets folks believe all titles can sell 250k units to 5 million units.

I see promise in digital technologies, too, but we are in a series of binds right now, and being aware of the exact places the pinches are taking place is crucial. Your thoughts are just the type of conversation I hoped would emerge. This needs to be pushed higher on the scale of discussion, is my thinking.

Posted by .(JavaScript must be enabled to view this email address)  on  March 11, 2010 at 02:58 PM

Lower budgeted films (non-effects driven) taking advantage of world wide markets, if that is the suggestion, can’t be the answer.  There is no revenue model currently for even the lowest budgeted films through digital distribution.  The music industry is still trying to find it’s way out of “free” and probably will eventually, but i think it will have to have some kind of premium pricing alternative as part of the successful route.  Even with the more frugal digital production pathways available, the “dollars for digital dimes” exchange the industry currently complains about is unlikely to be sustainable and something addressing pricing models will have to be part of the solution.  Maybe that’s just hopeful thinking from the production side… we’ll see.