Previewing the Post-DVD World: Don’t Expect the Free Ride to Last

In the wake of Steve Jobs’ death, mainstream media outlets spilled a lot of ink trying to quantify the late Apple executive’s impact on the pop-culture universe, as in Entertainment Weekly‘s recent piece about the evolution of the iPod. The magazine noted that many of the music fans who had stopped paying for CDs when MP3 files made it easy to download music happily embraced paying 99 cents per song after the iTunes store launched. To the great relief of music executives, the combination of convenience and low prices turned iTunes into a money machine.

Professionals in the film industry watched these developments closely because they hope to replicate the music industry’s iTunes income. Just as selling millions of downloads replaced some of the cash record labels lost when CD sales plummeted, Hollywood types have crossed their fingers that selling digital copies of movies will replace some the income they’re losing as DVD sales fade.

Yet even though the disappearance of physical media has been troubling for showbiz executives, the transition has been intoxicating for young consumers who came of age during the digital era. To these consumers, the idea of clearing CDs and DVDs off their shelves, and instead storing movies and music on hard drives or in the digital cloud, seems like common sense: Why bother with clunky plastic discs when everything worth listening to or watching can live in the same digital ether that feeds laptops and smartphones?

For these consumers, digital-era convenience is tethered to the idea that prices will continue dropping as entertainment companies discard traditional operating expenses: Just as the days of paying $17.99 for a brand-new CD gave way to the new reality of paying $9.99 for a download of the album, it seemed reasonable that the days of paying $24.99 for a brand-new DVD would give way to a new reality of paying a fraction of that amount for a download of the movie. After all, weren’t prices on other forms of digital movie delivery dropping as well?

Consider Netflix, the movie-rental company that’s been making headlines lately because of its miscalculations about the speed with which consumers are abandoning DVDs. For years, Netflix customers bought “unlimited” DVD rentals for fees around $10 or $20 per month; depending on the customer’s cinematic appetite and free time, the customer could conceivably burn through a dozen or more movies each month, translating to a unit price of under a dollar per film.

And then, when Netflix introduced its phenomenally popular instant-streaming functionality, the numbers got even more outrageous. Customers gained the ability to complement dirt-cheap DVD rentals with open access to a vast library of movies and TV shows, driving the unit price for each hour of content even lower than before. Until this summer, it seemed like the party was never going to end, in terms of getting filmed entertainment for less and less with each successive year.

Now things are changing fast, and for the worse. The adjustments started over the summer, when Netflix introduced its controversial pricing-structure changes, which nearly doubled the cost per month for Netflix clients who use both physical DVD rentals and online streaming. In an instant, the illusion that prices for filmed entertainment were on a permanent downward slide was shattered. Netflix took a major PR hit and suffered the humiliation of scuttling its proposed spinoff company, Quickster, before the spinoff even launched. But, tellingly, the price increases have not been reversed.

The same type of lightning-fast backlash was felt at Universal Pictures recently, because the studio’s plan for selling video-on-demand access to its upcoming Ben Stiller-Eddie Murphy movie Tower Heist (for absurd fees around $50 per viewing) was crucified in the court of public opinion and suffered the same fate as the never-launched Quickster. Obviously, there’s a threshold of greed the public will not abide, but even with this well-reported resistance (Occupy Hollywood?), price points that previously seemed inviolate are changing, and not just for Netflix customers.

Last week, Redbox, the company behind those ubiquitous movie-rental kiosks outside convenience stores and supermarkets, announced that its standard single-movie rental price was bumping from $1 to $1.20. (Keep in mind this price increase is happening at a time when consumers are moving away from renting physical DVDs.) Across the home-entertainment spectrum, companies that used to offer great deals are acknowledging that old pricing structures have become unsustainable.

Additionally, the normal logic that a competitive marketplace can support multiple companies offering closely related products seems to apply only sporadically in the realm of home entertainment. Just as price is becoming less and less attractive for consumers, so too, apparently, is choice.

For instance, one would think that (prior to recent events) Netflix’s overwhelming dominance of the DVDs-by-mail business would have motivated some enterprising company to enter the market as a legitimate competitor, seeing as how it was the explosive profits of renting DVDs by mail that allowed Netflix to become a showbiz powerhouse that now regularly pays six-figure licensing fees for streaming content. Yet the only company to make a real run at Netflix in this area has been Blockbuster, the onetime titan of brick-and-mortar video-rental stores.

For the last couple of years, Blockbuster has been trumpeting its DVDs-by-mail service as preferable to Netflix based on the dubious feature of customers being able to return mail-order discs to stores in order to get new discs faster than by waiting for postal turnaround. The problem, of course, is that there are so few Blockbuster stores left, and the inventory in the stores is so abysmal, that this isn’t much of an incentive.

Nonetheless, during the tumult of this summer’s Netflix changes, I was wooed by Blockbuster’s savvy marketing strategy of offering steep discounts to new customers as a means of poaching disgruntled Netflix clients. I tried Blockbuster’s DVDs-by-mail service as an experiment, and the service was so disappointing that I dumped my subscription after a matter of weeks. Blockbuster’s online interface is fine (it’s an almost identical copy of Netflix’s interface), but the company’s shipping speed is atrocious. Typically, if I return a disc to Netflix, the company issues my next disc within a matter of hours from the time they register the return. But with Blockbuster, it regularly took two to three days from the time a return was registered for the company to issue a fresh disc. There’s simply no comparison between the two services, so customers who want DVDs by mail are stuck with Netflix as their only real choice.

Less choice, higher prices, unexpected changes . . . not exactly the most appealing combination.

Given these circumstances, it is clear that the brief window of time during which the realm of online movie rentals was a buyer’s market is closing. Back in the days of VHS rental stores, there was a clear marketplace hierarchy: Customers could pay low fees at mom-and-pop stores, but the tradeoff was poor selection, or customers could pay high fees at major chains, which had better inventory. Now, the VHS-era financial reality is reforming in the digital marketplace: Consumers can pay low fees by patronizing businesses like Blockbuster’s DVDs-by-mail service, which has serious drawbacks, or they can pay premiums by patronizing smoother operations, like Netflix’s various delivery systems.

Obviously, paying fair market value for a desirable product is standard operating procedure in a capitalistic economy. But, as indicated by tip-of-the-iceberg price hikes like Redbox’s 20-cent bump and by scary experiments like Universal’s attempt at Tower Heist price-gouging, consumers should brace for nasty surprises when they discover the gulf between what consumers consider fair market value and what companies consider fair market value.

And that’s without taking into consideration major changes that are still in the discussion stages. Just imagine what will happen to home-entertainment prices if concepts like “net metering,” which involves consumers paying for the amount of bandwidth they use instead of flat Internet-access fees, become reality. Bottom line: Enjoy dirt-cheap movie rentals while they last, because the party is almost over.


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