I had an eye-opening conversation yesterday with a very senior operations exec at one of the big Hollywood studios about the pricing challenges in content industries--the tone of the dialog was pretty scary. To quote him on lessons being learned in the music business "the sky isn’t falling, it has fallen".
We circled the issue for a good 30 minutes from the old "Content is King" mantra of a decade ago through the hypothesis that maybe distribution is what really matters and ultimately back to the devices on which we consume content, whether that’s an iPod or a Blu-Ray player. No one seems to know how to get paid.
The underlying problem is that traditional pricing assumes increasing marginal costs of production, which equates to the supply curve in old school "supply and demand" microeconomic theory. This makes sense for physical products that require plant and equipment for production. Non-physical products, like music or feature films, have historically been available only via physical media which move through the supply chain to consumers sort of like all other products, from factory through distribution and ultimately to the shelves of Best Buy and Wal-Mart. No more.
Although not the first to break the bonds of the physical chain, Apple has effectively blown it up once and for all causing some serious heartache in the entertainment industry. Now iTunes' first ever variable pricing (announced yesterday) may open the door to pricing based on willingness to pay rather than marginal cost to deliver. Good news, yes, but now content businesses have to get smart fast about how they set and enforce their prices.
I have no answers yet, but as a student of supply chain, I wonder what lessons can be learned from other industries with products that include a lot of content, or intellectual property. Pharmaceuticals make money with IP but regulate consumers’ access with a physical product – typically pills that enforce price discipline, but this is sustainable against generics only because of patent protection. Luxury fashion products get most of their margin from the premium they command due to design and brand, but this IP is exposed to counterfeiting by the very global supply chain that delivers low cost materials and production. Even a mega-brand like Coca-Cola must secure its brand premium through the physical supply chain with formula control and packaging artwork standards.
Pricing for intellectual property must somehow reward the creative source not just for the idea itself but for the promise of future ideas. Until a widely understood and accepted model for pricing of intellectual property evolves business will face severe downward pressure on prices and a growing disincentive to develop new content. The conundrum feels like an M.C. Escher drawing where the down staircase just keeps going down. Can we reverse this vicious circle and make it a virtuous circle? I have to believe the answer is yes.
What do you think?
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