There has been a tons of rumors about Apple creating movie rentals in iTunes. Let me tell you what I think about this mess. I think it’s a HORRIBLE idea. The problem isn’t with Apple, it’s a problem with the Studios and Networks. It’s also a major league issue with economics. Anyone who has taken an economics course should be able to figure this one out, but the studios are missing it.

Digital downloads of movies, tv shows and music does not follow a physical model of sales. And it never will. The studios want to sell the content online for the same price as they do in a physical format. The problem is that they haven’t figured out that they could make MORE money by lowering the price for online content. Here are the facts. A physical DVD requires PHYSICAL resources to create, these physical resources to manufacture. I’m sure we aren’t talking about a ton of money here, but it is a cost. Factor in shipping, labor and packaging, I’m sure the cost is minor, in relation to the cost of retail price of the DVD. But lets say that it’s 10% of the retail price. I am in NO way an expert on these costs, I’m just making a generalization and guess.

Ok, so here is my thinking on the topic. In economics there is an equilibrium of supply and demand. As supply increases, demand decreases and there are downward forces applied to price. As supply decreases, demand increases and upward pressure is applied to price. We aren’t talking about anything earth shattering here. This is Econ 101 stuff. So… A physical DVD requires resources to manufacture. Labor, Materials, Shipping. Both Human and physical materials. This is part of the reason that DVDs take time to go from theatre to retail store shelves. If a DVD costs 15.00 on the retail store shelf and it costs 10% of that or 1.50 per disc for manufacture and they sell 100,000 of them then it costs 150,000 do make those discs.

On the other hand. Let’s say that they distribute a movie in digital format only. They make the copy ONCE, and then can copy the item infinitely at no cost. Want proof of this, copy a file on your computer and see how much it cost you. So here’s the economics. Following the logic of as supply increases it applies downward price pressure these means that a Movie’s price should be approaching 0. Because a Digital copy can be reproduced at no cost means that supply is infinite. Infinite supply would apply downward price pressure with a limit of 0.

As of April 9th, 2007 Apple reported that they had sold the 100 millionth iPod sold. That was almost exactly 9 months ago. iTunes is a free download for both Windows and Mac. You don’t have to pay for it. Don’t have to build a website, don’t have to do much of anything to get it to the user. Additionally, guess what, they USER pays for the distribution of the tool, just like with at TV. Anyone with a computer, (Sans Linux users, sorry guys) can download and install iTunes. Let’s just take the iPod numbers as a base, at 15.00 per movie let’s say you sell 500,000 “copies”. That would net you 7.5 million bucks. 500,000 is 1/2 of 1 percent of iPod owners. Now, let’s flip that around, what if you could sell 25,000,000 copies, or 25% of the iPod market, at 1 dollar each? Doesn’t cost you any more to make them, but you make $25,000,000.00. Um, that’s more than 300% more and it didn’t cost you anything more to get. If I were the stock holder of a major studio, I would be SCREAMING for them to lower the price and sell MORE content on iTunes. Market to the iTunes user, it costs you NOTHING and you can make HUGE amounts of profit.

You can’t fight the invisible hand. The fact is that people instinctively know what something should cost. And most people think that a movie shouldn’t cost 15.00 bucks. It’s already starting to cost that to GO SEE IT AT A THEATRE. Want to sell MORE, lower your price. Want to make it so that you have so much money you don’t know what to do with, make it so easy and so inexpensive for people to get the content on their iPod that they PREFER IT. Try this for 6 months, sell Songs for 33 cents each (DRM FREE), TV Shows for 66 cents an episode and movies for 99 cents. A few things will happen and none of them will be your problem. Apple will be upgrading the infrastructure of the iTunes store, hard drive and blank media dvd sales will go through the roof and Cable/Satellite companies will SERIOUSLY start complaining. Don’t get me started on Walmart. iTunes is the platform, make it work FOR YOU. Quit limiting users with fake and arbitrary limitations that mean nothing. Do something that the consumer will like and they will reward you for it.

I am a HUGE proponent of digital content because I can watch it when I want, where I want and how I want. If you cut the price and the volume goes way up, what’s the difference? if you cut the price and the volume is such that you make MORE money you will be scene as a genius. You will also know EXACTLY what your market is for a show or a movie based on your downloads. If a show is getting 10,000,000 downloads of the episodes each week, that’s 6.6 Million per episode at 66 cents per episode. If you can’t make quality content for 6 Million an episode, stop making content. If you keep increasing the price to keep up with “Physical Media” sales, people aren’t going to do it, but if you make it EASIER and CHEAPER than downloading it illegally, why in the world would you NOT want to? I’m not saying that every show will get 10 million downloads, but I’m sure it will be more than you are getting now and it will more than make up the difference.

Studios, it’s up to you, if you want to survive and not upset more people than you already have, you need to embrace the new technology and figure out how you can leverage it. You shouldn’t be alienating your market. The consumer is showing you EXACTLY what you should be doing, you need to listen and pay attention. If you could get 1/2 the people to buy the content versus downloading it illegally wouldn’t that make you happy? Keep in mind, the market for this stuff is limited, because you have already aired it on TV for FREE.

So I’m browsing around the TV this morning and I stop off at Fox News. I don’t spend much time there as they are well, anyway, but, what do I see sitting on the desk in front of two of the anchors? Two MacBook Pros. They look like 17″ MBPs but I’m not sure as the TV distort that sort of thing, and I’m not sure what they are running, but there they were, large as life.