Ignoring Market Signals

I am fascinated by the Hollywood studios’ war with Redbox. Today’s NYT has a nice overview and my friend Rich Greenfield at Pali Capital has been covering this for some time (registration required). Most of the attention is falling on two issues: (1) Hollywood hates the one dollar per day price point, and (2) also hates that Redbox breaks their windowing strategy by offering new releases as rentals immediately as the DVD hits the market.

Redbox’s CEO, Mitch Lowe, knows he has stumbled on a model to which millions of consumers are responding. There will be more than 22,000 Redbox kiosks by December in places like supermarkets and Wal-Mart stores. Their volume is sufficient to scare the studios. The studios’ fears? Cannibalization of DVD sales. Their argument? DVD sales are down 13.5 percent for the first half of 2009 over last year and some titles are selling 25 percent fewer copies than expected while rental income is up 8% (NYT, Digital Entertainment Group).

What baffles me is that the studios still think they are in control. The only reason this model exists, like Netflix, is because of the first sale doctrine. This section of copyright law makes it permissible for anyone who buys a copyrighted work to resell it. Therefore the studios can’t stop a wholesaler or retailer, to whom they have sold a DVD, from selling it to Redbox. And they can’t stop Redbox (or Netflix) from renting DVDs, even though they hate the practice. In the digital world, there is no first sale doctrine, and that’s why your choices of which movies to rent or buy online are terribly restricted and unreasonably priced. The studios set the terms, and no unapproved and unlicensed model can emerge.

Redbox, and Netflix before them, have found models that consumers love. They are based on low price points and high consumer convenience. Time and again we know consumers respond to these models. Consumers don’t respect windows and profit skimming (even though these are intelligent business models). In the digital world, consumers have too much choice to adhere to restrictions imposed by copyright owners. Why buy DVDs when you can download any number of the 65,000 apps in the iPhone app store? Why pay for a digital rental that expires in 24 hours when you can watch six simultaneous channels of the U.S. Open on DirecTV for no extra charge?

We now live in an attention economy. The studios haven’t yet learned that they are dramatically competing for our attention, not just our wallets. To be successful, they must look for market signals, and man is this a big one: consumers will rent more DVDs when you price them low, put them at locations where they already are, and offer the newest releases. The alternative? We’ll just do other things. That is, until the transition to the digital world is complete. Then most of these models will go away if the studios have their way. Then, like the music industry, piracy becomes a better choice and a superior good (no restrictions, low-price).

I have talked before about the need to read market signals. Note to studios: here is a big one. You should be excited, not scared.