Saturday, February 26, 2011

Why The Film Business Doesn't Face The Same Fate As The Music Business

For years, there has been a steady stream of of articles reporting the continuing decline of the recorded music industry. Everyone knows the saga by now.  As music became available on the Internet, people stopped buying CD's and younger listeners started freely copying song files from one another.  A whole generation of consumers now has the idea that music should be free, and sales of recorded music continue to decline.

All of those facts are pretty accurate, but there is one element of the story that is often left out, and it has a lot to do with why the music business can't get back to its prior levels of revenue.  Record companies were primarily in the business of selling albums -- groups of 10 or 12 songs.  Back in the "old" days, the normal price of an album was around $15.00, give or take a few bucks.  That meant that the price per song was a dollar or two -- much like it is now -- but the unit sale was much higher.

The magic in that model was that a record company could promote one good song off the album, and consumers would have to buy the rest of them too.  Think of it in another context.  You're hungry for a hamburger, but you have to buy 11 fish sandwiches at the same time in order to get your hamburger.  McDonalds would sell a lot of fish sandwiches that way, even if no one really liked fish sandwiches.

In reality, with the retail price of a recorded song about where it's always been, the gross profit margin is actually higher.  There are no manufacturing, shipping or co-op placement fees. Same revenue, lower costs -- that means more gross profit to go around.  But the problem is that this new model of distribution doesn't let the record company sell a bunch of fish sandwiches along with the burger.

With the demise of the DVD, there is a real fear that the film business will face the same sort of irretrievable decline in revenue from the home entertainment division.  While the problems of illegal copies and piracy are certainly a similar challenge, the film industry isn't faced with a prior business model that had them selling 10 or 12 movies per disc.  So as film distribution moves from discs to digital downloads and streaming, film distributors are still going to be selling in the same units as before -- one film at a time.  And all of the economic efficiencies of digital distribution should work in the same way to actually increase the profit margins.

I understand there are many other factors in play.  Films are expensive to make (although less expensive than they used to be), and there might still be a perceived value issue where consumers won't pay as much for a download or stream as they will for a disc.  However, with all of that said, at least the film guys aren't trying to reclaim a business model where most of their sales were from products that no one ever really wanted to buy.

3 comments:

Michael said...

Your points are very good, and I agree. Ironically, we were just discussing this issue on Twitter this week. My position was, the music business and movie business have significant differences.

A "real" band can go into a garage studio and make a dozen songs for $100 each, and a little later, do it all again. And, if people want to buy them, they're pretty easy to sell online; MP3s on a variety of sites are easily downloaded after plopping $1 on PayPal.

A "real" filmmaker, on the other hand, makes one movie for a million dollars, and spends at least a couple years doing it. There is not yet a clear-cut infrastructure for easily selling that movie online. Even if there were, the download of a movie is still a daunting task for most computer users. And it seems, at this point in time, people don't want to pay more than $4 or $5 for a movie (four times the retail price of a song, yet the investment to make the movie is one thousand times times more than to make a song.)

Yes, these are simplistic (but not illogical) assessments, and other factors enter into it, but these are significant differences between music paradigms and movie paradigms. In this age when every filmmaker is frustrated and frantically looking for the new paradigm, it's important to keep in mind such differences.

Roger Goff said...

Great comment, Michael. In the rush of changing paradigms, I think some of these points sometimes get lost. Ultimately, technology will drive the market to be what it will be. The key is not to get caught up in what was, and instead to look for innovative ways to continue to create.

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