Loss and found: Building the pic download biz

Online movie firms focused on long term by offering cheap pix now

Movie download sites are uploading a page from the playbook of their brick-and-mortar cousins: the loss leader.

Apple’s iTunes offers Disney movies for $12.99 in their first week of release. To promote its new download-and-burn service, CinemaNow sold Universal’s “The Fast and the Furious: Tokyo Drift” for $9.99. And Guba VP Bart Myers boasts that his site has “the lowest pricing in the industry,” selling pics from Warner Bros. and Sony for as low as $4.99 apiece.

The sites actually lose money on each sale, since studios charge the same wholesale price for a digital movie as they do for a DVD, to avoid upsetting big retail partners like Wal-Mart, Target, and Best Buy. But online movie firms say that while they can’t recoup by selling Coke or kitty litter like retailers, they’re focused on long term.

“If I lose $5 on the sale of a title, but I acquire you as a customer, I can probably justify the loss on the initial purchase,” says CinemaNow CEO Curt Marvis.

Amazon.com recently began offering new customers a free download of a TV show to get people to try its new Unbox digital download service. “The key is to give people an easy opportunity to try it out for free, and get to know it,” says Amazon exec Roy Price.

Some companies also use their pricing to gather data about what price points will persuade a customer to purchase a digital download instead of the DVD. Marvis says that while consumers don’t chafe at the difference between a $9.95 digital download and a $14.95 digital download, once the price climbs to $19.95, purchases tend to drop off, because “everyone knows that they can probably buy it cheaper at Target or the local grocery store.”

At Guba, Myers says he hopes that by sharing info with the studios about how well movies sell at lower price points, Guba’s biggest partners, Sony and Warner Bros., might see the value in supplying digital movies at a lower wholesale price than DVDs.

“They’re moving carefully,” Myers says. “They’re trying to avoid channel conflict.”

(Myers admits that another reason for the dirt-cheap movie prices at Guba is that the company is trying to meet the minimum guarantees it must pay the studios on each title. And he acknowledges that a customer who only purchases loss-leader titles might not be as valuable as one who also buys library titles and adult videos, which have better profit margins.)

Studio execs are reluctant to talk about their pricing policies, for fear of running afoul of laws against signaling. But Paramount Digital Entertainment head Thomas Lesinski indicates he isn’t feeling a sense of urgency about dropping prices for digital versions of Paramount titles.

“We’re in this inflection point right now — a transition between an old medium and a new medium,” says Lesinski. “We don’t have to jump out right away at a really low price.”

At Disney, though, Buena Vista Worldwide Home Entertainment exec Pat Fitzgerald hints the studio might be thinking differently, moving toward a three-tiered pricing strategy he terms “good, better, best.”

The digital download, Fitzgerald says, is the lowest-level product, since it doesn’t include bonus materials standard on DVD, and the picture is of lesser quality. DVD is the better product, and a high-definition disc, Fitzgerald says, is the best. (Disney favors Blu-ray.)

One distributor that has been experimenting with rock-bottom wholesale prices is Tempe Entertainment, a horror-oriented company based in Akron, Ohio. Tempe’s movies can be downloaded from Guba for $4.99, or downloaded and burned to a DVD for $6.99 at EZTakes.com.

Movielink chief Jim Ramo hypothesizes that once retailers like Wal-Mart begin to operate their own digital download services, “they will see the world differently, and realize that the digital movie and the DVD version probably don’t compete nearly as much as bricks-and-mortar retailers think they do.”

Both studio and Web execs say pricing isn’t the only factor preventing more consumers from trying digital downloads. For one, more consumers need high-speed Internet connections, and they need to be able to play downloaded movies on devices other than their PC — like a television set or handheld video player. And Lesinski says the selection of movies needs to expand. “The studios have been trying to clear (digital rights to) content quickly, but right now, some of our distribution partners are ahead of us, in terms of wanting more stuff,” he says.

But even with such improvements, the pricing problem could make life very difficult for sites that hope to support legal downloading.

“It’s a classic chicken-and-egg situation,” says Marvis. “How do I convince someone to lower their wholesale price when I don’t have the sales figures yet that show that I can take up the slack of the retail (DVD) channel?”

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