There’s been a big brouhaha in the last week or so over Netflix’s decision to boost rental rates.
While monthly prices are only increasing by several dollars, in terms of percentages, it’s about a 50 percent increase for most people. I was a bit surprised by all the negative reaction.
Sure, I’m not happy about a 50 percent increase, but even under the new price scheme I think you’re still getting a lot of bang for your buck.
So how do we know if Netflix is charging too much or if its service is actually under priced?
After a little thought, it seems like the pricing of film entertainment is surprisingly arbitrary — shouldn’t the price of a movie ticket reflect the production costs and popularity of a movie?
Strangely, the pricing of movies — both movie tickets and DVD/Blu-ray — is uniform.
The cost is not based on demand, or reflective of how much was spent to make the movie.
For instance, tickets for Midnight in Paris, which had a budget of $30 million, cost the same as (2D) ticket for Transformers: Dark of the Moon, which cost $200 million to make, and another $100 million to market. And demand for each film was different. Transformers was one of the most anticipated movies of the year (based on how many people saw it opening weekend), but its ticket price did not take that into account that.
The pricing structure in other entertainment industries is much more variable — it’s market based.
Tickets to a MLB baseball game vary from one stadium to the next. Prices factor in the popularity of the team, the market the team is located in, as well as the overhead costs of the stadium and team. A similar supply and demand structure is also applied for live music.
The uniform pricing for movies doesn’t make much economic sense. I feel like I’m going over to the dark side saying this, but the price per movie ticket should vary from film to film.
If a movie cost $200 million to make, I think it’s reasonable to charge a bit more.
It’s a huge investment that leverages the overall fiscal well being of a studio, so a higher price per ticket would help insure a return on investment. Or to look at it from another perspective, studios can only afford to make so many blockbusters. If you like huge blockbusters, paying more will allow more to be made.
A market based pricing structure would actually benefit art house films.
Given that most movie goers have finite entertainment budgets, a Woody Allen film can offer few incentives when competing against large studio films with huge marketing budgets.
I think more people would be willing to go to small independent films if they took up a smaller proportion of their monthly movie budget.
I’ve heard people say countless times: “I’m interested in seeing that film, but not for $10.”
Another potential benefit to consumers is that market based pricing will make financing films with limited appeal less risky.
It seems pretty foolish that studios don’t cash-in on highly anticipated films by charging more. I don’t see it as greedy, but by maximizing profits from a “sure thing,” you can hedge against low performing movies. A film like L.A. Confidential had a difficult time finding financing because everyone knew that there was a limit to how much money a period noir film could make. A 20% price increase to a film like Transformers would help offset expected low revenues from those kinds of films — it will make it easier for the profits of summer action films to help support potential losses from independent films.
So going back to Netflix, I think it is really easy to measure the value of their service: as long as you can rent multiple movies for less than the cost of buying a single movie on DVD or Blu-ray, it’s a really good deal.
