Digital May Alter Movie Pricing

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The issue of pricing pay-per-view movies in a digital
environment will be a major consideration for cable operators as more sophisticated
digital boxes enable them to offer enhanced services to consumers.

There already seems to be some movement within the business
to test the price elasticity of PPV movies: DirecTV Inc. may look to increase the price
for its titles to $3.99 in an effort to generate more revenue from its
near-video-on-demand movie service, according to several studio executives.

Also, some operators are considering testing an even higher
price point for NVOD and VOD movies in the future. Such pricing adjustments could alter
the way that operators think about pricing their NVOD PPV services as more digital boxes
roll out into the field.

DirecTV, which has been very successful offering PPV movies
for $2.99, has had recent discussions with studio executives about raising its PPV-movie
price to the level that cable operators charge for analog PPV.

"DirecTV has mentioned in conversations that
they're considering a move [to $3.99]," one studio PPV executive said.
"They would have loved to see what would have happened at $3.99 from the
beginning."

Another studio executive who wished to remain anonymous
said any DirecTV movie-price increase could also be tied to its eventual rollout of
high-definition television or other enhanced movie features.

But Robert Mercer, manager of communications for DirecTV,
vehemently denied that the company is considering changing its price.

"We are not raising our PPV-movie rates, nor are we
thinking about it," he added.

The $2.99 price point, which is $1 lower than what most
cable operators charge for movies, has been a very successful marketing tactic for DirecTV
in its drive for subscribers.

But with studios generating nearly $2 from each movie buy,
the return to DirecTV is minimal, making PPV movies more of a loss-leader than a
profit-maker for the direct-broadcast satellite service.

"There is no doubt that you'll get more buys at
the $2.99 price level, but the question has always been whether the additional buys will
make up for the [poor] splits," said Bruce Leichtman, director of media strategies
for media-consulting firm The Yankee Group.

"It comes down to price versus profit, but DirecTV has
used it as a loss-leader to get people to into the store," Leichtman added.

Very few operators currently offer either digital or analog
PPV movies at $2.99. One exception is AT&T Broadband & Internet Services (formerly
Tele-Communications Inc.), which has priced its digital PPV movies at $2.99 to effectively
compete with DirecTV.

Robyn Remick, director of partnership marketing and PPV for
AT&T Broadband, would not say whether the MSO is generating enough buys to offset the
loss in splits, but she did say that its PPV-movie business has been "successful.
We're happy with the product."

If DirecTV does change its pricing, its triple-digit
PPV-movie buy-rate performance may not suffer much. According to a recent CTAM
digital-customer survey, 66 percent of consumers said they wanted to see more recent
movies, and 83 percent of that group would pay more to get them if the price were
reasonable.

Such results have prompted at least one MSO executive to
consider offering digital NVOD and VOD movies for as much as $5.

"We're providing an increased value to consumers,
especially with VOD, so why should it be priced at the same level or lower than what is
considered an inferior product in analog PPV?" the executive asked.

But Leichtman said digital movie pricing should be based
more on the competition than on the product itself.

"People are paying to see [There's] Something
About Mary
-- they're not paying for the better picture quality or sound,"
he said. "[Pricing] has to be in the ballpark with the competition, which, at this
point, is the video stores. If you go beyond the price that the consumer can buy the
product for elsewhere, your price becomes unreasonable."

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