The Clicker: Television Physics and the $1.99 price point

Every Thursday Stephen Speicher contributes
The Clicker, a weekly opinion column on entertainment and technology:

Oh to be Steve Jobs... Yes, rumor has it that he struck some sort of perverse deal with the devil, the details of which are sketchy but apparently require that he dress in the black-turtlenecked uniform of a Selsun Blue model. However, can you blame the guy? It's a small price to pay for such incredible success. Just look at the power he wields. He makes one little announcement like "We'll begin selling select television shows for download" and poof: the world goes wild. Stations begin to revolt. Well... not revolt but rightfully ask "Excuse me guys – what's in it for us?" (The answer is, of course, very little). Eccentric billionaires like Mark Cuban hail the brilliance of the move. Ripples of shock are sent through the industry. That's so
Raven Steve Jobs.

It's a bold move to be sure. However, the question still remains: has Steve Jobs saved network television or simply helped to hasten its death?

You see ? there?s a secret in the television industry. Network execs don?t like to talk about it, but it?s there.
Quite simply, television works in large part because people are lazy. Take a minute. It?s rough to hear, but they count on the fact that your entropy drives you. Or, more to the point, it doesn?t. Television physics dictates that a channel in motion stays in motion, and television economics have evolved to rely on the fact that people who start watching television will continue watching television.

Television physics is one reason for Apple?s $1.99 pricing paradox. The Apple pricing paradox is that odd disconnect between what consumers view as the reasonable price for an iTunes show and what the networks view as the ?correct?
price. Ask any person on the street and she will tell you that $1.99 seems quite high for a show that she now watches for free. Ask the networks and they will tell you that the $1.99 is, if anything, too low. How can that be?

(Disregard, for the moment, that it?s not free. If you?re one of the 90+% of the people in the world who live ? gasp ?
without a DVR, you?re paying for that show every time you reach past the Safeway Select Bleach and grab the Clorox.)

So what are they paying for your eyeballs? Let?s take a look at some very simple numbers:

Let?s see ? Desperate Housewives gets about $330,000 per 30-second slot. There are approximately 17 minutes of commercials per hour. That brings us to a little over 11 million dollars of ad revenue per episode of Desperate Housewives. Latest estimates show that 17 million of your closest friends are likewise indulging in that ever-increasing estrogen-fest. Do a little more math and you?ll see that advertisers are paying about 64 cents per hour per viewer. So why the large gap between the 64 cents that advertisers pay and the $1.99 Apple charges? Clearly it?s not distribution. While distribution isn?t free, it?s likely to add but a dime to the overall cost.

?The numbers don?t quite add up,? you think. How could networks possibly claim to need more than a 3x difference between traditional advertising revenue and per episode download revenue?

Here?s where the house of cards starts to tumble. The fact is, shows rarely stand on their own. For instance, network news has traditionally been a loss-leader, depending on its ?Friends?? revenue to subsidize it. Purists preach that news can?t be a business lest actual profit taint its objectivity. Realists argue that the apathetic public wouldn?t pay for news. Either way, the news is rarely a money-maker. Popular shows like Desperate Housewives make other, less profitable, endeavors possible. The hope is that the network, as a whole, will be more appealing and you know what they say ? a rising tide floats all boats.

In other cases, the subsidies are far more subtle (yet still very real). The networks count on the television physics.
Don?t believe me? Consider this fact: at one point in time ?Jessie? was one of the most watched shows on television.
Having trouble remembering that show? By all relevant numbers, it was a hit, and yet most people would be hard-pressed to give you their favorite Jessie moment. That?s because Jessie was the product of bundling. The show was placed smack-dab in the middle of ?Must See TV.? NBC was rolling. The rest of the night was so strong that ?The Potted Plant Show? would have garnered a 15 share. Based on that strength, NBC was free to place a low-cost high-margin show into that time slot. Did Jesse earn 15 share money? Of course not, and that?s precisely the point. The strength of that evening?s schedule gave an otherwise horrible show a large viewer base. Switch the dynamics and ask people to
choose the shows they want to watch and, poof, Jessie and her profits disappear. By offering a pay-per-episode model Apple is threatening to both deprive networks of their bundling revenue and strip them of their brand identity.
You can start to see why the networks might show some trepidation about this new venture. You can also see why they might price shows like Desperate Housewives such as to compensate for their complete economic loss.

Still not convinced that per-episode-downloads would shake things up? Consider for a moment that the average US
household television consumption per day is a mind-numbing (both figuratively and literally) 8 hours and 11 minutes PER
DAY. At Apple?s $1.99 pricing model that works out to an average television bill of $486 per month. Is it possible that people might start turning off the TV if they were charged per show? Is it possible that the economics of television assume a passive audience that?s willing to watch ANYTHING as long as they don?t need to move?

In any case, it?s unclear that television can handle per episode sales. Like DVR use, as long as the majority of the people remain stuck to their couches, listening to those insipid jingles, it works. However, as DVRs near the tipping point, DVRs and per-episodes downloads threaten the networks? bread and butter. Suddenly you?re not only skipping
commercials you?re skipping shows and they just can?t have that.