I don’t think anyone in the advertising/marketing business can say they don’t owe a great deal to Steve Jobs… even the PC folks. From revolutionizing how we produce the work (I’m told this used to be done by hand), to proving once and for all that good taste has real marketable value (would design and creativity be nearly as valued today if it wasn’t for Apple?), our business is what it is today because of his work.

Thanks, Steve.

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Apple has announced that it will no longer rent TV show episodes for $0.99. Customers must purchase them for $1.99.

The rationale seems straight-forward: Apple’s competitors rent. By choosing to only sell, Apple sets its service apart… it’s a premium service. iTunes becomes the place true TV lovers go to build their collections. (It’s worth noting that with iCloud, a purchased episode will always be available to you on any iTunes-connected device.)

But here’s my question: Why $1.99?

The reports are that the price was set in order to appease the studios. $0.99 was too cheap for their tastes.

This seems reasonable at first glance. $1.99 for a 30 or 60 minute episode is cheap compared to buying a 90 minute movie for $20 or $30. But is that really the best comparison to make? Is $1.99 really a good deal? Or are we getting ripped off?

A more appropriate comparison would be to ask how much money is made per viewer when a show is aired on TV. For most channels, the only revenue is advertising. (For the sake of this discussion, I’m not going to take into account subscription channels like HBO.)

Math Time:

TV advertising rates are done on a cost-per-thousand (CPM… the M being “mille”) basis. I’m not an expert on media costs, so I’ve had to do a bit of searching. Estimates on average CPMs are a bit all over the place, but your average 30 second spot sells for $5 to $25 per one thousand viewers. Let’s go with $25.

If an hour-long TV show has about 18 minutes of commercial time, that’s about 36 commercials.

If each spot paid $25 per thousand viewers, that works out to $900 per thousand viewers. Meaning each viewer is worth about $0.90.

Now, iTunes is selling episodes for $1.99. After Apple’s 30% cut, that leaves the show with revenue of $1.39.

If customers purchase an episode and only watch it once, iTunes is generating 54% more revenue per episode per viewer than TV advertising does. However, if they watch the episode twice – the equivalent of watching it at least once on rerun – TV might provide revenues of $1.80 per viewer. Suddenly the iTunes sale is providing 23% less revenue. (Remember: iTunes sales are a one-time thing. No matter how many times you watch an episode, the company doesn’t make any more money. With TV, they get paid every time the show runs.)

It keeps going downhill from there, of course. We can start to see why the studios/networks (or whoever owns the shows) would be nervous about anything less than $1.99 per episode.

Conclusions:

1. To date, we’ve seen $0.99 as the sweet spot for selling music and apps. It’s a magic number that makes purchases sky rocket. $1.99… not so much. If $1.99 is the best they can do, can digital downloads ever beat the TV subscription model?
2. As I’ve said before, when you look at the true costs of media creation, we begin to see how much benefit we get from having TV subsidized by advertising. It’s estimated that the average American household watched 8 hours of TV per day, maybe more. If all of that was purchased on iTunes, they’d be spending $16 a day on TV alone. Even if we assume half of everything being watched was a rerun they’d already seen, that’s still $8 a day, $56 a week, $243.33 a month, and $2,920 a year. Anyone else feeling a tad bit appreciative of all those disruptive ads right about now?

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Some Caveats:

1. There is a big difference between how much money an advertiser pays for a 30 second spot, and how much the studio that made the show actually gets. I’m not expert, but let’s assume that at the very least the network running the ads is taking a significant chunk. I don’t know the percentages, so I left that out of my calculations.
2. A $25 CPM appears to be a premium rate. I don’t really know, but that’s what the interwebs tell me.
3. All in all, the point of the math above was to get a basic sense of how the money works out, with wide margins of error.

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Most products aren’t simply products. Their value goes beyond their immediate utilitarian function. We buy products for specific reasons. Sometimes those reasons are minor. Sometimes they’re really big.

A few days ago, Google released a video advertisement that takes “mundane” products like email and maps, and shows how powerfully meaningful they can be.

Go ahead… try not to be moved by this:

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Amazon is famous amongst marketers for their leading edge in online retail. They’re constantly innovating, constantly using data to find new ways to help people find things they might wanna buy.

One of the areas they pioneered (or at least embraced) was: “Customers Who Bought This Item Also Bought.” It’s a simple recommendation engine that shows you the other items most commonly purchased by the people who bought what you’re looking at. It doesn’t seem all that revolutionary today, but it was still a bit of a breakthrough at the time.

Another method they’re using is allowing users to tag books. So you might tag Suzanne Collins’ The Hunger Games as “post-apocalyptic”, “dystopian”, “young adult”, “sci-fi”, etc.

Or you might assemble a gang of online trolls to tag A Billion Wicked Thoughts like this:

Click to see a larger version.

See those tags at the bottom?

• mansplaining(462)
• bad science(450)
• bad research(414)
• authors failed research methods 101(406)
• psuedoscience(371)
• surveyfail(362)
• phds written in crayon(361)
• complete crap(342)
• disclaimed by boston university(337)
• junk science (319)
• Etc.

Ouch. To be clear, I haven’t read this book. I have no idea if it’s any good or whether the backlash is deserved or simply the work of hundreds of teenagers with nothing better to do.

But it’s enough to make me think twice about the “wisdom of crowds.”

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