Since the beginning of the month, I’ve been reading up entranced by the bitter fight between NBC and iTunes, which had been well covered by Phill Ryu. This is an interesting case where someone at NBC sadly thought that this was a good idea but have clearly miscalculated.

Basics of What Happened

This case can be summed in 5 basic steps:

1. NBC’s sells shows on Apple’s iTunes Store at $1.99 per episode; contract comes up for renewal
2. NBC tries to re-negotiate with Apple asking $4.99 per episode; Apple refuses to budge on price
3. Negotiation goes public; NBC hoped “the people” would side with them, forcing Apple to concede
4. Negotiations goes nowhere; NBC switches to Amazon’s Unbox service for Tivo
5. Wheels fall off the bus!

So who’s the Biggest Loser?

I think that NBC will lose because:

Reason #1: People will buy the DVD

NBC is operating under the assumption that people are willing to pay $5 per episode. Considering that a typical television season has 21 - 23 episodes (according to Ryan Tuttle, who is an avid TV watcher), I’m calculating that viewers of shows like 30 Rock, which had 21 episodes, will shell out almost $105 based on the new price:

21 episodes/season * $4.99 per episode = $104.79

That’s a fair sum, considering that you can buy the 30 Rock Season 1 DVD for less than $50. If viewers paid $1.99 per episode, they would be shell out a more reasonable $41.79:

21 episodes/season * $1.99 per episode = $41.79

Reason #2: People will steal download shared episodes for free

In comparison to movie downloads, shared TV episodes are more popular. It seems that while only a small fraction of shared files, or torrents, are TV series, 50% of all download activity is focused on grabbing these shared files. And at $4.99 an episode, downloading these for free would be a steal.

Reason #3: iTunes is FREE while Tivo’s are not!

You can download iTunes for FREE but the barrier to entry for Amazon Unbox Service is a Tivo box. While there are potentially 1.5 million broadband-ready TiVo boxes that can take advantage of this service, it seems that Amazon is tight lipped about how many subscribers are currently purchasing movies through this service. Even if you estimate that 2% of subscribers, that’s only 30,000 potential customers, which will fetch about $150k per episode which seems a bit on the lighter side.

Reason #4: People will opt for cable/satellite TV

Many of the folks that I’ve known who buy episodes do not have cable. They buy episodes from iTunes because it is more cost effective. If you assume that a viewer watches three TV shows and there are 4 episodes a month (one per week), a typical viewer would pay much less than a regular cable bill:

3 shows * 4 episodes * $1.99 per episode = $23.88 per month

When you compare that to a normal cable/satellite bill (approximately $30 to $60 per month), viewers can save a ton of dough. But when you price an episode at $4.99, a viewer will now pay $59.88 per month and at that cost viewers will likely opt in to cable TV.

Reason #5: People will Tivo the episode

One of the reasons that people have Tivo’s is that they can digitally record shows. The benefit of having the Unbox service is that you can access movies, and that is worthwhile if you are a bare-bones cable subscriber. A typical Tivo subscriber would “Season Pass” the show and enjoy the show at their leisure.

Final Marketing Pressure

To makes matters worse, Apple is considering a more aggressive marketing strategy for the TV episodes, with rumors swirling of a price cut to $0.99 per episode. When you consider that NBC had a 30% market share of downloads on iTunes, I see NBC really taking it on the chin.

Oh well, hope that you don’t own any GE stock shares (GE is the parent company of NBC).