NBC’s Bad Move

Will all due apologies to the Fresh Prince, networks executives just don’t understand. Or, rather, NBC executive just don’t understand. This past week, we learned that negotiations between Apple and NBC broke down because NBC wants to charge $5.00 an episode for television shows sold via iTunes while Apple, understandably, wants to charge less.

Rather than lure consumers in with a partial-season offering of NBC programming, Apple will not sell any NBC shows this fall (the deal was set to end in December anyway). First, a little bit of math. Assuming a 24-episode season, regular viewers will be paying approximately $50 for the season at $1.99; NBC wants those viewers to pay in the neighborhood of $120 for that same programming. You know, that’s a lot of money, especially considering that the cost of production is largely subsidized by commercial advertisers during the first broadcast run.

Of course, as advertising dollars decline and production costs increase, the shortfall must be filled in some manner. And NBC is likely (and unless I miss my guess, correctly) assuming that residual and participations costs will increase for downloadable media. So there will be a squeeze on their bottom line.

Naturally, the solution is to ding the consumer. NBC has an inflated sense of the value of television programming to the average viewer. For most of us, this is considered “free” programming. We are trained to pay for HBO, but we don’t see that the hours spent watching commercials is payment-in-kind for broadcast television. The fact that consumers have willingly embraced downloadable media — and have paid for it — shows that consumers are willing to give up free in exchange for convenience. This is not the same thing as being gouged by the studios.

If the reports that Apple has sold 50 million downloads of television shows are true (and, remember, this is still a fledgling industry), then that’s approximately $100 million in play. Apple takes the smaller share of this windfall. The studios get a good portion. If the audience continues to grow (and there is every indication that the motion picture companies expect this revenue stream to become huge), then television as we know it will change forever.

This requires the studios and networks to change their thinking. Right now, the major competition comes from services like BitTorrent. Right now, many consumers are saying that they prefer the convenience and quality of programming offered via iTunes to that of BitTorrent. Raise the price of “The Office” to $5 and suddenly minds will change. It’s already a not-so-hidden secret that viewers are turning to services like BitTorrent to find programming that the studios and networks don’t find “cost effective” to offer as paid downloads.

Scarcity is a false concept, and these entities are losing money because they’re trying to protect assets that are becoming increasingly less valuable.

I am also very much amused by the so-called “piracy concerns” link by NBC and Universal. This is a red herring and the notion that Apple should do more to stop piracy is like missing the forest for the trees. There will likely always be an element of piracy because humans simply roll that way — but the fact that consumers have willingly embraced the cash-for-programming model should tell NBC and its compatriots that working toward a user-friendly, cost-friendly consumer experience is the key to combatting rampant pirarcy. Napster and its gazillion imitators came about because the music industry twiddled its thumbs. The opportunity was there, but the desire to maintain the status quo led to industry paralysis.

Or, you snooze, you lose.

I digress. For better or worse, iTunes has the consumer base and Apple has the hardware market. This will change, because this sort of market dominance always changes. But the dominance of Apple makes motion picture companies uncomfortable. They prefer to call the shots. Now that consumers are driving the market, there’s a loss of control that makes executives very uncomfortable.

NBC and Universal are also being a bit disingenuous when they cite price controls, bundling, and other issue as the reason to walk away from these deals. These are negotiating points, and negotiating points that could have lead to very interesting resolutions. It’s no coincidence that this issue came to a head in the very same week that the two companies announced that they’d finally come up with name for their YouTube/iTunes “killer”: welcome, Hulu.com, to the fray.

How many times over the past ten years have we read about major initiatives from entertainment companies (primarily music) only to watch them fizzle? Or, worse, if you were the investor, never capture an audience. Over and over, it’s too little, too late, too complex, to expensive, too restrictive, too unpalatable for the consumer. Why music labels, publishers, and motion picture companies keep repeating the same mistakes is beyond me. Can anyone cite even one real success story?

There are, by the way, certain common denominators in each of the above failures. I will leave it to you put the pieces together.

This move will not hurt iTunes/Apple nearly as much as it will hurt NBC. As more and more programming comes online, the iTunes store will continue to thrive. As more and more consumers choose the iPod — for a variety of factors — it will remain the standard for portable digital media players (any worthy successor will necessarily be required to support the iTunes format or provide a legal way for conversion, otherwise consumers, already weary of repurchasing media libraries, will simply walk right on by).

And hulu.com doesn’t even go into beta until October. This should tell you more than you need to know about the development process. Given how cheaply and quickly — generally speaking — the major online media destinations have been developed and launched, it sounds like NBC and Universal are putting more effort into complexity (e.g., user-unfriendly, over-the-top piracy protection, etc) than usability.

So this fall, consumers looking to buy legitimate, usable copies of their favorite TV shows at a reasonable price will be disappointed. Those consumers will seek out the programming elsewhere; there’s a reason they turned to iTunes in the first place. And NBC/Universal will continue to develop hulu.com while complaining bitterly about rampant piracy.

Also, lost income.