For a few dollars more (V)

Of course book publishers aren’t the only sellers of information goods who rely on second-degree price-discrimination strategies. The music labels have a similar strategy. They release albums in both “regular” and “deluxe” editions. The extra content of the higher-priced “deluxe” edition is designed to attract fans who have a higher willingness to pay for this premium content, while still allowing the label to sell the regular album to lower-value consumers.

However, the second-degree price-discrimination strategies used in the publishing and music industries are nowhere near as complex as those used in the motion-picture industry. Figure 3.1 illustrates what was, until a few years ago, a typical release strategy for movies, with six main product-release windows, staggered over time and varying in quality, usability, and price.

The first window, the theatrical window, is followed approximately 60 days later by hotel and in-flight airline services, then, after another 60 days, by a DVD release; then, six months to two years after the original theatrical release, the movie is made available through pay-per-view cable TV, pay cable networks, and advertising-supported television broadcasts.

Movie studios also use segmentation strategies within these release windows by varying usability (e.g., Blu-Ray versus DVD resolution, or bonus content versus regular content, similar to the “deluxe album” example above). For example, in 2005, when the movie Lord of the Rings – fellowship of the ring was released on DVD, New Line Cinema sold three DVD versions of the movie: $30 two-disc widescreen edition for casual fans, a $40 four-disc “platinum series” special edition for serious fans, and an $80 collector’s gift set for the most serious devotees.

As in book publishing, digital channels have added new complexities to the movie industry’s established release windows (see figure 3.2 for a simplified version of current studio release schedules in physical and digital channels), raising many of the same questions for studios that publishers are asking: “How will digital sales channels such as iTunes affect sales in my other channels?” “How much do iTunes sales compete with iTunes rentals or with streaming services such as Netflix?” Most important, “How can I use these new channels to enhance, as opposed to damage, my ability to differentiate between high-value and low-value consumers?”

As with publishers’ e-book strategies, we believe the answers to these questions lie in the data – data that can help studios understand the interplay between product differentiation and sales cannibalization. However, these same data can also shed light on the other feature of differentiated-product strategies: the ability to create complementarities between channels so that sales in one window increase demand in subsequent windows.