Tuesday, May 25, 2010

Versioning Hollywood movies

Saturday's WSJ reports a long overdue development: Hollywood studios plan to start distributing new films directly to households within 30 days of their initial release.  MBA 505 veterans know that the studios use Shapiro and Varian's theory of versioning to extract the maximum amount of consumer surplus.  After appearing in first run theaters, movies are distributed to dollar movie houses, cable, and DVD.  Those who are most impatient pay the higher price.  With the growth of bandwidth and a rising share of households with HD TVs and surround sound, I have long thought that the studios would start issuing movies directly to households sooner -- thereby grabbing more of that consumer surplus for themselves and leaving less for movie theaters.  It appears that day is here.  Studios plan to charge $20-30 for a nearly first run movie (e.g., Robin Hood would be a likely choice this weekend), which is competitive with movie prices for a couple.  Of course if you watch a movie at home you will miss certain things, like overpriced snacks and strangers talking on their cell phone.

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