After a long day’s work, Americans just want to watch Fast & Furious 6, not Fast Five. They definitely don’t want to spend 30 minutes toggling through the maze of suggestions served up by the Netflix (NFLX) algorithm: “Business Documentaries,” “Cult Sports Movies,” and the always encouraging “Random Picks.”
Hollywood—as well as Apple (AAPL) and Amazon.com (AMZN)—is finally starting to realize that couch-bound consumers are willing to spend handsomely for new and immediate film fare. Online movie sales surged 47 percent last year, more than offsetting DVD declines, according to a new study by Digital Entertainment Group, an industry trade group.
The bulk of the sales increase comes from people buying movies in the slim one-week to four-week window between when they are available for digital purchase and when they are available to rent online. The staggered-release strategy, though relatively new, is commanding a slice of commerce that is by far the fastest-growing category in the home-entertainment business.
Here’s how Ron Sanders, home entertainment president at Warner Brothers (TWX), described it to the Wall Street Journal: “We’ve seen a fundamental shift in consumer behavior based on that early digital availability.”
It’s not that the film industry has been underestimating consumers’ willingness to pay (the online movies are often cheaper than DVD copies). And it’s not that studios have been overestimating their willingness to wait (though that’s getting closer to the crux of the matter). It’s just that on-demand technology creates the perfect environment for poor economic decisions.
It’s easy to pass on a $20 movie when one is walking through a big-box store, but the behavioral economics shift when one is loafing on a couch in Despicable Me pajamas. Similar dynamics have sold untold stale airline snacks and stratospheric pool-side piña coladas.
At play is what behavioral economists call hyperbolic discounting, which roughly translates to: ignoring math for an immediate payoff. If a person walked into a movie theater and was told she would have to pay a fourfold premium to see the film that day, rather than a month later, odds are good she’d walk right out and never return. But that, in essence, is the pitch of an early online sales window. (Of course, buyers can watch the movie over and over, while renters get only a single play, but how many films in an Amazon OnDemand library are watched the four or so times necessary to warrant a purchase?)
Apple, meanwhile, is working to widen yet another revenue window: the “preorder” movie sale, a vestige of the old-fashioned music business. Customers eager to watch the Thor sequel, for example, can fork out $20 right now for the ability to download the film in four weeks, as if digital copies will somehow sell out.
Stay tuned for Fast & Furious 7.