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Loss Leader Pricing

17 May, 2006 By: Erik Gruenwedel

Last week's announcement by Fox Entertainment Group that it would offer select episodes of “24” on MySpace.com for $1.99 each marked the latest emulation of rival networks' similarly priced content on Apple Computer's iTunes.

And why not? The controversial teen site has almost 80 million registered users — about the market share of the iPod.

It would appear the networks have determined that a single, non-ad-supported episode of “Lost,” “Desperate Housewives,” “24” and “Love Monkey” — the day after its prime-time airing — is worth less than $2.

Those episodes of “Veronica Mars,” “House” and “CSI” taking up space on the hard drive of your DVR are worth about $6 to the networks.

That doesn't seem like much, and I wonder how that margin jibed with the cost-per-thousand ratio the networks originally pitched to advertisers and affiliates.

That subject recently was brought to the attention of Bob Iger, CEO of The Walt Disney Co., and Peter Chernin, president and COO of News Corp., both of whom intimated the $1.99 price was as much a stab in the dark as the result of supply-side economics.

“There is a fair amount of experimentation going on about pricing,” Iger said, adding that Disney had sold about 7 million video downloads to date on iTunes.

Chernin said Fox has turned conventional distribution on its head and was considering offering the season finales of “The Shield” and “Rescue Me” prior to their network airings for $4 per download. Fox also is in discussions with Europe's Vodafone to offer one-minute files (“mobisodes”) of “Prison Break,” “24” and “The Simple Life,” among other fare.

“We will certainly examine any distribution window to be replaced if we think we can replace it with something that we earn a higher margin,” Chernin said.

To Chernin, price is relative only to whether it is margin-accretive or margin-destructive. And when it comes to repurposing content across multiple platforms and often simultaneously, $1.99 apparently is the sweet spot.

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