Why digital media is not cheaper

Look at this (click on it to show in full size):

TheEconomistSubscription

Doesn’t make any sense does it? The print subscription (which The Economist admits includes the digital subscription) is the exact same price as the digital subscription at £117 per year? Despite the cost of printing and posting the magazine? Surely this is a typo?

Also why do electronic books, music, movies and video games cost the same price (and often more) when buying on-line as in the shops? Don’t these companies realise we’re getting less for our money (no hardcopy) and dont want to pay more for that privilege? Don’t they realise we are saving them money by not making them print books, press discs, haul physical goods around the country AND pay for shop fronts and retail space? Surely digital copies of media should be much cheaper?

OK let’s got some initial things out-of-the-way first: Physical media is not that expensive to create and distribute. I’ve tried to find a reliable breakdown of the costs of producing a CD, DVD or Blu-ray disc but haven’t had much luck but articles from a few similar bloggers seem to suggest about a £1 maximum – which sounds about right. Think about how much a blank CD/DVD or Blu-ray disc costs? And that’s you the end consumer – it’s even cheaper when buying wholesale and in bulk. Similarly with printing a box to put it in. Hardly anyone includes a physical instruction manual now – both for the expense to produce and the fact people rarely read them – and so including a pdf on the disc costs nothing. So at most, you’d expect CDs to be £1 cheaper (£12.99 instead of £13.99), which is not a huge discount and probably what you get online anyway. For a Blu-ray (cost £19.99 to £24.99) this is even less of a discount percentage wise and for computer games (cost £39.99 or £44.99) it’s hardly worth mentioning. While discs may be cheap to produce, books are not that different – think about it paperbacks typically cost anything from £4.99 to £9.99 and if you think the production costs are a high percentage of that then you are fooling yourselves.

Now we have countered the myth of how expensive physical media is to distribute let’s look at the other side of the coin: digital media is not free. People massively underestimate the costs of digital media compared to old school physical formats. Ignoring the cost of the content itself (paying authors, artists… etc as well as promotion and all other costs) which is the same for both formats, the costs are different. Physical media requires printing and delivery costs. Digital media has costs too though: Trust me – I’m a professional computer programmer and I get paid very well for what I do. To successfully distribute digital media you need different ways of users buying it (a website, a mobile website, an iPhone app, an Android app), you need back-end servers to stream or allow downloading of your content and most of all you need computer professionals to set this up for you. “Those are one-off costs” you might argue and, unlike physical media, there are no “unit costs” so once you’ve sold the first book, the rest are just profit for you. This not true either: you need support people to ensure the whole system is up and running and deal with technical issues (“I’ve purchased a game online and can’t download it – please help”), you need to keep up to date with third-party software advances and security (see all the negative press about PlayStation Network hacks) and unless you want to be left in the past you need to continually change and improve you website or app. All of this costs serious money and continual investment. You can’t get around this by just getting Amazon or someone to distribute your media for you either – they will take a cut of your profits for the work they are doing for you.

Ah but what about online advertising? That magical thing that makes all of the on-line world profitable? Stick a few ads on your website and you easily pay for the server and programmer costs. Well for a start online advertising doesn’t actually make that much money (we’ll come back to this later). Other than Google, most companies struggle to fund their websites alone with advertising never mind anything on top of their website. Additionally once you buy your on-line book, music, film or game you do not see an advert each time you try to play it (and you’d be pretty annoyed if you did) so advertising is only useful when you are buying a product: which is basically the same as having a fancy display stand to tempt you to also pick up that product when in another shop.

So digital media should not necessarily be considerably cheaper than physical media. Sometimes it might be cheaper, sometimes it might be more expensive. The costs will vary. There are other factors to take into account: shops will often have sales to sell off old stock and make room for new title – making the old titles cheaper than buying online. Online digital media has no such concerns and so does not need to discount old titles as much. Similarly Amazon with its massive out-of-town warehouses which are considerably cheaper than prime time high street costs, also does not need to do this even for physical media. Online media also has advantages both for consumer and publisher – you get it immediately and don’t need to queue outside a shop on release day, you can have free trial or partial copies which can easily be upgraded to full copies, you can potentially have multiple formats copies and the benefits that brings (e.g. reading a book on a Kindle and then on a Kindle app will pick up where you left off, Blu-ray versions will often include the DVD version for free) and finally you can change the cost easily to match demand. All of these will influence the cost.

So back to our first example of the Economist pricing. Hopefully the fact that the digital only edition is the same price as the “physical and digital” price now does not seem so strange anymore. But is it really the exact same price? Why do they even bother having two prices in this case? Also shouldn’t they have a physical only price as well and charge more for the “both” option? Well all that depends on what The Economist wants out of the subscription price. Have they set the price purely based on cost? Or is it set on what the market will bear? Or is it genuinely a typo? The Economist employs some very smart people and specialises in economics so I think we can safely assume it’s neither a typo nor been decided on randomly.

The Economist is a premium product – the price alone gives this away. They also want to encourage subscriptions with their pricing model and also raise the most amount of money. Assuming they had a magazine only price of £120, a digital only price of £100 and a both price of £140 then what would this do to subscriptions? They may get a few people going for the “both” option but most people would likely choose the cheapest option to fit their needs. Older readers may pick the print version and may feel cheated that they, the people who’ve supported the magazine until now, are having to pay extra. They might become resentful of this. On the other side digital-only subscribers are now losing the company £20 per subscription under this model. So at the very least we should price them the same (£120 each) to prevent both these problems.

But is that the full story? For a start print-only subscribers will not be using the digital version so The Economists misses an opportunity to persuade them online and means they do not have the option of moving to an online only option in future. So should The Economist be encouraging the digital version for traditional print only subscribers? As discussed, once you have a digital platform adding on new customers is practically free so why not throw in the digital version for free? We also must return to subject of advertising. The typical Economist reader is an affluent individual and highly desirable to a number of companies who would like to advertise to them. However, even with this, online adverts are not that effective compared to print advertisements as mentioned earlier – people subconsciously block out online ads. So, baring in mind the increased advertising will more than take care of the printing and deliver costs should The Economist be encouraging digital only subscribers to also take the print copy? Even if they just throw it in the bin most days, The Economist can claim higher subscription numbers for advertisers – which may sound unethical but in reality the magazine may well still be read by the subscriber (e.g. if they are going on a plane or the underground or in the bath where they are not able to use their online subscription), or by anyone else in the house or visiting (spouse, friends… etc) so this may increase readership.

So, since it will cost no more to produce relative to income, it does seem to make sense to try to push the “both” package to all readers. Why bother with the “digital only” version then? Well I can think of two reasons: 1) to make the “both” option seem cheap by comparison and 2) some people feel strongly about waste for products that they will not need. The digital only version is therefore an option for the “greens” amongst us: you can’t complain they don’t give you that option even if its unlikely most people won’t choose it!

One final comment on this is that in other countries the prices are not the same. Australia charges $219 AUD for the digital only version and $365 AUD for the “both” option for example. This may represent the additional costs of postage to Australia if they don’t have local printers there, local taxes on print media or the fact that there is no Australia edition with Australian specific advertisements.

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