Global Product, Global Price

When DVDs first came out, I was one of those people irritated by the idea that the world had been split into 5 regions solely for the purpose of differential pricing. Particularly as I live in the most expensive zone that seems to be charged more than any other: Europe. My response is like that of many others. I have a hacked DVD player that will play DVDs from any region. Any intelligent person can tell that the cost of making a film does not change no matter where it is seen, and that the cost of distributing it on DVD is going to be almost the same all over the world, so differential pricing is solely about maximising profits. In other words, the business philosophy is to charge most for content where the customers are prepared to pay most. But creating price differentials encourages sophisticated customers to find ways to buy at the cheapest prices.

Thinking about Intellectual property is an exercise in philosophical juggling. On the one hand, it is abstract, so it is the same anywhere in the world. On another hand, it gets sold – by which I mean licensed – to people, so there is the potential to price according to where the person is. But people can move. Whilst we rush headlong towards a world where money, people, goods and services flow without interruption across borders, media companies want to hark back to the days when people did not have passports because they never left the country of their birth. At the same time, only people allowed to make copies can make copies, because it is theirs to control. Which might sound reasonable if it was not so very easy to make copies. With that attitude, you might as well pass laws to stop more than one person reading the same magazine. Piracy is a crime, of course, but media companies can hardly expect much sympathy in the fight against piracy if they are so blatant at exploiting markets. After all, pirates just exploit the ease of copying and undercutting the legitimate prices. Media companies thus can find it hard to take the moral high ground. Especially when they hype the consequences of piracy. For example, take the claim that piracy funds terrorism: does anyone really think that Al-Qaeda wants more people to watch shows like 24 and films like Airforce One?

So instead of just having 5 regions for DVD content, why do media companies divide the world even more precisely to better maximise profits? Why not, for example, divide the United States into rich states on the coasts, and poor states in the middle, and charge more for DVDs on the coasts? Well, the reasons are several: keeping the right side of public opinion, keeping the right side of governments, and not trying to enforce the unenforceable. So dividing the world into different price regions works, but dividing the US would not work because the public would complain, the government would intervene, and people would just cheat the system by transporting DVDs and players from the low-price states to the high-price states.

So if I am unhappy about DVDs being over-priced in Europe, you can imagine how happy I am about the cost of music downloads in the UK. Because if Europe is top continent for over-priced content, the UK is the top country in Europe. Today, 1 US dollar trades at 0.75 Euros and 0.51 UK pounds. Take a good look at that ratio, 1:0.75:0.51. But whilst US customers can buy a track for 99 US cents, most European customers have to pay 99 Euro cents, and British customers pay 79 British pence. That means according to Apple iTunes the exchange rate is 1:1:0.8. In other words, if you converted your Euros to Dollars and bought in the US, you would buy 5 tracks in the US for every 4 you would have got in Euro-land. And if you converted UK sterling, you would get 8 tracks in the US for every 5 you would have got in the UK. Yet this is digital media, exactly identical and transmitted electronically. All that stops me buying at the better US rate is that I do not have a US bank account. Presumably if I did have a US bank account, but downloaded the music with the intention of listening to it in the UK I would be breaking the law. However, US tourists who listen to the music on their iPods whilst on holiday in the UK are doing nothing wrong. This kind of nonsense makes it hard to have sympathy with media companies complaining about the revenues lost from piracy.

But the news is that Apple and the music majors are now going to be subject to an anti-trust probe from the European Commission. This may eliminate the potential for price differentials within Europe, which would be good for the UK, but it will not prevent higher prices in Europe relative to the US. The only people who can do something about that are the worldwide army of copyright abusers. And with download music set to be DRM-free I expect their influence is going to become stronger than ever.

How can the media companies fight back? Well one way that might hurt reduce their revenues in the short term, but increase them in the long term, would be to accept that content is the same the world over and to charge the same price everywhere. Too high a price may encourage copyright abuse in poor countries, but crucially the risk is worst in the richest countries. Casual copying will be strongest where customers can obtain and afford broadband, PCs and flash drives. Every person with the incentive to learn how to cheat the system has the potential to train and recruit many others through their informal, i.e. social, networks. Trying to stop this kind of abuse using the same tactics as applied to organised crime will be futile. So the best advice is to limit the incentive to act in a criminal fashion in the first place, by setting prices that are perceived to be fair.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.