Running the iTunes Vs NBC Numbers

iTunesThere’s been such a fuss made over the last few days regarding this NBC Vs Apple fiasco. Beyond the obvious fact that the NBC execs have completely lost the plot and effectively asked people to pirate their shows instead of paying for them, there are some questions that no one seems to be asking. How did Apple come up with this magic $4.99 price?

The press release Apple put out states that the doubling of the wholesale price, which was apparently NBC’s demand, would result in the cost to the consumer more than doubling. So, to put in algebraic terms, X+Y=$1.99 where X represents the NBC cut and Y represents the Apple cut. And the proposed change would result in (X2)+Y=$4.99. Now, I’m no algebra expert, not even close, so if someone can point out my ridiculous mistakes, please go ahead but, I’m going to run with it.

Now, let’s assume that the two companies split the takings roughly 50/50, with NBC taking $1 and Apple taking 99c. So X=1 and Y=0.99. But this clearly doesn’t add up, if you use the figures to complete the second equation, the price comes out at $2.99, so where have the other two dollars gone? Well, there are a few options.

Firstly, it’s possible that in the contract Apple and NBC agreed that each would have a percentage of the price each. Therefore, the new equation would still be X+Y=$4.99, with the values of X and Y changing proportionally (X2+Y2=Z if you will). This doesn’t quite add up, but you can say it falls within a reasonable tolerance. Especially if you add in some fixed costs, such as bandwidth and storage. Taking into account the fact that the press release states “more than double” this becomes a more realistic option considering that X2.5+Y2.5=$5 if X+Y=$2.

The second possibility is that Apple are inflating the numbers in order to garner public support for their cause. I don’t think this is the case, else we would have heard NBC claiming Apple’s statement was “preposterous” by now, and lawyer-ball would be in full swing. Of course, the Apple end of the price may not be fixed, so while NBC more than doubled the wholesale price, Apple may have tripled their profit margins. Not out of the question, but once again I’m sure we would have heard something from NBC by now if this were the case.

So where does this leave us? Well I’d put my money on the first, fixed proportion of selling price, option. Seeing as Apple was talking about renewing the contract, it’s entirely possible the discussions were bound by the previous percentages. You would have thought the parties involved could have completely renegotiated the contract, with Apple retaining the same gross profit (but not profit as percentage of sale price) with the end price increasing. Personally, I’m glad they didn’t. Let’s be honest about it, Apple were, and still are, visionaries in this field. It’s taken such a long time for the “Old Media” companies to catch on I’m not surprised they don’t get it. NBC were effectively making money for free from iTunes. All they had to do was issue a license for Apple to sell the content. All the administration was taken care of, as was the promotion, sales and processing. The joy of iTunes is convenience. As I understand it, $1.99 is the tipping point for convenience. Any more and people won’t pay, resulting in increased piracy. And of course, NBC claiming this move is to reduce piracy (quite how DRM coupled iTunes videos add to piracy, I don’t know) is quite possibly, and I’m going to be bold here, the stupidest thing I’ve ever heard. Every time a legitimate distribution channel is removed, the illegitimate channels will pick up the slack.