AppleTV, iTV and content pricing

The Apple rumor mill is in full swing again. This time is it about a (supposedly) soon-to-be-announced upgrade to the AppleTV, which is slated to be called iTV. Thus far, AppleTV has repeatedly been described by Apple execs as a “hobby”. But if we believe the rumors, soon, it may be turned into a real business.

The AppleTV, for those who do not know, is a small dedicated computer that allows the user to browse, download and play standard definition and high definition video and audio content from the iTunes store, YouTube and local computers with iTunes. And the entire system is controlled with a thumb sized remote control.

Here is one journalist’s take on the matter:

“Currently, TV downloads from iTunes cost an average of $1.99 per show—just high enough to annoy many customers who are used to getting TV for free, but low enough that people pay it. A 99¢ TV rental would obviously be a little closer to free and, if the shows remain commercial-free like the rest of iTunes, would be an upgrade from watching them on the boob tube or Hulu.”*

While the pricing strategy is a mystery to this particular journalist, for us in the pricing industry it is not. Apple, being the Pricing Champion they are, priced content on iTunes to maximize profit instead of demand. They know that early adopters are a smaller group, but they are not price sensitive. They buy because they want to be first. They want to know they are on the leading edge. Likewise, the AppleTV is not cheap at $229. You could almost afford a “real” computer at that price. But again, early adopters are not price sensitive.

So if the rumors are true, and Apple will introduce the $99 iTV and the cost of downloads does reduce to 99¢ it really just means that Apple now believes their little device is ready for prime time and expects it to be widely adopted. Some people call this strategy a skimming pricing strategy but I think it is just common sense. Think about this for a second. You develop a new product, created a whole new business segment, and you want to recoup your product and infrastructure development cost as soon as you can - so you price relatively high because you know the early adopters and not price sensitive. But as the product reaches the mainstream, volume goes up and price sensitivity goes up - so you lower the price. But this time the sunken research and development costs are already paid by the early adopters, so you can lower the cost and maintain profit margins. More often than not, just like in Apple’s case (if the rumors are true) a new version of the product is developed that is cheaper to manufacture and, because it is now a “different” product, it does not alienate those early adopters that are sooooo important for future product development.

The lesson to learn hear (no matter if Apple introduces this new product or not) is that what is a pricing mystery to some is common pricing sense for the rest of us. And that anybody who prices new groundbreaking products and/or services should not price low but should be aware that their marketplace’s early adopters are not price sensitive. In this context I could expand this article into a rant about the stupidity some people call penetration pricing, but I’ll save that for another time….

With warm August regards,

Per Sjofors

*The full article can be found at http://arstechnica.com/apple/news/2010/08/-more-evidence-for-99-itunes-tv-rentals-apple-tv-makeover.ars