Redbox, RealDVD and Hollywood’s long struggle with consumer demand, Part II

In my last post, I discussed the Hollywood studios’ long history of being willing to frustrate consumer demand in order to maximize their own profit, or at least to do what they believed would maximize their profit. For decades, in fact, it defined their basic business model: starve demand in one window or market to boost it in another.

In ordinary businesses, continuously frustrating consumer demand would not be a very effective business plan. But under the artificial conditions of the copyright monopoly it has generally worked for the studios over the years. When some innovator came along and found support in the Copyright Act for a model to meet consumer demand without giving primacy to studio profits, such as video rental stores, the studios’ first instinct has been to suppress it, often by litigation or seeking new legislation, or failing that through monopoly pricing.

It’s a deeply ingrained habit.

From the bunker of their copyright monopoly, however, the studios have often misidentified their own self-interest, at least at first. The video rental market, after all, went on to become hugely profitable for them, despite their unease with it. Yet the old habit is stubborn.

DVD, for instance, was the most successful format for distributing movies to the home ever devised. And it achieved that success largely by overcoming the studios’ historical ambivalence and meeting consumer demand head on. It didn’t eradicate the rental market but by meeting consumers’ reasonable expectations for purchasing a movie–in terms of price, convenience and quality–DVDs fundamentally changed consumer behavior to the benefit of the studios.

It wasn’t enough to change studio behavior, however. As later technological innovation caused consumer expectations and behavior to change again, the studios effectively did nothing to respond. DVD prices that once seemed reasonable, for instance, came to seem less reasonable over time as consumers’ expectations of value changed. Yet prices largely stayed where they were.

Rather than expanding on DVD’s early success by driving prices down to where the retail base was expanding, the studios sat tight and harvested their ever-fatter margins even as their manufacturing costs decreased. Yet now that those changing consumer expectations are manifesting themselves in lower DVD spending, shrinking shelf space and a shift in the market back toward rentals the studios can think of nothing to do but insist the consumer must be wrong.

Imagine on the other hand if new release DVDs were being sold today in supermarkets for $7.95, or even $8.95? Apart from the likely boost to consumer spending on DVD purchases, how many supermarkets do you think would today be installing Redbox rental kiosks? I’d guess about none.

Which brings me to the Kaleidescape and RealDVD litigation.

Changing technological conditions over the past decade have changed consumers’ expectations of what they should be able to do with the DVDs they own. When DVDs were first introduced there was no such thing as an iPod, but today there is. Consumers can move their CD content to their iPod; it seems reasonable to them they should be able to do something similar with their DVDs.

If you’re studio, you can insist that consumers are wrong to expect what they expect, or you can close your eyes, put your fingers in your hears and go “nah-nah-nah I can’t hear you.” But if you fail to meet those expectations–however illegitimate you may find them–there are really only two ways that can go: Consumers will find their own, unauthorized ways to meet their expectations, which the studios label “piracy,” or consumers will simply see less value in DVDs and spend less money purchasing them.

The Kaleidescape system and the RealDVD software, in contrast, represent good-faith efforts to respond to consumers’ changed expectations regarding DVDs. They were only able to do that, moreover, because the studios had not already done it themselves. Yet the studios’ first instinct was to try to suppress those innovations through litigation.

In both cases, the studios waved the bloody shirt of piracy, but the charge is absurd. Both the Kaleidescape system and RealDVD are all-but useless to someone bent on serious piracy. The entry level price to be outfitted with a Kaleidescape server, for one thing, is about $10,000. You can buy AnyDVD from SlySoft for $49.95 and get a lot more copying done.

Morever, both Kaleidescape and RealDVD re-encrypt the copy they make on the hard drive, to which the copy remains tethered. What would someone intent on piracy want with a re-encrypted copy?

If you were to set out to devise a home-media server solution for DVDs that met all reasonable parameters set by a studio you’d come out with something that looked pretty much like a Kaleidescape system or RealDVD.

The studios’ response to Kaleidescape and RealDVD, in fact, is very much of a piece with their initial response to the rental market back in 1983. Kaleidescape’s sin was that it did not preserve the primacy of studio profits in designing its system to meet consumer demand. Never mind that, like the rental market for VHS, Kaleidescape or RealDVD might encourage consumer investment in the format.

Indeed, rental is very much the real heart of the dispute. On some level, even the studios must realize that no one would use RealDVD or a $10,000 Kaleidescape system to engage in genuine piracy. What the studios most fear from devices such as Kaleidescape–indeed what’s animated their own, absurd efforts to device a managed-copy system within DVD-CCA–is rent-rip-and return, the only genuinely illegimate trick a Kaleidescape system is really suitable for.

So, for fear that some people might stock their home media servers by copying rented discs, the studios are willing to frustrate ordinary consumers’ desire to get more value out of their DVDs–even at the cost of encouraging the spread of tools that really can be used for genuine piracy.

With their litigation, of course, the studios have now gotten two courts to declare that RealDVD and Kaleidescape violated (or could have violated) the CSS license, which is a bit like complaining that the violin in the Titanic’s orchestra was out of tune that night.

The law does not absolve a business of the need to respond to actual consumer demand. For many years, the studios experienced a sort of false absolution due to the limitations of the technology available to consumers. But digital technology is lifting those limitations, and the veil of false absolution is falling away.