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Executive Report - By Thomas Baekdal - September 2010

The Digital Renting Business is Fundamentally Flawed

Let's get rid of the renting business model before people forget why it is that we don't need it.

Later today, Apple is having yet another one of their mystery press events, where they are expected to talk about iTunes. One very strong rumor is that they will extend iTunes into the online renting business, allowing US customers to rent TV shows at 99 cents.

I don't know whether that is true, but I do know this: The digital renting business model is fundamentally flawed, and we need to get rid of it before everyone forgets why we do not need it.

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The renting business model makes a ton of sense in the traditional world of manufacturing and distribution. It's a win-win situation for everyone.

The content producers save a ton of money because they don't have to manufacture as many DVDs. There are costs savings on shipping. You don't need as big a warehouse. You don't need as many employees handling everything.

The physical shops, like Blockbuster, save a lot of money on shelf space. They can increase their inventory. And, they get a much higher sale when renting a DVD for $2.99 than trying to get people to buy one for $10.99.

The consumer gets access to content they want for a drastically lowered price, with only a very small additional cost of being forced to return it 48 hours later.

Everybody wins!

The renting industry was simply invented to lower the cost and resource requirements of manufacturing, distribution, and storage-to lower the price to a level acceptable to the market. That was the problem they solved.

None of this makes sense in a digital market

In a digital marketplace, the cost of manufacturing is zero. Once you have created your "prototype," you also have your product. A movie studio doesn't need to manufacture DVDs, because the original digital file can be used directly.

There is a very low cost method of distribution, which amounts $0.43 USD/person if you decide to use Amazon S3 (cloud computing.) This amount includes storage costs as well. Costs would still be $0.43 if the TV and movie studios were to sell a movie instead of renting it.

However, the technical requirements for renting content are enormous. You have to add some kind of DRM to prevent content to be played 48 hours later. It has to work even when you are not connected. You have to create databases that tracks each transaction etc. All which costs money to make?

So what exactly is the renting business model solving?

In the traditional world, the renting business saved costs, lowers the price, and thus increases the market demands.

The digital model does not save money. The cost of manufacturing, distribution and storage are the same as if a TV show were simply sold and you have a higher cost of development.

In the digital world, and from a financial point of view, selling a TV show would be more cost efficient than renting it.

What is really going on here?

Some of you might argue that the TV and movie studios will earn more money because people might rent the same episode twice. But that logic is flawed when you compare the user behavior with how you used to rent movies at your local Blockbuster.

How often have you rented the same movie more than once? Yeah ...never!

The real answer is two things.

1: Traditional executives have forgotten why they started renting content in the first place. They are just continuing the status quo, doing what they have always done, and generally failing to understand the economics of the digital world.

2: The few executives who do get it are trying to drive up a false level of demand, by implying that buying a TV show should be more expensive than renting it. They are being greedy, and are using every trick in the book to get you to play along.

The renting business model is a relic from our non-digital past, and back then it solved a real problem in a rather ingenious way. But, the internet has solved that very problem in a much more efficient way.

There is no longer a need for a renting business model, as the problem of manufacturing, distribution and storage no longer exists.

In the digital world, we now need to turn look at other business models, to better reflect the limitations of our digital future.


The digital renting business model does not solve any of these problems. Renting solved a traditional problem-one that no longer exists.

Let's get rid of the renting business model before people forget why it is that we don't need it.

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Thomas Baekdal

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"Thomas Baekdal is one of Scandinavia's most sought-after experts in the digitization of media companies. He has made ​​himself known for his analysis of how digitization has changed the way we consume media."
Swedish business magazine, Resumé


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