Editor's Note: A previous version of this article incorrectly pointed to Star Wars as an example of a DVD that has been distributed for free. The error has been corrected.
Flood the market with enough of a given good or service, and its price will drop to almost nothing. In Great Britain, that's proving true for an usual commodity: DVDs.
According to a Reuters article, newspaper companies across the pond have an addiction to giving out tons of the discs to entice readers and build customer loyalty. By distributing DVD movies, newspapers seek to convince consumers to get their news by hard copy, as opposed to the Internet. To give you an idea of the magnitude involved, 130 million DVDs were distributed as freebies to British consumers in 2005, while 211 million were sold in retail channels. In the last quarter alone, 54 million DVDs were bestowed upon newspaper customers.
Free DVDs -- sounds great, right? There's just that little problem that I stated at the beginning: devaluation. Even though many of the free movies might be antiquated, there's no question that such a marketing move does corrupt the image of the disc as a premium commodity. In fact, the article states that the Hollywood studios are none too thrilled by all this. Why would Disney (NYSE:DIS), General Electric's (NYSE:GE) NBC Universal, Viacom (NYSE:VIA), Sony (NYSE:SNE), or Lions Gate Entertainment (NYSE:LGF) be happy about this kind of competitive force? (Ironically, newspapers owned by News Corp. (NYSE:NWS), the parent company of the 20th Century Fox film studio, were listed as being involved in the scheme.) All of these movie studios put a lot of stock in their respective film libraries -- especially Lions Gate, whose intrinsic value and desirability as a takeover candidate arguably depends on its library -- and they want to amortize films' production costs by distributing catalog products at the highest price possible.
Why do studios allow this to go on? They don't necessarily have a choice. Local distributors in the British marketplace often hold the rights to certain films, and can apparently do as they please.
There's merit to the devaluation argument. Again, increasing the supply of free or very cheap product will certainly affect consumer perception, causing prices to fall. And although it's not going to kill studios' DVD segments, it probably makes their job more difficult. After all, the proliferation of Internet file-sharing did the music business no favors, and cheap legal alternatives like iTunes have really buried costly mall-bound music stores.
Just as the next video game cycle promises to improve the fortunes of video game companies like Electronic Arts and THQ, thanks to better pricing power once the PlayStation 3 and NintendoWii arrive, the new disc formats should enhance the value of Hollywood movie libraries. Whether Blu-ray or HD-DVD eventually triumphs, the current DVD paradigm will eventually give way to a new medium of technology, and as such, a whole new period of movie distribution can begin, one with much more stable prices.
There is, perhaps, one risk to hoping for higher price points -- Internet downloads may become the most popular means of selling movies. If that happens, all bets concerning physical mediums are off. As we all know, studios and cable companies are offering video on demand, and they expect great success from the model going forward.
Still, I can't imagine physical discs becoming completely obsolete, since there probably will be technologies that work best outside of the 'net. Besides, people will most likely always want to collect movies. Either way, the coming of new formats should spell renewed value for movie libraries and the companies that own them.
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Fool contributor Steven Mallas owns shares of Disney and General Electric. The Fool has a disclosure policy.
