I’ve been struggling with this piece for a full day now. The impetus was a Ben Fritz story in the LAT, followed a remarkably snarky and confused piece by Patrick Goldstein.

The issue is Digital Sell-Thru… which is to say, Not Digital Rental.

And i guess what it comes down to for me is that some executives out there are fantasizing about getting a significantly higher price (at least 3x) the Digital Rental price for Digital Sell-Thru and dreaming that sell-thru will become the future standard, not rental.

And what ties my brain up in knots, in trying to be clear enough to write this piece, is that these are not, at their core, different products. The only functional difference between the two is the price point. Want to watch it once? $3 or $4. Want to watch it over and over again? $14.

And though I think Disney and others will junk this model almost completely for a subscription-based model that will be more profitable, there will be some buyers of Digital Sell-Thru, especially for Disney product, where kids watch the same movies dozens and dozens of times.

But the industry has already destroyed any hope for Digital Sell-Thru to be the dominant transaction, long before digital delivery was realistic. (And really, it is still in it’s infancy.)

DVD price wars, combined with a passive position taken with Netflix and other subscription based businesses, killed Digital Sell-Thru before it could ever happen. It wasn’t, as Patrick screams, the industry failing to be aggressive or visionary, as the newspaper business (save NYT, WSJ, and a few others) was. This is where the argument starts folding in on itself. People want to argue that we need to speed up the digital future, but at the same time write about the complexity of digital delivery to the most conventional viewing place, the TV in your living room.

And while many have enjoyed the early days of digital delivery, even we early adopters must admit that the tech has grown in leaps and bounds over the last year or two, even from the leading edge companies. For instance, Netflix just this month worked things out so you could stream them through your PS3 without a special disc. While it’s true that Netflix and their discs were on the PS3 platform before all the other streamers, now that I have multiple platforms and their software on the PS3, accessible more quickly, really, than a game or Blu-ray (which I still have to put in the slot), the consumer experience is massively different. Sony has been pushing. Netflix has been pushing. But it happened this month. So now to convince dad or grandma to buy that PS3 (or X-Box, whose pleasures I don’t know) because it is their new set-top box, delivering as much or more than their cable/satellite box, just as easily, if not as familiarly. Just the start of the journey.

It was one of the silly games of people trying to kill the January Oscar date, suggesting that screeners would be on computers only if digitally delivered. There will be a dozen legitimate options for streaming movies to your TV and maybe elsewhere as well, with security, by this time next year. And even if the January date is now dead (until the ratings drop 15% this year), I expect digital screeners to be dominant next season.

But I digress…

The problem the industry now faces is that as the DVD business matured, leading to less units being sold, which led to more price competition and a plummeting anticipated price point for consumers, the entire Home Entertainment business matured… whether they meant it to or not. And with that, the DVD pricing and the power valuation of ownership that changed so dramatically for DVD also attached to Blu-ray and even more so, to digital delivery sell-thru.

In other words… only a tiny slice of the market cares how it gets there… they only care that it gets there and that it looks good. When the pricing on DVD dropped to about $15 on average, the industry created a ceiling for itself that it will never crack when it comes to the idea of buying a movie. And since most adults are not inclined to multiple viewings of all but a few favorite films… and also have cable/satellite and DVRs, which bring them this content in the context of a subscription package within a year of theatrical release, spending the $15 is unlikely for their personal use. They have been down that road with DVD and are not going there again with a “digital lockbox.”

The idea of Digital Sell-Thru is a step backwards, not forward. It is asking people to do what they did… what they did from albums to tape to CDs to mp3… what they did from VHS to DVD to (for some) Blu-ray. It is a desperate notion of One More Bubble!

The exceptions to this rule are very simple. Teens and kids watch things over and over. So a kid renting the same movie 4 times and wanting more will make a parent want to kill their children. Under 25s are where the “must-see on opening weekend” resides, so they are the target for theatrical too.

So under 25s are the primary market for Digital Sell-Thru. And the people who pay the credit card bills for this group will be susceptible to Disney, a Transformers movie, a Pirates movie, etc… movies they know will be watched over and over and thus be a value proposition. (There is a smaller, but valuable, group of hard-core travelers who may also be game, though rental works for most of them.)

But then you hit the other wall… a flooded content market and subscription providers.

At $10 a month, Hulu-Plus is a great bargain for TV lovers and works on your TV (via PS3 or other boxes) as well as your portables. So why would anyone keep spending $2 an episode so they can watch 30 Rock on their treadmills on Friday when for $10, they get every episode of the series and so much more for every other day of the week?

Netflix is another $10 a month for access to thousands of titles streaming to you. So do you need to see Studio Movie X the day it comes out on DVD? Surveys have consistently said that the answer to this for adults is, “No<" outside of special events. I LOVE digital delivery. But i have to say, when people write about it like its something other than a new platform, with many of the same business issues of the old platform, they are getting caught up in the hype. Right now, things are such a mess that no one can really expect the average consumer to sort it out. Movies are in theaters, then in some cases, on DVD and Download and/or VOD less than 4 months later, then a month after that on Netflix and Redbox, then a few months after that, pay-TV and or Netflix streaming. How many bites of the apple does the industry think it can have... and at what price for each one? That is the big question weighing on everyone's mind. And you know, if they were so very sure about "fight pricing," then you can only wonder why Harry Potter and Tangled, movies right in the line of possibility-of-success with the idea, aren’t going there next month. The answer: they don’t know. The Catch-22: Besides having to convince powerful partners to play along… besides igniting a war with exhibitors… franchises that have the best potential to work for day-n-date are also the franchises still having the most success with windows, starting with a solid theatrical window. And… if it “failed” with a Harry Potter or a Pixar film – meaning the final bottom line isn’t increased over the current platforming system – it would be hard to get anyone to play again for a long time, especially when 90% of the product being released doesn’t come with a fraction of the built-in audience that these big events do.

Staying at Disney for a moment, since they have the most strongly committed audience for any studio brand, Disney also has to figure out the math of the subscription model vs current windows vs broken windows. With over 100 million babies born in the world each year, how many Disney homes are there? 15 million subscribers at $10 a month for access to everything anywhere is a $1.8 billion revenue stream. (And aren’t there more, especially in Europe and Asia?) And that is without theatrical or DVD or Digital Rental/Sell-Thru or STARZ/Netflix or cable/satellite Disney Channel viewers who don’t subscribe to the monthly service (which would be reduced significantly, but still be a good chunk of revenue). That’s just the all-access proposition that would be primarily with people with kids in the 6-16 age range. So I expect them to go there before 2015.

This article is a bit of a mess… all over the place… which is why it’s been a struggle… but also representative of the subject. Rights are spread out all over the place. Technology is just settling in. Netflix is overpaying by too much to disregard so that engines can be revved for another couple of years instead of advantage being taken. Every rights holder seems to be trying to get into the package streaming business, even if they don’t specifically have the right to do so… or have not been precluded from doing so. Studios have very different content values in this evolution. Disney, as noted, is a singular kids play. But Viacom’s Nickolodeon may also be a powerhouse… and may or may not benefit from being connected to Paramount. Is HBO of enough value to stand alone, without getting sucked into Wanrer Bros’ plans? Should pre-1970 catalogs, like the Warner Archives, be offered separately from the big studio library? What about mixing or separating film and TV?

There is a lot of experimentation to do. And the problem is, history tells us that one or two missteps can set groundwork for an unhappy future.

The dream is that as many people as bought DVDs in the heyday, and more, will pay DVD prices for “ownership” of a digital version of films and TV shows. I think most studios know that the price is never going up. But i would still argue that it’s a fantasy to think that digital delivery will just become the new DVD, even if you can watch something on multiple platforms. There will be a small bubble. But DVD felt revolutionary. Digital delivery, after the shock of the new, is evolutionary. And people only have so much money to spend on Home Entertainment… which is when the next war starts… when people start subscribing to 20 things and are spending $200 a month and the next recession hits and they start paring it back… even to $150 a month. That’s when even more consolidation starts and the shrinking of the industry really settles in to a future reality.

Anyway… sorry it’s rambling… but I think there is a lot to chew on… interested in your opinions…

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