How much should a digital copy of a TV show cost? The answer, ultimately, is obviously: "what the market will bear". But the market will bear a lot of things, and not all of them are necessarily equally profitable or rational.

If you can sell 10 things for $10, or 100 things for $1, or 1000 things for 10¢, in each case you will make the same total amount. Now, if what you are selling is some big, physical thing, it might make sense for you to chose the higher price point, and sell fewer, because then you don't have to make as many of the physical thing, and transport it, and store it, and so on. These things very likely actually limit how many of this thing it is even possible to produce.

If, however, on the other hand what you are selling is information, bits of 1s and 0s, then it doesn't really matter how many you have to make. One digital copy of a TV show is, practically speaking, the same as a 1000 digital copies of the show. In this case, you'd be a fool not to go with the lower price point and get as many copies of your product out there as possible, and reap the benefits of "popularity".

With this in mind, let's examine the $1.99 price point NBC Universal and Apple have come up with for TV shows from the iTunes store. Will the market bear it? Probably. Is it the best price point for maximizing profits and popularity of these shows? I highly doubt it. To see why I reach this conclusion, let's take a quick look at how much an average, popular TV show is worth to a Network (I've chosen the show E.R., mainly just because I could find numbers for it, and it doesn't seem to be at this point an extreme show either in popularity or advertiser price; I get a similar final answer using Grey's Anatomy):

A quick Google tells me that for the TV show E.R., the rate for a 30 second spot was $400,000 in 2005. An average 1 hour TV show is actually 44 minutes long; the remaining 16 minutes are commercials. For the sake of simplicity, let's say that only 10 of those 16 minutes are actual paying advertiser spots (the rest are station promos, public service announcements... -- things that don't directly bring in money). So that's twenty 30 second spots, which means that, roughly speaking, one episode of E.R. brings in $8 million.

Another quick Google tells me that, for the week of March 20-26, 2006, E.R., in the number 16 spot, had 9,963,000 viewers. So, a quick and dirty calculation tells you that every viewer of E.R. is worth approximately 80¢ to the Network. (This also tells you that advertisers think 30 seconds of your time is worth 4¢, which works out to an effective hourly rate of $4.80 /hour.)

So if on television the Network is willing to sell the show for 80¢ per episode, why then all of a sudden does it cost $1.99 from Apple? Clearly they can afford to price it at least as low as 80¢, and as I argued above, for a digital copy of a TV show, where production and distribution costs are negligible, you should price it as low as you can to sell as many units as you can to reap the popularity this brings. You can probably afford to price it much lower still, because at 80¢ per show, you are basically assuming that that is one fewer person who will watch the show on TV for every digital copy sold, something that is not at all yet clear. See the case of Battlestar Galactica, where widespread watching of the show over the Internet actually seems to have increased its ratings on TV.

Which then touches on my final point: who are the people who will buy the show? Are they people who will stop watching the show on TV and now exclusively buy and watch copies on the Internet? In this case, if you don't include the advertising, then it seems that 80¢ is the already established price point, and you should probably go lower still. Are they people who will still watch the show on TV anyway? In that case you can price it for free, since you won't lose anything, and free might attract people who might not otherwise watch the show. Are they people who would not otherwise watch the show on TV? Then you might as well price it for free, since you're not losing anything, and now you might get more fans of the show.

So: free, free, less than 80¢ -- anyway you look at it, $1.99 is too much. (A conclusion ABC seems to have mostly arrived at all on its own, even if they are still trying to leverage ads into it ...)