By Michael Greeson, CEO, Co-Founder of The Diffusion Group
According to a June 19 article in Variety, Apple is in active negotiations with a number of major Hollywood studios to add movie downloads to its iTunes media store and begin offering the new service by year?s end. While much of the focus has been on the rumored pricing model and ongoing negotiations, only a few observers have tapped into the larger story ? that is, the impact of Apple?s move on the entire online movie download model. Will iTunes do for online movies what it did for online music? Does Apple?s entry into this space represent a ?tipping point? for the entire segment, or is such an outcome even relevant to Apple? In other words, is this simply the next step in Apple?s larger strategy to establish a presence in living room?
The Rumored Offering
Numerous unnamed sources told Variety that Apple CEO Steve Jobs has proposed selling all movies for a flat rate of $9.99, regardless of whether the movie is 20 years old or released only yesterday. Of course, the studios are not too happy with that idea. Variety quotes a ?studio exec? close to the negotiations as saying, “We can’t be put in a position where we lose the ability to price our most popular content higher than less popular stuff.”
The flat-rate model is (at the moment) a standard part of iTunes: songs sell for 99¢ and TV programs sell for $1.99. Only recently has iTunes started to experiment with other forms of content at different price levels, but by and large the flat-rate approach defines iTunes.
Given his recent success in putting down attempts by the music industry to institute variable pricing for song downloads, Jobs is confident he can do the same with movie downloads. Yet the very leverage that enabled Jobs to prevail in online music ? the market dominance of iTunes in the medium ? may not help when it comes to negotiating fixed $9.99/download rates for online movies.
Then again, Apple was able to negotiate 99¢ song downloads before the online music business took off, so why can?t it do the same with online movie downloads? Given its real success in online music, its perceived success in online TV programming, and its brand power, Apple may be able to pull this off. Maybe?.Never underestimate the ability of Hollywood to miss the point and screw up a good opportunity.
In this case, the content cartel should move beyond its myopia and instead view this as an opportunity to help grow the market for online movie downloads before its starts worrying about short-term profits. By making the terms as attractive as possible, Hollywood could help spur those consumers who have been sitting on the fence regarding Internet video to actually use the service. A $9.99 price tag for a new movie title would go along way to generating such interest. If the concept takes off, there will come a point in time to renegotiate pricing. If the concept doesn?t take off, the movie studios aren?t out much but they can say they put their best foot forward to help spur the medium.
Hollywood?s largest DVD distributors such as Target and WalMart have long complained about the threat that a successful online movie download service would have on their retail business. Of course, they said the same thing about online music (at the same time WalMart was dipping its toes in online music distribution). Again, this begs the question as to whether the $9.99/download model will work.
Would a $9.99 iTunes Movie Model Work?
As was the case with digital music, Apple?s would not be the first company to attempt an online movie download service. The space is already populated with the likes of CinemaNow and Movielink, with new entrants to likely include TiVo, Netflix, and even Amazon. Of course, this is only the beginning of the party and given the beauty of the Internet distribution model, TDG expects other entrants to step up (some very small, some very large).
It is important to note that the first-movers in the online movie rental/download space, CinemaNow and Movielink (both of which have been discussed numerous times in previous TDG Opinions) are having difficulties attracting a critical mass of users. In fact, Movielink ? which is owned by five of the industry?s largest studios ? is up for sale. Last year, Movielink brought in Salem Partners LLC, a Santa Monica-based investment banking firm, to find buyers. It seems that Paramount, Sony, Universal, Warner Bros. and MGM are ready to shed their Movielink holdings.
According to a recent analysis in Business Week, Movielink has enough cash to last one more year, having spent the majority of the $150 million in funding it received to launch service in 2001. To make matters worse, Movielink only sells about 75,000 downloads a month ? no where near what it needs to sustain its business.
So why would an iTunes movie download service work when other such services have tried (and failed) to gain a critical mass of users?
First, we?re talking about Apple not Movielink or CinemaNow. Apple has tremendous brand strength, an existing base of fanatical supporters who spend big bucks on comparatively overpriced (and arguably inferior) hardware tied to a proprietary service with unnecessarily restrictive usage parameters ? these are ?believers? not just consumers.
Second, Apple has employed an incremental approach in the evolution of the iTunes service ? from digital music to short films and TV programming ? and at each stage has had a chance to evaluate what the ?next step? might look like. Adding movies to this mix is a logical enhancement to the existing service, one that will make sense to existing iTunes? users.
Third, whether this move is immediately successful may be beside the point. In reality, introducing an online movie download service is but part of Apple?s long term strategy to become a dominant media brand in the consumer living room.
What?s this Really All About?
Many contend that Apple?s move to include movie downloads on the iTunes site is about feeding more content to the iPod (especially the ?new and improved? video iPod said to be in the works). While a larger viewing screen may indeed make portable video viewing more enjoyable and thus increase the appeal of the video iPod for watching long-form content such as movies, this is just the tip of iceberg for Apple. Apple is no doubt shooting for the living room TV and its incremental execution of this larger strategy has gone unrecognized by most observers.
As I mentioned in a March TDG Opinion, Apple?s Mac Mini, although not officially positioned as a ?living room PC,? was Apple?s first intentional foray into the living room media space. The platform features a variety of entertainment-specific goodies, including a six-button remote, Apple?s Front Row/Bonjour media software package (beefed up to support shared music, photos, and video), a dedicated TV output, a built-in WiFi access point, four USB ports, and S/PDIF audio output. Just to make sure you don?t confuse this with a home office PC, Apple doesn?t include a keyboard or a mouse ? just a remote control.
The Mac Mini is just the beginning of what TDG believes will be a series of more Apple-branded CE-like platforms positioned for the home entertainment center. Given the dominance of the iPod and the popularity of the Apple brand, the Company hopes to extend its presence into peripheral market spaces including mainstream in-home consumer electronics. With the iPod market maturing, and with it becoming increasingly difficult to continually ?improve? the platform in ways that entice existing users to buy yet another iPod, the time to extend the brand in new directions is quickly arriving.
Imagine a Mac Mini positioned as an iTunes set-top box that can be placed in your home entertainment center and which uniquely has access to an iTunes? music, TV, and movie service (I say ?uniquely? because Apple does not license its DRM technology to other companies, giving them a virtual lock on both access and consumption). Yes, the price of the Mac Mini may be a bit excessive for some ($599-$799 depending on the configuration), but Apple has been able to sell iPods for significantly higher prices than its competitors (as high as $500 at times). It is not at all inconceivable that Apple could get $500 for an optimized iTunes Mac Mini, especially if it enabled users to enjoy iTunes content in the comfort of their living room. Apple would then own both the hardware and the service, precisely the model it has used in the portable media space and which has made it the envy of every media and technology company in the world.
While these two ?events? seem unrelated, they are both logical extensions of Apple?s larger iLife project and, if so, there is a very good chance that one day soon you will see an Apple-branded ?A/V receiver? or ?set-top box? matched with the iTunes content services, that, as with the iPod, locks specific content services to specific hardware platforms. If Apple is able to pull this off, that?s two ?tipping points? that will have been fueled: one in regards to online movie downloads and the other in regards to Internet-enabled CE in your living room.
For more information about The Diffusion Group, visit our website at http://www.thediffusiongroup.com/.
