BusinessWeek is reporting that Apple is close to closing deals with various movie studios to bolster their online efforts for video distribution. And it finally seems like the movie studios are getting their wish – a piece of the Apple hardware revenues. But not necessarily directly…
Hollywood is getting a chunk of the iPod hardware sales. Sort of. By way of the price that Apple has supposedly agreed to for digital distribution of new movies being so high – $17 per movie and $4 per 24-hour rental, they’re just taking either no profit or a loss on each one sold or rented. Even with slightly subsidized prices, I only one way out of this for now: failure. The price is too high and what you get isn’t enough.
Consumers aren’t stupid. Given the choice of paying $15-17 for the physical DVD, along with packaging, DVD extras, etc, or paying the same price for a digital copy that they cant backup on to a physical medium to play in a DVD (or High Definition) player, they cant take to a friends house or loan out to a co-worker, and is subject to being lost in a HD crash, what do you think they will choose?
The same goes for rentals -Netflix is only $17/mo for three movies at a time, and you can probably get at least 10 movies per month if you send them back promptly after watching them, and this also includes HD content (Blu-ray and HD-DVD are available on Netflix). That would be the equivalent of at least $40 in iTunes Movies rentals, perhaps more considering you can keep the movie as long as you want and watch it more than once over the course of a few days before sending it back.
Brick and Mortar stores also hold a distinct advantage over Apple here as well. They can afford to sell the new releases at cost or below cost. This is commonly known as “loss leaders”, where they sell items at or below cost to get you in the door, and they hope you purchase some higher margin items while you’re in the store. Apple really doesn’t have this opportunity – the only way for them to get money back is by selling you new and better iPods every year (the reported margins on iPods is about 100% – half of the device cost is profit).
The only positive way out of this is if the movie studios come to realize what the music industry already has – DRM wont work. Once consumers aren’t tied to a store for their specific piece of hardware, the movie industry will be forced to competitively price downloads. People will be able to shop around between various sites, and choose the best price and features. Stores wont make money if they cant be flexible with the content, and will go back to the movie industry asking for better terms.
I said above, the “only positive way out” because it’s entirely possible that they don’t want a positive way out of this. DVD’s are (or possibly were, as sales have been slowing) the industry cash cow – turning that box office bomb into a salvageable title that might warrant a direct-to-DVD sequel (I’m looking at you Disney).
It is a rough time for everyone - transition can be a shaky time when you don’t know what will pan out. For now, I think digital feature length movies are still on the out. TV Shows and other eposodic content will do well, but the 2 hour movie is still too long to download in DVD quality. Not until 2010 and widespread DOCSIS 3.0 deployment, and the expansion of cable plants to 1GHz will we see the 10Mb/s+ speeds needed to download movies in reasonable amounts of time.
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