First it was music a la carte. Then it was TV shows on demand. Now there are reports Apple is in negotiations to offer downloads of full-length movies on iTunes.
Having found the secret to a thriving music-download business and kick-started an iPod-friendly TV program, Apple has turned its attention to the next logical medium: movies. The outfit wants to sell films through its online store, but an agreement with the movie studios is unlikely any time soon.
A report in the trade newspaper Variety says negotiations between Apple and Hollywood’s major studios — including Twentieth Century Fox, Warner Brothers, Universal Studios, and Disney — are active and ongoing to iron out the details and bring the inevitable to fruition.
According to the report, price is holding everything up.
Apparently, what remains to be worked out at this point is pricing. According to the reports, the studios rejected Apple CEO Steve Jobs’ proposal of a $9.99 flat rate per movie and are pushing instead for a variable-pricing structure, whereas studio executives want a range of prices that mirrors videos and DVDs at retail stores which, generally speaking, run from discount titles at a few dollars apiece up to $19.99 or more for new releases.
To the studios, Apple’s version of "consumer-friendly" looks more than a bit self-serving—and unnecessarily tough on them.
Different Model:
Studio executives want to avoid the fate of their counterparts in the music industry. Consumers pay Apple anywhere from $69 to $329 for an iPod but end up paying the music label just 65 cents or so for its cut of the song’s 99-cent download. "Steve has a lot of leverage, but the Hollywood executives are not going to tolerate what he did to the music labels," says a digital media consultant who has spoken with studio executives about the negotiations, and who requested anonymity.
Apple’s unwillingness to stray from their 99 cent per song price created some headlines earlier this year, when members of the recording industry tried to renegotiate the price of songs and albums before agreeing to a new contract.
In the end, it was the recording industry that caved, signing a new one-year licensing deal with Apple in April.
Instead, studio executives also want Apple to try methods other than the basic download store, particularly movie subscriptions that would let consumers buy a specified number of movies for a given price.
Rather than give in to Jobs’ demands, studios are rapidly placing other bets. In the last few months most have agreed to allow their films to be downloaded to hard drives through Movielink and CinemaNow, and Warner Brothers is even allowing it with BitTorrent, the one-time peer-to-peer pirate site. Others are in talks with Wal-Mart to let the retailer set up kiosks where consumers can pay less than $10 for a DVD-on-demand of slow-selling older films that are not on the shelves, says the industry consultant.
Will Hollywood Join the Digital Media Revolution?
Water coolers from Cupertino to Hollywood are abuzz over the prospect that Apple Computer is plotting a frontal assault on the movie business.
As is typical for the maker of the fashionable and ubiquitous iPod, the company had no comment on the report. "Apple loves secrets," commented Ina Fried, senior writer for CNET.com. "Apple loves to be the one to make its own news."
Indeed, Apple has held serious negotiations with movie studios about adding a movies section to its famous iTunes Music Store, sources confirm.
It is been nine months since Apple announced an iPod capable of playing video and opened a video section of the iTunes site with a deal with Disney to sell reruns of shows such as Lost. Since then, it has sold just 30 million videos. Sure, that is nearly 30 million more than any rival. And the company has landed a string of landmark deals with other studios that have helped sales of shows such as NBC’s The Office and Showtime’s Weeds.
Fried says it is no shock that Apple is working on bringing movies to iTunes, but believes they may be dragging their feet with good reason. "Apple is moving into video at a slow and measured pace," Fried said. "It still takes a lot of time to download video."
No Pressure:
At this point, there does not seem to be much middle ground. Sources familiar with the talks say Hollywood executives are frustrated with Jobs, who is personally doing most of the negotiating for Apple. "It is all his thing, and he is the one making it happen at this point," says one source.
But it is the movie studios which may hold the true power in this deal, as they do not want to jeopardize the money brought in from already lucrative revenue streams like DVDs.
"Hollywood wants to augment what they are already making from DVDs," said Fried.
Still, Fried says studios know they have to do something to pull together a digital download model before the pirates begin taking an even bigger chunk of the industry’s revenue than they already do.
Some Hollywood insiders are uncomfortable haggling with Jobs, who is a director and the largest shareholder of a huge rival, Walt Disney & Co. Another reason a deal may not be imminent is that neither side needs it to happen right away.
Although she acknowledged that it is the individual studios that are working on deals, Kori Bernards, a spokesperson for the Motion Picture Association of America said, "Our companies’ movie studios are certainly thinking about different opportunities to distribute content."
Music studio sales were collapsing at the time they negotiated deals with Apple. Not so with Hollywood studios, which can continue to work on other deals with the security of knowing that Apple might not be able to sell a lot of movies on their behalf anyway.
She sited several examples of film studios making strides on the digital frontier, such as a recent deal between Warner Bros. and BitTorrent to allow the service to distribute Warner’s movies legally.
One of Many:
But because iTunes is already widely used for downloading songs and television shows, the relatively new market for downloading movies would likely get a boost from the added exposure of being backed by iTunes.
Rather than acting as a pioneer this time, Apple will be just another player in the field if it starts offering movies. Movielink, a joint venture between five of the big movie studios, and CinemaNow, backed by Microsoft, Lionsgate, Cisco, and Blockbuster, long ago staked their claim to this territory.
And it is not like any competitor is threatening to steal this video opportunity from Apple any time soon. While PC makers have been selling computers running Microsoft Corp.’s Media Center PCs for years, analysts say few consumers use these computers in place of TVs.
"Apple will enter a competitive landscape, competing with the likes of CinemaNow," said Zippy Aima, an analyst at research firm Frost & Sullivan. "Apple will have to price the movie downloads in a similar range."
Movie executives attracted by the lure of additional revenue streams will want to work with Apple, Aima added. But Apple will have to do some of its own work to provide "convincing, competitive packages to customers to promote download movies through iTunes."
Fried believes that if Apple and Hollywood are able to reach an agreement to bring movies to iPod owners, we may be looking at yet another iPod contraption.
It is hard to image Apple having a feature film business and not having some kind of device to take advantage of that, she said. "I do not get a sense that the iPod has become a way for most people to watch video."
No Competition:
Citing unnamed sources, Variety said iTunes might begin offering film downloads by the end of 2006, but currently a price on iTunes is a sticking point in negotiations.
Pricing is a key component behind the appeal of iTunes. Since its launch in 2003, Apple has sold individual song downloads for a flat price of 99 cents. When it added TV shows to its download menu, Apple set the price for individual shows at $1.99.
Studios will demand flexible pricing and licensing models, which Apple has been reluctant to explore with audio content; said Nitin Gupta, a Yankee Group analyst.
The service has expanded its pricing a bit of late, however. "High School Musical," a Disney Channel TV movie, sells for $9.99, while the "Battlestar Galactica" miniseries is priced at $15.99.
No doubt Jobs does hold a wild card if he wants to get iTunes movie sales started: He could convince fellow Disney directors to take the first step by making some of its movies—say, the new Pixar film Cars—available for his $9.99 price. If sales take off, other studios may follow suit—just as they did soon after Disney became the first to make some of its TV shows available on iTunes.
Industry experts have noted that Apple’s dominance in digital music has given the company the leverage it needs to set its own terms — for the most part. But that is not the case with movie downloads.
We cannot be put in a position where we lose the ability to price our most popular stuff; one studio executive close to the negotiations was quoted by Variety as saying.
Although the video iPod plays video, Fried points out that it does not do it very well and it is certainly not capable of playing high-quality films.
Over the past months and years, Apple technophiles have created their own mock-ups of what a true video-playing iPod might look like, but to date, the company has not announced any new iPods.
Waiting Game:
Even if a deal is inked, it may well lead to more headlines than actual sales in the near term. For starters, movie studios might withhold some of their hottest titles. Moreover, Apple has hardly turned the video-watching world upside down since it first began selling TV reruns and other video fare last October.
Apple has hoped to get the store up and running within weeks, Hollywood sources say. But the deal is not yet done—and there is a chance it would not be any time soon. That is because Apple and studios remain at loggerheads on a range of issues, from how much movie downloads should cost, to the degree of piracy protections they should carry. "This will take months and months to figure it out," says one source involved in the talks. "It may even be a 2007 kind of thing."
Many analysts believe Apple’s big play for Tinseltown will arrive only should it come out with a new kind of consumer device designed specifically with movies in mind, rather than the iPod and its tiny screen. Little wonder both sides may be content to play a waiting game. Apple’s Jobs seems determined to approach the movie business with a similar formula to the one that enabled Apple to create a $1 billion-a-year market for legal music sales. The recipe includes a low, uniform 99-cent per-song price.
Representatives for Apple and most of Hollywood’s big studios either declined to comment or were not immediately available.