Apple Figures Out Video with Its New iTunes Business Model; Consumers Prefer to Rent Movies

| Jan 17, 2008 | Digital Home - U.S. | Competitive Intelligence Report

| Analyst: Bruce McGregor

Current Perspective: Positive
Vendor Importance: Very High
Market Impact: High

Event Summary

January 15, 2008 -- Apple announced its new iTunes Movie Rentals services at Macworld, enabling iTunes users to rent a digital copy of movies for up to 30 days with a 24-hour window to watch the movie multiple times. Apple has secured relationships with the major movie studios, including 20th Century Fox, Walt Disney Studios, Warner Bros., Paramount, Universal Studios Home Entertainment, Sony Pictures Entertainment, Metro-Goldwyn-Mayer (MGM), Lionsgate, and New Line Cinema for its new video rental business model, making 1,000 titles available by the end of February 2008. iTunes Movie Rentals can be played on multiple devices: Mac, PC, iPod, iPhone, and Apple TV. Rentals cost $2.99 for older films and $3.99 for new releases, with an additional dollar for the high-definition (HD) version. Apple TV software was enhanced to permit users to rent or buy movies directly from their Apple TV without having to first download the content on a computer and then transfer it.

Analytical Summary

• Current Perspective: Positive on Apple’s move to embrace the concept of allowing its iTunes users to rent digital movies in addition to buying them, because, at $11 less per movie, it is more economical for consumers to rent than to buy. Apple has developed an online video download revenue model called iTunes Movie Rentals that all the major movie studios have agreed to support to give consumers greater access to movies. For $3.99, Apple offers consumers a good deal, with rental access to a newly released movie for up to thirty days with the digital rights management (DRM) restriction of that copy only viewable for 24 hours once viewing has started. HD-formatted movies are available for one dollar extra per movie. The rented films can be downloaded through the easy-to-use iTunes 7.6 software with access on multiple devices, including a home computer (Mac or Windows), select iPod portable media players, an iPhone, or an Apple TV home media center.

• Vendor Importance: Very high to Apple, because the company has not been nearly as successful with delivering digital video content when compared to its dominance of the music download industry. The online movie rental model with cheaper access to content is necessary to make the Apple TV device more worthwhile for a digital home consumer to invest $229. Apple cleverly launched iTunes Movie Rentals at the same time as its Apple TV software upgrade. New Apple TV software will soon grant users access to the iTunes Store through the connected TV to download movies directly, as opposed to the earlier version that required users to download movies on a computer first.

• Market Impact: High on the digital home services market, because Apple has become more serious at gaining market share in the video services market. The host of announcements at Macworld demonstrates that Apple wants to gain the favor of consumers who choose iTunes to get instant downloadable access to movies and TV shows. Apple offers the customer a choice that competes with premium TV channels, DVR content, VoD programming, DVDs, or other online delivery service providers such as Vongo and Netflix. The availability of movie rentals from all the major studios via iTunes breathes new life into Apple TV and further distances the iPhone and Apple’s iPod portable media player line from the competition in terms of access to premium video content.

Recommended Competitor Actions

• TiVo needs to aggressively market its Amazon Unbox online video service, which provides content on-demand as another option to its device’s standard function of recording live broadcast TV. The Amazon online video download service offers $1.99 TV episodes and $9.99 to $14.99 full-length popular movies, plus the option to rent movies for $3.99 per film. Supported video content includes current television shows and movies from over 30 studio and network partners with over a 1,000 titles from which to choose.

• Leading cable and satellite TV providers need to tout the vast amount of video programming that is available through their digital video packages along with their appealing value-add features such as DVR and VoD services. In addition, cable providers should continue the extremely successful strategy of selling their video services in bundled packages with their broadband and voice services at about $100 for an entry-level triple play.

• Netflix should further promote to its more than 7 million DVD rental customers the advanced feature to stream movies directly off their Web site on a PC. Now, Netflix does not limit the number of movies that can be watched instantly for no additional charge, with access to 6,000 movie and TV titles. Netflix needs to work quickly with LG Electronics to deliver its new device to compete with Apple TV.

• AOL Video’s new December 2007 partnership with MTV Networks opens up AOL users to a host of online video content from popular TV channels: Comedy Central, MTV, Nickelodeon, VH1, CMT, Logo, The N, Spike TV, MTV2, AtomFilms, and GameTrailers. Worldwide, MTV Networks programs more than 145 television channels that reach more than 510 million viewers. MTV Networks has an assortment of more than 300 Web sites that attract 90 million unique visitors each month. AOL needs to demonstrate that it can make music and video more dynamic on the Web, and that it offers more and more compelling content on the Web than its competitors do.

• Microsoft’s Xbox 360 LIVE Marketplace, with ability to download hit movies to an Xbox gaming console, needs to be further expanded to meet growing competition from Apple TV. Right now, Xbox just offers select movies and TV programs from Disney, Warner Bros., and Paramount. With an established customer base of over 17 million Xbox devices sold, Microsoft can start to morph the game console into a hybrid device with more home entertainment features. Ten million Xbox LIVE members and more than 3,500 hours of premium content make Xbox 360 already a powerful platform for on-demand video content.

Recommended End User / Customer Actions

• iTunes users will be excited to try the iTunes Movie Rentals service since they can now access blockbuster movies from the major movie studios at a cheaper price point of just $3.99 per rental, instead of the original option to buy the download for $11 more. Consumers must understand upfront the restrictions of renting iTunes movies instead of buying them, with just a 24-hour viewing window once a movie is started.

• iPod and Mac enthusiasts should look into adding the Apple TV device to their home’s TV entertainment center to utilize their purchased iTunes music and video content linked seamlessly to their digital TV. The Apple set-top box is compatible with the following WiFi formats: 802.11b, 802.11g, or 802.11n (wireless video streaming requires 802.11g or 802.11n). It is also compatible with a 10/100BASE-T Ethernet wired connection. Consumers looking for a one-box solution for video, music, and photos, unless they are loyal to Apple iTunes, could be satisfied with AT&T Homezone and its 2Wire MediaPortal or TiVo’s DVRs (with its relationship with Amazon.com’s Unbox and Rhapsody).

• Consumers interested in getting downloadable access to digitized movies and TV shows need to be cautious before investing in new devices and buying large amounts of online content. Apple’s video services have improved overnight with a cheaper rental option and new lower price for its Apple TV at $229. In addition, Apple TV has greater functionality coming soon. New video services are emerging rapidly in 2008, but cable and satellite TV still own the pay TV space by providing the greatest amount of content through their digital set-top box.

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Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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