Warning to Jobs: Taming Hollywood not easy
The king of digital music surprised no one with its new movie download strategy. Now comes the hard part.
By Jon Fortt, Business 2.0 senior editor

SAN FRANCISCO (Business 2.0) -- Plenty of the usual "oohs" and "aahs" to go around when Apple Computer took the wraps off its movie download strategy Tuesday, but the iPod maker might have a harder time dominating digital movies than it has had ruling digital music.

The reason: the movie industry, while in turmoil, is in a far stronger position today than the music industry was when Jobs came to the rescue a few years ago when record companies were reeling from the onset of Internet piracy.

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But that isn't keeping CEO Steve Jobs out of Hollywood. In a presentation that opened with a new lineup of iPods for the holidays, Jobs unveiled Apple's (Charts) iTunes movie download service. Movies will cost $12.99 in the first week after their release, and $14.99 starting in the second week. Older movies will cost $9.99.

Jobs also offered a sneak peek at the company's plan to use a sleek silver box to wirelessly connect the PC to the living room TV. The box, temporarily called "iTV," will cost $299, and will be available before April 2007, Jobs said. But the company did not detail how iTV will work. (More on Apple's announcement).

Apple, of course, isn't the only technology company looking to partner with movie studios. Amazon.com (Charts), for instance, announced last week its Amazon Unbox service, which allows users to download movies for viewing on PCs and Windows Media devices. Sprint Nextel (Charts) also announced a pay-per-view service last week. And startups including CinemaNow, Guba and MovieLink are also competing in the market.

Flawless execution is key

Michael Gartenberg, an analyst with Jupiter Research, said Apple's iTV is impressive, but warned that the company has little room for error. The technology has to work seamlessly in the home from the get-go.

"That's going to be (Apple's) challenge," said Gartenberg. "This thing better work out of the box. This is the kind of thing that needs to work the first time."

What's more, if Apple hopes to make it big in movies, it's got to play by Hollywood's rules.

Apple's movie launch differs in key respects from its original iTunes Music Store launch more than three years ago. When Apple unveiled its paid music downloads, it bet that millions of Internet users would pay 99 cents a song to legally download music - an idea many considered far-fetched, since savvy Web surfers had grown accustomed to grabbing free downloads from services like Napster and Kazaa.

The skeptics were wrong, and Apple's gamble paid off big.

Its head start in paid downloads has allowed it to dominate the market, with a huge lead over rivals like Microsoft (Charts), and mostly dictate its terms to the music industry.

And though music titans have openly pushed Apple to let them charge more for hit songs, Jobs has resisted, saying it's imperative that Apple keep the digital download system simple. And since Apple's iTunes commands three quarters of the download market, according to estimates by industry analysts, Jobs gets his way.

Hollywood's pricing power

This time around, Apple's video offerings join an already crowded field of Internet video services, and Hollywood is determined to keep Jobs from wielding as much influence over video downloads as he does over music.

Case in point: iTunes movies will have variable pricing. It seems that strategy was important to Disney (Charts), the first Hollywood player to allow TV shows and movies on iTunes.

Walt Disney Studios Chairman Dick Cook, who was at the Apple presentation, said variable pricing makes a lot of sense in movies - first-run flicks should cost more, while "You take an older title like 'Old Yeller' - something like this gives it new life," even at $9.99. It's the same argument the record labels made, but to no avail.

Cook also offered this: It's important, he said, that the digital download business be "revenue neutral" for Disney, meaning that Disney plans to make as much money from downloads as it does from DVDs after packaging and other costs are factored in.

The biggest threat Applewood faces?

The main competitor for all of the online services could be a company with an entirely different strategy for shaking up the movie business: Netflix.

Just as Apple changed the game in music downloads, Netflix has changed the playing field for movie rentals. The company booked more than $463 million in revenue in the first half of 2006 thanks to a wildly successful model that lets subscribers pay as little as $5.99 a month for unlimited DVDs.

Why isn't Apple pursuing a digital version of the Netflix subscription model? With music, Jobs has said, people are accustomed to owning their favorite tunes and listening to them over and over again.

But it would seem that movies are a different story. Consumers buy DVDs -- but they're more likely to rent a movie on a whim, watch it once, and send it back. Some services, like Guba and CinemaNow, are pursuing the digital rental business.

It remains to be seen whether Apple will offer its own subscription option, and whether its movie efforts will prove as popular as its music store. Either way, Apple might not be the only star on the red carpet.


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