Don't Change Horses Mid-stream

Second Economic Report:

After consulting with Justin, Hayley, and Marion, I feel that Apple switching to the BitTorrent distribution system is currently not an economically sound investment.

With Bit Torrent, Inc.’s new Entertainment Network just being released, initial reports on the effectiveness of the network to distribute protected multimedia are shaky. A report on the system by “Ars Technica” showed many early flaws in the Bit Torrent Entertainment Network. According to the report, many of the problems found by the user were the result of Bit Torrent’s increased focus on legality. This caused two blocked attempts from the user to purchase movies, saying she was in a country that was not permitted to use the system. But the user’s billing address and computer location were registered in Chicago, IL. Next there were problems with the compatibility issues of DRM between Mac and PC users. This would be a problem that Apple would have to research and develop a new system of DRM that could be costly R&D. Upon the final successful completion of a download, when attempting to view the movie, the user was met with a prompt that declared “the media usage rights for the file are not valid.” Also, the download of the popular new release, “Nacho Libre,” took 47 minutes to complete. In Justin’s trial download from iTunes, “The Hunt for Red October” too barely 9 minutes.

This trial of Bit Torrent’s attempt to legally distribute licensed media raises many economic concerns if Apple were make the same attempt. Many encrypted bits of data from many different users would could cause problems (such as in the report) that may affect the user’s viewing experience. A recent study of the iTunes Music Store shows its growing popularity among internet users. In November 2006 alone, the Music Store attracted 20.8 million new users. This is reflected in iTunes revenue in the first three quarters of 2006 being up 84% from the first three quarters of 2005. And iTunes’ popularity continues to soar. Initiating a new unproven system in the hopes of delivering HD DVD movies more quickly is inherently risky. But the risk is even greater given iTunes’ success and popularity. If users have a frustrating experience like the trial of Bit Torrent’s system, Apple could be at a huge risk of alienating its loyal consumer base.
Consumer confidence and familiarity are certainly not to be overlooked. iTunes currently has a simple, artistic, and enjoyable interface that has attracted many customers. I feel Apple must take a risk-averse approach to completely altering its downloading format.

The need for alteration of downloading format is in fact very questionable. iTunes users have come to rely on paying for a download and receiving their movie order in a short time, in many times shorter than BitTorrent. BitTorrent’s own Vice President stating, “the download time [of BTEN] is analogous to downloading from [Apple's] iTunes.”
Many users enjoy the ability to begin a movie download and begin viewing it as the download is in progress. Essentially, this could cut the waiting download time down to just a couple of minutes. This is unfeasible under the BitTorrent system where separate pieces of data arrive in random order and must be pieced together upon completion of the download. Apple’s current system is arguably faster, more reliable, and more assuring then BitTorrent. When a user downloads from iTunes, he knows he is receiving his movie directly from a reliable and reputable Apple Server. Many concerns can be raised when consumers are forced to start downloading from other unknown users that could be potentially harmful.

Apple already holds a strong share of the online movie download market. Mac users are locked in to using iTunes as a downloading platform, and PC users are given the option—which many choose to accept. Coupled with this is the incredible importance of the video iPod. “total iPod sales reached 88,701,000 units as of January 2007.” Users hoping to download movies must use iTunes and Apple’s DRM to play on their iPod. This gives Apple a quasi-monopoly on a fairly sizeable consumer base of iPod users and Mac loyalists. There does not seem to be a need to change their current pricing strategy of $14.99 for new releases and $9.99 for all other movies. This standard pricing strategy (modeled on the $.99 per song Music Store pricing) has been one of Apple’s greatest causes of success.

Since nearly 48% of Apple’s profits are a result of iPod sales, I would advise them to spend investment funds on developing a new piece of hardware through which to play movies downloaded from iTunes. Although the video iPod is an option, some type of small portable device with a larger display more geared toward viewing would result in greater sales from users forced to download from iTunes. It is smarter to force consumers to purchase movies from iTunes after they buy their hardware than to try to attract them by “hopeful” better download times after investing in a new BitTorrent system.

Finally, the HD-DVD/Blu-Ray market has yet to be proven a wild success. Not all new releases are even formatted to this new standard. Yet, if they do prove to be successful, Apple may have to dedicate more hardware and bandwidth to its iTunes infrastructure to ensure reliable downloads. But this investment would be less risky (Apple would simply be expanding what it has already found success) than applying funds into a BitTorrent experiment that could have high detrimental effects on Apple’s role in the future of online movie downloads.




Sources:

http://arstechnica.com/news.ars/post/20070227-8929.html

http://www.macdailynews.com/index.php/weblog/comments/comscore_apple_itunes_sales_are_surging_revenue_grew_84/

(http://www.pcmag.com/article2/0,1895,2098221,00.asp)

(http://www.techcrunch.com/2006/10/15/itunes-movies-v-the-rest/).

http://en.wikipedia.org/wiki/Ipod