More Economics

Apple’s biggest future competitor is Wal-Mart. Wal-Mart has recently signed with 5 major studio companies and has opened an online movie store. Along with Apple, Wal-Mart is the only other retailer to not offer a rental service, but rather varying amounts to purchase new releases and older films. Wal-Mart has incredible negotiating power as it is responsible for over 40% of DVD sales in the US. This allowed Wal-Mart to sign deals with all the major studios and aggressively price their downloads less than iTunes ($1.96 for TV shows, $12.88-19.88 for new releases, and $7.50 for older movies). Studios enjoy the ability to offer variant pricing strategies on their films, a source of many problems for iTunes negotiations with them. iTunes has built itself on a successful model of a standard price per download and wants to continue. Apple should possibly consider altering its strategy in response to Wal-Mart’s undercutting in efforts to license more films and maintain its consumer base.

Internet downloading is expected to generate about $4 billion in annual revenue in five years, compared with an estimated $27 billion from DVD rentals and sales, according to Adams Media Research. This discrepancy is the result of viewers continued reliance on watching movies on their TVs. Consumers derive their utility from the ability to comfortably watch movies in their living rooms on a larger screen with better quality. In order to try to capture this overwhelmingly large consumer demographic, Apple should market its new AppleTv more aggressively. This hardware wirelessly syncs a Mac or PC with iTunes to a television set so the viewer can enjoy over 50 hours of video from the comfort of his couch. As this device (for $299) only works with iTunes, it will continue to attract more costumers to iTunes as their preferred download store.

Amazon and TiVo have also noticed the importance of allowing viewers to watch their downloads on their own TVs. Amazon and TiVo have struck a recent deal to allow for movie downloads through Amazon to be played on people’s TVs through their TiVo recorder. This type of technology could be threatening to Apple, but there are currently only 1.3 million compatible TiVo’s in the US for this type of technology. Assuming that not all of the 1.3 million will download movies, this does not look to greatly affect Apple’s sales.

http://www.businessweek.com/ap/financialnews/D8N40R4O0.htm

http://store.apple.com/1-800-MY-APPLE/WebObjects/AppleStore?family=AppleTV

Why might Apple want to use a BitTorrent system to distribute files? According to Businessweek.com, “Distributed delivery is attractive because the technology downloads files by collecting bits and pieces of it from many sources, rather than putting the burden on just one source. That means it costs next to nothing for content owners to distribute movies or music -- a huge advantage over the current approach, in which files are streamed over individual servers and the massive amount of bandwidth required for video can run up huge bills.

One example is MovieLink.com, an online movie store that uses direct-server distribution and is owned by Metro-Goldwyn-Mayer Studios, Paramount Pictures, Sony Pictures Entertainment, Universal Studios and Warner Bros. Studios. The movie store cost the studios as much as $150 million over the last four years, despite selling only about 70,000 downloads a month, according to one source with knowledge of Movielink's financing.”

Although it is too soon to find relevant statistics on the movie downloads from iTunes (given its recent start-up), an inquiry into the iTunes music store proved interesting. Apple currently averages selling about 3 million songs a day at $.99 each. iTunes Music Store also represents 83% of the downloaded music sold on the internet. Yet, analysts say with such low pricing, “Apple's iTunes business roughly breaks even. That's because after paying its partners, such as the music labels, Apple receives only about 25 cents to 30 cents per song. Add in operating costs and the business hovers around the break-even point, said Michael McGuire, an analyst at the industry research firm Gartner.” But these sales help stimulate the sales of iPods, which accounted for half of Apple’s $5.75 billion revenue in the last three months of 2005 alone (14 million iPods).

This would also seem true for its new movie downloads. At prices lower than DVDs, it would be difficult for Apple to earn a high profit from downloads. Switching to a BitTorrent system might lower operating costs so as to give Apple a higher profit margin. Yet, I don’t feel as though it would sufficiently lower the costs of supplying bandwidth to stream the files over individual servers enough to make it economically wise. Apple should run the Movie Store in the same way as the Music Store—not as a mega cash cow, but rather a device to supply locked-in users with video iPods and Macs, hopefully fueling more sales of video iPods or their new AppleTV device. After all, the overwhelming majority of Apple’s profits are the result of its hardware sales.

http://www.businessweek.com/technology/content/may2006/tc20060508_693082.htm

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2006/02/24/BUG9THDRI31.DTL&type=business