Apple Computer demonstrated on Sept. 12 that it intends to become as big a retailing powerhouse in movie downloads as it has already become in the market for music distribution.
Everything company CEO Steve Jobs revealed Sept. 12 at San Franciscos Yerba Buena Center for the Arts Theater fit into a coherent strategy for strengthening Apples position (and revenue flow) as a digital media marketer and distributor.
From its strategy for selling movie downloads, to new iPod features, to an unprecedented “sneak peek” at iTV, a product to be announced in early 2007, everything Apple showed all share the primary purpose of expanding the companys ability to sell not hardware, but bits and bytes of entertainment. Though, of course, Apple will sell you the hardware, too.
The only thing conspicuously absent from the announcements was a full-screen video iPod, which some market analysts expected to debut.
Apple is already a digital retailing juggernaut in the music world. Jobs noted that iTMS (iTunes Music Store) had an 88 percent market share of online music retailers, with over 1.5 billion songs sold to Mac and PC users.
By the second quarter of 2006, he added, Apple was the fifth biggest seller of music that he stressed was legally obtained, behind Wal-Mart, Best Buy, Target and Amazon.
Unlike Apple, all these retailers sell physical CDs. And Apple, he noted, was poised to surpass Amazon in 2007.
As expected the Sept. 12 announcements were led by Apples movie download service.
Jobs drew parallels between todays movie offerings, which are limited to titles from Disney and three studios owned by Disney, and the first days of selling TV shows on iTMS, with only five shows from one network.
Jobs said that today iTMS sells over 220 shows from 40 networks. Expect a similar expansion of offerings in the movie category, he added.
These movies will be sold at “near-DVD” resolution of 640 by 480, rather than at the previous resolution of 320 by 240. Using the H.264 codec, Jobs said, this would provide excellent picture quality for viewing on computer—and larger screens.
This feature ties into the “sneak peek” device, currently code-named iTV. Although the final name will likely be different, Jobs said. Such a device has been long anticipated by analysts and Mac watchers.
The iTV, which looks like a flatter Mac mini, serves as a wireless way to connect your Mac to any TV via HDMI or component video, and analog or digital audio.
The iTV connects to a Mac via 802.11 wireless, allowing users to browse content with Apples remote (which comes with most currently available Macs) through Mac OS Xs Front Row interface.
This offers a simple, large-text menu system for selecting movies, music, photo slideshows or movie trailers streamed from Apples Web site. With the iTV, any Mac will become a challenger for a dedicated Windows Media Center PC.
Jobs said the iTV will work with any computer outfitted with iTunes, though he did not say if PCs will also get the Front Row interface experience.
This is an instant value-add move for Apple: People who already have invested in digital media through Apple will have, after paying $299 for the iTV, a new venue for their media. Movies wont have to be watched at a desk, or computers wont have to be dragged out to the living room.
Starting a New Revenue
This is perhaps why Jobs chose, as he has been loathe to do, to talk about an upcoming product.
If he had shown a full-screen video iPod that would not be on the market for six months, this could impact current iPod sales. But by showing the iTV, which will give new value to any movies, TV shows or music you buy today through Apple, he has increased the value of those purchases.
“You buy a movie or a TV show today,” said Ted Schadler, an analyst at Forrester Research in Cambridge, Mass., “and have a new experience with it when you have an iTV.”
Schadler also said that pre-announcing the product is “something that companies in a dominant position do.”
He added that this strengthens Apples bargaining position when dealing with potential content partners. “It says to studios, heres how were going to do it. Heres how were going to be the winner in the living room.”
Michael Gartenberg, vice president and research director at New York-based JupiterResearch, was also intrigued by the announcement of the iTV player and the fact that Apple, known for trying to maintain the secrecy of product launches to heighten the market buzz, unveiled it well in advance of its launch.
“Apple is providing a solution for the digital home, and thats a pretty big deal at this point,” Gartenberg said. “They are offering a means to play video, but move it beyond a PC and onto a television set. They have set a big challenge for themselves and we will have to see what they deliver in 2007.”
Van Baker, the vice president of research for media at Gartner, based in San Jose, Calif., said that by offering iTV next, but announcing its presence before the holiday shopping season, Apple has essentially frozen the market, forced its competitors to respond and left consumers with an option.
“People might want to wait and get a look at this before they make a purchase,” Baker said.
As for the movie sales, Baker believes that Apple may have wanted to have all the movies sell for $9.99 to keep in line with the music on iTunes.
Under the current scheme, the $9.99 price will be limited to older movies. But in the end, the pricing will help keep a constant revenue stream flowing to the company and studios.
“Its pretty good marketing and the preorders create a purchasing incentive,” Baker said. “You can move a whole bunch of preorders and its a cash flow for Apple and for the studios.”
Schadler said that Apples pricing system, which is $12.99 for pre-ordering and ordering within the first week of a new release, with the price rising to $14.99 thereafter is a “promotional pricing” scheme.
But, what was most significant, he said, was that Apple negotiated the “availability window,” winning the ability to sell a movie online the same week of its DVD release.
“This says that the movie industry is willing to cannibalize DVD sales,” said Schadler. He noted that DVD sales have usually been a “cash cow” for the movie industry.
Though Jobs also debuted a new generation of iPods, he couched their updates in terms of movies.
He noted that the new video iPods, though sharing the same form factor as the previous generation, had 60 percent brighter screens and could play 3.5 or 6.5 hours of video, depending on the model.
And even more telling, perhaps, was the introduction of an iPod Games channel in iTMS.
Jobs demonstrated a variety of games designed for the iPod from game companies Electronic Arts and Pop Cap. At $4.99 each, they are cheap compared to their desktop versions, but as mobile phone companies have shown with ring tones, its the content that can be the most profitable revenue stream of all. Editors note: Staff Writer Scott Ferguson contributed to this story.