Why Apple Needs Movie Rentals

ipodtouchtunes.pngThe Financial Times reports that Apple is close to announcing a deal with FOX that will allow the Cupertino, Calif.-based computer and consumer electronics giant to offer movies for “rent” via its iTunes store sometime in 2008. Other Hollywood studios are also said to be negotiating with Apple, the report says.

The rumor is being viewed by some as a way to revive the flagging Apple TV platform. The reality is that Apple needs to beef up its video offerings if it wants to continue the iPod cash machine humming. The best clue is the easy-to-rip-and-transfer-to-iPod capabilities that may be built into future FOX DVD offerings.

Apple will also for the first time extend its FairPlay digital rights management system beyond its own products. A digital file protected by FairPlay will be included in new Fox DVD releases, enabling film content to be transferred or “ripped” from the disc to a computer and video iPod.

A quick visit to the Apple’s iPod website shows that with the exception of low end iPod shuffle, every iPod is video capable. The big money makers for Apple are its new iPod Touch and iPhone devices. Shaw Wu of American Technology Research in a note to his clients estimated that iPod sales for the current quarter will be about 25 million.

“It’s looking like Apple’s most optimistic guidance in eight quarters is turning out to be conservative after all. Our recent checks with supply-chain sources lead us to believe Apple is positioned to deliver upside.” (via Bloomberg)

With 5 million iPhones expected to be sold, Apple at the end of fourth quarter 2007 will have between 5-and-10 million widescreen devices. This is a market that will be looking to fill their new acquisitions with content. Sure, there is a lot of video content for sale at the iTunes Store – television shows for example – but movies are in short supply. As Liz writes over on NewTeeVee

Compared to the six million songs it has in stock, iTunes has about 500 movies and 550 television shows. In October, Apple said it had sold over three billion songs, over two million movies, and 100 million TV shows.

Sure Disney and some other studios offer movies for download, but high prices have kept the buyers away. At $2.99 a pop, the rental business makes more sense. Say if you travel a lot, then filling your device with two or three movies you want to watch before leaving home is still cheaper than paying the airlines for a limited selection of movies, or watching the standard fare.

There is another reason why I don’t think this deal is about Apple TV and the living room – at least not yet. I have been buying TV shows – Numbers, CSI and Psych (before NBC pulled the plug) – and an occasional movie from Apple iTunes. While these were great to watch on my Macbook Pro’s 15.4 inch screen, the experience was mediocre at best when watching the shows my LCD TV via Apple TV. Unless Apple increases the quality drastically, many of the new HDTV owners will find the experience of watching videos on their big screens lagging.

For studios this is not a bad deal. As I have written in the past, DVD business is slumping, and these rentals can help compensate for the lost DVD revenues. More importantly, if someone likes a movie as a rental, they can buy the higher quality (or HD) versions of their DVDs.

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Photo courtesy: Apple Inc.