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Apple, Hollywood and windows

Apple_itunes_store_movies_2008Apple closed two gaps today with its announcement about downloadable movies for sale through the iTunes Store. The one it emphasized was the agreement by six major studios to pony up their films the day they were available on DVD. This was a no-brainer for Hollywood. In fact, according to a publicist for Vudu, the studios have long been providing downloads for sale through other online vendors "day and date" with DVD releases. The more interesting element here is that Apple has finally persuaded Hollywood's largest studios to sell movies through iTunes.

When Apple started selling movies through iTunes in September 2006, only one major studio agreed to participate. That was Disney, on whose board Steve Jobs sits. Studio executives complained about the wholesale discounts Apple sought, and disparaged Apple's approach to copy protection. Among other things, they didn't like the fact that movie buyers could transfer copies of the film to unlimited iPods. Paramount, Lionsgate and MGM eventually provided older movies for Apple to sell, but the pickings remained slim for new releases. With today's announcement, new and older titles from Sony, Universal, Warner Bros., 20th Century Fox, Paramount and Lionsgate are all joining Disney in making new releases available for sale. That leaves MGM, a studio that hasn't been much of a force in new releases, as the largest holdout.

Apple eventually made some concessions to Hollywood on copy protection, although they don't seem significant from the consumer's perspective. And with Disney reporting that iTunes was adding to its profits, there was no reason for the rest of the studios to stay on the sidelines. Not that iTunes is printing currency for Disney; Silicon Alley Insider's Peter Kafka called the studio's revenue from iTunes "a rounding error." That's true at least in part because studios have forced Apple and other downloadable movie outlets to offer flawed a product. By not allowing shoppers to burn movies easily onto discs that can play in conventional DVD players, the studios have made it much more complicated to watch a downloaded movie on TV than it is to watch a disc.

The iTunes movie rental service appeared to have more support from Hollywood when it was announced in January. All of the major studios were on board, and Apple predicted that more than 1,000 titles would be available by the end of February. But the service hasn't lived up to the promise of the announcement. Today, iTunes has less than 450 titles for rent, which is a small fraction of what's available on disc from Blockbuster or Netflix. And like its competition (e.g., CinemaNow and Movielink), Apple is forced to wait 30 days or more after a DVD is released before it can rent that movie to customers.

The studios' rationale for the delay has been that they don't want downloadable rentals to cut into DVD sales. They have applied the same delay to cable's on-demand movie channels, fearing that the instant gratification provided would be more appealing than the permanence of a purchased DVD. On Wednesday, however, Time Warner CEO Jeff Bewkes told financial analysts that Warner Bros. would put downloads, VOD and DVDs in the same release window for most titles. Rather than speculating about losses to DVD sales, Bewkes noted that VOD generates higher profit margins than DVD rentals. The goal, he said, is to move people from renting discs to watching films on demand.

That's the right framework. The longer the people have to wait to for movie to be available in the format they want, the more likely they'll be to lose interest in it (or find another source). In addition, the studios' logic about sales being undermined by VOD seems flawed. The day a DVD goes on sale, the disc is available for rent. The easy availability of a rental alternative suggests that people buy DVDs because they want a permanent copy. Sure, making new releases available through VOD might reduce the number of people who buy DVDs impulsively at the grocery store. But more VOD viewers are likely to come from the ranks of movie renters, because VOD won't satisfy people who genuinely want to own a disc.

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Times editorial writer Jon Healey pens opinion pieces about a variety of business issues, and blogs about technologies that are changing the entertainment industry's business model.

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