Today’s Jobs Keynote
There are many places to see roundups of today’s Steve Jobs keynote from the Macworld Expo in San Francisco, so I won’t bore you with the details. I have one major takeaway from today’s keynote. Apple may have lost the thread with the iTunes Store.
Apple created the iTunes Store in a market that was originally hostile to its very existence. The record companies had no clue about how to market music online and Apple had a white-hot device that set the standards for usability, size and a whole host of other features for an entire market segment. Apple created a great webapp , then called the iTunes Music Store, and DRM system called FairPlay and integrated it with their iTunes music player. They shopped it around to the record companies with a price-per-song (99 cents) already in mind. Apple knew that at that price they had no prayer of making much money off the store, but they also knew that selling tunes to the market at that price would make them rich off the sales of iPods. iTunes Music Store was, in essence, a modern loss-leader. This created an entire market and almost every other music store online has followed Apple’s lead in their attempts to compete. Apple wrote the business model for online music sales.
The progression from music to television and movies was deemed by most to be inevitable. Apple soon started to make contacts with the licensing departments at the major TV and movie studios, but their success has not been nearly so easy. Up until today Apple only sold a handful of movies from Disney properties (due to Steve Jobs’ position on the Disney board, this was a no brainer), and those haven’t exactly been blockbusters for Apple. The TV shows were initially a huge hit, but as downloading bootlegged copies for free has become easier these have trailed off and Apple has started to lose major partners in this business (NBC/Universal most notably).
I see the relative failure of movies on iTunes as a failure of Apple to recognize the fundamental differences in markets. The business models are similar between music and movies, but the perception of market realities is not. Music is cheaper to produce and cheaper to sell than movies, with a huge catalog of new and old content that seems to grow almost exponentially year over year. Movies are very expensive to produce, expensive to market and the number of available content tends to be fairly static. The investment in both time and money that the consumer must make to consume a Movie is much much greater than that of Music. This doesn’t even take into account the complexities of marketing different content to different segments of the market (TV series on DVDs vs. Movies, for instance).
The movie studios are narcissistic and vain. They see their industry as very important to the entire world and will not listen to those with new ideas about how to do business. Music companies have been long suffering from their loss of control of the content they produce, they are inherently more willing to listen to those with new ideas about how to make their business viable again.
Apple clearly thought that their success in music would translate directly into a success with movies. They saw their ties with behemoth Disney as being golden. The vanity of the movie studios was not something they saw as a threat to Apple hegemony. Apple’s vanity, ironically made them blind to that of the movie studios. While Apple waited for other studios to come around and let them sell movies on iTunes, others like Amazon and Vudu were more flexible with their terms and allowed the movie companies to set prices and terms for movie sales and rentals online. The going rate for movies online was no longer even a negotiating point for Apple.
So now we’re at today’s announcement of rentals via iTunes. Apple, coming from its position of weakness, had no way of negotiating good pricing or terms for its rentals. They are releasing a product that is overpriced and very restrictive. People don’t want restrictions on how they use content. They want to pay $2 for a movie rental, keep it for however long they want it and watch it in as many sittings as they can. I think Apple knows this. They had a chance to release a product that would succeed, instead they released a product that is more or less an already proven failure. Apple has ceded the market for video to their more flexible (weaker?) competitors and in so doing have created a situation that is untenable.
Apple should have waited for one of their competitors to fail in the movie game and then gone back to the negotiating table with ample evidence that the pricing and restrictions on content were not proven by the market. They then would have had the upper hand at setting prices and allowed the market to have a new movie rental experience. Instead they released a me-too product that is only differentiated by the ability to watch movies on its own devices. This is a missed opportunity and one that I believe Apple will come to regret in time.
