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In January, when Apple (Nasdaq: AAPL) CEO Steve Jobs announced iTunes would begin renting movies from its well-trafficked online store, he was quite specific about the number of films that would be available by the end of February: 1,000.
Two months later, the site has not even come close. Judging by a review of iTunes' offerings, Apple has at best reached slightly more than the halfway point. While two months is not much time to forge the necessary relationships to develop an online rental business, this is, after all, Apple.
Indeed, that may well be the problem.
Treading Carefully
"The business and legal folks at the studios are always careful about how new deals affect their existing relationships -- such as with Wal-Mart (NYSE: WMT), Blockbuster, etc.," David Wertheimer, executive director of the Entertainment Technology Center the University of Southern California told MacNewsWorld.
"This one is especially complicated because it's Apple/iTunes, and companies are increasingly curious about how the decisions they make today may come back to haunt them later," he said, pointing to perhaps the most notorious decision of all -- the music industry's agreement let iTunes lock its prices at 99 cents for song downloads.
Setting up these agreements can be more complicated than they appear at first glance, Mark Meckler, an associate business professor at the University of Portland in Oregon, told MacNewsWorld. In fact, he was surprised that Jobs even put a concrete number out to the public. "Unless there were negotiations under way at the time that later fell through, that was an incredibly ambitious thing for him to do."
First Things First
In order for the content to bulk up, Meckler explained, a number of things have to happen first.
"Old-school content distribution contracts have to expire or be bought out. The big rental companies -- Blockbuster, Hollywood [Video], Netflix (Nasdaq: NFLX) and so on -- have contracts with the movie production houses and library rights owners that give them certain priorities as rental outlets. These distribution and revenue sharing contracts are the result of major negotiations and are pretty much iron-clad."
These contracts specify how quickly a movie goes to rental after it's been in the theaters; if it goes to rental before sales or sales before rental; how much of the revenue gets shared between the renter, the seller and the movie rights owners; and plenty of other smaller items of negotiation, he said.
When the contracts do expire or are bought out, iTunes and other online rental service providers have to negotiate their own rights agreements with terms that allow them to also profit, Meckler said.
"It is not an easy road for iTunes because everyone is trying to get a piece of the pie, and some of the players, like cable and satellite TV companies, have very deep pockets, the best lawyers and strong lobbies. The competing new outlets are bidding against each other and against the old outlets, who are not about to roll over and die."
When the "old-school" supply chain contracts do expire -- or if they are bought out, or struck down in courts as overly oligopolistic -- then the content can be offered more easily through other emerging channels, such as online only providers like iTunes, he said. At some point in time, iTunes will sign new revenue sharing and distribution timing agreements with the movie production houses and other movie library rights owners.
However, it's not easy to predict when this will happen, or how well they can negotiate versus the Comcasts of the world, Meckler continued. His best guess: "Over the next three to five years."
Just the Surface
Whether this long, drawn-out process will succeed in crushing this corner of the Web 2.0 ecosystem remains to be seen.
Online movie rental is an important part of the anytime/anywhere content ecosystem, Wertheimer said. "However, until a few key issues are solved, it will absolutely be a marginal product."
Legalities aren't the only things tying the hands of new providers as they try to sell content to consumers. There are practical constraints as well. For instance, Wertheimer pointed out, renting online movies currently requires too much advanced planning. "Several hours to download an HD-quality movie means you have to think way ahead. The few people who plan their entertainment far in advance are already Netflix subscribers."
Also, watching long-form content on a computer is not a mass-market proposition, he added. "Movie delivery to the TV is critical. That said, dedicated boxes for movie delivery to a TV is probably not a good long-term solution either -- TVs need to have this capability built in for the majority of consumers to be interested.
"And since most people in the U.S. have cable, the product has to add value over video on demand, which requires no download, no computer, and goes straight to the TV," he said.
Another problem: The usage rules associated with digital content have to be revisited, continued Wertheimer. "For example, 24 hours to watch a movie before it vaporizes is a model borne out of historical dealmaking, without a concept of current digital consumer mindsets."
Finally, the pricing model has to match the experience, he said. "Consumers generally aren't willing to pay more for a product that has less value to them because of the limitations."
