Media Wonk

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Studios try to sing a new iTune - May 13, 2008

Fool me once, shame on you; fool me twice, shame on me. That seems to be the philosophy the studios and TV networks took into their dealings with Apple Inc. Having watched their music-industry counterparts essentially get fleeced by Steve Jobs, the studios are so far playing a much tougher game when it comes to licensing their wares to iTunes.

When Jobs put on his white hat and rode to the "rescue" of the music companies the labels were in grand mal panic. CD sales were plummeting, file-sharing was eating them alive, cats were sleeping with dogs. It was ugly. Jobs offered the labels a DRM-walled garden and persuaded them that offering cheap legal downloads would lure people away from piracy. The labels took the bait.

As it turned out, many consumers did opt for legal downloads. But overall, iTunes has barely made a dent in the rate of online piracy. More to the point, cheap legal downloads have done nothing to reverse plunging CD sales; if anything, the rate of descent has increased since iTunes was launched, in part because iTunes itself (along with more recent competitors) has encouraged consumers to think in terms of individual tracks instead of complete albums. From an overall revenue perspective, the record labels are worse off today than they were before Steve Jobs "rescued" the business.

That lesson obviously hasn't been lost on the studios and networks. As the studios' recent electronic sell-through deals with iTunes make clear, Hollywood remains protective of DVD sales. Although iTunes will be able to begin selling movie downloads day-and-date with their appearance on DVD, wholesale prices are similar for the two formats, forcing Apple to sell the downloads at a loss if it wants to keep the retail price below DVDs.

With the exception of Warner, the deals also don't permit Apple to start renting the movies online until the pay-per-view window. In other words, no low-priced rental downloads during the DVD window to cannibalize full-price DVD sales.

Now Apple has blinked again, agreeing to a deal with HBO that will price episodes of "The Sopranos," "Sex and the City," and other HBO original series at $2.99, a 50% premium over the price iTunes charges for single episodes of other TV series. More critically, episodes of the HBO series won't be available on iTunes until they appear on DVD.

The record companies ultimately got far less than they thought they were getting from their deals with iTunes. In contrast, the studios and TV networks seem determined as much as possible to make iTunes incremental to their DVD business.

Media Wonk's question is whether the studios aren't simply making the same mistake in slow motion. DVD sales are likely to continue to erode anyway, even if the studios never made a deal with iTunes, albeit not as rapidly as CD sales have declined. The real long-term challenge the studios face is to figure out how to meet changing consumer demand, regardless of the format. Treating specific formats as discreet, vertical businesses that must be protected against cannibalization by other formats is an ever-less viable approach to managing their overall P&L.

Retarding the growth of one distribution channel in order to protect another could ultimately leave the studios with less of both.
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