Consider that despite the fact that nearly everyone rightly credits Apple Computer with being a foresighted innovator in the sector, it appears that the iTunes moniker is itself rapidly becoming obsolete. It’s not merely about music anymore. Increasingly it is about video too.

For example, last fall iTunes started selling downloads of popular television programs such as “Lost” and “Desperate Housewives”. Since then they have broadened the catalog with other television shows and music videos.

Finally, earlier this week Variety reported that Apple is negotiating with the major Hollywood studios to permit iTunes to sell downloads of motion pictures, presumably including recently released ones in the DVD release window.

There can be little doubt that Apple is anxious to move forward with such an initiative. Consumers are going to want to purchase movies over the Internet for the same reasons that they like to buy music that way.

First, and foremost, there is no physical reason why titles should ever be out of stock. Second, an online store is convenient because it is never closed. Third, the merchandise is delivered nearly instantaneously. There is no delay imposed like the one requiring consumers to get in their cars and drive to a physical retailer.

Changing Attitudes in Hollywood

Seeking New Revenues

As for the studios, their reluctance to move forward may be weakening because they need to find new revenue sources. Contrary to popular understanding, the studios don’t make most of their money off of box office receipts. Instead, over half of the industry’s revenue is obtained from the sale of pre-recorded DVDs.  

But those sales are expected to grow just 2 percent this year, a far cry from the double-digit growth the industry enjoyed just two years ago. High-definition DVD's were supposed to pick up the slack, but technical delays and a thorny format war between camps led by Sony and Toshiba have dampened expectations. Moreover, some observers are questioning whether mass market consumers will even want High Definition DVDs since the superior video quality cannot be discerned unless the screen size is a lot bigger than the TVs most of us have in our living rooms.

Enhancing Profits & Combating Piracy 

In order to move forward the studios have to convince themselves that they will make more money by adopting a more vigorous download sales effort than by retaining the status quo. While DVD sales may be peaking, they are still very profitable.

Like most technology-centric constituents, it is thought that Apple believes the best way to fight piracy is to reduce the incentive for it by pricing entertainment media lower. At prices of $10 we would guess that most consumers would rather buy a legitimate file than patronize potentially malware-laden websites like Pirate Bay. 

Additionally, it is illogical to expect iTunes, or any online store, to sell movie downloads at the same price as DVDs if the downloadable files cannot be burned to blank DVDs and thereby made playable at the living room television as well as in the computer.  Yet it is thought that just such a prohibition is being sought by the studios in the iTunes negotiations.

Lower Per-Unit Profit Can Generate Greater Overall Profit 

Fortunately it is not necessary that the studios make as much profit on each movie download as on the sale of each DVD. They can still increase overall profits. One reason is that they will never lose sales because iTunes is “out of stock”. Once a digital file is placed on the iTunes server, there is no reason for it to ever be “out of stock”. The same does not apply to terrestrial retailers.

Another reason is that digital downloads can facilitate impulse purchases since the consumer is not deterred by the required action of driving to a retail store which may not even have the desired title in stock, as implied above.

Finally, digital downloads make it economical to sell films from the back catalog. For example, the classic Beau Geste is unavailable in DVD except as a package sold as a collection of disparate Gary Cooper films that appears to have been haphazardly thrown together. 

Presumably, Universal does not feel there is demand enough to justify a production run of the title, but it would cost very little to digitize the file and make it available to iTunes, or some other online store. (Readers who are unfamiliar with the mystery of the Blue Water are likely to find the story as fascinating today as audiences did when the film was released in 1939.)

Others Are Eager

It is as certain as tomorrow’s sunrise that iTunes is not the only vendor interested in offering downloadable movies. Other likely candidates include RealNetworks, Amazon.com, Netflix, TiVo, Yahoo, Google, and AOL merely to name a few.

Conclusion

Evidence that the growth of pre-recorded DVD sales is cresting is unmistakable. Since the category accounts for over half of the industry’s revenues there is little doubt that the studios are going to have to find new sources of revenue. Digital downloads is an idea whose time has come and the flattening of DVD sales could well be the forcing factor that makes 2006 the year that the studios (at least start to) adopt a sensible digital sales policy.

Phil Leigh

President

Inside Digital Media, Inc.

pleigh1@tampabay.rr.com

www.insidedigitalmedia.com