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A Video iPod? Don't Count on It

By Peter Burrows The rumor mill has been buzzing of late with word of a new kind of iPod -- one capable of playing videos. And that has Apple (AAPL) watchers wondering how chief exec Steve Jobs might position the new product. After all, Jobs has downplayed the potential of such a device for years, arguing that the iPod's small screen would make it a lousy machine on which to watch a movie.

"We have a saying around here: It's the music, stupid," Jobs said in early 2004 when asked whether Apple's plans for its white-hot music player extended beyond the audio realm. "We have to stay focused on the fact that people are buying these devices because they want to listen to music."

Yet something is in the works. Apple has been talking to record labels about licensing music videos so they can be sold for $2 or so on its iTunes Music Store, says one music industry executive. Media reports suggest Apple is also in talks with TV studios including Disney (DIS) about getting the rights to other kinds of programming.

ADDED ATTRACTION. Will Jobs really change his tune on the subject? Probably not. While some expect the company to unveil a revolutionary new kind of iPod, designed specifically for playing video, chances are the company will simply fold some video capabilities into all future iPods. That means no separate product name -- and no big advertising blitz.

Instead, the ability to store and view videos may be presented as one more reason to buy an iPod. As a strategic weapon, video may be more important in defensive terms -- as a way to dissuade consumers from considering video-capable products from rivals such as Archos, Creative Technology (CREAF), and others.

So why wouldn't Jobs put all of Apple's reality-distorting powers behind a video iPod. Well, consider Apple's experience with the defunct iPod Photo. When introduced in late October, 2004, Apple was betting that consumers would pay a premium to be able to store and view thousands of pictures on their iPods. Why else give the product its own name or price the high-end model at a hefty $599? (That's more than the Mac mini, the full-blown computer announced just a few months later.)

EMPIRE EXPANSION. Yet just eight months after launch, on June 28, iPod Photo ceased to exist as a separate product. Instead, every iPod now has photo capabilities built-in. Apple says the decision was simply due to the fact that it decided to give all iPods a color screen, which is by far the most costly part required to handle photos. Indeed, the experiment wasn't a failure -- many consumers will doubtless use and enjoy these photo capabilities (although Apple declined to share what it knows on this score). But if consumers had been willing to pay a premium for this capability, I'm sure Apple would have gladly maintained iPod Photo as a separate, higher-priced model.

I'm betting Apple learned from that experience and will use video to fortify its current iPod empire -- not build a new one. That means no bigger, business-card-size color screen or the clunky battery that would be necessary to drive one, and no reworked interface. It means a device that, true to Jobs's oft-stated belief, isn't designed for watching full-length movies. Rather, it might work for teens who are willing to pay for their favorite music videos, or boomers who want to watch SportsCenter clips or CNN Headline News.

That's not to say a video push isn't significant for Apple. One possibility is that Jobs could use this opportunity to introduce a subscription service, in which customers would pay a fixed monthly fee to watch as many videos as they want.

So far, Apple has declined to offer such a service for plain old music. Although rivals such as Real Networks (RNWK) and Napster (NAPS) have been signing up subscribers at an increasing clip, Apple points out that their demand is dwarfed by the lucrative vein Apple has struck with its online download store, which has sold more than half a billion songs.

VIDEO's STRATEGIC COVER. A subscription model might make more sense for videos. After all, how many times do typical music fans really need to see a music video? A few dozen, perhaps -- but probably not nearly as many times as they would want to hear the song itself. But what if there was an all-you-can-view service that let you watch -- but not own -- as many videos as you want?

If Apple does find success with such a video subscription service, it could provide the kind of strategic cover for Jobs to reverse course on a music subscription service. While a nascent market now, most industry insiders think it's only a matter of time before this approach goes mainstream.

Simply put, subscription services let consumers take advantage of digital technology by letting them easily discover new music with a few clicks of the mouse. And the math, from a music fan's perspective, is simple as well: It's a lot cheaper to pay $10 a month to get access to a million songs, rather than $1 million to buy them for 99 cents a piece.

CHOKEHOLD AIM? Few moves could do more to solidify Apple's chokehold on the digital-music landscape well into the future than adding such a subscription service. And it could provide a reliable stream of revenue to Apple's bottom line, to boot. "Sure, Apple is getting a big payoff by selling iPods, but most people are buying fewer than 30 songs [from iTunes]," notes one music executive. "So [Apple is] not seeing any big recurring revenues." Even if monthly subscription rates fall below the current norm, typically $10 to $15, a subscription service would change that.

Ultimately, the push into video could help Apple move in new directions -- such as movies -- that completely unconnected to the iPod. Already, players such as NetFlix (NFLX), TiVo (TIVO), and the cable providers are planning services to let consumers easily move downloaded movies to the viewing option of their choice -- probably not the PC in the den, but more likely the plasma TV in the living room, or maybe someday the media player in Mom's SUV.

Figuring out Apple's role in all of this is something of a Silicon Valley parlor game. Maybe Apple can turn its iTunes online store, which now generates little profit, into a big moneymaker by pushing more types of media through its virtual gates. "Maybe it turns out that iTunes becomes a general server for all kinds of content," says technology analyst Mark Anderson, founder of Strategic News Service. "Maybe Jobs' dream is to be the chokehold for all this content."

THE VALUE OF SIMPLICITY. Or maybe Jobs just wants to control the flow of media so that he can build new kinds of profitable hardware to bring some of Apple's trademark simplicity to tomorrow's digital homes. Anderson points out that many home-theater customers now pay $1,000 for someone to configure and connect the gaggle of audio, video, and networking gear required just to watch your favorite show. He asks: "What if you could walk into your local Apple store and come home with a 60-inch TV that's ready with 10,000 movies for you to choose from?"

Of course, that's in the future. And even in the short term, it's always dangerous to try to predict what tech's top showman will have up his sleeve. I plan on being surprised -- but not by the video iPod that everyone seems to be expecting. Burrows is BusinessWeek's Computer Editor in Silicon Valley

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