Will Apple Upset the Rental Cart?

A plan to offer online video rentals could turn up the heat on Netflix and Amazonand reinvigorate interest in Apple TV
Apple CEO Steve Jobs Justin Sullivan/Getty Images

In much the same way it upended online distribution of music, Apple may now be poised to redefine the way movies are rented online. According to published reports, Apple (AAPL) and Fox (NWS) plan to bring movie rentals to Apple's popular iTunes Store, and through that to its family of iPod media players and the iPhone. The two companies are said to have concluded an agreement that will have Fox movies available for limited-time viewing via iTunes as they are released on DVD.

Online film rental is only now getting off the ground. Netflix (NFLX), which specializes in mail-order movie rentals, recently launched an online movie rental service that lets consumers order movies and watch them instantly on a computer. Netflix said in August that its customers had watched some 10 million movies and TV shows on their computers. Meanwhile Amazon.com (AMZN) and TiVo (TIVO) have launched a partnership to let owners of TiVo digital video recorders purchase or rent movies and TV shows from Amazon's Unbox video download service. And in August, Movielink, an online on-demand movie service backed by major movie studios including Universal, Paramount (VIA), MGM (MGM), and Warner Bros. (TWX), was acquired by Blockbuster (BBI).

Some companies have scrapped video download efforts altogether. Wal-Mart Stores (WMT) closed its download service on Dec. 21, according to a statement on its Web site. Hewlett-Packard (HPQ) discontinued the service because the market for paid video downloads did not perform "as expected," Reuters reported, citing an HP spokesman.

Apple TV May Get Juiced

The problem with many of these services is that they're hard to use and their movies don't work with iPods, among the most popular digital entertainment devices on the market, says JupiterResearch analyst Michael Gartenberg. "Apple will be bringing to the table its famous ease-of-use and its popular player," Gartenberg says. "For all intents and purposes, if something doesn't work with the iPhone or the iPod, it doesn't exist." Some of the services aren't compatible with Apple's Macintosh computers, either.

As with all things Apple in the realm of digital media distribution, the devil will be in the details. While rumors have swirled about an iTunes-based movie rental service at least since mid-2007, no details have been released on prices or on how widely consumers can use rented movies. Apple Chief Executive Steve Jobs may announce the rental plan on Jan. 15, during his keynote address at the Macworld Expo in San Francisco. A Fox spokesman declined to comment, and Apple didn't respond to a request for comment.

As much as the Apple-Fox deal could shake up online film rental, it's also likely to breathe new life into Apple TV, a digital media also-ran. The device is a small, flat box that connects to a TV and uses a home network to play video and music from a consumer's iTunes account stored on a Mac or Microsoft (MSFT) Windows PC. While Apple has sold more than 100 million TV shows and 2 million movies over iTunes, the market largely ignored Apple TV. Apple's Jobs has even publicly described it as "a hobby."

Apple hasn't disclosed the number of Apple TV devices sold, but market research firm iSuppli has estimated the number at less than a million units (BusinessWeek.com, 10/22/07). The number could rise quickly once movies are available for rent from iTunes.

Late to the Party

Apple TV currently has a set of options related to the iTunes Store that for now do nothing. Analyst Gene Munster of Piper Jaffray (PJC) expects that soon consumers with Apple TV boxes will be able to rent movies from their living room by using iTunes via the TV. "Indeed we have been expecting iTunes movie rentals for nearly one year," Munster wrote in a research note, but pricing disagreements and arguments over copy-protection technology have kept the rental feature under wraps.

Apple may have resolved disagreements over how best to protect copyrighted work by agreeing to license its FairPlay digital rights management technology to Fox. Until now, Apple has been loath to license FairPlay, a technology that keeps music and video content tied to a customer's computer, iPod, and iPhone players. It also limits the number of computers to which the content can be copied.

Terms of the agreement concerning FairPlay are as yet sketchy, but reports say Apple will allow future Fox DVD releases to be "ripped" to iTunes collections in much the same way that music can be ripped from a CD. While it's already possible to do that with existing third-party software such as HandBrake, studios generally consider such actions the equivalent of piracy. Making FairPlay available to Fox might indicate Apple's willingness to make it available to other studios, which might in turn be more willing to sell and rent their movies on iTunes and to make their DVDs iTunes-ready. To date, only Disney (DIS) sells new movies on iTunes, while studios like Lionsgate (LGF), Paramount, and MGM sell movies mostly from their back catalogs.

Also unclear is how widely and how long movies will be usable. Earlier rumors had said that movies would be playable for 30 days for a price of $2.99. Presumably the same time limits would apply to use on a computer as on an iPod or iPhone.

If Apple can get those details worked out, while making online rental as straightforward as its online music and video sales, Jobs could have another winning business on his hands. The tendency for many consumers to favor movie rentals over purchases is as strong online as it is offline. Gaurav Dhillon, founder and CEO of Jaman, a startup that sells and rents independent and international films for online consumption, says rentals constitute the vast majority of its business. He says, "We've been doing rentals for a year now, and I'm actually surprised it's taken Apple so long to come around."

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