Why is Apple still fixing the price of iTunes video?
It was a convincing argument a few years ago, when the iPod was young and the world doubted people would pay for music tracks they could easily pirate for free: Apple (AAPL) CEO Steve Jobs insisted that iTunes prices needed to be fixed at $.99 per song to keep people coming back.
Later, the same went for TV shows: $1.99 a pop, Jobs said, no exceptions.
But is it time for Apple to rethink that position – at least for video?
News Corp. (NWS) President Peter Chernin obviously thinks so. The chief of the company that offers shows such as 24 and Prison Break on iTunes offered a subtle warning to Apple this week about its video policies. Speaking to a Reuters reporter in Poland, Chernin said that while "right now we have a perfectly good relationship with Apple," the pricing issue isn't going away. "We're the ones who should determine what the fair price for our product is, not Apple," he said.The warning shot comes days after NBC Universal (GE) had an uncomfortable public spat with Apple over pricing in the iTunes Store. First NBC leaked news that it would pull next season's shows from iTunes. Apple responded on August 31 with a statement that NBC made unreasonable demands – NBC wanted to double the wholesale price it charges Apple for the content.
Chernin has a point. Lost in the drama is the question of why Apple cares what NBC, Fox, or any other network charges for video. If NBC executives want to raise prices above those of the other networks, why not let them? If the price is too high, as Apple contends, the result will be that customers will buy shows from rival networks instead. But if NBC finds that consumers are willing to pay the higher price, the higher profit margins should make both NBC and Apple happy.
The tension is growing as iTunes has made Apple the third-largest U.S. music retailer behind Wal-Mart (WMT) and Best Buy (BBY). Because of Apple's leadership in digital entertainment downloads, no one these days doubts that large numbers of consumers are willing to pay for digital content, as long as the customer experience is pleasant.
One thing the networks do doubt, however, is that Apple has their best financial interests at heart. Apple has not been shy about the fact that it does not make much profit selling content on the iTunes store; mainly, the company uses iTunes as a platform for selling more iPods. iPods, by contrast, tend to be enormously profitable – Apple typically makes better than 20 percent margins selling them. So while the networks maximize profits by selling shows for as much as consumers are willing to pay, Apple maximizes profits by selling network content for as little as it can get away with.
Apple's newest iPod lineup gives the studios even more cause for concern. Now, for the first time, every iPod with the exception of the screen-less $79 shuffle plays video. Apple clearly sees video as an important selling point for this latest batch of iPods – which means it needs to get consumers more excited about downloading it. The studios can see the dollar signs in Apple's eyes, and they see Apple's profit coming at their expense.
Who knows? Maybe Apple's right about the pricing of video downloads. But unless Steve Jobs & Co. allow the networks to figure that out for themselves, they risk alienating the iPod's most powerful video allies.
I support Steve Jobs. Their are a lot of retailers that do not control the retail price of the product they sell. They will lost the contract they have with the manafactor, or the manafactor will delay or stop shipping support to retailer. We as Americans have priced ourselves into a ( you build it and we will buy). The price of things do not change unless we stop it. Steve Jobs is only doing a small part. He will get his profit, that is for sure. But thanks for now.
To poster above, re: your Nike example
Your example doesn't make sense. A store cannot make unlimited copies of shoes for free and re-sell them.
>Have you EVER seen Nike cancel a
>distribution contract because a store
>would not charge the entire price?
You're getting hung up on who's said to be canceling the contract. It's stupid: if you want to change a contract, you have to cancel it and make a new one. Everyone does this including Nike.
>if the networks do not like it, they
>can price the product above what Apple wants
>and Apple will not carry the product"
This is exactly what is being reported.
You're getting hung up on your perception of who's running the show. A contract involves two parties.
Just proof that UB is an MS tool, look at their spin on the Xbox price cut…
"Xbox 360 price cut: Is it enough to wound the Wii?"
…
"The move seems calculated to improve Microsoft's position heading into the second half of the year, when console and game sales are heaviest. Some game industry analysts are saying that after the Xbox 360's weak showing so far this year, Microsoft will need a strong holiday season to avoid a last-place showing in this round of the console wars."
…
http://blogs.business2.com/utilitybelt/2007/08/xbox-360-price-.html
See how they seem to cheer MS to beat Nintendo?
jf: OK, now, be fair:
Two heat complications for Microsoft’s Xbox plans
http://blogs.business2.com/utilitybelt/2007/08/two-heat-compli.html
Enterbrain: Nintendo’s Wii clobbering PS3 and Xbox
http://blogs.business2.com/utilitybelt/2007/07/enterbrain-nint.html
Catch Wii if you can: Do Sony and Microsoft have a chance?
http://blogs.business2.com/utilitybelt/2007/08/catch-wii-if-yo.html
And the winner is … the Wii (with honors for the Xbox 360)
http://blogs.business2.com/utilitybelt/2006/11/and_the_winner_.html
Seems to me like the networks want more money. Apple is making the right move here. No one I know even has a zune. Sounds to me like NBC just wanted to "show" apple how childish they are and made a huge mistake. If i was to download a show it would be Lost from ABC anyway.
For some reason 
no one covers the Xbox fiasco when MS have to spend billions to fix defective Xboxes. Must be because so many bloggers have no shame to be an MS tool.
If Steve Jobs were to give the networks more power over pricing, it could lead to the same problems that we have now with cable and satellite systems. The networks try to tell them how to run their business with disregard for the consumer.
Ex: the NFL annually holds Time Warner's feet to the fire about cost for the NFL broadcasts. They have insisted on less pay per view and instead of structuring premium packages just for the football fan, they try to force more games in the basic packages which results in higher costs for everyone. Time warner does not agree and so every year we go through the same period before the season and again before the playoffs when cable subscribers do not know if home-team games will be premium packages only or available on basic cable. The same problems arise during the NHL playoffs. This is bad business for all involved.
I would really hate to see that happen to iTunes, and I support Steve Jobs. It seems like a smart move to me, I would rather see iTunes without network shows than have the networks dictating Apples business policies.
Look at the comments in iTMS sometime, particularly about video downloads. There is clearly a large segment of users who blame Apple for pricing (season or per episode), quality and timely distribution – when in fact all those are controlled by the distributors. If Apple caves to the TV execs, it will be Apple that gets blamed for new high prices, not NBC or Newscorp. From a TV exec point of view however, if I'm hooked on Lost, I'm buying the episodes no matter what the cost (well, within reason)so why not get more money for it and let Apple take the PR hit with users. I think sales at iTMS would also diminish if prices were higher. Example, I currently download CSI and Lost – full seasons – at less than $1.99 per episode even though I could watch for free with commercials. Bump that price up – I might start going to CBS and ABC to watch them there – Apple loses revenue, ABC, CBS gets advertising revenue.
How much more Apple Bashing can one take. Why the heck do you show up on Yahoo under Apple's ticker symbol? Every article that I read by you is anti-Apple! Are you being paid to post this stuff by competitors? I am actually thinking of doing a Google search for every single Business 2.0 article published since the Apple run up.
This is just stupid.
I've never seen a retail store anywhere that doesn't control the price of the product they sell. Nike makes a shoe and sets the retail price at one hundred dollars. Have you EVER seen Nike cancel a distribution contract because a store would not charge the entire price?
So if a store thinks they can not sell a shoe for more than 80 bucks, and Nike charges the store 90 bucks for the product….. guess what? The store stops carrying the product. Simple as that.
The networks do NOT get to set the price of the shows on iTunes, Apple does. If the networks do not like it, they can price the product above what Apple wants and Apple will not carry the product. Now….. if you think 100 million iPod users are going to throw away their handsets and go get a zune so they can watch episodes of NBC shows that are not that popular, you got the tail wagging the dog.
This is classic retail, Apple is building a mraket that did not exist. If NBC wants to double the price of their shows, let'em sell'em on Amazon to download onto a Zune. Big market for THAT……
iTunes worked right off the bat because the price was good and iTunes made It easy. Everybody agreed to the pricing. Everybody that sells on iTunes agrees to the same price. They are welcome to go somewhere else to sell their wares if they want and some will, but the pricing is what made people buy in the firs and Apple knows it. Kudos to Apple for sticking to their guns. Those who leave just so they can jack up their prices will fail and be back in the same boat they were in before Apple gave them a chance to make money instead of watching everybody pirate their media for free.