Analysis: HBO deal may signal pricing policy shift for iTunes

Plenty of TV networks have signed on to sell their digital wares at the iTunes Store. But few potential providers have generated as much anticipation among iTunes users as HBO.

It’s easy to understand why: HBO is a premium cable channel whose programs—The Sopranos, Sex and the City, and others—have a devoted following.

But the most significant thing about the deal announced this past week that finally delivers HBO programming to iTunes may not be the shows themselves. Rather, HBO’s arrival at the online digital media store could be another signal that Apple is rethinking its once rigid approach to pricing.

Six HBO shows now appear at iTunes—besides The Sopranos and Sex and the City, customers can also buy episodes of Rome, Deadwood, The Wire and Flight of the Conchords. Three of those offerings—The Sopranos, Deadwood, and Rome—cost $2.99 per episode; the rest cost $1.99.

Why the disparity? Premium shows that demand a premium price, according to Phil Leigh, senior analyst at Inside Digital Media.

“These are shows that have developed cult followings,” he said.

But having different tiers of pricing is quite a departure from how Apple has done business with television programming at the iTunes Store. With few exceptions—notably, Nova documentaries from PBS—TV programs at iTunes have cost $1.99.

Apple’s insistence on one price for all TV content has caused friction in the past, most notably with NBC Universal. The two companies feuded last year over variable pricing, with NBC contending it wanted to offer a variety of pricing options for its show and Apple countering that the network wanted to charge as much as $4.99 per episode. Apple wound up not offering any new fall shows from NBC in 2007, and all NBC programming disappeared from the iTunes Store ahead of the December 2007 expiration date for the network’s iTunes contract.

Initially, Apple forced uniform pricing on the iTunes Store to help normalize the experience for consumers new to downloading media, according to Leigh. Now that such activity is commonplace, Leigh believes that Apple may be more amenable to adjusting the price of its programming in order to build out a large library of television shows and movies.

What’s more, variable pricing has already appeared in other parts of the iTunes Store. When Apple introduced DRM-free iTunes Plus tracks to the music section of the store a year ago, it charged $1.29 per song rather than the 99 cents that other songs cost. (Apple has since cut the price of iTunes Plus tracks to 99 cents.) For movies, Apple charges a different amount to buy or rent new releases than it does for library titles.

But James McQuivey, vice president and principal analyst at Forrester Research, disagrees about the normalization of video downloads. “It’s not an established-enough model at this point,” he said. “It’s grown only about as half as fast as Apple has expected it to.”

For that reason, variable pricing may not have been something Apple wanted to adopt on its own, but an option it had to agree to in order to attract hard-to-get partners like HBO.

“This is one of those discussions that Apple never wanted to have happen [with content providers],” McQuivey said. “I think going forward [Apple is] going to have to have a more fluid dialogue with content owners than they’ve had in the past.”

Indeed, that dialogue may be happening with more companies than just HBO. Earlier this month, the U.K. iTunes Store began offering NBC programs, with newer shows available at a higher price than older titles.

Does that development, coupled with Apple’s HBO deal, mean NBC could return to the U.S. iTunes Store? McQuivey doesn’t think so, at least not right away. NBC recently announced a deal with Microsoft to distribute its shows to users of Microsoft’s iPod rival, the Zune—with episodes priced at $1.99 each. NBC has also launched a Web site called Hulu.com that enables users to watch full episodes of its shows through streaming, ad- supported video.

Apple’s biggest competition going forward may be an add-supported streaming service, said McQuivey. “And that model is something Apple has never been comfortable with.”

Forrester Research did a survey last fall that found 24 percent of people watching video online were viewing full-length shows using ad-supported streaming services, according to McQuivey. That compared to only about 9 percent of viewers paying to download shows. The rest were content to watch snippets of video through YouTube, MSNBC and other services.

“The ad-supported streaming model has grown like gangbusters,” said McQuivey. Video downloads through services like the iTunes Store have been limited mainly to iPod diehards and laptop travelers, he added.

Whatever happens in regard to NBC, don’t look for Apple to depart too dramatically from its current pricing policies at iTunes.

“Any media company thinking of trying to adjust pricing shouldn’t assume that Apple is a pushover, however,” Inside Digital Media’s Leigh said. The company will still try to enforce as uniform a pricing policy as it can.

“I don’t think Apple is going to embrace variable pricing that much right now,” McQuivey said. “Apple will resist going higher than $2.99.”

Leigh agrees that $2.99 is most likely the ceiling for TV downloads, adding that it would be unlikely for another network to get Apple to set a higher price. “For one thing, it’d really upset HBO,” Leigh said.

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