Analysis: Apple faces competition in movie-rental market

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By introducing movie rentals to its online digital download service, Apple is hoping that it’s 2003 all over again.

That was the year Apple introduced its online music service, then dubbed the iTunes Music Store. It entered a market served by several competitors (mostly subscription-based services), though no one dominant online music retailer. Five years later, that’s no longer the case—Apple’s iTunes Store dominates the digital music retail scene.

Can Apple pull off a repeat performance with movie rentals? As with its music efforts, Apple is getting into a market behind other services. And unlike with music, where Apple could challenge the subscription model with its per-download pricing, the rental system unveiled by Apple CEO Steve Jobs Tuesday is not all that different from what rival services already have in place.

But one analyst thinks Apple is in a strong position to succeed in the movie-rental business, even if its approach to rentals is similar to what you’d find at CinemaNow, MovieLink, and Vudu. Apple is “following the industry’s lead rather than taking the lead here,” said James McQuivey, a media and technology analyst at market-research firm Forrester, but he added that the the large number of iTunes users puts the company at a great advantage.

“The iTunes movie rental experience is in the best environment that the business could operate in,” McQuivey said. “Apple offers a rental service to literally millions of people who already have an Apple device, not to mention people who just use the iTunes Store.”

Jobs announced the iTunes Store’s implementation of online movie rentals during his Macworld Expo keynote speech Tuesday. The service will allow users to rent movies via the iTunes Store at rates of $3.99 for new releases and $2.99 for older titles. Users have a month to start watching a rental, but once they start, they have a 24-hour window to finish watching the movie.

Apple extended its partnerships to include 11 major movie studios, which makes more than 1,000 titles available for rent with the service’s launch.

To get all those studios on board, Apple had to agree to certain restrictions on rentals. Take the 24-hour viewing window, a limitation that the movie industry insists on which “isn’t how people consume movies,” McQuivey said. The ideal solution would be to give users the option to rent a movie for an extra 24 hours for an extra dollar, for example, he said.

New movie titles won’t be available for rent in iTunes until 30 days after their DVD release. That’s another restriction imposed by Apple’s partners, McQuivey said, and one that’s standard for all online movie services. As a result, it’s a weakness to the digital renting experience that’s beyond Apple’s control.

“The movie industry has put its foot down and said they make billions on DVD sales,” McQuivey said. “Until the DVD business starts to erode by itself naturally, the movie studios aren’t going to hand someone the tools to undermine that business.”

Comparing the iTunes Store to other online movie rental services, McQuivey said the Vudu is at a disadvantage. The Vudu, a $399 TV-set top box that debuted in October 2007, offers 5,000 movies to date.

“[Apple has] the users in place,” McQuivey said. “There’s certainly more of an advantage over Vudu, who has to sell you the box and convince you it’s the right way to watch movies.”

For its part, Vudu took Apple’s entry into the rental market in stride. “VUDU is staying focused on making their customers happy and doing what they set out to do well,” spokeswoman Tara Wagner said. “It’s a difference between video quality, [number of] films in the library, HD content and VUDU has all those things and will continue to expand their offerings in new ways.”

Just this week, Netflix, the most popular DVD-delivery-rental service, made 6,000 of its 90,000 titles available for unlimited online streaming to a PC. And Netflix is working with LG to create a set-top box to stream movies directly to a TV. Still, McQuivey thinks the iTunes and Netflix services aren’t comparable—the former charges a pay-per-rent fee, while the latter uses a per-month subscription model.

Nevertheless, Netflix isn’t about to yield any ground to Apple, especially with its LG box expected by mid-2008. “We’ll continue being the #1 trusted online source for movie rentals,” said Steve Swasey, Netflix’s director of corporate communications.

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