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Apple videos hint at film ambitions

iTunes is already bulking up with music videos. Is a movie store and movie device in the works?

Apple Computer CEO Steve Jobs is famously secretive when it comes to sharing plans for his company's future.

To find clues, however, you need only look as far as the latest versions of the iTunes Music Store. You can't help noticing support for podcasting, or "radio reborn," as Apple puts it.

Look beyond that, and you'll notice that since May, the iTunes software has allowed you to play videos, movie trailers or even home movies. The store itself has begun selling a handful of music videos, with more being added each week.

Record label sources say Apple has been in talks to sell a much wider range of music videos through the store, probably as soon as this fall. The company also has indicated to media executives that an iPod that plays video could be unveiled as early as September. That leads some industry insiders to believe that Apple is working on an online movie store and a video playback device that does for movies what iTunes and the iPod have already done for music.

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What's new:
Apple may be working on an online movie store and a movie playback device that does for movies what iTunes and the iPod have already done for music.

Bottom line:
Industry observers caution that the iTunes phenomenon will be a tough act to follow, and they figure Apple will take incremental steps later this year and next rather than diving headfirst into video overnight.

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"Apple was a pioneer in digital music downloads, and Macs are great for audio and video," said Mike Homer, a longtime Silicon Valley executive and well-connected Apple alumnus. "This makes them well-positioned to introduce video on a grand scale."

Homer and others caution, however, that the iTunes phenomenon will be a tough act to follow, and they figure Jobs & Co. will take incremental steps later this year and next rather than diving headfirst into video overnight.

The biggest challenges are on the business side, not in technology.

Apple must strike a deal with Hollywood executives, who worry about copyright protection on the Internet and don't want to jeopardize DVD sales, which outpace sales at the box office. Apple also must compete with cable television giants such as Comcast in the movie download business.

Beyond that, Apple must come up with a plan to make a profit from video, just as it did with music. Apple makes almost all of its music business money selling iPods, not from the iTunes Music Store.

But if anybody can succeed, it will be Jobs, according to many industry executives and analysts. They cite Jobs' leadership in digital music as well as his Hollywood contacts and experience as chief executive of Pixar Animation Studios.

"He's the greatest entertainer and showman in the business," said one prominent Silicon Valley venture capitalist.

"Anything else you can give to a consumer that they don't get on a CD is really cool."
--Chris Sims, music video editor, Timecode Entertainment

Some Hollywood filmmakers agreed that, with help from Jobs, legal Internet sales of their movies could transform their business.

"The business is going to go down, down, down before they finally realize what Steve Jobs and a few others have already realized--that there is a way to make a business model out of this and then people won't steal it quite so readily," George Lucas, director of "Star Wars," said last month on CNBC.

Apple executives declined to discuss their plans. When asked at a conference last month whether the company would sell video via an iTunes-like store, Jobs said Apple's "actions of the future" would answer that question, adding that it is working on "great things" in its labs.

Poker-faced Apple already is showing some of its cards, however:

• Besides providing video support on iTunes, Apple's latest version of QuickTime comes with the H.264 codec, which lets consumers view high-definition video with less bandwidth and storage space than its predecessors. H.264 shipped with Apple's latest operating system, called Tiger, and a preview version of the software is available for Microsoft's Windows.

• The computer maker has been rolling out new products such as the Mac Mini and Airport Express, which costs $129 and is designed to wirelessly stream music to a stereo. Future versions could be designed to handle movie and television, as well. Apple's agreement to use Intel chips starting next year also will make it easier to build a low-cost home media player, many experts argue.

• Apple is getting more serious about embracing the entertainment business' biggest concern: protecting the intellectual property rights of movies and music. Jobs' experience as a moviemaker provides added credibility.

Apple is making its biggest strides in software. When iTunes launched in May, four bands provided music videos: Gorillaz, Morcheeba, Dave Matthews Band and Thievery Corporation. The total has since expanded to more than 16.

In most cases, the bonus videos are bundled with albums, often at a $1 premium. Examples include Billy Corgan's "TheFutureEmbrace," Coldplay's "X and Y" and Missy Elliot's "The Cookbook," each priced at $11.99.

"Anything else you can give to a consumer that they don't get on a CD is really cool," said Chris Sims, a music video editor at Timecode Entertainment in Los Angeles. "A bunch of artists see this as an option."

The iTunes store also does a better job of promoting movie trailers, which Apple has shown for years on its QuickTime site. The iTunes movie trailer page shows clips from new films as well as from DVDs. It also lists 17 major studios by name and links to each of their trailers.

Although the movie clips are free, the trailer page also sells film soundtracks and audio books. That's the holy grail of entertainment marketing: the cross-promotion of movies, soundtracks and books.

In one deal offered exclusively on the iTunes store, you can watch the movie trailer of Steven Spielberg's "War of the Worlds," buy the soundtrack for $9.99 and get an audio book of H.G. Wells' classic, starring the cast of "Star Trek," for $12.95. The next logical step--assuming the business hurdles can be crossed--would be to include the movies themselves.

The hardware side of Apple's video plans is more vexing. Many analysts have speculated that Apple will release a video iPod. That may support the new music videos finding their way into iTunes, but is unlikely to form the backbone of a full movie distribution service, according to those interviewed.

In the past, Jobs has downplayed the video iPod. "A lot of these other things that people are talking about building in, such as video and things like that, are foreground activities," he said last year. "You can't drive a car when you're watching a movie, you know? It's really hard."

But the popularity and picture quality of Sony's PlayStation Portable device could force Apple's hand. Sources said Apple has looked at prototypes of portable video players in its labs, and future versions of iPods could play music videos, if not full-length movies.

"People watch videos when they sit down for two hours. Technology won't change that."
--Steve Perlman, co-founder, WebTV

As a first step, Apple could turn the Mac into more of a home media player, industry executives said.

"A home media player would be the best thing," said Steve Perlman, co-founder of WebTV and a former Apple scientist who helped launch QuickTime. "People watch videos when they sit down for two hours. Technology won't change that."

Apple's release of the Mac Mini earlier this year only reaffirmed their thinking. The pint-sized $499 computer looks and works more like a media PC than a laptop or desktop. It's small enough to sit near a television, so a person could plug it into the TV and play music videos or movies.

A Mac Mini with a faster processor, linked to a high-definition TV, could play high-definition video, now that Tiger supports HD video. A bigger hard drive would hold more videos, too.

A unit that wirelessly streams video, in the way AirportExpress streams music, could also be built.

A similar unit could be built to handle video signals. LG makes a digital video adapter, and other manufactures are on the verge of releasing similar products, said Kevin Corbett, vice president and chief technology officer of the digital home group at Intel. Corbett declined to comment on Apple's plans.

The agreement struck earlier this month for Apple to use Intel chips in its computers could pave the way for a Mac home media center. Besides its fast processors, Intel has been building companion chipsets, such as Grantsdale, that are tailored to the digital home.

Jobs hinted at the benefits of going with Intel earlier this month. "We can envision some awesome products we want to build for our customers in the next few years. And as we look out a year or two in the future, Intel's processor road map really aligns with where we want to go much more than any other," he said after the announcement.

Intel also is making inroads in Hollywood. Earlier this month, Intel and actor Morgan Freeman's movie production company, Revelations Entertainment, said they have formed a new venture aimed at distributing first-run movies over the Internet.

The chipmaker also has built a digital home in Santa Monica, Calif., that showcases the latest in home entertainment technology.

"We want to show studio heads the state of the digital home and how digital-rights management works," Corbett said. "If somebody had shown this to the music industry six years ago, they might have been more proactive against piracy."

"For the first time since the Mac, Apple has created an opportunity to reinvent their business well beyond PCs."
--Mike Homer, Silicon Valley executive

In addition, Intel has been a leading member of consortiums such as the Digital Home Working Group, which creates digital-rights management systems and other technologies that will clear the way for movie downloads.

Hurdles remain, however. Apple created a digital-rights management technology called FairPlay when it launched iTunes three years ago. But FairPlay hasn't withstood attacks by computer hackers. "It took them roughly a day to crack it," one studio executive said of FairPlay.

While movie studios remain skeptical about copy protection, making enough money from movie downloads is the bigger concern, Corbett said. Profits from movie downloads, a business dominated by small companies such as CinemaNow and Movielink, are scant.

In addition, subscription-based movie downloads are limited because existing agreements between the studios and HBO, Showtime and Starz have locked up most of the Internet rights.

But don't underestimate Jobs, whose iPod took people by surprise and now accounts for one-third of Apple's sales. Years from now, a video service could make Apple more like Sony--a consumer-electronics giant that pipes digital music, music videos and movies into the living room or iPod-like devices.

"For the first time since the Mac," Homer said, "Apple has created an opportunity to reinvent their business well beyond PCs."