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Why Apple can't do to video what it did to music

Forrester's James L. McQuivey says it's time for Apple to change its video game plan, starting with winning NBC back.

    From Hollywood to New York City, media executives have spent the last two years fretting that Steve Jobs could wreak havoc on the video distribution business the same way he upended the music industry.

    The hand-wringing can end; the Apple juggernaut won't be able to do to video what it did to music.

    Flashback to October 2005: Apple's music store was plowing through previous barriers of consumer behavior and industry politics to build the only successful online music store. So successful, in fact, that in the present, iTunes sells about 20 percent of all music sold in the United States. It came as little surprise when iTunes created the video iPod and announced it would go after the video market in a big way.

    Now, two years later, the bad news for Apple is that the company's media distribution strategy is not going to work in video like it did in music. MP3 players, including the iPod, are valuable from the day you buy them because your entire CD collection provides immediate content to fill the device. The video hardware business is different. Unfortunately for consumers, the movie industry won't let you rip DVDs to iTunes, and therefore any one of the many devices Apple has recently added video to, including the iPhone, iPod Touch (essentially an iPhone for people with Verizon calling plans), iPod Nano video, and Apple TV. This means you can spend $299, as is the case with the Apple TV, and still not be able to transfer any of your existing video library to the device, forcing you to buy video from iTunes.

    This might not be so terrible if all the videos you wanted to watch were on iTunes. But even after all the major movie studios agreed to participate with Wal-Mart Store's online download store in early 2007, most of them have still not agreed to sell new releases through iTunes--either from fear of building an Apple monster, or because of exclusive commitments to other partners in paid TV or elsewhere. That's why, despite the back catalog of movies that Paramount, MGM, and Lionsgate feature there, the result is a stunning lack of movie content for purchase.

    MP3 players, including the iPod, are valuable from the day you buy them because your entire CD collection provides immediate content to fill the device. The video hardware business is different.

    To make matters worse, the one bright spot iTunes had going for it--the TV show download business--is stalling. NBC announced this fall it would withdraw its content from the iTunes store when its current agreement expires at the end of this year. Content that NBC Universal CEO Jerry Zucker has claimed on the record accounted for 40 percent of the iTunes video store's sales, while only bringing NBC an anemic $16 million in revenue.

    Not to mention that the value of an expensive video device is dramatically lessened since there are now easier ways to watch the TV shows you want, when you want to watch them. By the end of 2007, Forrester Research estimates that 26 percent of homes will have a DVR, and the 52 percent of the population with a broadband Internet connection can watch TV shows for free from every major network. NBC Direct will even let its fans download shows for offline--read: airplane--viewing.

    All of this adds up to one conclusion: don't let the Mac geeks posting angry blogs against NBC fool you. Any supposed backlash against NBC will not materialize since NBC has made its content available, for free, on NBC.com and has plans to do so on six other major portal sites through Hulu.com, as well as via NBC Direct download and over cable VOD. Without NBC's content, iTunes is only 60 percent of a store.

    There are additional obvious things Apple can do, like changing from a download-to-own model to a pay-per-view movie model, a strategy that Hollywood has embraced and that also solves long-term storage problems for consumers. However, the real innovation comes if and when Apple funnels more Web video--both professional and user-generated--into iTunes. Envision ubiquitous "download this to iTunes/iPod" links that go beyond those few Web videos formatted as video podcasts.

    Of course, the only way to download Web video without getting sued is to let Web video providers embed ads in the video streams that iTunes will capture. Have no doubt, the 6 million U.S. households with video-enabled iPods would be welcome target customers for top video sites' advertising ambitions. And this would allow iTunes to grab a piece of what my marketing colleagues at Forrester predict will be a $7.2 billion online video ad market by 2012.

    But even while cashing in on ad opportunities, Apple shouldn't lose sight of the fact that the purpose of all of these improvements is to make all of its high-price, high-margin video devices become worth their price tags to another few million customers.

    Media executives on both coasts can continue to arrange their deck chairs since there is no Apple iceberg visible ahead. Yes, there are still pirates in these waters, but the bigger long-term problem is complacency. They shouldn't let a lessening Apple threat cause them to slow the pace of innovation. As we know from fickle audiences in the past, if you do not serve them, they will wander--to competing content, certainly, but also to competing consumption models.