Research firms: Hollywood need not let Apple make all of the profit

Parks Associates & The Entertainment Technology Center at USC have published a whitepaper, “How Hollywood Can Out-Apple Apple,” which reads in part:

Ninety percent of all broadband users have a mobile phone, but only 10% regularly use it to watch video; just 6% regularly use it to watch live TV. Similarly, one-half of all broadband users have a portable MP3 player but only 10% regularly use it to watch video; roughly one-half the number that have a video-enabled player. Why have consumers not been more receptive to portable video platforms? The answer lies in a mixture of technological and business challenges plaguing the industry.

For years, big-box retailers have used music and movies as a loss-leading lure for store traffic. Apple adapted this strategy to the digital age by offering content as a low-margin lure for hardware. The company gave away millions of free music tracks in order to prime the market for iPod sales. It likewise offered low-cost price points on movie and TV titles in order to promote ‘video’ iPods. The strategy has been a great success for Apple, but content producers have been less enthusiastic. The content sold by itself does not generate substantial amounts of revenue.

MacDailyNews Take: Giving away free music tracks did not “prime the market for iPod sales.” (See: Pepsi’s Apple iTunes promo nightmare, only 5 million songs redeemed.) The ability to rip our already-purchased CD libraries are what sold iPods initially and still sells iPods to new customers today. Anyone who tells you differently doesn’t know what the heck they are talking about. Furthermore, the lack of the ability to easily rip already-purchased DVD libraries via iTunes is the number one reason why consumers not been as receptive to portable video platforms as they have those that play music. (Yes, we know about HandBrake, but until it’s a feature in iTunes, it’s not mainstream.)

More from the “How Hollywood Can Out-Apple Apple” white paper:

Hollywood need not let Apple make all of the profit. If Apple is effectively using content as a loss-leader (or at least break-even leader), then Hollywood should similarly leverage content to promote sales of its flagship products. The latter must simply employ a different strategy.

Rather than asking “How much money can we make on portable content?”, the question should be “How can portable content help me make money?”

The full free white paper is available (pdf) here.

[Thanks to MacDailyNews Reader “Brawndo Drinker” for the heads up.]

If Hollywood really wants to make money, they should simply drop the senseless DRM they insist upon as it only punishes paying customers while generating laughter from pirates.

No white paper is necessary: Sell us good content that’s free of draconian restrictions at a reasonable price and we’ll make you rich beyond your wildest dreams.

Interestingly, Disney is listed as one of the The Entertainment Technology Center at USC’s “executive sponsors.” We’ll see how long that funding lasts.

22 Comments

  1. Hollywood makes out just fine. Hollywood doesn’t have to incur the costs of producing physical media, shipping it to Wal-Marts and Best Buys, or other such costs. It simply takes the digital movie, encodes it as necessary for Apple’s delivery methods, and gives the movie to Apple. Heck, Apple may even do the encoding for the studios.

    And the price point doesn’t have to change – consumers are used to paying ~$20 for a new release movie, and ~$30 for a Blu-Ray movie. So even a dollar off seems like a bargain to the consumer.

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  3. “…mobile phone, but only 10% regularly use it to
    watch video; just 6% regularly use it to watch live TV.”

    Way too high. Less phones are video/TV capable than this or too expensive from phone carrier.

    “I don’t feel that spending $13 dollars on the iTunes music store in order to get a DVD that I could buy for $5 or $10 somewhere else is reasonable since it’s in lower quality.”

    How can the Apple content price be too low yet it costs more from Apple than a retail outlet?! Self-contradiction.

    “Interoperability remains a major challenge—content purchased for one portable platform can rarely be used on another.”

    Easily fixed – remove the DRM.

    “The amount of high-quality content available is still extremely limited.”

    Easily fixed – release more content for sale.

    “Technological upgrades to networks and devices will likewise require substantial investment—operators and manufactures will not jump on board without some assurances of success.”

    But they’re guaranteed failure if they don’t jump on board.

    “Apple adapted this strategy to the digital age by offering content as a low-margin lure for hardware.”

    Yet the cost per song is more than a physical CD-ROM, and a downloaded album remain the same cost as a CD-ROM. How is this low-margin again?

    “The strategy has been a great success for Apple, but content producers have been less enthusiastic.”

    The cost of sales and rentals closely matches current levels, plus making a sale on a portable device where previously no sale was made – why should this make producers upset? Were they upset when Sony sold a PSP movie too?

    “Hollywood need not let Apple make all of the profit. If Apple is effectively using content as a loss-leader…”

    Hollywood gets paid for the sale and rental. If they can’t make a profit when there are no pressing, transport, marketing and retail costs, maybe their expenses are too high.

    “The free distribution of scenes, clips and made-for-mobile content will encourage ticket sales and DVD purchases.”

    People don’t see the value in our product, so lets give bits of it away. Right…

    “In the end, “advertainment” becomes content in and of itself and a profitable way to provide consumers something to watch when they find themselves in situations where a little diversion is welcomed.”

    Since we all really do love to be diverted by advertising. Truly we do.

    Amazingly their chart showing the countries that have the largest ‘Unauthorised video downloads’ are the same countries where Hollywood and Apple don’t sell legal downloads! And the US has the highest PPV (pay per view) and smallest piracy since the stores actually sell the content here! Duh!

    Get a clue. People will buy it, but only if you sell it.

  4. if every DVD came with a (DRM free) track that was an iPod version of the entire film, i would stop buying movies from iTunes and start collecting DVDs. that simple.

    ….and i bet a lot other iPod/iPhone owners would too.

    or they could offer ALL their films on iTMS for my iPod and Apple TV. i would buy a lot more movies that way too. and again, i am not alone.

    so here is a thought…. what if they *gasp* offered both! i would be handing them my money in fist-fulls!

    …but the movie studios aren’t that smart.

  5. I don’t buy films-why would I when I watch them once?
    I don’t care about the so called extra features, why would I care about the director or actors prattling on about what I am watching on screen?

    I think rentals was a smart move on Apple’s and the Movie studios part.
    iTMS DRM does not get in my way-I am not trying to steal content or share it-just watch it on my iMac or Touch-which I can easily do now.

  6. It’s true that the iTunes Store is a “break-even leader” that helps sell Apple hardware. However, the iPod’s success is not dependent on the iTunes Store.

    OK, I actually read the paper. I can’t believe these are “experts.” First, they try to perpetuate the myth that people bought iPod because of the iTunes Store. Second, they recommend that Hollywood do what it is already doing.

    Interestingly, Google’s stats showed that most of the mobile phone users currently accessing content on the Internet are iPhone users. That’s because most iPhones users regularly use their phones to access the Internet.

    Most users of other smartphones do not, because of limited mobile browsers and poor interface design. So from the perspective of the content providers, it’s basically all iPhones out there. Those other smartphone might as well not be there.

    So Apple has once again put itself in a NO LOSE situation, where it has no real competition. If Hollywood succeeds in “leveraging” mobile content to sell their primary products, they will be doing so though iPhone and iPod users.

  7. “How to use Apple to sell White Papers that are full of S–T!”

    Obviously, these guys like bending people over and making them take it up the wazoo.

    The point is, the Studios make “profit” off of iTunes. They don’t have to produce physical CDs. Marketing costs are way down. And they receive over 75% of the revenue. Apple takes $0.20 per track or something like $1.73 on a $10.00 album. Because of storage and bandwidth costs, Apple breaks even on THEIR revenue from the track. The Studio still makes money.

    Please people, don’t act all puffed up and say iTunes is a break even game. BECAUSE it only is so far as APPLE is concerned. The Studios STILL make a profit. Use your heads. PLEASE.

    “Parks Associates & The Entertainment Technology Center” are a bunch of FUDders. Really, they are just low life dinks trying to make a buck.

  8. Hollywood is going to hold onto their utopian dream of PPV for everything video in much the same way (and for the same reasons – $$$) that the music industry just won’t let go of their utopian dream of endless revenue from music subscriptions.

    We’re in for another long struggle, folks.

  9. When you base conclusions on false assumptions you get a pompous piece of dreck like this so-called study. The truth is if Hollywood just cut a tad back on all the drugs they buy for themselves they would have plenty of profits. The fact is they make plenty of profits. They all use VERY creative accounting to cry poverty while the drive Porsches to their Malibu compounds.

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