Strategies for a discontinuous future.

Saturday, April 02, 2005

Apple vs Apple

So Sony wants to do iTunes for movies. Argh - what can I do but say I told you so. Look, I want Apple to be a serious player in the Media 2.0 ecosystem. I luv my iPod. But every week, something happens that confirms my believing the opposite.

A few months back I argued that Apple should open iTunes op, and use the rents it captures to subsidize platform extension, leveraging speed to build economies of scale (or scope), and exerting massive innovation and strategic pressure over it's competitors. Building a movies iTunes would have been a great move.

Just sending a few signals would have been a deterrent.

Anyways, this is another example of a theme for this year: Apple's my favorite example of strategic errors, just like Yahoo was last year. Like I said before, creatively, Apple r00lz, but strategically, Apple's rapidly...welll...Appling itself (Mac 1984 style).

Macfanatics, please, think before you comment...last Apple thread, I challenged you guys to give me an example of a seal-of-approval program that worked and I got Good Housekeeping in response (!). Clearly, we're talking about digital goods, with platform FX - the economics are completely different, etc, etc. So please, do respond - just don't do it (purely) out of emotion.

-- umair // 4:47 PM //


Raise your hand if you think portable video can rival portable music. Okay, the three guys with broken glasses and no fashion sense need to sit down. Anyone else? I thought not. And if the desire for portable video is that small (and I assure you it is) Sony is unlikely to make any headway with its clueless attempt to have the first iVideoStore.

Let's be serious for a minute. The form factor for a decent video device makes it too large to slip into a shirt pocket. Those three geeks in the front row may sling one from a belt holster but the rest of us won't have anything to do with it. The large screen makes the device fragile and the protective case will make it larger and heavier.

Let's be serious for a minute here. I'm willing to spend nearly $400 for my iPod because I can use it anywhere: in my car, at work, walking through town, at the mall, in the gym, and at home. My iPod gets at least 40 hours use a week. How often will I be able to use my iVideo? Two hours a week? Five?

Let's be serious for a minute here. One of the great things about my iPod was the ability to leverage my extensive CD library. That won't happen with the iVideo - not legally. But let's accept the idea that many of us will be willing to take the illegal route to getting our iVideo content. How many of us will be willing to devote that much time to our video feeding habit? How long does it take to rip a DVD? How long will it take to turn that rip into something the iVideo will play? Yeah, lots longer than the 4 minutes a CD does.

Nah, don't be afraid - unless you own Sony stock. Then...be very afraid.
// Anonymous // 10:06 PM

"Video" is NOT the same as music even though they both can be packaged as digital media.

The ONLY reason we have online music sales is because there are 50 BILLION free tracks and the fact the record labels cannot turn back the clock on Mp3.

Music is also international. A great song transcends language and for most dance songs - who cares what they are singing. NOT true for most video. While action translates fairly well, comedies do not at all across borders.

Music holds up under repeat listening - songs you love you can probably listen to two or three times in a row - what Tv show or movie do you like so much that you can watch the exact same episode or movie two or three times in a row or even ay after day? VERY FEW.

The video market also supplies most of the consumer needs. You have a high quality format that is relatively portable already (DVD's) ... unlike music, where you'd want/have to carry 10-20 CD's to create the same atmosphere and entertainment time, a DVD can hold up to 3 hours of entertaiment. DVD's also only cost a few dollars more than CD's and have in place a sensible pricing structure. Most obscure DVD titles are about $5 after 1 or 2 - certainly close to the price of disposability ... so where does that leave us? TV shows?

The problem is since they are essentially "free" now - the value we place is not as high. Even a pristine master transfer to DVD is not valued as highly as a movie. A 2-hour movie is about $15 dollars - a 22-hour TV show/season set is NOT 11 times the price of a movie ... basically we value a shruken down TV series downloadable at probably about $1 to $2 (at the most).

There is NO way the production comapny & networks are going to devalue the future of their DVD sales and syndication to make $2 per (at most) AND the actors, copyright holders, talent, unions, guilds and profit participants are NOT going to sign off rights for that little.

The only programming that might be available are obscure series from the 1960's and earlier where the DVD sales or syndication value is so low they might do it (since the older shows, they tend to hold ALL the rights) ... OR you would be willing to watch MANY minutes of ads togo with it.

If you add in that video is not international, video is not really repeatable, video takes up a lot of bandwidth, video requires visual and audio interactivity, there is no magic video compression that can give you 80% of the quality for 20% of the original size (as MP3) ... what do you have? You have something lots of people are willing to move around if it's FREE but when it costs money, why not just spend $3 to rent the EXACT same thing in the best available format already?

Right now, there are about 5 online movie stores & viewers already - check back in a year after the Sony store opens - the selection will be minimal and the business will be 5% of the Sony CONNECT store ...
// Metro // 10:32 PM

Look, I want to be able to *rent*, not buy, videos and watch them on my A/V system (not my computer). Give me an easy way to do this via downloads, and I'm all for it.

However, an iTunes-like store for movies (I'm assuming Sony wants you to *buy* the movies since you buy songs from iTunes) doesn't do it for me.

Right now, I can do on-demand rental of movies through my cable provider. However, I think they have about 250 movies total available, not a particularly good selection.

I don't have any inside knowledge, but I would bet my sweet bippy that Apple has been considering how to do movies as well as it does music. And I'm sure that they've run into the same issue: how do you get the content owners to all get on board, cuz that's the only way it's going to be commercially attractive.

Just my two cents.

// jim8151 // 12:41 AM

Some points that address the comments, but not your post:
1. The target is not the portable video market. The primary target of video is the home video market.
2. The key point is the distribution of HD video, not standard video. It is a discontinuity with all previous video and video distribution systems - i.e., it requires purchase of new equipment (TV, DVD player, etc).
3. Music is not that much more international than video. Current TV/movies are not much more interactive than music.

Your post is interesting. I've disagreed with you previously over whether Apple's Mac or iPod/iTunes "system" is inherently flawed (i.e., cannot be sustained) or less desirable compared to the open platform system embodied by Microsoft and its partners. But I will address it again in a bit.
// Kev // 4:21 AM

In the beginning, I too wondered why Steve and Apple didn't come up with a PMP, portable media player, that can also playback video. Then I thought maybe such product is secretly being developed. Unlike the music content, however, video content needs be ready before any PMP can be sold in volume.

But today, I tend to agree more and more with Steve, Apple and Anonymous // 10:06 PM's perspective, which is that video portable player might never sell in volume, but will remain a niche product for those who really want to watch video on the go.

The reason is because it requires too many variables for succeed. Unlike the music players, content alone will determine whether PMP can be sold in volume.

Best Regards,

George Lien
[email protected]
// Anonymous // 4:38 AM

1. Your immediate concern seems to be that Sony looks like it will be a first mover. To me, Sony hasn't done anything yet but copy MS' method of announcing vapor. The track record of Sony's electronics products that use Sony's homegrown software for a user-interface is woeful, and Sony's Connect store is awful - I have no basis to expect anything better.

2. A successful first mover must provide all the pieces that create a good-enough experience for the mainstream consumer (not just the early adopters). MS and others (CinemaNow, Akimbo, etc) have put out stores (purchase or rental) but have not shown much traction because they do not yet have all the pieces.

3. For pieces, we have at least these: content, distribution (convenience), playback device usability, cost. With user expectations driven by both consumer electronics and the culture of the Internet.
a. Content is yet to be significantly better or broader than what can be seen on TV/cable/satellite, DVDs, or on the Internet. HD could be a significant differentiator.
b. Distribution - ease of finding/accessing/retrieving content has improved but still is severely lacking. There is nothing yet like TiVo-style software for getting video content over the Internet. Immediacy per Internet culture, and convenience are not fully addressed. (TiVo has convenience but not immediacy - no on-demand available, only pre-recorded.)
c. Playback device usability - home or mobile devices still are not simple to use (or pretty to look at) - they are in early adopter stage. They have computer-style mysterious glitches, which consumer electronics just don't have.
d. The device and the content (buy or subscribe) must be available at a reasonable cost. Note that content owners usually price their content higher than people are willing to pay.

Without any inside knowledge, I'd have to believe that Apple is working all-out to bring all the pieces together to market when they are ready. But Apple knows they still have time, as the technology or content (i.e., multiple wireless video streams in the home, HD content) to put it all together is still not fully available.

You imply that a movies iTunes needs to have been announced already for it to be a great move. It's not a great move if it's not ready. Or you might be implying that Apple is not working on it. Do you have info that shows they are not? And why does Sony need to be or why would Sony be deterred by an Apple announcement? Sony was not deterred from starting its Connect store way after the iTunes store appeared.

I will address your broader ecosystem point in my next comment.
// Kev // 5:04 AM

1. Your view has been that Apple needs to allow other music stores and device producers to license Fairplay DRM, with Apple collecting licensing fees. Music stores would license it because they want to sell to iPod owners, and device producers would license it because their device users want access to the iTunes music store. And Apple could still compete and win because their iTunes store and the iPod would still have better usability and design, and more brand awareness than its competitors.

The counterpoint has been that Apple believes it is the integrated system that provides the value that some consumers want. Enough consumers want it so that Apple makes a profit and able to enhance and sustain the system. For the Mac, this is hardware/OS integration. For the iPod, this is focused on store/jukebox/playback device integration. This core value might prevent Apple from owning the market, but BMW and Mercedes do not own the market either.

The counter to that is that people may want to use their music in ways for which Apple has not provided a product at all or at a cost people are willing to pay. The response is that if others can provide it without affecting the core integration, they can do so, thus, the iPod ecosystem. For those that do affect the core integration, Apple is licensing (ie. Motorola phone) or has provided (Airport Express) or will be providing a product (remote control and multiple streams are coming).

2. Your view is that Apple needs to license now while they still have dominance; if they wait, consumers will choose other music formats that are able to be used on multiple brands of players.

The counterpoint is that if there are other players that are better (for reasons other than DRM), they would be even better if they were able to use Fairplay. And Apple would lose that sale regardless; the license fee they collect would be consumed by the amount of iTunes/iTunes Store support they would need to provide for that device. Furthermore, licensing would only make it easier for current iPod owners who own Fairplay songs to switch (ouch!).

Even if the iTunes store was arguably better, the profit from song purchases by users of these other-brand devices is small, and it would be somewhat offset by iPod owners possibly using other stores that license Fairplay.

The only question is whether a first-time buyer is being deterred or whether a current owner is totally disaffected by Apple's refusal to license. For now, it seems that first-time buyers can be influenced greatly by marketing (both purchased and free-viral), and current owners are still incredibly happy, albeit patiently waiting for pieces that Apple or the ecosystem has yet to provide. If Apple determines that either of the above is no longer true, Apple can still win back people by licensing at that point.

(Note that altho I wish Apple always put my best interest above Apple's own, I fully recognize that Apple is a business that is out to make a profit in accordance with its core beliefs.)

3. Your view is that Apple could use its current dominance to extend the store to include other media, and sell new products to playback other media; all using the same licensing scheme.

Same arguments as above apply. And Apple could still use its dominance to extend the store without licensing, primarily on brand awareness and customer satisfaction arising from its integrated nature, assuming that Apple provided all the pieces that I laid out in my previous comment.
// Kev // 5:52 AM

Having now read your previous post on Made for iPod branding, you and Apple have a fundamental disagreement over what generates future revenue.

Apple believes it is the quality of a user's experience, and not the broadest set of features, that generates the producer-consumer relationship that brings repeat business. Additional features are good only when served at some minimum quality threshold. Thus, Apple places barriers around its core product in order to preserve that quality. The iPod branding is partially such a scheme.

Apple believes that its brand (Apple, iPod, Mac) represents a level of quality of user's experience. And it needs to ensure that people buying into its brand get the level of quality that was expected. Thus, only those that meet Apple's testing will get branded with an Apple stamp of approval. Apple is trading its brand reputation for dollars, and at the same time, sharing its brand reputation with others in its ecosystem. In the long run, those producers previously without brand-name awareness could gain a quality reputation riding on Apple's coattails. Long-term, that's what they are paying for.

Note that there are differences between the Mac and iPod, one is a computer-experience, and the other is a consumer electronics-experience. And the consumer electronics experience demands a lot more in terms of ease of use. Thus, such a program is less necessary for the Mac.

So you see having an enormous ecosystem as a barrier against others entering and stealing away users. Apple sees such an ecosystem as good too, but only if the low quality or low commitment (fly-by-night) producers are weeded out.

You ask if there are others out there that have succeeded with such an approval scheme. I ask you if there are others out there that have such a loyal base of repeat purchasers out there - especially among consumer electronics vendors.
// Kev // 7:07 AM

Imagine if Apple starts to lisence FairPlay to music stores and that tons of new smaller Fairplay stores open... Now if some of them fail and/or start to switch to WMA, you'll see headlines like "Fairplay is failling for many music stores: most of them are starting to switch (back) to WMA". Other possible problems would include stores that have bad costumer service, bugs and problems with their stores.

This would create a downward spriral where people would start to abandon the Fairplay stores etc, Apple would end up being the only one selling Fairplay tunes again, with no stores wanting to get the lisence and Apple would have lost a good part of it's marketshare in the process.

Apple should keep FairPlay to themselves until a real official open standard emerge. What could probably happen somewhere in the future is that the company that has the dominant DRM format will be forced to give up it's exclusivity and to open their format in a way that it becomes the -official- music format for record labels.

You can bet that if Apple wasn't dominating the portable player market and the online music store market that WMA would be the one that would become the official standard.

The only way one can seen as dominant vs Microsoft is not to show any signs of weakness. Fairplay stores closing up would certainly give a bad impression of the AAC+Fairplay model.

Market fragmentation is really not a good way to fight Microsoft dominance.
// Anonymous // 4:37 AM

Metro and the other commenters have I think done a great job here. Umair, not one of your better analyses. The economics of video as it stands mitigate against doing anything like an itunes for movies.

One of the things that seems to happen a lot in these discussions is that the content that we have today is taken as the chunk/experience of the future. I think it is much more likely that online video is going to be short-form, probably integrated with long-form event releases in some way at one end of the market; but with opportunities for new, cheap, socially networked productions at the other end. It will be new content companies who take the risk here, and there will be a whole lot of attrition before we see anything like a mature model. Once that happens, microsoft/apple and/or the big media cos will make moves. Then we can talk.

Until then, it seems pretty obvious that Sony aren't going anywhere with this. They have zero chance of locking up a big enough proportion of event programming to get people to invest in their service (e.g. like if iTunes only had sony music releases)
// Anonymous // 9:41 AM
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