03 September 2010

A New Digital Battlefield

The Wall Street Journal
Amazon, Apple Rivalry Moves Beyond Music and E-Books Into TV Shows

TV shows are emerging as a new front in the war over digital media between Amazon.com Inc. and Apple Inc., amid their ongoing battles over electronic books and online music.

Hours after Apple said Wednesday that it would begin renting some shows for 99 cents per episode, Amazon cut its price on a similar set of shows to 99 cents from $2.99. And unlike Apple, which rents the videos, Amazon lets its customers buy the shows.

"When we see a competitive product available elsewhere, we make sure to match or beat that price," said Bill Carr, Amazon's vice president of music and video, in a Thursday interview. "Things are evolving rapidly."

Apple declined to comment on Amazon's pricing.

A price battle between the tech titans could help drive consumer interest in the nascent market for paid on-demand video over the Internet. But it could also drive away the media giants that Apple and Amazon are counting on to feed them with TV content. Some media executives worry low prices could eventually undermine the existing TV business.

For the past several years, Amazon and Apple have both offered services that let consumers buy or rent films over the Internet on a one-by-one basis and watch them on TVs, game consoles or portable devices. It's part of a wider race among cable-TV and satellite-TV providers and tech companies, including Netflix Inc. and Google Inc., to dominate the digital delivery of TV and movies.

That race heated up on Wednesday when Apple introduced an updated Apple TV set-top box for $99 and said it reached deals to offer rentals for a selection of TV shows from News Corp.'s Fox and Walt Disney Co.'s ABC, ABC Family and Disney Channel, as well as BBC America.

TV networks haven't presented a united front when faced with Apple, Amazon and other tech companies that want to license their content. Already, some, such as Time Warner Inc., are aligning with cable and satellite TV operators to offer some shows on the Web only for their paying subscribers, while others such as General Electric Co.'s NBC Universal put episodes from a large number of their shows online for free viewing with ads. But even those positions are changing, with some media companies pulling back how much they offer free or working on paid subscription offerings of their own.

Apple has already discovered those divisions: While both News Corp. and Disney signed on to test its 99-cent TV-show rentals, other major media companies rejected the plan. Several executives said those rentals could be a step toward a world where people see less advertising or stop paying for cable subscriptions—two principal sources of revenue. (News Corp. owns The Wall Street Journal.)

The price war could lead at least some media companies to pull existing episodes sold at $1.99 from Apple, one media executive said.

"We're happy to sit back and see how it goes," said another media executive, who also suggested that competition between the two tech giants could be a boon. That executive said a major danger media companies face is allowing one player—like Apple—to gain too much power over the distribution of content, as it did with music. Amazon could provide a welcome challenge, the executive added.

Securing affordable video content is crucial in Apple's strategy to tout the iPad, iPhone and iPod Touch as go-to multimedia devices.

The existing price of content—which can cost $2.99 apiece for a high definition TV show or $4.99 for a movie—is still a high barrier of entry when consumers can access many of the same shows free on websites such as Hulu, or as part of their Netflix subscription.

Amazon, the Web's largest retailer, has used aggressive price cuts on a variety of products to draw attention to its offerings and maintain its position as a low-price leader. The company today offers 75,000 movies and TV shows, which customers can watch on a variety of systems, from computers to TVs.

Mr. Carr declined to say what impact a price cut might have on adoption of digital video, and said it "remains to be seen" what an ideal price might be for video.

"The lower that they bring the cost, the more they will expand adoption," said David Krall, the chief operating officer of Roku Inc., a company that makes set-top boxes that play Amazon and other online content on TVs. "People compare the price to going to the DVD store to rent, and convenience of having to get in the car."

It remains to be seen whether the pricing rivalry will hurt Apple's dominate position in the space. According to Screen Digest, Apple accounts for 57% of transactions in Internet video-on-demand movies, on a number-of-sales basis, and 53% of the TV shows market, excluding sports. In contrast, Amazon is only 5% and 6% respectively.

Both Microsoft Corp. and Sony Corp., through their videogame consoles, sell more online video than Amazon, according to Screen Digest. (The estimates exclude Netflix because it doesn't offer a-la-carte sales and rentals of movies and TV shows over the Internet.)

One advantage that Apple has in these early days is that it has many products through which consumers can view the content. By contrast, on the digital book front, the competition between Apple and the online retailer is more intense in part because Amazon had Kindle, an e-book reader that it had been selling long before the iPad. Mr. Carr declined to comment on whether Amazon was interested in making its own devices for watching digital video.

"We don't believe Amazon's price cutting on TV shows will materially affect Apple's overall market share," said Arash Amel, Screen Digest's digital media research director. "ITunes rarely gets sucked into a price-war, given their position as the market-leader."

Amazon has had mixed success with its past digital media efforts. Its digital music business, in which it also uses aggressive pricing, has what analysts estimate is about 12% of the digital music market.

Moreover, the TV discounting costs Amazon because the company will continue to pay the companies the same wholesale price per episode that it paid before the retail-price cut, said media executives.

In the short run, a price cut could help Disney and News Corp., if Amazon sells more episodes while paying them each the same wholesale price. But some media executives and analysts believe the proliferation of lower prices could start to devalue electronic TV shows more broadly.

"It further ingrains in the consumers' mind the idea that a TV show is only worth 99 cents," said Evercore media and entertainment analyst Alan Gould.

Amazon is also interested in challenging players such as Netflix with a subscription service that would deliver TV shows and movies over the Internet. In recent weeks, Amazon has pitched a Web-based subscription service to several major media companies.

Mr. Carr declined to comment on the idea of a subscription service.

The entire business of selling episodes of TV shows through services like Apple's and Amazon's is expected to generate only $407 million in 2010, according to Screen Digest. Meanwhile, U.S. consumers and advertisers will spend about $143 billion on traditional TV advertising and subscriptions in 2010, according to PricewaterhouseCoopers.

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