Apple’s movie store strategy: Exploring blades and razors

We do not know if the latest rumor about Apple preparing a massive overhaul to its movie store and digital distribution system is true, but that’s not hindering us from hypothesizing about Apple’s business options in this market.

When Apple started their online music business with the iTunes Music Store, its iTMS business model was said to turn the razor and blades business model on its head by selling the songs (i.e. the blades) at a subsidized price and making the profit on high margin iPods (i.e. the razors).

To explore Apple’s options in the online movie market we will follow this familiar razor and blade scheme and discuss
1. Will the blades be given away again?
2. What will the razor be this time?

The competitive environment in the movie download business is - in some respects - very similar to that of the music download business when Apple entered it in 2003. Back then Apple faced a powerful competitor, illegal file swapping networks, who “offered” music for free. But Apple managed to compete with piracy by setting a reasonable price and building its easy-to-use iTunes Music Store.

Likewise the movie download business today faces stiff competition from Television (which is free and easy-to-use), from pay-TV (which is reasonably priced and offers exclusive content) and video rental stores (which offer favorable and ad-free content).

Thus it seems obvious, that the path to success can’t be taken through premium pricing. In order to convince customers of regularly using the new service, Apple has to make a compelling offer in terms of price, size of content catalog and user experience.

But if the answer to question number one is “yes” and Apple is going to offer movies and TV shows at a low price point, where would Apple’s margin come from? Or to paraphrase: What kind of high margin razor are they going to sell to us?

If you think that’s an easy question and the answer is the rumored new Mac mini equipped with an Intel processor and hardware-based DRM technology, because the content owners demand the Mac mini’s new hardware-based digital rights management to protect their content, think twice. With no new Mac minis out there in the wild: how long would it take to build a sufficient customer base for the new movie store? At least too long to make it appear as a clever strategic decision.

But if the copy protection scheme is bound to the introduction of new hardware and if the content owners insist upon a rigid protection of their precious artwork, are there any other options at all?

As we argued elsewhere, Apple’s new video distribution system will be all about leveraging the iTunes Music Store’s customer base. To accomplish this, Apple could sell TWO kinds of blades: On the one hand hardware-DRM-protected high definition content, on the other hand software-DRM-protected low resolution content (Quicktime’s H.264 codec provides the necessary technology to do so).

Every current iTunes Music Store customer could immediately begin to download movies using the low-res option and this would open plenty of options for Apple to sell suitable razors:

  • To enhance the viewing experience, it would be nice to watch the shows on the TV in the living room. This could be done by purchasing an iPod with video-capabilities (razor #1) or a yet-to-be introduced Airport Express with video streaming capabilities (razor #2).
  • To know the true promise of Apple’s movie store one would be tempted to buy the new Mac mini (razor #3). By the way, we should consider the new Mac mini less as a Mac with HD movie store capabilities (nobody wants to put a computer in the living room) than as a stationary iPod video on steroids with computer capabilities as an add-on (but sans screen).
  • Furthermore Apple could charge the HD-store user for hosting the movies on the user’s personal server space (razor #4).
  • As the content owners could urge Apple to open the HD store to customers, who don’t own a new Mac mini, but a PC based on Intel’s “Viiv” chip set, Apple could license its hardware-DRM related technology to the manufacturers of those Viiv-PCs (razor #5).
  • Apple could decide to charge ordinary “Viiv”-PC customers for the HD version of its movie store software (razor #6), but include the software for free on its mac minis.
  • Finally Quicktime’s growing ubiquity on user’s desktops would stimulate the adoption of Quicktime as the media format of choice for independent publishers and this would increase the demand for Apple’s xServes (razor #7).

Which option is Apple going to choose? Hey, this is not a rumor site!

strategic options razor and blades game

3 Responses to “Apple’s movie store strategy: Exploring blades and razors”

  1. mark Says:

    Great article with excellent thoughts! The chart is a bit confusing, however. I see the distinction between HD-res and low-res video content as follows:

    HD-res is basically for home viewing via virtual iDisk hosting on a Mac mini (or other Mac, or future 30″ and larger Apple HDTV sets with network built-in). No local storage. Your iDisk has a catalog of what you’ve purchased but when you access it over broadband, it is actually delivered from Apple’s distributed server network. Any stream to your home can be streamed to any Apple HDTV or your TV/mac mini in your home via a new Airport Express AV. You can get some mobility by carrying your mac mini (or Apple HDTV) to anywhere there is a broadband connection to connect to your iDisk catalog.

    Low-res is for iPod (future iPod tablet, iPod car, iPod phone, and portables) or if you will be taking it to some place with no broadband connection. Low-res is downloaded and locally stored.

  2. mark Says:

    Also, low-res works with all older Macs and PCs using iTunes. HD-res will only work on new low-cost Mac minis, new Macs, new Apple HDTVs, or new PCs that license the DRM from Apple. By the way, the HD-res content and HD devices are the belated unveiling for Jobs announced year of HD.

    As you can see, there are plenty of razors for Apple to sell. In the home, there is a device for a display (i.e, mac mini), the display with the device embedded (i.e. Apple HDTV), and the base station device (i.e., Airport Express AV). Given that the TV is central to most people’s living rooms, and that plenty of people own 2 or more TVs (1 in every room), there is a bigger market here than there is for iPods. And of course, all the new Macs for HD-res playback (Mac users upgrading and switchers until such time Apple licenses HD-DRM to Viiv).

    Then there is the car (a mac mini-like device with Airport Express connection for sync and download). And the phone. And of course, new and better versions of the iPod. One of which I think will be the real iPod video, having a display covering the full-face, and called the iPod tablet. (And this will lead to a Mac tablet, and so on.)

  3. Derrick Says:

    I agree with the article (and comments) that low and high resolution content will be targeted for different purposes … ie. low resolution for iPod and HD for large screens. I think streaming high resolution video content would work very well in a specific situation … to replace typical movie rentals. One could purchase a temporary key which allows you to stream a specific movie … or purchase a permanent key to give you unlimited access. It could even be portable … if you go to someone else’s home … take your Apple ID with you and access the content you have rented/purchased even when away from home.

    I think the movie studios would like this scenario to reduce the risk of piracy … and I don’t think one is giving up too much when you look at this from a rental perspective.

    Some may complain that not being able to download the content itself is an impediment … I think music and video have different purchasing patterns. Of course, many people (including myself) like to purchase movies … however, the number of movies that most people rent likely vastly outnumbers the number purchased on DVD. Unlimited titles with high resolution all from the comfort of home vastly outweighs having to have an actual file on my hard drive … at least for most movies … I can always purchase a DVD if I want to have a physical copy.