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Apple Reveals New Internet Movie Service

September 13, 2006 at 6:45 PM EDT

JEFFREY BROWN: In recent days, two retail giants have announced new digital storefronts for consumers to download movies to computers and portable devices. Amazon’s Unbox allows you to rent or buy films.

And, yesterday, Apple unveiled a service that lets people download movies, just as they now do with music. The company also introduced a device coming in 2007 which will play those movies on a living room TV.

What does all that mean?

We get an explanation from Safa Rashtchy, managing director and senior research analyst at the investment bank Piper Jaffray.

Why don’t you start by explaining the big trend here behind these announcements? What’s going on?

SAFA RASHTCHY, Managing Director/Senior Research Analyst, Piper Jaffray: Well, we are almost at an inflection point of several trends that are helping push these initiatives.

And it’s been happening rather quickly. If you look back over the past few months, certainly, this year, we would — you would see probably about 90 percent of the announcements regarding movie downloads that have happened very recently.

So, what’s happening is that, for the first time, we have crossed over the 50 percent broadband penetration. In other words, the majority of the U.S. households now use some sort of a broadband connection, which means downloading video, which takes a lot of time, is faster now.

And, at the same time, over the past several years, especially with Internet growing, younger people in particular have been paying less attention to traditional forms, like TV or even going out to — to see movies. So, all of these things have compelled the content creators and studios to look for new ways of distribution, being online especially.

And, within this environment, distributors like Google, Amazon, and, of course, Apple see a major opportunity. So, that’s really pushing this trend towards movie downloads.

Your living room TV

JEFFREY BROWN: So, explain a bit more what Apple and Amazon in particular are proposing to do. What would consumers see? How would it work?

SAFA RASHTCHY: Well, first of all, these are not the first ones to announce such a service, but they are the heavyweights in the area. And, of course, Apple has been very successful with its music downloads. So, it carries a lot more weight. But movie downloading has been available for some time now.

With Amazon's Unbox, you basically pay anywhere between $10 to $15, depending on the movie, and you can download it. But the trick is that you can only watch it on the screen that you download it to on your computer, in other words.

With Apple's system, you would be able to download and watch it on your iPod. But what is really most interesting about Apple's announcement, and the thing that was probably missed in some of the discussion, was their iTV initiative, the box that, in the next few months, will come in 2007, and would allow people to wirelessly transfer that file and watch it on TV.

Now, that is the so-called last 10-foot problem. And that is the critical problem to resolve. So, if Apple is successful with that, it could gain a major market share.

JEFFREY BROWN: The Wall Street Journal headline said, "Apple Aims to Take Over Your Living Room TV." So, that's partly what this is about, getting it from online, into a computer device, a computer or a handheld device, but then getting it into the TV set.

SAFA RASHTCHY: Exactly. I mean, that's the big issue. People have been spending thousands of dollars on buying their largest set of TVs. They like to watch it in their comfort.

In reality, downloading a movie, waiting for two hours, and then watching it on a small 17-inch or 30-inch screen is not the ideal case for the majority of Americans. Those who are more involved in the high-tech industry, maybe the younger people and those who travel a lot, will have a need for it.

But, at this time, until we cross that 10-foot problem, this is going to be somewhat of a niche play, more of an experimental stage, rather than a new way to -- to have movies downloaded and watched by a majority of people.

JEFFREY BROWN: Now, I'm glad you mentioned earlier that Amazon and -- and Apple didn't invent this. Certainly, it's been -- it's been going on with other experiments. They get the attention because of the track record that they have; is that -- is that why?

SAFA RASHTCHY: Well, for two reasons -- or different reasons, I should say.

Amazon gets the attention because it is the largest retailer on the Web. It is the most trafficked one. So, it has a lot of traffic. People know Amazon. People go to their Web site. And they trust Amazon. And, by the way, they buy a lot of movies at Amazon. So, some of the movies in that -- the movies can be downloaded from there.

Amazon also has an imperative to get into the space rather soon. About 70 percent or more of Amazon sales are for media, books, music and video. So, they know that this trend is happening for download. They have to be there. They kind of lost it on music.

Apple has a track record. They came up with a very innovative device. It really won the hearts and minds of many young people. So, now they feel that they have a legitimate play, position to go after video next.


JEFFREY BROWN: You mentioned some -- that there are obstacles here. There's the technological obstacle still of how long it takes to download a movie. Are there other -- are there other issues, the cost of -- of downloading movies?

SAFA RASHTCHY: There are a number of issues. So, while this is very exciting, I think it's important to keep in mind that, as I mentioned, this is the beginning of a process, but it will be a long process before we watch most of our movies through a download method.

The obstacles are the following. There are some technical obstacles, especially transferring the movies into a large screen, i.e., your TV.

But, beyond that, there are two set of issues. One, from consumers' point of view, the process has to make more sense than the traditional ways that they know of buying movies or watching movies. That is, it has to be at a cheaper -- which it is not at this point. It has to be easier, which again, it is not, given how long it takes to download and to transfer it. Or they have to have a bigger selection.

So, until those things come into play, the average person is not going to have a lot of reasons to switch to this way, other than going to -- to Wal-Mart to buy a movie or renting from Netflix.

JEFFREY BROWN: Well, even though...

SAFA RASHTCHY: From a studio's point of view...


The stakeholders

JEFFREY BROWN: I was -- I was going to say, even though we're at the beginning, I couldn't help but think -- and some of our viewers will remember a story we did only a few weeks ago -- about the problems at Tower Records, where one of the problems is, so many people are downloading music now that people aren't coming into the stores anymore.

So, one would imagine that, even though we're at the beginning here, you must have the Wal-Marts, the Blockbusters paying close attention to this, perhaps movie theaters themselves, whether people will come in the future, and I guess the film industry itself. How is this all being seen?

SAFA RASHTCHY: Well, those are exactly the -- the -- the stakeholders who are very interested in how this process unfolds, in large part because of what happened to the likes of Tower Records, in other words, what happened to the music industry.

It basically took its own course. And the major players, the music labels and others, had to basically watch -- sit back and watch. You're not able to do much. So, most of the music download is illegal now, and the sales are a small part of it.

The -- Wal-Marts and others have a great stake here. And they have been very unhappy about moving to download very fast. They have been quite vocal and public, even, in voicing that to the studios, that they should not be thinking of jeopardizing that distribution channel quickly.

And the studios themselves have a huge stake. They make most of their money by selling the DVDs to Wal-Mart and others. The large percentage, over 40 percent, of their revenues comes from that.

So, they -- they notice the trend that they have to play with. They have to get their feet wet, because the audience wants it. But they also know that it is not going to be economical for them. So, that's why it will be a gradual process.

JEFFREY BROWN: All right, Safa Rashtchy, thank you very much.