In Movie Distribution Apple Trumps Amazon

Includes: AAPL, AMZN
by: Paul DeMartino

Apple Computer Inc. (NASDAQ:AAPL) and Inc. (NASDAQ:AMZN) recently joined the race to provide online distribution of movies, but from an investment standpoint, Apple's system seems to offer better chances for growth. Ease of use and fewer restrictions give Apple the edge.

The strengths of each system are relatively straightforward: Apple's system is convenient, especially for video iPods. For many people, downloading seamlessly onto a device they already own makes things like digital rights management [DRM] completely irrelevant. It is dealing with codecs, transcoding applications and network delivery to remote systems that makes people get nervous.

For Amazon, the strength is variety. While Apple will initially only offer films from Walt Disney Co. (NYSE:DIS) studios, Amazon's partners are many. Quoting Amazon's press release:

Participating Movie Studios

20th Century Fox [part of News Corp. (NWS.)], Paramount [Viacom Inc. (NYSE:VIA)], Sony Pictures Home Entertainment [Sony Corp. (NYSE:SNE)], Universal Pictures [owned by General Electric (NYSE:GE)], Warner Bros. Entertainment [Time Warner Inc. (NYSE:TWX)], Lionsgate [(LGF)] and Metro-Goldwyn-Mayer Studios, Inc.

Investors may well conclude that most of Hollywood is behind Amazon. But here's another list of studios: "...Metro-Goldwyn-Mayer Studios, Paramount Pictures, Sony Pictures Entertainment, Universal Studios and Warner Bros. Studios." That's the list of the investors in Movielink LLC, another site with a virtually identical business plan and, more telling, a history that doesn't bode well for Amazon.

Movielink has been an active online distributor of movies since 2001. On June 1, Business Week reported that the studios were seeking buyers for the joint venture. The magazine notes that it seems likely the studios intended to sell it all along, but Movielink's results — 75,000 downloads or so a month after a half decade of operations — didn't really change their minds.

Why go with Amazon, then? From the point of view of the studios, there are two things Amazon offers that Movielink doesn't: An online brand name worth a darn and a third party to bankroll risk and distribution costs. Further adding to Amazon's risk is the idea that downloads could jeopardize its DVD sales.

From the consumer point of view, Amazon and Movielink are remarkably similar: Both have heavy DRM restrictions with the inability to do much with "owned" files beyond play them on particular licensed computers with proprietary software. Specifically, burning a purchased movie onto DVD — still the most convenient way, theoretically, to get a downloaded movie onto many TVs — is prohibited.

In this regard, Amazon's business model has been tested by Movielink and has been found wanting.

Apple's plan, based more on hardware integration, particularly with its well-established iPod devices, seems more likely to offer attractive growth. The company also offered a glimpse of an appliance, iTV, that promises to bridge the last few crucial feet between the computer and the TV, the big sticking point for the studios, who don't want to jeopardize their DVD sales. It's also the great divide for consumers; in the chain of downloaded file to TV pleasure, the big technical complexity from the consumer's viewpoint is that same trip, particularly if burning DVDs isn't an option.

Apple's whole business plan for the last few years has been one of hardware integration and commoditization. One MacBook is pretty much like any other MacBook, and if you connect another Apple appliance, there is unlikely to be any hitch in sharing content. Given that one of the lynchpins of the video download system, the iPod, is ubiquitous (if not in its video form), Apple might see more success in the long term with movie downloads.

At the time of publication, Paul DeMartino did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by