Disney and Apple's Movie Success Means Competitors Must Get With the Program

At a Goldman Sachs investor conference yesterday, Disney CEO Robert Iger reported that Disney (DIS) sold 125,000 movie downloads through Apple's (AAPL) iTunes Store in less than a week, accounting for more than a million dollars in revenue. He further noted that he expects this trend to continue with Disney capturing more than $50 million in revenue from movie downloads in the first year.

This result is nothing short of remarkable. Remember, that the iTunes Store launched movies with fewer than 75 titles from Disney properties. No loss leaders were offered; every single one of these movies was paid for at prices ranging from $9.99 to $14.99. And while Disney and Apple will share those revenues in some undisclosed split, because this is digital distribution, Disney's share of that $50 million will largely show up as profit on its income statement.

What does this mean for movie studios? It means they should:

* Sign with Apple soon or miss out on the movie downloading profit stream. Amazon Unbox hasn't posting anything like these numbers with its download service yet. And while other services like MovieLink have possibilities, as of now, Apple appears to be the path of best digital distribution -- and best revenues.

* Stop holding out for variable pricing of movies. Studios that won't sign contracts with Apple or Amazon unless they get variable pricing for new releases are cutting off their profits to spite their faces. This is a market just getting started. Making the movie downloading process simple and a pleasant experience is far more important during this phase of the market than optimizing profits. The result? By holding out for the best possible profits on digital downloads, these studios are getting no profits from them whatsoever. Not exactly a recipe for business success.

What does this mean for Apple's competitors? It means that just as in music, Apple is demonstrating that a working system, a compelling store, and a simple business model is a far more powerful business proposition than promises of software, untried stores, and perfect profit optimization. In four years, Apple went from having no music presence to being the fifth largest retailer of music in the United States (and will pass Amazon to become #4 in early 2007). It has just started this process with movie downloads. And if the first week is any indication, Apple may see similar success -- and dominance -- with movies.

Disclosure: Author is long AAPL shares

Comment on this article

Comments

[Andrew Payne:]

Mr. Howe,
I'm not complaining about your article today. I happen to agree with your points.
I just want to point out how your organization publishs articles that have such differing opinions (about the same subject) that it takes away from the validity of the writers. Just last week a fellow journalist of yours wrote about how the iTunes movie service was simply not up to snuff and actually questioned why anyone would want to spend all that time downloading less than DVD quality movies. He seemed to be writing more of a blog-type article (too personal) whereas you wrote an article based on research and gave your opinion based on said research and observation.

2006 Sep 20 04:24 PM

[John Doe12:]

quick comment to Mr. Payne... I want differing opinions about the same topic... the last thing I want is a bunch of puppets all saying the same thing... the more views the better.. it stimulates conversation....

Mr. Howe's points are dead on... greedy media companies are missing the boat as they hold out for "better terms" from Apple... all of those old 60s, 70s and 80s t.v. shows, cartoons, movies, etc.. going to waste by not being on iTunes!! ... everyday those shows are not on iTunes is a day of lost profit... because it is all profit... no box to ship, no shipping charges, no marketing, just put it on iTunes and count the money!!... Disney gets it... and why doesn't HBO have the Sopranos on iTunes? what a waste....

2006 Sep 20 05:27 PM