In a classic example of the inherent conflicts that exist between content suppliers and content distributors, NBC Universal is pulling the plug on the sale of its hit TV shows and movies via iTunes. NBC-U will not renew its contract with the Cupertino Internet, computer and consumer electronics giant, which is due to expire in December.
The General Electric-owned media conglomerate is upset over Apple’s take-it-or-leave terms, which generally dictate flat prices of $1.99 per TV show and $9.99 per movie, with no room for variations such as specalized bundling or packaging. NBC-U’s move follows a similar decision by Universal Music to allow its contract for iTunes to lapse, although Universal is still selling songs on a one-off basis to hedge its bets.
This stand-off between a potent content supplier and a major content distributor is nothing new. The history of the media and entertainment business is rife with object lessons for all parties involved and if history repeats itself, Apple is no doubt eyeing, or should soon consider, moves that allow it to vertically integrate into the entertainment content businesses.
Hollywood understands the power of vertical integration all too well, having danced back and forth with the concept since the movie industry’s inception. Once upon a time, the studios had the upper hand in the video business, so much so that in the 1940s, when theater owners (i.e. distributors) began objecting to the studios’ own take-it-or-leave it terms, Hollywood began buying up theater chains to lock down the supply-distribution chain. The theaters that didn’t accept the studios’ onerous terms were shut out.
It took a major Supreme Court decision to bust up Hollywood’s business practices and the studios’ had to sign consent decrees barring them from ever owning theaters again. Until 15 years ago or so, Hollywood was similarly thwarted from owning any interest in the TV distribution business by a series of FCC decisions that barred TV networks from owning a financial stake in the TV programs they aired. (Now, of course, NBC, Viacom, Disney and Fox, in fact, are the biggest “broadcast network” owners),
These and other prohibitions that separated content from distribution are relics given the current relatively robust state of competition in the video distribution businesses. But they underscore the eternal power struggle between content suppliers and content distributors that is driving NBC-U to play hardball with Apple.
Unlike in the past, however, the studios no longer have the upper hand and this power struggle can’t be resolved by Hollywood’s attempts to buy up or financially control their distributors. Apple is just too big, too smart and too rich for the studios to control. Nor will the studios cave to Apple because the Internet makes possible too many other avenues of distribution (NBC-U and News Corp., of course, are banking on their Hulu venture to give them greater control over the distribution of their content on the web.)
So, if Apple is serious about its strategy to sell content as a means of bolstering and expanding its sale of iPods and iPhones, the company is going to have to take matters in its own hands and start buying into the content business.
As was the case with the cable industry in the 1980’s, Apple can co-opt the content suppliers by making its own strategic investments in content, whether that be ownership stakes in existing video program suppliers or production houses or the creation of entirely new kinds of content. The big cable operators did both of these things when they too faced recalcitrant TV programmers in the mid-1980s, just as cable TV was getting hot.
If Apple doesn’t start investing in content that it controls, the company could find its iTunes store increasingly empty of product to sell because other studios and powerful content suppliers are likely to follow NBC-U’s lead. Apple just doesn’t have the power to call the shots in the Internet video business that it does in the digital music realm.
On the other hand, it’s doubtful that folks won’t buy iPods or iPhones because iTunes doesn’t have all the latest TV and box office hits. Apple could decide that iTunes is not the foundation that will fuel growth in its high-margin computing and portable entertainment products. That would be the path of least resistance, not a path that Apple normally follows.
Update: Oh my, this situation has turned into a true p*ssing contest. Apple issued a release this morning saying that “since NBC would withdraw their shows in the middle of the television season, Apple has decided to not offer NBC TV shows for the upcoming television season beginning in September.” Apple is in essence saying “You can’t dump us…we’re going to dump you first.”
The only problem is…NBC’s hit TV shows accounted for 30% of iTunes revenue, according to the company.
Apple took NBC to task for asking to sell its TV episodes at a price of $4.99/pop.
“We are disappointed to see NBC leave iTunes because we would not agree to their dramatic price increase,” said Eddy Cue, Apple’s vice president of iTunes. “We hope they will change their minds and offer their TV shows to the tens of millions of iTunes customers.”Posted by Cynthia Brumfield at 9:38 AM | Print | Comments (3)
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