How the New iPhone Helps Hollywood

iPhone Helps Hollywood - H 2013
Illustration by: Robert Neubecker

iPhone Helps Hollywood - H 2013

Apple's cheaper device means greater penetration in China and India as iTunes movies, TV and music suddenly will land in millions (billions?) more hands.

This story first appeared in the Sept. 13 issue of The Hollywood Reporter magazine. 

The new iPhone 5S will make headlines this fall for its better camera, longer-lasting battery and flashy fingerprint-sensing lock. But another device Apple is expected to introduce at a Sept. 10 event could have a much greater effect on Hollywood.

Meet the budget iPhone, nicknamed "the 5C" (as in "color") by Apple watchers for what likely will feature multicolored plastic backs. The device is expected to debut with specifications close to those of the iPhone 5 but will sell for less than $500 (some analysts think it could be priced as low as $349). An iPhone now starts at $649 without a service contract, so a cheaper option would be Apple's first phone intended for the masses -- a truly global product aimed at such countries as China and India, where consumers pay full price to buy phones "off contract" (as opposed to the dominant model in the U.S., where cost is subsidized by service carriers).

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Greater iPhone penetration means more iTunes users, and iTunes users consistently pay for and consume music, movies and TV in greater proportion than other smartphone users. Worldwide iTunes accounts have grown sixfold since 2009 to more than 575 million, second only to Facebook. With cheaper iPhones, that number could hit 1 billion by 2016. As Chris Jones of technology consultants Canalys notes, "A lower-cost, new iPhone and the expansion of the iOS user base is great news … for developers and content providers, including Hollywood."

Smartphone use has been exploding, with worldwide shipments up 50 percent year-over-year. Along with the U.S., China and India are the world's largest smartphone markets (China is No. 1; India is No. 3), but Apple has lagged in those countries. Brian Marshall, an analyst at International Strategy & Investment, estimates Apple's global penetration is only half of what it is in the U.S.

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Although taxes and regulatory hurdles have been a problem, the biggest impediment has been price. Sales of phones less than $200 are expected to triple to 635 million units by 2015, say analysts at Sanford C. Bernstein. By contrast, sales of phones priced above $450 only are expected to grow modestly to 300 million units from 235 million in 2012.

Apple particularly has struggled in China, where its revenue dropped during the most recent quarter. The company has been attacked by state-owned media for allegedly offering Chinese consumers inferior warranties and shoddy repairs, and it has struggled to reach a deal with China Mobile, the world's largest cell phone carrier with 740 million customers. ISI's Marshall says a lower-priced iPhone could be "crucial" to building key relationships in that country.

Hollywood is watching closely as content consumption shifts to mobile devices. All the major studios now have deals with Apple, which offers more than 100,000 movies and TV episodes, though availability varies by country and pay TV windows. In total, professionally produced media generated about $8.1 billion in 2012 sales on iTunes and is expected to grow to at least $9.6 billion in 2013. Music accounted for $4.4 billion of the total and video and books about $3.7 billion, with Apple returning 70 percent, or about $2.6 billion, to creators.

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Video revenue is growing much faster than music as the number of countries offering video increases and because of its higher price points. Apple says users now are downloading 800,000 TV shows and 350,000 movies a day.

As iTunes has expanded, per-user revenue has dropped from more than $70 to about $40. Analyst Horace Dediu predicts further erosion of that average as iPhones are adopted in Asia, the Middle East and Eastern Europe, where piracy is more widespread and the culture of paying for content is less established -- even as overall iTunes revenue expands.

But the Apple user experience has tended to shift those attitudes. Says analyst Benedict Evans: "Lots of people outside the U.S. want an iPhone but can't afford $600. If Apple were to give them the phone at a lower price, they're likely to buy more content."