Why Apple rental plan alienated most studios

Holdouts fear 99-cent price endangers business model

Don't look for rival studios to join Disney and News Corp. for Apple's announced 99-cent TV rental offering anytime soon.

Unveiling a new Apple TV product Wednesday, Steve Jobs said he had hopes for "other studios to see the light." But sources at other content companies believe Disney and Fox are moving like moths to a flame.

At issue is the 99-cent price tag that represents a steep discount from the TV episodes already offered on iTunes. Multiple executives described it as an unacceptable devaluation of the content that puts in jeopardy the so-called "downstream" windows crucial to generating profit including DVD and syndication.

One studio chief drew a comparison between the new arrangement and the damage done to the music industry when Apple disaggregated the traditional album-oriented business model in favor of a singles-centric approach.

"If we head down this path, we're starting down the same slippery slope where the music business went," the executive warned.

While few were surprised that Disney again joined forces with Apple, the emergence of News Corp. as a willing partner this week raised eyebrows. The deal reportedly was made at the behest of Rupert Murdoch, who overruled the objections of News Corp. executives because he is trying to advance his company's interests in the digital news business.

Noting the lockstep Disney CEO Bob Iger has moved with Jobs, the company's largest shareholder, one exec cracked, "If Steve Jobs jumped off a cliff, Iger would hold his ankles on the way down."

Cable and satellite operators could be particularly steamed as TV networks are perennially embroiled in tough negotiations with them over retransmission fees for the same content they are making available to the competition. ABC is now engaged in such a standoff with Time Warner Cable, which likely will count Apple TV as a threat to its upcoming TV Everywhere initiative.

Although Apple is touting the inclusion of Disney and News Corp., the holdouts are hoping their absence from iTunes rentals will weaken it. Already they're taking pride in having successfully prevented some of Apple's previous efforts, including a 99-cent download (as opposed to rental streaming) and a bundled monthly offering.

The holding-out of Viacom, CBS Corp., NBC Universal, Warner Bros. and others could end up marking a stark contrast to what transpired when Apple introduced downloadable TV episodes five years ago: Disney was on board as an inaugural partner, and eventually every other conglomerate in the TV business came on board.

One studio exec noted that increasing concerns about digital monetization in the creative community, such as "Modern Family" creator Steve Levitan's recent comments to THR regarding Hulu, could provide an edge over Disney and Fox when it comes to signing top writing and producing talent.

Another competitive edge also could come to the growing list of services competing with Apple to bypass multichannel providers into U.S. living rooms, from video game consoles to Internet-connected TV sets. A few execs highlighted Netflix's recent syndication deal with Warner Bros. for TV content including "Nip/Tuck" as an exemplary model (Netflix also will be accessible via Apple TV).

The addition of 99-cent rentals also is prompting bewilderment by observers who note the increasing vulnerability to cannibalization among digital platforms devoted to the same programs. Disney strategy in particular was described by one rival exec as "schizophrenic," considering its series pop up on ABC.com, Hulu, Hulu's iPad offering and now Apple TV.

The downside of Apple's rental model also was recognized on Wall Street, where Evercore Partners analyst Alan Gould noted: "We recognize the studios have to provide a reasonably priced online version of their content or illegal downloads will become pervasive. However, that does not mean the studios have to provide the product at a long-term money-losing price."

But Peter Rice, chairman of entertainment, at Fox Networks, struck a more optimistic note. "We're very excited about the launch of Apple TV and this initiative," he said in a statement. "We're always looking to explore innovative and creative ways to reach and engage our viewers on digital platforms, which makes Apple a perfect partner."