Steve Jobs: deal with the devil or wrestling with an angel?

If it wasn't for iTunes, I wouldn't be buying ANY music. That doesn't mean I would be doing illegal downloading, I think that's a crime. I may buy the occasional CD, and I discovered the second hand CD shops, but Music CDs are just too expensive for what you get. I can buy a movie for $20 but it's soundtrack of music-only is $17. That's a no-brainer as to which one I would buy first. Amelie is the only soundtrack that I enjoyed enough to go out and buy a CD.

iTunes allows me to listen to a sample and buy only the tracks that I want from albums. My favorites are the player lists for TV commercials. As for videos, I've bought episodes of "LOST" that I missed and watch on my computer (I don't own an iPod, they're overpriced), but I think $9.99 would be my limit for a movie at the quality that iTunes provides.

Movielink recently began offering movie downloads that you can keep on your computer, but they're charging DVD prices. Hey, I'll just go and buy the DVD. Actually I prefer $5.99 as a standard price for movies. They break up two hour TV episodes into two $1.99 purchases, so that's $3.98. $9.99 is the most I would pay, but I might buy more than I normally would, just like I do with the music.

The music industry should be kissing Job's butt (or whomever came up with the idea) for creating the perfect model for legal music downloads and the device to play them on. The music industry I would think would get more cash from this than the would from e-music's subscription based fees, right?

So far this year I've spent over $100 on music on iTunes compared to spending the same amount over the previous two years on new and used CDs. So there is 6 months left to go on this year, and I'll probably buy more.

The movie studios have tried selling online before and nothing has worked. The movie studios need iTunes.
I think multiple prices should and could be offered. I don't believe in a $9.99 flat price for movies. But definitely nothing should be sold for more than $12.99, it needs to be a price that's attractive to customers.

More importantly, the video needs to be DVD quality otherwise no one will buy it. Why spend $10-$13 or more on a video you can only watch on your ipod or small computer screen?

Maybe Steve should just teach the studios a lesson, by selling all Disney and Pixar movies online first. Connect your PC or iPod to your TV and watch the movie.

OR if the studios are reluctant to allow DVD quality video purchases at a fair price, then why not allow renting of movies? $2.99 to instantly rent any movie for 30 days.

I'm wondering if the Studios really want to sell movies online. They have their world nicely compartimentalized with designated local "monopoly" distributors, complacent hardware manufacturers (dvd region coding, HDMI flaging)and long drawn out release schedules (sometimes we get films in Europe which have been released a year or two earlier in the US). The Studios would have to change their cosy business model.

The are trying to get painless additional revenue out of an online video store, not revolutionize distribution.

Maybe only a Steve Jobs can bring them (kicking and screaming) to accept that their existing business model is very consumer unfriendly.

Apple's Content Problem (AAPL)
One of the most interesting aspects of the Apple SEC filings is the reference made to content for the iPod and iTune products and services.

"The Company pays substantial fees to obtain the rights to offer to its customers this third-party digital content. The CompanyÂ’s licensing arrangements with these third-party content providers are short-term in nature and do not guarantee the future renewal of these arrangements at commercially reasonable terms, if at all."

This issue has been more visible recently as Apple negotiates with movie studios to procure video content for the iPod. However, it points to the issue that Apple has with the music companies. The success of iTune content sales could hurt its margins as the record companies look for a bigger piece of the action. From the latest Apple 10-Q: "Certain parties in the music industry have consolidated and formed alliances, which could limit the availability and increase the fees required to offer digital content to customers through the iTunes Music Store."

And, why wouldn't the companies that provide content to iTunes want a larger cut? None of them could have forecast the huge success of the iPod model, but now that the tremendous sales volume is obvious, suppliers like content owners will certainly press for a larger piece of the pie.

The risk to Apple's margins are significant. iPod sales in the last quarter hit 8.526 million units up from 5.311 million in the year ago period, a 61% increase. Revenue from iPod sales hit $1.714 billion, up 69%. The theory that Mac sales will become a second strong leg for Apple's growth are not supported by the numbers. Mac unit sales were 1.112 million up from 1.07 million in the first quarter a year ago. Total sales for Mac products were only up 5% while the company'stotala revenues were up 34% in Q1 06.

Apple is already facing intellectual property suits from companies like Creative Technology who want a part of the revenue that the company gets from iPod. As a matter of fact, Apple filings indicate that there are 24 legal actions involving the company. Granted, many of these have nothing to do with iPod, but successful, cash rich companies draw litigation and the number of suits involving the iPod and iTunes may well increase.

Apple's strength is becoming a weakness. Although content companies need the iPod as a distribution platform because of its tremendous success, they are bound to want a larger portion of the revenue from a level of success no one could have anticipated when the product was launched.


Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does now own securities in any of the companies he writes about.