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iTunes Headed for Living Room? You Can Bet On It

iTunes Headed for the Living Room? You Can Bet On It, Says TDG
TDG Releases Second Report in Landmark Series Focused on Apple's Entry into the Movies-on-Demand Market
Download this TDG Press Release as a PDF

August 31, 2006 (Dallas, TX) - Despite Hollywood's recent fascination with broadband video distribution, online movie services such as Movielink and CinemaNow continue to languish. Neither of these services has been able to attract a critical mass of users, primarily because they serve only those few consumers who are willing to watch a full-length movie on a PC monitor and offer overly restrictive usage models.

But according to The Diffusion Group's latest analysis of online media, Apple's anticipated entry into this space promises to change the entire landscape and serve as a catalyst for broadband-enabled home movie delivery. On the Viability of an iTunes Movie Download Service – Part II(iTunes to the TV), the second installment in TDG's analysis of online movies services, offers a unique combination of primary consumer research and market analysis to evaluate how a living room-based iTunes service would be received among US consumers.

"Given Apple's success in music and video downloads, extending this model to include full-length movies makes sense," said Michael Greeson, founder of The Diffusion Group and co-author of the report. "However, simply including full-length movie downloads for PC viewing is not the primary goal of this service. While it may very well start out that way, there is no doubt that Apple is aiming for the living room - the Promised Land of video consumption and the epicenter of home entertainment."

As Greeson noted, downloading music files or short video programs for consumption on a PC or portable device is a very different activity than viewing full-length movies. "The value proposition is very different if only because full-length movies are normally viewed in a theater or in the comfort of your living room on a home entertainment system. While movie purchasing models have proven to be flexible (capable of supporting brick-and-mortar, on-demand, and even mail order models), movie viewing preferences are well-engrained and will be difficult to alter."

Hollywood has been slow to support online movie distribution, due not only to concerns regarding digital rights management and copy protection issues but because the revenue model of on-demand distribution favors service providers over studios. At the moment, studios bank heavily on DVD sales to make up for declining theatrical profits. Net profits from DVD sales hover around $10 per title for new releases, several times more than a video-on-demand download may yield. In a new media world, the distribution of profits shifts in favor of the service provider who distributes the content - service providers can net as much as 75% of the price consumers pay. This phenomenon is representative of what TDG has characterized as the ‘shifting profit pools' inherent in new media distribution.

At the moment, cable companies are leading the video-on-demand charge with TV and specialty programming, not first-run post-theatrical content. Alternative movies-on-demand providers such as Movielink, CinemaNow, and MovieBeam have yet to attract a critical mass of users. As long as this continues, the film studios can bank on DVD sales to make up for declining theatrical revenue and profits.

But when a legitimate direct-to-consumer movies-on-demand business does come to fruition - one capable of capturing the consumer imagination and delivering a stellar service with an appropriate degree of 'bling' - DVD sales will begin their long, slow decline. And when this happens, studios will be forced to reassess their business models.

It is within this context that speculation regarding Apple's entry into the online movie space has heated up. Industry insiders predict that within the next few months Apple will announce an iTunes movie download service. Regardless of when the service is launched, and regardless of whether the service is a rental-only or purchase-to-own model, Apple's entry into this space will be viewed by many as a turning point for online movie distribution.

To evaluate how an Apple iTunes movie download service would be received by consumers, TDG commissioned a June 2006 study of more than 2,000 US households regarding their interest in and price sensitivity toward two types of Apple iTunes-branded online movie services - the first involving movie downloads to the PC and the second involving movie downloads to an iTunes-branded set-top box connected directly to the primary home TV. Researchers examined consumer receptivity to both of these scenarios across a variety of price points, identified the core group of consumers most likely to adopt each of these different services, and profiled these segments across a number of characteristics.

The results of this extensive analysis are featured in a two-part report series entitled On the Viability of an iTunes Movie Service - Consumer & Strategic Perspectives. Part II contains a detailed examination of consumer receptivity towards an iTunes movie download service for the primary home TV - that is, service to the living room. The report also features an overview of Movielink and CinemaNow, the two leading online movie distribution services, and a detailed examination of MovieBeam, a set-top box based movies-on-demand model. The report also features a discussion and analysis of the role that new hardware platforms and iTunes will play in Apple's entry into the home living room.

For more information about this report or TDG's other research, please visit www.thediffusiongroup.com.

About The Diffusion Group ( TDG ) -
TDG is a professional services firm helping clients deliver better products and services through partner and research collaboration. Our clients benefit from years of industry experience and extensive global resources to help prepare for the upcoming challenges and opportunities within the new media and digital home markets.

TDG is... Intelligence in Action®

ENDS

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