The Serpent in Apple's Garden

Life was pretty good in the Garden, or so the story goes. Then, tempted by a sinister, selfish serpent, Eve took a bite of the fruit of forbidden knowledge, and Adam soon followed. Soon Paradise was in shambles, and for betraying their benefactor, Adam and Eve were cast out forever.

Whether or not that story's a part of your personal belief system, it certainly inspired the famous Apple (Nasdaq: AAPL  ) logo. The Mac maker's revitalized computers and iPod music players are as popular as ever, and its iTunes Music Store deserves considerable credit for helping to move digital music purchases into the mainstream.

Apple gained that success by doing what a smart company ought to in a free-market economy: giving customers what they want. Steve Jobs may have shafted his shareholders with shady stock-option grants, but in all things iTunes, he's consistently sided with consumers against greedy, grasping record labels. But now that Apple's moving from music into movies and TV, I fear it's begun to jeopardize its success by aligning itself more with the content-creating industry heavyweights -- at the risk of alienating the customers responsible for its current download dominance.

Making sweet music
Consumers aren't stupid. They've known for years that major record labels keep the lion's share of the money they rake in from sales, passing pennies per album -- if that much -- on to all but the most popular artists. And in the digital age, music fans also know that digital distribution carries virtually zero additional expense for record labels, since they don't have to pay to manufacture millions of CDs, cases, and booklets, then physically ship those discs to stores. With Apple reportedly covering the bandwidth costs for music fans' downloads from the iTunes store, digital sales are apparently pure profit for the record labels.

The iTunes Music Store revolutionized music sales by acknowledging this incredible cheapness. By charging $0.99 per song and $9.99 for most albums -- even the pricier ones cost no more than a buck per track -- iTunes passed some of the savings of digital distribution on to consumers. Its sales are still dwarfed by the vast number of illegally pirated music floating around online, and critics still gripe that songs and albums could and should be much cheaper. Nonetheless, the more than 2 billion songs iTunes has sold since its music store's 2003 debut are nothing to sneeze at.

But many of the music monoliths still remain terrified of change, even as high-margin download sales fatten their coffers. They've been demanding a host of charges that would make Ebeneezer Scrooge blush, including the ability to charge more than iTunes' mandatory maximums for the latest hot single or album. Universal Music even negotiated a small royalty from rival Microsoft (Nasdaq: MSFT  ) for the pirated music that may or may not be stored on each of its Zune players; in essence, automatically assuming that every consumer is a thief.

Down with DRM
Apple's battles with the labels to keep iTunes' music relatively cheap and unrestricted have grown increasingly well-publicized. Unlike the major labels, Jobs knows that cheaper prices are digital music's biggest advantage. He even recently spoke out against digital rights management, the type of security technology that restricts the use of music sold on iTunes and other stores.

Apple's DRM is more reasonable than most, but it can still be a hassle for consumers who want to play their music on a variety of devices. Circumventing it is time-consuming, but not particularly difficult. Consumers generally hate DRM, it doesn't really work, and there are better, less intrusive methods of securing copyrighted content, including digitally "watermarking" each downloaded file with the identity of its purchaser. Once again, Jobs is siding with his customers on this issue, knowing that grateful music fans will likely return the favor -- in cash.

Movie megalomania
But when it comes to TV and movies, Apple's taking a much different approach. Disney's (NYSE: DIS  ) recent buyout of Jobs' Pixar animation studio made Jobs the House of Mouse's single largest shareholder. And while that's provided Apple with a reliable source of content for iTunes' TV and movie sales efforts, it's also given Jobs a whopping conflict of interest. He now has no advantage in fighting for cheaper prices on digitally downloaded TV shows and movies, and every financial reason to agree to jack up prices for video-hungry consumers with few or no legal alternatives in online video.

So it's little surprise that movies on the iTunes Store follow a more variable pricing scheme than albums. Unlike the music store's near-ubiquitous $9.99 pricing for nearly every album, the movie store offers older films for the same price, but lets studios charge significantly more for newer titles. The latest releases on iTunes range from $12.99 to $14.99. True, that's still a modest discount to these films' DVD counterparts. But bear in mind that iTunes movies can't be burned to DVD -- if a glitch wipes out your hard drive, you'll have to buy them again -- and lack commentaries, deleted scenes, and other special features.

(If iTunes does consumers few favors, its rivals may be even worse. Wal-Mart (NYSE: WMT  ) and other retail heavies have thus far dissuaded every major studio save Paramount, Lions Gate (NYSE: LGF  ) , and Disney from joining iTunes' movie store. The brick-and-mortar behemoths are complaining that digital downloads are just too cheap; in Wal-Mart's newly launched online movie store, which employs Microsoft's Windows Media, films cost exactly the same as their DVD counterparts.)

TV troubles
The disconnect only grows wider with the new Apple TV. The slim set-top device is designed to wirelessly connect consumers' TVs with their iTunes library, seamlessly streaming music, movies, photos, and more. So what's the problem? The Apple TV could easily and inexpensively work like a TiVo (Nasdaq: TIVO  ) digital video recorder (DVR) as well -- but it doesn't, and it probably never will.

Buzz on the Internet suggests that at least some of Apple's customers would love a Mac that can record TV shows straight out of the box. It's certainly no great technological leap -- for years, third-party manufacturer elgato software has been offering its line of eyeTV devices for Macs to do just that, with the freedom to burn recorded videos to DVD, and without the expensive monthly fees TiVo and cable companies charge for DVR service. The Apple TV even has a small but adequate hard drive built in, along with a high-speed USB port. But Apple has explicitly stated that it has no plans to offer video recording via the Apple TV, nor allow third-party developers to do so.

Why should Apple, after all, when it would only discourage consumers from buying copies of their favorite shows off the iTunes Store? Never mind that consumers want such a service, nor that they've long been accustomed to taping their own shows on VCRs at no extra cost. Giving the Apple TV recording capabilities wouldn't fatten Apple's bottom line. Sorry, consumers -- this time, you lose.

Beware that sneaky serpent
I'm surprised that Apple seems to be ignoring its own lesson here. It won big with iTunes music by following common sense and listening to consumers. It may have missed out on sharing a bigger slice of the revenue pie with record labels, but without iTunes' cheaper prices and reasonably fair approach to DRM, Apple's attempt to spark a digital download revolution may have been doomed before it even began. In the long run, giving your customers what they really want -- not what you think they should want, or what you want to give them -- is the smarter, more profitable choice.

In siding with the movie studios and shackling consumers' choices when it comes to video, Apple's setting itself up for a fall. While Jobs and co. enjoy the forbidden fruits of fatter sales served up by the studio serpents, Apple's leaving the door wide open for some leaner, smarter, more consumer-friendly company to topple its dominance, just like Apple did to the record labels.

For consumers' sake, I hope we won't have to wait too long for fairer choices in digital video. And for Apple and its shareholders' sake, I hope the company wises up and changes its strategy before its little Eden comes crashing down. I don't know about you, but I'm in no hurry to see Steve Jobs trade his signature jeans and black turtleneck for an iFigLeaf.

Amazon, Disney, and TiVo are Motley Fool Stock Advisor picks, while Wal-Mart and Microsoft are Motley Fool Inside Value selections. Try any of our Foolish newsletters free for 30 days.

Fool online editor Nathan Alderman owns a variety of shiny iProducts and an ever-expanding iTunes music library, but he holds no shares in any companies mentioned in this article. The Fool's disclosure policy knows better than to eat fruit offered by talking snakes.


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