Apple's Blockbuster Move

It's good to be Apple (Nasdaq: AAPL  ) these days. Just the very whiff of a Financial Times report over the weekend -- indicating that Apple was in talks with major studios to launch an online flick rental service -- was enough for the leading financial publications to chronicle the bright prospects of a movie-loaning juggernaut.

  • "Apple's Venture Into Hollywood," read Forbes.
  • "Look Out, Blockbuster! Here Comes Apple," went Fortune.

It's easy to see why this could be an industry rattler. At an alleged price of $2.99 for a 30-day rental, the service would appear to render existing services obsolete. Blockbuster (NYSE: BBI  ) charges far more for physical rentals with much shorter rental lifespans.

On the digital front, Amazon's (Nasdaq: AMZN  ) Unbox has been in the rental download market for several months, but those $3.99 rentals die 24 hours after you first start viewing them (even though they can be stored for as long as 30 days until you make the time to start watching).

Also working in Apple's favor is that its downloaded rentals will supposedly be able to be ported to a single Apple portable device like its ubiquitous iPod and the eventually ubiquitous iPhone.

Price and convenience are siding with Apple, but let's not assume that everyone else should be waving the white flag of surrender at this point. Apple isn't perfect. There are a few things working against the i-everything juggernaut.

Really.

It's not over until the fat bandwidth sings
The reason rentals have been a slow sell, digitally, is that companies are reluctant to foot the bill of chunky bandwidth files that need to be marked down to attractive rental points (despite costing as much to service as actual digital purchases).

Apple's blessing here is also its curse. Smaller downloads will do the trick on small iPod and iPhone screens. However, how many people do you know who have the time to see entire movies on their portable devices? Apple TV was supposed to change all that, but the convergence has hit a major stumbling block as disappointed buyers realize how lousy iTunes video downloads translate to the living room screen.

At least Amazon can point to its higher-quality downloads and the seamless portability to WiFi-enabled TiVo (Nasdaq: TIVO  ) digital video recorder boxes. Blockbuster can point to its physical DVDs, loaded with all of the special features and options that thrifty digital downloads fail to match.

The degradation of quality
Some may argue that rentals don't need to look great. Folks have been dumbed down on the music side for years, consuming and swapping audio files that are inferior to the original CD versions. Why should video be any different, especially to an online community that has embraced small Flash videos on sites like YouTube as acceptable?

Oh, I'll answer that for you. The video degradation is more evident. There are also several high-quality alternatives like Blockbuster and Netflix (Nasdaq: NFLX  ) that are peddling the real stuff, in a more convenient fashion than the music industry ever got around to trying. Yes, Apple may come cheaper, but movie studios wouldn't be dumb enough to consider less lucrative revenue-sharing deals if they thought they would cannibalize a major chunk of the existing rental business. If most of the major studios aren't backing Apple with their films on the digital purchasing side, the fears can't amount to much on the rental side if they're going that route.  

As important as Apple may be to digital media, the rental battle will be its trickiest conquest. Blockbuster's salvation may come from the digital dilemma, that quality downloads take time to complete (especially if being viewed on a television larger than your garden variety PC monitor).

Or maybe it will come down to something as simple as the lack of popularity of watching piracy-protected feature films on PCs or portable devices. Apple has had more success selling short television episodes and music videos than theatrical releases through iTunes. Sony's (NYSE: SNE  ) hope that PSP owners would flock to UMD movie purchases hasn't happened in a material way. Even Amazon's Unbox, with dreams of movie buffs taking their laptop flicks to-go, has woken up empty early on.

If all of the headlines are true -- and Apple is ready to dive into digital movie rentals -- I think journalists will definitely be watching. It's the consumers who can't be counted on to watch, and therein lies the rub for Apple.

Surf through related Foolish content:

Amazon.com, Netflix, and TiVo are Stock Advisor recommendations. Find out why with a 30-day trial subscription offer.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. He also owns shares in TiVo. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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