Apple’s iTunes movie muddle

By Peter Burrows and Ron Grover

updated 6:58 p.m. ET June 21, 2006

Water coolers from Cupertino to Hollywood are abuzz over the prospect that Apple Computer is plotting a frontal assault on the movie business. Indeed, Apple has held serious negotiations with movie studios about adding a movies section to its famous iTunes Music Store, sources confirm.

Apple has hoped to get the store up and running within weeks, Hollywood sources say. But the deal isn't yet done—and there's a chance it won't be any time soon. That's because Apple and the studios remain at loggerheads on a range of issues, from how much movie downloads should cost, to the degree of piracy protections they should carry.

"This will take months and months to figure it out," says one source involved in the talks. "It may even be a 2007 kind of thing."

And even if a deal is inked, it may well lead to more headlines than actual sales in the near term. For starters, movie studios might withhold some of their hottest titles. Moreover, Apple has hardly turned the video-watching world upside down since it first began selling TV reruns and other video fare last October.

Many analysts believe Apple's big play for Tinseltown will arrive only should it come out with a new kind of consumer device designed specifically with movies in mind, rather than the iPod and its tiny screen. Little wonder both sides may be content to play a waiting game. Apple Chief Executive Steve Jobs seems determined to approach the movie business with a similar formula to the one that enabled Apple to create a $1 billion-a-year market for legal music sales. The recipe includes a low, uniform 99-cent per-song price.

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To the studios, Apple's version of "consumer-friendly" looks more than a bit self-serving—and unnecessarily tough on them. Jobs is said to want to sell movies at a flat $9.99 apiece. That's far below the $19.99 that studios want for downloads of their newer films and major hits, and that they now get for selling DVDs through Wal-Mart and other retailers.

Studio executives want to avoid the fate of their counterparts in the music industry. Consumers pay Apple anywhere from $69 to $329 for an iPod but end up paying the music label just 65 cents or so for its cut of the song's 99-cent download. "Steve has a lot of leverage, but [the Hollywood executives] aren't going to tolerate what he did to the music labels," says a digital media consultant who has spoken with studio executives about the negotiations, and who requested anonymity.

Instead, studio executives also want Apple to try methods other than the basic download store, particularly movie subscriptions that would let consumers buy a specified number of movies for a given price.

Rather than give in to Jobs' demands, studios are rapidly placing other bets. In the last few months most have agreed to allow their films to be downloaded to hard drives through Movielink and CinemaNow, and Warner Brothers is even allowing it with BitTorrent, the one-time peer-to-peer pirate site. Others are in talks with Wal-Mart to let the retailer set up kiosks where consumers can pay less than $10 for a DVD-on-demand of slow-selling older films that aren't on the shelves, says the industry consultant.

At this point, there doesn't seem to be much middle ground. Sources familiar with the talks say Hollywood executives are frustrated with Jobs, who is personally doing most of the negotiating for Apple. "It's all his thing, and he is the one making it happen at this point," says one source. Some Hollywood insiders are uncomfortable haggling with Jobs, who is a director and the largest shareholder of a huge rival, Walt Disney & Co. Another reason a deal may not be imminent is that neither side needs it to happen right away. Music studio sales were collapsing at the time they negotiated deals with Apple. Not so with Hollywood studios, which can continue to work on other deals with the security of knowing that Apple might not be able to sell a lot of movies on their behalf anyway.

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