The Value of iTunes Video Rentals

According to recent reports, Apple will enter the movie rental business in the immediate future—a lower-priced, more consumer-friendly alternative to the more challenging movie selling business it has been trying with iTunes since last year. Consumers, goes the logic, generally watch movies once or twice, and don’t have a need to pay full price to own a film; they’d prefer to pay less, enjoy a quick viewing, then get rid of the video.

The appeal of Apple’s iTunes Store as a conduit for movie rentals is obvious. iTunes is already installed on tens of millions of computers, and Apple has used it to successfully sell billions of songs and millions of videos. There is a large, established customer base waiting for more digital video content, and demonstrably willing to pay reasonable prices to get it.

More importantly, unlike almost any competitor, Apple has a complete infrastructure in place to handle video distribution. It offers services that successfully manage the entire process, from movie encoding and protection to catalog browsing and order transaction to high-speed fulfillment and optimized display on a screen. And it sells desktop, laptop, pocket, and living room hardware capable of performing the video. With modest exceptions, it all works.

And though adding the concept of “rental” to the system involves a number of technical challenges, no one doubts that Apple will hurdle them without breaking a sweat.

Assuming an iTunes video rental system will happen—and we do—what’s most interesting to us is the value it will bring to individual consumers, movie companies, Apple, and the marketplace as a whole. Here are a few thoughts on those topics.

* Individual Consumers: Blockbuster Video and NetFlix are currently the biggest players in the video rental business, and depend substantially upon physical DVDs and physical transportation (cars or US Postal Service trucks) for fulfillment and returns. Digital video distribution removes DVD inventory and shipping costs, transforming the old physical fulfillment process into a three-click system: open iTunes’ video section, select your video, and press the rental button. You can do this without leaving your home, and there’s no disc to ship back and forth to a store. Within seconds of picking your movie, you can be watching it, and within seconds of finishing it, you can “return it” without lifting a finger—assuming that the videos automatically expire.

* Movie Companies: Movie companies currently need to make significant manufacturing estimates and investments in order to distribute their videos to consumers: how many discs will people buy? Rent? Copy? Send out over the Internet without permission? With a digital distribution system—at least, one backed by good copy protection—piracy diminishes, as do the significant costs of manufacturing, packaging, and price-adjusting discs that may or may not be sold. A video can be rented an infinite number of times without degradation of the media, and copies can conceivably be stopped, or at least tracked.

Profits become easier to measure, as they’re not offset by physical cost-related expenses and deferred losses. And, best of all, these profits are in addition to whatever the companies are currently making from traditional video rentals; as the market shifts from physical to digital distribution, the movie companies can benefit immediately, rather than leaving money on the table or struggling to build their own competing systems.

* Apple: The appeal for Apple as a middleman—neither the movie maker, nor the end consumer—is somewhat obvious, and somewhat complex. It goes without saying that Apple will make at least a little money on every transaction, and benefit from having its preferred media and DRM standards widely adopted. Sales of devices compatible with the movie rental service will increase, as they will have just that much added value to consumers. And products such as the Apple TV, which currently have very limited mainstream appeal, will become more useful thanks to the presence of additional compatible content.

*The Marketplace: The marketplace for video content will benefit in a number of ways from increased competition. Companies such as Blockbuster and NetFlix are already feeling the pressure to offer digital downloads as an alternative to physical rentals, and other companies are entering the digital download market in an attempt to stake a claim on an emerging business. As of today, despite efforts from companies such as and TiVo, the downloading process is more complicated and limited than it needs to be—acquiring movies through the TiVo/Amazon partnership, for instance, is very slow and requires extra steps—and Apple’s entrance into this market will help push other companies to streamline and improve their offerings, as well as offering superior pricing.