Apple calling shots as biz tries to control market

When Ed Burns’ “Purple Violets” appears on the virtual shelves of the iTunes Store later this month, it will mark the first direct-to-digital release of a movie on Apple’s online marketplace.

It’ll also signify a new push by Apple to land a true hit in movie downloads, something that has eluded its iTunes service and those offered by all of the studios in their quest to create the next great marketplace.

For all of the attention that movie downloads have generated — in the form of studio investment or in WGA demands for their fair share — the truth is that the results so far have been paltry. The majority of consumers haven’t begun buying movies in digital form.

But what’s clear so far is that Apple is already emerging as the Wal-Mart of Internet media. Like Wal-Mart, Apple seems to be flexing its muscle to dictate terms to studios and indie producers. iTunes is a digital “big box” store to be reckoned with, and the choices Steve Jobs’ company makes and the conflicts it faces will likely shape the way movies are consumed over the next decade.

Settling the digital frontier is a process that has been under way for nearly a decade, without much success to show from services like Movielink and Clickstar. Another, CinemaNow, owned mostly by Lionsgate Entertainment, was founded in 1999.

“Digital distribution of movies has taken much longer than anyone expected,” says CinemaNow chief Curt Marvis. “It has been a challenging road to figure out the right business models and services for consumers.”

Movielink, a joint venture funded by every major studio except Disney, arrived on the scene in 2002, offering more than 170 titles at launch. Though Movielink received an allowance of $150 million from its studio parents, the service never took off. Last year, BusinessWeek reported that Movielink was doing about 75,000 transactions a month. When vidtailer Blockbuster acquired Movielink this summer, the company paid less than $7 million in cash, according to a filing with the Securities and Exchange Commission.

Other high-profile digital download ventures haven’t made much more progress. Amazon.com’s Unbox service, which offers content from every major studio except for Disney, hasn’t released any statistics about how well it has been faring since its debut last fall.

“We are still in the early phase of digital movie downloading,” says Roy Price, director of Unbox. He adds that because the wholesale prices Amazon pays studios for digital movies aren’t significantly different from wholesale DVD prices, Amazon doesn’t enjoy a higher profit margin on a digital download than it does on a DVD sale — a strange situation, given the costs of building and staffing warehouses and handling physical inventory.

Google’s earliest experiment with selling feature films, in early 2006, was a flop: After telling “Waterborne” director Ben Rehki that he’d sold 3,000 downloads in the first few days of the terrorism thriller’s release, Google confessed that it had miscalculated. The actual number was 300.

Morgan Freeman’s pet project, ClickStar, hasn’t disclosed any numbers at all. Late last year, the company made available a digital version of “10 Items or Less,” a small-scale comedy starring Freeman and Paz Vega, just two weeks after its theatrical release. That experiment was enough to get “10 Items” shut out by every theater chain, except for Landmark Theaters, the arthouse circuit owned by Mark Cuban.

iTunes is the only outlet bold enough to announce how many movies it has sold: In April, when it added back-catalog titles from MGM, Apple said the total had surpassed 2 million. Figuring an average download price of $8.99 (shorts sell on iTunes for $1.99, older features for $9.99 and new releases for $14.99), that means iTunes is approaching $18 million in sales. Apple passes on 70% of the purchase price, or about $12.5 million so far, to content owners. It’s not exactly boffo box office, but it’s the seedling of a new consumption pattern, and surely preferable to having Internet users trading movies for free on underground peer-to-peer networks.

Privately, studio execs have expressed hope that iTunes won’t turn into the single dominant retailer of digital movies — with all the accompanying negotiating leverage — that it has become for music. They don’t want to be in business with a partner that dictates terms to them, rather than the other way around.

But that situation may have already arrived. According to Nielsen Soundscan, Apple’s share of the digital music market is 85%, and many in the digital media business think its share of the movie market could be in the same ballpark.

“They’re obviously the leader, by a long way,” says Jamie Chvotkin, president at CD Baby and Film Baby, two services that help musicians and filmmakers offer their work in digital form. “Their share in movies is probably similar to what it is in music, somewhere in the 80% range.”

“To Apple’s credit, they’ve created a cool architecture, with the combination of iTunes and the iPod, that is elegant and very easy to use,” says Douglas Lee, executive VP of worldwide digital media at MGM.

By Chvotkin’s reckoning, CinemaNow is a distant second to iTunes. Some studio execs hope that Microsoft’s Xbox Live Marketplace, linked to the game system; Joost, a start-up company; or Hulu, the NBC/Fox joint venture, will emerge as credible challengers.

For now, however, Apple has a firm grip on the growing business of digital movie downloading. Research firm Screen Digest recently forecast that by 2011, digital downloads will generate $1.3 billion in revenue annually.

One conflict Apple will have to resolve is the impasse with studios like Sony Pictures, NBC Universal and Fox. No titles from those studios are available on iTunes, since Apple requires rigid adherence to the pricing scheme it has laid out.

“It’s not that those studios don’t want more distribution, it’s that they’re not willing to sell movies at a price lower (than the DVD wholesale price) to Apple,” says CinemaNow’s Marvis. “Someone is going to have to blink.”

Disney is currently the only studio offering new releases on iTunes. MGM’s decision to withhold current releases isn’t because such a deal would conflict with any of the studio’s output arrangements, Lee says, but is “just a strategic decision to go with our catalog first.”

Despite the cold shoulder from the studios, Apple hasn’t looked to independent producers to supply iTunes with content — until very recently.

Apple has been talking to content aggregators like Film Baby, the Independent Online Distribution Alliance and Mediastile about adding more indie titles to its online store. But the pace of discussions has frustrated some, and Amazon’s Unbox has been much more welcoming of indie content.

“I would like to be able to give you a timeframe when our movies will start appearing on iTunes, but I can’t,” says IODA founder Kevin Arnold. “We’ve been hopeful for quite a while that it’s imminent.”

Arnold’s company already sells digital music from indie bands through iTunes, and has plans to offer docs like “24 Hours on Craigslist” and “Ramones: End of Century.” He says discussions with iTunes began early this year.

Mediastile, based in Nevada and run by Mitch Davis, son of record mogul Clive, has had better luck. It cut a deal with the Sundance Film Festival to deliver selected shorts to iTunes, and last month began selling one of the first independent features through the service, a doc about marathoners called “Runner’s High.” A documentary short handled by Mediastile, “The Tribe,” was briefly the top short film sold by iTunes last month, beating out the latest short from Pixar, “Lifted.”

“It’s important for other indie films,” says “Tribe” helmer Tiffany Shlain. “It proves that there’s a big, powerful audience that wants to see more of this kind of material.”

Apple may indeed be getting more interested in indie fare. It heavily promoted “Hotel Chevalier,” a free short from Wes Anderson, in advance of the release of Anderson’s feature “The Darjeeling Limited.” “Purple Violets,” which stars director Ed Burns, Debra Messing, and Selma Blair and was made on a $4 million budget, will be a crucial test for iTunes, the first movie it’ll have before it is available anywhere else.

Properly marketed, “Purple Violets” or another indie exclusive could turn into the kind of breakout hit that could nudge digital downloading into the mainstream — something that hasn’t happened yet.

Others think that a change in pricing would have a more powerful effect. “Paying $12 or $14 to download a movie when you can go and pick it up for that same price on DVD is a real deterrent,” says Chvotkin.

One possibility is that indie producers might be willing to offer digital versions of their titles to iTunes and other digital retailers on more favorable terms, since they don’t rely as heavily as the studios do on giant DVD purveyors like Wal-Mart, Best Buy and Target. Jaman, a download service focused exclusively on independent cinema, prices its download-to-own titles at $4.99.

Making it simpler to view downloaded movies on a TV or portable device is another problem that needs work, although Apple has been a leader in that area as well, with its iPod devices and its $299 Apple TV set-top box, which stores digital movies for playback on the tube. Amazon has a partnership with TiVo that allows Unbox movies to be automatically delivered to a TiVo set-top box.

Apple didn’t respond to numerous requests for comment.

“I would stress the fact that it’s still early days, and we will try a variety of things with a variety of partners,” says Lee at MGM.

Other studios are still in experimental mode, too. But barring a dramatic competitive shift, Apple has emerged as the main game in town — both for studios and independent producers who want to get in on the digital download biz.

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