Majors offer digital downloads of DVD releases

Pricing concessions paved the way for Apple’s sweeping movie sell-through deals with the majors.

Pacts were actually brokered several months ago, shortly after all six majors agreed to rent their movies through the iTunes Store, but not formally unveiled until Thursday. Apple, studio execs say, needed time to “ingest” an appropriate amount of content before going public with the deals.

Initially, Disney was the only major to sell new releases the same date DVDs hit shelves, but Fox and Paramount had recently begun to sell a few new releases under the service (Daily Variety, April 16). From now on, those studios, along with Universal, Warners and Sony, will sell all their new releases through iTunes. Lionsgate, Image Entertainment and First Look Studios will also sell their movies day and date under the service.

Studios have also been selling older catalog fare under the service for some time, but those pics had already been released on disc, so pricing, and the risk of cannibalization, was less an issue.

iTunes charges $14.99 for new release purchases and $9.99 for library title purchases. However, under Apple’s original terms, studios would have gotten less per download transaction than they would for a DVD sale to Best Buy, but the current deal puts the profitability on par with a disc sale.

Only Disney, closely allied with Apple topper Steve Jobs through Pixar, agreed to the early terms, and it got guff from major retailers like Wal-Mart over the iTunes pricing and availability.

“The initial Disney deal was at a price that was silly,” one home entertainment topper said. “It was ridiculous.”

The key, another exec said, was finding a margin that would enable studios to maintain proper margins for packaged media, which consumers are willing to pay a little more for, and digital downloads. “We’re well inside that band right now,” he said.

The day before the new deals were unveiled, News Corp. prexy and chief operating officer Peter Chernin marveled that more hadn’t been said about the studio negotiations with Apple to improve margins. Speaking at a Milken Conference panel on the consequences of the digital revolution, he called these talks “one of the most important negotiations” for studios this year. The characterization is all the more remarkable given Chernin’s role, with Disney topper Bob Iger, resolving the writers’ strike.

Deal reps a major step forward in electronic sell-through, which has been Lilliputian compared to even Blu-ray sales, but is a big studio priority for the future. Homevid execs believe Apple’s juice could jumpstart the sector, given the popularity of the iTunes service for music and TV purchases and widespread availability of iPod devices.

“It’s definitely a game changer,” said Universal Studios Home Entertainment topper Craig Kornblau, who also oversees the studio’s digital distribution.

“We’re really optimistic about it,” seconded Thomas Gewecke, prexy of Warner Bros. Digital Distribution. “This is part of a broader strategy of trying to make sure our movies are as available as possible.”

Amazon and services like CinemaNow and Movielink also sell movie downloads during the DVD window but none have the muscle that iTunes has had in digital sales. Movie and TV downloads are expected to generate “several hundred million” in the U.S. this year.

“We’ve barely scratched the surface,” said Lionsgate prexy Steve Beeks, whose company is a lead investor in CinemaNow. “We expect digital sales to account for 10% to 15% of the home entertainment market by 2011.

If anything, studios wish that Apple was offering even more movies for download through iTunes. They say the huge size of movie files has presented a major technological challenge for Apple.

“They are definitely having ingestion problems,” one exec said.

“One challenge Apple has had is getting enough content up as studios would like,” another said. “I don’t think that should be surprising. They’re starting from scratch. That’s a big job.”

The iTunes Store currently offers more than 1,500 pics — 200 of them in high-definition — 600 TV skein and more than 6 million songs. It is not clear how many pics Apple will add this year.

Apple’s movie sales offerings are ramping up at a time when new release DVD sales are exhibiting worrisome softness. Last quarter overall disc sales were flat at $3.5 billion, with even top seller “I Am Legend” failing to meet Warners’ aggressive sales target for it. Homevid toppers attribute strong TV on DVD sales and pricey box sets from preventing sales slippage during the first three months of the year.

The new deals do not affect the rental terms studios previously brokered with Apple, which fall under studios’ respective video on demand windows, which typically fall a month after the DVD release.

Warner has been experimenting with collapsing its VOD windows, in part to boost transactions through its Time Warner cable operation, and rival Comcast has also been conducting similar tests with several studios.

Nor does the deal affect NBC’s separate deal with Apple over iTunes sales of TV skeins. The Peacock continues to have pricing issues with Apple.

Consumers who purchase movies on iTunes will be able to view them on iPods, computers or TVs hooked up to an Apple TV device. Most pundits believe VOD and downloads will really take off when more consumers can use these services in their living room.

“This is another expansion of the home entertainment business,” Beeks said. “At Lionsgate, we’re all about consumers the opportunity to consume content when and how they want.”

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