Wednesday, May 16, 2007

ITunes video, Apple TV 'dead ends,' claims researcher

Apple Inc.'s for-pay video download business on iTunes and its Apple TV set-top box are "dead ends," a researcher said today, because television and cable networks will quickly shift their creative products to free ad-supported streaming.

"The paid video download market in its current evolutionary state will go the way of the dodo," argued James McQuivey, an analyst at Forrester Research Inc. in Cambridge, Mass.

While TV and cable move to ad-backed media streaming "where they have control of ads and effective audience measurement," movie studios will throw their weight behind subscription models similar to Netflix Inc.'s mail-delivered DVD rental business, McQuivey said.

He made the prediction even as Forrester estimated that revenues from video downloads at iTunes,, Wal-Mart Stores Inc.'s Web site and other online outlets will nearly triple this year, from $98 million last year to $279 million. But because only a fraction of online consumers -- just 9% by Forrester's reckoning -- have paid to download a television program or movie, the market is driven by "media junkies" and not mainstream users.

"The people currently downloading are very unique," said McQuivey, citing statistics that claim today's downloaders watch three times more video clips than the average online American. "That need to feed a video habit isn't as strong for everyone else," he said.

Apple's strategy is unsound, said McQuivey, because its eight-week-old Apple TV has been made obsolete almost as soon as it made market. "A year and a half or two years ago, when Apple had to start development [of Apple TV], I bet they thought they would have two or three years to build this market slowly, just as they did with the iPod. What they didn't count on, what no one did, was the mass shift to broadcast-quality streaming. ABC's doing it now, and there are rumors that NBC will follow," he said.

Paying for video downloads and "renting" movies by downloading to a computer will turn out to be a short-term, transition-style business, McQuivey said. "The pay download market will stay around, but it will not continue to grow like it did this year," according to McQuivey.

To adjust to the new reality, Apple must rethink Apple TV, he said, and turn Version 2.0 into a broadband service provider, most likely of second-tier video sources. "Only with ad-supported content will Apple be able to compete with the power of free television and TV-quality Web streams in attracting the second million buyers," said McQuivey. "Beyond the faithful who want the Steve Jobs experience, Apple's closed system will have little appeal."

McQuivey suggested one route Apple might take: turning Apple TV into a set-top box that also offers back-catalog programming for a fee. "It could stream current shows, and then say, 'Would you like to order back episodes?'" said McQuivey.

Apple officials did not respond to a request for comment.


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