Analysis - Movie rentals and purchases in iTunes Store are catching up with DVDs big time with today’s announcement that Apple’s online media store will offer new and library titles the same day as DVD releases. The fact that you’re now able to purchase a movie on iTunes the same day DVD hits the retail channels is a major milestone in the digital movies development. Wal-Mart isn’t going to like this at all...

Today’s announcement by Apple confirms yesterday’s article in the Hollywood Reporter claiming Apple has a deal in place with major Hollywood studios that would see movies at the iTunes Store available for rental or purchase the same day as on DVD, dropping altogether the 30-day window that had been separating digital from physical releases. According to Apple’s press release, both new releases and catalog titles will be available from 20th Century Fox, The Walt Disney Studios, Warner Bros., Paramount Pictures, Universal Studios Home Entertainment, Sony Pictures Entertainment, Lionsgate, Image Entertainment and First Look Studios. It’s interesting that MGM at this point isn’t part of the solution. On the other hand, the inclusion of Warner will significantly boost the iTunes catalogue since the studio owns the biggest movie library in Hollywood.

The deal comes just a few days after fifth anniversary of iTunes this Monday and is supported by a quiet update to the Apple TV version of the iTunes Store, now allowing movies to be purchased directly from the device. Recent Take 2 software update brought movie rentals but users still had to resort to PC or Mac to purchase the movie and sync it back to Apple TV. Now, it’s possible to purchase a movie from Apple TV and then sync it back to iTunes library on PC or Mac. The change doesn’t require software updates (it’s automatically applied to the storefront). Movies purchased from iTunes Store can be viewed on a Mac, PC, iPod, iPhone and Apple TV.

When iTunes started with movie sales in 2006, just a couple of studios joined in, led by the Disney conglomerate. Disney’s CEO Bob Iger said this March that his company had sold 4 million movies via iTunes. It should come as no surprise that Disney was the first studio to signup for iTunes’ download-to-own scheme because Apple and Disney have an executive relationship: besides being Apple’s CEO, Steve Jobs became the largest individual Disney shareholder when the entertainment conglomerate acquired Jobs’ animation studio Pixar. However, the majority of studios were absent from iTunes’video downloads, most notably Warner. In January, studios joined in to test movie rentals on iTunes. Today’s announcement not only removes the window of exclusivity for DVD but effectively brings all major studios to iTunes in both movie rentals and download-to-own schemes. This kind of commitment to iTunes puts greater pressure on competing services, most notably Microsoft’s Xbox Marketplace, Amazon’s Unbox, the Vudu set-top box and the upcoming box from Blockbuster.

A 30-day exclusivity windows had been the norm set by studios due to pressure from retail chains who are afraid of digital movies cannibalizing DVD sales. Studios make billions of dollars by selling DVDs to retail chains so it’s no wonder that Wal-Mart bended Hollywood to its will back in 2006, with a threat to significantly cut DVD orders if the studios continue to favor pricing of digital content over the physical (movies on iTunes cost up to $15 for the "near-DVD quality digital file). Wal-Mart’s influence over studios comes from the fact the retail giant is the largest wholesale buyer in Hollywood. Apple’s announcement proves the retail giant is loosing some of its negotiating power, signaling change to the balance of power and evident tidal shifts in digital movies market.

Movie downloads are already huge, with vast future growth potential. Market research group Screen Digest values movie downloads to $250M this year, predicting growth to $1.05B by 2012. Screen Digest also predicts that by 2012 digital rentals will overtake download-to-own model. Unlike music that people overwhelmingly buy to own, people find it more convenient to simply rent a digital movie for couple of bucks than to own the content that’s going to be viewed only once, anyway.

According to the Digital Entertainment Group survey, revenues from DVD sales and rentals in 2007 fell 3% compared to year ago. It was the first decline in DVD sales in a decade, another sign of changes in consumer behaviour. Hollywood made $23.7B this year from DVD sales and rentals, but revenues from sales were $600M lower then a year ago.

These figures show the movie sales and renting market being very lucrative. It’s no wonder many are interested to claim the market once it goes all digital. This may happen sooner than later, mimicking the way the digital music revolution took the music industry by surprise. As we can see from the data, the decline in DVD sales already begun and will probably escalate further, especially since online stores such as iTunes can now offer movie the same day it becomes available on DVD.

Movies and music already make a significant portion of Apple’s revenue. For example, Apple posted a $7.5B revenue in Q2, with $881M coming from sales of music, movies and iPod accessories. Apple’s movie business received a much needed boost in January when iTunes movie rentals were introduced and Take 2 software update for Apple TV. True, Apple TV still isn’t quite there and we may have a ’Take 3’ or 4 before Apple actually delivers its promise if "the DVD player for the 21st century." But the most important stimulant for digital movies can come only from within Hollywood.

We’re referring to restrictions that are a result of pressure from retail chains. Of course retail chains want to hinder digital sales in favor of DVDs, but this very effectively hampers wider acceptance of digital movies. NYT’s David Pogue describes in a funny video why it’s still far more convenient for consumers to grab a physical DVD, than to wait 30 days for a digital copy. We think the removal of the 30-day window is the first step, a very important one, in the right direction. But it won’t provide enough kinetic energy to get the snowball rolling. Instead, the viewing window has to be increased from 24 to at least 48 hours. It’s simply inconvenient to watch half of the movie today and not being able to finish it tomorrow because the movie expired. When both pre-requisites are met, you will get instant gratification (buy/watch the movie the minute it comes on a DVD) and a meaningful value proposition (rent it and watch in 48 hours).

Of course, studios in the meantime need to increase their digital catalogue vastly. MacWorld reported that Apple missed its self-imposed target of having thousands of movie rentals available by the end of February. The iTunes Store now has 1500 movies, 200 of which are HD. That’s still well bellow competing services claiming 5,000 movies (Vudu) and a drop in the ocean compared to 19000 titles that are out there on DVDs in the US alone. The iTunes’ catalog is mostly comprised of older library titles, with only the latest and greatest releases coming on digital services. Luckily, this problem will sort itself out. Catalogs will expand when the demand goes up and this will happen when Hollywood creates a fair proposition for customers.

People ridiculed Steve Jobs when he talked about the digital music revolution during the iPod introduction back in 2001. Now the same revolution is overtaking Hollywood, the video games industry, and even book publishing. Any kind of content that can be digitized and consumed on our computers or mobile phones will at some point in time be delivered mainly digitally, with movies obviously being next. With the removal of exclusivity period and backing it now enjoys from Hollywood studios, iTunes Store and Apple TV set-top box could soon become more than a "hobby business" for Apple.