Apple, Disney in a Bind on Movie Downloads?

Considering that the news leaked out days in advance, Steve Jobs’ announcement this month that Apple Computer Inc. was expanding into movie downloads came as no shock.

What did catch many off guard was that his supporting cast during the media show at San Francisco’s Yerba Buena Center for the Arts included only one top Hollywood executive -- Walt Disney Co. Chief Executive Robert Iger.

Jobs would have liked a crowd of moguls to show up as a vote of confidence in technology he hopes will do for movies what iTunes did for music. But with only Iger on board, Jobs has just 75 films -- all from Disney’s library -- to offer consumers.

Jobs’ problem is that the rest of Hollywood still fears alienating retailers, especially Wal-Mart Stores Inc., that sell and rent DVDs, producing half of Hollywood’s revenue. Studios are reluctant for now to publicly endorse something that could speed the killing of the goose that lays the golden eggs.

“The other studios want to wait and see how it goes,” said Harold Vogel, an independent media industry analyst.

That Iger showed up was hardly a surprise. Jobs became Disney’s largest shareholder and a director when the Burbank entertainment giant bought his Pixar Animation Studios Inc. this year for $7.4 billion. Iger was in no position to turn down an invitation from someone who owns $4 billion in Disney stock, Vogel and others said.

For Apple, however, a one-on-one deal with Disney could cause other studios to see the company as more of an arm of Disney and therefore a competitor instead of a distribution partner.

“That could be a real problem for Apple,” said analyst Rob Enderle of Enderle Group. “They need at least one more studio.”

Cupertino, Calif.-based Apple is charging as much as $14.99 for downloads of the newest movie releases on iTunes, and people familiar with the arrangement said Disney would get a maximum of $14 from each sale. The studios charge big bricks-and-mortar retailers about $16 for new DVDs, but the $1 to $2 spent to manufacture and ship those DVDs means that studio profit is about the same as with Apple’s movie downloads, said Tom Adams, president of Adams Media Research Inc.

The problem is that consumers will pay less when they shop Apple, undercutting retailers such as Best Buy Co. and Wal-Mart, which alone is responsible for 40% of DVD sales.

To retaliate against Disney, “Wal-Mart could decide to give them less shelf space,” said digital entertainment consultant Ted Cohen of TAG Strategic, whose clients include studio Lions Gate. “That’s the danger in stepping out first; there’s going to be a lot of phones ringing from major accounts.”

So the other studios had little incentive to take the plunge with Disney -- especially because they all signed up for a rival service revealed days earlier by Amazon.com Inc. that is considered less threatening to DVD retailers.

Amazon’s Unbox will probably be slower to catch on, because it works only with Microsoft Corp.’s Windows Media software. Microsoft-powered portable devices have nowhere near the wide use of Apple’s iconic iPods, and consumers have been reluctant to download movies just to watch them on computers. (Apple said it would ship a television next year that uses a wireless connection to play iTunes movies.)

But Unbox gives the studios more control over pricing and other tactics, leaving them the freedom to decide how far they want to go in provoking old-school DVD sellers.

What they charge is up to them, and they don’t have to release a movie online the same day it comes out on DVD, as Apple promises. A delayed online version is less threatening to retailers because sales of hit DVDs typically fall sharply after the first week or two.

Unbox, however, did force Jobs to plow ahead with his movie offering or risk appearing to be behind the curve. That’s why he called in Iger rather than waiting until he could reach a deal with more studios, movie executives said.

“You’ve got to start somewhere,” Enderle said, and hope early success will give you a better negotiating position.

At first glance, Iger should have been thrilled to take the spotlight at Apple’s San Francisco announcement. Last fall he was lauded for putting such hit ABC TV shows as “Desperate Housewives” and “Lost” on iTunes. It was one of his first big splashes as CEO, positioning him as one of Hollywood’s leaders in entertainment technology. A movie deal would seem a safe sequel to a proven winner.

But the TV deal was largely about showing that an Iger-led Disney wasn’t afraid of new technology, as it had been perceived to be under his predecessor, Michael Eisner. It also showed that Iger had patched things up with Jobs, who had had a bitter falling-out with Eisner.

At the time, it also was crucial news for Disney investors because Pixar, then still independent, was threatening to jump to another studio. The computer-animation studio produced such hits with Disney as “Toy Story,” “Finding Nemo” and “The Incredibles.”

In addition, selling TV shows was less likely to anger DVD retailers. Since the movie deal, however, Disney has fielded concerned calls from several retailers, said Bob Chapek, president of Disney’s Buena Vista Worldwide Home Entertainment unit.

“To some extent, they feel a little bit caught off guard,” Chapek said, adding that he didn’t expect any retaliation.

Still, Disney’s decision to fly solo on the Apple deal raises questions about Iger’s ability to say no to Jobs. Corporate governance experts say that Jobs has a conflict and that Disney needs to be careful.

“It’s appropriate that both companies be concerned about the potential conflicts of interest when you have a shareholder and board member who also has an executive position at a customer, supplier or business partner,” said Kirk Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University.

It’s unlikely that the Apple deal was big enough to come before the Disney board, according to two people familiar with its workings. Even so, executives might be reluctant to go against Jobs, Hanson said.

“It makes a big difference what kind of direction Iger gives to the organization when they go about negotiating,” he said.

“If he says, ‘We need to get everything we can; we are not going to act differently,’ that’s one thing. It’s critically important for Iger to give his own organization the freedom to walk away.”

Chapek said that although Iger was involved in establishing the criteria under which all digital deals could be struck, “he was not involved in any one deal to any great extent.”

“I can tell you from being involved firsthand, we treat Apple like every other technology provider,” Chapek said. An Apple spokesman declined to comment.

Any concern about whether Disney was unduly influenced by Jobs will evaporate, industry analysts said, if Apple’s online movie business booms.

The results look promising, consultant Adams said: 125,000 downloads in a week, bringing Disney $1 million in revenue. Iger projects $50 million in sales the first year.

Those numbers would probably bring the other studios into the fold, rival executives said, erasing a great deal of awkwardness for Disney.

If Amazon’s Unbox “turns out to be a bomb, they’re going to look brilliant,” said analyst Dennis McAlpine of McAlpine Associates, “and vice versa.”

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joseph.menn@latimes.com