Murdoch may be key to Apple’s plan to offer 99-cent digital rentals of TV shows
The price that people pay to watch a television show on their iPad might hinge on Rupert Murdoch’s mission to save the newspaper industry.
For several weeks Hollywood has been wrangling over Apple’s push to offer rentals of TV show episodes for 99 cents. Many in the entertainment industry fear that the low price could break the economic model that supports the high cost of producing TV shows. Media giants NBC Universal, CBS Corp. and Time Warner Inc. have dug in their heels in opposition. Walt Disney Co., meanwhile, is willing to go along with Apple’s new pricing plan — at least for now.
The pivotal company in the debate has become Murdoch’s News Corp.
News Corp. executives are divided over selling TV shows at such a discount, according to people close to the conversations who requested anonymity because they were not authorized to discuss internal company matters.
Single episodes of such popular shows as “Glee” or “Lie to Me” are available to purchase for as much as $3.99 at Apple’s iTunes store. Some executives of News Corp., which owns the Fox network, worry that offering 99-cent episode rentals will cut into lucrative DVD sales and pull viewers away from watching network TV, thereby eroding a $20-billion advertising market, these people said.
But other top officials at News Corp. — especially Murdoch — are prepared to join Apple’s six-month pricing trial because it could cement a relationship with Apple’s powerful chief executive, Steve Jobs, and reap benefits for other divisions within the company, namely newspapers.
Murdoch, who began his career running small newspapers in Australia, has said that the Apple iPad will rescue old print media by luring readers who will not subscribe to a newspaper. That makes the iPad a keystone in Murdoch’s ambition to launch a digital national news product this year.
The outcome of News Corp.'s internal debate should become clear Wednesday when Apple is expected to announce the rental service, possibly in tandem with a new, more compact and less expensive version of its Apple TV device, which sells for $229.
For Apple, the issue is straightforward. The company began selling TV shows through its iTunes store in 2005, but sales slowed a few years later when NBC and Fox started streaming their most popular shows for free online on Hulu, said Arash Amel, digital media analyst for entertainment researcher Screen Digest.
“That business has stalled since 2008,” Amel said.
The growth has come from consumers who buy an entire season’s worth of shows such as “Dexter,” which is the digital equivalent of buying the DVD box set.
Total sales of digital TV program downloads, of which Apple accounts for roughly two-thirds, will reach $395 million this year, according to Screen Digest. That’s a nearly 37% increase from 2008 but well short of the hockey stick-like trajectory that Apple saw when it offered 99-cent music downloads. Apple has said it needs to slash the price of TV shows to compete with Hulu and the networks’ own websites.
“Unlike music, digital video-to-own never got much traction,” said Russ Crupnick, a senior industry analyst for NPD Entertainment, which conducts periodic surveys of online consumer behavior. “Only about 2% of the U.S. population reports actually buying a movie — and about the same for a TV show.”
Lowering the price to 99 cents for a two-day rental would more than double transactions, Apple executives have told Hollywood executives, according to people familiar with the negotiations.
“Apple has shown in the past that they can alter consumer behavior by dropping the consideration below a dollar,” said Aram Sinnreich, an expert in digital media who teaches at Rutgers University. “They’ve done it twice, with music and applications.”
Over the next six months, Apple said it would guarantee the networks the same amount of revenue they would have collected at the higher price points, these people say. In exchange, Apple wants to offer commercial-free versions of popular shows within 24 hours of their original airing.
No one in Hollywood was surprised that Disney — whose largest individual shareholder is Apple’s Jobs — was willing to accept Apple’s terms.
But CBS and NBC have rejected the proposal. They worry that Apple’s commercial-free offerings will eat into DVD sales, people close to the companies said. Also, CBS and NBC don’t want to get locked into a pricing formula that could encourage people to watch TV shows on mobile devices rather than subscribe to cable or satellite TV services that pay hefty fees for programming.
Moreover, some network executives contend the 50% or more discount on TV show rentals sends the wrong message at a time when broadcasters have been demanding that cable operators pay for the right to retransmit network TV signals.
Other major TV producers say privately they fear the industry is about to fall into the same trap as the music industry. Faced with burgeoning Internet piracy, music labels struck a deal with Apple to sell 99-cent song downloads in 2003 — inadvertently torpedoing CDs sales. Warner Bros., for example, refuses to jeopardize its lucrative syndication business, which can haul in an as much as $2 million per episode for the sale of reruns of shows such as “The Big Bang Theory,” a comedy it produces for CBS.
But change is coming, said media consultant Mike Vorhaus, president of Magid Advisors. Traditional business practices will give way over time as technology alters the distribution of television shows, he said.
“What I’m saying to these guys is, ‘There’s no guarantee your traditional businesses are going to pay you the volume or the margins they are today forever,’ ” Vorhaus said.
Nonetheless, there is no cause for panic, he said. The business “will probably decay slowly.”