Friday, December 28, 2007

Apple Video Rentals

Yesterday, Apple made major headlines with news of a possible deal with Fox to offer video rentals via iTunes. The fundamental question, in my view, is how Apple will leverage a movie rental business into the sale of more hardware. It's hard to imagine a dramatic new surge in iPod sales because of the movie rental launch. Moreover, it's easy to imagine price battles among the major players, such as NetFlix, who compete in the movie rental business . On the other hand, perhaps Apple is poised to build upon its early Apple TV product, or launch an altogether new product designed for consumers to easily view movies downloaded via iTunes. If Apple can couple the on-line movie rentals from iTunes with an easy-to-use piece of hardware, then they can generate substantial profits. Once again, they will have executed a successful blades and razors strategy, i.e. selling inexpensive blades (movie rentals) to generate high profits from hardware sold at a price premium (Apple TV or some other product used to view the movies, transfer them easily from PC to TV, etc.).


Kevin said...

Video rentals will certainly drive more AppleTV, iPod Touch, iPhone sales, as it is almost certain that both will directly access the iTunes rental store via wifi (just like they do with YouTube and iTunes music (iPod only) today), thus cutting out the computer.

And in any imagination, there are forthcoming Apple devices that sit between the iPod Touch and a MacBook laptop, in both screen size and functionality. Those devices would be helped by having video rentals as content.

The beauty of Apple's strategy across iPods, iPhones, Macs, AppleTV and iTunes is the leverage each item provides to the others, both for device sales and for getting content providers to sign on.

One last thought: your use of razor-and-blades (printers-and-ink, video console-and-games) seems to differ from common understanding. In those cases, the highly profitable item is the blade/ink/game which are sold at high volume, thus allowing the mfr to sell the razor/printer/ console cheaply (possibly at cost or a loss). In Apple's case, the high volume "blade" (song, video, movie rental) is sold just above cost, so that the lower volume "razor" (iPod, AppleTV) can be sold with a high margin. Your post doesn't use either of these formulations.

Michael Roberto said...

Thanks for the post, Kevin. I specifically used the term "blades and razors" rather than "razors and blades" to describe the fact that they are essentially selling the music (the blades) at low margin to drive sales of the hardware (the razors), which are high margin. This is indeed the opposite of the traditional Gillette razors and blades model. I'm sorry for not explaining my thinking in more detail - I had done that in a previous post, and simply didn't repeat it here for that reason. Again, thanks for reading, and for requesting clarification!

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