Friday, August 31st, 2007

Apple Comes Out Swingin’

“..after Apple declined to pay more than double the wholesale price for each NBC TV episode, which would have resulted in the retail price to consumers increasing to $4.99 per episode from the current $1.99. ABC, CBS, FOX and The CW, along with more than 50 cable networks, are signed up to sell TV shows from their upcoming season on iTunes at $1.99 per episode. ”

Um, wait a minute. The wholesale cost was absorbed by the original $1.99 price tag. Doubling the wholesale cost caused the retail price to increase by a factor of 2.5? The redistribution cost didn’t increase at all. That’s some pretty screwy iMath. If the wholesale cost doubled, at most the increase for Apple’s price should be around half to three quarters of that of the original iTunes price, depending on the margins. The margins on songs are rumored to be around .30 per, so a guess would be that for a television show, they’re making .60 cents. Sounds like Apple more than doubled their margins in making up these numbers.

Since other services charge much less and have newer contracts (XBLM – $3.00), I sense these numbers are just, well, sour apples.

“Apple’s agreement with NBC ends in December. Since NBC would withdraw their shows in the middle of the television season, Apple has decided to not offer NBC TV shows for the upcoming television season beginning in September. NBC supplied iTunes with three of its 10 best selling TV shows last season, accounting for 30 percent of iTunes TV show sales.”

Wow. Now that’s ballsy. This is going to be fun to watch. Apple never made much off the margins on songs and shows compared to the hardware. Apple is biting the hand that feeds it, because it’s the content that sells the hardware. Jobs has always had a habit of screwing himself over things like this. History repeating itself? NBC is the first, but not the last network seeking to renegotiate a contract with Apple.

Another thought, when the Zune came out, the deal with Universal involved a cut of player sales. So possibly the $4.99 includes the cost of a player percentage Apple isn’t willing to give up.

The blogs are of course, blaming this all on NBC, which is what Apple wants. But I think they are missing the bigger picture in their zeal for Apple. NBC chould counter with more accurate figures in a similar press release. Hopfully some more level headed reporting by the MSM will help clarify the situation as well.

Overall though, this is a huge opportunity for the other players. It will be interesting to see if they take advantage of it.

Link

Update - wholy crap, it’s not just NBC –

“Availability of Web-popular programs like USA’s “Psych,” NBC’s “30 Rock” and Sci Fi’s “Battlestar Galactica” are all affected. Programming from NBC and cable properties like USA, CNN, Bravo and CNBC will be cut off from iTunes at the start of the season on Sept. 24, Apple said.”

AP Link

Posted by Jim Mathies on August 31st, 2007 | Filed in Technology | 6 Comments »


6 Responses to “Apple Comes Out Swingin’”

  1. August 31st, 2007 at 7:09 pm

    Gary said:

    Two things:

    1) Your analysis begs the question as to why the wholesale cost doubled.

    2) At the end of the day neither the transfer price nor the margins are actually known so this is merely speculation. Like any company there is no reason for Apple to take a hit to their margins considering they have provided an avenue for NBC they did not have previously.

    Hmmm..maybe the studios and wholesalers are getting greedy and Apple is caling them on it?

    And in terms of “huge opportunity” let’s see what happens on the 5th…

  2. August 31st, 2007 at 9:20 pm

    Jim Mathies said:

    Well, why the wholesale costs doubled is obvious right, to make more money and exert more price control over Apple. It’s a contract deal, they can’t arbitrarily raise prices whenever they want, so they have to set the price long term.

    We don’t like paying higher prices for anything, but Universal has the right to raise them, it’s their product. Market forces would then take effect, and the consumer would decide which service to use based on how low different vendors slice their margins for customers. Plus, I think, IMHO Apple isn’t exactly fighting for consumers here, they want to sell the content cheap so we’ll blow lots of cash on the hardware. If that’s the case, if Apple is trying to force NBC into selling it’s product cheap for Apple’s own gain, I’d tend to side with NBC in that fight. (But as you know, I’m no fan of Apple either.)

    As far as the margins go, I think I was close, I’ve seen a few follow-up posts using similar numbers. I honestly don’t know what the $5 price tag breaks down in to, but I do know Apple. They sling mud, and they like to twist the truth in their favor. I mean, really, do you really think that press release from Apple was 100% accurate, honest, or is there a chance Steve got pissed, threw a tantrum and spitefully lashed out at NBC for holding it’s ground?

    I think you can love Steve Jobs for his product design, but you can’t turn him into a saint in cases like this. He’s a very shrewed, very brilliant, very cut throat business man, with a habit of being very spiteful when he doesn’t get his way. He’s alot like Gates in this respect. He loves the idea of lock-in when it favors his own products. I personally can’t criticize him for that, but I find it ironic that people can demonize Bill Gates and praise Steve Jobs in the same sentance on the subject. Heck I’d even argue that SF is worse, as least Microsoft builds platforms, Apple builds sealed units developers have no access too. With NBC, Apple’s press releases might make NBC appear evil, but the message comes form a company that is arguably a master of spin and self advertising. Which is why I posted this, because, Apple always gets a free ride from the tech blogs because they are enamored with the company’s products.

    Here we have a situation where Apple’s refusal to cut it’s margins and license other media formats insures shows you love to watch on iTunes won’t be there in January. People blame NBC entirely, but I think Apple deserves a lot of the blame too.

  3. September 1st, 2007 at 12:29 pm

    Gary said:

    Side with who you will but at the end of the day without Apple’s innovation and access to consumers most people would still be torrenting their hearts out and NBC would be locked out of a fairly significant chunk of the market.

    It’s ironic that Apple opens up an entire market heretofor unavailable and now it’s time for NBC to get greedy – and btw…no problem with Apple keeping prices low “so we’ll blow lots of cash on the hardware.” Can’t wait until the 5th…

    By that argument as well it does seem in a bit of an ironic twist you’re arguing that Job’s does not subscribe to the razor and blades theory…which for Gillette seems counter intuitive.

    It’s all about leverage both groups think they have it and both groups are now pissing about it…

  4. September 1st, 2007 at 3:44 pm

    Jim Mathies said:

    I need to clarify something – I’m trying to point out that Apple is not the consumer’s champion, Apple is Apple’s champion. That’s the point of my post. Take for example Universal’s deal with Microsoft, in order to keep prices low for the consumer (and to be competitive) they agreed to give a percentage of player sales to Universal. Apple could have cut a similar deal and probably kept prices the same. I’m not going to criticize Apple for protecting its bottom line, they have a responsibility to their investors to do that. But note that in an effort to keep that bottom line (e.g. to keep making the same amount of profit on the content), they screwed the consumer, by claiming prices would have to rise and then ultimately letting the content get pulled.

  5. September 3rd, 2007 at 4:43 pm

    Gary said:

    NBC is NBC’s champion…Microsoft is Microsoft’s champion…
    Microsoft had to do the deal with NBC because they had zero leverage – but Apple has much more leverage.

    To me this one salvo in an ongoing war between a consolidated media industry versus a consolidate distribution industry. There is no question that the dispute here is over pricing as NBC wants Apple to charge more for some shows, less for others and to bundle some programs together at different prices. NBC’s position is the **very same** that record labels have taken with Apple in their negotiations in the past where they too have tried to persuade Apple to charge more for hits and less for older songs which to date Apple has resisted.

    Apple’s argument is quite simply it needs to set prices low enough to encourage consumers to legitimately buy music and videos rather than to torent them. Further if the pricing was variable it would add in an additional step in the purchase process and confuse the consumer. All seems to make sense to me!

    In the Nielsen ratings NBC ranked 4th and the iTunes store offers them an extra source of revenue and serve as an important source of hype/buzz for new programs which NBC could use. So when the fall season starts and they see how successful downloads are all of this will be a blip…

    At the end of the day, the dispute is much broader than Apple and NBC for entertainment companies traditional business models are crumbling and this skirmish is going to be one of many to come.

    My bet – they’ll all kiss and make up by Dec when the current contract expires. And I respectfully disagree, they’re not “screwing the consumer” at the end of the day they are arguing to keep prices lower – I guess they could say they are “protecting their bottom line” by keeping prices lower and making it easier for consumers to continue to purchase.

    Again on the 5th when new iPods are announced and NBC starts to see sale volumes they’ll have a change of heart because it is the best game in town…

  6. September 3rd, 2007 at 5:21 pm

    Jim Mathies said:

    Agreed.

    > My bet – they’ll all kiss and make up by Dec when the current contract expires.

    It’ll be interesting to see what kind of deal they end up with if they do.

    > on the 5th

    I’m curious to see if Apple implements wireless. I’d be interested to see what kind of deal they work out on that. I’ve heard rumors that their contracts don’t allow Zune’esk sharing, so if it does show up, it may just be wireless transfers from iTunes. But if they’ve managed to fenagle that out of the networks, I think it’ll be a big win for everybody.

    Other than that, a touch screen iPod and a short iPod looking Nano seems to be the consensus. Makes me wonder what Zune 2.0 will look like (yes, I’ve seen the spy shots but don’t think they are real). I’m not holding my breath thinking MS will somehow upstage Apple, that’s for sure, but I sure hope they do. (Although I’m a little negative on Zune right now, because Amazon’s PlayForSure videos won’t work with it and I’ve been getting into that.)



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