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When Walt Disney (DIS) said it would start streaming shows via online video site Hulu, attention immediately turned to what the deal means for Hulu rival YouTube as well as for CBS, the only major network outside Hulu's orbit.
The Disney-Hulu content-sharing arrangement may have even bigger implications for a company that neither creates video content nor distributes it free online: Apple (AAPL). It's not hard to gauge the impact of the Disney-Hulu deal on Google's (GOOG) YouTube and CBS (CBS), owner of TV.com. Both companies are locked in a battle with Hulu over online video viewers and the revenue from ads that run in conjunction with that programming. The more programming available on Hulu, the more time Web users are likely to spend on that site.
And the more popular Hulu becomes, the less compelling Apple's strategy of renting and selling video content online is, says Gartner (IT) analyst Michael McGuire. "Over time, perhaps the direct-payment model goes away," he says. Hulu is poised to become a bigger threat in the event it can strike content-sharing partnerships with cable companies, analysts say. Cable content could help the unprofitable Hulu wring profit from the placement of ads alongside its programming. For cable companies, partnering with Hulu represents a way to remain relevant as consumers increasingly view video online.
In a matter of years, Apple was able to dominate the business of legal music downloads through the pairing of its iPod digital music players with the iTunes online music store. Hollywood is loath to see any single company dominate digital distribution of video in a similar fashion.
Hulu might serve as a bulwark in the effort. When the $100 million venture was announced in March 2007, skeptics gave it little chance of success. But thanks to strong word of mouth, the site quickly became an online destination for watching premium movies and TV shows. Now the No. 3 video site behind YouTube and News Corp.'s (NWS) Fox Interactive Media, owner of MySpace, Hulu stands to convince consumers they don't need to purchase downloads from the likes of Apple. And Hulu can afford to distribute video free by selling ads against an ever-widening—and popular—stable of shows and movies. Down the road, Hulu may also charge subscription fees for premium services.
A deeper foray onto Apple's turf may be in the works. Industry insiders say Hulu is working on an application for Apple's App Store that would let iPhone and iPod Touch users stream content to those devices.
For Hulu, partnerships with cable companies would be key. Comcast (CMCSA) and other major companies are worried that the trickle of subscribers dropping cable in favor of online programming may become a flood. The cable industry could speed its own efforts to distribute programming online by paying Hulu to create specialized Web sites that would let their cable subscribers view Hulu content and other premium video as an added benefit to monthly service, says James McQuivey, an analyst at Forrester Research (FORR).
For all the firepower being amassed by Hulu, no one is counting out Apple yet. Like Hulu, Apple has demonstrated an ability to attract a large audience. Users downloaded 1 billion App Store applications in just nine months. The company has its own entrÉe into homes with Mac computers, its Apple TV product, and a growing stable of portable devices capable of receiving, storing, and streaming video.
In addition to a loyal fan base, Apple also has amassed valuable information on individual buying habits and has strong billing relationships, with millions of consumer credit cards on file. "We're still waiting to see what they plan on doing with all that," says Gartner analyst Allen Weiner. "The question is, when they finally getting around to answering, is it going to be too late?"
Apple is working on software and devices that could be well-suited to video. Executives have shown mobile-phone carrier Verizon Wireless a handheld computer-like device dubbed by a person who has seen it as a "media pad."
Most analysts also expect Apple to unveil an upgraded iPhone in June, when it has said it will introduce new software dubbed iPhone 3.0. Just as the initial iPhone made mobile Web browsing mainstream, the new iPhone may make it a snap to watch home movies on a handheld. A person familiar with Apple's plans says it's simple to record and edit stunningly sharp video with the device—and then wirelessly send it to friends with a few clicks or watch it on the phone's improved screen. Such technology also could be used to send clips of TV shows or movies to friends.
Never mind that Apple CEO Steve Jobs is Disney's largest shareholder. Hulu's pact with Disney serves as a reminder that if Jobs & Co. wants to make the splash in online video they appear poised to make, Apple needs to act fast.
Edwards is a correspondent in BusinessWeek's Silicon Valley bureau.