Will Apple Upset the Rental Cart?

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Apple hasn't disclosed the number of Apple TV devices sold, but market research firm iSuppli has estimated the number at less than a million units (BusinessWeek.com, 10/22/07). The number could rise quickly once movies are available for rent from iTunes.

Late to the Party

Apple TV currently has a set of options related to the iTunes Store that for now do nothing. Analyst Gene Munster of Piper Jaffray (PJC) expects that soon consumers with Apple TV boxes will be able to rent movies from their living room by using iTunes via the TV. "Indeed we have been expecting iTunes movie rentals for nearly one year," Munster wrote in a research note, but pricing disagreements and arguments over copy-protection technology have kept the rental feature under wraps.

Apple may have resolved disagreements over how best to protect copyrighted work by agreeing to license its FairPlay digital rights management technology to Fox. Until now, Apple has been loath to license FairPlay, a technology that keeps music and video content tied to a customer's computer, iPod, and iPhone players. It also limits the number of computers to which the content can be copied.

Terms of the agreement concerning FairPlay are as yet sketchy, but reports say Apple will allow future Fox DVD releases to be "ripped" to iTunes collections in much the same way that music can be ripped from a CD. While it's already possible to do that with existing third-party software such as HandBrake, studios generally consider such actions the equivalent of piracy. Making FairPlay available to Fox might indicate Apple's willingness to make it available to other studios, which might in turn be more willing to sell and rent their movies on iTunes and to make their DVDs iTunes-ready. To date, only Disney (DIS) sells new movies on iTunes, while studios like Lionsgate (LGF), Paramount, and MGM sell movies mostly from their back catalogs.

Also unclear is how widely and how long movies will be usable. Earlier rumors had said that movies would be playable for 30 days for a price of $2.99. Presumably the same time limits would apply to use on a computer as on an iPod or iPhone.

If Apple can get those details worked out, while making online rental as straightforward as its online music and video sales, Jobs could have another winning business on his hands. The tendency for many consumers to favor movie rentals over purchases is as strong online as it is offline. Gaurav Dhillon, founder and CEO of Jaman, a startup that sells and rents independent and international films for online consumption, says rentals constitute the vast majority of its business. He says, "We've been doing rentals for a year now, and I'm actually surprised it's taken Apple so long to come around."

Hesseldahl is a reporter for BusinessWeek.com.