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Saturday, January 19, 2008

Apple's movie rental service will NOT be adopted widely

MacWorld 2008 is over and one of the innovations Apple unveiled is the movie rental service. The basic idea is that now you can rent movies without leaving your couch using you Apple TV remote. You can play the rental movies on your TV, on your computer with iTunes, and on Apple products-iPhone, iPod, etc. The rental cost is $2.99 or $3.99 or $4.99 per movie depending on format and movie. Also, rentals are valid for 24 hours after you hit play for the first time after the download and rental automatically expires in 30 days if you don't press play.

Now, let's apply the innovation adoption principles, I wrote about more than a year ago, to explain why the movie rental service will not be adopted widely. It is ironic that I used an Apple innovation-iPod to explain the innovation adoption principles and now I am using the innovation principles to explain why another Apple innovation-digital movie rentals (AMR) will not be adopted. For our discussion, we will consider movies as generic term which includes TV shows, etc. Also, we will not get into User-Generated content and how that is changing consumer behavior to reduce customers' dependency on content produced by "big media companies". Furthermore, we will not discuss market size/$$$ of this opportunity.

Following is the explanation:

1. Relative Advantage: What advantage does the new innovation (product/service/etc.) offer over what’s available currently?

The biggest relative advantage offered by AMR is the ability to move your movie rentals to portable devices manufactured by Apple which was not available before easily i.e. you can watch your AMR on device of your choice (TV, Computer, or Apple portable device). So, the relevant advantage is applicable to a small segment of population which owns an appropriate Apple portable device or is willing to invest in it in addition to investing in Apple TV.

Most movies rentals today are mainly in the DVD format which has been one of the fastest adopted innovations in the history. It does offer portability between watching a movie on TV, Computer, or portable DVD player (popular among kids).

Let's understand current customer behavior re movie after movies have gone through the theater system.

a) Retail chains: Blockbuster, Hollywood Video, Grocery store chains, etc. This method is what popularized movie rentals in the past but now they increasingly becoming thing of the past because of limited selection, late fees, inconvenience of leaving the house, pricing, etc. They are trying to change their business model. However, we won't get into it right now. The point is that this an option available for movie rental.

b) Online movie rental service: Netflix is an excellent example. They are giving the retail chains run for their money by offering good relative advantages to consumers. There is no late fee, huge selection (think
long tail), simple pricing, community of friends for cross-referencing movies, ratings, good suggestions based on your past behavior, etc. etc. And, recently Netflix started offering unlimited instant movie watching (download/streaming) to most of its subscribers at no additional cost! However, for the most part instant movie watching lis imited to watching movies on computers. Blockbuster is also doing similar things in this area.

Tip for Netflix: Do a tie up with Sony for making the library available for download on PS3.

c) Digital Downloads & Rentals: Many big name companies have been trying this for years. None of them have been very successful. For similar reasons that I am explaining here.
Amazon Unbox tie up with TiVo is something to observe.

d) Movie purchases: With continuing declining cost of DVDs, a big portion of population now just buys the movies in DVD format. Think about it now you can buy movies at grocery stores, book stores, Costco, Walmart, gas stations, online retailers like Amazon, eBay, etc. etc.

e) Video on Demand or Pay per view: Almost all cable and satellite TV providers offer this option to cash on the consumer impulse. With AT&T and Verzion laying fiber to the home (FTTH) to offer entertainment and communication services, this may become a big threat to other options available today for movie rentals. However, FTTH is years away from being widely deployed.

f) Blu-Ray and HD-DVD: Well, how can we forget this. Another battle which Sony apparently won with Blu-Ray disc format. Blu-Ray and HD-DVD are the two new formats for watching movies on your new flat panel HD TV. These formats offer much better picture quality than offered by a DVD. HD TV sales are sky-rocketing and Blu-Ray and HD-DVD player sales are increasing as well. This segment of people would want to use their newly purchased Blu-Ray and HD-DVD Systems by playing the Blu-Ray discs.

g) TiVo/DVR: People who have TiVo/DVRs-more and more cable/satellite companies are giving them away-don't miss as many movies on premier/network channels as they used to.

h) Peer to Peer Networking: Talk to any teenager and you will learn about the underground world of free movie swapping using BitTorrent. According to some estimates, just BitTorrent is responsible for more than 1/3 of all Internet traffic worldwide. One can play these movies on any device. Then there are new alternatives like Joost which allow you to watch your "TV" anytime from any computer.

AMR does not offer a significant Relative Advantage for consumers to change their behavior.

2. Interoperability: How does the new innovation interoperate with existing products/services? It means the ability of the customers to use the new innovation without requiring additional hardware/software/service.

Let's see. To fully utilize AMR, you would need to buy Apple TV ($229 retail). Buy appropriate HDMI cables which cost extra (very expensive) connect everything and make it work. Most likely, get a new iPod and get a software upgrade for iTunes and Apple TV would not play most of the other content you already have or buy/rent from other places. With Nexflix, you can have a $8.99/month plan and watch unlimited movies for 2+ years for the price of just Apple TV! Also, if you already have a HD service from your Satellite/Cable company and a PS3/Blu-Ray/HD-DVD player/TiVo/etc. you may not have an HDMI port left on your TV to add Apple TV:-). Most reasonably priced HDTVs come with 2 HDMI ports.

Think about the bandwidth you get at home with your DSL or cable modem and how annoying it is to download or watch streaming video content. AMR does not interoperte well with current bandwidth delivery infrastructure.

Not to mention, restrictions related to DRM and playing content only on TV or Apple devices.

AMR offers extremely low Interoperability with existing products/services.

3. Simplicity: How simple is the new innovation to use and communicate?

Apple has shown its mastery in creating simple and intuitive products with iPod. However, with AMR they have failed. Just look at the enclosed link-
to see what you can and can not do with AMR. How do you think an average customer will do with these restrictions and complexities. Try telling your friends what you can not do with AMR. Even I could not bring myself to explain it. I posted a link instead:-)

You only have 24 hours to complete watching the movie after you press play first time after downloading movies from AMR. This puts constraints on your entertainment after you have made an investment of at least $250 and paid $3-5 for the movie.

AMR is not Simple.

4. Trialability: How easy and inexpensive is it for customers to try the new innovation?

Well, the customers will have to buy Apple TV first with all the required cables connect it properly with the TV and pair with iTunes. And, most likely get a new iPod, get a new software to try the service. It is not like an iPod which you can easily try at the store or borrow it from your friend to try it. This may even work against Apple since the first experience may not be good and people will talk about difficult it is to try it.

AMR is difficult to try.

5. Observability: How observable is the new innovation? This is similar to word-of-mouth which is still the best form of marketing. If people see other people using the new innovation and enjoying the benefits, they also want to try it.

AMR is "behind the scenes" i.e. it is not observable by people like an iPod or an HDTV is. Apple TV will sit in your jungle of cables and set top boxes. How will anyone see that you are using Apple TV and enjoying the movies through it? If you are watching a movie rented through on you iPhone/iPod, people will see the iPhone/iPod and not that you got the movie through AMR.

AMR is not highly Observable.


Hence, AMR will NOT be adopted widely.