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Apple's announcement of a September 12 special event has stirred rumors that the company will unveil a movie download service in the vein of its wildly popular iTunes Music Store. But to succeed in movies the way that it does in music, Apple faces three critical challenges: cost, content, delivery.

Just as Apple wrangled the 99-cent-per-song price for iTunes Music Store, it needs a similarly aggressive movie download price. Michael Greeson, founder and principal analyst of The Diffusion Group, cites other sources (such as Think Secret) as saying that the price of new movie titles on the iTunes service will be $15 per download.

But will this price be as magical? According to a study conducted by Greeson's firm, 14 percent of broadband households would be interested in a $15 per download price, while 23 percent surveyed said they would be interested in a $10 per download price, the original price rumored to be requested by Steve Jobs. The Diffusion Group surveyed 2000 U.S. residents last June. Greeson says he believes that Apple will pay $14 per title for new releases, thus grossing less than $1 for each new movie sold.

"This is consistent with Apple's general hardware/content model as embodied in iTunes--keep the prices of the content as low as possible in order to maximize hardware sales for which Apple is able to set above-market prices and draw extremely high profit margins," says Greeson.

Other Competitors

This ability to profit less from digital media could change the economics of the online movie business and has competitors watching closely. One such competitor is Starz Entertainment Vongo, a broadband video service that lets subscribers watch a certain number of movies on up to three devices for a fixed monthly subscription fee. (For a full rundown of other online video options, see PC World's story "Video Everywhere.")

"Apple is not really entering the business to further the delivery of digital media. We believe they're entering the business to further the delivery of iPod," says Bob Greene, Starz Entertainment executive vice president of advanced services. "We'd like to see them drive the prices down so long as they don't give away the wholesale business."

While Vongo is currently subscription only, Greene says that Starz plans to offer what it calls an electronic sell-through business within the next several months. And so does another competitor: Netflix.

"We're investing $5 million to $10 million in a downloading program that we'll announce next year," says Netflix's director of corporate communications Steve Swasey, who did not give further details. "Our goal is to be in the downloading arena when it's more viable."

Barriers to Entry

Swasey says that those selling online movie downloads currently face two impediments. The first is the dearth of movies available for download. Licensing agreements between Hollywood studios and traditional broadcast outlets are complex, long standing, and dependent on the type of delivery. For example, Starz Entertainment has exclusive access to make available by subscription about 40 percent of Hollywood movies from Disney, Sony, Universal, NewLine, and other independent studios, during certain time periods after first release.

The second impediment is delivery. Right now movie download services let you watch content on PCs or other portable devices. "Most people want to watch movies on their wide inch TVs," says Swasey.

Despite the challenges, Apple is well positioned to make a splash and influence pricing in the online movie market.

"Apple's entry into this market will serve to legitimize the entire online video download industry--it will bring instant credibility to business models that until now have been languished and which Hollywood studios honestly believe will grow to be a major part of consumer video sales," says The Diffusion Group's Greeson.