Daniel Eran Dilger
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How Apple Could Deliver Workable iTunes Rentals

iTunes Rental Slots
Daniel Eran Dilger
Apple is reportedly considering an expansion of its iTunes offerings to include video rentals. How can Apple succeed in a market where so many other online media outlets have failed or are struggling for relevance? By taking an new approach that follows what works in the real world, and respects the existing culture rather than trying to overturn it. Here’s what’s involved in the complex world of digital rentals.

The Mythical Market for Exploding Media Rentals.
Back in July of 2006, ThinkSecret predicted Apple would unveil a new iTunes movie rental store at its summer WWDC 2006. In response, I published “The Online Music and Movie Rental Myth,” where I explained why I thought the rental subscription rental model was flawed and why Apple was extremely unlikely to open the door to movie rentals.

It was easy to be right on the subject. Microsoft and Real Networks, two of the main proponent of rental media subscriptions, have been unable to make subscription rentals attractive enough to develop a sustainable business. Back in 2003, Steve Jobs described the failure of music rentals as a reason why Apple wasn’t interested in copying Real’s Rhapsody and Microsoft’s Media2Go/Janus DRM/PlaysForSure initiatives.

Sure enough, it’s nearly 2008 and rental subscription music hasn’t made any progress. A few months ago, Real partnered with MTV to pull its URGE music store out of Microsoft’s Windows Media Player in order to bolster Rhapsody’s subscription service with paid downloads.

Microsoft has been similarly forced to downplay its subscription services and pattern its Zune brand after Apple’s iPods and iTunes business, even following Apple’s lead in offering DRM-free music. That’s an anathema for Microsoft, which is mortified that its Windows Media DRM investment is obsolete before ever being driven around the block. The dream of exploding media rentals has fallen apart.

Rise of the iTunes Killers Myth

The Online Music and Movie Rental Myth
Rise of the iTunes Killers Myth

Rental Music vs Rental Movies.
One reason why rental music has been such an absolute failure is that American culture has long involved owning music. Rental CD stores are actually illegal under 17 USC 109 (b)(1)(A), which restricts commercial rent, lease, or lending of an audio recording in any format “unless authorized by the owners of copyright.” It excludes library or educational lending of audio recordings, but doesn’t cover video rentals.

That means in order to open a CD rental store, you’d first have to obtain permission from the labels for each CD you intended to offer for rent. Other countries, such as Japan, have no restriction on rentals but instead charge compulsory licensing fees of CD rental shops. In those countries, music rentals stores even offer CD-R blanks with the rental, because there’s no illusion about the intention of the renters.

The American video rental business is entirely different than the music business. In the 80s, movies on VHS or LaserDisc were often “priced for rental” at $150 or more, as many studios assumed there was no significant market for selling films at retail. That changed with the appearance of DVDs in the late 90s, which were priced and packaged similar to CD to appeal to consumers as a retail purchase.

Movie rental stores helped introduce DVDs to a broad audience, but studios were ecstatic to discover a way to sell movies directly to a much wider audience, including the early adopters of home video who had already amassed collections of movies in VHS. The CSS DRM on DVDs limited casual copying to analog outputs and roughly VHS quality, which protected sales of new DVDs.

That worked so well that the DVD Consortium tried to co-market DVD-Audio as a high definition replacement to the CD, which had no remaining copy protection mechanism after the practical limits of dealing with 550 MB of raw data were overcome in the mid 90s. The failure of DVD-A proved that what works for movies won’t necessarily work for the very different business of music.

Movie Studios vs. Consumers in Home Theater
Movie Studios vs. Consumers in Home Theater

Physical vs. Virtual Movie Rentals.
In 1998, long after the practice of renting movies had become commonplace, Circuit City partnered with studios to introduce DIVX, a superset version of a DVD player that had to be plugged into a phone jack to authorize rental DIVX discs. Consumers were supposed to pay around $4 for a DIVX disc, and would get 48 hours to watch it. After that period, they’d have to pay fees to keep watching it, or could throw it away.

Being a rental medium, DIVX movies were commonly released as pan-and-scan versions rather than letterboxed, and lacked the bonus features of DVDs. That inspired additional alarm from home theater users. Consumers in general hated it and DVD rental stores incited protest against it. Because the new format used stronger encryption, certain studios began releasing new movies in DIVX exclusively, including Dreamworks and Paramount, the same two studios who now support HD-DVD over Blu-ray.

DIVX quickly died. A variety of other exploding rental formats have also been rejected in the market place. Why did DIVX fail despite the popularity of movie rentals? Because it injected a layer of control that policed users’ experience. Circuit City is not an entity that thinks a lot about consumer service. Its stores post a “greeter” to evaluate you as you walk in, and shake you down on the way out. DIVX felt like the same police state experience of a Circuit City retail store at home, but with more fees.

Blu-ray vs HD-DVD in Next Generation Game Consoles

Blu-ray vs HD-DVD in Next Generation Game Consoles

Digital Movie Rental Problems.
Video store rentals let you walk out with a normal, functional DVD, use it as long as you want, and then charge you based on how long you keep it. The involvement of a plastic disc gives the DVD a feeling of value, and returning it adds something tangible to the rental agreement. While you’re really just renting intellectual property on the disc, the medium makes it feel like its a real item, not just an idea.

Delivering a similar experience digitally is difficult because most consumers don’t understand the value of software or intellectual property. If you buy a disposable DVD, throwing it away makes you feel like it wasn’t worth much. People value an item in direct proportion to what they paid for it. If Apple offered the iPhone for free with a higher subscription plan, its users wouldn’t think of it as a valuable device, making it much harder for Apple to sell the iPod Touch next to it at any price. Setting prices is both an art and a science.

Just like Circuit City, Microsoft gave little value to how consumers would feel about media rentals. It delivered a DRM system that focused purely on meeting the objectives of content providers. In doing so, Microsoft ensured that no consumers would use it, particularly if they had any alternatives. Windows Media-DRM has some of the same flaws as DIVX: you have to regularly authorize your permission to use media files, and your flexibility in playback is hampered by time limits that self destruct after 24 hours.

Apple can’t do the same thing as Microsoft and expect things to work any differently, just because it has smart marketing and nicer looking hardware. That’s why Apple hasn’t delivered the foundations needed to deploy a rental media store patterned after Microsoft’s PlaysForSure failure.

How FairPlay Works: Apple's iTunes DRM Dilemma

How FairPlay Works: Apple’s iTunes DRM Dilemma
Will Steve Jobs License Apple’s FairPlay DRM?

Copying a Successful Model.
Apple’s success in the iTunes Store comes from copying what made the increasingly rare independent record stores so attractive: the ability to find specific music or causally browse; the ability to audition music before buying it; music suggestions and effective merchandizing; and largely unrestricted use of the music you buy.

The movie industry is different than music. Last year Apple expanded its iTunes offerings into movies following a similar model to the record stores that expanded to sell DVDs. The movie studios required more restrictions in iTunes than the music labels did, resulting in videos content comparing with audio tracks in a similar way that physical DVDs compare to CDs.

While lots of people buy DVDs, the rental market is even broader. Outside of cult favorites, family movies, and spectacular films, there’s a lot of movies that are only worth watching once, or at least are hard to rationalize buying at retail. How will iTunes succeed in digital rentals in ways that other attempts from DIVX to PlaysForSure have failed? Again, by copying a successful model.

DVD rental stores and mail-in services like Netflix are very popular. They involve the handling of a tangible disc, they don’t explode in 24 hours, and don’t require asking permission to play. Apple could copy the same success by delivering a slot-based media rental within iTunes.

Did iTunes Kill the Record Store?
Forrester’s James McQuivey Announces the Death of iTunes, Again

Playing the Slots.
Rather than renting one-use access to media rentals that are timed to explode, it seems more likely that Apple will deliver a slot-based media offering, where users could buy a certain number of slots on a subscription basis. When finished with a movie, the user returns it to the slot and can replace it with another download. This would copy how Blockbuster and Netflix run their DVD rentals, within the virtual realm.

The difference for consumers is that they would decide when they are done with a title, rather than it expiring or limited them to one play on one device, as is the case for Microsoft’s Windows Media rentals for the Xbox 360 Live service. It would also be possible to sync iTunes’ slots to mobile devices, as iTunes already manages their library sync. Those devices would “loan out” the item in slots, and return them to get new items.

For example, within iTunes you could sign up for four slots for a monthly fee, then select movies you want to download in those four slots. After receiving them, you’d have files that could be synced with Apple TV or to iPods or the iPhone. In order to download additional movies into your four slots, you’d first have to return a movie within iTunes, which could only be done if the devices that had loaned it out were re-synced to remove the title.

Users might figure out how to somehow defeat the system to intercept and hoard movies, just as one can ripping Netflix DVDs, but most consumers would be happy to have a selection of slots they could always fill with whatever download they want, use however they want, and return whenever they want. That’s the same reason Netflix is popular.

Another similarity: Netflix takes a day or two to ship new DVDs, but having an allotment of three DVDs means that users can manage that limitation themselves, keeping two around while one cycles back through the mail. With iTunes slots, Apple could also deliver higher definition movies downloads that it currently can, because users won’t have to wait for a new purchase to download; they can simply “order” movies to fill slots as desired and leave them to download in the background.

iTunes Rental Slots

Side Benefits of Rental Slots.
Such a program would make iTunes movies more popular for users with slower Internet connections as well, as content could be queued up. It would also generate recurring revenues for the studios, whether iTunes users were families with children who kept watching the same few Disney movies over and over, or adults who chose to watch a different movie several times a week. The more movies you want available at once, the more slots you sign up for in your monthly plan.

In addition to a subscription plan, Apple could also offer a single rental experience with one slot. Select a movie, download and watch it, and then return it at a set interval. If you chose not to return it, it would become a regular iTunes movie download and you’d pay the difference. If you return it, iTunes recycles the bits and your rental period ends.

Such a system could also monetize iTunes’ significant selection of TV programming and Audible audio books. The ability to pay a regular subscription for a few content slots would make iTunes a viable alternative to cable TV for many users who currently play $50 – $100 a month just for the few programs they actually watch.

With an unlimited plan tied to slots, Apple could bring in enough revenue for studios and cover its delivery bandwidth while allowing users to cycle through regular content without worrying about archiving or throwing away the TV content they bought at full price.

Of course, in order to account for bandwidth use, the subscription fee would have to be high enough to make sense. Don’t expect to pay $20 per month to watch all the content you can download. Apple could accommodate different users’ needs by throttling each slot to a certain number of downloads per week, so users who want lots of content could buy more slots, and more causal users could pay for fewer. Such a plan would scale from the needs of occasional movie renters to those who used iTunes as a full alternative to cable.

Forrester’s James McQuivey Announces the Death of iTunes, Again

iTunes Prepaid.
Such a prepaid system would also free users to download content more regularly from iTunes, rather than worrying about how much each item they download costs. The same rental system could be applied to iPod games, utilities and games for Apple TV, and even apply to iPhone software, enabling new options for paying for utilities and tools, personalized push content, and access to other services over time rather than as a one time purchase.

Imagine being able to sign up for iPhone or iPod Touch WiFi service on a monthly basis right within iTunes, and then having the access account information synced to your device so that it would automatically login to a given WiFi provider whenever it discovered the network. I currently have access to AT&T’s hotspot network as part of my DSL plan, but rarely bother to try to connect one of the various networks affiliated with AT&T because I can’t recall the connection accounts required for each network.

It’s easy to do rentals wrong, but getting rentals right would unlock a lot of options for regular content and services that would benefit both consumers and providers. The value Apple can add is simplicity within iTunes, portability on the iPod and iPhone, integration with home theater via Apple TV, and access to a broad collection of content.

In addition to renting Hollywood movies and other rental services, iTunes also provides access to vast amounts of education content from iTunes U, public archives and alternative content in iTunes’ podcasts, and users’ own home movies and photos. Nobody else is providing anything similar. That makes it key for Apple to pull off rentals in a way that works and isn’t offensive or abusive to users. Doing nothing will squander a major opportunity, but if Apple plays its cards correctly, it will allow iTunes to grow in important and lucrative ways that make its current blockbuster success look minor.

As alluded to in “Why Low Def is the new HD,” there’s another area Apple is rumored to be expanding into with iTunes besides rentals, which I’ll look at in a future article.


Why Low Def is the New HD

What do you think? I really like to hear from readers. Comment in the Forum or email me with your ideas.

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  • Tilneys

    I’d buy that.

  • jerryartvandalay

    I buy want I want, I don’t sign up for ‘monthly fees’ that take my money whether or not I’ve actually used the service.

    What you are saying here isn’t that different to the
    socialist exploding media nirvana tried and failed by itunes competitors that you have lambasted previously.

    Or am i missing something?

  • gus2000

    Apparently you didn’t read the entire article, since Daniel explained how the rental might work on an ad-hoc basis. This article describes exactly how a rental might work without the media exploding at all.

    So yes, I’d say you’re missing something.

    Right now I get most of my movie “rentals” through PPV over satellite. If the iTunes prices were in the same range, I would be tempted to finally splurge on the AppleTV.

  • sebastianlewis


    Yes, people actually do rent movies more than they buy them and Daniel’s solution mimics Netflix only instead of getting a physical DVD via Mail you have a set of digital slots. It’s nothing like those horrible music rental services.

    Personally I prefer buying movies myself as well, I have no use for rentals whether physical or digital but if Apple added rentals to iTunes Store then it would help their movie business a lot.


  • jerryartvandalay

    I’m all for rentals in iTunes but just not subscription rentals.

    Whenever there are subscriptions available they are priced so that anyone not on a subscription would be better off on a subscription. This isn’t done by subscriptions being cheap it is done by overcharging non subscription customers.

    How much is Netflix, cheapest price looked to be $4.99+Tax a month for 2 movies a month one at a time. Now I don’t know how much a brick and mortar rental costs in the US. but lets just say $4 like the DIVX 48hr time bombs. Giving netflix a $3.01 per rental cost advantage. But you don’t get instant gratification. If you don’t watch the two movies you’ve still paid for them.

    Mobile phone companies are the worst(I won’t meantion the iPhone, except that i love mine), they say we’ll give you a ‘free mobile phone’ when you sign up for a contract. If you don’t sign up we’re going to charge you stupid amounts for each call you make!

    My only mobile phone contract was $AUD25 per month, which was said to include ‘$AUD120’ worth of calls a month plus paying off a phone. No it didn’t include $120 worth of calls it was only around $20(calls) and $5(phone laybuy) per month. If I went without a contract they would charge me 120 for the same amount of calls i could make on contract without even giving me a phone. That is over charging non contract customers to move them onto a contract.

    Now that I’m in the UK, I’m with O2 pay as you go. They say they’ll charge me £7.50 for a months worth mobile internet or if you don’t sign up for the £7.50 per month I have to pay £3 per MB! That’s over charging non subscription customers.

    Every company wants you to be on a contract or subscription because they then have guaranteed income. I’m worried that this will happen to iTunes if a subscription/slot service is implemented. $4 for each rental or pay $4.99 for 2 a month whether you use it or not. that’ll be over charging non subscription customers.

    I’d prefer the freedom to pay for what I use at the correct price. If I use more I pay more, at the correct price. If I don’t use I pay nothing which is the correct price for nothing.

  • josh

    very interesting idea, daniel. i don’t think it’s limited to itunes. i would love it, if tivo offered something like this.

    i’ve used their amazon unbox service and it’s miserable. terrible user interface and poor selection of titles not to mention the exploding rental issue. oh & no closed captioning. picture quality was good though.

    I would probably be willing to pay up to $25 per month for a single slot. i wouldn’t need 3 slots like netflix because the downloads would be quicker than the mail. if you have broadband, a well designed service should let you start watching the movie (while it finishes downloading in the background) about half an hour after you rent it.

  • Steve Nagel

    Great! I use Netflix. Works fine. I am, more and more, using it for TV programs (BBC, Showtime, HBO) as well—that is, real adult fare. A virtual version would be great. I could let go of cableTV completely.

    Add a “buy now” feature to get a burnable or DVD version. Take a bite out of Amazon.

  • josh

    netflix would still have one huge advantage: selection. they litterally carry everything that comes out on dvd except porn. because itunes would have to deal with licensing issues, i don’t think they could duplicate netflix’s selection.

  • http://homepage.mac.com/johnnyapple johnnyapple

    A digital NetFlix like service via iTunes is exactly what I have in mind. I’d sign up. I’d like if it worked with TV shows too since most of the time I only want to see something once. Downloading and storing 1GB+ movies is kind of a challenge.

    I suggested this a few months back writing “$14.99 per month for 5 download movies at a time at DVDish quality. When one movie is finished and the user clicks “done/delete”, the next one queues up.” I don’t recall how I came up with that price – whatever. I’d happily pay that amount for 3 at a time too. I’d likely rent 2 or 3 movies per month and maybe a dozen or so TV shows.

  • lightstab

    I understand the Netflix comparison, but I still don’t see how Apple avoids exploding media. The media might not disappear in the same way, that is, it won’t expire, but if you have get rid of the old media to refill your slots, we’ll just talking semantics, but I do think this would work better than other alternatives. Nice job, Dan.

  • jerryartvandalay

    Thinking about it more it still makes even less sense for Apple to offer a subscription service.

    Correct me if I’m wrong but when netflix buys the physical DVD, it only has a one off cost to them for the physical disk and license to rent it out. They can then matter how many times if it rented out. correct? So after that first investment of capital has been made the only extra cost to netflix to ‘rent’ the DVD to you is the postage.

    With iTunes on the other hand, its a different ballgame. Movie studios are going to want a cut of each download of a movie. So Apple will have to pay the studio’s each time a movie is downloaded. So it makes more sense for Apple to offer a pay per view service.

    Don’t get me wrong I’m always waiting for Daniels next article but this is the first one I strongly disagree with.

    Time will tell if I’m wrong or not.

  • http://ghscommunications.com potterhead4

    I’d buy this instantly, and so would thousands of people who already do this with BitTorrent (download movie titles to watch once and then delete them) because of faster download times, higher quality and better availability. I’d love to have this to put new movies and shows on my iPod for long trips without having to invest a ton of money.

    @jerryartvandaly: None of your arguments against this make much sense.

    #3: This isn’t the same exploding system because the content doesn’t explode until you return it. This means you can download a movie and watch it as many times as you want over whatever period of time you want. And, unlike exploding music rentals, no one pretends that you own the movie and then yanks it from you when you fail to pay the next year’s subscription.

    #6: Sorry, but that’s the way the system works. Companies are willing to trade unit price for loyalty. And whether you like it or not, Netflix and Blockbuster’s mail-in services have become the norm. You probably don’t realize this because you’ve never tried one of the services, but the beauty of them is that regardless of whether or not you use two movies a month, you actually get your money’s worth because you can choose exactly when you want to watch each movie versus having to watch it within 3 or 5 days like exploding download services, and you aren’t penalized for doing it like rental services. Plus, most people find that when they buy the service, they use it because it’s so convenient. I can see myself watching 10 or 20 movies via iTunes each month.

    #12: Unless the downloads explode after an amount of time, which Apple will never agree to, the movie studios are going to have just as much of a problem with pay-per-view rentals. It’s just economics, and Apple will work out a profitable (or break-even) way to do it if at all possible. Plus, as Daniel points out, it probably won’t be successful because the reason Netflix and rental stores work is that consumers get a real copy of the DVD that they can play as many times as they want. Daniel’s proposal really is the only way to do it.

  • nat

    Cool concept. I see this happening at Macworld ’08 and it would come at a time when Netflix has running into trouble.

    In case people haven’t heard, the majority of those Netflix mailing envelopes are requiring human labor as they are getting stuck in the USPS’s automated sorters. A $0.17 surcharge per movie is being considered by USPS, which would seriously cut into Netflix’s profits. Just search “Netflix” in google news. Here’s the one I read:

    I have a Netflix subscription myself (3-movies/unlimited) that’s $16.99+tax per month. With my somewhat busy schedule, I generally watch them over a week or two, clipping them to the door for the mailman after viewing each. That $17 also gives me 17 hours of “instant watch” access, but of course, that’s only if I’m running Windoz.

    Though Netflix is nice for more than just renting movies and tv shows (don’t know how Handbrake got set to automatically open when I insert those DVDs :D) I’d prefer near instant gratification via iTunes, as long as there was an option to pay the difference if I wanted to keep the rental and the subscription cost was reasonable. I also like the idea of pre-paid rentals that don’t necessarily require a subscription.

    Can’t wait for the next article.

  • http://web.mac.com/lowededwookie lowededwookie

    We have a number of services similar to NetFlix here in New Zealand, the one I use being Fatso.

    $29.95(NZ)/month for as many DVDs as you can fit on a 2 disc basis so effectively I’m getting between 4 and 6 discs a week if I plan it right. Over 4 weeks that’s about 24 discs.

    Currently we don’t get any movies from iTunes on our version of iTS which sucks but either or I would definitely use if I was given the chance. With Daniel’s idea there would be instant gratification because there would be no waiting times from the time you place the order to the time you download it (save for the actual download times). You don’t have to wait for the postie to deliver it to you and you don’t have to wait for the postie to deliver it back to them by which time you’ve lost 3 days of your “unlimited” plan.

    What I tend to do with DVDs is rip them and keep them until I can watch them at times that best suit me without affecting my queue too much, if I enjoy the movie a lot I will go out and buy it which means the movie companies have now made two amounts of money off me. If I don’t like it I either don’t rip it and send the disc back or if I’ve ripped it already for later viewing and sent the disc back I simply delete the rips.

    This would be difficult to allow on iTunes so it would be interesting to see how this idea would pan out. Either way it is infinitely better than exploding media.

    As always a well thought out article Dan.

  • nat

    Meant to add, since iTunes has a nice music recommendation system (Just For You), if they expanded that to movie rentals (is it already available for movies, tv shows, etc.?) it would compete well with Netflix. Just For You could even be expanded, so that it would recommend movies to users based on their musical (or tv show, podcast, audiobook, etc.) tastes!

  • Albert

    Dan’s approach would really be ideal, however my only concern is video quality. I commented about it in the other post, I have a 50inch HDTV and iTunes videos do not look that great, I still buy my DVDs and rip them with handbrake because I want a higher resolution. However iTunes movie downloads look superb on my iPhone. So will Apple find a way to satisfy both mobile users and couch potatoes? Can they produce one file that contains HD and LD information, I refer to it as 720p+, where you get the most quality if using AppleTV or iPhone/iPod. Only time will tell.

  • Robert.Public

    hey dan,
    longtime reader first time commenting. This really would be the killer app for apple tv and it could end the “hobby” stage. But the fact that it could be mobile would really bolster iPhone and iPod touch sales in particular and probably be the best reason for the company to create this system. I see one problem, er challenge. If your iPod breaks or are having troubles syncing for whatever reason, you couldn’t return a movie properly. So what do you think they could do so that you could keep renting?

  • thgd

    Thanks, Dan, for this interesting and perceptive article.
    If Apple does something like this and they add more video content, their business will be going even further off the charts.

  • rjackb

    I think your idea for a movie slot scheme is interesting but what I really wanted to comment on was one other topic that you mention, namely, music sales vs. music subscriptions.

    I’ve long agreed with you, Daniel, that I want to own my music. And I still do. But, after recently reading a comment by Barry Sonnenfeld in Esquire magazine in which he stated that when using a music subscription service, he found himself listening to music that he would have never even considered buying on iTunes, it occurred to me what I think is the perfect model for an online music store such as iTunes.

    The perfect model would offer BOTH a subscription service (with no long-term contract) and sales. I could then sign up for the subscription service, listen to anything I wanted in its entirety rather than a brief snippet, buy whatever I discovered that I liked, then drop the subscription service until I again want to search for new music! That model seems ideal to me.

  • rjackb

    To follow up on my previous post…

    I would think that if the iTunes store were to adopt such a model as I have suggested, i.e., both a subscription and sales model, they would increase their revenue in two ways, 1) By the addition of subscription income, and 2) By increased sales income due to the exposure of subscription customers (even if temporary) to a much wider range of music.

  • pgutches

    There are some very good points made here, but just about all subscription services rub me the wrong way. The reason is that they try to impose regularity on something which actually changes… my movie viewing habits. Sometimes, I watch a lot of movies in a close period of time. Other times I have a lot of work and my viewing falls off the map.

    Ideally, I would want the option to order as many rentals as I choose to at once, just as with the current go-to-the-store model. If I want to rent 3 movies, I shouldn’t have to subscribe to 3 slots. I just get the three movies and the number of slots are totally fluid.
    If I never get around to watching one of the movies… it’s still there, along with the other 2, except that maybe I can’t play it because the rental period is over. But if I wanted to watch that third movie, I could rent it again (in which case I would not have to download it again), or, as Daniel suggested, I could buy it for the difference in the rental price. I like that idea.

    I could also re-rent one of the others I’d just watched, or buy them, and they’d be ready to play immediately. If I’m really done, then I dump them.

    But the prior point raises an interesting question… if a rental is $4 and the price to buy is $14, and the difference to buy it after a rental is $10… what happens if I rent it twice, or three times? Is it still $10 to buy? I think this policy might be shaped by what people’s real habits are. What _is_ the average # of times people watch the same movie? That could possibly define a tipping point for pricing and purchase incentives.

    I currenly do not use Netflix or any other such movie rental service because I _hate_ it when I rent a movie that is essentially unwatchable because the disk is scratched or warped or the cheap DVD player gives up the ghost at a critical moment. And the former can be a _very_ frequent experience. All digital rentals would pretty much guarantee that my time and expectations are protected.

    So… I might be a rare case of someone who has actually been waiting for an all digital solution of the likes being discussed here. But bottom line is, as much as I love the idea of digital rentals, and Apple, I would not buy into any subscription service Apple offered unless I could rent on demand and not be limited to one slot.

  • sorenlk

    Thanks for another great article!

    There’s one thing I don’t understand about this otherwise great idea: What happens if I rent a couple of movies and loan them to my iPhone and then my iPhone breaks. I won’t be able to sync the iPhone again which means I can’t return the movies. What would I have to do? Call support? I could imagine that would generate a lot of support calls.

  • pope

    “In the 80s, movies on VHS or LaserDisc were often “priced for rental” at $150 or more, as many studios assumed there was no significant market for selling films at retail. That changed with the appearance of DVDs in the late 90s, which were priced and packaged similar to CD to appeal to consumers as a retail purchase.”

    This is where you lost me…VHS rental in the 80’s was huge. And it was only $2-$3 a movie to rent. There were more mom and pop rental stores than today and less blockbuster stores. In other words, there were more places to rent from than today. The prices to out right-purchase the movies were $80 to $150 with today being about $20.
    You make it sound like affordable video rentals started in the late ’90s and that is not correct. They started in the early 80’s.

  • Steve Nagel

    On the subscription pricing: It’s worth looking at the dollar value of the service. It’s big.

    If iTunes can aggregate the costs of subscribing to cable and Netflix, and purchasing occasional rentals, it’s equivalent value is about $100 US per month. Let’s round it to $1,000 US per year.

    Say, Daniel, did you address the DVR opportunities and restrictions? Maybe it’s not an issue since time shifting (and place shifting) is built into the service. That is another $150 a year.

    Apple could price the subscription at $50 a month—conditioned on what it offers—and look very good comparatively. If it can offer all the film and TV programming that Netflix does, it’s cheap at that price.

  • Leomania

    As a Real Rhapsody customer for the past year, I can say that I find the subscription model meets my needs and then some. It took someone recommending Rhapsody to me and describing how he used the service before I understood its value; I was hooked after that. For the price of a single CD per month, I get all the music I care to listen to and just as with iTunes I find new artists all the time. This would be nearly impossible for me via any other method, especially radio which I just can’t stand any longer.

    But the subscription is just an enhancement to how I approach music; I still buy CDs for those artists whose albums I really like. Others I am content to listen to via Rhapsody. For me, the value is provided by letting me find new artists and albums that I wouldn’t otherwise know about. That’s worth the monthly fee.

    So why isn’t the subscription model more popular? I think people simply don’t know about it, or when they do hear about it, they don’t quite “get it” so they don’t try it, even when there are offers such as Rhapsody’s 30-day free trial. I tell folks about it all the time, and they either haven’t heard of or tried the different services yet. Music delivery doesn’t have to be completely different by necessity; I think it’s simply a matter of what people are accustomed to.

    When it comes to movies, I’m absolutely shocked that people will pay to purchase movies and television shows. I mean really, how many times can you watch the second season of the Sopranos? A delivery method such as Netflix offers is ideal for this kind of content, and an Internet-based offering such as what Daniel describes here seems obvious. People would just “get it”, as is so often the case with Apple products.

  • http://www.roughlydrafted.com danieleran

    @ rjackb: the problem for subscription rental music is that it’s an expensive idea. To actually make it work, Apple would have to roll out DRM that works just like Microsoft’s, and iPods/iPhones would all have to include call home authentication policing, just like PlaysForSure and the

    Reviewers in ivory towers seem to love rental music, because they test it out and rush to judgement. Actual users don’t want to deal with heavy duty DRM restrictions and pay $120 – $200 a year to “discover music” when one can already do that for free.

    Of course, some people do like rental music (like Leomania above), and I certainly don’t want to take it away from them. But it has failed for ten years now, so its time for BusinessWeek’s Peter Burrows to stop calling it an “emerging market” that “many industry experts think … may end up as a mass-market phenomenon.”

    If the studios would allow rental music plans without the DRM, then it might be popular on the level of a “paid premium radio on demand” alternative to today’s commercial junk radio. But that’s not on the table. They want you to agree to draconian DRM and pay for music that explodes after you stop paying, and those two factors will ensure that Rhapsody/Napster/PlaysForSure services will never rise from their respective graves.

    @ pope: yes, movie rentals were fairly cheap in the 80s. It was retail purchases of movies that was expensive. Since there was no recognized mass market for movies, studios sold VHS/LaserDisc at relatively high prices to the rental stores, and magazines reviewing movies described them as “priced for rental.”

    VHS retail sales only broke out after home theater got big enough to create its own weather and was joined by parents buying “direct to video” family movies and Disney reissues. DVD was realized as a retail-centric format from the start, and positioned very differently from earlier formats from very different times. Remember that in the early 80s, us of the working/lower middle class *rented the VCR* with the movies. Ah, memories.

  • gus2000

    It wasn’t that long ago that the DVD rental stores also rented the DVD players! If you could *find* a DVD rental store, that is.

    I remember being the first on my block to have a DVD player, and it was a Sony VAIO hooked to the TV. That couldn’t have been more than 10 years ago.

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  • rjackb

    Daniel, thanks for your response. I certainly didn’t mean to suggest that iTunes provide a traditional subscription service in addition to their sales model and, perhaps, shouldn’t have used the term “subscription”. What I am suggesting, however, is that I, for example, be able to pay $10-15 for one month and one month only to be able to somehow listen to any music in the iTunes store in its entirety during that month rather than be limited to a 30 second snippet of a track that is insufficient to give me a feel for what a track really sounds like. I wouldn’t care at all if, due to DRM, that I would be restricted to listening on my computer rather than my iPhone. I can promise you (and Apple) that I would buy a ton of music from iTunes if I could fully preview it first, whereas, with only a 30 second snippet to go on, I’ve yet to buy anything from iTunes.

  • rjackb

    I’m not aware of any way to edit my previous responses so let me clarify that, in my latest post, wherever I mentioned “iTunes” by itself, I really meant to say “the iTunes store”.

  • sda005

    This sounds like a fantastic idea, and I’d love to see Apple implement it, but does anyone here know if there are patents already filed and held that might keep Apple from being able to do this?

  • http://web.mac.com/lowededwookie lowededwookie

    In terms of rental music / try before you buy there is a simple solution to this moronic idea – put full length, low quality tracks on the iTS site so you can listen to the WHOLE song instead of the crappy 30 second sample. 30 second previews are so stupid.

  • thgd

    An alternate to the subscription fee would be a pay-as-you-rent scheme with a maximum limit of rental slots.

    This way everyone would get say four rental slots and could fill them for maybe $2.99 per slot. Each movie would have a “RENT” or “BUY” button in the iTunes store but have a “RETURN” or “BUY” button when the movie was in the rental slot. “RETURN” would allow another rental and “BUY” would charge the customer the difference between full price and the rental price.

    A customer could theoretically keep all four rentals forever but they could only rent something new if they returned one. Apple would likely put some type of reasonable time limit on the rentals, say 1 year.

    Who knows what Apple will do, but I don’t think they want to be associated with any service that has the word “subscription” in it.

  • thgd

    Well, I am already wrong.
    Apple sells Dot Mac as a “subscription” service

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  • dkrieb

    This may have been mentioned before but some option to purchase the movie for an additional charge after it’s been viewed would be a huge selling point. I want to rent most of my movies but occasionally I’d like to purchase DVD after viewing.

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  • pecos.bill

    You’ve basically described a Net based version of NetFlix. I’m not sure you’ve factored in the perceived value angle. The huge challenge that Apple has doing this is making the time to watch short enough to warrant the higher price they must charge to pay for all that bandwidth. If my Netflix disk is picked up today AND all things go well, I’ll see another disk in two days (or Tuesday if it’s a Friday or Saturday). This model would have to sell the instant gratification that PPV has but with a wider selection. The one advantage that Apple would have is with a queue of movies, they could be slowly streaming movies in advance of you actually using them. If they could lock them up tight enough, they could leave them sitting on the HD so users don’t have to wait quite so long. There’d be limits of course as someone would catch up to the end of the buffer if they watched movies in succession fast enough.

  • http://homepage.mac.com/lunaticsx/ LunaticSX


    “When it comes to movies, I’m absolutely shocked that people will pay to purchase movies and television shows. I mean really, how many times can you watch the second season of the Sopranos?”

    It costs $10-12 for one person to go out to the movies, now (don’t forget to add in the ridiculous price of snax at the concessions stand). For two people that’s easily a $35 evening. A movie rental might be $3. If you really like a film you might rent it more than once, so that would go up to $6 or $9, etc. Older films can now be had on DVD for as little as $10 or less, so the economics of buying a favorite older film certainly make sense. It especially works once you’ve built up a library of titles and you get to choose between taking the time to go out to the rental store and finding/agreeing on something to watch, or just picking something you have on hand to re-watch that you know you like.

    At $15 to $20 for a DVD, it’s still cheaper than going out to the movies for two people, and while you don’t get the big screen experience, the films that are now out on DVD aren’t generally still going to be in theatres, anyway. Plus for recent films the rental store may not have a copy available for rent. Your local big box store is pretty much guaranteed to have the most recent DVDs available for purchase.

    As for TV shows, it’s kind of awkward to rent one disc of 3 or 4 episodes at a time. Then you have to bring it back and hope the next disc is available. Or you could rent two discs, but that’s 6 to 8 hours worth of content, and are you going to watch that all within the three day rental period? Yes, Netflix scores a major win, here, with TV show rentals, since you keep each disc as long as you like.

    Back to the economics, a four-disc TV show might cost $8 or $12 total to rent locally, but it’s not very convenient, and you might wind up with late fees, or have to re-rent some of the discs because you didn’t finish watching them. You might be able to buy that season for $30 to $40, which is significantly more. You’ll get 12 to 24 hours (or more, with bonuses) of content, though. The base price compares very favorably with two people going out to a movie, however, and you get a lot more total entertainment time out of it.

    $30 to $40 also compares reasonably well with a month’s cable subscription. So if you don’t subscribe to cable because you don’t watch that much TV, yet there are just a few shows you’d really like to watch, a $30-40 box set of a TV show is perfectly reasonable. Plus you don’t have to deal with commercials, and you can watch it on your schedule (including immediately watching the next episode after a cliff-hanger, instead of waiting a week).

    Another factor is the “Oh, you haven’t seen (movie X, or TV show Y)? I’ve got it on DVD, we can get together and watch it!” social experience. You personally may not think of re-watching a particular movie or TV show multiple times on your own, but you’d be interested in re-watching it with someone who hasn’t seen it.

    You can have a personal library of movies and shows that fall in this category, and it both eliminates the hunting down of those titles at a rental store, and filters the available options so you aren’t presented with a paradox of choice. Along those lines, how many Netflix subscribers rip and burn the titles they rent so they can do this later?

    Finally, buying a tangible physical good means that you have something you could potentially re-sell later. The difference between your original buying price and your selling price might only be as much as the cost of renting the same movie twice.

  • http://homepage.mac.com/lunaticsx/ LunaticSX


    “In terms of rental music / try before you buy there is a simple solution to this moronic idea – put full length, low quality tracks on the iTS site so you can listen to the WHOLE song instead of the crappy 30 second sample. 30 second previews are so stupid.”

    A low quality version of the song isn’t going to compel people to buy it, though. They’ll either think “that song sucks” if they haven’t heard it before, or “I’m not going to buy that here, the sound quality stinks.”

    Feel free to open your own digital downloads store with full length, low quality previews of all the tracks available, though. I’m sure we’re all eager to hear of your success against the iTunes Store.

  • Norm Potter

    Breakthrough idea Daniel!

  • jerryartvandalay

    How is this a breakthrough idea?

    I is shoehorning the limitations of physical media distribution onto digital media.

    With Netflix you need the physical disk to watch it because it needs to go into your DVD player. Netflix therefore has to limit the number of disks you can keep at any one time so you don’t hoard them all. Thus taking away the availability of an actual physical disk that then can’t be posted to someone else.

    This is digital downloads we are talking about. There is no need to limit the number of downloads you can make. Because there is no physical disk to distribute between customers. We can all rent the same thing at the same time since there is no limitation on digital copying.

    Isn’t iTunes a success because each purchase by itself can be seen as an impulse buy. “bah, it’s only 99c for the song, just buy it you fool” goes off in my head a lot before buying a song. This is why iTunes is a success, IMHO. And Apple would better serve itself by sticking to this winning formula with rentals. “bah its only $2.99 to hire, if I don’t like it I’ll just delete it and download another as I don’t even have to return the disk to the store or post it back to Netflix”.

    Netflix’s business model is born out of the necessity of physical disk distribution no need for iTunes to replicate that model.

    Another problem with this proposed model is that the studios would have to agree to it. I don’t think they are going to want to share subscription revenue. They’ll want their full cut of each download. Which means Apple will be going backwards pretty quick if people have 4 slots that they continuously churn through. Netflix doesn’t have to play a cut to the studios each time you get a DVD from them because they have paid upfront for the right to rent the DVD.

  • http://homepage.mac.com/lunaticsx/ LunaticSX

    @ jerryartvandalay

    One-time rentals for a fixed fee per each use require exploding media, though.

    The whole point of a Netflix-style system, where you pay a subscription fee to load up a fixed number of available “slots” is that the media doesn’t need to have a limit on the number of times it can be played, or how long you can keep it. As long as you keep paying the subscription fee, you can keep and watch a movie or show you’ve loaded into one of your slots.

    Of course, if you stop paying the subscription you’re not going to be able to watch the downloads.

    If the fee is low enough for one slot, though, it can be used practically like a pay-per-use system. Say it’s $10 for one slot, for one month. So you pay $10, use it to watch 4 movies, and then cancel before the end of the month. That’s equivalent to $2.50/movie, but none of them had any restrictions on how many times you could watch them, or how much time you had to watch them before they expired, as long as you did it before you canceled the service.

  • http://teamoverkill.com/blog/ LD

    If this were available I would drop Netflix in a heartbeat.

    I travel for work. I love Netflix but getting the physical media doesn’t work well for me because I will be home maybe a couple days a week. Their Watch Now service is horrible. Let’s ignore the lack of content, it’s non-existant.

    The problem with Netflix’s Watch It Now service is the type of thing that’s described above. For me, the biggest hurdle is that you have to be online. As I said, I travel. I often don’t have wifi access. I do have 3G, but that’s not fast enough to stream a movie and finding a good signal can be a problem in and of itself. I also have an ultraportable that doesn’t have an optical drive. I don’t need one for anything. So that rules out a physical DVD anyway.

    I also can’t use it on my Mac which makes it worthless when I am at home.

    It’s crippled by Microsoft DRM, the same problem with pretty much all online movie rental services.

    iTunes fills that void. I can download when I’m on a broadband connection. Take it with me anywhere. There is no need for optical media. I can use it on both my work PC and my home MacBook Pro.

    Seems like the perfect solution, especially as described above. The concept is sound, simple, and familiar to people. You rent a movie, take it home, and return it. I’ve been doing that since 1983 when I rented my first VHS.