Only 14% of Broadband Consumers Interested in Paying $15 for iTunes Movie Downloads

Diffusion Group: Spike in Price Sensitivity toward iTunes Movie Downloads as Prices Increase from $10 to $15 per Title Only 14% of broadband households would be interested in an iTunes online movie download service for use on PCs or portable devices if titles were priced at $15 each. This compares to total interest of 23% at $10 per download - a 64% decline in interest when increasing the cost per title by only $5.

Mmovie studios originally demanded that Apple accept a pricing scheme of around $20 per download, similar to the prices charged by current online movie services such as CinemaNow and Movielink. Apple demanded download prices of around $10 for even new titles, half that of existing services. It would seem, then, that the two parties simply split the difference. All things equal, this appears to make sense.

The net loss of demand from increasing the price from $10 to $15 is almost four times the gain in demand from lowering the price from $20 to $15. In other words, at $10 per title, demand would have been optimized yet profits would have suffered, while at $20 per title both revenue and profits would have been optimized with little loss in demand.

Regardless of whether the iTunes movie download service is announced this month or later this year, the time is right for Apple to enter this market space. Although current services such as CinemaNow and Movielink continue to languish, Apple is aware that the conditions are now suitable for extending iTunes to include full-length movie downloads. Consumer awareness has improved; video-over-broadband is now viable; studios are now making movies available for online download to DVDs; portable video platforms are improving qualitatively with each new generation; and Apple's brand awareness and credibility are at all time highs. As well, CinemaNow and Movielink's experience, while insightful, is of limited value to Apple, who continues to enjoy the fruits of being a market-maker in portable digital electronics and online media services.

One challenge faced by today's online movie download services that will still haunt Apple is the fact that movie downloads are still being viewing on the PC or portable devices – scenarios that do not reflect the video consumption behavior of the majority of US consumers. Connecting these services to the living room TV (either directly via a broadband-enabled set-top box or indirectly via a digital media adapter) is imperative to expanding the online movie market beyond the earliest of early adopters and to helping move Apple into the living room (the primary battleground for future-thinking PC and CE vendors).

On the Viability of an iTunes Movie Download Service Publ 200600905