Rental breakdown: Can Apple's iTunes TV plan succeed?

Apple's (NASDAQ:AAPL) quest for global multimedia dominance continues: Reports this week indicate the company is now in negotiations with broadcast television networks ABC, CBS, Fox and NBC to offer 99-cent TV episode rentals via the iTunes digital storefront. Citing three sources familiar with the negotiations, Bloomberg reports Apple is proposing commercial-free episode rentals spanning 48 hours, optimized for devices including the iPhone, iPod touch and iPad; programming would become available on iTunes within 24 hours of its original network broadcast. iTunes presently offers feature films for rental and purchase, but no rental option exists for television programming. "This takes Apple out of the position of making consumers decide to either buy or not view," said Altimeter Group analyst Michael Gartenberg. "It makes Apple much more competitive with services like Hulu."

Sources tell Bloomberg the a la carte rental service negotiations follow in the wake of an abandoned Apple proposal to launch an iTunes TV subscription service, an initiative that would have jeopardized the networks' existing revenue deals with cable providers like Comcast and Time Warner. At present, ABC, CBS, Fox and NBC receive about $250 million annually in broadcast retransmission fees industrywide--RBC Capital Markets analyst David Bank said that number is poised to grow to several billion dollars within the next five years. "If you're running a TV network, you don't want to upset the existing ecosystem broadly by starting a rival subscription service with Apple," Bank said. "You want to look for ways to drive incremental revenue." According to The New York Post, Disney-owned ABC and Fox appear more receptive to Apple's overtures than their rivals, with at least one content provider exec calling the computing kingpin's proposal "insane," adding "I don't know of anyone who's said ‘Yes.'" 

It seems inevitable Apple will launch a video rental initiative sooner or later, regardless of whether the four major networks are in its corner. "Fast forward a bit, to early next year," Gleacher & Co. analyst Brian Marshall tells Reuters. "By then, there will have been a total of 200 million shipments of iPhones, iPads and iPod touches, all the devices that run Apple's iOS. That makes Apple a cable company with 200 million subscribers." When it happens, the question is whether consumers will pay 99 cents per episode to rent broadcast television programming that's already available from sources like Hulu, network websites and on-demand cable services. The economics don't make a great deal of sense: For example, iTunes currently sells all 13 episodes from the first season of AMC's Mad Men at a bundled price of $19.99--renting each episode at 99 cents per show would ultimately total $12.87, so for a difference of about $7 more, consumers could purchase the season in full and permanently add it to their digital media library. To make the rental model truly successful, it's likely Apple will have to secure content from sources outside of the networks and basic cable, content that viewers have already proven they're willing to pay for--in other words, programming from premium cable giants Showtime and HBO.

Showtime's digital future is unclear: Earlier this year, reports indicated the network is planning to launch an online streaming service featuring original series like Weeds, Californication and Nurse Jackie, but nothing concrete has materialized. HBO's a different story. In February, the Time Warner-owned network introduced the online streaming video service HBO Go, promising 800 hours of on-demand, high-definition content each month, including acclaimed original series like The Wire, Curb Your Enthusiasm and The Sopranos as well as feature films and sports. HBO co-president Eric Kessler said the service (free for existing HBO subscribers through Comcast and Verizon FiOS) will expand to Apple's iPad and other mobile devices within the next six months, part of the company's larger plan to accelerate its digital efforts in the face of competition from rivals like movie rental and streaming video service provider Netflix. "There is value in exclusivity," Kessler said, stating consumers "are willing to pay a premium for high quality, exclusive content." That's the challenge facing Apple: Everyone wants to distribute their content across its devices--they just don't want Apple claiming a cut of the profits. -Jason