Last week we wrote about how iTunes was getting new movies and making them available to purchase the same day as the DVD release. This is a pretty big step for Apple, and now we’re learning that they’re actually losing money on these new movies. The Wall Street Journal reported that while Apple is selling newly released movies at $14.99, they’re actually paying the studios about $16 for each movie. This translates to about a one dollar loss on each movie sold which adds up over-time.
Why would Apple be willing to take a loss? Our guess is because they feel that the loss will eventually turn into big gains if they can get people to regularly buy movies from them. Clearly, they’ve been extremely successful selling music, but they haven’t experienced quite the same success in selling movies. This could help bring in new customers and new customers could provide sales in all areas of iTunes including music, movies (not just new releases), and TV shows.
Movie studios end-up benefiting from sales of the digital format as well because they save costs in distribution and returns. The WSJ says:
Apple hopes it can translate some of its music success to movies. If it works, studios could end up making more money, too. While the wholesale price that studios are getting is less than they make selling movies to traditional retailers, studios will end up with a bigger profit for each sale, executives say. Their savings will come from the elimination of expenses like distribution and returns, which don’t exist with online movies.
In the end, iTunes really isn’t the big money-maker for Apple anyways, the hardware is. New iTunes customers can help sell the hardware that brings in the money for Apple whether it’s a new iPod to play the music or movies, or an AppleTV for playing movie rentals and watching TV shows.
Sometimes it’s worth it to take a loss and make-up in gains elsewhere which is what Apple is doing here…
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Tags: Web Sites, Apple, iTunes, Movies, Music
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I’m sure Apple can recoup the $1 / movie loss in other place…says iPods, iPhone, MacBook Air, need I say more?
At this point they probably aren’t even trying to recoup losses, they’re probably just trying to make themselves the dominating player in the digital movie arena so that they can control prices.
Peter Oppenheimer said it best:
Shannon Cross - Cross Research
Okay, and I don’t know, Tim or Peter, could you give us an idea on your goals for iTunes rentals? How should we think about the success of that business and is it more a way to drive incremental Apple TV sales or are you looking at it more from a profitability standpoint for that specific unit?
Peter Oppenheimer
We just introduced it. We think customers are really going to love it but we’ll have to see. Our objective with the iTunes store is to run it just a little above break even and we think that it helps us to sell iPods and Macs and that is really our strategy.
Isn’t the loss more than $1/movie? If they need to pay $16 to the movie studios, they still need to pay for running costs (bandwidth, support, development of the iTunes application etc.). I’m sure they’ll earn it all back once it becomes a success though.
I didn’t think of it that way but yes, I’m sure they’re taking a much larger loss than $1.00.