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Studios Evaluate Apple's Rental Offer

Apple is the hot topic in Hollywood as studios continue negotiations with iTunes over 99 cent TV episode rentals. Now sources tell me they expect an announcement at Apple's iPod event on September 1. Steve Jobs has been pushing the idea of 99 cent rentals around Hollywood for about a year now, sending the message that the current $1.99 price to *buy* a TV episode is too high. His pitch: bringing the price down to 99 cents for a rental will expand the volume of sales dramatically.

Steve Jobs
Steve Jobs

Disney and News Corp's Fox are both on track to sign on for Apple's new rental plan. They're both still in negotiations, but all signs point to a deal: 99 cent rentals for 48 hours, starting 24 hours after a show airs. (Disney offer offers ABC shows 24 hours after a show airs on ABC.com and Hulu; Fox makes most of its shows available on Hulu). Both Disney and News Corp are co-owners of Hulu, along with NBC Universal, and they see this Apple Deal as yet another experiment as they expand choices for consumers.

A key point: they're not worried about cannibalizing their business with 99 cent rentals. Selling episodes for $1.99 on Apple and offering shows free and ad supported on Hulu has only generated incremental revenue. They don't see see 99 cent rentals as competition for broadcast TV, but as an alternative to piracy. One executive close to these negotiations told me "If our content's not available in an easy way to consumers, they're just going to find it elsewhere."

Steve Jobs is on Disney's board. And News Corp is forging new ties to Jobs: Rupert Murdoch has raved about the iPad as a savior for the news business and is now building a digital news app designed to distribute through the iPad. A few industry execs have suggested that Murdoch's need for prime placement for his news app is his ulterior motive for striking a TV rental deal.

But NBC Universal (CNBC's parent) and CBS are not signing on for the 99 cent model. CBS doesn't sell its network shows on Apple and won't be part of the new deal. CBS simply does not see sufficient value to get on board.

NBC's resistance to 99 cent TV rentals predated the Comcast merger, so its relationship with Comcast isn't why it's holding back. NBC won't reveal its revenue numbers from $1.99 sales, but seems quite happy with the way its iTunes sales are going. So why would NBC possibly cut the price for its episodes in half?

This is the rental-sale paradox of digital distribution: a digital TV *rental* and a digital TV episode *sale*, are pretty much the same to consumers. People are willing to invest to *buy* a DVD if it's a movie their kids are going to watch over and over. But when it comes to single TV shows, people usually buy them on impulse, planning to watch them once. So the introduction of 99 cent rentals is effectively cutting the price for a TV show in half. NBC Universal doesn't want to risk losing half its revenue, which means it doesn't believe the increase in volume will be as significant as Jobs expects.

It's worth noting that Apple's iTV launch and content deals seems timed to upstage Google's Google TV November launch. The iTV is a store and Google is launching an operating system with an App store, and they're quite different. But this does seem like another bit of one-up-manship between Steve Jobs and Google CEO Eric Schmidt as they stake a claim in the TV space.

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