Update: Apple has issued a statement saying that its partnership with NBC has ended with immediate effect. “The move follows NBC’s decision to not renew its agreement with iTunes after Apple declined to pay more than double the wholesale price for each NBC TV episode, which would have resulted in the retail price to consumers increasing to $4.99 per episode from the current $1.99.”
Our original coverage below
The New York Times is reporting that NBC Universal has decided not to renew its contract to sell television show downloads on iTunes. Although the current contract doesn’t expire till December, NBC — whose content accounts for 40% of TV downloads on iTunes — has opted to give Apple the required ninety days notice to end the partnership.
It’s a familiar story to anybody whose been following UMG’s recent standoff with Apple, whereby the major content owners want greater control and flexibility over iTunes pricing, as well as stricter copy protection controls, in contrast to Apple’s insistence on keeping the iTunes experience simple and competitive.
In my analysis of the Apple/UMG negotiations — which involves the sale of music not video downloads — I argued that UMG needs Apple more than Apple needs UMG:
… if users can’t buy Universal music for their iPods from iTunes, then they’ll either purchase on CD and rip it, or more likely, download it illegally elsewhere. Remember, on average, music bought from iTunes only accounts for 3% of songs on every user’s iPod. Either way, it won’t impact on iPod sales, which is where Apple makes most of its music-driven revenue, anyway.
However, in the case of video downloads, and NBC in particular, the balance of power maybe tilted the other way. Users don’t rip DVDs to their iPods, or the AppleTV, in the same quantity as a CDs, as it’s not nearly as convenient (it takes a lot longer to rip a DVD and requires additional software). Likewise, downloading pirated video involves dealing with large files, which, once downloaded, often require conversion to a video format compatible with Apple’s hardware. Also add into the mix the plethora of competing video downloads stores and streaming services, including Microsoft’s XBox Live, as well as startups such as Joost and the newly formed “Hulu” (a joint venture between NBC and News Corp.)
Were NBC to pull their television content from iTunes — with over two months left, negotiations are far from conclusive — then Apple will have a lot less content to help drive sales of its video iPod and the fledgling AppleTV. At the same time, losing a major partner in NBC, could seriously weaken Apple’s future negotiations with other content companies, and in doing so, would damage the company’s digital media strategy.
One option Apple could consider (although I can’t see the company ever going down this road) is to add DivX video support to its iPod, iPhone and AppleTV. DivX is the pirate’s video codec of choice, and if Apple’s hardware supported it, then the company would be far less reliant on content partnerships to drive hardware sales.