Apple's push into subscription TV: Why it will be a tough sell

The Wall Street Journal reported late Monday that Apple is in talks with CBS Corp. and Disney to offer television programming using a subscription model but suggested that the venture could face a pretty steep uphill battle.

There's an understatement for you.

Sure, Apple has been incredibly successful with iTunes, which now includes music, movies, TV, games and apps. For those who remember the early days of iTunes, the content catalogs were pretty thin as record labels - and later TV and movie studios - resisted the iTunes way. Apple has a reputation of cut-throat "our way or the highway" terms with its partners, which is believed to be one of the reasons that the iPhone is on AT&T and not on Verizon. But as the iPod exploded and dominated the portable music player market, it almost seemed to be bad business to not play ball with Apple.

But this time, for as much as things are similar to the early days of iTunes, things are also very different. Consider the following:

Hollywood has become more tech savvy: Hollywood was still technologically immature when Napster first hit the scene a decade ago and threatened the long-standing business model of the record labels. The digital revolution has since spread to the movie and TV studios and while Hollywood is still struggling with the influences of digital media and the Internet as a distribution platform, the entertainment industry has actually become a bit more receptive to Web. It's experimenting with different ways of pushing content. It's also toying with different models for monetizing that content through pop-up ads, sponsorships and limited commercial interruptions, as well as pay-per-episode options such as those offered through iTunes.

iTunes largely still uses a Pay-Per-View model: Yes, there's already a relationship between the networks and Apple but changing the terms with a company that has a reputation of playing hardball and subscribing to the "our way or the highway" negotiating model could get sticky, just as it did in the early days. After all, television programming remains a complex web of relationships between studios, networks, distributors, cable companies and others. Slicing the revenue pie of a TV show can be tougher when it's part of a monthly subscription.

It's the content, not the network: Viewers don't watch based on networks, they watch based on content. And quite frankly, they don't care if a show is part of A&E, TNT, ABC or MTV. They just want to watch on their terms. That means the networks will have to step up their games, as well, if they want to maintain their value in a YouTube world where amateur content for the Web has the opportunity to gain as much of a following - and maybe even a bigger one - than a big money Hollywood production. Instead of worrying about getting the niche networks online, perhaps the focus should be on online promotion of the niche program itself.

But don't underestimate the network: Big television has been playing hardball for years with the cable and satellite companies over distribution of all of their programming, not just the popular stuff. Viacom, for example, owns Nickelodeon, MTV, Comedy Central, VH1, BET and LOGO, among others. When Viacom negotiates with DirecTV or Comcast or others, it surely wants a full lineup of its networks on the cable channel lineup, not just Comedy Central or MTV. The same might be said for a place on the iTunes lineup, as well. The cable guys have a finite amount of space on their lineups and have resisted carrying some channels - and that's led to some threats to pull programming in the past. The Internet gives the networks new options.

Limited subscriptions offer limited value: The beauty of a pay-per-episode model is that users can weigh the benefits of the purchase on an individual basis. For example, if there's a single episode of my favorite show that I missed - and can't find anywhere else on the Internet (which is also a longshot), then $2.99 for a download of it from iTunes is worth it. Am I willing to pay $20 or $30 per month for access to a limited number of shows from a limited number of networks when those same episodes might be available elsewhere on the Web for free - or for the cost of watching a few 15-second commercials. An excerpt from the WSJ story:

In at least some versions of the proposal, Apple would pay media companies about $2 to $4 a month per subscriber for a broadcast network like CBS or ABC, and about $1 to $2 a month per subscriber for a basic-cable network, people familiar with the proposals said. Those amounts are in some cases much higher than media companies receive from traditional distributors. The question is whether selling fewer networks at higher prices is better business.

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