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Apple has recently announced that it is going to release the iCloud service this fall. How would it change the situation in the online content distribution market and how are the current players reacting to this? We are going to discuss it in this post.

The business of paid digital content distribution has attracted major companies from different industries and countries. This market is entered by the traditional Internet companies (having previously used the advertising model only), telecoms (trying to avoid becoming a dumb wide pipe), and media companies (seeking new ways to monetize content). However, there are companies that avoid categorizing, such as Apple, that develop the potential “next big thing” trends, and digital content distribution is certainly such a thing. Generally, Apple often becomes a paradigm shifter in the industries it enters. For instance, by launching iTunes Musical Store in 2003, it fundamentally changed the music distribution business. This has been described in detail in many Steve Jobs biographies, for instance, how difficult it was to negotiate with the copyright holders. A brief overview can be found here and there. However in the video content distribution, a totally different company has excelled — Netflix. Many people attribute Netflix success to a unique (for that time) combination of an unlimited flat-rate offer with a broad content choice (Netflix buys a lot of content for its subscribers, often with exclusive rights).

With the iTunes Store, Apple has managed to win 70% of the Internet music distribution market in the U.S., so many people fear Apple’s move in the direction of video content. The recent launch of iCloud announced at WWDC has spawned many rumors and expectations well before its introduction. Many Netflix shareholders felt particularly tense, which is evidenced by the stock quotes on the day of WWDC. Surely, the process has been closely watched by other players – Vudu, Hulu Plus, Amazon Prime. By itself, the iCloud service is not particularly interesting. In fact, it is another version of MobileMe, a service allowing to save photos, documents, applications, backups, contacts, etc. Details can be found here. But the integration of iTunes into iCloud has some revolutionary aspect, yet only available in the U.S. In fact, Apple has offered a path to its users to legalize their music libraries. To do so, the users can launch iTunes Match and get all the songs that they already have (with a limit of 25, 000 songs), at a high quality on all their devices (iOS + Windows PC). Apparently, Apple has a great influence on the major copyright owners (60% -70% of the Internet music distribution market), once it has managed to drive them to such conditions. Apparently, this would further decrease the market share of other players. Anyway, let’s wait for a response from Amazon and Google. Moreover, there are rumors of a new service expected from HP soon. Apple’s effect on video content distribution market is not so high (the least so for feature films), so the rumors of an emerging competitor to Netflix and other companies finally did not materialize. There are many talks of further expansion of the service to video content, but to my mind, this is quite unlikely. Netflix would rather succeed in this, having got a habit of flooding the copyright holders with money to gain exclusive rights to the content.

Online video business in general is very specific: at present, the maximum massive reach is gained by subscription based projects with unlimited access (flat rate). The pay-per-view model yields no impressive results, and the ad-based model is still rather uncertain. Is it possible to reach a return on investment into the delivery of high-quality video content through the built-in advertising? If so, why is Hulu putting such efforts at developing Hulu Plus, its premium subscription-based service? In addition, many large copyright holders have enough ambition to deploy their own video portals with exclusive content. HBO Go is an excellent example of such an approach. With its highly popular content, HBO monetizes it primarily at its own своей site. And in this case, the copyright holders can pressurize content aggregators such as Netflix, dictating the termsto them.

To summarize, let’s outline the following important factors in the online video business:

• A Web site needs a big audience to influence the copyright holders
• A Web site needs a broad choice of preferably exclusive content to attract a large user audience
• Customers highly prefer unlimited subscription to the pay-per-view model

These principles are key to the Netflix success: with a sound startup capital, Netflix has offered a wide range of content, attracting a lot of subscribers who realized that they can watch virtually anything they want without restrictions. Having earned a decent subscriber base, Netflix got more money to purchase additional content. Now it is hard to imagine an entry of a more powerful player. This could be expected only from the cable operators or large content rights holders that have a subscriber base comparable with Netflix: HBO (Time Warner) and News Corp. to be the first candidates.

Yet after another Apple’s shake-up, online video business can live peacefully, adhering to the present rules of the game. How long will this balance live?

How will it be outside the US? The strong players will probably try to adapt the most successful business model to local realities. We have already seen many premium video portals built around an ad-based (Hulu) or subscription-based (Netflix, Hulu Plus) model. It is clear that the major players emerge from the same sectors as in the United States.

We are looking forward to your thoughts on this matter.
Wishing you a successful online business!