This article was written on May 05, 2008 by CyberNet.
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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