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Apple’s Movie Business Faces Shrinking-Pie Problem

The company controls market share, but consumer trends are troubling


Who says Apple (NASDAQ:AAPL) isn’t vulnerable?

A new report from research group iSuppli found that Apple’s iTunes digital storefront lost major ground in the online movie sales and on-demand rental business over the last 12 months. Its near-75% share in 2009 dropped to just below 65% in 2010 – a completely devastating dropoff.

The tongue here is, of course, placed firmly in cheek. Nobody selling movies online comes close to Apple’s control of the market. Microsoft’s (NASDAQ:MSFT) Zune store, which offers a comparable service to Apple’s and actually has more of a presence in the living room thanks to the Xbox 360 video game console, was at least partly responsible for the dip in iTunes’ market share. But it still only rose to an 18% share.

Sony (NYSE:SNE) trails both, accounting for just 7% of the market. Other business, including heavyweights like (NASDAQ:AMZN) and newcomers like Wal-Mart’s (NYSE:WMT) Vudu, collectively control 10% of the market.

The question now, however, is whether Apple’s digital video business makes it a big fish in a fast-shrinking pond. Consumers are becoming more interested in streaming services than they are in traditional sales models — like owning a movie or even renting it.

Netflix’s (NASDAQ:NFLX) astronomical growth over the course of 2010, jumping from 11 million subscribers to 20 million in just 12 months, is proof enough that audiences are more interested in paying a flat monthly fee for access to a wealth of home video content than they are in dropping $15 for a digital copy of some middling Hollywood fare they may only watch once on their laptop.

Even with commanding control of the digital sales and rentals market, Apple is already feeling pressure from streaming services like Netflix and even Hulu, the streaming video joint venture owned by Comcast (NASDAQ:CMCSA) and General Electric’s (NYSE:GE) NBC Universal, Disney’s (NYSE:DIS) ABC, and News Corp.’s (NYSE:NWS) Fox.

Apple ran afoul of those three television companies as well as CBS (NYSE:CBS) last summer when it attempted a 99-cent television episode rental program that kicked off when the new Apple TV set-top box was released last fall. News Corp. and Disney especially felt that Apple was undervaluing their products in its efforts to boost declining rental sales.

The odds are good that Apple is already moving to modernize its home video business. Piper Jaffray analyst Gene Munster said in an investor note last Thursday that Apple’s recent clandestine investment of $3.9 billion in LCD screen components signals that the company is going to get into the television business by 2012. Munster believes Apple will spearhead the push for Internet connected television adoption with a line of TVs with screens up to 50-inches.

With a television app store likely to be a part of the overall TV strategy, a subscription-based streaming option to compete with Netflix and Hulu would be natural for Apple. Until those plans come to light, investors should expect iTunes to maintain its dominant market share. That market share, however, will represent less and less revenue as consumers increasingly adopt streaming services.

At the time of publication, Anthony John Agnello did not own a position in any of the stocks named here.

Article printed from InvestorPlace Media,

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