Apple Smackdown: Content vs. Hardware

A constant stream of new iPhones and iPods means that Apple's got a ravenous appetite for all-important content. But is supply drying up?

Industry insiders speculate that a new incarnation of the video iPod is about to be unveiled, after Apple sent cryptic invitations to analysts and reporters for a September 5 event.

Two music execs said Apple C.E.O. Steve Jobs is going to announce a much-enhanced version of the iPod, featuring a larger video screen and touch-screen functionality, among other things.

Jobs is also expected to announce that Apple will be making iPhone-exclusive ringtones available for download through its iTunes music store.

Just as rumors about Apple's latest and greatest new device swirl, news has surfaced that its content supply might be at risk.

General Electric's NBC Universal decided not to renew its contract to sell downloads of its television shows on iTunes, after becoming unable to come to an agreement with Apple on pricing.

The media conglomerate's defection costs iTunes its biggest supplier of digital video. NBCU contributes some 1,500 hours of programming, including hits like The Office and Heroes, and accounts for about 40 percent of all iTunes video downloads.

Due to its market dominance, the iTunes download service has commanded significant power with content providers. Apple's distribution platform accounts for more than three-quarters of digital music sales. Apple trails only Wal-Mart and Best Buy in music sales overall.

But Apple's main focus, and its main source of revenue, is not the digital content distribution itself, but the hardware devices that play it.

Apple keeps churning out blockbuster products as fast as the market can absorb them, and it's widely believed that video will be a, if not the, key element of Apple's retail strategy going forward.

Now that Apple may need content providers more than they need Apple, the balance of power appears to be turning.

Already Vivendi's Universal Music Group ditched a long-term contract with iTunes in favor of providing music to Apple "at will," so that the major record label could pull away from the partnership at any time.

Tensions between Apple and media companies highlighted by NBC's defection are not new; record labels have long been unhappy that Apple will not give them more control over how content is priced, packaged, and protected from piracy.

NBC Universal's departure will not have an immediate effect on iTunes, because its shows will be available there at least until the current contract expires in December.

But looking forward, it will be harder for Apple to make a big push into video-related devices if the video content becomes limited.

by Liz Gunnison