December 27, 2007 - The Financial Times is reporting that Apple, Inc. has struck a deal with 20th Century Fox studio to deliver feature film rentals via its iTunes Store. Details are expected at Macworld in January, during Steve Jobs' keynote speech.

The Financial Times article also reports that physical media sold in traditional retail outlets will include a digital version of the movie, negating the need to "rip" content from a copy-protected disc:

A digital file protected by FairPlay will be included in new Fox DVD releases, enabling film content to be transferred or "ripped" from the disc to a computer and video iPod. DVD content can already be moved to an iPod but this requires special software and is considered piracy by some studios.

STUMBLING BLOCKS

Currently, sales of digital movie files from Apple's iTunes Store are limited to a handful of studios, with the remaining holdouts fearful of handing over too much power to Steve Jobs, repeating the mistakes of the music industry labels. The files that have been made available are restricted by Apple's Fairplay DRM, which means that they cannot be burned to a DVD for use in a DVD player and are viewable only on a limited number of devices and computers. Another stumbling block to mainstream acceptance is likely rooted in the current low-quality of available content, which the studios see as a piracy deterrent, and which customers see as a purchasing deterrent. (File size is also a practical limitation of serving content over a network.)

When you download movies from iTunes, you get near DVD-quality, 640-by-480-pixel video1 that's great for watching on your computer and positively brilliant for syncing to your iPod. And iTunes makes playing movies a pleasure, thanks to convenient onscreen controls. Source.

For many consumers, "near" DVD quality isn't quite good enough, as digital prices aren't yet low enough, and digital files do not currently provide bonus materials, physical media for the purposes of archiving or inserts often found in DVD packaging. In this regard, the perception of "getting something" in exchange for money is working against Apple.

Further complicating matters, traditional retail giants Wal-Mart and Target are putting pressure on movie studios regarding the sale of digital content, as neither want to see their massive DVD cash-cow marginalized by digital sales.

All that could change once rentals are factored into the equation: Consumers are less likely to worry about quality when renting content, as rentals can be pitched largely on the basis of convenience. If priced attractively enough, consumers may be willing to forgive a little digital "noise" -- and Apple clearly hopes a renewed interest will coincide with invigorated sales of their  TV device, which is intended to bridge the gap between computer and entertainment center, but which hasn't caught on quite like the iPod. Most importantly, rentals would not compete with the sales model of outlets such as Wal-Mart and Target.

HD DVD vs. BLU-RAY

Meanwhile, standard definition DVD sales are tanking as two competing high definition formats duke it out for consumer acceptance, not unlike the VHS/Betamax war of the late 70s and early 80s. In one corner, HD-DVD with its lower price-point and backing from Microsoft and a small number of movie studios. In the other corner, Blu-ray, capable of higher capacity discs, sturdier media, and backing from a larger number of movie studios.

For a more comprehensive break-down of the two formats, wikipedia offers a comparison:

Comparison of high definition optical disc formats

As is to be expected, these formats are incompatible and some studios will only release content for one or the other. Notably, 20th Century Fox backs Blu-ray exclusively.

Thus far, neither format is selling anywhere near the level of standard definition DVDs. This is due, in part, to uncertainty over which format will ultimately catch on: No one wants to buy an expensive device only to find out that their choice has lost out to another format.

APPLE AND FOX STRIKING A BLOW FOR BLU-RAY?

Both Apple, Inc. and 20th Century Fox are supporters of Blu-Ray technology. It's quite possible that this partnership is a last-ditch effort to give an edge to their HD format of choice, via added value.

In January, Steve Jobs may well announce an online shift in focus to rentals. In doing so, he will have appeased the retail giants while entering a market with no overwhelming competition and, as an added bonus, providing incentive for consumers to purchase an  TV. Whether or not the content will be provided in high-definition is up in the air, but the safe bet is that this content will be provided in the same resolution as current movie purchases. Either way, some form of DRM will be in place to keep rented content rented.

At the same time, Jobs may announce a ground-breaking deal to include a high definition digital file with every 20th Century Fox movie sold in the Blu-ray format. Consumers with an interest in purchasing movies will retain all of the benefits of owning physical media while gaining the benefits of a portable digital file -- with no lingering questions about the legality of ripping content from a protected source.

Coupling the digital file with physical media may be seen as the master-stroke which sidesteps the controversy over DRM.

Standard Definition DVDs may not even be mentioned as part of this announcement. When it comes to technology, Apple tends to look ahead: In the past, this has meant leaving behind the still popular 3.5" floppy disc and other widely adopted peripherals in favor of the next big thing. (In the case of the floppy disc, the "next big thing" was email and high-speed networks.) The last-generation DVD format may be seen as dead weight, and this would be a bold way to cut loose.

In one fell swoop, Apple, with the help of 20th Century Fox, may be able to take the lead in movie rentals (possibly in an HD resolution, but more likely in a resolution comparable to what is offered for sale from the iTunes Store today) while locking in consumer interest in the Blu-ray format.

If this is the case, expect to see Blu-ray drives integrated into Apple's lineup across-the-board (or at least in their "Pro" lineup and in their higher-end iMacs and MacBooks) during the Macworld Keynote speech, prior to a "one more thing" announcement regarding HD content. Bundling all of these announcements together would also seem to point to an upgraded  TV announcement, possibly with support for HD at higher resolutions.

QUESTIONS REMAIN

Even assuming all this comes to pass, and that's a big assumption, a few questions remain:

• Would Blu-ray disc prices increase above and beyond the premium already in place?
• Can device manufacturers lower the price of Blu-ray players enough to compete with HD DVD devices?
• Would these digital files (and possibly, rentals) be provided in 1080 i or p resolution, or in the lower quality HD resolution, 720p? 1080p televisions are becoming more and more common, not to mention less and less expensive. On the other hand, the  TV is currently only capable of 720p.
• How many studios will follow suit, and how long will it take? Steve Jobs is seen as public enemy number one by the execs at many of these studios, and that may slow adoption, especially if interest skyrockets.