NBC's decision to remove programming from iTunes

NBC Takes Programming off of Apple iTunes Introduction NBC's decision to discontinue its relationship with Apple regarding the distribution of its popular television shows is symptomatic of the evolving conflicts between content providers on the one hand and device manufacturers on the other. NBC executives contend that Apple's commoditization of the music industry will not happen to television programs, as far as NBC is concerned (Rebecca Dana and Nick Wingfield, A3). NBC also contends that Apple's approach to implementing privacy and Digital Rights Management (DRM) are insufficient to protect the video content that NBC until this month, have sold on the iTunes site. The most divisive issue however between NBC and Apple are the pricing requirements of the content provider, which Apple says would require them to charge $4.99 per episode downloaded, up from $1.99 today (Joshua Chaffin (1), pg. 18). NBC's senior management asked Apple founder and CEO Steve Jobs for a percentage of Apple iPod sales revenue attributable to video content, yet Jobs refused. NBC has since been joined by other content providers who increasingly see Apple as a commoditizer of their programming content. In addition, the nascent approaches Apple uses for managing DRM has led NBC and other content providers to question how protected their content is online, and how safe from duplication and piracy. In December 2005, Apple and NBC first signed their distribution agreement, and less than two years later, NBC is now 30% of total iTunes television sales, netting the company $15M a year in revenues (Knight Ridder News Service, 3, 4). Both NBC specifically and content providers in general have invested in websites and streaming video technologies to provide their programs online, either for a fee or for free. NBCs' launch of NBC Direct and the much-hyped Hulu.com are both cases in point. Where content providers initially considered iTunes comparable to Amazon.com as the most ubiquitous and cost-effective digital distribution channel, the pricing policies of Apple are driving content providers away from what had initially been a very attractive digital distribution channel. Effects on Ratings and Popularity of NBC Shows Admittedly the marketing buzz created for NBC's shows being on iTunes added to the shows' collective perceptions of being popular. iTunes, with over 100 million songs downloaded and its ubiquitous music and video catalog available in multiple languages, has become a force of an entire new form of personal entertainment and fostered the development of personal MP3 players that now include the ability to also view videos. While iTunes itself is not an integral part of how NBC builds brands for its television shows and other forms of content, the customer segments iTunes sells to are the most attractive, from an advertising standpoint, that NBC wants to attract to its programs. These are the below 30 year old young professionals who are show-loyal over simply channel surfing, which is common in older viewers. NBC loses the potential to connect with this critical customer demographic segment by discontinuing the Apple iTunes relationship. NBC however is confident that their new initiatives including NBC Direct and partnership with Hulu.com will be successful. The net effect on NBCs' ratings and popularity will be minimal, yet the loss of another channel of communication to a very important demographic segment could partially impact NBCs' ability to charge more per minute of commercial advertising time due to any potential drop in viewers from the under-30 demographic segment.

NBC's Response to Apple's iTunes: NBC Direct Looking to build marketing buzz regarding their online initiative, NBC has been leaking limited but significant information to bloggers, key influencers including financial and industry analysts and journalists to promote the new service online. This strategy has been successful as ironically screens and screen cams of NBC Direct are now on YouTube.com, a barometer of how pervasive the buzz of this new initiative has been. NBC Direct (http://www.nbc.com/Video/), now in beta testing, illustrates how NBC is attempting to alleviate connectivity and integration issues quickly. The majority of customer service calls and e-mails for iTunes regard how to make the Apple-proprietary player work with other MP3 and MP4 files. NC, with NBC Direct, appears to be taking on this challenge head-on and creating icon-driven interfaces that indicate compatibility of the specific web browser being used, if a compatible player is installed, and instructions on how to download the content itself. NBC has also designed the NBC Direct initiative to provide a critical element of customers' feedback and ratings of specific programs. Customer referent systems are a unique feature of the Amazon.com site, and NBC looks to increase the popularity of programs through giving viewers both an opportunity to rate programs, and also see, in aggregate, what the ratings are from other viewers as well. Unlike iTunes, which relies on a purchase-driven revenue model, NBC Direct relies on an advertising model based on the commercials included in the downloaded program content. NBC Direct does not allow the downloaded programs to be burned onto DVDs or put into portable video recorders including Apple iPods. Further, the beta version of the NBC Direct client applications only runs on the Microsoft Windows-based systems that are running Microsoft Internet Explorer. Unlike iTunes which runs on multiple operating systems and in conjunction with Firefox and other Linux-based open source browsers, NBC Direct requires all major system components to be Microsoft-based (Knight Ridder News Service, pgs, 3, 4). In addition, the programs are available for seven days from the date they are originally broadcast. In addition to all these differences to iTunes, there is also the lack of scalability testing that has occurred on the NBC Direct website versus the intensive daily workloads on Apple's iTunes store application software and supporting websites. All other aspects being equal, iTunes will be proven over time to have a higher level of reliability, based purely on the accumulated testing and workloads placed on the application and supporting websites. NBC also has invested in Hulu.com, a video sharing and digital content distribution website other content producers also are participating in. Currently in beta, Hulu.com is focused on replacing YouTube.com, relying on syndicated content and a variety of advertising- and purchased-based business models to fund its development. From these developments it is clear that NBC has considered iTunes to be a strategic weakness for some time, and one that could potentially force their premium digital content into commoditization. NBC President and CEO Jeff Zucker has remarked that the two major concerns of a lack of adequate piracy controls using advanced DRM technology, and the lack of flexibility on pricing left NBC with no choice but to exit the Apple partnership (Joshua Chaffin (2), et. al.). Apple's iTunes business model is driven by transactions and customer loyalty. For NBC, their most successful business models have as their basis advertising revenue. In a sense it was inevitable for NBC to consider its own digital forms of content distribution to protect its programming and also look for content distribution approaches that capitalize on their core strength of advertising revenue-based business models.