• by Diane Mermigas , January 18, 2008

Apple CEO Steve Jobs intended to wow the faithful at Macworld Expo with the ultra-thin MacBook Air computer and iTunes digital movie rentals. Apple stock dropped, and consumers yearned for another transforming iPhone-like device. But there was far more going on than meets the eye.

The initial wave of digital interactivity has conditioned consumers, businesses and investors to live on the edge of a tidal wave of big-bang developments. In 2008, those will continue with the auctioning of spectrum that will unleash a new wave of wireless services, and Google's pending merger with DoubleClick, which will set a new level of online advertising and e-commerce in motion. Breakthrough devices such as the iPhone and iPod will continue to surface, albeit less frequently. The emphasis and value is shifting to the refinement of interactive products and services that will deliver their own brand of potency. Apple's latest efforts represent the brand-extending media game-changers we will see more of in 2008.

The anticipated launch of movie rentals directly through television and to any Internet-connected Apple device has notable ramifications for Comcast and Time Warner Cable, Blockbuster and Netflix, which have been slow to embrace direct-to-consumer content delivery. Given Apple's wildly popular and powerful ecosystem, the iTunes move will hasten the long overdue conversion to digital film rentals. The downloads will be more economically efficient, and will hone valuable viral marketing and consumer trade relations. The new iTunes service also undercuts cable operators' ramping day-and-date VOD with studios' DVD movie releases, which could be headed for the endangered species list. Studios are less inclined to view iTunes rentals as a threat to DVD sales, or even the existing DVD movie rental business, because of the new service's structure.

However, it does pose a competitive threat to the VOD expansion recently announced by Comcast. If the iTunes movie rentals prove to be "the holy grail that cable has always wanted," as Pali Research analyst Richard Greenfield suggests, then cable system operators will suffer as a result of their slow response to interactive mobile devices. "As the world shifts toward IP video, Comcast wants to be more than just a dumb pipe," Greenfield said.

The shortcut may be acquiring a company that could bolster Comcast's broadband video portal strategy against intensifying competition from iTunes and Hulu.com, Greenfield suggests. That would further infuriate shareholders, who as recently as Thursday chided Comcast management for doing too little to organically mine its high-tech infrastructure while engaging in an $80 billion buying spree that has failed to raise its share price in a decade. (Chieftain Capital Management, a longtime minority shareholder, sent an angry four-page letter to Comcast's board Jan. 17, representing the frustrated demands of other investors.)

Yet Comcast isn't the only media player caught in the crosshairs of convergence, especially as it is being defined by Jobs and Apple.

Hollywood film studios suddenly are feeling squeezed by the reverberations of the writers' strike, as well as what Wall Street perceives as a slate of weaker films in 2008. They are being forced to take a closer look at evolving platforms and devices that could grow (not threaten) their business. Clearly, the movie rental service announced for iTunes' 119 million users could become a springboard to a download-to-own platform. It could eventually provide studios with the means to build an Internet strategy that supports the legal online distribution of feature films as well as a "consumer-friendly" bridge between PC and TV, according to Lehman Brothers analyst Anthony DiClemente.

Rivals such as Netflix, Amazon and TiVo are positioning themselves to do the same in the midst of what some are called a dismal outlook for filmed entertainment. Less than $100 million in sales from film streaming and downloading in 2008 (according to Accustream) will not begin to offset the shrinking DVD rental and sales market. Last year's box office returns--down 4% to $9.9 billion on flat attendance --are expected to decline another 5% to $9.4 billion on an 8% attendance loss, according to Wedbush Morgan Securities analyst William Kidd. The strike-ridden film industry cannot move fast enough to devise new ways to further monetize its assets.

Maybe Steve Jobs' hidden strategy this week was surprise. What is being construed by some (the studios) as an irresistible growth opportunity is considered by others (the cable operators) as a formidable threat. Either way, Apple is again the agent of change.