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Movie rentals on iTunes point to 2008 as Apple¿s Year of Video

The reports that Apple has signed a deal with News Corp's 20th Century Fox studio to allow people to rent its content from the iTunes Store could be a fundamental clue as to the company's next major product focus.

Recall that Apple's efforts in 2007 were dominated by the iPhone, right from Steve Jobs' Macworld keynote in January. Yes, the company kept releasing new Macs and refreshed the iPod line for Christmas, but the iPhone was the center of attention all year long. It even drew resources away from Leopard, the latest version of Mac OS X, delaying its release for several months.

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I'm guessing of course, but it would make sense for Apple to set video as its theme for 2008, starting with Jobs' Macworld keynote on Jan. 15. Video currently is Apple's weakest link, since its other businesses – the Mac, the iPod and the iPhone – are all going gangbusters.

But Jobs, like Alexander the Great, is always looking over the horizon toward his next conquest.

Much has been said this year about the failure of Apple TV to make an impact. Jobs has described it coyly as a "hobby." Video sales at the iTunes Store have been decent but not great. Of the major film studios, only Walt Disney has made new releases available for purchase (it could be Jobs' membership on Disney's board helps a tad).

The television component of the iTunes Store took a giant step backward when Apple's running spat with NBC Universal resulted in the removal of shows from NBC, the Sci-Fi channel, the USA Network and other Universal properties.

The technical hurdles of selling video over the Internet haven't helped, either. The large files – a typical movie on iTunes is about 1 gigabyte, or about 200 times the size of a typical pop song. Even for users with broadband Internet connections, gratification is not exactly instant.

It's the sort of glum confluence of circumstances that can cause even large and otherwise successful companies to throw in the towel. Wal-Mart, for example, announced yesterday that it has canceled its movie download service -- less than a year after it launched.

But one thing Apple has proven in recent years is that it often can succeed where others have foundered, such as with the iPod or its chain of retail stores. Solving video over the Internet is exactly the sort of challenge Apple relishes.

Apple now can put its experience as a video vendor to use as it crafts the most user-friendly option for consuming video over the Internet.

The move to rentals makes complete sense, and probably was inevitable. In the years Apple has dabbled in offering video downloads, it has learned that fewer people want to own video than do music. If people didn't want to rent videos there would be no Blockbuster or Netflix, not to mention the various "video-on-demand" services provided by cable companies.

The deal with Fox shows Apple is serious about getting video right. The content, according to the Financial Times of London, will be new. It will be encoded with Apple's FairPlay digital rights management software, but it should play on Macs, iPods, iPhones and on a TV via Apple TV. In other words, users will be able to watch the rented video pretty much on a variety of devices, unlike other services that restrict the user to a single device.

Apple is even licensing FairPlay to Fox for use on its DVDs. This will allow the video to be ripped legally to a computer for transfer to a video-capable iPod or iPhone.

The millions of handheld video-capable devices Apple has sold over the past few years surely supplied a major piece of leverage in securing this deal. In the case of the iPhone and iPod Touch, one could download the content directly to the device through iTunes. What studio wouldn't want a piece of this action?

The Financial Times article said Apple "is understood to have been in talks with Sony Pictures Entertainment, Paramount and Warner Brothers about making their new releases available on iTunes to buy or rent."

Expect video to be the centerpiece of Jobs' Jan. 15 keynote. He almost certainly will announce the Fox deal then and possibly deals with other studios (I can't imagine that Disney isn't already signed up to add rentals to its iTunes catalog).

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The long-neglected Apple TV figures to get a significant upgrade and be integrated into Apple's video strategy as one of the ways to access the rentals. If Apple TV 2.0 can connect directly to the iTunes Store and includes some TiVo-like features, it could go from flop to hit overnight.

Apple isn't far from having a killer video strategy. It has most of the pieces in place already. It just needs to bridge the gaps and then integrate those pieces as only Apple knows how.

Then watch how fast Apple's "hobby" disrupts the entire movie rental industry.

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