Apple V. Netflix

I decided to look and see if there was any validity to the argument that if Apple were to offer subscription based rentals they would lose money if you rented more than say five movies a month.

Lets look at the Netflix financial statement and see if we can get some perspective:

Netflix latest revenue numbers for the six months ending June '06 was $463.4 million dollars. The costs of those revenues were $298.8 million. Subscriber costs were $254.8 million, Cost of subscription revenues consists of revenue sharing expenses, amortization of their DVD library, and postage and packaging expenses related to shipping titles to paying subscribers. Then there was the fulfillment expense, $44.1 million, which consist of expenses incurred in operating and staffing their shipping and customer service centers, including costs attributable to receiving, inspecting and warehousing their DVD library. Fulfillment expenses also include credit card fees.

Now based on those numbers, 64% of Netflix revenue goes towards costs associated with getting there product to their customers. Now I work in the Transportation/Logistics industry and I can tell you that even the largest manufactures transportation expense typically don't exceed 10% of gross revenue.

So my argument that Apple or any other company doing digital rental would not be concerned with high volume renters seems valid. No inventory means no associated costs. The only costs would be the content, which would surely be encoded by the studios eliminating that expense. Storage, which would be far less than trying to maintain 32 DC's and the associated inventory. Transmission facilities, which these days fiber is cheap. Plus all the costs associated with the transactions on iTunes, which can be shared with the music and movie purchase services. Realistically, I bet the costs associated with subscribers would be substantially less than Netflix. In addition marketing costs would be less as well, owing to that fact that there are almost 60 million iPods out there all running off of iTunes, so you have a built in advertising and marketing medium.

Could it work, I am positive that it would. The only constraint would be the number of broadband households.